Futures rallied nicely despite some disappointing personal spending and income numbers. Why?

SUMMARY:
- New month, new economic data, same results.
- Personal income, spending disappoint. Construction, ISM surprising.
- China PMI tops expectations and market rallies. US ISM (PMI) tops expectations, market flat; but it already rallied on the FOMC right?
- Market is taking the wait and see approach ahead of the two big stories . . . just in the first part of the week.

New money rallies the market for a half hour and then coughs it up. New month, same story.

A new month and as usual new money was at work. Futures rallied nicely despite some disappointing personal spending and income numbers. Why? China economic news. Its manufacturing report topped expectations despite its efforts at slowing lending and credit. That, along with the dollar trade, dominates other factors in the economic and thus the stock world. Indeed since the FOMC announced Quantitative Easing 2 on 8-27, SP500 is up 13% while the dollar is down 7%. Chinese growth helps keep the outlook positive, liquidity keeps the US in the game.

So, the market started higher on the Chinese news and of course some new money for the month, but as with last week it simply could not hold onto the gains. SP500 gained 12 points before giving all but a point away. NASDAQ sported a 25 point gain but gave it all up. Unlike SP500, however, NASDAQ moved to three points from its April peak. That may have been the apex of the move for the techs unless SP500 gets into the mix in a way other than intraday bounces that fail.

That can definitely happen. After all earnings remain solid and there are some very important events this week that could be positives: election, FOMC, and the employment report. On the other hand, the market has rallied almost nonstop off the August low, has little room left before hitting important resistance, and you can argue a lot of the move to this point has factored in the election expectations and the FOMC initiating QE 2.

And let’s not forget why the market has rallied. Yes earnings were not bad, but the economy is in no great shape. Last week GDP came in at 2%. Wow, now that would support a big rally. It is not even enough growth to support any increase in jobs. This entire rally off the bear market lows is a liquidity rally, pushed by massive amounts of liquidity from the Fed and central banks the world over. So much money is circulating the globe that gold has streaked higher on inflation worries. It is in a pullback now but that is likely all it is. When that much money is in the system and there is so little economic growth in many parts, the money is put in to the financial system and hence the rising securities prices.

Ironic isn’t it? The US markets are rallying on Fed easing and easy money in a desperate attempt to fend off deflation thanks to very poor policies and poor choices. Chinese markets, however, are simply rallying on good old fashioned strong growth and sound economic fundamentals. Smoke and mirrors versus real growth.

OTHER MARKETS

Dollar. The dollar continues to try its hand at rallying off the last selloff. Rough end to last week after an initial bounce, but Monday it caught itself and rallied positive after a gap lower (1.3884 versus 1.3919 euro). Still fighting its way upside here despite the FOMC meeting announcement to come Wednesday.

Part of the rumor Monday was that the Fed was NOT going to announce another $1T in asset purchases, etc., that it would instead offer a mere $500B over many months. That perhaps aided the dollar’s rise. After all, it was expecting a trillion dollar pounding and now it is going to be only half that; plenty of reason to rally, right?

Bonds. As the dollar bounced on the idea the Fed is not going to throw $1T into the streets, bonds sold on the idea (2.63% 10 year versus 2.60% Friday). Bonds bounced modestly to end last week on the notion of the FOMC QE 2 announcement coming this week. If the Fed is not going to be as aggressive then bonds are not going to be as much in demand. Couple that with inflation possibilities and bonds are not worth as much. Hey, Bill Gross said that last week as well so it must be true.

Gold. After surging to end last week gold was up early but it could not sustain the move (1350.60, -7.00). Again, if the Fed is not going to buy as many assets, you don’t need as much gold. Not as much; that does not mean inflation fears are over. There is still another $500B to come and on top of all else that has been dumped on the economy that is still a massive amount of liquidity.

Oil. Nice surge to start the week, bouncing up from the tighter consolidation in the four week lateral move. Oil is again bumping the January peak, an important resistance point. This time it might make it as it rallied even as the dollar put in an upside session (82.95, +1.52).

