Weekly Technical Commentary by Art Huprich

Near-Term Technical Green Shoots, BUT Please Watch Support Levels

Wednesday Morning 11/04

For the first time in a number of weeks, the tape action and “market internals” were mixed and not decidedly negative. I say this because of the following observations:

the intraday low (DJIA down 86 points) was set early and held, after being tested twice intraday,

M&A news was embraced and wasn’t greeted with across-the-board selling,

a downgrade of the semiconductor group was pretty much contained (Where were “they” three weeks ago when the SOX started underperforming? Critical support for SOX = 285.25.) as was negative news about some overseas financial institutions,

a higher U.S. Dollar didn’t hammer the stock market, and

the intraday breadth figures reversed sharply and after being decidedly negative closed with a net reading of 705+ advancing issues.

Don’t get me wrong. Not everything was rosy [NYSE volume (1.38 billion shares) didn’t expand, and there were more new 52-week lows than highs on the NASDAQ], but for the first time in a few weeks, I can identify a few near-term technical “green shoots.” At the final bell, the DJIA (9771.91) was down 17.50 points; the NASDAQ (2057.32) gained eight points.

Another telling point to yesterday was the news of India’s central bank purchase of gold – 200 metric tons of gold from the International Monetary Fund. This sent the precious metal sharply higher. Mr. Buffett’s purchase of Burlington Northern Santa Fe (BNI/$96.98) likely generated some additional demand for commodities as he is making an “all-in wager on the economic future of the United States.” I maintain that short-term gyrations aside, when viewing the long-term relative strength trend of Gold versus the S&P 500, I want to be long gold.

Two areas of the stock market that were “leaders” coming off the March lows and also major “underperformers” prior to the stock market’s recent correction were small cap and technology. This is likely due to their reflection of “risk appetite” on the part of traders and investors. I am defining these areas by the Russell 2000 (RUT/570.62) and NASDAQ, respectively.

Now, while both have sustained a lot of technical damage, which is only exceeded by a lot of technical damage that has been experienced by a number of individual sectors and stocks (please continue to manage risk on a stock specific basis), you’ll notice that each index has pulled back to an important level of support, whether it be on an absolute basis (RUT) or relative basis (NASDAQ). These charts can be viewed below.

The bottom line is that each index is at a critical level. A decisive breakdown will likely produce lower prices and a deeper short-term correction in the stock market; stabilization above support would lead to a near-term rally followed by the beginning stages of a short-term trading range.

Between today’s statement from the FOMC and Friday’s employment report, we should get our “bottom line” answer shortly!

Click to enlarge

Click to enlarge

Charts courtesy of Thomson Reuters

Tuesday Morning 11/03

On a recent airline flight, my 17-year-old daughter reminded me that she gets motion sickness. Great. I’m glad she wasn’t watching the tape yesterday. Following a jump of 146 points, the DJIA (9789.44) proceeded to trade on both sides of the “unchanged line” more than a half-dozen times. At the final bell, the “senior index” gained almost 77 points. The NASDAQ (2049.20) spent more time in the “red” but at the end gained four points. Small capitalization indices closed lower. On the NYSE, volume contracted to 1.54 billion shares, indicating that institutional money managers were not aggressive buyers. There were 232 net advancing issues. Overall, I would say that the stock market once again failed to embrace good news, which in yesterday’s case, was the better-than-expected ISM Manufacturing and pending home sales report. While I think yesterday’s topside probe was of poor quality, this observation (the stock market’s reaction to good news) will get tested again today, based on the news last night and this morning concerning Black and Decker (BDK/$61.48/Market Perform) and BNI.

Using intraday prices and following the recent 6.5% decline by the S&P 500, 7.5% decline by NASDAQ, and 11.3% decline by the Russell 2000 and while I don’t believe all of the short-term downside probing is behind us, let’s review a reason why I remain positive on an intermediate-term basis into the first quarter of next year.*

Within the context that price and volume are “first and foremost” and that cycles and seasonality factors are secondary forms of analysis – in my way of viewing the world and in scanning the times since 1950 for when the S&P 500 closed the month of September higher and was down in October but had a positive return over those two months – you can see that it is a rare event.

While the number of observations is small and would cause some to say that it is statistically irrelevant, I am intrigued by the fact that for the most part, the S&P 500 is higher through January of the following year.

Click to enlarge

*Due to the fact that the S&P 500 closed lower in October, this study is different than the one I used in my meetings in Boston.

Monday Morning 11/02

Following last Wednesday’s tape action, which caused a number of market proxies to complete short-term double-top patterns (Russell 2000, Dow Jones Transportation Average, and the Bank Index, to name a few), when I was able to sit down and look at the numbers after last Thursday’s “200 point Dow delight” (10/29/09), my initial thought was “poor quality rally.” I used this phrase to describe the tape action on 10/29/09 because amongst a few observations, NYSE volume failed to expand from the previous day’s reading, and net breadth figures and the NASDAQ were not as strong that day as they were weak on 10/28/09. In other words, a few internal readings didn’t fully support last Thursday’s 200-point rally, regardless of “why” it occurred. This was the technical backdrop that Wall Street faced Friday morning, in my opinion. At the final bell Friday, stocks took a beating and closed near the worst levels of the session. The DJIA fell 250 points, and the NASDAQ declined 52 points. On the NYSE, volume expanded to 1.65 billion shares. There were 2,285 net declining issues. Consistent with all this, the CBOE Volatility Index (VIX) broke out to the upside.

