Daily Market Assessment

Tough Sledding Ahead

Unfortunately, yesterday's comments were very prescient. Uncle Ben went out of his way to explain that the Fed still thinks inflation is a Big Problem, which means interest rate cuts are futher off than we had hoped. Naturally, the market tanked. Although not as bad as February 27, it still took the wind out of the sails of every bull. Economic news wasn't all that hot, either. So we're back to a bearish outlook in the short term, even though the long-term forecast is for a steady rise in prices. The techs and retail are going to weight down the whole market for the next several weeks.

Which is why now is a good time to go on vacation in Italy. See you in mid-April.

Summary: Stay in cash for the time being!

Daily Market Assessment

Time to be Cautious!

I was unhappy about yesterday's market action. The SPX ended slightly below support at 1430, and needs to recover sharply to avoid more selling from fund managers sensitive to that indicator. What's worse, the gentlemen from the Fed, ol' Uncle Ben, is back in front of the microphones today. We liked what he said last week, but my gut tells me that we're not going to like what he says today. I'm moving to the bear side short term!

Summary: Short term bearish, Long term bullish.

Daily Market Assessment

It's Still Good.

With the market off its best weekly percentage gain in four years, it wasn't surprising to see the stocks take a bit of a breather Monday. A surprise drop of 3.9% in new home sales rocked a market that had been pricing in more signs of stabilization within the troubled housing market. At 10:00 ET, the Commerce Dept. showed that new home sales unexpectedly fell in February to the lowest level in nearly seven years. More troubling was the fact that inventories rose to the highest level in 16 years. The data showed that housing is still in a correction and will remain a moderate drag on real GDP for several more quarters. Not surprising, Homebuilders (-1.8%), this year's biggest disappointment (-16.5%), ranked among today's worst performing S&P industry groups. However, new signs of weakness in the troubled housing sector exacerbated ongoing concerns of further impairment charges among mortgage lenders ? which in turn hurt Financials.

Oil broke $63 a barrel for the first time this year amid potential supply disruptions after the U.N. tightened sanctions against Iran. Oil prices eased marginally later in the day and offered support to a rally in the markets that reversed over half of the day?s losses.

Markets are poised to open on a downbeat note as the futures market trades below fair value. Even though monthly sentiment data don't really say much about the economic outlook and does not correlate well with short-term consumer spending trends, investors are anxiously awaiting the latest read on consumer confidence. The Conference Board's index for March will hit the wires at 10:00 ET and is expected to drop from a reading of 112.5 in February, the highest level in five-and-a-half years.

Summary: Short Term neutral, Long Term bullish.

Daily Market Assessment

Last week finished on a very positive note. In ten days the market recovered almost all of its losses; in fact, the S&P500 is actually up 1.3% YTD. Over five trading days the DOW reclaimed 541 points and a new rally was confirmed. We are definitely back into bull territory!

What was the cause of the quick bounce-back, you ask? Thank Uncle Ben (Bernanke, that is). His comments following the FOMC meeting last week did two things: secondly, he removed the Fed's bias toward additional rate hikes which had been haunting the market all year; he indicated that the Fed thinks they have control of inflation, which opens up the possibility of a rate cut!

Right now Merrill Lynch and Goldman Sachs are scoring a 100+ basis drop in the next twelve months as a 75% probability! Believe me when I say that a drop from the current 5.5% down to 4.5% in four quarters would stimulate the market enormously.

Remember, it's not what will happen that counts in the market. It's only what people with money BELIEVE will happen that counts! The long-overdue correction this past month, plus a positive outlook from the Fed is just what the traders needed.

One of the more interesting aspects of the rapid recovery from our sharp 6.7% fall-off from February 26 to March 7, is the way in which the Fibonacci numbers have been hit on every major index. We are showing a 61.8 retracement on the DJI, the SPX, and the COMPQ. Since we are leaving for Italy this week, I am taking the close adherance of the markets to the numbers theory of a 13th century Italian mathematician as a positive sign overall.

All this optimism does not stop me from being cautious this week, however. It's going to take a few more closings above these current support levels for a new base to become firm. I look for sideways trading between 1410 and 1436 on the SPX, and a few down days preceding the holiday weekend (Good Friday). In fact, the another area of concern on the market overall was the lack of really large confirming volume. We need to see everybody back in the pool. Also, Schaeffer's put/call options index (SOIR) is strongly bearish, having achieved four-year highs late last week. A contrarian would see that as bullish, but I would hope for an evacuation effort by the shorts this week. The quick recovery apparently caught them with their pants down.

Strong industry sectors include transports, energy, brokers, biotech and software. Weak sectors are semiconductors, retail, computers, homebuilders and pharma.

Summary: Short-term neutral; long-term bullish.

Daily Market Assessment

Just What We Were Waiting For!

It was like Groundhog Day in more ways than one. Like the Bill Murray movie, the Fed did the same thing that it has done time and time again, nothing. Like the holiday, people eagerly awaited the announcement and then reacted. In yesterday's case, the reaction was positive. The Fed decided to leave rates unchanged (more on that later), and the reaction was quick and decisive. The Dow Jones Industrial Average (DJIA - 12,447.5) was hovering near breakeven for the first part of the day and then quickly rocketed higher. At day's end, the Dow finished the day with a 159-point gain. The only Dow component that finished the day in negative territory was Alcoa (AA), which was subject to a downgrade (check out our blogfor more details). The rest of the blue-chip barometer was led higher by American Express (AXP), Citigroup (C), Caterpillar (CAT), J.P. Morgan (JPM), and Exxon Mobil (XOM) were all significantly higher. The S&P 500 Index (SPX - 1,435.04) finished the day more than one percent higher, bouncing off its 20-day moving average and putting the 1,400 level well in its rear view mirror. The Nasdaq Composite (COMP - 2,455.9) finished the day nearly two percent higher, surging after the Fed's announcement.

