The Dow, S&P, Nasdaq, Wilshire 5000 and the Semiconductor Index all broke out to new highs despite the weaker than expected Non-Farm Payrolls.

Market Statistics

The big news for Friday was of course the big miss in the Non-Farm Payrolls. The headline number came in with a gain of only +36,000 jobs instead of the consensus estimates of +146,000. I warned on Thursday the weather disruptions could cause the actual number to be dramatically different than estimates. I was glad the number did not come in negative. I am even more excited to see the market shake off the jobs miss and move to new highs before the weekend. Given the weekend risk from Egypt I view the rally into the close as bullish.

The low jobs numbers were directly related to weather with 886,000 workers reporting they were not at work because of the weather. The average for January over the last ten years was 262,000. As a result of the weather there was a decline of -32,000 construction jobs and -40,000 in transportation/utilities.

The report was not all bad news. November job gains were revised higher from 71,000 to 93,000 and December gains rose from 103,000 to 121,000. That was an upward revision of +40,000 jobs.

The unemployment rate fell sharply to 9.0% but not because a lot more people found jobs. The benchmark revisions for 2010, which are released each January, reduced the number of people in the workforce from prior estimates and that changed the unemployment ratio. It is strictly an accounting change not a change in actual employment. However, the household survey did show a significant jump in new jobs of 589,000 (seasonally adjusted) for January. The household survey is different from the establishment survey that showed a gain of +36,000 jobs.

I was glad to see the headline number was not negative. This suggests the job hiring dynamics postponed by the weather will be pushed forward into February and potentially produce a blowout month.

Non-Farm Payroll Chart

The payroll report was the only major report released on Friday. Next week's calendar is VERY light. I could not find anything that was worth a highlight.

Economic Calendar

The earnings schedule is also shrinking. On the list below the only company I felt was really important was Cisco. You may remember they disappointed on earnings back in November and the stock was trashed for a -25% loss. That upset the entire tech sector until many more techs had reported and we found out it was a Cisco problem not a problem with the tech sector.

Cisco shares have not recovered from their November beating but they have been moving higher for the last month. Another earnings disappointment on Wednesday would be painful and I would not be surprised to see some profit taking before earnings.

Earnings Calendar

While on the subject of Cisco they boosted the tech sector last week when they projected Internet traffic over mobile devices to increase 2600% by 2015. Cisco said users are increasing their web surfing and video viewing on their smartphones. Add in the iPad and the 30+ Android tablets heading to market and bandwidth usage is going to explode. That is very good news for Cisco because they make the heavy-duty routers and switches required for that much bandwidth. Cisco is projecting 7.1 billion Internet connected devices by 2015. They also expect tablets to account for 3.5% of all Internet traffic. This study by Cisco suggests any short-term dip would be a good buying opportunity to add some Cisco shares. They WILL be the leading provider of Internet hardware for the foreseeable future.

The conspiracy theorist in me wonders if they released this study the week before earnings in an effort to blunt another stinking earnings release. Enquiring minds want to know!

On the earnings front on Friday the winner was definitely JDS Uniphase. JDSU posted earnings of 29-cents and analysts were expecting 19-cents. Revenue rose +38% and earnings +142%. They raised guidance to $440-$460 million and analysts were expecting $438 million. Shares of JDSU rallied +27% on Friday after closing at a new 52-week high on Thursday. It was definitely celebration time for holders of JDSU shares.

JDSU Chart

Tyson Foods (TSN) also rallied after earnings but not quite as dramatically as JDSU. Tyson earnings jumped +86% on improving sales of chickens and rising prices for beef and pork. Analysts said the sharp increase in consumer spending for meat products and the ability to raise prices indicated the recession was clearly over. Consumers cut back on meat consumption during the recession and forced some severe cutbacks at companies like Tyson. That period of depressed food prices has passed and demand is rising. We keep hearing every day that food inflation is causing problems around the world. Commodity grains are soaring in price and I would have expected that to impact Tyson but they were able to pass on the prices in their meat thanks to the rising demand. Shares of TSN gained +5.7% on Friday.

Tyson Chart

Pulte Homes (PHM) reported earnings on Friday and the homebuilder said they were seeing encouraging levels of traffic from potential buyers. This is a repeat of other guidance in the sector. Apparently homebuyers are still shopping as interest rates begin to rise. The race is on to lock in a cheap mortgage and the normal winter slowing has actually seen some traffic improvement. This suggests the spring selling season could be very strong. That assumes the monster flood of foreclosures doesn't swamp the new home market.

