Mercantile Financial Services

“The key to all this will be how the bank lending area views the scores of moves and adjustments by the central banks, the U.S. Treasury, and the SEC. If the bank lending logjam does not free up...Don’t relax. Stay alert and stay nimble.” Art Cashin, “Cashin Comments

Yesterday’s rally was partially a result of renewed optimism on the passage of some form of the bailout bill. I ask, “Would the bill be received more favorably if we call it the ‘economic stabilization’ bill instead,” per my conversation with Chief Economist Scott Brown? How about, as Scott said, the “Bad asset relief fund?” Generally, since there are so many tentacles to the current financial problems the U.S. and our foreign neighbors are experiencing, I’ll simply stick to my reference of it as “P2”, or the “Paulson Put.” In any event, the DJIA gained 485 points and the NASDAQ rallied almost 99 points.

The U.S. Dollar Index, which is moving within the context of an intermediate-term up trend, rallied 2.2% yesterday. Please be apprised that a lot of resistance exists in the 80 to 80.40 range. Important support exists between 76.76 (50-DMA, which will marginally change each day) and 76. If you are trading off the U.S. Dollar, please use these levels accordingly.

Conclusion:

On the NYSE, volume contracted to 1.53 billion shares. There were 1994 net advancing issues – worse than the market indices. There were only 9 new 52-week highs. This is very poor and indicative of a lack of sustainable leadership – no good! One thing that is needed for a sustainable rally is a crop of new “leading” stocks. The Index Put – Call Ratio closed over 200% (212%) for the second consecutive day.

Yesterday’s price gains felt good, but the stock market’s internal readings yesterday did not support the move! While I am still looking for some further upside, on a short-term basis, yesterday’s move doesn’t come close to changing the intermediate-term downtrends that are still in place for most of the major market indices. Resistance levels need to be violated, on a closing basis, in order to change the current short- and intermediate-term chart configurations.

DJIA (10850.66): Support = 10365 and between 10156 and 9708. Short-term resistance = 11168 and 11483.

NASDAQ (2082.33): Support = 1983, 1890, and 1750. Short-term resistance = 2211 and 2318

Tactically, I would continue to hedge, reduce, or sell stocks (raise some cash if you haven’t already done so OR aren’t comfortable with what you have already done) whose actual or relative price trends are recording “lower peaks and lower troughs.” If a stock is setting a multi-month/year low, it is doing so for a reason. Thus, please separate stock analysis (technical research) from company analysis (fundamental research).

Tuesday Morning 09/30

“A Phoenix will rise from these ashes and there will be winners in this new order”

The past few weeks tape action was a matter of “confidence”, or a lack thereof. Yesterday’s 7% decline by the DJIA (778 points – largest point decline by the DJIA in history) all the way to the 11.5% decline by the NASDAQ 100 (176 points) and the 21% decline by the Bank Index (BKX) was a matter of “understanding.” With the cessation of credit and, thus, the inability by many corporations to conduct business (and from what I am know hearing small business owners are feeling the squeeze either directly or down their chain of business), I really don’t think “people” truly understand how tentative business conditions are. Consequently, when the House rejected a financial services bailout bill that would have established a fund to buy troubled assets from banks, uncertainty (the stock market abhors uncertainty) among stock market participants lead to wholesale selling yesterday. The 10 S&P macro sectors were down between 4.2% (Consumer Staples) and 16% (Financials). We have updated the study of 300-point-plus moves and come up with our own statistics. “During the entire 2000 to 2003 downturn, there were 26 such days (300-point-plus moves). Currently, starting with the 335-point gain on Sept. 18, 2007,” yesterday’s decline of 778 points was the 23rd such day. So in just over one year, the stock market has recorded almost as many 300-point-plus moves as it recorded in a little more than three years. I think this type of volatility will stay with us.

Yesterday’s tape action definitely had the “prints” of capitulation in many places. On the NYSE, volume expanded to 1.86 billion shares. Declining volume beat advancing volume by an astounding 40-to-1 ratio. There were 2953 net declining issues, or said another way, declining stocks lead advancing stocks by a 19-to-1 ratio. The ARMS Index, which closed at 2.04, was over 5.11 intraday. There were 1170 new 52-week lows, below its 9/16/08 and 7/15/08 reading – a positive divergence. The Oversold – Overbought Oscillator closed at minus 6.1. The Index Put – Call Ratio closed at 219%. The Volatility Index for the S&P 500 (VIX) (following chart) and S&P 100 (VXO) reached levels not seen in decades.

“Art, what is the best case scenario from this sell-off” was a question I received yesterday. My answer, after quoting the statistics above, was “While the broad market and major indices topped between the summer and fall of 2007, these types of readings don’t usually show up at the beginning of a decline...”

On a short-term basis, the observations above bring me to the conclusion that the stock market should produce some type of countertrend, snapback move higher. Tactically, I would use said move to hedge, reduce, or sell stocks (raise some cash if you haven’t already done so OR aren’t comfortable with what you have already done) whose actual or relative price trends are recording “lower peaks and lower troughs.”

