The major indices, on the back of a declining Dollar, moved sharply higher yesterday. It has been quite a rally since last Friday’s lows, but despite the move back up, the major indices are still below their down sloping 20 and 50 day moving averages and rallies should still be sold. China raised its reserve requirement for the second time in a month to protect against an overheating economy. Loan growth in China is accelerating and property prices have been surging lately. Many pundits have been predicting a real estate and fixed asset bubble in China that if it popped, would be a critical blow to the global recovery story. So far, however, the Chinese have been very able in handling double digit growth; and banks already require a 16% reserve requirement. Presently global debt woes, domestic political concerns, and an over heating Chinese economy are ammunition for the bears. Of course ultimately it is earnings that drive stocks, and estimates continue to rise, such that as it stands right now, 2011 could well be a record profit year. So on one side we have a myriad of potential fears and concerns and on the other we have a historically cheap stock market relative to underlying interest rates. Our own thoughts are if the bears are going to win a couple of rounds, then do it in style, let’s see a real correction, a test of the 50 week averages, something we can buy aggressively; not this wishy-washy indecision. Heck we have a President who has waged war on banks, the very oxygen of our financial system, all these recent profits are just a Government spending induced mirage, we have deficits that are spiraling out of control, the Dollar is sure to collapse, we will lose our AAA rating, the Global debt bomb is still ticking, heaven help us when we start to raise interest rates and take away the fiscal punch bowl, yada, yada. We don’t buy this view, but surely the bears can do better than this. Germany’s economy stalled in the 4th Quarter it was announced this morning, so come on bears, pound the table on the Euro Zone double dip scenario, and contagion, got to throw that word around, spread the fear! Yes, this is called talking your position, but we would dearly like to see the major indices break recent lows and set up the best buying opportunity since last March. Take Apple (AAPL – 198.67), for example; it is tracing out a potential head and shoulders top, which would be confirmed by a break of the neckline at $188. Now would we prefer to buy back at $205 where the green light, all clear buy signal is triggered, or would we relish the chance to buy at the 50 week average (currently at $163), which is also the Fib 0.382 retracement level of the entire move from last March? The chance to buy AAPL at 10-11 x earnings after cash would, in our opinion, represent a tremendous buying opportunity, that no doubt would be mirrored across the large cap tech sector. The bears are still in control, the 20 day averages have broken below the 50 day averages on the major indices for the first time since the rally began, and there is plenty of overhead resistance; so for now, we continue to hold on to the hope that the selling can accelerate and give us our anticipated 200 day/50 week buy set up.
Retail sales ex-Autos for January were up 0.6%. Despite double digit unemployment, a strong savings rate and a steep decline in loan activity, the consumers’ demise has been greatly exaggerated. We are not denying obvious headwinds, only that the consumer will continue to spend, albeit at a reduced pace, and that given how lean and productive Corporate America has become, profits will continue to grow steadily in that environment.


S&P 500 (1078.47) closed above its 10 day average and we were expecting some follow through this morning, but the news out of China seems to have put some downward pressure on the futures, which look to be down about 8 points. Any ability to reverse early weakness will meet resistance at the 10 day average at 1077. A move above that brings the 20 day into play. The down sloping 20 day provides significant resistance at 1093. Given that the slope of the 50 day is also rolling over and lies just above at 1109, experience would suggest a significant shorting opportunity if we see a move above 1177 and towards the 20 day average. Of course the market can do anything, and we could see a recapture of the 50 day at 1110 and a move back up in our indicators and a return to the long side of the equation, but that whipsawing action would be most frustrating. We have for the first time in almost a year got a real correction, where we are entrenched below the 50 day moving average, where the slope is turning lower, and we would expect a return of more concentrated selling pressure to develop shortly. The lows of the last three sessions are 1059/1060, and that is the near term line in the sand for the index. A break below that support brings back our test of the 200 day scenario.

Nasdaq (2177.41) closed above its 10 day average for the first time since the GOP Massachusetts senate victory. Watch for support this morning at 2158, the 10 day average. Below that the bears regain the near term upper hand. The Feb high is 2194, the down sloping Holy Grail 20 day average short set up is at 2197. Any reversal of early weakness and rally to 2194/2197 would set up a great near term shorting opportunity. Only a move back above 2227 brings the all clear buy signal back into play, and quite frankly that whipsaw action would be very frustrating. For now rallies are opportunities to reduce long side exposure or add shorts. The 200 day average is up to 2032, the 50 week will be at 1966 next week. We feel the recent rally is a dangerous time to add long side exposure, and we continue to anticipate that a 200 day/50 week set up will develop in coming weeks.