Date: Thursday, February 25, 2010

Market Commentary

A huge jump in jobless claims was blamed for a dramatic gap down at the open today, but it was all for naught, as both technical and fundamental factors combined to move the major indexes well off their worst levels and close but moderately in the red.

When the day started it looked like panic had set in. The market gapped down around -1.5% in short order under continued overbought conditions and a new spike warning in jobless claims that the fragile recovery may actually be a mirage.

Data from the Labor Department cast a pall on the stock market early this morning when their report showed that that first-time jobless claims rose to just under a half million (496,000) versus an expected decrease to 460,000 -surprising nearly all economists' forecasts (they have clearly drunk the recovery kool-aid).

This marks the second consecutive report where economists have been shocked at the continued weakness in the labor markets. What are these economist guys doing? Reading comic books? Scanning the new Obama health care plan? Shopping for some spring outfits (nah - couldn't be doing that - they would see all the empty malls)?

My friends and neighbors spend more time talking about jobs than they do talking about the weather. There is nothing more important to Americans right now.

Those who have jobs are giving thanks, over and over again, as each new neighbor loses their job, then their house and certainly, their optimism for a better tomorrow.

"The economy is going into a little bit of a fits-and-starts period," said Michael Mullaney, who manages for Fiduciary Trust Company in Boston. "We don't see any job creation coming along. That's by far our biggest concern."

"A lot of portfolio managers are just sitting on their hands, building cash in their portfolios because they feel like they're getting conflicting signals about the economy," said John Bollinger, president of Bollinger Capital Management, in Manhattan Beach, California.

"Unfortunately, it will probably take some improvement in the jobs picture to get people the kind of certainty they're looking for."

Ya think?

So why did the market recover from this panic collapse and erase much of the days worst losses?

Well, for one, Bernanke was still testifying before congress - so he needs his automatic bumps. And Obama was entertaining the Democrats and the Republicans in the very first televised discussion on health care - that had to inspire confidence, eh?

Yea, that had to be it . . . NOT! . . . (I catch on to colloquialisms a little late)

All of the technical charts I showed you yesterday pointed to a continued decline . . . and decline it did, right out of the gates. But it didn't stay down.

The reason could be fundamental, i.e., probably about the dollar, which posted nice gains early on, but then began a steady course downward, undoubtedly helped by the unwinding of extremely bearish bets made earlier in the month when it looked like Greece's heavy debt load could lead to sovereign default.

Those heavy bearish bets on a Greece default provided the dollar with significant strength, which in turn has hurt commodities and the equity market. And now that Greece has slid into the background a bit by numerous discussions about who is going to bail them out, the default has slid even further into the background. So, the dollar takes it on the chin, as things must not be that bad for Greece.

The reason could also be technical, as the following chart of the S&P 500 illustrates:

A very important technical pattern was broken at the open today. The S&P 500 has been in a rising channel, still perfectly contained within that uptrend despite recent selling until the market opened today.

When the market gapped down strongly on the open the rising channel pattern was broken and a new downward channel was confirmed. You can see the gap down and channel break down to the right on the chart.

As illustrated on the chart, prices breaking down out of the ascending channel is bearish . . . but with a strong gap down to create a new down channel, prices then rose throughout the day to fill the gap down (a typical action for most gaps in prices) and to back test the broken support trend line at the bottom of the rising channel.

As you can see from this chart, prices not only filled the opening gap down, they also rose to the top of what may be a new down channel.

Regardless of how much of today's recovery from such a dramatic opening collapse can be credited to fundamentals (unwinding of Greece default bets) and how much can be credited to technicals (filling the gap and back testing), prices remain firmly within the old trading range.

You may find it interesting that the gap down at the open managed to hit the lower trading range before prices then worked their way higher. Check the chart:

Prices have now retreated to the bottom of the trading channel AND worked back up to the middle of the trading channel (all in one day) and sit just below the 50MA resistance level.

Will the top of the range be tested next? Or will we see a zig-zag move downward to see if the trading range support line will hold? Both are very good questions and while it would be nice to have the answer, neither the bears nor the bulls have shown yet who is in charge.

FYI, regarding the Greece debt problem - it hasn't gone away.

Greece has to repay more than 20 billion euros ($27 billion) of maturing bonds and bills by the end of May, according to data compiled by Bloomberg. An upcoming Moody's downgrade for Greece may make it harder for the nation's banks to fund themselves by making Greek government debt ineligible as collateral for European Central Bank loans.

Perhaps those negative Greek bets will be re-placed, huh?

SOLVING FORECLOSURES

A disturbing proposal from the Obama administration designed to help troubled homeowners who can't keep up on their mortgage payments was released today. The undertones are reminiscent of when the administration told GM bond holders to go take a flying hike, and if thoroughly understood could crush the embattled mortgage industry:

Feb. 25 (Bloomberg) -- The Obama administration may expand efforts to ease the housing crisis by banning all foreclosures on home loans unless they have been screened and rejected by the government's Home Affordable Modification Program.

The proposal, reviewed by lenders last week on a White House conference call, "prohibits referral to foreclosure until borrower is evaluated and found ineligible for HAMP or reasonable contact efforts have failed," according to a Treasury Department document outlining the plan.

. . .

At present, lenders can initiate foreclosure proceedings on any loan that hasn't been submitted for HAMP eligibility. Under current HAMP rules, foreclosure litigation can proceed while borrowers are under review for the program or even in a trial modification.

The proposed changes would prohibit lenders from initiating new foreclosure actions before loan screening by HAMP and would require lenders to halt existing proceedings for borrowers once they are in a trial repayment plan.

. . .

This is just what the mortgage industry needs: A plan to prevent foreclosure . . . great for the borrower . . . disaster for the lender.

Can you imagine what would happen if all the homeowners whose mortgages were under water suddenly decided to stop making their house payments? Under a mountain of paperwork to review HAMP for all these people, foreclosures could be deferred for months, if not years - allowing the delinquent owner to stay in the home rent-free while he saves up money for future rent or a future down payment on someone else's distressed home.

While foreclosure rates would certainly come to a halt for a while, they might turn into a tsunami in a year or so. What lender would possibly want to embrace a mortgage with these restrictions? . . . Where do these ideas come from?????

Dennis Slothower