INTERNALS

Volume. Down 10% on NASDAQ and 7% on NYSE. Lighter volume as NASDAQ gapped higher and gave up the gain; at least no heavy distribution, just a lack of buyers following through.

Breadth. As you would expect, NASDAQ breadth was down -1.7:1; gap higher then a rollover. NASDAQ 100 was up on the session; it was a down day for the ‘smaller’ NASDAQ stocks. NYSE breadth ‘rallied’ positive at 1.06:1. Again, breadth matched the action.

CHARTS

SP500. Almost matched last Monday’s intraday high and then reversed to give almost all of it back, just as it did last Monday. SP500 continues moving laterally above the 78% retracement, but it simply cannot make a move stick. It didn’t get any help from the financials Monday, but stocks such as GS are in position to move. Yes, yes, I said that over the weekend but it bears considering. Counting on it? Not really, but open to being pleasantly surprised.

NASDAQ. Gapped higher and rallied within 3 points of the April peak then reversed. Perhaps NASDAQ made the test of the April high for the rest of the market. NASDAQ has moved almost a hundred points off the last test two weeks back (a one day affair), has touched near the peak, and faded modestly. Not a great place to be looking for more upside, not just yet.

SP600. Small caps declined 0.67% but held the 18 day EMA on the low. That move simply keeps them working laterally as they have done the past three weeks. If the market moves up they are in position to do the same.

SOX. Chips finished basically flat (-0.32%), taking a breather after that nice surge last week. Due for a bit of a test. If they get it they are in good shape to continue, but the rest of the market likely has to test a bit as well.

LEADERSHIP

Leadership was something of a nonevent on Monday though of course there are always stocks moving higher.

Financial. JPM is still holding the support, still in position to bounce. GS posting a lateral move the past two sessions, resting after breaking higher early last week. EWBC is in great position to move as well. BBD, foreign banks, broke higher. Very promising, but so far it has been promises, promises.

Technology. Large cap tech performed better but that was no great endorsement. They basically moved laterally again, though that is not all that bad (e.g. AAPL, GOOG).

Metals. FCX, the copper topped stock, continues to set up its pennant. Other non-precious metals are not faring as well as steel continues to struggle.

Industrials. Concerning. CAT was up but was not a picture of strength. BUCY bounced from its selloff but looks to be running out of gas.

THE ECONOMY

Spending and Income dip in September

Back to school was stronger than expected, but it apparently borrowed from September. Spending was up but at 0.2% half of expectations and posted a 3-month low. Income flipped negative (-0.1%) versus 0.2% expected. August was revised to 0.4% from 0.5%.

Not the news that gave the market a warm feeling but it also did not upside the morning gains. There are no straight lines up or down and thus one data point does not change the big picture. Not that it is a great picture, but incomes are on the rise. Why? Because with fewer people working companies are paying those left a bit more to keep them motivated to do the job with less help. That is part of the equation that ultimately leads to new hiring but it is not at the point to do it on its own.

ISM posts a solid surprise gain.

56.9 in October topped the 54.0 expected and even the 54.5 in September. Good on the headline and some solid internal numbers as well. New orders at 58.9 versus 51.1 in September. The last time they were close to this high was June’s 58.5; that was the peak for that move and one would hope this was not the peak on this recovery.

Production jumped to 62.7 from 56.5 in September. The prior high was in June as well at 61.4. Production is good; more production means more workers. Prices were a sore spot, but not much worse at 71.0 (70.5 in September). Steady rise: 61.5 in August, 57.5 in July, 57.0 in June.

Overall a solid report as manufacturing continues its expansion. At some point we get jobs, but manufacturing is still a small part of our economy after years of contraction.

September Construction Spending also posts a surprise gain.

The 0.5% gain turned the -0.7% expected on its head. Not bad. August, however, was flipped negative from positive (-0.2% versus +0.4%). Those darn revisions, significant ones, still cast a lot of doubt upon the data the government issues. It is all we can go on other than common sense, but widely varying results doesn’t instill confidence. In any event, a half percent gain is a half percent gain, particularly when a significant loss is anticipated.

