Chinese New Year Week

What was shaping up to be a positive week last week ended up with a huge ditch on Friday, closing the Dow down -0.41% week on week.

Even though GDP didn't beat consensus last Friday, it was still very impressive and pointed towards strong economic recovery and should not have spurred the strong sell off. Consumer sentiment later last Friday also extremely strong and beat consensus. Consumers are the backbone of the US economy and happy consumers definitely lead to a happy economy. So, what really happened last Friday? Why did the Dow drop 166 points in a single day?

First of all, lets put matters into perspective. 166 points drop in the Dow on a single day isn't a big deal. On days where there are truly huge market driving bad news, the Dow typically drops anything from 200 to over 300 points in a single day. Secondly, such 100+ points single day drops are normal "breathers" in every bull market. Just look back at the numerous such single day drops in the past bull trends. In fact, most of such drops recover almost the very next trading day, as such, we should not read too much into such single day drops. Single day drops only sound an alarm when the following trading day remains red. It is then we need to make a reassessment of the situation and see if there is strong evidence that the market is turning around significantly. Currently, there is no evidence that this single day drop means anything more than a healthy breather leading to higher highs.

This is also Chinese New Year week. Chinese New Year does not affect the US market like Chrismas and New Year Day does so traders should not be overly concerned. This is the first week of February 2011 and we are getting those heavyweight economic data once again. Monday's Chicago PMI would shed the first light on how Tuesday's ISM index might turn out. Generally, consensus is mirroring the current volatile economic data period and is expecting some pretty volatile results as well. This is the period to take a longer perspective and survive the short term volatility.

Here's wishing all my Chinese readers a very happy and prosperous year of the Rabbit! Gong Hei Fat Choy!
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Housing Data Continues To Look Good...

The Dow closed marginally higher by 4 points in yet another sideways day amidst mixed economic data.

Fundamentals
Market opened in the red on poorer than expected durable goods orders and jobless claims but took back lost grounds as the housing market continues to show signs of sharp recovery. Pending Home Sales rose 2% in December and certainly paints a consistent picture with the better than expected New Home Sales released on Wednesday. Indeed, a recovering home market is essential to overall economic recovery. Of concern today is the far worse than expected jobless claims which the regulators are blaming the heavy weather for. The surge in jobless claims has also resulted in the 4 weeks moving average for jobless claims turning upwards, which is discouraging at this critical stage of economic recovery. However, the US economy is currently going through a temporary period of volatile economic data and investors should maintain a longer perspective. Yes, economic numbers are like the stock market, going up in waves and never straight up. What investors should take note of is that the overall trend still points towards economic recovery and sustenance of the current primary bull trend.

Technicals
The Dow has been struggling at its current short term resistance level of 12000 all week but has yet to show any sure signs of weakness. Even though the Dow made a sideways day, the S&P500 and the Nasdaq Composite both made healthy advances and are both yet to enter short term overbought condition, as such, there is no reason to doubt that the current bull trend still has legs.

For now, the Dow remains in a short term bull trend, intermediate bull trend within a primary bull trend.
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Sales Hit By Heavy Weather

The Dow closed marginally lower by 3 points in a largely negative day rescued by last hour buying.

Fundamentals
Investors were discouraged by worsening sales data the very moment market opened. Both Store Sales and Redbook worsened due to heavy weather in the East, leading to the Dow losing as much as 81 points in the afternoon. However, on the bright side, consumer confidence picked up sharply for the month on improvements in the job market and that might have been the catalyst for the final hour bargain hunting which brought the Dow back up to almost breakeven for the day. This is also supported by a surge in call options buying, bringing the total equities put call ratio to up almost par. Tomorrow's FOMC announcement is likely going to see a slow morning session with low volume before the market react to whatever the announcement may be in the afternoon.

Technicals
The Nasdaq composite completed a rebound off its daily 30MA short term support today, which could provide some strength for the market over the next few days. However, the Dow and S&P500 continue to lose short term bullish momentum on our technical indicators which supports the view that the market is currently overextended for the short term. However, the market can do two things to digest such short term overbought condition; 1, to retreat to its short term support level before rebounding or 2, to move sideways until the 30MA catches up. The Nasdaq composite has clearly performed action number 1 while the S&P500 looks like its moving for action number 2. The respective daily 30MA would be critical for continuing this all out bull trend, failing which, the market could go into a significant consolidation like the one back in November 2010.

For now, the Dow remains in a short term bull trend, intermediate bull trend within a primary bull trend.
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FOMC Week!

The Dow closed 1.19% higher last week as the US market continue to climb against volatile economic numbers.

Even though economic numbers have been largely volatile over the past few weeks, important forward looking indicators such as last week's Empire State Index, Leading Indicators and Philley Fed have pointed to continued economic growth. This continues to reinforce the economic recovery scenario which is especially important for the long term prospects of the market.

So far, with only 6 more trading days to go in January and a strong sense of the market being short term overbought, this continues to be a dangerous time to be newly long. The NASDAQ composite has already staged a significant pullback to its 30MA short term support and chances that the Dow would follow suit this week remains very high. This is a week of heavyweight releases; consumer confidence on Tuesday, FOMC announcement on Wednesday, Durable Goods Orders on Thursday and GDP on Friday (see Stock Market Calendar).
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Economic Data Remains Soft...

The Dow closed marginally lower by 12 points as sales data turned in softer as expected.

Fundamentals
Sales data today turned in softer as expected due to post holiday season and heavy weather. Both the S&P500 and the NASDAQ composite ended the day significantly lower, closing down by 1.01% and 1.46% respectively. Investors were clearly concerned about volatility surrounding tomorrow's major economic releases and Friday's options expiration. Analyst estimates for tomorrow's Leading Indicators and Philley Fed are both for the downside which causes some concern about how the market will react. Yes, we are still in a short term period of shaky economic data which is totally normal in a recovery market, coinciding with the market's technical need for a breather before more upside can be expected.

Technicals
Today's retreat is an extremely healthy one which could actually help the market go further upwards if tomorrow's economic data surprises to upside. However, even if it doesn't, a couple of days more retreat would actually put the market into a far better position for future gains. As we go into the final 7 trading days of the month of January, would historical odds drive the market lower from here onwards to close negative for the month of January once again? So far its hard to tell but odds continue to favor a short term pullback perhaps down to the 30MA level both for the Dow and the S&P500.

For now, the Dow remains in a short term bull trend, intermediate bull trend within a primary bull trend.
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Week 3 January 2011

Welcome back after the long weekend!

The market continued to power ahead despite all signs of weaknesses in both technical indication and economic data with the Dow gaining 0.96% week on week.

Last week has been a week of volatile economic data which disappointed some investors, however, that didn't seem to stop the market from continuing its gradual and steady climb as investors continue to return to the market, creating a month of largely above average trading volume so far.

This week is not only a holiday shortened week but also options expiration week, as such, some volatility should be expected. In focus this week would be Tuesday's Empire State Index and Thursday's Jobless Claims and leading indicators (see Stock Market Calendar). Again, I would expect some volatility in those numbers as well since we are in that period of recovery where some volatility in economic activities is expected.

Make no mistake, historical odds does still favor a lower January and I never want to be on the opposite side of such strong odds. So this is certainly not the time to be newly long unless you are trading positions that you expect to hold beyond January.
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Economic Data Goes Through Volatility

The Dow closed marginally lower by 23 points as jobless claims surged unexpectedly.

Fundamentals
Jobless claims surged unexpectedly today due to seasonality, turning in 445K, far worse than the consensus of a lower 405K. However, seasonality played a big role in this surge, as such, investors would be glued to next week's jobless claims report for confirmation. Stocks opened up marginally lower today on this pre-market release and remained largely negative eventhough some strength was seen in the late morning session. Tomorrow's retail sales and consumer sentiment will be in focus. Consumer sentiment has been rising for two straight months so far and some volatility should not be taken negatively. The US market is clearly in a period of volatile economic data right now. Yes, nothing go straight up or down, even economic data. All recovering economies go through occassional period of worse than expected economic data and investors need to take heed of the overall trend rather than take these volatilities too seriously.

Technicals
Today's just another sideways day as the market continue to lose short term bullish momentum. However, going by the strength of the intermediate bull trend, we expect a short one or two days retreat, perhaps down to the daily 30MA line in order for the bull trend to continue upwards healthily.

For now, the Dow remains in a short term bull trend, intermediate bull trend within a primary bull trend.
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Week 2 2011!

The first week of 2011 ended positively, like most first weeks of the year, with the Dow gaining 0.84% as investors and traders returned to the market.

Even though unemployment rate fell unexpectedly to 9.4% versus expectations of an increase to 9.7%, investors were less than pleased with the lower than expected gain in nonform payroll. However, there is now a clear trend in the jobless claims reports and the jobs report and that is the job market is recovering. As long as the trend continues, we can be assured of economic recovery and long term stock market strength.

On a short term basis, bullish momentum continues to fade in the market without the kind of enthusiasm that we would like to see in a bull market. Going by past market behavior, we continue to believe that we should see a significant retreat this month before the intermediate bull market has the next leg.
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Welcome to 2011!

Welcome to 2011! Here's wishing all of you a very happy and prosperous year ahead!

2010 ended last week with the Dow gaining 9.75% or 1029 points for the year. So far, the US market recovery has been a standard textbook one with a strong rebound on the first year out of recession (+20% in 2003 and +24% in 2009) followed by a slower year (+5% in 2004 and +9.75% in 2010). 2010 has also been a year of recovering economic data with the US real GDP growth rate staying in positive territory throughout 2010 versus the largely negative readings in 2009.

The world is still struggling to break out of the 2008 crisis and hope can now be seen in the numbers. Nobody can predict exactly what is going to happen in 2011 but our short term technical indicators are telling us to be careful in January as short term momentum begun to drop last week. Indeed, the fabled January effect really hadn't been around much the last decade and from the way traders are preparing to short their way into the first month of 2011, I see the odds favoring yet another negative January.

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