This morning after the homes sales data was released, the Dow Jones once again went below that magical 10,000 number.  Yes, the same number we first talked about in 1999.  Here we are over 10 years later and we’re still talking about Dow 10,000.

According to my calculations, the Dow Jones has crossed above or below 10,000 18 times in 2010.  That’s just in 2010.  When I talk to the average Joe on the street about the market, they constantly discuss the Dow Jones and is it above or below 10,000.  They also make comments about the fact that if the Dow Jones is above 10,000, it is a good market.  This is one of the least reliable indicators you can use.  It’s similar to buying or selling stocks based on one moving average.  The fact that the Dow has crossed the 10,000 mark so many times just this year reiterates the need for income and shows that despite the emotional swings, the market has really gone nowhere in 2010.  I think what we’ve experienced in 2010 is in microcosm what we’ll experience on a bigger scale for the next several years.  The bands may be bigger but I believe the results will show that it was a grind it out, essentially flat market, with a lot of bumps and a market that saw 10,000 come and go many times on the Dow Jones Industrial Average.

Use periods of excessive optimism to sell and excessive pessimism to buy and continue to generate income any way you can.  For the short-term, I think we’re very oversold and due for a bounce.  We may not be done correcting overall but I think the stock market will work its way higher into the mid-term elections.  For now, there is neither excessive optimism or pessimism but the pessimism is certainly winning out which makes me a net buyer of stocks, not a net seller.

In the past month, we’ve been methodically moving higher.  Below is a picture of the S&P 500 over the past 20 trading days on an hourly basis.  Today marks the end of this short-term uptrend.

This may be an end to the short-term uptrend, but I don’t believe this is the end of the rally.  In fact, I think ultimately this will be a buying opportunity.  I’ll have more on this in an upcoming podcast.  Stay tuned.

This morning GDP QOQ (Annualized) was released at 2.4% vs. the estimate of 2.6%.  At first glance, you think uh oh.  Then, there was the revision to last month’s number.  It was a big revision UP.  You put it all together, and it shows a economy that slowed down very fast last month.  As you know, I watch this number carefully because it correlates so well with the S&P 500.  (Below is the picture including today’s data).

As you can see, really what we need right now is some stabilization.  I believe that if the economic data that continues to be released over the next few months is mediocre, the stock market can rally further.  What the market has been reacting to over the past 3 months has been the sharp drop in all the leading economic indicators.  Some stabilization in the Europe & the U.S. combined with continued growth in the emerging markets could be just what the bulls want.

The market was off to a reasonable start this morning after great earnings by Apple last night. But, for most of the day, the major indices were basically flat. Then, Ben Bernanke began to speak to Congress giving his semiannual monetary policy report. The more he spoke, the more equity prices fell. I immediately flashed back two years ago when I used to see some politician on television and down we’d go. I’d look on my Bloomberg machine and see that a speech was scheduled later in the day and you’d watch the put options. The speech would start, the market would fall, and S&P 500 put options would fly. Maybe that trade is back on. It sure was today.

I was able to listen to most of the speech and watch the reaction tick by tick in the markets. And what I heard was Ben Bernanke (who I do like) give ALL his various options if the economy gets worse. This wasn’t in his statement but rather in response to a question. Remember, the complaint has been that the Fed is out of bullets. “Helicopter Ben” confidently said there are plenty of tools in his belt. First, he said he can change the language to let people know that the Fed will be more accommodating for a longer period of time. This will give the market more confidence that higher rates aren’t in the cards. Second, he said he could lower interest rates. Third, he said he could buy more bonds to keep rates down and inject more into the system.

Let’s analyze each of these options. First, he can change the language. So, basically that means do nothing. It’s jawboning and cheerleading with no real action. Second, he said he can lower interest rates. ALL the way down from .25% to 0%. Really? Remember when the Fed had rates at 5% or 6% back in the day? We would all wait to see if they were going to drop rates by .5% or .75%. Now, does he really think dropping rates from .25% (basically nothing) to 0% (literally nothing) will do any good? Last, he talked about buying bonds. That’s legitimate and certainly gives us a green light to buy more bonds. But, these different tools don’t sound like tools to me. They sound like the Fed is running out of bullets. I first thought to myself no wonder the stock market is falling. But, then I thought wait a second. This is the problem. We’re still relying on the government to fix everything. Hasn’t the Fed done enough? They’ve done their job. They’re finished. They’ve injected more capital in the last two years than we’ve ever seen. They’ve lowered rates to practically nothing to encourage activity. They’ve purchased bonds to keep rates low for longer than we had originally anticipated. And, they purchased all the “junk” that bank couldn’t sell. What more should we want? But, we saw the market sell off because the Fed wasn’t giving us any new information and inventing any new tools they could whip out of their belt that would surprise us and get the economy back on track any faster.

