One of the key ingredients for me in trying to determine if a market rally is near after a sustained sell off is how the market reacts to bad news.  That was the theme over the past week and I discussed it with my members a few times.  On Monday traders came back from the Thanksgiving break and took profits in a big way resulting in a nearly 700 point plunge in the Dow.   However, my sentiment changed over the course of the week as the market not only held up, but managed to rally following a flurry of bad news. 

On Wednesday evening I commented to my members that my sentiment was changing a bit to the bullish side…

“Yesterday the market was not able to follow through on the sell side.  In fact, as quickly as the market fell off a cliff at the end of the day on Monday, the market wiped away those losses very quickly yesterday morning.  Most of the gains were wiped away late in the trading day, but the market rallied furiously on hopes that an auto bailout is on the horizon.  As I mentioned to premium members last night, it was a positive day in that the bleeding had been stopped in its tracks and support levels in the Dow and S&P held up.  However,it wasn’t until today that I decided to shift the portfolio from slightly bearish to slightly bullish.  Why?

How the market reacts to bad news is a key component to finding a bottom.  It now appears we are very close to having that component in place.. That is, the market is beginning to shrug aside bad news and rallying on any signs of hope.  Before the open, JP Morgan slashed estimates on both Goldman Sachs and Morgan Stanley, saying that Goldman could lose a whopping $5.14 in Q4 2008.  This follows a few days of downgrades from other analysts.  The result? Goldman rallied
nearly $4 bucks today.  That bad news has been largely priced in.  Thirty minutes later, the ADP employment report, which measures private sector job losses, came in with a loss of 250K jobs in November which was much worse than the expected (lowest in 7 years) 205K.  Anything a bit better than disastrous out of Friday’s jobs number from the government will probably be looked at as positive.”

The jobs report on Friday was a big test for this market and would provide the ultimate “market reaction to bad news” litmus test. How did it do?  Remarkably.  Expectations for November non farm job losses was in the neighborhood of 335K, but the number came in at 533K.  That was  the largest drop in 34 years and much worse than expectations.  With that kind of downside surprise, the market would have exhibited bullish action just by closing relatively flat.  After a shaky first few hours, trading stabilized mid day and the market staged a furious end of day rally.  That is just the kind of action that hints at a market bottom and at the end of the day I told my premium members that the action has me significantly bullish (at least over the next few weeks) than I have been all year.  I said after the close, “Am I bullish?.. you better believe it 🙂  I’m more bullish after today’s move than I have been all year.. we just moved nearly 300 points after the worst jobs report in 35 years.  That’s exactly what I was talking about in an email a few days ago.. the character of this market has changed considerably this week.  Volume could have been a better but its still accumulation.. next stop is likely the 50 day moving average on the daily chart.”

A bit of a caveat here though.. while I’m getting more bullish on this market, there are a few problems and I am by no means getting overly aggressive on the long side just yet.  I have moved the Self Investors Model Portfolio from about 20% net long to 40% net long, but won’t get more aggressive on the long side until I see big buy volume come into this market.  Let’s take a look at the charts.

The Nasdaq has emerged from the 2 month downtrend (or should I say crash) line but note that we didn’t get great volume on the buy side last week.  It was great to see the market hold up after Monday’s plunge and ultimately breakout in the face of bad news but we must get some big buy volume coming into this market relatively soon.  I’d like to see a big confirming move of Friday’s action early next week.  I do think there is enough strength in this market right now to at least test the 50 day moving average before the end of the year.

The S&P also nudged above the downtrend line on Friday and looks poised to test the next level of major resistance around the 50 day moving average.  Let’s see if we can hold above the downtrend line this week.  That would be further evidence that this market is changing character.

 

::: 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% and is more than 30% ahead of the S&P in a very difficult 2008.  This is a REAL portfolio with position sizing and features annualized returns of 24%.

Would you like to receive buy and sell alerts in the Model Portfolio within minutes (NEW! now get them via instant messaging in near real time) of each transaction?  You can receive these along with ALL of the tracking tools and video reports with the very popular Gold membership.  Don’t delay, get started today and join me for many more highly profitable months here at SelfInvestors.com.

::: Best/Worst Performers :::

– Top 10 Performing Industries For the Week –

1. Office Supplies: 21.45%
2. Home Furnishing Stores: 17.50%
3. Sporting Goods Stores: 15.80%
5. Residential Construction: 12.50%
6. Surety & Title Insurance: 9.20%
7. Auto Parts Stores:  9.10%
8. Apparel Stores: 9.00%
9. Department Stores: 8.50%
10. REIT – Hotel/Motel: 8.20%

– Top 10 Worst Performing Industries For the Week –

1. Oil & Gas Equip & Services: -21.30%
2. Oil & Gas Drilling & Exploration: -20.75%
3. Independent Oil & Gas: -17.75%
4. Silver: -17.15%
5. Aluminum: -16.80%
6. Nonmetallic Mineral Mining: -15.65%
7. Copper: -14.45%
8. Industrial Metals & Minerals: -14.00%
9. Steel & Iron: -12.80%
10. Oil & Gas Refining & Marketing: -12.65%

– Top 5 Best Performing ETFs For the Week –

1. iShares Home Construction (ITB) 12.15% 
2. Morgan Stanley China (CAF) 11.45%
3. SPDR Homebuilders (XHB) 9.80% 
4. SPDR Retail (XRT) 6.40%
5. SPDR Insurance (KIE) 5.65%

– Worst 5 Performing ETF’s –

1. PowerShares Dynamic Oil Service (PXJ) -22.15%
2. HlDRS Oil Service (OIH) -21.75%
3. iShares Oil Equipment (IEZ) -21.20%
4. SPDR Oil & Gas Equipment (XES) -20.00%
5. SPDR Oil & Gas Exploration (XOP) -19.20%

::: Upcoming Economic Reports (12/8/2008- 12/12/2008) :::

Monday:        None
Tuesday:       Pending Home Sales
Wednesday:  Wholesale Inventories, Treasury Budget, Crude Inventories
Thursday:      Export/Import Prices, Initial Claims, Trade Balance 
Friday:           PPI, Retails Sales, Business Inventories

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

Tuesday: AutoZone (AZO)

Thursday: Costco (COST), Integral Systems (ISYS), Martek Biosciences (MATK)