In many instances, rising volatility and a choppy-to-lower stock market occur in lock-step with each other. When it comes to managing risk, despite last week’s decline of 5.1% by NASDAQ, the 4% sell-off by the S&P 500, or the 2.6% loss by the DJIA, please don’t be complacent. I say this, to paraphrase some comments made by Dorsey-Wright & Associates, namely: “If you have set stops in your account, you’re probably finding that some are getting close to being hit; some perhaps already have over the past week. As nerve-wracking as it is to watch stops get hit, this will help raise your cash levels naturally toward your “sleeping level” as risk rises and will allow you to stay in things that haven't indicated signs of weakness. Now is the time to review your holdings and scale back on those with (poor) technical attributes … don't let bad positions become bad nightmares.”

What I think occurred last week is that the stock market indices were catching up on the downside with what had been approximately a two-week period during which the stock market’s internal readings had been weakening.

This week, there are a lot of potential market moving events, starting with today’s ISM Manufacturing Index report, the FOMC Policy Announcement on Wednesday, and the Employment report on Friday. Along with this, technically, the stock market is marginally oversold, based on a 10-day average of the Arms Index, and the DJIA is near initial trendline support, “in and around” 9600.

Consistent with this and in view of last Thursday’s poor quality bounce, it will be critical to see how the stock market’s internal readings respond to any period of stability or topside probes.

Click to enlarge

Charts courtesy of Thomson Reuters

The opinions offered in this piece should be considered a part of your overall decision-making process. These comments are published individually on a daily basis. This report contains a compilation of several days' worth of comments and is updated weekly. Unless otherwise noted, prices included are as of the previous day's close. For more information about these reports - to discuss how this outlook may affect your personal situation, to learn how this insight may be incorporated into your investment strategy, and/or to receive individual daily reports - please contact your Raymond James financial advisor .

Additional Risk and Disclosure information, as well as more information on the Raymond James rating system and suitability categories, is available at rjcapitalmarkets.com/SearchForDisclosures_main.asp. Copies of research or Raymond James summary policies relating to research analyst independence can be obtained by contacting any Raymond James & Associates or Raymond James Financial Services office (please see raymondjames.com for office locations) or by calling 727-567-1000, toll free 800-237-5643 or sending a written request to the Equity Research Library, Raymond James & Associates, Inc., Tower 3, 6th Floor, 880 Carillon Parkway, St. Petersburg, FL 33716.

Investors should consider this report as only a single factor in making their investment decision.

International securities involve additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets.

Small-cap stocks generally involve greater risks. Dividends are not guaranteed and will fluctuate. Past performance may not be indicative of future results.

Investors should consider the investment objectives, risks, and charges and expenses of mutual funds carefully before investing. The prospectus contains this and other information about mutual funds. The prospectus is available from your financial advisor and should be read carefully before investing.

For clients in the United Kingdom:

For clients of Raymond James & Associates (RJA) and Raymond James Financial International, Ltd. (RJFI): This report is for distribution only to persons who fall within Articles 19 or Article 49(2) of the Financial Services and Markets Act (Financial Promotion) Order 2000 as investment professionals and may not be distributed to, or relied upon, by any other person.

For clients of Raymond James Investment Services, Ltd.: This report is intended only for clients in receipt of Raymond James Investment Services, Ltd.’s Terms of Business or others to whom it may be lawfully submitted.

For purposes of the Financial Services Authority requirements, this research report is classified as objective with respect to conflict of interest management. RJA, Raymond James Financial International, Ltd., and Raymond James Investment Services, Ltd. are authorized and regulated in the U.K. by the Financial Services Authority.

For institutional clients in the European Economic Area (EEA) outside of the United Kingdom:

This document (and any attachments or exhibits hereto) is intended only for EEA institutional clients or others to whom it may lawfully be submitted.

For Canadian clients:

Review of Material Operations: The Analyst and/or Associate is required to conduct due diligence on, and where deemed appropriate visit, the material operations of a subject company before initiating research coverage. The scope of the review may vary depending on the complexity of the subject company’s business operations.

This report is not prepared subject to Canadian disclosure requirements.

Additional information is available on request.

The information provided is as of the date above and subject to change, and should not be deemed a recommendation to buy or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate of complete. Persons within the Raymond James family of companies may have information that is not available to the contributors of the information contained in this publication. Raymond James, including affiliate and employees, may execute transactions in the securities listed in this publication that may not be consistent with the ratings appearing in this publication.

Proprietary Rights Notice: By accepting a copy of this report, you acknowledge and agree as follows:

This report is provided to clients of Raymond James & Associates, Inc. (RJA) only for your personal, noncommercial use. Except as expressly authorized by RJA, you may not copy, reproduce, transmit, sell, display, distribute, publish, broadcast, circulate, modify, disseminate or commercially exploit the information contained in this report, in printed, electronic or any other form, in any manner, without the prior express written consent of RJA. You also agree not to use the information provided in this report for any unlawful purpose. This is RJA client releasable research

This report and its contents are the property of RJA and are protected by applicable copyright, trade secret or other intellectual property laws (of the United States and other countries). United States law, 17 U.S.C. Sec.501 et seq, provides for civil and criminal penalties for copyright infringement.