THE MARKET

MARKET SENTIMENT

VIX: 21.83; +0.63
VXN: 22.92; +0.68
VXO: 21.21; -0.12

Put/Call Ratio (CBOE): 0.87; -0.03

Bulls versus Bears:

The CROSSOVER from August is long gone but it did its job.

This is a reading of the number of bullish investment advisors versus bearish advisors. The reason you look at this is that it gives you an idea of how bullish investors are. If they are too bullish then everyone is in the market and it is heading for a top: if everyone wants to be in the market, then all the money is in and there is no more new cash to drive it higher. On the other side of the spectrum if there are a lot of bears then there is a lot of cash on the sideline, and as the market rallies it drags that cash in as the bears give in. That cash provides the market the fuel to move higher. If bears are low it is the same as a lot of bulls: everyone is in and the market does not have the cash to drive it higher.

Bulls: 45.6%. A slight rise after a fade the weak before (45.1% versus 47.2%). Steady rise since hitting 29% where bears overtook bulls back in early September, but now somewhat indecisive with SP500 moving laterally. Still below the 65% level considered as bearish, above the 35% level below which is considered bullish. Where you would expect for a rally such as this one. The crossover level at 29% bulls is long gone, but it did its job. The high on the last leg was 56.0% after starting at 35.6% on the low in February, the lowest it has been since July 2009 . . . until this last leg. 35% is the threshold level suggesting bullishness. After peaking at 53 on this move the bulls lost some nerve, falling to a new low post- July 2009. Once again bulls peaked out near the 50% level. Bulls have bumped at 50ish since late August 2009, falling to 45ish and then rebounding. Hit a high of 47.7% mid-June on the run from the March lows. Again, to be seriously bearish it needs to get up to the 60% to 65% level.

Bears: 24.4%. A bit of caution moving back into the market after dipping modestly the prior week (22.0% versus 24.7%). Down from 28.3% a month back. The 37.7% peak at the height of the crossover is well in the rearview mirror but bears remain well below the 35% level considered bearish for the market overall. Hit 18.7% on the low in April. Hit a high of 27.8% level on the prior leg in February. For reference, cracking above the 35% threshold considered bullish. Hit a high on the prior run at 47.2%. For more reference, bearishness hit a 5 year high at 54.4% the last week of October 2008. The move over 50 took bearish sentiment to its highest level since 1995. Extreme negative sentiment. Prior levels for comparison: Bearishness peaked at 37.4% in September 2007. It topped the June 2006 peak (36%) on that run. That June peak eclipsed the March 2006 high (33%) and well above the 2005 highs that spawned new rallies (30% in May 2005, 29.2% in October 2005). That was a huge turn, unlike any seen in recent history.

NASDAQ

Stats: -2.57 points (-0.1%) to close at 2504.84
Volume: 1.84B (-9.91%)

Up Volume: 919.771M (-243.452M)
Down Volume: 975.424M (+116.851M)

A/D and Hi/Lo: Decliners led 1.7 to 1
Previous Session: Advancers led 1.24 to 1

New Highs: 152 (+39)
New Lows: 40 (-5)

NASDAQ CHART:

NASDAQ 100 CHART:

SOX CHART:

SP500/NYSE

Stats: +1.12 points (+0.09%) to close at 1184.38
NYSE Volume: 958.326M (-7.36%)

Up Volume: 449.419M (-98.321M)
Down Volume: 495.84M (+59.235M)

A/D and Hi/Lo: Advancers led 1.06 to 1
Previous Session: Advancers led 1.62 to 1

New Highs: 388 (+106)
New Lows: 41 (+17)

SP500 CHART:

SP600 CHART:

DJ30

Stats: +6.13 points (+0.06%) to close at 11124.62
Volume DJ30: 150M shares Monday versus 189.7M shares Friday.

