Friday's market skipped the obligatory dip at the open and declined significantly in the afternoon on a large sell program but investors bought the dip again despite possible event risk over the three-day weekend.

Market Statistics

The sharp afternoon sell off was a shot of adrenalin for both bulls and bears alike. The bears were suddenly awakened from their misery of another day of gains by the tantalizing prospect the long awaited sell off was beginning. The bulls suddenly saw the chance for a major pullback for a "real" buying opportunity. Unfortunately for both the dip never really achieved its potential because impatient investors jumped the gun and powered the Nasdaq and S&P back into positive territory.

Eventually both sides will get the meaningful dip they want and that should power an even stronger rally once the fear of buying the top has evaporated.

There were no economic reports of consequence on Friday. The Risk of Recession for January declined to 21% from 24%. This is the percentage of risk the country will enter a recession over the next six months. This is the lowest level since 2007.

The Weekly Leading Index declined fractionally to 129.5 from 130.2 but the smoothed, annualized growth rate component rose to 4.9% from 4.6%. The WLI has slowed its climb from the bottom but has failed to reverse. It has posted several fractional declines in recent weeks but they were followed by similar increases. This week's reading is only 0.7 from last week's high. The positive trend is still intact but the rate of climb is slowing.

Reports due out next week include the Richmond Fed Manufacturing Survey and the Kansas Fed Survey. I doubt those will be blowouts like the Philly Fed Survey last week but they should both be positive and confirm the continuing recovery.

The first revision in the Q4 GDP will be released on Friday with a minor increase inspected.

One event I added this week is the speech by the Saudi Oil Minister Ali al-Naimi on Tuesday at the International Energy Forum in Saudi Arabia. This forum marks the 20th anniversary of the dialog between producing countries and consuming countries that started in 1991. More than 96 countries will be attending the forum. One topic the forum will discuss is the collection and distribution of data and analysis with the aim of achieving market transparency. I would be truly amazed if we ever achieved any real transparency because it would be counter productive to OPEC. Since the OPEC nations are the ones who publish numbers that not even the other OPEC countries will believe it should be interesting to see what comes out of this forum. When OPEC management produces reports they sometimes have to resort to information from third party tanker trackers to get reliable production information from some OPEC nations.

As Saudi Arabia Oil Minister Al-Naimi is the most influential figure in OPEC, I doubt he will make any earth shaking pronouncements but his speech will probably move energy prices.

Economic Calendar

In other economic news on Friday China boosted its reserve rate by 50 basis points only ten days after raising interest rates. Friday's move will force banks to send another $55 billion to the central bank and take that money out of circulation.

The worry over a future slowdown in demand from China sent fertilizer stocks lower but personally I don't see the connection. I understand consumer loans will slow and consumer demand for products will eventually slow as China fights inflation but people still have to eat. Why wheat demand would decline significantly is a mystery. It is even more of a mystery when nearly every headline you read is talking about food inflation in Asia and around the world. The way to reduce that inflation is produce more food and that requires more fertilizer. Shares of fertilizer companies have been moving sharply higher since December when Potash said demand was soaring. Grain futures had also been hitting highs but cooled last week. I believe Friday's decline was just profit taking ahead of a three-day weekend and a reaction to the CF earnings. When traders grow nervous about their highly profitable positions they will always find an excuse to sell. CF Industries reported what appeared to be great earnings and a bullish forecast on Thursday but the stock was crushed with a $10 drop on Friday. Other decliners were POT -6.25 and MOS -3.73,

The problems in the Middle East are escalating. Over the weekend there were demonstrations in Bahrain, Yemen, Jordan, Algeria and Libya. More of these protests are turning deadly with more than 100 killed by the security forces so far in Libya and several hundred more wounded. Some reports claim many more dead with some hospitals running out of space to store the bodies. There were more dead reported in Bahrain even though the government recalled the tanks and military and allowed the protestors to again congregate in the square. Reports out of Iran claimed between 2 and 10 protestors were killed.

