Remember never forget the power of greed and fear, and the propensity for investors wanting to own stocks (taking long-side) and fund managers chasing performance as we saw today especially if they think the bull-train is pulling away they will want to hop on board.  Please, remember when in doubt as to market conditions/direction CASH is always king (or queen depending on your gender J ) please trade cautiously and be quick to protect your profits. I’m guessing that this the days ahead we will become embroiled in a major bull-bear battle as we head into the end of earnings-season!

Its a start to another week and we have to ask will this Monday be a Mutual-fund or Merger Monday wherein we see another attempt at a significant gap-up/run by the early market futures players.....and whether we should expect another bullish tone for the open due to news that is hyped or an external event hitting the wires on Sunday or Monday morning; we are still very oversold on the 30/60/120/180/240 and daily charts so even though we ended at or near the lows on Friday we should not discount such an attempt by the futures player to orchestrate a huge gap-up….the questions is will it be a GAP-Run or GAP/Crap….. as the mantra of late has been to sell into gaps or rips....I would not be surprised if they  attempt to press a Gap/up and then a run...the markets could get a boost (on dollar weakness) or succumb to selling on dollar strength again so this will be an important indicator to watch, we will need to watch crude as well as its been in a down-trend, along with the greenback and the Asian markets closely....I am also watching the Russell-2000 for directional clues as speculative money is again finding its way into this sector!    Please take on LONG positions very carefully as well as SHORTS  at these levels as the risk to at these critical levels is compounding

Strap-yourselves, as it is sure to be another wild another wild rollercoaster ride!! especially during as this week is the heart of earnings reports!   The question is do you want a ticket to embark on this amusement ride...I expect volatility will be quite high and we will have many bouts of pops and drops...and a trader or investor that is not nimble or willing to correct with the market-flows and ebbs could lose a few fingers or become a proverbial bag-holder!      Currently the trend is down, and the selling has been on significant volume...but that could quickly change as the dip buyers may emerge with the onset of a short-squeeze, or the bad-news bears could taste blood and grind the bulls into chuck....so until key levels are breeched to one side ort he other I'm recommending to my passive folks to remain on hold (sit on your hands...(see technical section below)....remember these quant-programs are great at developing head-fakes!    

After months and months of an artificial rally, where 80% of the gains in the indexes have come on 31 Mondays, of blatant upward manipulation the indexes now look poised to reverse.  I believe wholeheartedly that we have either already posted or we are about to post the third major top in the various indexes in this decade; and maybe it happened this past week or maybe we will start the mega-roll-over in the next several weeks as earnings season comes to a close or at my next major inflection turn date that is forecasted to fall in February 5^th to the 9^th from my vantage point the major key at this juncture is not to attempt to pick the proverbial so called exact top….this can be a foolish endeavor as the level of market manipulation is at historic highs as the Fed and treasury and major-lecherous banks/bankers who are a primary-responsible party to the major economic implosion of the housing-sector and debt-markets.

This week we enter into a proverbial plethora of potential market moving economic releases as we will get the national ISM Manufacturing Index and the ISM Services indexes to be released. Both are expected to post noticeable gains; we get the Factory Orders report on Thursday which is a lagging indicator for December but it provides insight as to whether the inventory build was continuing. We get the ADP and Challenger Gray reports on Wednesday as a prelude to the big report….the Non-Farm Payrolls for January due out on Friday as the so called estimates right now are all over the place (ranging from 125,000-175,000 jobs gained to 75,000-125,000 jobs lost….no one seems sure how the termination of a bevy of seasonal workers will impact the numbers. The problem is the 350,000 seasonal workers took jobs for the holidays so they could pay bills; and now we are seeing massive reductions in workers from UPS, FedEx, Wal-Mart, Macy's, Target, Best-Buy etc. as they have been very quick to let them go so I am sure they have yet to find other employment in this deteriorating jobs market, so I’m guessing those favoring some decent job gains on Friday could be in for a nasty surprise.  I read this weekend that Bloomberg surveyed 40 so called analysts and two-thirds expected an increase of jobs with the average at 23,000 jobs created…they better be right, nevertheless the markets may have already priced in or are still pricing in a dismal number. 

