As a long-term market-bullish player (long-term) I am sure we all wish and hope that the rest of the year is as strong as the first week of 2010, but I would not hold my breath. The first week of 2010 on anemic volume led by fund-buying and trading desk-gaps we saw that the Dow gained 1.8% and it's the laggard of the big three as the Nasdog added 2.12% and SPX gained 2.68% due to the energy and banking sector runs; it was a classic example of an index fund rally with the SPX leading the anemic volume charge.

Its a Monday again therefore we should expect a bullish tone for the open (Merger/Monday or due to “news that is hyped) expect the futures player to orchestrate a huge gap-up….the questions is will it be a GAP-Run or GAP/Crap…..also its the beginning of a new-year and we should see some money inflows for a day or so, as historically the first few days of a new-year are historically bullish.....we will need to watch and possibly follow Asia's and Euro land's lead!       I would not be surprised if they  attempt to press a Gap/up and then a run...into the 10:45-11:00 inflection window and try to hold it there then pump it into the close; the markets could get a boost (on dollar weakness) or succumb to selling on dollar strength again, we will need to watch crude, the greenback and the Asian markets very closely....I am also watching the Russell-2000 for initial directional clues as speculative money is again finding its way into this sector!    I still have been seeing smart money selling into strength time and time again as my block selling indicators are increasing steadily as the weeks progress;  this is a clear indication of a classic market distribution process marking a significant top.   As such please take on LONG positions very carefully at these levels as the risk to being long at these levels is compounding every day especially in over-bought technology and consumer-cyclicals and retailers  Strap-yourselves, as it is sure to be another wild another wild rollercoaster ride!! especially during options-X week! The question is do you want a ticket to embark on this amusement ride    

The SPX daily chart and now the weekly chart continues to display what I a coiling pattern into a very narrow rising bearish wedge formations as I have spoken about for several weeks now. The SPX continues to grind higher ever so slightly as momentum slows the anemic volume has helped the trading desks are able to press the index higher. These conditions are telling me that this could be a determining signal that the program trading players might be switching their a negative market trading bias trading strategy (as the call writing has increased greatly these past two-weeks. I will continue to closely observe sudden movements in the SPX index and options over the next several days as we encroach into options-X Friday.

The McClellan Oscillator is struggling to move higher and this steady stream of low volume indicates to me that the market is getting tired and this crawl higher could be ending very soon and the sellers who are waiting with baited breath are only waiting for a reason to pull the sell-trigger. If the SPX trades below 1120.00, sellers could emerge in droves and start their taking pent up profits off the table. I continue to believe that this last move higher may result in a so called false breakout due to the fact that the other major averages such as the Dow Transports, the Dow Utility and the Nasdog have not confirmed a higher move over solid overhead resistance, which leads me to believe that are only a few stocks (mostly the HTB’s hard-to-borrow, and heavily shorted stocks) in this heavily skewed index that are holding the advance like in the NDX. As such I continue to wave the red-flag-of extreme caution and have already started to be prepared for a sharp reversal to the downside.

I mentioned it looked like we were going to finish the day on Friday with a nasty doji right at significant OHR and that's what we've got. A down day on Monday breaking the ‘Fund-Monday streak” would start to create the 3-candle reversal pattern we need to see for a set-up for a significant correction. So the perma bears know what they want to see today. And so do the Bulls as they want to see a continuation of the rally to negate the potential bearish setup and break below SPX 1135 then 1120 would signal that we've got a real top in place. If my longer-term wave count is correct we are real close to or we have already got the top in place. In that case, get ready to rock/roll to the downside.

The McClellan Oscillator for the past several days (4-days now) as on Friday we had another small insignificant change, suggesting a very large price move is coming over the next day or two. It could be impressive. The 30 and 60 minute Full Stochastics suggest prices are overbought, and could fall, with the 15 minute FS giving indecisive guidance. Given the recent breakout above resistance in the S&P 500, we believe this large price move could be up, as the SPX heads toward the upside target of two Bullish patterns, 1,155-1165. Both a Bullish Head & Shoulders bottom pattern and a Bullish Flag pattern point to this possibility that this level will be reached during option X-week. Perhaps we need to see prices drop first to work off the extreme overbought conditions before we see the attempt to break the indexes out in what I believe will be a huge head-fake move!

