Hope is Bearable?

Lets just get this part out of the way: The Bear market is still hear. It is strong and it is (or was) roaring loudly over the past few months. Some might say that an important low as put in over the past few weeks by the financials but at "important" market lows, EVERYONE participates on the downside. Example: Where is Apple today compared to say Merrill Lynch over the past few months? If Apple were cascading or RIMM were tumbling hard along with mother Merrill, along with all those oil stocks to the downside, perhaps a different perspective would be gleaned today. However, the facts are the facts and problems remain.

First, anecdotally, the credit issues remain for the markets. We are in the think of earnings season and I heard somewhere today that some analysts believe that financial earnings will be down over 20% from 2006 levels next year. Lower earnings combined with terrible debt to equtiy situations normally leads one to gets a bit worried about the given situation. One needs income afterall to pay of the intererst payments due from the debt. Thus, while BAC, JPM and WFC were able to show that they can make some money in this environment, the brokers and eveyrone else are having issues (regional banks going under again this weekend). Thus, while over the longer term this is something to watch that could change the tide against the finanicals, shorter term, there is no lift - just more selling.

The second fact to consider is seasonality. Generally speaking, August is the biggest vacation month of the year. Thus, many pro's will be on the sideline, probably working buy stops if they were long or sell stops if they are short. Thus, the moves that come between now and labor day may be range bound. Sure, 2001, which many are citing as a comparable period to the current action, had a major decline in August. Last year we had major issues in August. Thus, putting these instances together (both considered bursting stock market bubble periods), you get the expecation that the selling is right around the corner and things the next leg down to 1100 is in the cards. Taking this fact, and combining it with the credit picture, an ugly red is expected on everyone's trading screens.

However, I see some glimmers of hope for a continuation of the rally. The first support sits with the charts of the markets as a whole and the Nasdaq 100. In the NDX 100, you get the largest 100 companies of the Nasdaq. It is a closely watched index and the futures are liquid enough for me. This index has been outperforming relative to its brothers in arms (the Dow and S&P). Interestingly, over the past week, there has been no mention of this and only mention that markets are going to sink. The NDX 100 though showed me a few things that are worth talking about.

First, it bounced off the 1750 level which triggered an upgrade for me moving it from a minus 3 to a minus 1 (minus three from the beginning of June). If this move up from 1750 continues, the next big target to watch is 1890. A move above that level, when combined with the better power model figures (power model measures postive volume for me) and you have a positive 1 rating. Supporting this is hte increasing amount of stocks, on an MA basis that have jumped over their 150 MA moving average. This made a higher low, breaking a downdward trendline from the begining of 2007. What would support my case would be a good move over 1850 and close this week. If such happens, I would be much more optimistic on things going forward.

The other factor to consider is the bonce factor off a trendline. Generally speaking over the pats 6 years, when the S&P hits the top trendline of my chart model, it bounces to the bottom one - sort of like a ball bouncing off two walls. Since the Bear arrived last fall, the S&P hit a high in November before falling back to a low this spring. Then another bounce took us to 1400 beore the rcent fall back to 1200. The next logical level on this is somwehre between 1300-1325. If the bear still controls things that that point, then the move from that looks like 1150 sometime next year. So with that said, I am looking for a bounce towards the 1300 level in the next few months. We hit 1291 but that does not count in my book. 1300/1325 counts and that is what I am looking for.

The next few days should be interesting. With the jobs report on Friday, I wonder how we set up going into the number. It appears the bulls want a strong number as shown by the response to the ADP data this morning. If the BLS complies, we could NDX 1850 and a major push toward the 1300/1325 range.