It's apparent now that the Fed expects to begin cutting interest rates sometime later this year, perhaps as early as this summer. The market knows that 5.25% is too high to sustain our weakening economy, and we also know that virtually all of the inflation signals have been overblown. Assuming we don't have a rapid run-up in oil prices again, a quarter-point rate cut looks good before September. And the market will love it!

Summary: Short Term Neutral; Long Term Bullish

Daily Market Assessment

Another up day in the markets on Tuesday. But volume was still below average and the overall rise well below the 1.7% jump I need to see for solid follow-through. There's just too much money sitting on the sidelines. The DOW rose 62 (marking four out of five up days), and the NASDAQ was up 14, but the more important S&P 500 benchmark was only up 9, still encountering resistance at the 1410-1420 level. Although another jump up would put us back over the 50-day MA, right now all we have beneath us for support is the 200 MA at 1350. Remember, when we look back over the past 60 years, the average correction of 5% or more has taken 10 weeks to recover fully. Remain cautious.

Summary: Long term still Bullish, but short term bearish.

Daily Market Assessment

Monday: Decent Bounce, But No Follow-Through

It was tough to sit on the sidelines Monday as the DOW and NASDAQ jumped off to a rousing good start for the week. But closer examination revealed a lot of concern.

The major averages opened with a positive bias and spent the rest of the session trading up, but the major averages failed to meet the required +1.7% percentage gain on higher volume to produce a sound follow-through day. Volume, a critical component of institutional buying, waned on both exchanges, which further emphasized that institutional buyers were nowhere to be found. One might expect to see volume recede from Friday's levels which were inflated due to the quadruple witching day of multiple options expirations. However, volume totals on Monday were not only below Friday's session, but also below average.

Breadth was positive as advancers led decliners on the NYSE by greater than a 3-to-1 ratio and by a 2-to-1 ratio on the Nasdaq exchange. The number of new 52-week highs led new 52-week both exchanges.

The latest round of multi-billion dollar mergers and acquisitions (M&A) helped build optimism and send the major averages higher on Monday. Community Health Systems Inc (CYH -5.49%) said it will buy Triad Hospital Inc. (TRI +5.25%) for $5.1 billion. ServiceMaster Co. (SVM +12.40%) surged to its highest level in over 5 years as the nation's largest provider of lawn-care and landscaping services was bought out by a private equity group. So far this year, $507.7 billion in US deals have been announced, exceeding $386.7 billion at the same time last year. The recent spate of M&A's has led many to believe that 2007 will be another strong year after a record number ($ value) set in 2006.

The National Association of Home Builders/Wells Fargo released its sentiment index which fell to 36 from February's revised 39, the first decline since September. A reading below 50 means most respondents view conditions as poor. Concerns over the housing market remain on the horizon as investors await Tuesday's housing starts data. The Fed Open Market Committee (FOMC) is also set to begin its two day meeting on Tuesday. Their decision will be announced on Wednesday and as always, investors will take a close look at the language for a better understanding of what concerns the FOMC has. At this point, must people are looking for the Fed to hold rates steady, but they may have to lower borrowing rates in the future to offset the effects of falling real-estate market.

Monday marked the fourth anniversary since the war in Iraq began. March also marks the month when the present multi-year bull market began, after the horrific bear market ended in October 2002. During that time, the S&P 500 has climbed +60% and reached a six-year high, however, it is still well below the all-time high set in 2000.

Summary: Short Term Bearish; Long Term Bullish

Daily Market Assessment

Beginning today, I will be making a daily pre-market assessment of direction and opportunity whenever I am in town. Sometimes it will be fairly long, but most of the time it will be only a few sentences.

Friday, March 16, was Triple Witching Day, with options expiring all over the place. One result was a big surge in volume, over 2 billion shares on both the NYSE and the NASDAQ. That much activity contributed somewhat to the very strong VIX indicator of volatility, which has jumped up into the 15-18 range since the end of 2006, where it had settled into a really low average of 12.80 for the year. The obvious cause of all this excitement (or fear, which is what the index truly measures) is the sudden collapse of stocks in late February. To put it succinctly, we're not out of the woods yet.

Summary: Long Term Market Direction is UP; Short Term Direction is DOWN. Hold Current Positions with very tight stops at 50-day support levels; do not go long on anything new. Look for short-term (2-3 month) bearish option trades.

The markets all fell on Friday and were down for the week. For the S&P500, which is the best measure of overall market performance, this was the third week in the past four that the index has fallen. It closed at 1387, which took it below its 10, 20, and 50 day moving averages (with a nice little mid-day "kiss goodbye" to the 10-day MA), and only has the 200-day MA at 1367 for support. If it drops through this level, it's Katy-Bar-The-Door, Lookout Below! This week the market will test this level; it's not a good time to be buying.

To confirm this, virtually all the industry sectors also are below their short-term support levels and falling. The only areas that seem resilient right now are Groceries, Drug stores (mostly due to the price action surrounding the bidding war for Caremark, which CVS appears to have "won"), and Utilities. After watching the market open, I will be looking at SHORTS and BEAR SPREADS only, especially on ETFs for Retail, Biotech and the Internet.