Friday's Non-Farm Payroll report was not even close to what the talking-butts-heads were touting and I was not surprised to see that all the markets gapped sharply lower on the news….unfortunately for me (as I’m net short) the sell the news event I was expecting was short lived and bulls raced in (especially the large trading desks as the volume was light) to by the dips and buy stocks as all the indexes finished in the green by slight-margins.

The economy lost 85,000 jobs in December and that was much larger than the final consensus estimate for a loss of 23,000 jobs. This was a major shock to analysts who were flirting with the possibility of job gains in December….the under-reported household employment survey (it was extremely bearish and as such the bubblevision networks would avoid reporting on it during market hours) reported that jobs plunged by 589,000. The total labor force declined by 661,000 due to unemployed workers giving up on looking for work. This drop in the number of available workers helped to depress the unemployment rate and it remained at 10.0% even though the number of workers with jobs declined. The labor force participation rate fell to 64.6% and a 25-year low. The broadest measure of unemployment on a pro forma basis by our labor department called the U-6 rose to 17.3% unemployed. More than 7.6 million workers have lost their jobs since 2007 and there are more than 15.4 million total unemployed. Over 4.164 million jobs were lost in 2009 alone; and nearly 40% of unemployed workers have been out of a job more than 26-months as the average duration of unemployment has risen to 20.5 weeks and by far the highest on record….for a comparison during the early nasty 980s recession it peaked at 12 weeks (but the so called pundits have now stated that this nasty recession has reversed far quicker than any other of such magnitude by far and now we embark toward the land of milk and honey…do you believe they are right as I do NOT)!  I believe that the January non-farm payroll report could be very ugly given the sharp decline in December as the January report will likely show that a vast number of seasonal-temp-workers were fired after the holidays and given the pace of declines in manufacturing in December the January numbers could easily be back into the 200,000+/- job losses.

We also saw on Friday that Consumer Credit took an enormous hit in November (not very bullish for the retailers) as credit card firms continued to restrict the amount of available credit to customers and Americans who are becoming more fearful of job loss continue to pay down their ballooning debt. Consumer credit plunged $17.5 billion and it was the sharpest monthly percentage drop since 1980 and the largest dollar decline since they started to keep records as $13.7 billion, of the drop was related to credit cards. The decline prompted a warning from regulators to banks that they should not be restricting consumer credit ahead of an expected rise in interest rates….but the lecherous banks and their slave-masters could care less in my opinion.  

The big events of the week will be the INTC earnings on Thursday; and they better report stellar earnings and provide great guidance or this could mark a negative turning point for the markets. INTC has made positive comments multiple times in the past couple quarters and the best may already be baked into the stock price, the holiday sales better have been good for them. Intel is expected to report profits of $0.30-0.32 per share on revenue of $10.2-$10.5 billion, and this would be a decent rebound over the same quarter in 2008 where they posted $0.04 and $8.2 billion in revenue; we need to watch gross margins are expected to be in the rage of 62%-63% the Microsoft Windows 7 operating system has been received well and computer sales are improving. As always their earnings could set the tone for the entire earnings cycle for technology (it’s the guidance to watch for) also INTC tends to gap higher if earnings are good and subsequently sell off for several days/weeks before rebounding, so please be careful chasing this. If they say business is improving significantly we could be off to the races with a huge gap up on Friday….as long as JPM doesn’t sour the landscape as they report pre-market on Friday their earnings could be a trouble spot as we saw this week that a Citigroup analyst offered a bearish outlook for the major banks.

Horowitz said fixed income trading revenues had ground to a halt in 2009Q4. He downgraded estimates for BAC, JPM and Goldman Sachs as he said there was a significant decline in Q4 and that decline in revenue could reach as high as 20% in 2010. Regulatory reform could knock off another 5-10%. He said Bank America could see fixed income revenues fall by 16% but he kept his profit estimate for 2010 intact at $0.84. BAC reports on the 20th. He cut Goldman to $5.25 per share with consensus estimates at $5.39 but kept his buy rating and they report on Jan 21st. He cut Q4 estimates for Morgan Stanley nearly in half from $0.66 to $0.36 per share and he cut 2010 estimates by $0.50. 

