Despite a stronger than expected GDP report and a continued stellar earnings season, the major indices resumed the recent slide that began the morning after the Republican victory in the Massachusetts’ senate race. Both the S&P 500 (1073.87) and the Nasdaq (2147.35) have lost more than 7% in the past eight sessions. We came into this period aggressively long, believing that the enormous amount of sidelined liquidity, compelling valuations and improving earnings would provide a strong underlying bid to any downside action. In deed, we have long felt that we would not see a 10-15% correction until the S&P 500 made its way to the underside of its down sloping 200 week (currently 1232) first. The technical breakdown that has accompanied the changing political landscape has changed that view. Both the S&P 500 and Nasdaq closed last week below their 20 week moving averages for the first time since they were recaptured last April. We are rolling over, and in our view, the next stop is a date with the up sloping 200 day averages. The November lows (2024 on the Nasdaq and 1029 on the S&P 500) may well coincide with the 200 day averages (currently 2010 on the Nasdaq and 1014 on the S&P 500) if and when they make this test. Such a move would represent a 13% decline in the Nasdaq and 10% fall in the S&P 500, but would certainly be in keeping with typical sharp bull market shakeouts we have seen in the past. We will be monitoring the Ts indicators, as we have seen that whenever the first indicator has fallen below 0.25 while the 10 week is above the 50 week moving average on the S&P 500, it has historically been a great time to pick up the pieces. In fact the Nasdaq has gained a compounded 90% in the approximate year that the signal has been the prevailing condition going back to Oct 1st 1998. The hope now is that any bounce is met with renewed selling pressure and that we have a date in the next few weeks with our 200 day averages. Such a move would undoubtedly push the Ts indicators into an Oversold/Up condition and in our view, provide the absolute best buying opportunity since last March. Until then, however, we need to exercise increasing caution, especially on rallies.
Microsoft (MSFT – 28.18) did indeed follow the recent script of blowing out expectations, only to sell off accordingly. To say that the huge earnings momentum is already built into the stock, is a little hard to conceive, when the forward multiple is only 11x earnings after cash. Even some of the perennially negative market pundits are turning the bullish corner, pointing to a renewed conviction that the P.C upgrade cycle is in its early innings, and that if earnings are strong now, then what will happen when the business sector actually starts to open up its wallet. Or now, however, the technical’s appear to be in control, and we would watch the 200 day on MSFT (currently $25.40) to load up. We recommended MSFT on our buy and hold portfolio at $16.33, and it promptly doubled from there; and while those “easy pickings” days are behind us, we believe that MSFT could well reach $40-$50 into 2011, and that any test of the 200 day averages, not just on MSFT, but many leading stocks, will provide the best buying opportunity since last March. We have a little ways to go on the downside, but its time to start getting our shopping list ready, and we will be looking to add several names to our buy and hold list in coming weeks.
The Budget was released this morning. We have been ardent advocates of a Keynesian initiative to “stabilize” the economy, and have berated those who have suddenly found fiscal conservatism after the previous Administration over spent by $5 Trillion, and turned a $250 billion surplus into a $trillion deficit. That said, we need to see the foot start coming off the accelerator; especially now that the threat of imminent financial Armageddon is off the table. We fully appreciate why we overspent by $1.4 trillion last year, but an increase this year to $1.6 trillion is obviously moving in the wrong direction. The number one story now that the job picture is stabilizing will be the amount of red ink coming out of Washington. Our Federal debt will be 100% of GDP in 2011 at this rate. We often quote how we left World War 2 at 125%, but the move to 100% now could put tremendous pressure on bond prices, especially as the amount of the deficit is going in the wrong direction. Perception, as we have all learned in recent years, is everything. A sustained “soft landing” of deficit reduction needs to start sooner rather than later, and we suspect this latest budget release will provide justifiable consternation from critics of the Administration. This budget obviously has an eye on the November election, and we suspect will add to the recent sell the rally view of participants; similarly we will be looking to sell strength.


S&P 500 (1073.87) closed below the 20 week for first time since last April. Also broke below our three month trading range. The slopes of the 10,20 and 50 day moving average are all pointing lower. Needless to say, therefore, rallies have to be sold. This is especially true on any oversold bounce back to the 10 day average (currently 1104). We are near term oversold and have not had a short set up since the selling began on Jan 20th. Our expectation is that we may now see a respite in the selling pressure, but that any near term relief will be short lived. Ultimately, it appears to us that we have a date with the 200 day moving average over the next few weeks.

Nasdaq (2147.35) oversold near term, but broke convincingly below the 20 week average. Defense has to be applied on rallies. The down sloping 10 day average is way up at 2215, so we are certainly near term oversold. That said, we would view any two/three session relief as an opportunity to move to the short side of the ledger. Ultimately, the recent break down would suggest a date with the up sloping 200 day average (currently 2010) over the next few weeks.