The surprising Non-Farm Payrolls sent the Dow up +150 at the open only to see a return to negative territory a few minutes later. The volatility was extreme and recent winners became big losers.

Market Statistics

What a day! The contradictions in the major indexes were surprising and the reaction to the jobs news for commodities was extreme. The jobs news was a real surprise and caught everyone completely off guard resulting in short squeezes of all types.

The November Non-Farm Payroll report blew away estimates for 130,000 jobs losses with only 11,000 jobs lost in November. In addition the losses previously reported for September and October were revised lower by 159,000 jobs. On the surface this was a very bullish report.

September job losses were originally reported as a loss of 263,000 jobs. In October that was revised lower to a loss of 219,000 jobs. In the jobs report on Friday that same number was revised to only 139,000 jobs lost. That is an improvement of +124,000 jobs over the last 60-days. The October job loss was originally reported as 190,000 and that was revised lower by 79,000 jobs to a loss of only 111,000 jobs. When coupled with the mere 11,000 jobs lost in November this was a very strong report.

The unemployment rate dropped to 10.0% from 10.2%. I realize that is a minimal amount but the key word there is "dropped." Despite the market reaction to the numbers there were some problems not reported in the news. The unemployment rate dropped because 98,000 workers fell off the survey because their unemployment benefits ended. The labor force participation rate fell to 65% and a new record low for this recession.

Another reason for the drop in job losses was the sharp increase in temporary seasonal workers. For instance FedEx hired over 35,000 seasonal workers and UPS more than 50,000. My UPS driver has had a different helper every couple days for the last two weeks. Earlier this week I commented to him about having a new one for the third time in two weeks and he said the new guy was an unemployed aerospace engineer. The prior helper was an unemployed CPA. So far he has seen three quit after a couple days because delivering UPS packages is not easy work in 20-degree weather.

Other positives included a fractional rise in the weekly hours worked to 33.0 from a record low of 33.0 in October. Also, average hourly earnings also rose by a fractional +0.1%. Professional and business services employment grew by 86,000 (probably seasonal) with gains of 52,000 in temp services, also seasonal. October also showed a gain of 40,000 temp jobs. The employment from the household survey rose by 227,000 jobs and I view that as the biggest positive in the report. The household survey includes the entrepreneurs who are starting new businesses, family workers, agricultural workers and private household workers. The key class in the survey is the entrepreneurs since new businesses are the source of nearly all new jobs in the USA.

Despite the "less bad" employment report there are still more than 15.4 million unemployed workers looking for work and nearly 50% have been unemployed for more than six months. Manufacturing and construction are still losing tens of thousands of jobs each month. November was the 23rd consecutive month of job losses. Moody's still expects unemployment to rise to 10.7% in mid-2010.

Non-Farm Payroll Chart

The only other economic report out on Friday was the Factory Orders for October. This is a lagging report and was overshadowed by the jobs numbers. However, this was a positive report. The headline number came in a +0.6% compared to estimates for a zero gain. Inventory levels remain low and will eventually support a robust manufacturing cycle once demand begins to increase.

Factory Orders Chart

I hope all the market commentators got their economic fix on Friday because next week's calendar is positively bland. There was nothing on the schedule that I thought was important enough to highlight. This is mostly economic filler as we approach a heavy schedule in the following week, which includes a FOMC meeting.

Economic Calendar

Of interest for next week is $135 billion in new debt being auctioned. There is $74.3 billion in 3, 10, 30-year notes/bonds and $61 billion 3 and 6 month bills. The Treasury will sell $40 billion in 3-year notes on Tuesday, $21 billion in 10-year notes on Wednesday and $13 billion in 30-year bonds on Thursday. Those 30-year bonds will be the most watched auction of the week.

What we need to start thinking about for next week is Q4 guidance and earnings warnings. We are approaching the middle of December and the period where major companies will start giving guidance updates for Q4. This is not as prevalent as in years past since most companies are beating earnings from cost savings. However, there will be a few that will confess that Q4 is not going as well as planned. Hopefully there will be more companies that upgrade guidance. Intel upgraded or affirmed guidance several times in Q3 and it helped the market every time. Intel already upgraded guidance for Q4 back on Nov-12th and now they are in their quiet period until their actual earnings on Jan-14th. Other companies who report later in the cycle are still eligible for upgrade reports. Keep your eyes open for unexpected guidance announcements.

Not exactly a guidance upgrade but the Bank America announcement they were repaying the TARP funds should have been a market mover but they got caught in the dollar volatility trap as the week ended. BAC announced they were selling 1.3 billion shares or about $19 billion in stock. Those shares were called common equivalent securities and will convert to common stock once BAC gets shareholder approval to increase the number of outstanding shares. The CES shares sold for $15 each and about 5% below the BAC price at the time. BAC is also selling $4 billion in other assets to repay the TARP funds.

S&P decided the CES shares represented actual shares and re-weighted BAC in the S&P 500 as of the close. This increases the BAC weighting in the index from 1.4% to 1.6% and forced index funds to buy more shares. S&P said this equated to $2.2 billion of buying pressure on BAC. Unfortunately index fund managers had to sell fractional positions on the other 499 stocks to lower their weightings. This may not seem like much but when you have several thousand index funds all selling fractional positions of the same 499 stocks on the same day it does make a difference.

On the bright side BAC delayed the offer several days and raised the amount because of strong demand. BAC closed on Friday at $16.19 and well over the $15 CES sale price. Selling the shares into a high demand market and paying back the TARP does not get BAC out from under the government's thumb. The Treasury still has 122 million warrants on BAC that they can sell later. It will probably be much later since the BAC warrants have a strike price of $30.79. That means they are out of the money by about $15. It also means they will not be a further dilution risk for BAC for a long time. Treasury also obtained a promise from BAC to sell that $4 billion in "other" assets. I recommended buying BAC in the LEAPS newsletter back in January and James and I talked about continuing to keep them this weekend. I am still a fan and still believe we will see $30 before those 2011 LEAPS expire. I would add to positions of your choice over $16.50 and over $18.50 but make sure they are long-term positions. Over 1.1 million option contracts were traded on BAC on Friday.

BAC Chart

While on the subject of TARP the Treasury auctioned 12.7 million TARP warrants on Capital One last week and received $146.5 million in another heavily bid auction. The warrants sold for $11.75 each and allows the bidder to buy one share of Capital One at $42.13 sometime before they expire in 2018. Since COF was only trading at $36.92 ahead of the auction these warrants represent a very long dated LEAP with no premium decay. If you really wanted to own Capital One you could have bought it for $37. However, if sometime over the next nine years COF returns to its post recession high of $90 then you got a great deal. You just have to really be looking for a long-term payback and not a quick gain. Capital One has already paid back its TARP loans.

COF Chart

Treasury is also going to auction warrants on JP Morgan and TCF Financial. JP Morgan waived its rights to purchase their warrants back from the Treasury after the two parties could not agree on a price. The warrants on JPM could produce $1.0-$2.75 billion for the Treasury coffers. Goldman Sachs bought theirs back for $1.1 billion rather than suffer the dilution. Treasury still holds warrants on 261 banks and only 15 have paid back the TARP loans.

Treasury Secretary Geithner told the press last week that Treasury is going to have "substantial resources" from the repayment of the TARP and the $70 billion in unused funds to make available for new stimulus programs. Treasury spent about $450 billion of the $700 billion in TARP funds. $290 billion of that went into banks. Before the Bank America announcement this week nearly 50 financial companies have returned $72.3 billion in bailout money and paid nearly $7 billion in forced dividends on the government preferred stock they were forced to issue. Geithner said they expected $175 billion in repayments before year-end 2011 and that was "substantially" more than they expected just a couple months ago.

While I am on the subject of banks the FDIC closed six more banks on Friday bringing the total for 2009 to 130. Of the six banks AmTrust Bank of Cleveland was the largest with assets of $12 billion and deposits of $8 billion. The other five banks had assets of less than $1 billion each. The six failures will cost the FDIC $2.3 billion. I saw two interviews of bank analysts last week and both still believed there would be more than 1,000 banks closed over the next two years. Sheila Bair said last week that the impact of those closings could cost the FDIC over $100 billion.

All that glitters is no longer gold. The nearly positive jobs report caused a giant short squeeze in the dollar as it rebounded over a point to 75.91 on the dollar index. After trading as low as 74.26 on Tuesday this was a monumental rebound. It was pure short squeeze as analysts revised their estimates about when the Fed might raise rates. That would strengthen the dollar. I explained how the dollar short squeeze was a double-edged sword last week because large institutional traders were shorting the dollar and buying commodities. That trade came back to haunt them big time on Friday.

We started to see the gleam fade from gold on Thursday as some smart traders exited their gold positions ahead of the jobs report. Gold hit a new high of $1,225 on Wednesday evening and then started down. There was a $20 drop on Thursday followed by a $55 drop on Friday to trade under $1,150 late Friday. With the dollar trade exploding in their face and the gold trade imploding it was a tough Friday for those traders.

The key now is where to get back into gold? Despite the better than expected jobs numbers the Fed is not going to raise rates for months to come and the U.S. is still selling record amounts of debt. As long as the Fed is on hold and the government is going deeper into debt the value of the dollar will continue to decline. It may not decline for a few days because there are still shorts that need to cover. That means gold could also decline further.

I know it is tempting to buy the GLD ETF at $112-$114 but it could go lower. The 21-day on the daily chart has held prior multi-day corrections since August but the game has changed. The U.S. suddenly "appears" to be improving rapidly. I say appears because I expect those jobs numbers to worsen before they get better. Gold has gone parabolic and should this turn into a self-feeding correction on the dollar/gold combination then both could continue to move in opposite directions. However, note on the dollar index chart below that Friday's close was exactly on downtrend resistance.

Dollar Index Chart

GLD ETF Chart - 90 Min

GLD ETF Chart - Daily

Crude prices suffered from the dollar rebound but not nearly as badly as gold. Crude broke support at $76 and appears to be trying to create support at round number $75. However, if the dollar continues to move higher it is going to be an impossible task. Inventories are still rising and demand numbers are still falling in the USA. Oil has a serious headwind here with a $9 contango and Russia increasing production to record levels. They are not in OPEC and have no restrictions on production.

There is really no reason for oil to go higher short of Iran being bombed by Israel. Even if that happened Saudi Arabia could replace the lost production within a couple weeks if they wanted to. Of course an instant jump to $90 on any bombing news would benefit other OPEC countries so they might be slow to counteract that drop and feel like higher prices was payback for the transgression.

Crude Oil Chart

The airlines are flying high again. The November flight data released on Friday showed that every U.S. carrier except for U.S. Airways showed an increased load factor. Southwest was the highest with a +13.3% increase followed by United at 4%, Continental at 3.3%, Alaskan Air +3.1% and American +3%. Revenue per mile increased +11.7% for Southwest and +10.5% for AirTrans. Falling oil prices did not hurt either. Airline stocks were flying for the week with UAUA +31%, AMR +22%, CAL +22% and DAL +21%. If you look at the charts with flat performance for the last month and suddenly a 20% gain for the week you would probably realize that somebody got the traffic numbers well ahead of the public.

United Airlines Chart

You may remember me talking about the rally in the Baltic Dry Index several weeks ago as an indicator of China's economic activity. The Baltic Dry Index had rallied +115% since late September with hardly a blip in the climb. That blip occurred with an -18% decline in 8 days on no specific news. I see it as simply a necessary bout of profit taking. Over the same period the SEA ETF declined -1.50 or about 10%. SEA also has tanker stocks in the index so it does not track evenly. If you believe that the global economy will improve over the next 3-6 months it might be worth picking up some options on SEA but remember there are 800-1000 new ships coming on stream over the next 12-24 months. Short-term trades only.

Baltic Dry Index Chart

Is there trouble at Apple? The stock that led the Nasdaq to its November highs can't seem to find any traction. It has been declining almost daily since mid November. Friday saw a -3.16 drop on a day the Nasdaq Composite was up +21 points. Apple is single-handedly holding back the NDX/QQQQ and preventing them from advancing. Apple is 16% of the NDX/QQQQ. A $3 drop in Apple held the QQQQs to a 23-cent gain on Friday. There is no news to explain why Apple has been so negative. On Friday AAPL closed under its 50-day average for the first time since March. For Apple that is a strong negative signal. AAPL closed at $193 and next support is $188 but without a reason for the decline from its $208 high back in November I would be leery of going long. Apple did announce on Friday it had acquired the digital music service Lala. Terms were not disclosed but since Lala revenues were less than $10 million this was pocket change for Apple and not a reason for the decline. I have a theory on the decline of Apple and others I will discuss later.

Apple Chart

Cisco is expected to affirm guidance at its analyst meeting on Tuesday. On Friday Cisco said it received enough votes to acquire videoconference leader Tandberg. Cisco is expected to tell analysts it can return to 12-17% annual revenue growth as it does battle on increasing fronts with Hewlett Packard. Brian White at Ticonderoga Securities said, "Cisco is expanding their market quite rapidly. Their activity level over the past two months in joint ventures and acquisitions has been unprecedented." Besides Tandberg they also announced the acquisition of Starent Networks. Cisco has $35 billion in cash and even sold $5 billion in debt to add to that cash. Cisco will turn 25-years old next week. When John Chambers became CEO in 1995 Cisco had $1 billion in revenue. Now they have revenue of $35 billion with gross margins of 66%. Unfortunately they have 6 billion shares of stock outstanding, which makes big moves very far apart. Cisco rebounded +60% from the March lows but has gone nowhere in the last three months.

Cisco Chart

Cisco's competitor Juniper has the same chart pattern but got a boost from Goldman Sachs last week. Goldman added JNPR, CVLT and RAX to the Conviction Buy List. They removed ADI, MRVL and TWX. Their conviction sell list includes LXK, Q, VRSN and NVLS. The added Juniper because they saw meaningful top line revenue growth for Juniper in 2010. Goldman cited positive signs in the company's service provider division that drives two-thirds of their sales. They expect Juniper's router business to see 20% growth as network traffic increases. They expect Juniper to beat estimates and raise guidance in their January earnings and again on their analyst day in late February.

Juniper Chart

I am seeing several things happen in the market that defy accurate explanations. One is the Apple decline, another the airline rally. The third is the semiconductor rally last week. The Semiconductor index jumped over 8% for the week. If you look at the chart you would think somebody put a tack in its Thanksgiving dinner chair. The semi sector has suddenly caught fire as we head into year-end. I may have missed it but I don't think I got the email telling me to buy chip stocks. A continued move higher and a breakout over 340 would be very bullish. Options on the SMH anyone?

Semiconductor Index Chart

The market reporters were all pointing to the Dow's big reversal as an "outside day" and an omen of bad tidings. An outside day is normally thought to be an indicator of a potential trend change. The definition of an outside day is one where the day's high is higher than the prior day's high and the day's low is lower than the prior day's low. The Dow's high was 10516 with the prior day 10507. The Dow's low was 10311 and Thursday's low 10350. That qualifies as an outside day BUT there are other considerations.

In an up trend the outside day must close near the low of the day to be considered important. The Dow closed at 10388 and +77 points from the low. That is -138 points off the high but still well off the low so I will give it a grade of C. Outside days are most predictive when they occur on low volume. Volume on Friday was 10.4 billion shares and the biggest day since Nov-2nd. I grade that an F.

In Bulkowski's Encyclopedia of Chart Formations a day like Friday has a high failure rate for predictive behavior. Bulkowski did a study of 510 outside day formations over 5 years. A pattern is considered a poor predictor of future performance if it fails 20% of the time. Friday's pattern would normally fail just over 42% of the time. That is really close to a coin toss in this instance with only a 58% chance of a reversal.

Dow Outside Day Chart

I believe the markets are going to be more focused on the Fed's perceived action on rates due to the better than expected jobs data rather than the outside day on the Dow. The Fed is the key here and they meet again on Dec 15th, only a week away. This is going to be a seriously contentious meeting and the primary focus for the market next week even though it is over a week away.

I don't expect the Fed's comments to change materially. The Fed understands that this was seasonal hiring and not a material change in conditions. I doubt they will change their bias although they might remove the considerable period statement just to start easing in that direction. However, almost everyone still expects unemployment to be well over 10% by mid 2010. The Fed can't raise rates in that environment.

Secondly the administration officials are talking about another stimulus package of some sort and possibly even a payroll tax holiday. The Fed can't talk about raising rates when the government is talking about additional stimulus. The jobs were a fluke and the report needs to die a peaceful death. It may take the markets a couple days to settle down but I believe it will happen.

However, that will not take the focus off the Dec-15th Fed meeting. It will control our lives for the next week whether we like it or not. With Philly Fed President Plosser out last week talking about raising rates, the stink is in the air. It is like the smell of a baby's dirty diaper in a room full of adults at a family dinner party. Everybody smells it but nobody wants to acknowledge it or they might get stuck with changing it. The smell of future rate hikes is in the air but nobody wants to acknowledge it. They are hoping the Fed will also ignore the smell until sometime in 2010 so nothing disturbs the potential for an end of year rally.

The Fed normally begins raising rates 18-20 months after the first uptick in employment. That first uptick would have been last February and "normally" we could expect rate hikes somewhere July-August 2010. This is not normal since we have just undergone the Great Recession, the worst since the 1930s. The Fed will want to make very sure the rebound has traction before acting.

That does not help our markets next week. We are going to be left to twist in the dollar rally wind until that trade is exhausted. Hopefully I will turn on my charts on Sunday night and see the dollar already declining but I am not counting on it. On a side note I received an email this week referencing my Tuesday commentary saying I should not use the words hope and love in my writing because they were emotional words and did not belong in a technical conversation. I responded that whenever I am in a trade I hope to profit. I am pretty sure nearly everyone reading this today has seen me write numerous times that hope is not a strategy. I do hope my trades succeed and as a human I fear I will not be able to consistently avoid those terms in my writing.

As for the markets I think we are better off than it appears on the surface and I will explain that in a moment. The Dow may have had an outside day but it was taken down by declines in commodities and oil. Dupont fell -7% or -2.49 with AA, IBM, XOM, TRV, MCD, WMT, MRK and PFE also Dow losers. The decline to nearly 10300 was right inline with other major declines in the last month to support between 10250-10300. No harm, no foul. If we were to break under 10250 that would be a game changer although there is uptrend support just under 10200. True support at the 50-day average is well below around 10100. We can decline significantly without doing any real damage to the 9-month rally. The Dow is looking rather top heavy and that is the real cause for concern.

Dow Chart - Daily

If you want to see a real outside day look at the S&P. The S&P traded in a 24-point range and closed near the bottom of its range. On the positive side it gained +6 points and closed back over 1100. That is stretching the positive aspect a little but 1100 is a key level as the round number magnet in the center of the current range. Real support is 1085 and real resistance is 1110. We did see the S&P make a higher high on each of the last three days but each day it was stopped cold by the prior uptrend support, which is now resistance.(blue line)

The challenge with the S&P is the fact it fell out of its long-term channel. It is struggling to move higher but can't get any traction over 1110. You should also note that the 30-day average is starting to flatten out at 1085. This adds to support only as long as the average remains in an upward trajectory. I am worried about the S&P although it did have significant selling pressure at the close from the Bank of America rebalance. As long as any further weakness on Monday remains above 1085 I view it as favorable. After Monday a break below 1085 would be lights out in my book.

S&P Chart - Daily

The Nasdaq also had an outside day but closed at the high end of the candle and well over the prior day's close. This would seem to be a continuation move rather than a reversal signal. The Nasdaq Composite made a new intraday high for 2009 when it broke over 2200. Friday's close was the third highest close for the year. The decent 21-point gain despite the big range was bullish. However, as I have been pointing out for two weeks the Nasdaq has been a drag on the other indexes. If this is reversing then the composite index should breakout next week. The strength of the semis overcame the drag of Apple because Apple's weighting in the Composite index is relatively small compared to the NDX. Support is 2150 and resistance 2200.

Nasdaq Composite Chart

The Nasdaq 100 was crippled by Apple. With Apple representing 16% of the Nasdaq 100 weighting the -$3.16 decline in Apple was a dead weight for the NDX. However, the NDX managed to set a new intraday high and clearly respected initial support at 1775. I view this as a positive signal but it could also be viewed technically as a potential double top. Next week will be the key. If the NDX declines below 1750 we are in serious trouble.

Nasdaq 100 Index Chart

Why did the Dow and S&P suffer so badly on such positive news? You should know the answer to this question. There are multiple answers because of multiple factors but I am looking for a specific answer. An answer could be that the commodity sell off removed about 35% of the supporting stocks from the S&P. That is one reason. Another would be that the dollar rally forced those short the dollar and long equities to equalize those positions. The answer I am looking for is in the opening graphic of market statistics.

The Russell 2000 was up +4.43% for the week with 2.4% of those gains coming on Friday while the rest of the major indexes were up an average of 0.5%. For weeks I have been preaching that the Russell was underperforming because fund managers were putting excess cash into the highly liquid blue chips and avoiding the illiquid small caps. Fund managers were looking for safe havens not investments. On Monday that trend began to reverse and accelerated into Friday. Fund managers were selling the big caps and buying the Russell stocks. On Friday the Russell made a new 6-week high and unlike the Dow, Nasdaq and S&P, it closed near the high for the day. I view this as a major indicator of a change in market sentiment. Fund managers are thinking if jobs are improving then the economy must be getting better so I need to invest in small caps.

I could be totally mistaken in my theory but I am sticking with it until proven wrong. We waited in vain for weeks for the Russell to recover while the Dow was making new highs. Now it is the Russell showing strength. I feel like shouting hallelujah but that would be an emotional outburst. I believe part of Apple's problem last week was the fund managers taking out cash. Apple is one of the most highly liquid tech stocks and its $190 price tag holds a lot of cash in a few shares.

The support on the Russell is the 100-day average at 582 and resistance was Friday's high at 606. A move over 606 targets the resistance high for the year at 623.

Russell 2000 Chart

I think I have accurately laid out our challenge for next week. It will be dollar strength on Monday from additional short covering and then fear of the Fed for the rest of the week. Hopefully investors will realize that the Fed can't act when the administration is proposing additional stimulus. Bernanke has not been confirmed yet so he should be toeing the party line for another week.

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Jim Brown