MARKET OVERVIEW

Fund managers show their nervousness, using the Egypt story to sell and sell some more.

A picture is worth a thousand words. Looking at the indices, you can see that a nervous market finally got a trigger to sell. The market was trending higher, but the growth indices were starting to show cracks in their armor over the last few weeks. There were reversal days on the NASDAQ and the SP600. They managed to rally back over the last week but, as noted on Thursday, these indices now had the real test in trying to take out those prior highs.

There was something wrong with the market, but we could not put our finger on it. The trends were still good. There were still great moves in solid stocks, and even those solid stocks held up quite well on Friday. There was a problem overall, however, and it was being addressed by the bonds. The bond market refused to sell off even though it had every reason to. In other words, if the economy is improving as the Fed and others are saying, then it should be selling. Instead, it has been trying to bounce.

It has moved laterally for six weeks now. It has not broken out yet, not even with the Friday selling in the stock market and the advance in the bond market. It was showing a resilience that it should not have been. There was something out there. The bond market knows what evil lurks in the shadows of the world. It may not know exactly what that evil is, but it understands that there is something going on. It would not sell off, and it started to break back to the upside on Friday as the news hit.

What was the news? It was not the fact that GDP was decent with a 3.2% advance (even though 3.7% was expected). There were some good numbers inside of that, and they were much better than the headline indicated. Final sales rose 7.1%. Consumer consumption posted the highest move in four years with a 4.4% gain. Business spending was very solid at 4.4%. The government says that inflation is low, and I guess that is the case if you are just looking at flat screen TVs and computers. Unfortunately, we do not eat those items. We have to wear cotton, and we have to eat soy beans, milk   you name it. It is all going higher. That is not up for debate at this moment, however, because the government tells us it is not a problem.

The Michigan Sentiment, the final for January, was better than expected at 74.2 with 73.2 expected. It continues to rise, and it somewhat reflects the consumer confidence report that rose more than expected a week ago. They are still at low levels. They are still not at levels commensurate with a decent economy, but they do continue that upward trajectory.

The news centered around Egypt and the growing unrest in that general part of the world. The Tunisian government dissolved when the army joined the protesters. Now in Egypt, President Mubarak has called for the government to resign in response to the protests and riots in the country. He is not to resign, of course, but the government should. He wants to buy time in order to install his son and make sure he has a foundation to take over control. There is a lot of worry surrounding Egypt, mainly because Mubarak is a friend of Israel. He continued the Anwar Sadat peace with Israel. If his government is gone and extremists take over, then Israel loses a backstop in the region. That adds to the volatility.

It was interesting how the day unfolded. Futures were holding up decently despite obvious problems in Egypt that were known before the market opened. Futures were knocked back on the GDP number, but they came back. The market posted gains early on and was looking decent. Then the bid ran dry about half an hour into the trade. Stocks turned down and sold sharply into the beginning of lunch on the east coast. There were a bunch of pictures released from Egypt. It was made known that the government had shut down cellular service and the internet, and possible outcomes looked generally bad.

It is never a good idea to see a government shut down all forms of communication. We better be very careful about that here in the US. There are calls for a national ID number   a general password   for internet access that you use everywhere. The government is also setting up a system whereby it can shut down the internet if it finds it necessary. We should NEVER agree to curtail the avenues for asserting our right of free speech. The internet has become integral in making sure that the true stories get out. It cannot be shut down. This is a good lesson to us in the states: Do not give the government the power the shut down the internet infrastructure. But I digress   though not too much. All these themes played around the world because everyone took a look at themselves and said, “That could be us.”

In any event, there was a massive selloff. It checked up and was actually able to move laterally into the close. We had several hours of range trading as the market limped home for the weekend. It was an impressive thumping   a good, old fashioned tail kicking. There are other, less-polite phrases, but I will stop there. NASDAQ, -2.5%; SP500, -1.8%; Dow, -1.4%; SP600 -2.5%; SOX, -2.8%; NASDAQ 100, -2.6%.

The day was epitomized by Ford   ticker symbol F. It got an ‘F’ on the day, no doubt. The company reported earnings, and the new Explorer apparently cost a lot more than anyone expected. It gapped lower, and then it just got silly. It crescendoed lower when the Egyptian stories grew over the day, and F was pasted. It was the poster child for the selloff because it is a well-known and highly publicized stock right now. It is the only non-government automobile stock in the US, and it was taken to the cleaners. The interest thing was it managed to bounce off a support level. We will see how that plays out.

This underscores an important aspect of how I believe the day unfolded. Yes, the market was troubled, and it was bothering us for the last several sessions. I kept talking about something being wrong and trying to reconcile what the bond market was doing versus the stock market and other indicators. I knew something was up, but could not put my finger on it. The market was showing good action, so we could not really move against it. Then when some bad news hit, it showed there were a lot of fund managers that were nervous as well. They use it to take some gains, and things got out of hand on Friday.