Helping the jobs numbers in the weeks and months ahead though will be the flood of workers (approximately 1.15 million temporary workers) to conduct the census. That hiring will peak at about 700,000 in additional monthly jobs in May and then begin to decline in June as the endeavor wraps up. They are already running ads and interviewing applicants for the jobs. This is a stimulus program in its own right and will put quite a few folks back to work for the spring period…this is also likely going to be a political gift for the administration since it will create positive jobs numbers for the next several months, and they will have the opportunity to influence the masses…so I’m betting the best spin-doctors will be hard at work telling us how the stimulus program is working and has created or saved massive numbers of new jobs. Obviously the census hiring every ten years and the stimulus are completely unrelated, but the headlines will not show this.  

We enter the week in very-over-sold-conditions, and this week I hold a tad bit of hope for the bulls for a technical rebound; but there are still a lot of earnings to be released (this is the last heavy week) but the only one that really matters now is the CSCO earnings due out after the close on Wednesday. I listened to John Chambers this past and even though he is in the proverbial quiet period before earnings it sounded like he was trying to eke out the fact that he is seeing an upswing in IT spending. He is clearly in a position to give the markets a heads up when that IT spending starts to gear-up again since his components are the leading edge equipment that are going into new datacenters, expanded technology infrastructure, as they have to install the routers and switches before anything else will work. You build the networks out first then add the computers, servers and employees.  Since we have been embroiled in a nasty, heavy selling volume correction I not sure if their earnings will help the markets in their current state of malaise, but if we sell off into the Wednesday, it could be the catalysts for a relief rally.  

As I stated on Friday in our real-time trading room…. All the indexes are at/near or have broken key levels of support and appear headed for a decent correction. At this point the bulls need to be concerned with is whether it is a 10% correction or worse. With this much cautionary revenue guidance and lackluster forward guidance I have to believe that institutional investors and the so called smart-money players are worried that there could be a double dip ahead (as real demand is missing from earnings, as many firms are still making earnings by slashing costs) and moving to the side lines (many may park the money in short-term bonds) so they can position themselves to profit from a potential debt default by Greece, or another major market contagion (bad bond auction) or geopolitical event. That would mean moving to dollar-assets instead of stocks or the once hot commodities. As I forecasted we have seen a very-decent commodity selling-event since early January and as I predicted the dollar has risen to new 6-month highs this past week; the rotational trade is underway and I don't think it is done yet as many firms could be seeing a way of redemptions in the days and weeks ahead!

On a technical basis we are entering the danger-zone; perhaps most importantly as I have previously mentioned and written about are the weekly charts in my technical section below which depict that the MACD oscillator, a very telling indicator along with the full stochastics has turned down from historically very overbought conditions and if the Indexes do not rebound strongly this week we could see a very-strong sell-signal trigger which could be the start of a water-shed selling event….the near-term charts [daily, 240/180/120/] are quite oversold (doesn’t mean that they can not remain in such a condition for an extended period of time) and we must be on the alert for a manipulated monster short squeeze as the prop and programs traders are renowned for staging such events when the street believes that critical support levels are broken and the only path is down! As in a nut shell several of the major indexes have broken down through their 100-Dsma…I have seen the herd of newbie shorts get crushed in stampedes when the shorts are squeezed many time (been there myself years ago)  

Nevertheless in the past decade a weekly (or better yet a monthly roll-over of the MACD from such overbought levels has occurred infrequently and each time we have seen very powerful selling events; In the past several months I’ve been accused of being a very pessimistic gloom and doomer. At times my prediction and forecasts have to many sounded exceptionally and overly pessimistic and sometime a few readers even asked what I had been smoking; of late many publishers of stock-market-timers chose not publish some of mt recent works, but that hasn’t been a problem for my subscribers; the calls were based on reasoned logic sound technicals and fundamentals and my exhaustive-top call emerged as expected….but now most of you are now reiterating that this move is now behind us…its in the past now what developments do I see happening in the days and weeks ahead.  The most asked question has been {How far will the indexes drop? Where can we safely look to buy the dips for a rebound? And what will be the impact on the economy be after such a drop?