Last year builders got help from the government with a buyer tax credit and they don't have that added stimulus in 2011. If the government really wanted to help Bernanke push the economy forward they would offer another stimulus program of some sort for homebuyers. Unfortunately the term "stimulus" is a four-letter word for voters and lawmakers alike this year.

Homebuilder Standard Pacific said earlier in the week that sales in January were stronger than just a few months ago. The CEO said he did not expect to beat last year's tax credit stimulated sales numbers but they expected to come close even without government help.

Stronger than expected home sales is just one more confirmation the economy is improving. We saw both ISM Manufacturing and ISM Services post outstanding improvements in January with decent numbers from the supporting cast of reports. Employment may have slowed in January with storms as an excuse but the employment components in each of the ISM reports showed dramatic improvement. Those are just surveys of company plans being put into action and it could be several more months before the actual hiring picks up significantly but I believe it is coming. When I say significantly I am not expecting a return to full hiring speed but monthly numbers in the 200,000 range or better. It takes 150,000 new jobs per month just to absorb immigrants and newly graduated workers into the job market.

The Nasdaq reported on Saturday that hackers had infiltrated the Nasdaq network used to provide confidential communications to some 300 corporations. The intrusions did not impact the Nasdaq stock trading systems and no customer data was compromised. The Nasdaq network service called Directors Desk, helps companies communicate with their boards in a timely and secure manner by hosting documents and communications between board members online. Apparently it was not as secure as they thought. Hackers had penetrated the network multiple times over the last year and left behind zombie programs intended to provide remote access and data. The FBI and Secret Service have been investigating for months and asked the Nasdaq not to go public for fear of losing the trail of the intruders if they abandoned the hack. Unfortunately the Wall Street Journal got the story and immediately went public. Having access to secret communication between board members of top corporations would be invaluable for placing trades ahead of events like mergers and takeovers.

Crude oil prices declined -$1.42 on expectations for a Mubarak exit in Egypt. At one point on Friday he was rumored to be resigning and leaving Egypt to live in Montenegro. The problem with Mubarak stepping down and leaving Egypt is how to keep the fortune he amassed as president of Egypt for 30 years. Not only his fortune but that of his family and primarily his son Gamal. All have amassed huge fortunes and many believe they were made through government corruption.

Countries who evict their leaders have a good track record of recovering the money. Once the leader is out of power and cannot wreak havoc on those trying to prove corruption the leader is an easy target for all manner of financial seizures. Mubarak must get his fortune out of Egypt and then vacate the country quickly to another country without extradition treaties.

This is why analysts believe Mubarak has not yet run for cover. He is probably trying to structure an orderly exit with guarantees from the succeeding government that they will not chase him to whatever country he chooses.

Saturday afternoon update: Gamal Mubarak, Hosni Mubarak's son, resigned from the leadership of Egypt's ruling party on Saturday and vowed not to run for election in September. Reportedly Gamal fled to London last Sunday along with Hosni Mubarak's wife, Suzanne, and daughter and over 100 suitcases. Since then Gamal and his wife have been reported in the U.K. where they reportedly have a home. Gosh, 100 suitcases. I wonder how many were packed with cash?

There are rumors circulating this weekend that the newly appointed Vice President, Omar Suleiman, survived an assassination attempt last week but two of his bodyguards were killed. That would have been one of the shortest tenures on record even in the Middle East.

A gas pipeline from Egypt that delivers gas to Jordan and Israel exploded suspiciously on Saturday. Officially they claim it was a gas leak that caught fire. Unofficially and from several sources the pipeline was targeted by anti-government demonstrators to punctuate the risk to Mubarak of not stepping down. Gas to Jordan and Israel will be offline for at least a week while repairs are made.

When the demonstrators label Friday as "departure day" it was a guarantee he would not leave on Friday. He would never appear to give demonstrators the satisfaction of pushing him out according to their calendar. That does not mean has hasn't already picked a destination and is packing his financial bags. After watching president Obama speaking publicly about his administration suggesting Mubarak leave immediately I believe he would not be making so many public statements if he did not already have assurances Mubarak was on the way out. Politicians, in any party, always want to make it appear they were instrumental in the eventual outcome. If the exit never came they would be seen as ineffectual and that is not the picture president Obama would want as he heads into the election cycle.