That does not mean the market will not sell lower, but they got out of hand on Friday because the moves were magnified by the Egyptian story. We may see a modest recovery and bounce back as we saw on F at the end of the day. Some of that Friday action could be taken out of the stocks or put back into stocks if nothing major happens over the weekend. If that is the case, we can get a bit of a relief bounce. That would, at a minimum, gives us better exit points and gives stocks a chance to move back into their patterns and above support. We will have to see how that plays out.

It was definitely a factor on Friday. Things simply got out of hand because it was the weekend and the market had rallied for eight consecutive weeks to the upside. There was general nervousness because of the rally to that point. With the news out there, and the fact that it was still unfolding as the day went on, people wanted to avoid the Valentine’s Day rush. They just had a little Valentine’s Day massacre of the stock market ahead of time.

Earnings will continue and the parade gets even louder. There will be a lot more coming out. There will also be a lot of data which ends on Friday with the jobs report. We will have Personal Income and Spending on Monday, Chicago PMI on Tuesday. The ISM index is very important. Wednesday brings the jobs report warm up with the Challenger and the ADP employment report. The weekly claims and ISM services are on Thursday, and Friday is the jobs report.

As I said, one of the keys will be whether money is leaving the market after this. It has been rotating up until Friday, and we will see if it stays in or if new money uses the selling as an opportunity to move in on what is ostensibly an improving US economy. An interesting aspect to consider is that some money may move in from emerging markets into the US stock market as a safer market (or, as one analyst put it, one of the better places in a bad neighborhood). Perhaps the problems in Tunisia and Egypt will lead to money leaving emerging markets and coming home, so to speak, to markets that are considered safer.

Again, Friday the move was exaggerated by the worries about Egypt. The pictures coming from Egypt seemed to get worse and worse, and the market sold more and more as they hit early in the day. I think it was overdone, and there may be a rebound. The question is whether there will be new money coming in to drive stocks back up and continue the rally, or if it will just be a relief bounce from an overdone day on Friday.

If stocks bounce and they are unable to get back into their pattern or over a good support level, that is an invitation to close them. We will leave other stocks that hold their patterns. If the economy is still growing and this issue starts to dissipate (if it was an overreaction), then we should see a resumption of the upside move. Again, despite the overall slaughter in the market, many positions held up quite well. It would not take much for them to continue back to the upside.

Of course, it would not take much for them to sell further either. This looks like one day of selling on the SP500. As seen in November, there were three weeks of issues. It was all over within the first week and a half, and then it moved laterally. This is just day one, and there was an almost 2% decline on the SP500. NASDAQ has already put in a bit of downside. It rallied back up to that prior peak from the week before, and it was primed to fail. Boy, did it turn over and get busted, and it has more to come back. We will have to see how far.

We were able the pick up some downside, and that was sweet. We got some good entry points despite the issues with options. Some of them we missed, and that was a bitter pill to swallow. We were all over them, but we could not get there. We will look for some more. I am seeing a lot of stocks. This is just a preliminary view, however. I may have to eat crow on that if there are not so many, but I am seeing quite a few that held up well and look like they could be very good buys. As for the downside, we may still find some here. CRM continued higher on Friday, but look at that tombstone doji action below a resistance point. That is primed for a move back down, and we will see if it makes it. There will still be some downside opportunity despite the juggernaut to the downside through lunchtime.

If there is a bounce on Monday, we could get an opportunity for downside as stocks rebound and then fail at some resistance and roll back over. A lot of this depends on what happens this weekend, and we will have to keep a close eye on the news and see how things could be opening up come Sunday. I may have to put out some alerts before then just to let people know how things look.

In any event, it is been an interesting day. The rally finally got a little comeuppance. I hate to say that, but it was due to test and the bond market was showing something was up. Sure enough, it got the trigger and the blow torches were taken out. Some stocks were burned bad, but not all of them. A lot of stocks held up. I do not want to put any false hope out there. Things could still deteriorate, and the market still does need to test.

We are probably in for two to three weeks of testing whether we like it or not. In that situation, you look for good exit points on stocks that are struggling. You keep the good ones that are able the hold up, and you look for opportunities in them. If things get better, you look for opportunities in other stocks that have spent the time quietly basing under the radar. In the interim, we will try to make some money on the downside. We were buying into positions such as FCX and DECK on Friday.

We will try to take what the market gives. Looks like we will be in a pullback now, and it is just a matter of how severe it will be. We will try to ride through it, make some money to the downside, and look for opportunity when things move back up. Remember, that was just the second run in a good base. We want to look for more upside, particularly if the economic numbers keep coming in better.