The major indices sold off sharply yesterday; with the S&P 500 (1084.53) closing below its 20 week average (but above the Nov low) and the Nasdaq (2179.00) clinging just above its 20 week average. The mean stock (P>5, Vol > 100,000, Mkt Cap > $100 Mil) has lost nearly 7% since the Massachusetts senate result. Particularly hard hit has been our proxy for risk, the Semiconductor index (SOX – 327.25), which in the last two weeks has lost a quarter of its entire gain from last March. We are near term oversold and would not be surprised to see a modest bounce here. That said we would look to sell strength and move increasingly towards the neutral or short position. The market is clearly rolling over and while we remain rampantly bullish longer term, we cannot ignore the technical breakdowns that are occurring. The trend has turned lower and as such rallies are opportunities to reduce long side exposure. After the bell Microsoft (MSFT – 29.16) announced, like all its major tech counterparts, simply blow out earnings. MSFT earned almost $70,000 for every minute of every day! The 74 cent number was 15 cents above estimates, and the Jun ’11 estimate will now most likely move from $2.10 to $2.40. MSFT has $3.35 in free cash, which stripping out, would mean the stock trades at less than 11x the new forward estimate! And this at the beginning of a new upgrade cycle. Just a refresher on equity analysis 101. Prevailing interest rates matter because when we are valuing a security we try to ascertain the “pay back period” or the price of the stock. If interest rates are sky high at say 10%, it will take a little over 7 years to pay back the principal on a compounded basis. If however, we have a 10 yr treasury at 3.68% as we do today, then the pay back period is approximately 19 years. That is why a $1 earned in a sub 4% world is worth a lot more than in a 10% world. If MSFT had no growth at all, it would take 11 years to return the price of the stock net of cash, which means even if its business went no where, it is probably a better investment than putting your money in the bomb shelter. Incidentally MSFT has only had one year in its entire history where it did not grow earnings and that was fiscal ’09, and it averaged double digit growth throughout the entire last decade. What will be interesting today is to see if the “earnings don’t matter” theme continues today with MSFT; the stock has an important pivot at the 20/50 day convergence at $30.20, and so a close above that would be bullish and could lead technology in general back. Conversely if it does what every other stock has done on good earnings and sells off, the up sloping 200 day is way down at $25.40. If the “as good as it gets” crowd can take back control on the downside today, then we could well be looking at a market that ultimately will take leaders like MSFT to their respective 200 day moving averages. The PC cycle is not peaking, shipments will surpass 20% growth this year, and just as the Barron’s article pointed out last weekend on Intel (INTC – 19.92), there are many sustainable headwinds. So if Mr. Market wants to sell the news and take the Nasdaq below its 20 week (currently 2174), then watch out for a potential date with the 200 day averages and the best buying opportunity since last March.
Hey, preliminary GDP growth for the 4Q was 5.7% , a six year high! Now most economists will disregard the number as a one time blip, but remember none of them predicted such growth to begin with. Yes, the bears howl, but it’s because of all this stimulus and government spending, which is not sustainable. Well actually government expenditure only contributed 0.1% in growth. Tech spending soared and the consumer continues to consume despite high unemployment and a positive savings rate. Think about what has happened over the past year. We were at negative 6% GDP in the 1Q, a labor market that was losing 700,000 jobs a month; and now we have blow out earnings, the strongest GDP growth in six years, and a job loss rate that is very close to the flat line. All we can say is how soon they forget.


S&P 500 (1084.53) up six points in the early going, back above the 20 week average. The down sloping 10 day average is at 1112 and then the 50 day at 1114 provide the short set up point if we see a sustained bounce on the better than expected GDP report. Above that the Holy Grail short set up would develop at the down sloping 20 day, which is currently 1123. The recent selling has been so sharp that it really hasn’t afforded mush opportunity to move the in the other direction. That would change on a rally to the 1113/1123 area, and as the weight of evidence suggests we are rolling over, we need to add some short side exposure if we get such a rally. Any weekly close today below the 20 week at 1089 would still have ominous consequences for next week’s action.

Nasdaq (2179.00) Breaking down, but tenuously holding on to its 20 week at 2174. The 50 day at 2230 is now resistance, and with the down sloping 10 and 20 day averages just above, any sustained move back towards the 50 day would be another opportunity to reduce exposure. The downs loping 10 day average is at 2242, the down sloping 20 day is at 2270. We are near term oversold, but technically speaking, any rallies need to be sold and the recent break below the 50 day average respected. The Bears remain in control.