The UPS guidance on Friday was mixed and negative in my opinion as it is more of what I expect (slash and burn American workers to protect profits and ensure insider bonuses). UPS said earnings could be (key word = could) as high as $0.75 and that was a dime more than analysts had expected. And of course the rise in profits came from further cost cutting. They are cutting another 1,800 management personnel and potentially 1500 more line workers. As to improve profits they are cutting more workers; and of course this as it is always is…a positive later down the road because as business continues to improve so will profits without the additional overhead. It tells me though that UPS earnings were not improving fast enough so they dug a little deeper to find some more costs to cut. If firms continue to cut workers as business improves then we could be in for a very nasty jobless recovery. The UPS CEO said he saw the economy gradually continuing to improve in 2010. It must be very gradual if he resorted to slashing another 1,800 jobs and could slash another 1500 thereafter to please investors. If the recovery was really finding traction why would he have resorted to these cuts, a question that bears pondering?

Shares of many American steel makers (much to my surprise) were again on the rise Friday, gaining on the triple prospects as hyped by analysts upgrading the sector and various stocks of significant price hikes, an anticipated decent uptick in global demand and relative scarcity following a period of production cuts.  I just do not agree with their assessment, nevertheless market participants have embraced the hyped analysis and conjecture:

According to the world steel report, world crude steel production for the 66 countries surveyed was 107.48 million mt in November, increasing by 24.2% year on year (much of this increase is yet to be bought) and down 5.23% when compared to the previous month. The hypsters pointed toward the fact that November 2009 was the third month in a row showing a positive year-on-year growth rate and just the third month indicating a year-on-year increase since September 2008. Meanwhile, the six-month trend of month-on-month increases in world steel production came to a halt in November this year.  

Meanwhile, world crude steel production in the January-November period totaled 1.09 billion mt, decreasing by 10.8% compared to the same period of the previous year (they never mentioned this statistic in their analysis did they); the world crude steel capacity utilization ratio in November was 75%, a slight decline from 76.9% in November last year. (Looks like supply is being kept artificially low or is it?). Output in the European Union was up 10.8% year-on-year at 14.2 million tonnes, while in the United States, production was at 5.96 million tonnes, posting a rise of nearly 27% year-on-year…I in turn ask where is the demand? 

According to the hyped and promoted story in bubblevision land much of this movement is being driven by a plan by China's Baosteel to increase prices for the third consecutive month, along with hikes by domestic firms as well. According to a report from Steel Market Intelligence, “with January hikes now sticking well, we expect to see further price increases announced in China as well as Europe and the US.” (Since China’s steel firms are government enterprises China is attempting to impact world steel-prices higher). “First quarter domestic steel prices are heading up again as indicated by multiple announcements last month and we expect to see the major domestic mills informing their customers of new hikes in the coming days. Because the supply pipeline is so empty and lead times for production increases aren't instantaneous, the pricing environment is being whipsawed,” the SMI report noted.

It amazes me that so many are so brain-dead….as at such depressed capacity operating rates for the global steel sector and with a horde of idle capacity (steel mills are intentionally sending a message to their customers that they've become more full the past month or so by renegotiating existing pricing commitments, slowing down their deliveries, and pushing out schedules, to influence price!  

American steel firms were also buoyed by a bullish research note from J.P. Morgan's Michael Gambardella, who raised his profit estimates and price targets on the big three dramatically with out releasing any matrixes wherein he supported such an analysis! “Over the past month, the key raw material costs for steel (iron ore, met coal, and scrap) have all seen strong gains and are likely to push global steel prices higher, limit imports into the U.S. and encourage exports,” he wrote. “After dropping to a recent low of $500 a ton in late November and early December, producers have announced a series of price hikes for the beginning of the year which should (this is a key premise of his analysis) take hot-rolled sheet prices to $550-580 a ton for February.”   

He never mentioned that a distinct slowdown was due mostly to China manipulation of the markets as the world's top consumer and now producer of steel whose production jumped by 37.4% year-on-year to 47.2 million tonnes in November, but this was down 9.5% from October's 51.7 million tonnes. Chinese production has held up strongly in the face of the global economic downturn (as they have been stockpiling steel, and now they are trying to drive up prices in order to dump the stockpiles, what a great game they and other producers play huh), China’s production levels is likely running out of steam now, as their stock piles are ballooning! They are attempting to affect free-trade in my opinion. 