If these protests continue to gain strength it will eventually weigh on the U.S. markets again. Leaders in the Middle East cannot put the cork back in the bottle but after seeing regimes fall in Tunisia and Egypt they seem determined not to let that happen to them. This means ever increasing casualties as protestors defy government decrees not to congregate. This could evolve into a much bigger deal if another country is seen to be in danger of falling. As each domino falls it puts more pressure on those remaining countries.

The Dow was powered higher on Friday thanks to Caterpillar, Chevron and Travelers. Caterpillar said machinery sales soared in January with a +49% worldwide increase. North America was the strongest geography with a +58% rise and +56% in Latin America. Shares of CAT rose +2.50 and adding +20 points to the Dow's 73 point gain.

Shares of Intuit (INTU) soared on Friday after raising guidance for the current quarter. Intuit reported earnings of 32-cents on Thursday that was inline with estimates but the guidance raise seemed to do the trick. Intuit shares rose +3.67 to $54. In the why bother category, a Jefferies analyst reiterated his buy rating and raised the price target by $1 to $56. Why waste the digital ink to raise your target by a single dollar and only $2 over the current price?

Intuit Chart

Investors have a really short memory. FedEx surprised last week with an earnings warning and the stock was hammered for a loss back to $94. On Friday FedEx closed at a new high at $98.29. The warning has been forgotten or more likely forgiven and investors are flocking to FDX on expectations for increased business as the recovery continues. UPS also hit a new high on Friday at $77.

Apple (AAPL) was the number one reason the Nasdaq was negative most of the day on Friday. The stock lost $8 on news of an anti trust probe by the Justice Dept and the Federal Trade Commission on its new rules on iPad content. Apple has decided that anyone selling digital content like news feeds on its iPad must sell the subscriptions through the iTunes store so Apple can collect their 30% fee. Also, the seller cannot sell the product cheaper anywhere else. For example if they are selling it for $10 a month on the iPad they can't sell it for $7 a month on an Android platform. That means Apple is telling content providers what they can and can't do on other platforms. I personally have a serious problem with this and apparently many others have the same feeling. Apple has already turned down apps from numerous magazine and newspapers because those content providers did not agree to the rules and Apple's 30% fee. This is digital blackmail. Why does Apple get to control what content we can see on a device we own?

Apple dodged one bullet on Friday after Steve Jobs turned up at the president's supper meeting with all the tech heads in California. Apparently the press was kept well away and could not take any pictures of the attendees but others at the meeting said Jobs looked fine and did not appear to be in any immediate physical distress. In the "official" picture below that is Steve sitting next to the president with Mark Zuckerberg sitting on the far side of the president. Yes, Mark wore a suit and not his customary hooded sweatshirt. Note the awe struck look on Mark's face in his conversation with the president.

President's Dinner Meeting

President Obama and new pal Mark Zuckerberg

There were some other serious losers on Friday in what could be a warning our momentum trend could be nearing an end. The fertilizers stocks are one example. Another would be Carbo Ceramics (CRR). This is an oilfield services company that has been on a vertical sprint since earnings on January 25th. Carbo added +$25 in that period. On Friday the stock gave back -4 on no news. It was down nearly $6 intraday.

Refiner Tesoro (TSO) had rallied about 40% since mid January but gave back -6% on Friday on no news. First Solar (FSLR) at Friday's high had gained $20 over the last seven days but closed down -$7 from the intraday high after a blog site named a $153 price target. Since when do blogs have enough power to move a stock like FSLR $8 in one day?

The power moving these stocks is the continued skepticism in the rally and the feeling the market is severely over extended. When traders start to worry they tighten their stops and the slightest bit of volatility creates a cascade decline of stops getting hit. As markets become top heavy the volatility increases.