All those smug politicians asking questions to Ben Bernanke as if they have a clue about finance always cracks me up. I wish he would have asked them “What are you guys (& gals) going to do to get the economy back on track?” How about lowering taxes to stimulate small business growth which in turn creates jobs? But, no. What I saw was Congress cutting Ben Bernanke off in mid sentence so they could look smart and act like bullies.

This evening, I heard a politician say in an interview the Fed has a lot of options because they have so much on reserve. However, it’s not about the reserves. That’s like buying a stock because the company has a lot of cash. When a company has a lot of cash, that’s great but it’s what they do with that cash that’s important. We’re relying on the management to earn a return on that cash, not just sit on it. If the Fed has reserves, that doesn’t help anybody.

Again, I’ll reiterate. The Fed has done their job and it’s time for Congress & the President to step up to the plate and figure out how to grow our economy. All I see right now is other countries growing and the U.S. is about to embark on massive tax hikes which will drive capital offshore to these faster growing countries. America has a tremendous opportunity in front of it. We can capitalize on emerging market growth if we choose helping those unemployed find work and grow our economy. Instead, I think we’re wasting that opportunity.
Today’s drop wasn’t Ben Bernanke. It was a reminder that the Fed isn’t going to really do anything else. It’s up to someone else to take over. Ultimately, that’s not good in the long run.

Google (GOOG) releases their earnings after the bell tonight.  Below is a picture of Google in the last year.  Three out of the last four times they’ve reported, the stock has fallen after the report (the “E” labels are the dates earnings were released).  Given the recent run in Google, we probably shouldn’t expect anything else.  Implied volatility is somewhat elevated right now so buying puts on the stock to protect yourself might not be the best way to play it.  Perhaps if you own the stock look to sell out of the money calls.

I have an iPhone 4 on the way.  I checked the shipping history this morning and it actually showed it starting out in China.  I’ve never seen shipping history actually start in China and work its way to the United States.  Obviously I know most products start there but generally show a state in the U.S.  Back to my story.  I ordered the iPhone 4, found out about the antenna problem, and didn’t cancel my order.  I talked to a friend last night who knows about the antenna problem, and he told me which case he’s going to purchase for his iPhone so the reception  problem won’t happen.  Are we crazy?  What other product would cause intelligent people to act this way?  A known defect with the phone but we don’t care.  That’s Apple’s power.  I continue to drink the Kool-aid.  Below is how I feel when it comes to Apple products.

A few days ago, I posted a picture of initial jobless claims on top of the S&P 500 to show you the correlation of jobs and stock prices.  You’ll hear from some “pundits” that jobs don’t matter.  We’re a service economy now and manufacturing here in the states is never coming back.  And while I believe that, my job is to figure out what makes stock prices go up or down.  Job growth is one of the many components that affect stock prices.  Today, we got another confirmation that jobs do matter. The change in non-farm payrolls figure came out at 7:30 a.m. CST.  The number (which will be revised) came out at a -125,000.  This was a little better than estimates, but once again this number is going in the wrong direction.

I know it’s hard to believe government numbers and we know they change over time but the point is this:  If you believe we’ll have more jobs and a robust economy, you buy stocks.  If you believe we’ll have stabilization like we did in the mid 2000s where jobs were created even at a slow pace, you buy stocks.  If you think unemployment is going to stay over 10% and increase, then you avoid stocks.  This is a longer-term indicator and while things look very bearish based on the above graph, I think we are setting up for a tradable rally in the next few days.  As always, we have to monitor the strength to determine whether or not it should be shorted or not.  We often get rallies into holidays that are somewhat patriotic.  This year, it may be the opposite.  I think the rally comes after the holiday.

Short-term (starting in the next few days) – Bullish
Medium-term – Bullish
Long-term – Bearish

Some people will say technical analysis is hocus pocus and voodoo.  I think just the opposite.  I think sometimes fundamentals don’t make any sense.  All you have to do is plot the news on top of the price of any security and you’ll often see that the technicals lead the fundamentals.  But, as many of you know, I’m not an all or none investor.  I combine the fundmanetals with the technicals.  In addition, I know that a lot of people that are controlling money DO watch the technicals so it becomes a self-fulfilling prophecy.

Given that, right now I’m focusing on the fact that technicians are watching the 50-day moving average and the 200-day moving average and how they interact and where they cross.  The last time the 50-day moving average crossed below the 200-day moving average was early 2008 (highlighted in yellow circle).  In June of 2009, the 50-day moving average of the S&P 500 went above the 200-day.  Now, we’re very close to getting the bearish crossover once again.  With that said, I am expecting a rally that will keep the 50-day above the 200-day based on some other technical indicators I watch.