A brief technical out look

The Dow has broken down below the 100Dsma @ 10,148+/- a move above this level could start the shorts into scrambling and a stop-run ploy by program traders could take us back up to 10,250+/- and if the bullish short-squeeze take on a life of its own this area could easily be breeched to the upside the bulls will make a stampede run to the 10,399-10,430 level where I would reverse into a short again….conversely a breech below the weekly 21ema @ 10,060 (where we bounced on Friday) we could see the bad-news bears press the bulls into the ground-chuck machine…and we could see a swift drop to 9,750-9,785 where I would be a buyer for a relief rally!  

 

The SPX has broken down below the 100Dsma @ 1,089.50+/- a move above this level could start the shorts into scrambling and a stop-run ploy by program traders could take us back up to 1,005+/- and if the bullish short-squeeze take on a life of its own this area could easily be breeched to the upside the bulls will make a stampede run to the 1,118-1,125 level where I would reverse into a short again….unlike the Dow the SPX has breeched the weekly 21ema @ 1,077.50 and unless the bulls return in a buying mood on Monday a break below 1,068 could start a nasty selling-event….which could take us down to 1,035-1,040 where I would be a buyer for a relief rally!  

 

The Nasdog has also broken down below the 100Dsma @ 2,173.50+/- a move above this level could also start the shorts (technology shorts are usually weak hands) into scrambling and a stop-run ploy by program traders could take us back up to 2,228+/- and if the bullish short-squeeze take on a life of its own this area could easily be breeched to the upside the bulls will make a stampede run to the 2,244-2,255 level where I would reverse into a short again….conversely we have breeched by a tad the weekly 21ema @ 2,151.85 (where we should have bounced on Friday) so we could see the bad-news bears press the bulls into a corner if this level is not regained quickly on Monday…and we could see a swift drop to 2,100-2105 and if this level fails which it could I would be a significant buyer for a relief rally at the next level of support at 2045-2055!  

The Russell-2000 has also broken down below the daily 100sma @ 606.60+/- and a subsequent move above this level could also start the shorts (speculative mid-cap-shorts are usually weak hands) into scrambling and a stop-run ploy by program traders could take us back up to 614-616 and if the bullish short-squeeze take on a life of its own this area could easily be breeched to the upside the bulls will make a stampede run to the 624-627 level where I would reverse into a short again….conversely if we breech the weekly 21ema @ 599.00 (where we could bounced, but I believe it will be breeched) and if I’m right we could see the bad-news bears bloody the poor old bulls if this level is not regained quickly on Monday…and we could see a swift drop to 572-575 level of significant support where I would be a dip buyer for a relief rally!  

So I hope I answered the technical questions however we do need to turn to fundamentals as well but the longer-term trend now in my opinion will be down with a series of lower-highs and lower lows to be made until we retrace between 19% to 25% (see table in the technical section for these levels), and this would be just a normal bull-market retracement, however since I believe we are in a bear-market ABC correction I believe we can easily retest the 50% retracement of this bear-market move, as valuations are stretched, consumer balance sheets are still in a shambles a are corporations, demand is weak and we are about to embark into a nasty housing market correction again due to a massive wave of newly defaults and foreclosures that have been delayed!     