When the announcement is finally made the price of crude will likely plunge without any geopolitical security premium to keep prices afloat. Crude inventories in the U.S. are at multi-year highs and inventory levels at Cushing Oklahoma, the delivery point for U.S. crude futures are nearly maxed out. The current March contract expires on Feb-22nd so the odds of some expiration volatility pushing prices lower are pretty high.

Crude Oil Chart

The plan for Egypt is for business owners to reopen their businesses on Sunday. Banks will also open. The stock market thinks it will open on Monday. The Egyptian equivalent of the SEC has relaxed the rules for stock buybacks in hopes companies will take advantage of the -20% drop of the last two weeks to buy back stocks and support the market.

I believe the rally into the close on Friday was based on the expectations of a significant improvement in the Egyptian situation before our markets open on Monday. The worst was priced into our market a week ago and now investors are buying the rumor the crisis is nearly over.

The VIX seems to be saying the crisis is over or at least will be over soon. The VIX closed at 15.93 on Friday after spiking to 20 the prior Friday. The VIX under 16 is very close to the 52-week low of 15.23 back in April. That was just before the Greek debt crisis pushed it to a high of 48 only three weeks later. This is a clear indicator investors no longer fear any news out of Egypt.

VIX Chart

The S&P closed at a new high at 1310 on Friday. Each intraday dip was shorter as the week drew to a close and the index seems to be pointing to higher highs ahead.

One analyst on Friday reported on some research covering the last 30 years. Whenever the S&P holds over its 50-day average for 100 days the trend continues for the next two months 80% of the time. Of course this has only happened five times in the last 30 years. The S&P last closed under its 50-day average on September 1st. That made this week the 100th day over the average and only the sixth time in 30 years.

They say the trend is your friend until the bend at the end. The trend in everything appears to be improving. The stock market is rising. Economic activity is rising. Employment, ignoring the blizzard impact, is rising. Even home sales and traffic are rising. Profits are rising. The trend is solidly higher in nearly every metric we examine.

Earnings estimates for Q1 have jumped from +13% growth to +21% growth since January 1st. That is a huge increase and it means analysts will have to upgrade target prices on stocks once again. Combined earnings for Q4 are now up to +37% with 70% of companies already reported. Fund flows into equity funds are increasing. For the first three weeks of January $8.3 billion flowed into U.S. equity funds and $7.7 billion into global equity funds. We have had negative outflows from equity funds since April and in quite a few months before that. Money market assets dropped -$21 billion last week as investors began to shift money back into risk assets like equities. All of the brokers reported with their earnings that the retail investor was returning to the market. Ameritrade reported this week that daily trades were up +21% in January alone to 432,000 per day. E-Trade saw a +23% improvement.

The market gains are broad based. The Wilshire 5000 had its best week since Dec-3rd with a +2.7% gain. It has closed higher on nine of the past 11 days.

The current bull market is closing in on its second birthday. On March 9th 2009 the Dow hit a closing low of 6,547 and the S&P 677. Friday's close represents an 84.2% rebound for the Dow and a +93% rebound on the S&P. There have been 27 bull markets since the early 1900s. The average length of a bull market over that period was 1.9 years. Compared to the average valuation of those 27 bull markets on their second birthday the current bull is between 20% and 32% over valued depending on which PE metric you use. In fact there have only been two other bull markets in the last 100 years that reached this level of overvaluation. Once was just before the 1929 crash and the other one was in the mid 1960s just before the lost decade for the Dow where it went nowhere for more than 10 years.

Obviously prior performance is no guarantee of future results. Bull markets of any length can continue far longer than most traders expect. Picking the top in a bull market is an art that most bears fail to master. It is like the Energizer Bunny. It just keeps going and going and going. Eventually there will be a day of reckoning but I don't think it will be soon. All the external factors I listed earlier are too positive and pointing to a much better economy 6-9 months from now. We should not have to worry until after the April earnings peak and just before the QE2 program comes to a close.

One primary reason the market should have farther to run is the vocal majority betting against it. The current rally has gotten no respect. Calls for market tops have been so prevalent that retail investors and quite a few funds are still biding their time on the sidelines. The volume over the last week has averaged only 7.6 million shares and Friday barely broke 7 billion. The S&P and Nasdaq rallied +3% but quite a few traders were still on the sidelines. Fear of buying a market top kept them from a 3% gain. As long as that many traders continue to worry about buying a top the more likely those same traders will end up chasing prices higher.