The fundamentals continue to deteriorate and are conflicting with the technicals.  Therefore, I’m still approaching this market very cautiously.  I expect a few more weeks or months of upside.  However, this market will eventually need to be shorted but I don’t believe it’s yet.

I did a lot of television interviews in 2009 and one of the things I got asked most during the rally was how can the market go up with such low volume?  My answer was and is simple.  I always look at the quality of the volume, not the quantity.  Today, we broke out of the downtrend that’s been in place for several weeks and the bears argued that there isn’t enough volume.  There are plenty of reasons to be bearish, but volume isn’t one of them in my book.

Above is the picture of the S&P 500 for the last twelve months.  First, you can see the breakout that occurred today.  More importantly is the volume at the bottom.  I’ve drawn a horizontal line based on today’s volume to get a perspecitve on where volume’s been the past year.  You can see during the run since March 2009 (which has been mostly up), volume has been higher and lower than what we are experiencing now.  I don’t know about you, but if I was using volume as an indicator to buy or sell stocks, I’d be lost. Don’t get me wrong, I like seeing stocks go up on heavier volume but it’s not critical.

Quality over quantity.  Every day, you have to look at what made the market go up or down and is there truly demand for stocks and less supply or vice versa?  In the past several days, the quality of the volume has been great even thought the quantity hasn’t.  The quality has lead to some nice gains.

With the market bouncing up and down on a daily basis, nerves are high.  The question I get more than any other is whether or not this is a new bear market or just a bump in the road.  I’m going to lay out some historical characteristics of bear markets vs. corrections in a bull market.  In 2007, there were several signs that the market was beginning to deteriorate.  It’s not just about looking at the level of the Dow Jones Industrials.  During 2007, in addition to the economy beginning to slow down, the internals of the stock market were getting weaker.  Anytime I analyze the NYSE, filtering through the various types of securities traded takes some time.  Closed-end bond funds, REITS, preferred stocks, etc. are traded on the NYSE.  Stripping those out and looking just at the operating companies gives an investor a much better sense of actual buying/selling and the future direction of the markets.  In 2007, the number of companies making new highs began to fall while the ones making new lows started rising.  In addition, the amount of volume (shares traded) was increasing on down days and falling on up days.  Various stocks began to enter their own private bear market.  Then, various sectors did the same.  Eventually by 2008, the entire market was in a downturn that eventually snowballed into what amounted to a stock market crash.  This progression that led to a new bear market was typical even though the drop in 2008 and the intensity were not.  Bear markets such as this one tend to look like a lower case “n” where they roll over.

A correction, on the other hand, happens very rapidly, is news driven and very scary.  As an trader and advisor, I tend to remember each year based on what the stock market does.  I remember 1998 as though it was yesterday.   In 1998, the stock market had started off the year very strong with 20% gains (based on the S&P 500) in just the first four months of the year.  That was followed by a mild correction (5%).  From the spring to midsummer, the S&P had gained another 10% and was at new highs.  Just as quickly as the rally had started, it came to a violent end.  What caused this abrupt turnaround?  In August of 1998, Russia defaulted on its debt and the financial markets went into a tailspin.  Long Term Capital Management (LTCM), a hedge fund collapsed.  The Federal Reserve sponsored a bailout of LTCM by its creditor banks. The Fed intervened and said they were trying to prevent a financial crisis.  Sound familiar?  LTCM eventually liquidated in year 2000.  In one month, the market had fallen 10%.  For a month it bounced around these low levels until it eventually fell another 10% bringing the correction to 20% from peak to trough.  It bounced 10% and eventually re-tested the lows.  That was the end of the correction, not the beginning of a bear market.

I believe Russia in 1998 is today’s Greece.  The stock market was in a well defined bull market and a 20% correction came virtually out of nowhere.  However, it ended and the stock market went on to make new highs before eventually peaking in March of 2000.

Below, I’ve overlaid the 1998 stock market on top of our current stock market.  There is a very similar pattern.  But notice in August 1998 (blue line) how the market took an initial drop (10%), paused and took another leg down.  I’m not necessarily predicting another 10% fall from these levels in the stock market, but it did happen in 1998 and that was a correction in a bull market, not the start of a bear market.

There are several instances over the past several decades of corrections that look very similar to what we’re experiencing in the markets in 2010.  With that said, there are several headwinds today that are different from 1998.  In 1998, we were dealing with taxes heading down, corporate profits rising, interest rates in a long-term downtrend, and a more peaceful geopolitical environment.  Therefore, there are more doubters of the recent rally than in 1998 and justifiably so.  It’s important to constantly monitor the overall strength of demand & supply of equities rather than try to predict how investors will feel a few months from now.  Over the next few days, I’ll be monitoring that demand & supply to see if any bounces are just the dead cat variety.