I read the following article…… Shippers See Worst Lakes Year in Seven Decades….Outlook for 2010 only slightly improved as iron, coal struggle; with the lowest cargo volume in 71 years for iron ore and the worst in 77 years for coal, the two chief backbones of U.S. Great Lakes shipping, fleet leaders are expecting better shipping in 2010 but only a tad better. The third biggest item for Great Lakes shipping, limestone, was down to its lowest level in 25 years, since the recession year of 1984. Iron ore shipments of just 31.8 million net tons, were at the lowest level recorded since 1938, when the shippers carried 21.6 million tons, the Cleveland-based Lake Carriers’ Association stated this past week. Coal for the steel and power plants of the Great Lakes basin dropped 25% from last year to 29.9 million tons, its lowest figure since 1932. (Is this a pick up in real demand that has been touted and hyped…..I think NOT)  

With only a few small commodities still to report next week, the U.S. lake-shippers will have carried about 35% less cargo overall than in 2008, LCA vice-president Glen Nekvasil told The Journal of Commerce on Friday.

Nekvasil stated that the collapsed demand from steel plants of the United States and Canada started to come back late last year but they still have about 30-33% of their capacity idle (again supporting my premise of keeping supplies low).

Mark Barker, president of Interlake Steamship Co., a prominent U.S. lake carrier, said in an interview  “We need the U.S. consumer to start buying steel products again. We are tied principally to iron ore, coal and stone," he said. “Demand for iron ore grew in the U.S. and Canada in the later months, and I think recovery this year likely will stay steady at the current rates.” “I think stone will continue to be weak and that coal will be at about the current rather poor levels.”    **(ask yourselves  why the railroad stocks have been rallying, remember they carry these products to and after the shippers cross the lake areas!)  

The World Steel Association forecasts only a moderate 9.2% return in world steel demand in 2010, much more in China and India than in North America. And Joseph Carrabba, chief of Cleveland-based Cliffs Natural Resources, a major mining firm stated this past week that “We are going to be pretty cautious going into the first half of 2010.” He does, however, expect to sell more North American iron ore than the 17.4 million tons in 2009. 

Where is the recovery….We saw this week that late gains couldn’t pull U.S. rail lines out of double-digit declines for 2009 9and yet they rally without any real sign of return demand) late-year gains in some commodity cargoes and in intermodal business were not enough to let the large U.S. rail lines escape double-digit declines in both types of traffic.

The Association of American Railroads said that for the 52 weeks ending 01-02-2010, U.S.-based Class I carriers and a few large regional lines that report to AAR saw car-loadings of commodities and machinery drop 16.1% to 13.8 million loads.

Intermodal fell 14.1% in 2009 to nearly 9.9 million units.  Measured by ton-miles which I say is distinctly more accurate measure of all types of rail volume [those railroads carried an estimated 1,491 billion ton-miles of freight in 2009, compared with 1,757 billion in 2008, for a 15.1% plunge] and of course we have not heard these stats talked about on the various bubblevision-networks when they are upgrading the rails to buys and strong buys!  

Overall traffic hit its lowest levels in the spring and summer, and then they began an anemic recovery. Even through heavy winter storms in December that depressed car loadings, a number of rail-hauled cargoes in the final month were barely staying ahead of the same point in 2008. Back then volume was plunging as all sorts of factories locked their doors to see how much the recession would spread. In the week ending 01/02/2010 intermodal loadings were up a mere 1.8% from the same week in 2008, while bulk carloads were down 1.5%  1 mainly on falling coal shipments (wow the fast money folks see huge increases but the data points elsewhere).

• On the bullish side the report showed that U.S. carriers picked up 26,143 carloads of chemicals, for a 19.5% gain from a year earlier. That is a strong signal of renewed factory demand for inputs, as chemicals are used as raw materials for some goods including plastics and for intermediate or finished products such as packaging materials.