I would not buy more of a stock that is recording such a pattern. I would rather wait for the completion of a basing pattern (be late and suffer opportunity cost), than be early and continue to try and catch a “falling knife.” In terms of new money, I’d remain patient and see how the next few days / weeks play out.

Of course you also realize that the other half of the question I was asked yesterday after the stock market closed, besides “what is the best case scenario” was, “Okay Art, now tell me the worst case scenario.”

Besides mentioning that more stock market related indices broke down yesterday (MID, NDX, and TRAN), I gave this financial advisor the following support levels for the DJIA: 10156 to 9708.

A similar support level for the SPX is 1060 (August 2004 low). For the NASDAQ similar support levels are 1890 (April 2005 low) and 1750 (August 2004 low).

Let me end this portion of the report by mentioning that when the market is in the midst of a sell-off (down trend), support levels are not etched in stone. These are levels that are identified as areas in which the market should start trying to “grip.”

DID YOU KNOW? In light of the fact that September is living up to its historical billing as being the worst month of the year (As of yesterday’s close, NASDAQ declined 16.2%, the SPX fell 13.7%, and the DJIA lost 10.2%), while I believe the market itself will be the final arbiter (meaning seasonal trends are secondary indicators, less important than price and volume ), given that the stock market has a long history of bottoming and / or setting a sharp trading low in the month of October (according to the 2008 edition of The Stock Traders’ Almanac, this includes 1946, 1957, 1960, 1962, 1966, 1974, 1987, 1990, 1998, 2001 and 2002 – as my friend and former colleague would say “Leave us hope.”), here are some statistics for the month of October:

Monday Morning 09/29

One definition of “confidence” by Webster is “a trusting relationship.” And one sign of confidence, in my opinion, at least for the U.S. economy, is credit or the ability to access credit. Unfortunately, both have been lacking, in my opinion. Rhetoric from Washington last Friday included “We can surely take time to decide on this proposal. Look, the DJIA is not down 200-300-400 points, while we wait. We know what we are doing!” While I won’t question their IQ (those who live in glass houses shouldn’t throw stones”), I will take exception to their comments about the stock market. Yes, the worst reading recorded by the DJIA occurred right after the open (down 154), but the broad market, as defined by my intraday advance / decline figures, was awful throughout the entire day. The DJIA closed near its intraday high, up 121 points and the NASDAQ lost 3 points.

Conclusion:

On the NYSE, volume contracted to 1.15 billion shares. The DJIA gained 121 points last Friday, yet declining volume beat advancing volume. The DJIA and SPX closed higher Friday, yet new 52-week lows expanded to 264. There were only 7 new 52-week highs, versus Thursday’s reading of 6. The new high readings show a complete lack of “leadership.” The DJIA gained 121 points last Friday, yet the NASDAQ 100 (NDX) was down almost 1% and the S&P Midcap 400 index (MID) was down the equivalent of approximately 78 “DJIA points.” Also, despite Friday’s gains by the DJIA and SPX, the Volatility Index (VIX/34.74) was up throughout the day and at the close. This implies “disbelief” or said another way, a belief on the part of many Wall Street participants that the “plan” isn’t sufficient enough to unlock the credit markets or be enough for all the other challenges the stock market faces going forward. A spike in the low to upper 40’s by the VIX, that is followed by a reversal down, and a close below 32.45, at a minimum, and 27.95 maximum, is needed to signal something positive for stocks, based on this indicator!

So, for the second consecutive session, the market indices were out of sync (they didn’t support each other) and the stock markets “internal” readings didn’t support the DJIA’s two-day gain of almost 318 points – the quality of its rally was bad.

Within the context of an intermediate-term downtrend by the SPX, DJIA, NYSI, and NASDAQ, the important point to monitor at this juncture, within the context of a retest of support derived from the September 24 low (very minor support) and more critically, the September 17 (closing) and September 18 (intraday) lows, will be the stock markets internal readings. We saw a “selling climax," a positive divergence by the new 52-week low reading and the holding of a bearish support line around those dates and we need to see more of the same!

DJIA (11143.13): Support = 10753 (9/24/08 low), 10609.66 (closing), 10459 (intraday).

SPX (1213.27): Support = 1179 (9/24/08 low), 1156.39 (closing), 1133 (intraday). Initial resistance = 1265.

NASDAQ (2183.34): Support = 2098.85 (closing), 2070 (intraday). Initial resistance = 2318

“Ya’ Gotta’ Believe” Tug McGraw, New York Mets, 1973 - Wall Street veteran Richard Russell recently wrote "The market is a stern teacher. If you have any weakness, any flaw, the market will find it, and it will end up costing you money.” I mention this relative to WM, because between March 2007 and May 2008 I labeled the chart as “Damaged or weakening,” “Further chart breakage,” “What can’t go up goes down” and “Breakdown.” I AM NOT pointing this out to be prideful. Experience is learning from your own mistakes. Wisdom is learning from the mistakes of others. My point is that I would rather manage downside risk even if it at the expense of missing big moves up. Why? …Because if you manage risk, you still have your capital. Otherwise...

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Weekly Technical Commentary by Art Huprich

Wednesday Morning 10/01

Conclusion:

Tuesday Morning 09/30

Monday Morning 09/29

Conclusion: