Market Stats for the past 4 weeks

Market Stats for Thursday, April 1

As you can see in the two tables above, Thursday's rally is what gave the week the bulk of its gains. Thursday was a respectable day with decent market breadth behind the rally. What wasn't behind the rally was volume which turned out to be one of the lighter days of the year. That's been the story of this rally--low volume on rallies and higher volume on selloffs. But it hasn't stopped the market from making an impressive 2-month run from the beginning of February. Now we enter one of the more difficult months for the market as April has tended not to be kind to the bulls. Coming into it as overbought as we are does make one wonder what else the bulls can do to keep the market rallying.

One thing the market may suffer from is a withdrawal of the some of the Fed's money (actually our money that they're freely spending). They've been saying for a few months now that they will stop the mortgage repurchase program, a program that has pumped $1.25T into the monetary system by purchasing mortgages and other toxic assets from the banks. The cash given to the banks was supposed to be then lent out to businesses and consumers. But with loan demand down and a desire on the banks' part to leverage up this money the big banks and their trading desks have been "investing" it instead.

By buying securities--stocks, bonds and commodities--the Fed's money has been making it into the market instead of borrowers' hands. This has created demand for bonds, such as U.S. Treasuries, which has kept prices up and yields down. The demand for stocks has created artificial support and kept share prices rising even while volume has been low. It has been a source of great frustration for bears who see no reason for the market to be this high, let alone rallying as strong as it has been. Welcome to QE (quantitative easing) from the Fed.

So now the big question as we head into April is what will happen to some of that demand if the Fed will no longer be feeding hundreds of billions into the monetary system each month through the mortgage repurchase program. Their balance sheet is already massively swelled with these assets so they can't just keep doing it. Certainly the lack of Fed money coming into the market could cause it to lose the support that's been holding things up.

If the bond market starts to sell off because of lack of demand for U.S. Treasuries the Treasury Department will be forced to raise rates to entice buyers (which goes along with reduced selling prices). That would obviously start to create pressure on the Fed who would soon be forced to follow by raising its discount rate (but they'll probably hold off as long as possible so that the banks can continue to borrow money for virtually free and then buy the Treasuries, thereby earning an immediate profit on the credit spread. They'll think they're geniuses and reward themselves with another massive bonus.

Another consequence of higher yields for bonds is that they'll be more enticing to investors who will see the higher bond yields as a safer bet than the stock market (which is near record-low yields). That would further take away support for stock prices as the combination of lack of Fed support along with investors shifting out of stocks into bonds could land a 1-2 punch to the stock market. As overbought as it is there could be rush for the door at any time. People keep asking what could trigger a selloff since nothing has caused it to sell off so far. Sometimes it's nothing more than some initial selling that triggers others' stops which creates more selling and before you know it the DOW has lost 1000 points and people are wondering why. And now with a dearth of shorts in the market there will be little buying power during a decline.

The past week's economic reports were a mixed bag; some showed improvement while others showed further deterioration. Some of the improvement was simply "less bad". Overall it indicates an economy that is still struggling but showing some signs of improvement. The stock market rally has of course been built on the hope that the improvement will continue and that we'll avoid a double-dip recession that many are expecting. If states continue to raise taxes (they have to do that and significantly reduce services) and the Federal government also raises taxes we can expect all the tax increases to cause a real drag on GDP.

The passage of the health care bill will only add to the tax burden. Revenue neutral is a pipe dream and anyone with any sense of reality expects the bill to add another $1T to our debt load. The new bill even includes funding for 10,000 new IRS agents. Overall our tax bite is going to get a lot bigger and public anger is only going to increase (it's the social mood shift that results in the swing to the downside in the economy and stock market). You couldn't pay me enough to be a tax collector as the push back against the government and taxes in general is only going to get worse.

We've seen an increase in GDP the past couple of months but most recognize it as just a statistical recovery as inventories are rebuilt from very low levels. Unfortunately demand hasn't increased to warrant further building of inventories. In fact Thursday's ISM report showed in improvement in the inventories index from 47.3 to 55.3 for March and the new orders rose from 59.5 to 61.5 (probably for inventory replenishment). Unfortunately the components I consider more forward looking were not as good. The employment index fell from 56.1 to 55.1 and the backlog of orders index fell from 61 to 58. These are all minor changes but it's the direction that I don't like.

The Chicago PMI declined from 62.6 to 58.8, factory orders declined from +2.5% to +0.6% (but at least still positive), home prices and sales are still falling and construction spending fell another -1.3%. But hope springs eternal and the stock market continued its rally. In fact the strong 2-month rally has been built on hopes that we'll see an improvement from less-bad numbers to outright improvement. I'd say at this point the stock market has priced in expectation of a strong economic recovery that hasn't shown up in the numbers yet. The one light at the end of the tunnel, unless it's a train, was the strong improvement in the nonfarm payrolls number reported on Friday. Or at least the headline number was good--162K jobs were added in March.

I don't want to turn a positive number into a negative but we do need to look under the hood and see what's going on. Pundits, especially ones who work for the government, will of course highlight the big number and ignore the information that detracts from that number. First of all there were about 48K in part-time census workers. Another 82K came from the birth/death model. This is essentially a guess about how many jobs were created/lost due to new businesses starting up or closing. It's not until months or even years later that the real number is known. During an economic contraction the birth/death number tends to inflate the number of new jobs created.

The good news about the employment picture is that it would appear that small businesses have stopped laying off people. The bad news is that the improvement in the jobs number has more to do with fewer layoffs than actual gains. A survey done by the The Liscio Report showed a decline in the chances of being reemployed from 20.1% to 18.7%. This is the lowest number since the survey started in 1948, showing how difficult it is to find a job once unemployed. The number of people unemployed for more than 6 months continues to climb.

The unemployment rate remained the same at 9.7% largely due to the number of people added to the population that counteracted the growth in employment. The economy needs to add 125K new jobs every month just to keep up with the growth in our population. The report showed there were 398K people added to the labor force which clearly overwhelmed the 162K jobs added. What kept the unemployment rate the same was the removal of 238K people who are no long considered unemployed because they've given up finding a job. These numbers are of course not discussed by the media and certainly not by the government. The U-6 unemployment rate, which includes part-time people who want to be working full time, continues to climb and now stands at 16%. The number of part-time workers took a big jump in March. So I ask you, is the 162K reported increase in employment bullish or bearish? We'll have to let the market tell us. Friday's futures took a jump but the cash market on Monday will be the better tell.

As I mentioned, we've finished a very bullish 2-month rally and now we enter a month known to be trouble for the stock market. With an overbought market in need of a correction at a minimum, coupled with the possibility the Fed will be pulling back on their QE program, I think it's prudent to be very careful about further upside. I'll show some upside potential (the market can always get more overbought) and identify some key levels to the downside that will tell us the rally has topped.

Starting with the weekly chart of SPX, I show a little more upside potential to the top of a potential rising wedge pattern, near 1205 next week. If the bulls get rambunctious next week, and perhaps into opex, we could see the 62% retracement of the 2007-2009 decline at 1228.74 get tested. At the same level is the 200-week moving average. If SPX does get up there it's going to be very strong resistance.

S&P 500, SPX, Weekly chart

With so many market participants expecting SPX to make it up to 1200-1250 I've been wondering if the market is being set up for maximum disappointment. One needs to be cautious now about the potential for a rally failure at any time. We're definitely at a time when a downside surprise could happen and create a disconnect to the downside. A lot of shorts have left the market and therefore there's less of a downside cushion provided by their buying power once the decline gets started.

Last week I mentioned SPX achieved a potentially important Gann Square of Nine level at 1178, which is one square or 360 degrees around from 1044.50, the February 5th low. Since that report on Thursday, March 25th, SPX hit a high of 1177.83 on March 30th and then 1181.43 this past Thursday, April 1st but it closed at 1178.10. So far it's looking like 1178 is an important level. This clip of the Gann Sof9 chart shows the relationship of the 1045/1178 levels:

Section of Gann Square of Nine chart showing 1178 square to 1045

With the futures up on Friday, following the jobs report, it looks like the 1178 level might finally break so we need to find some potential upside targets. Above 1178 on the Gann Sof9 chart the next potentially important level is 1204, which is interesting because of the trendline resistance near the same level. On the Sof9 chart 1204 is two squares from 943, the January 2009 high, which is opposite the 768 October 2002 low and the 1576 October 2007 high. I shrunk the Sof9 chart (can't read the numbers) to show the lineup of these numbers along the two red radials running from the top, left of center, to the bottom, right of center:

Gann Square of Nine chart

The 1045-1178 highlighted squares are the two square highlighted at the right side of the chart. The other radial on the Sof9 chart, running from top right to bottom left (since you can't read the numbers) shows the relationship between the March 2009 low near 666 and 1211. I cut out the upper and lower sections of the table, in order to see the 1576-768-943-1204 relationship (double radials) and the 666-1211 relationship (single radial), in the next chart:

Sections of Gann Square of Nine chart

So 1204 and 1211 are the next Gann levels to watch for, especially since the lower one closely matches the upper trend line on the price chart. Between Fibs, trend lines and time my sense is that SPX could get pinched if it rallies much more. As mentioned on the weekly chart, the trend line along the highs from October 2009 is currently near 1200. If we get a choppy rally that takes us into the early part of opex week, shown with the dashed line on the daily chart below, we could see SPX make it a little higher to where the uptrend line from February 5th crosses the upper trend line near 1204.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- cautiously bullish above 1181
- bearish below 1150

If SPX drops below 1150 it would be immediately bearish as it would indicate the high is in place. This is important because if the market immediately drops to 1150 on Monday/Tuesday (instead of rallying), it could find it to be support and launch another rally leg into opex. It must close below 1150 to be bearish.

Assuming we'll see the upside reaction to the jobs numbers continue on Monday, we've got the above mentioned numbers to look to. But before SPX can even get to 1200, it will run into potential resistance at the trend line along the highs from March 17th. The short-term choppy price pattern over the past two weeks leaves open several possibilities so my 60-min chart looks confusing with several trend lines and wave labels. Please excuse the mess.

S&P 500, SPX, 60-min chart

The bold red lines depict how I think price could play out from here, assuming we get a stock market rally following the jobs number--a thrust up on Monday followed by a small pullback correction into Tuesday and then a final high into Wednesday that falls short of 1200. The dashed line shows a smaller version of that pattern could play out and top out around 1185 by the end of the day Monday. If it makes it above 1185 it should be able to make it close to or above 1200 (in which case the Gann levels would be in play). If we get a rally on Monday then the key level for the bears to break becomes last Wednesday's low near 1167 as that would indicate the high was put in.

But as mentioned above, if the market tanks immediately on Monday then watch to see if it finds support at or above 1150 since the sharp decline could be the completion of the correction that started from the March 25th high. In that case the sharp decline could be followed by another rally leg into opex week. This depiction is not shown on the chart but is shown on the DOW chart below. A break below 1150 is what would tell us the decline is not the completion of a correction but instead would mean the top is already in place.

Similar to the 1150 level for SPX, if the DOW drops immediately on Monday, it could find support at or above its January high near 10730 and then launch another rally leg into opex (shown with the dashed line on the daily chart below). Upside targets for a rally next week include the trend line along the highs from February, which crosses the trend line along the highs from November near 11120 on Tuesday. This is also close to the 200-week moving average at 11133. A little higher is the 62% retracement of the 2007-2009 decline at 11246. Of course the first level the bulls need to hurdle is the 11K line. There will probably be more than a few bears hiding behind the trees at that line, ready to start picking off the bull scouts.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- cautiously bullish above 10950
- bearish below 10730

Taking a look at the Nasdaq Composite instead of the NDX, it was barely able to hold onto its uptrend line from February 5th. If you look at an intraday chart you can see that it broke the uptrend line on Thursday afternoon and then ran back up to it at the end of the day. If the market drops out of the gate on Monday it will leave a bearish kiss goodbye at that trend line. In that case, like the DOW and SPX, we could see a drop to about 2350 and then another rally into opex (dashed line on chart below). But assuming we'll see a continuation of the rally, watch the 2460 area where it will run into the mid line of its channel where it crosses the trend line along the highs since September (on Wednesday). It could certainly rally higher but that would be a level of interest if it stalls out there.

Nasdaq Composite, COMPQ, Daily chart

Key Levels for COMPQ:
- cautiously bullish above 2452
- bearish below 2358

Looking at the weekly chart the Nasdaq below, it is struggling to break free of its downtrend line from 2000-2007 (log scale). The previous week's candle was a version of a shooting star at resistance (at its trend line along the highs from September 2009). This past week's candle is a doji and could be simply indecision (consolidation) or it might be a reversal signal (a down week this coming week would confirm it). At the same time RSI has bounced back up to its broken uptrend line from March 2009. This is common to see as price makes a final high so it's another warning signal.

Nasdaq Composite, COMPQ, Weekly chart

The SOX has been a picture of determination--it has been nudging up underneath its broken uptrend line from March 2009 ever since it broke it in January and bounced back up to it in mid February. The weekly chart below shows it tagged its 200-week moving average the previous week and left a version of a shooting star. But not to be foiled, the bulls tried again and made a minor new high but still couldn't close above the trend line or its 200-wma. The new high above January's is leaving another bearish divergence on the oscillators, showing the waning momentum to the upside. Eventually this will make a difference and the rally will collapse. The SOX was much weaker than the broader market on Thursday.

Semiconductor index, SOX, Weekly chart

The RUT has been looking weaker than the others over the past week. Fund managers look to have been lightening up on small caps and parking their money in the larger blue chips, which of course makes it easier to unload a lot of inventory when the selling starts. I suspect the RUT will be one of the leaders to the downside once the market tops out. After breaking its uptrend line from February 5th, on March 26th, it retested it a few times but was unable to get back above it. On Monday that line will be near 696 and climbing about 3 points per day. Any break below the March 22nd low near 667 would be a potential sell signal and below the January high near 649 would confirm the top is in.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- cautiously bullish above 690
- bearish below 667

The NYSE has been showing some relative strength over the past week and pushed right up to potential resistance on Thursday--it hit its downtrend line from October 2007. If the market rallies Monday I see the potential for it to continue to make its way higher during the week to a little over 7700 where a Fib projection for a 5th wave up crosses the mid line of its up-channel from February and its trend line along the highs from October 2009. If it drops below Wednesday's low near 7422 it would be a confirmed break down from its up-channel but it takes a break below 7321, the March 22nd low, to confirm we've probably seen the high. The negative divergence as price makes a new high is a warning now. At the bottom of the chart I've noted the possible turn date of April 5th, which will be the same number of days from the January high as between the October and January highs.

NYSE, NYA, Daily chart

Speaking of negative divergences, it can be clearly seen against the advance-decline line for the NYSE. As the chart below shows, the new price highs since October have not been supported by the a-d line. And especially since early March we've got a sharp negative divergence. The 10-dma of the average is close to dropping below zero (meaning more decliners than advancers even while the index chugs higher). The rally is happening on the backs of fewer and fewer stocks and that's usually a good signal the top is near.

NYSE vs. Advance-Decline line, Daily chart

The KBW Banking index has held its uptrend line from February so the bulls still rule. The next task is to climb over the downtrend line from October 2007, which it tried three times previously but was unable to close above it. If the bulls can do it then the next upside target should be around 55 where it would run into its trend line along the highs from December, which produced a sharp reversal when it was tagged on March 25th. If BKX instead drops below last Wednesday's low of 51.40 it may be a good indication that the high is in and last week's bounce was just a correction. A drop below 50.50 would confirm we've probably seen the high.

KBW Bank index, BKX, Daily chart

On March 25th I pointed to the throw-over above the top of the rising wedge pattern for the home builders index as a good finish to the pattern. Confirmation of a top would come with a break below the bottom of the wedge and that's what happened on Thursday. Rising (and descending) wedges are ending patterns and tend to get completely retraced very quickly and I suspect the same will happen to the one from the December low. We should see the December low violated in less than 2 months.

U.S. Home Construction Index, DJUSHB, Daily chart

The home builders index is providing a heads up for the broader market since the housing market is the canary in the coal mine. It was true back in 2007 and it will be true for the next leg down. If the housing market takes another dive, which I believe it will, the home builder index will be one of the early forecasts of that. Remember it topped out in 2005, bounced into early 2007 to a lower high and then proceeded to crash lower. And that was a time when we were all being treated like mushrooms (keep us in the dark and feed us____) with statements like "the subprime problem is only a small one and will be contained". I think a bad selling season this spring will confirm the fears of many.

I've reported many times in the past several months the coming rise in defaults and foreclosures due the double peak in mortgage resets this year and next. In addition to the increase in foreclosed homes that will come on the market there is the shadow inventory that the banks are holding. Many of these homes will make it onto the market this spring and I suspect the spike in for-sale inventory will further depress home prices. When you combine a further drop in home prices with a spike in mortgage rates it's s disastrous combination. Many more people will look at their financial situation as untenable and simply walk away from their homes. We're seeing it happen already all around us. There's even a company called You Walk Away LLC that will help people figure out how close they are to eviction and then how to simply walk away from your house. It's a sign of the times.

The Financial Times recently reported on this housing problem in an article titled "U.S. Housing Market Hit by Walkaways." In the article they mentioned a couple in San Francisco who had a high credit rating and a $500K mortgage. They decided to walk away from their home stating "The loss if we sell will be so large that we made a business decision to walk away." I've reported on many banks doing the same thing but it doesn't affect their credit rating. We try to apply a stigma to people who do the same thing but many will start thinking like this couple and make the strategic financial decision to simply walk away. This will obviously further depress home values and is all part of the credit destruction process which has a long way to go before it has run its course.

We still have the Federal government filling in the void and borrowing at mind-boggling rates. That too will have to stop and the whole process can't be anything but painful. At any rate, back to the chart above, this is why I keep an eye on the home builders index--it's telling us the next leg down is coming. Even the mighty Chinese economy, which has been inflated with government stimulus as well, is seeing housing prices starting to decline.

Moving on to the Transports, after breaking the uptrend line from February 5-25 the TRAN has been trying to hold onto another uptrend line through the March 26th low. Price is essentially consolidating just underneath the top of a parallel up-channel for price action since the November 2nd low. That could be bullish and a break above the top of the channel and a price projection at 4461 (for two equal legs up from November) would be bullish. But until then, especially with the oscillators rolling over, it's not looking bullish. It takes a drop below 4200 to confirm the bears are running with the ball.

Transportation Index, TRAN, Daily chart

It's possible the U.S. dollar finished a 5-wave move up from its November low, which would call for a correction of the rally, lasting perhaps a little more 2 months. But so far the bottom of the up-channel held (a spike down on the jobs report on Friday tagged it) and Friday the dollar got a big bounce back up. That could be the start of the next rally leg that will take the dollar above 84. It needs to push above 82.52 to confirm the dollar bulls are still in control. A break below the 50-dma at 80.42 would be a good indication the larger pullback correction is already underway.

U.S. Dollar contract, DX, Daily chart

What the dollar does from here could have an impact on the other markets, with most of them running counter to the dollar (although that relationship does not always hold). Gold has been trading to the beat of its own drummer and is close to giving us a buy signal if it rallies back above 1134. But if the dollar rallies and gold turns back down and breaks its uptrend line from February, currently near 1093, we could see a hard selloff. Eventually it will break out of the sideways trading range it's been in for the past 4+ months.

Gold continuous contract, GC, Daily chart

The rising wedge pattern I had for oil has morphed into a potentially larger one. The price projection that I was watching at 84.86 (two equal legs up from December) was tagged last Thursday so it's possible that's all we'll see, especially if the dollar rallies hard from here. But there's the possibility for a small correction and then another push higher to a Fib price projection at 87.22 shown on the chart. Whether it turns back down from here or a little higher first, I continue to believe oil will sell off with the stock market.

Oil continuous contract, CL, Daily chart

The economic reports for last Friday are shown below, along with next week's. The nonfarm payroll number came within expectations although the expectations were all over the map, depending on who you talked to. The table below shows the market was expecting +184K and the number came in at +162K. Is that a disappointment? Only with the full participation of the cash market on Monday will we know for sure. The other numbers didn't add any element of surprise so other than the positive reaction in the futures Friday morning we'll have to wait to see how the rest of the market reacts (futures are easily manipulated in after hours).

Economic reports, summary and Key Trading Levels

On Monday we'll get the ISM Services but that number is generally not a big mover. The Pending Home Sales is expected to be "less bad" but from the chart of the home builders I think we're going to soon see disappointment on those numbers. Tuesday's FOMC minutes may cause a little reaction in the market but it's not likely we'll learn anything new. Consumer Credit on Wednesday will likely show a continuing contraction in the amount of credit the consumer is carrying, all part of the credit contraction that we're still going through.

The bullish sentiment continues at a near record high and call buyers are swamping put buyers. The ISEE Index is one of the more accurate gauges of speculative option buying so I watch the trend in this one. The last time it was trending above its 20-dma was into the January high. As you can see in the chart below, it's trending above its 20-dma again and consistently hitting peaks above 150, which is usually a good indication a top is not far away (it's obviously not a timing tool but instead you can use it for warning of extremes).

ISEE Index chart

As of Thursday's close I could have easily argued either direction for the market. The choppy price pattern, and what looks like a consolidation for the past week or more, makes it look like a bullish consolidation. But if you look at each of the tops in the past year this is exactly how they've formed. Therefore we have to wait for a break to give us a clue which direction the market will head next. Thursday's price action looked bullish but with the low volume ahead of the holiday weekend I wasn't exactly a believer. I'm always a little uncomfortable with the market rallying into an important news item, such as the payrolls number.

So Thursday looked bullish but I didn't believe it. In fact it could even fit as the final move of the topping pattern. Friday's positive reaction in the futures should have most leaning long into Monday (unless something happens Sunday night to take it away) but we all know a positive futures during after hours can be completely and quickly reversed as soon as the cash market opens. In instances like this I think big money pushes the futures in one direction to create some liquidity at the open so that they can fade it for a market move in the opposite direction. Be aware of the direction that futures are pointing the market but never trust it. Let the first 30 minutes play out.

Summing up the charts and what I see this weekend, I don't think the market will continue consolidating as it has. Price has been compressing and there should be a quick thrust in one direction or the other. I just wish I had some confidence as to which direction it will head. Follow the break and then trade carefully. If we get an upside break that holds in the first hour we should see the rally continue although I've shown enough nearby targets to indicate that playing the upside could be tricky at best and harmful at worst.

I think a reversal back down, when it comes, will be fast. If you look at the declines from all previous consolidation tops over the past year you'll see that it moved fast to the downside, even if it was short lived. I think most people are aware the market is overbought and therefore have pulled their stops up tight. Most are probably hovering over the sell key and ready to smack it at the first sign of market weakness. When you have a lot of people ready to sell and fewer shorts available to stop the selling, it's a setup for a speedy decline. That's why I'm saying playing the upside is tricky at best.

Playing the short side is clearly risky right now--there's just no selling that's taking hold and the bears keep getting their butts kicked for even trying. Most bears are now on the sidelines just watching, and waiting to pounce. It's part of the reason for lower trading volume. Entering a new month, knowing there isn't going to be the same effort to hold the market up for end-of-month/quarter performance, will have some bears feeling a little more emboldened to hit it when the market looks like it might be ready to roll over.

If the Fed truly is going to end its mortgage repurchase program then a lot less money is going to make it into the market. Without that support it could be tough pushing the ball up the hill any further. Once new-month money makes it into the market there may not be much behind it. But these are clearly just guesses based on what might happen. Go with the charts and watch the upside target levels pointed out on the charts. Once the market starts back down, use the key levels to the downside for confirmation that you should start looking to sell rallies. You can buy the dips for now but be very careful. I would be uncomfortable holding long positions overnight.

Good luck as we enter the first full week of a new month and quarter. I'll be back with you next Thursday.

Key Levels for SPX:
- cautiously bullish above 1181
- bearish below 1150

Key Levels for DOW:
- cautiously bullish above 10950
- bearish below 10730

Key Levels for COMPQ:
- cautiously bullish above 2452
- bearish below 2358

Key Levels for RUT:
- cautiously bullish above 690
- bearish below 667

Keene H. Little, CMT