• Another source of late-year strength was rail hauls of motor vehicles and equipment, in line with solid recovery showing up for the automobile industry thanks for cash-for-clunkers taxpayer bailouts. Rails originated 5,808 carloads of that cargo group for the final week, up 53.3% from the last week of 2008.

However, such these seasonal rebounds were too recent to overcome earlier declines in the year. Chemicals ended 2009 down 9.6% while vehicle and equipment loads were down 33.6%. The single largest rail cargo is coal, which ended the year down 10.9% and has continued to show weakness even late this past year.

How many times will the American investor get burned, before they abandon the markets (usually they only got burned once every 20-30 years….this past decade they got burned twice very badly as they bought into the hype of buy and hold stocks for the long run, and now they are just where they started in back in September of 1998. Then they jumped on the commodity bandwagon and got their heads handed to them and once again many investors with memory loss issues are buying back into these very same markets, but strangely I’m seeing a massive herd led by fund managers running into what they perceive as a safe haven “bonds” another bubble inflating making it almost 3-massive bubbles in less than a decade “yields” in the municipal bond market have been depressed so far this year, as investors have “poured a record $55 billion” according to Bloomberg into muni bond funds, and many other investors are buying muni-bonds outright. These are the folks who state that they can’t live without some “yield” and also cannot imagine their city, county or state governments going bust; well I hate to tell you they may not go bust at first but yield when they approach default status will soar. 

Municipalities have borrowed more than they can repay, they have as I have written before massive pension liabilities that they cannot meet (up to $1.3 trillion dollars’ worth, according to Moody’s), and their tax receipts continue to plunge. The only reason that states haven’t defaulted yet is the benefits from the so-called “stimulus program,” which took money from savers, investors and taxpayers and transferred it to the impoverished the people who live in the various states that are approaching collapse like California. I believe that starting this year and going through 2017 the muni bond market will be embroiled in a huge wave of defaults.

The recent massive wave of pro forma optimism since the March lows has shown up in every financial market, and has fueled a retracement in muni bond yields to their lowest level since 1967 and narrowed the spread between muni bond yields and Treasuries; this will become unwound starting this year and next! What I find extremely strange is that this stampede to buy municipal bonds is occurring right on the start of a dramatic decline in their real values; once again the lemmings are loading up right at the peak so they can participate in the next major market debacle while the smart-money-investors are handing off the hot-potato to the next round of retail bagholders.

I'm still bearish right now (please review the entire technical sections below)....but between here and options-X  and the start of the New-Year it could be dicey as fund managers chase performance and fight to maintain their gains to secure their bonuses...I will utilize any bullishness this week to establish some longer term (3-7 month, SHORT positions *or PUTS* as the technical and fundamental landscape is riddled with killer-mines ....as such I'm also looking to establish call positions and outright positions in the inverse leveraged profunds and 3x-funds....see a partial list below (For those with a limited tolerance for risk, we could also use a put-write strategy as well....I'm also looking to SHORT a host of high-beta high P/E stocks as well (like  AAPL, AMZN, PCLN)   In a nut shell I'm looking for a nasty corrective wave to swamp the bulls in the days/weeks ahead and slap them about..

I'm Short crude, and long the DTO....and we saw this past week that a number of analysts have come out in the past week with fund flow statistics claiming the rise in crude prices was related to year-end retirement money going into commodity funds. Eventually this money will run out. Also, crude is holding these levels on anemic trading volume with record amount in storage. For the first time I can remember the volume in gold futures this past week was higher than the volume in crude futures. This should not happen and suggests there is a mega volatility event in oil's future.

I have repeatedly shared with you all some of my favorite technical indicators and how to interpret them. All of them are still suggesting that the various stock markets would trend lower in the very near-future and the odds favor a significant correction; to reiterate we have seen that the Bollinger Bands are tightening, indicating a big move is on the way as well.  The VIX is the measure of implied volatility of the SPX index of options. It represents the expected volatility of the SPX index over a 30 day period. Since its introduction in 1993, the VIX is considered a key indicator for representing the overall sentiment for equity options. The charts of the major indexes are displaying near-completion of what could be very nasty bearish rising-wedge patterns as seen in the weekly and daily charts; also I believe we could see a significant pullback as we have several bearish crossovers using the full stochastics  on the weekly charts, and a bearish drop out of the rising wedge formation.  I'm also seeing increased bearish divergences between price and actual market breadth, price and volume, and price and momentum indicators that I follow for longer-term significant market moves. Please watch the weekly MACD indicators which are showing signs of topping and are now starting to curl over which is often a very bearish signal, as it was during the market top of 2007.