As we saw this week, helping to sour sentiment for traders and investors has been a bigger than expected earnings losses by several banks as the losses have come from higher than expected loan charge offs and a higher loan losses reserves. The continued apprehension over these types of loan losses in both consumer and commercial real estate will soon start to weigh significantly on the financial sector and the various bank-stocks. Current estimates for pending foreclosures are for 4.5+ million homes to be foreclosed on this year. Some of those may be saved by loan modification programs (the Obama folks are attempting to deploy several new-ideas/plans) but more than 50% of recently modified loans have gone delinquent again within 4-6 months (due to deteriorating labor markets and home-values declining).

From my analysis we have a vast amount of foreclosure inventory headed for the market in the spring is depressing home prices again. We saw that evidence presented within the Case Shiller Home Price release yesterday as it improved only slightly to a decline of 5.3% in November compared to the October decline of 7.3%. Some areas actually showed positive gains but there is clearly a decelerating pace in prices rebounding as banks begin dealing with another round of problem loans again. Most banks have deferred pending foreclosures in November/December/January in order to keep people in their homes with the heat on rather than be faced with vacant homes and frozen pipes and vandalizing sprees. Now the lecherous banks are again ramping up their foreclosure-teams in order to have these very houses vacant in time for the spring buying season before the homebuyer tax credit expires (now unfortunately you will never here this analysis or these facts on the various bubblevision networks).  

On the valuation front….below is a forecast by Standard and Poor of the next three quarters’ twelve month trailing earnings adjusted for Generally Accepted Accounting Principles (GAAP) and the implied P/E ratios that flow from these earnings, assuming the index remains at its current level. The forecast GAAP P/E ratio is 19.10 based on anticipated TMT basis with earnings on average of $57.30 per share in 2013Q3. I only like to use real earnings GAAP earnings other computations are just pipe-dreams!

The real P/E for the SPX is based on as reported or GAAP earnings and it is the standard for historical earnings comparisons. The normal range for the GAAP….P/E ratio is between 10 (undervalued) to 20 (overvalued). The various paid shills and market cheerleaders talking up their books on the various bubblevision networks almost always utilize pro forma or operating earnings, which of course exclude some expenses and are historically very deceptively optimistic.  The following are the most recently reported and projected twelve-month trailing (TMT) earnings, quarterly earnings, and price/earnings ratios (P/Es) according to Standard and Poor’s.

                                                       2009 Q3          2009 Q4(E)      Q1/10(E)          Q2/10(E)       Q3/10(E)

TMT P/E Ratio (GAAP).......:          85.60               22.30               19.20                18.80               18.70

TMT P/E Ratio (Operating)..:          27.10              19.00               16.90                15.70               14.70

TMT Earnings (GAAP)........:          12.54               48.17                55.86                57.22               57.30

TMT Earnings (Operating)...:          39.61              56.40                63.44                68.50               72.99

QTR Earnings (GAAP)......:            14.76               12.38                15.21                14.87               14.84

QTR Earnings (Operating).:            15.78              16.70                17.15                18.87               20.27

 Based upon projected GAAP earnings the following would be the approximate SPX values at the historical under/fair/over valued points of the normal historical value ranges are extrapolated. They are calculated simply by multiplying the GAAP EPS by *10, *15, and *20….quite simple math:                                                                                      

                                                                 2009Q3           2009Q4           2010Q1           2010Q2           2010Q3

Undervalued (SPX if P/E = 10):                125                  482                  559                  572                  573

Fair Value     (SPX if P/E = 15):                188                  723                  838                  858                  860

Overvalued   (SPX if P/E = 20):                251                  963               1,117               1,144               1,146