Despite what some analysts will tell you it is very hard to predict a market. I know that for a fact because I have tried it in this commentary 2-3 times a week for the last 14 years. I have learned the lesson more than I care to remember that the market leads and we should follow. In September 2006 I started listening to the bears and I was convinced we were going to have a sell off and I went negative on the market. The S&P rallied +300 points in 12 months for a 27% gain and I missed much of it because I had been seduced into joining the dark side. I swore never again to be wrong for more than a couple weeks. Actually it is fairly easy to be right more than your wrong if you just follow two basic rules. 1) The trend is your friend. 2) Don't fight the Fed.

The reason the bears are so adamant a top is near is the market statistics I quoted earlier. They will tell you no market rebounds +90% without a significant correction. What they forget is markets rebound much stronger and longer when coming out of significant recessionary events. The Great Recession we just exited primed the pump for a massive rebound that that rebound is still in progress. Yes, it will eventually end badly and it could be 20 S&P points from now or 200 points from now. Are you willing to bet against it for the next 200 points?

The S&P close over 1310 sets up another ten-point move to the next resistance level at 1320. The move over 1300 on bad news was another bad news bulls confirmation point so I expect that 1320 level to be tested and probably next week. In order to get there without a dip the S&P will have to test the top of its current uptrend channel. That would be bullish and trigger even more traders to get off the bench and into the game if that uptrend resistance was broken. Until the S&P does start that new leg higher we will have to remain content to buy the dips. This plan has worked like a charm for many weeks and I see no reason to change now.

S&P-500 Chart

S&P-500 Chart - Weekly

The pace of the rally is far from a bullish stampede. The S&P has gained +50 points since Jan 1st but the gains have been anything but peaceful. The index traded in an uptrending 30-point range with repeated dips to support giving bulls plenty of dips to buy but more importantly providing for a rolling consolidation of each major gain. The consolidating uptrend may be confusing the bears because every dip is seen as the start of the "big one" but in reality it is just an orderly market flow with temporary pauses for profit taking and dip buying. This type of market action could actually continue quite a while since each minor dip becomes a pressure release and allows new investors to join the party.

S&P-500 Chart - 60 min

The Dow has already moved over its uptrend resistance and closed at a new high on Friday. While over resistance it still can't seem to break free. We need one good move to bust out and trigger a new leg up. After Thursday's intraday dip it appears support is now 12,000. That prior resistance turned support is a bullish indicator. A move past 12,150 targets 12,500.

Dow Chart

The Nasdaq pushed through 2760 and a level that had been resistance for two weeks. It also surpassed the 2766 high from January 18th. In theory this new high at 2769 is a breakout but it is still in the grip of that resistance. We need one more decent day for a confirmed breakout to target the next resistance at 2800. The Nasdaq had been the laggard for the last week as the various big cap stocks rested. That appears to be over but we need that breakout move to confirm. Current support appears to be the 30-day average at 2711.

Nasdaq Chart

The small caps rallied for a 3% gain last week but stopped dead on resistance at 800 on Friday. The three levels of converging resistance in red could make for a rocky week without an end to the Egyptian crisis. Russell 800-807 will be one last wall of worry for the bulls. Support is the 50-day at 780.

Russell Chart

The Wilshire 5000 also closed at a new high over resistance at 13,800 and actually has some room to run if it can hold its gains. This is evidence of broad based bullish sentiment. The Wilshire can't be gamed by fund managers so it is a valid representation of broader market sentiment.

Wilshire 5000 - Total Stock Market Index Chart

In summary I believe the trend is still our friend. We should be patient and buy the dips rather than buying the breakouts. However, as we saw last week the dips are becoming shallower and could require some quick thinking to make the play. It is not important to buy the exact bottom of a dip. It is often better to buy the rebound rather than trying to catch the falling knife.

The economic calendar is boring next week and earnings are starting to wind down. This will focus more interest on geopolitical events like Egypt. Have you noticed how quiet Europe has been since the holidays? There are rumors they are going to expand the Financial Stability Fund (FSF) to prevent any future problems. If that happens it would be bullish for the market but some of that news is already priced in.

Don't fight the Fed, buy the dips instead!

Jim Brown

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"Live as if you were to die tomorrow. Learn as if you were to live forever." Mahatma Gandhi

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