When used in concert with the Volatility Index (VIX) option prices are skewed to the upside, suggesting the VIX is going to move significantly higher in the days/weeks ahead (one reason why I suggested buying calls on the VIX). And the Bullish Percent Indexes for most market sectors are overbought and beginning to turn lower. As a trader, I use the VIX/VXN to gauge overall investor/trader sentiment in order to plan enter/exit strategies. When using the VIX I use it to trade as an contrarian indicator meaning that when the VIX is high, the market is overly bearish and when the VIX is quite low (as it is now) the market is overly bullish; to enhance the ability of the indicator as a predictive indicator I like to use a weekly chart with moving averages of the VIX, as it smoothes out the daily volatility!  The VIX is considered as a gauge of investor fear and market risk. The higher the volatility the higher the market risk and the likelihood that the underlying security will experience big moves in either direction. As you can see from the chart below the weekly VIX is again encroaching into extreme bullish levels (a contrarian indicator)

We have consistently seen these past weeks that the stock market has been on a consistent bullish run since it bounced off the lows in March 2009. As stocks (especially high-beta and crap-stocks that have been placed on the HTB-lists) keep hitting new highs for the year, driven by the prospects (hopes and prayers) of a so called vast and global economic recovery, and many value investors like me are more than concerned about these lofty valuations. The P/E ratio on the SPX, for example, has risen to its highest levels in many years (depending on the calculations 27, 39 and 56). In addition, many once highly sought after dividend stocks, which were once selling at very attractive valuations just a few months ago, are now very expensive.

Since this bear-market leg has started we have experienced 2-distinct and significant relief up-waves (wave 1 and 3 of a 5-wave pattern) and now we are embroiled in what I believe is the third (wave 5) and last wave up in this corrective pattern what I believe is a (B) wave up and I believe we are very close to finishing this up-wave!

According to my wave analysis the 1^st sub-wave of the (B) corrective wave up was (a) which lasted 68-69 trading days from 3/6/09 to 6/11/2009….thereafter the second wave (b) down lasted from approximately 6/11/209 to 7/8/2009 a mere 18-trading days….and this was a very shallow retracement….here is the tricky part if wave (c-up of the B up corrective wave) tops in the next 5-10 trading days (likely in and around my next inflection period (11/6 to 11/13, we have a weekend and a holiday Veterans day on the 11^thin the mix) it would mean that the (c) wave lasted approximately 68-up-days plus 18-down-days or 86+/- days now not all Elliot-wave patterns are exact-linear-counts but I would pay particular attention to the 11/9/2009 date as it would be 86-trading days from the 7/8/2009 bottom!      

Now for my bullish friends….I am issuing a serious red-flag-warning as if I’m correct and I believe that I am, when the up-leg of this (B) relief rally is completed…we will become embroiled in a very-nasty (many will be in the land-of denial) plunge, and this will be the third leg of this bear-market super-cycle-down-draft, and this plunge will catch many if not all of the perma-bulls in a state of shock and utter denial…I believe that history will be repeated and we will unfortunately plunge our economy into a deep and protracted recession (hopefully not another great-depression) 

Please watch the weekly MACD indicators which are showing very distinct signs of respective topping patterns in the various indexed and are now starting to curl over which is a very bearish signal.  The concept behind MACD is fairly straightforward. Essentially, it calculates the difference between an instrument's 26-day and 12-day exponential moving averages (EMA). Of the two moving averages that make up MACD, the 12-day EMA is obviously the faster one, while the 26-day is slower one. In their calculation both moving averages use the closing prices of whatever period is measured, in the sector I watch for longer term moves (I use the weekly chart). On the MACD chart, a nine-day EMA of MACD itself is plotted as well, and it acts as a trigger for buy and sell decisions. MACD generates a bullish signal when it moves above its own nine-day EMA, and it sends a sell sign when it moves below its nine-day EMA