Now on the flip side the buttheads on the various bubblevision networks were all over last week's market deterioration, citing a 4% decline and that it was the worst week since March 2009. I concur that it was not your garden-variety dip in a bull market; but after such an euphoric run, a 5% is nothing to get concerned about, its what happens this week that will give us a better picture of the landscape ahead. While there are arguments when we view the near-term charts why this presents a buying opportunity for investors with an intermediate-term time horizon, I need to raise the yellow/red caution flag as this selling-event is clearly different compared to ones during recent bull markets…and it relates to massive amounts of call-writing, put buying and block-selling volume, the volume on the down days is nearly twice of that on the up-days, and to me this is a very nasty negative divergence that foretold of a potential nasty correction….please heed my warning as sort of a  wake-up call that it is time to realize that this bear-market bullish-relief rally can soon give way to a significant correction sell-off with 1-2 days of massive selling (what I call water-shed events where the blood runs deep in the streets for the bulls). Just look at the weekly charts of the SPX and Wilshire 5000 I provided in the technical section below (also reflect on the following nasty recession/depression charts, and before you tell me its different this time, remember we herd this rhetoric during the past 2-nasty bubble-creations (we are on the 3rd now and this one could be the worst)!

From my vantage point the odds that this past week's market activity represents a true change in the bullish to a bearish trend are fairly good. However there are a few technical arguments against this, one is that the overall market breadth remained fairly robust; right up until the selling began, the percentage of stocks trading at 52-week highs was very robust and typically this is a positive for the markets, however the volume was very anemic. Now why I bring this up is that breadth often deteriorates well in advance of major market tops as the proverbial little Indians (the followers….have been dragged along) drop away before the top-dog market leaders do. 

But as I have written about of late there are other negative factors weighing on the indexes is: distinctly poor market reactions to otherwise good pro forma fundamental news. Starting a few weeks ago with INTC, the markets reacted to what was professed to be stellar earnings by taking the stock to the woodshed. The same happened with other proverbial bellwethers such as IBM, GS, SNDK, AAPL, AMZN, GOOG and just this past week MSFT was the last big loser. In theory, negative reactions to so called good news should be perceived as a bearish warning-flag for more significant selling in the future. The question now for investors is whether this is merely another hiccup in this greatly hyped bull market or the start of the long-awaited correction due to a parabolic relief rally. We saw that this week that the markets continued selling-off after the Microsoft earnings, and after the Bernanke confirmation and State of the Union speech, and of course it wasn’t a surprise to anyone reading my vast writings. I have been warning my subscribers for several weeks that there would be nothing left to hold up the euphoric indexes once these news events passed into the dark-night.  

The only real surprise for me was that the decline was not worse than the tape showed on Friday as now market participants (especially funds) have entered a period of malaise called the “why buy at these levels” and by all indications the indexes should have declined even further…but its all not roses as the 663 point purge by the Dow since the high close of 10,723 on 01/19/10 (the high I called) has changed some of the expectations that were powering the rally in early January. The Nasdog has dropped significantly because the big caps (the top 10-players in the NDX) have already reported and some of their earnings guidance was quite uninspiring at best. The drops in MSFT, AAPL, INTC, QCOM and AMZN on Friday were responsible for subtracting 26 of the 30 points from the heavily weighted NDX index on Friday.  

The markets rocketed after the 2009/Q4 GDP numbers were released on Friday; GDP came in with a gain of 5.73% on an annualized rate; and this was the strongest quarterly up-move in over 6+ years. This was the largest headline gain since 2003/Q3 and much stronger than the expectations for a 4.3-4.6% increase, however, and I had warned previously warned my loyal subscribers about this potential upside surprise weeks ago; and I said than that we could see a large spike up due to abnormal adjustments to inventories which accounted for a massive 3.4-points of the 5.73 reading, but we certainly never saw this being touted on the various bubblevision networks. Real final sales of domestic product, which is the real GDP minus the change in inventories and a true measure of demand for U.S. goods and services, grew 2.9% in Q4 compared to 2.0% in 2009/Q3. The 3.4% GDP gain within the GDP numbers from the increase in inventories was the largest overall contribution to growth in over 25 years. Business had allowed their inventories to dwindle to anemically low levels due to the credit crisis (and serious lack of credit seeing into the economy from tight fisted banks) and the inability by many of these firms to finance an increase in inventories; as when the Holiday seasonal upswing developed business conditions improved a bit; and the additions to inventories overly inflated on an so called percentage basis because the starting levels were anemic; and this upswing in inventory replenishing accounted for a massive GDP up-swing (one reason why we shorted the markets when we saw the stall, as other participants caught the sent of something smelly as well with the huge spike in the GDP numbers). On the negative side (which received very little press) was that personal consumption expenditures, (meaning how much consumers actually spent in the economy, rose 2% and this was down from the 2.8% increase in 2009/Q3 and spending in the holiday quarter was actually significantly lower than 2009/Q3 and this is a divergence that bears watching as this was a holiday-period.  

