Wednesday, October 07, 2009

E-mini chart update 2 days after the spike provided by the Non-ISM mfg report

Yes, this is a tricky stock market trade for both bulls and bears. The trickiness is largely a function of the
bull momentum off the lows this year. After a 62% ramp-up from the March lows, you would think the
market would like to take a breather, for more than 7 days, particularly when the economic data month
over month is not “equity-friendly.” But no, the spate of bad news we have seen over the past two weeks
only spikes the market for a few hours or days, and then comes rushing right back up to the highs.

Let’s study the above chart closely and review some of the not so friendly data over the past few weeks.
We will find neural network patterns repeating throughout the past three weeks. The first bit of unfriendly

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data came from the existing home sales report (ehs) on Thursday Sept 24. The bearish high that day was
1064 and this pushed the stock market lower into the week’s close. However, bullish news of three
M&A’s on Monday Sept 28 pushed the stock market higher into the consumer confidence report on
Tuesday Sept 29. That day took out the bearish ehs high by two points. On Wednesday, Sept 30, the stock
market could not breach the ehs high at 1064. Oh, it tried mightily, but the Chicago-ISM report that
Wednesday morning was extremely bearish and the SP500 got whacked after trading as high as 1063
before the 8.45 am report.

Another bearish report came along on the Oct 1st ISM report. The bearish high that day was 1055, and the
SP500 got whacked all the way into Friday Oct 2nd’s bearish NFP report. Then, Mirabile Dictu! ~ another
bullish report on Monday Oct 5 (this time the bullish non-ISM report) drove the stock market higher into
the Tuesday Oct 6. Tuesday Oct 6 breached the bearish 1064 high of the previous Thursday’s Oct 1 ISM
report by almost two points.

What I am pointing out folks, is that these are the very same trades. And guess what, this Wednesday
morning tried mightily to breach the bearish Oct 1 ISM high at 1055 but has not. This means that this
Wednesday’s failure to breach the bearish ISM high is identical to the failure of the last Wednesday to
breach the bearish ehs high at 1064. The implication is that the stock market is poised to either correct the
advance off the Oct 2 low, or the correction off the Sept 23 high is about to resume. Any breach of the
ISM high at 1055 would obviously begin to negate the patterning indicating a correction is imminent.

Assuming the downside risks are increasing near term, initial support is in the 1034-1038 zone and
roughly around 1021. Much of the risks between now and next Friday will be a combination of earnings
economic reports. We have to have an open mind with respect to risks both on the upside and downside
near term. The reason is that much of the earnings reports between now and next Friday are so
unknowable. Will earnings be above or below expectations? On balance, by the time is all said and done,
the majority of companies will manage to beat raised and lowered expectations.

The earnings season got underway this morning with MON and COST. The former disappointed investors
and the latter was welcomed by investors. This evening AA will report, and because AA beat analysts
bearish expectations by a wide margin last quarter, analysts have been raising their expectations for this
quarter. Thus an upside surprise is unlikely this afternoon. A disappointment from AA this afternoon
could set up a soft tone to the stock market, particularly commodity stocks, going into the weekend. An
upside surprise could negate the repeating patterns pointed out above. In which case the next big
resistance is 1060 and 1064 for the stock market.

Let me close by reiterating what I have said for the past two months, downside risks to the stock market,
on balance, are expected to linger until the Sept 14 retails sales report and September IP report are
announced on Thursday Oct 14 and Friday Oct 15. On those two key days, bearish earnings from C on
Thursday will offset bullish earnings from GS (GS is an anomaly to the sector, and is a stock everyone
loves to hate, so what they report is going to be idiosyncratic to the sector as a whole. What C reports will
be more germane to the broad market.) Bearish earnings from BAC and possibly GE and HAL on Friday
Oct 15 could also weigh the market down on the Oct 15 IP report for September.

Oct 14-15 are the key dates for investors and traders to hone in on for either the stock market correction to
end or for the bull trend in equities to resume. I do not know if the Oct 2 low will be taken out as yet
between now and next Friday. A lower low would be entirely more satisfying, but who can say how well

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the trend-following systems will lock this market up. Remember between March 2003 and 2007, not one
correction greater than 10% ever flipping materialized. Most all those corrections hovered in the 4% t o
6% range.

Bottom line: no matter what happens between now and next Friday however, the risks are apt to shift to
the upside going into year end for mkt participants as the balance of the earnings season should go well
and the Oct economic data over Sept economic data will stabilize when reported in November and this
will buoy equities into year-end and the next earnings season. Oh, and Q4 09 earnings season should look
simply marvelous against Q1 08, so there is no reason not to expect a decent January effect, leastways as I
see it as we enter Q3 08 earnings in Oct 2009.