Momentum stocks with the slightest bit of negative news are crushed. Seacor Holdings (CKH) lost -$17 on Friday after reporting earnings that were 22% higher than the comparison quarter. They were crushed because of the slowdown in Gulf drilling. They lease service ships to the oil sector. In Q3 they had 1,772 vessel days on lease because of the response to the Horizon oil spill. This was a significant increase over activity prior to the spill. In Q4 when the Gulf activity went back to normal their revenue declined sharply from that in Q3 and they had only 336 vessel days. The problem is the new normal. Since there are no permits being issued in the Gulf nobody is leasing service ships. The new normal means they have 13 vessels off lease while we wait for the BOEMRE to release some permits. They still made a profit but because of their recent momentum gains the stock was quickly kicked to the curb.

Seacor Chart

We could see a change in the permit approval process soon. The Marine Well Containment Company announced its seafloor containment system was operational and ready for immediate use. They also announced the BOEMRE had witnessed a successful test. This was the main excuse the BORMRE had been using to deny permit applications, the lack of a proven containment system. Now that excuse no longer works.

Secondly the federal judge in New Orleans has ordered the BORMRE to act on five existing permit applications within 30 days. He has already found the government in contempt of his previous rulings and another delay is not going to go over well with the court. He said permits took an average of two weeks in the past and some applications have been pending for five months. This has forced six rigs to move out of the Gulf. It has caused the bankruptcy of Seahawk Drilling and forced the sale of rigs by smaller companies and forced some companies to abandon exploration in the Gulf completely. The government is out of reasonable excuses to reject permits so any further delay will be seen as politically motivated.

Rosetta Stone (RST) buckled under the pressure from the Borders Group bankruptcy and warned current quarter earnings would drop to 23-cents per share from prior forecasts between 28-38 cents. The Borders bankruptcy was a big hit for Rosetta because they were a big outlet for their language software and they were carrying a big accounts payable balance that is highly questionable in light of the bankruptcy.

Rosetta Chart

The China inflation story plus the tension in the Middle East combined to push the precious metals back to their highs. In the case of silver that is a 30-year high at $32. Dealers claim silver coins are flying off the shelves. Every silver dollar auction on Ebay has lots of bids even at $36-$38 per coin. Gold returned to $1389 and within shouting distance of resistance highs at $1425. Interest rates are rising around the world and the Fed's "extended period" clause is about to expire. European Central Bank Executive Board member Lorenzo Bini Snaghi said the bank may need to raise interest rates because of mounting global inflation pressures. Precious metals investors know the final chapter in this story.

Comex Silver Chart

Continuous Commodity Index

Volume remained low for option expiration Friday at just barely over 7.1 billion shares. However new 52-week highs rose to 927 and the largest number since the 1,005 on January 3rd. The meltup is continuing but it is very broad based.

Jane noted in the Market Monitor on Friday the current +27% S&P rally since September has only happened five times in the last 100 years. All five of those rallies continued higher, much higher. The average gain beyond this point was another +22%.

March 1935 thru August 1935
August 1949 thru March 1950
September 1953 thru March 1954
June 1958 thru Jan 1959
Jan 1995 thru July 1995

So far in February the S&P has gained +4.3%, Nasdaq +4.8% and Russell 2000 +6.6%. It is no wonder quite a few people are very reluctant to buy this market without a significant dip. These kinds of gains are begging for a correction and this is what has the bears in such a tizzy. I actually had a couple readers email me this week complaining about my comments in reference to the bears and their refusal to accept the rally.

I completely understand where the bears are coming from. I have paid my dues in the past for refusing to accept the trend at the time and continually betting against it. This is something we all have to deal with from time to time. Once you start looking for a contrarian play, a correction in a rising market or a rebound in a declining market, every minor blip looks like an early indicator of what your expecting and you miss the bigger picture. I have been there and done that more than I care to admit.

I want to emphasize I am not picking on any specific bear but just having a little fun with the facts. I guarantee you if I was the one calling for a daily top in a bull market my email would be full of comments not fit to print.

The object of the game is not to be right or wrong in theory but to make money on whatever direction the market gives us. Legendary trader Jesse Livermore was known for a specific quote. "There is only one side to the stock market and it is not the bull side or the bear side, but the right side." Jesse was basically a trend follower not a contrarian. He bought breakouts and sold breakdowns. He had another quote that explained his strategy. "Obviously the thing to do is to be bullish in a bull market and bearish in a bear market." And "Never argue with the tape." Jesse built up an enormous amount of wealth of more than $100 million in 1929. In today's dollars that would be several billion and he did it all on following the trend.

