Breakout Attempt On Verge of Failure, Caution Urged.. Again

In my report last week, the theme was resiliency.  I highlighted the fact that the indices were able to hold onto key support areas in the face of bad news, setting up the possibility of a retest of the 50 day moving averages.  I’ll call this week’s theme a “return to frustration”  with the Nasdaq and S&P failing again at the 50 day moving averages.

While the indices have been showing an increasing amount of resiliency and improving technicals over the past 2 months, any rally has been short lived with that 50 day moving average proving to be tough area of defense for the bulls to push through and hold above.  That was certainly on display again last week.  The market rallied with good  volume on the day of the Fed announcement closing near the highs of the day.  Both the S&P and Nasdaq even managed to clear the 50 day moving averages as it appeared the market may be ready to start moving higher again and once and for all use the 50 day moving average as a springboard for further gains.  I certainly liked the action and put on just a bit more exposure on the long side, but remained a bit skeptical of the move knowing the market often traded the other way the day after a Fed decision.  At the end of the day on Wednesday, I sent the following note to my premium members:

“An important day today with both the Nasdaq and S&P500 clearing major resistance at the 50 day moving average with volume heavier than the day before.. technically a day of accumulation and a breakout in the short term.  However, remember that trading the day after a Fed announcement is often opposite of  the day of the announcement so we could pull back tomorrow.  If we do so it needs to be orderly and we need to hold above the 50 day moving averages by the end of the day.  I most likely won’t be adding any more long exposure until I see what the GDP number looks like on Friday.”

Trading on Thursday was a disappointment.  The pull back, while on light  volume took out a few key levels of intraday support as the market awaited the GDP number Friday morning.  Here is the note I sent to Gold members late Thursday:

“I’m holding the $10K BGZ hedge overnight.  While volume was relatively light, not exactly the orderly price action I wanted to see today and we took out support at both 85 and 86 in the SPY with a good possibility of testing 84 tomorrow.  That will be mighty close to my break point .. take that out with volume and I have to get considerably more cautious once again.  GDP number in the morning, so an important day tomorrow.   All long positions not showing technical damage so continue to hold them.”

At the opening bell Friday morning, it looked as if the indices would stop Thursday’s bleeding and at least hold flat as GDP came in better than expected at -3.8%, but take out an increase in inventories and the GDP dropped -5.2%.  Not helping sentiment any was the Chicago PMI falling unexpectedly to 33.3 from 35.1 in December which suggests the recession could last all year.  Add to that the bloated stimulus bill that probably will do little to stimulate and  traders were clearly in the selling mood ahead of the weekend.  Any hope of a late day rally was squashed on rumors that the “bad bank” initiative to move toxic assets off bank balance sheet and address market to market issues had hit a snag and was put on hold.  All in all, a very disappointing end to a promising week.

So now the indices find themselves on the edge the cliff once again, with the Dow and S&P500 clinging to critical levels of support around 8000 and 800 respectively.  There is little room to run downhill from here, so a quick recovery early next week will be critical.  With so many failed runs at the 50 day moving averages and the government running out of band aids, you can’t help but think that those November lows will have to be retested before any sustainable rally can be achieved. 

::: Model Portfolio :::

** This section will now appear as a separate report about every other Wednesday. 

The Self Investors Model Portfolio wrapped up 2006 with a gain of 27.6%, 2007 with a gain of 30.2%, finished nearly 35% ahead of the S&P in a very difficult 2008 and is off to a great start here in 2009, ahead of the S&P by 6%.  This is a REAL portfolio with position sizing and not based on extrapolated hypothetical gains for each trade.  On average it beats the S&P by 20% per year.

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::: Best/Worst Performers :::

– Top 10 Performing Industries For the Week –

1. Toy & Hobby Stores: 10.50%
2. Money Center Banks: 10.40%
3. Music & Video Stores: 9.15%
5. Trucking: 7.25%
6. Banks – NE: 7.25%
7. Long Term Care Facilities:  7.05%
8. Research Services: 6.75%
9. Catalog & Mail Order: 6.65%
10. Banks – Foreign Regional: 6.25%

– Top 10 Worst Performing Industries For the Week –

1. Major Airlines: -21.15%
2. Resorts & Casinos: -10.45%
3. Farm & Construction Machinery: -10.45%
4. General Entertainment: -9.75%
5. REIT – Hotel/Motel: -9.35%
6. Small Tools & Accessories: -8.65%
7. Chemicals – Major Diversified: -8.60%
8. Aluminum: -8.00%
9. Home Furnishings & Fixtures: -7.85%
10. Regional Airlines: -7.80%

– Top 5 Best Performing ETFs For the Week –
(excluding leveraged ETFs)

1. Morgan Stanley Frontier Emerging Markets (FFD) 9.65%
2. iShares Austria (EWO) 6.75%
3. iShares Regional Bank (RKH) 6.70%
4. iShares UK (EWU) 6.40%
5. HLDRS Internet Infrastructure (IIH) 6.30%

– Worst 5 Performing ETF’s –

1. US Oil Fund (USO) -9.60%
2. Templeton Russian & E Europe (TRF) -6.35%
3. Morgan Stanley (RNE) -5.55%
4. HLDRS Broadband (BDH) -5.20%
5. HLDRS Telecom (TTH) -4.70%

::: Upcoming Economic Reports (2/2/2009- 2/6/2009) :::

Monday:        Personal Income/Spending, Construction Spending, ISM Index
Tuesday:       Pending Home Sales, Auto/Truck Sales
Wednesday:  ADP Employment, ISM Services, Crude Inventories
Thursday:      Productivity, Factory Orders, Initial Claims
Friday:           Nonfarm Payrolls, Unemployment Rate

::: Earnings I’m Watching This Week :::

Monday: BE Aerospace (BEAV)

Tuesday: Cameron (CAM), DR Horton (DHI),  Marothon Oil (MRO), Myriad Genetics (MYGN), Dow Chemical (DOW)

Wednesday: BHP Billiton (BHP), Cisco Systems (CSCO), National Oilwell (NOV), Pulte Homes (PHM), Visa (V)

Thursday: Diamond Offshore (DO), ESCO Tech (ESE), Evergreen Solar (ESLR), FLIR Systems (FLIR), Mastercard (MA), Omniture (OMTR), Stericycle (SRCL), TeleCommunication Systems (TSYS)

Friday: Beacon Roofing (BECN), Biogen (BIIB), Toyota Motor (TM)

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