DJ30 CHART:

TUESDAY

Election day and no scheduled economic data for the session. What is scheduled are some more earnings and anticipation of the results. Of course the market has been in the process of anticipating those results the past couple of months. Everyone is anticipating the reaction to the election and the FOMC, and most think that when the anticipation becomes fact the market gives back some gains. Makes sense, but then when in the market thinks something makes sense the market tries to make it nonsense.

We have gone light on new positions given the move upside and the prior tops. Doesn’t mean there won’t be another spurt higher; that conventional wisdom stuff. So while we still watch for upside opportunity if the setups are good, it is not time to load up. That may come rather quickly if the market makes a quick post-election/FOMC decline. Then again with this market right now it could jump higher before correcting again.

The short of it: the risk/reward position is not that great. SP500 continues a real struggle just over the 78% Fibonacci retracement and many of the rally leaders are extended. Everything says be careful here, and if we get the chance to take some more gain on any Tuesday rally then we will do that. Many times when such a big event is at hand and the market is in an upside bias, it tends to melt up ahead of the news. It can give a spike on the news as well.

Not really a buying opportunity, however, even if there is a breakout over the prior highs. The reason: the breakout may ultimately hold, but typically after such a long move to a resistance or support level, a break is rather quickly tested and indeed is often a deeper test. After all, NASDAQ has put in a 20+% move off the late August low.

The buying opportunity, for most of the market, would come after the correction. Doesn’t mean all stocks are hands off. There are always stocks in position and there are many that are in good position now despite the overall market rally. Not all stocks participated equally, and some look as if they are just starting to get involved. They are the wildcards that can keep the market surprisingly stronger even as it corrects.

All conjecture at this point. The risk/reward is by the usual measure less than ideal. The market is having a hard time moving past the 78% retracement (as measured by SP500), a sign of an oversupply of buyers near the April peak. The prudent thing is to take some gain off the table as we have been doing, not take too many new positions, at least not as a larger percentage of your accounts (several smaller than usual positions). You bank gain when you have it, leave some to run, and have some more exposure from ‘new’ stocks that are in position to continue higher and give us more upside exposure if the market defies conventional wisdom. Then we see what the market does with the news.

Support and Resistance

NASDAQ: Closed at 2504.84

Resistance:
2518 is interim peak from April 2010
2530 is the April 2010 peak (2535.28 intraday)

Support:
2482 is the recent October peak
The 18 day EMA at 2460
2434 is the May interim peak and the 78% Fibonacci retracement of the April selloff.
2425 is an interim peak from May 2010
2382-2395 from 2008
2324-2370 is a range of resistance from early 2008
The 50 day EMA at 2379
2341 is the June 2010 peak
2320 to 2326.28 is the January 2010 high
2319 from the September 2008 peak
2310 is the August 2010 peak
The 200 day SMA at 2303
2273 to 2282 marks bottom of January 2010 lateral peak
2275 – 2278 from the February 2008 and April 2008 lows. Key lows.
2245 from July 2008 through 2260 from late 2005.
2236 is the first August gap point.
A series of interim peaks at 2230ish from the May to August trading range
2221 is the gap down upside point from June.
2205 is the November 2009 peak 2210 (from September 2008) to 2212 (the July 2009 closing low)
2185 to 2195 represent support points for years: December 2004 peak, July to October 2005 consolidation, January, March and July 2008 lows, and October 2009 peak.
2184 is the June gap bottom side.
2169 is the March 2008 closing low (double bottom)
2155 is the August 2010 low and the March 2008 intraday low
2140 from the May and June 2010 lows
2100 is the February 2010 low
2099 is the August 2010intraday low

S&P 500: Closed at 1184.38
Resistance:

1185 from late September 2008
1220 is the April 2010, post-bear market peak

Support:

1174 is the May 2010 high, 78% Fibonacci retracement of April peak
1170 is the prior March 2010 high
The 18 day EMA at 1174
1156 is the Sept 2008 low
1151 is the January 2010 peak
The 50 day EMA at 1147
1133 from a September 2008 intraday low
Bottom of the January 2010 consolidation 1131 to 1136
1129 to 1131 is the June and August 2010 peaks
The 200 day SMA at 1123
1119 is the early December intraday high
1114 is the November 2009 peak
1106 is the September 2008 low
1101 is the October 2009 high and the recent May and June 2010 interim peaks
1084 to 1080 (September 2009 peak)
1078 is the October range low
1070 is the late September 2009 peak as well as several other peaks and valleys even in 2010. Important level.
1065 is the May flash crash intraday low.
1044 is the October 2008 intraday high AND the February 2010 low
1039 to 1040 are the May, June, and August 2010 lows

Dow: Closed at 11,124.62
Resistance:
11,205 is the April closing high
11258 is the April 2010 peak
11,734 from 11-98 peak

Support:
11,100 from the 7-08 low
The 18 day EMA at 11,059
10,963 is the July 2008 low
10,920 is the recent May high
The 50 day EMA at 10,830
10,730 is the January 2010 peak
10,609 from the Mid-September 2008 interim low
10,594 is the June 2010 peak
The 200 day SMA at 10,530
10,496 is the November 2009 high
10,365 is the late September 2008 low
10,285 is the late December consolidation peak
10,260 from the May and June 2010 interim peaks are breaking
10,209 is recent August 2010 low
10,120 is the October 2009 peak
9938 is the August 2010 low
9918 is the September 2008 peak
9855 is the early September peak in its lateral range
9835 is the late September 2009 peak AND the February 2010 low
9829 is the September 2008 closing high
9774 is the May 2010 intraday low

Economic Calendar

These are consensus expectations. Our expectations will vary and are discussed in the ‘Economy’ section.

November 01 – Monday
Personal Income, September (08:30): -0.1% actual versus 0.2% expected, 0.4% prior (revised from 0.5%)
Personal Spending, September (08:30): 0.2% actual versus 0.4% expected, 0.5% prior (revised from 0.4%)
PCE Prices – Core, September (08:30): 0.0% actual versus 0.0% expected, 0.1% prior
ISM Index, October (10:00): 56.9 actual versus 54.0 expected, 54.4 prior
Construction Spending, September (10:00): 0.5% actual versus -0.7% expected, -0.2% prior (revised from 0.4%)

November 03 – Wednesday
MBA Weekly Mortgage Applications, 10/29 (07:00): 3.2% prior
Challenger Job Cuts, October (07:30): -44.1% prior
ADP Employment Change, October (08:15): 23K expected, -39K prior
ISM Services, October (10:00): 53.4 expected, 53.2 prior
Factory Orders, September (10:00): 1.7% expected, -0.5% prior
Crude Inventories, 10/30 (10:30): 5.01M prior
Auto Sales, October (14:00): 3.8M expected, 3.75M prior
Truck Sales, October (14:00): 5.1M expected, 5.07M prior
FOMC Rate Decision, November 3 (14:15): 0.25% expected, 0.25% prior

November 04 – Thursday
Initial Claims, 10/30 (08:30): 445K expected, 434K prior
Continuing Claims, 10/23 (08:30): 4386K expected, 4356K prior
Productivity-Preliminary, Q3 (08:30): 0.9% expected, -1.8% prior
Unit Labor Costs, Q3 (08:30): 1.0% expected, 1.1% prior

November 05 – Friday
Nonfarm Payrolls, October (08:30): 60K expected, -95K prior
Nonfarm Payrolls – Private, October (08:30): 60K expected, 64K prior
Unemployment Rate, October (08:30): 9.6% expected, 9.6% prior
Hourly Earnings, October (08:30): 0.1% expected, 0.0% prior
Average Workweek, October (08:30): 34.2 expected, 34.2 prior
Pending Home Sales, September (10:00): 2.5% expected, 4.3% prior
Consumer Credit, September (15:00): -$3.5B expected, -$3.3B prior

Jon Johnson
Editor of IH Alerts