Jesse would love this market. The S&P just keeps moving higher and did so again on Friday despite the big loss in Apple. The index has moved above long-term resistance from August (dotted line) and is now using that as support. If there was to be a decent bout of profit taking we could easily return to the bottom of the channel at 1320 without even breaking stride. Strange to think that just last week we were struggling to get over 1320 and now it is distant support.

Just remember a dip for profit taking does not have to be big and scary. We have had numerous 2-3 day pauses in our climb to give traders an excuse to take money off the table. It has been nearly a month since we had any decent retracement and in market time that is a very long stretch. We are probably going to see that type of dip again this week but I would be surprised if it was damaging. Funds are still reporting positive money flows and we are approaching month end again. Unless there is a major news event the market is not expecting I believe the dips will remain shallow for several more weeks.

S&P-500 Chart

The Dow exploded out of the consolidation phase of the last two weeks and there is no short-term resistance in sight. Dow 12,500 would be the next level where sellers might appear. Like the S&P the Dow is using the failed longer-term resistance as support and any decline has plenty of pause points to slow the drop.

Dow Chart

The Nasdaq was chained to negative territory most of Friday with Apple -8 and Priceline -6 leading the list of the decliners. It is very bullish to carry a big loss in Apple with the stock at 18% of the weighting on the NDX and still manage to close positive for the day. However the resulting doji candle is typically indicative of a trend turning point. Regardless of the reason for the wide range but narrow close it is still a market fact. We can always explain away a single event but the market direction is the result of thousands of daily events. The market does not rise and fall on one stock even with an 18% weighting. However, the actions of one stock can spoil the sentiment for the market as we have seen time after time.

The Nasdaq has three levels of converging resistance at 2850 and could be relatively overbought by the time it gets there. Baring unforeseen circumstances it could happen this week. Support is 2800 followed by 2765.

The Nasdaq is very close to that ten year high with only 25 points separating the close at 2833 from the 2859 high in January 2001. That could be a significant hurdle.

Nasdaq Chart

The Russell is still gaining ground as it moves toward its all time historic high at 855. A move over this resistance level would be very bullish. Small caps have already gained +6.6% in February.

Russell Chart

The Dow Transports are a leading indicator for the economy and a confirming Dow Theory indicator. A continued move higher in the transports would be bullish for the Dow industrials. Resistance is now 5400 from May 2008.

Dow Transports Chart

The broadest measure of the market is the Dow Total Stock Market Index, formerly the Wilshire 5000. This index has also broken over uptrend resistance and moving away from that anchor line. This is a broad index showing exceptional bullish strength.

Dow Total Market Index

In summary I believe we are still in dip buy mode and eventually we are going to get more than a one-day dip. The violence in the Middle East is the wild card and any further escalation could be a problem. It is also about time for the EU debt crisis to flare up again. There was excessive overnight borrowing from the ECB late in the week, about ten times normal, and analysts were afraid it meant there was a bank in trouble. It was explained away this weekend as a bank doing an asset sale and needed to pay off existing loans so the assets could be sold free and clear. Once sold the overnight loans to the ECB would be repaid. At least that was the excuse for borrowing to go from 1.5 billion euros per day to 16 billion. We will see if it really works out that way.

Lastly Portugal is in the news again with rising worries they are going to need a bailout. We never know what new problem is going to pop up to cause us trouble. With markets at new highs they are very susceptible to event risk. Keep your stops tights and buy rebounds not dips. Buying the dip before the rebound begins could grow increasingly dangerous in the days ahead because we never know when that multi-day decline will arrive. Look for stabilization at the lows and evidence of an accelerating rebound before entering new plays.

Jim Brown

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"When you sit with a nice girl for two hours, you think it's only a minute. But when you sit on a hot stove for a minute, you think it's two hours. That's relativity." - Albert Einstein