Given the market's tendency to set relative near-term lows at the end of the past several months since this past summer, I think we need to be cautious as the number of stock market fairies (godmothers) have grown as has the amount of program/prop trading which in anemic-volume environments have taken control…so I want to watch how Monday develops as we should not be reckless….we should give the bulls a chance to recoup this weeks losses as often the funds under performing have used these 4-5% sell-offs to buy, limiting the pullbacks in the past to just a few days/weeks.  

But with earnings season becoming a lackluster event (maybe CSCO changes the tone this week, as it has sold off ahead of earnings) the landscape is quite chilly as we have seen a rotation of money from riskier assets to places perceived as safe-assets…so since money flows have diminished we cannot assume this time will be the same as buyers may not return with this shallow correction. It’s ironic that ahead of a potential CSCO catalyst high-beta risky technology, energy and biotechnology stocks have seen more than their fair share of selling so we could see a tech-rally after CSCO if they report better than expected earnings. 

I believe that the environment for equities has changed; but I want to tread cautiously before becoming a big-perma bear and selling with perceived impunity consider that nothing about these financial markets has been the same since direct-manipulation, massive liquidity infusions and countless-stealth buyers emerge are potential critical break-down points consistently during the past 10+ month rally, and the housing debacle and the bank-led credit crisis began more than two years ago. I believe we are in entering a potential nasty transition phase out of this manipulative bull market as the Fed will be exiting the MBS market we are entering a huge wave or mortgage ARM resets to mention just a few contagions!  

Despite my cautionary stance I have been sounding the alarm-bells since late-December that the indexes (even on a global basis) were due for correction. And now it appears we are likely embroiled in one and it is way long overdue. Now please remember from my past writings this is January, (the release of a deluge of fourth-quarter earnings and fund-managers reallocating funds) and we often see a mid-month correction, which is normal. However, this one may be entirely different as we have a massive amount of pent-up profits, external pressures (political and geo-political) and those holding stellar profits will no doubt get caught up in a stampede of fear if key levels of support are broken…we do not want to become perma bears until strong levels of support are breeched as we have incessantly seen what I believe to be massive waves of stock market intervention and manipulation that lasted throughout the fall, as each time we have seen a retracement of 4-5% a flock of stock market fairy-godmothers arrive and they wave their magic wands and presto we have several massive short-squeeze events, that reverse the bearish-tonality….so what does this weeks selling mean….right now it means we get a normal seasonal selling event with potential for something significantly worse.

I believe that this correction could feed on itself with one slip by the manipulators) and create a water-shed even if the fairy-godmothers fail to step in at or just below critical levels of support as they have done so in the past as the technicals and fundamentals…as depicted by the charts [Weekly and daily….see technical section below] are screaming at us that this could be a Wile Coyote type of sell-off, a little analogy... I like to use…and we could hear the talking heads after several more days of selling shouting as only they can “look-out-below” as the charts are signaling this selling cycle may be anything but normal. Like I have repeated started I’m looking for a 19-25% correction on this down leg, then some renewed buying mid-February through March maybe even into April; then I will be exclaiming to look out below, as then I believe we will be setting up for a 33-50% correction starting mid April and lasting well into July maybe even into early August according to my E-Wave and Gann wave projections….then we could see a pre-election relief rally.