Chris Tyler, Optionetics.com
January 9, 2011

A solid first week performance bodes well for higher prices still to come in 2011 but bulls face the more immediate prospects of earnings season and a market prone to profit-taking. For the five day period the SP-500 (SPY) is up 1.10% in easier-to-handle and slightly less VIX’ing behavior.

THE WEEKLY NUTSHELL

Happy New Monday Indeed.” Bulls put seasonal inflows and mixed but properly manufactured economic data to good work as 2011 kicks off with 1.13% gain in SP-500. China PMI data slips by acceptable amount in expansion territory thereby easing monetary tightening concerns. German manufacturing grows to near record levels on export driven expansion and stateside ISM comes in with mostly flat and in-line 57.1 reading. Construction spending sees near double of Street estimates with 0.7% increase. Alcoa (AA) upgrade and BofA (BAC) $3.0B charge to “clean house” of Countrywide mortgage mess provide leadership in Dow while Apple’s (AAPL) 2.17% gainer on “Buy” reit and target raise to $400 helps large cap tech and general market sentiment as commodity complex (GLD, SLV, USO) shows suspect “red chutes” weakness.
“Wait a Minute(s) Tuesday!” SP-500 & Co. come under modest pressure during first half on profit-taking exploits and mixed economic data. German unemployment shows surprise increase due to cold snap according to bullish pollsters. Stateside, factory orders surprise with unexpected gainer of 0.7% vs. -0.3% estimates. COMEX Gold (GLD) and silver (SLV) see hard bout of profit-taking amounting to -2.35% and -3.0% respectively. Afternoon release of FOMC Minutes reverses market to upside with SP-500 finishing off mild -0.13% as bulls appear pleased by report’s receding deflation risk while downplaying still sluggish hiring and content with status quo QE machinations.
“Bulls Get Back To Work Wednesday.” Early stab by bears quickly upended by record breaking ADP jobs report showing 297,000 increase vs. 100,000 estimates. Challenger data acts as background support with -34% month-to-month drop in layoffs, as does ISM Services slight expansion beat. Pre-market better-than-expected “sell the news” or “rate jitters” PMI data from Eurozone and Germany and in-line China PMI Services expansion results are quickly dismissed. Bullish Greenback (UUP) gapper through short-term MA resistance and pressured treasuries (TLT) derail hard commodities for second straight day. M&A assists bulls on news of AIG’s (AIG) Taiwan unit receiving $3.0B bid and Qualcomm’s (QCOM) plans to acquire Atheros (ATHR) for $45. Bid in oil (USO) following larger than expected weekly drawdown also adds some grease for bulls lighter volume push to fresh closing intermediate highs and SP-500 gaining 0.50%.
“Light Return of Merchandise Thursday.” Re-worked worries of “at risk” consumer on muddled and mostly disappointing (TGT, SHLD, M and JCP) same-store sales for December and trader focus on Friday’s nonfarm payrolls supports modest profit-taking i.e. return of merchandise of -0.21% in SP-500. China’s FTSE/Xinhua 25 Index (FXI) slips -1.25% after 5% run into 50SMA resistance and US Dollar confirmation bid assists in Thursday’s more thoughtful behavior.
“Laboring Friday for Bulls.” Lighter than expected nonfarm payrolls increase of 103K vs. 150K, lower but suspect unemployment reading of 9.4% and dour BernankeSpeak regarding labor market put SP-500 under modest out-the-gate pressure. Intraday ruling by Mass Supreme Court against Wells Fargo (WFC) and US Bancorp (USB) on treatment of mortgage securitization results in some Anchor Banker (JPM, BAC and XLF) technical dredging worthy of sending SP-500 to second half loss of about -1.20%, its worst in more than a month, before snapping back into the close for a minor -0.18% hammer finish.

WEEKLY CALENDAR OF KEY UPCOMING EVENTS

Monday:
Economic: No official US reports but over the weekend China announced its economy grew nearly 10% during 2010 with domestic retail sales growth of 18.5% a key driver. Top officials maintain the country has the “confidence, conditions and capability to maintain long-term stable and fast economic growth.”

Earnings: Dow component and aluminum giant Alcoa (AA) reports after the bell and unofficially kicking off the Q4 earnings season. Analysts expect profits of $0.19 per share compared to year-over-year $0.01. Technically, shares of AA have enjoyed outsized Q4 run of about 60% and back to its best levels since January 2010 in deep cup-shaped weekly base.

Others: AM: Acuity (AYI) Helen of Troy (HELE) and SMSC (SMSC). After Hours: Naz’100 component Apollo (APOL).

Tuesday:
Economic: Wholesale Inventories (1.3%).

Earnings: Lennar (LEN), Supervalu (SVU), HB Fuller (FUL) and Synnex (SNX).

Others:
Wednesday:
Economic: Weekly Crude data, Mortgage Apps, Import / Export, Treasury Bud and Fed’s Beige Book.

Earnings: CLARCOR (CLC).

Thursday:
Economic: Weekly Claims (420K vs. 409K), Continuing (4.07M vs. 4.10M), PPI & Core (0.7%, 0.2%) and Trade Balance (-$40.6B).

Earnings: Naz’ 100 component and India-based IT giant Infosys (INFY) releases before the opening bell. Analysts expect profits of $0.66 versus last year’s $0.59 per share. Shares of INFY are just off all-time-highs after run of about 37% during fourth quarter and approximately 5% above a “W” shaped base breakout.

After Hours: Naz’ constituent and world’s largest but increasingly dismissed semiconductor outfit Intel (INTC) set to report. Analysts expect profits of $0.53 vs. prior year’s $0.40. Technically, shares look to be at a major crossroad with bearish two-month long H & S top taking on more recent bullish Golden Cross and contrarian positioning below both key long-term moving averages.

Friday:
Economic: CPI & Core (0.4%, 0.1%), Retail Sales (0.7%, ex-auto: 0.6%), IP & CU (0.4%, 75.5%), Michigan (75.0), Business Inventories (0.7%).

Earnings: Dow component and money center banker JP Morgan Chase (JPM) is expected to produce earnings of $0.99 per share compared to prior $0.74 per share. JPM, along with financial cronies have outperformed during past month but underperformed during 2010. Friday’s Supreme Court ruling should continue to influence trading early next week.

TECHNICAL OUTLOOK

Figure 1: Ultra SP-500 (SSO) Weekly

Entering Monday and longer-term bullish operators were tossed another bone this past week as the major averages finished in the plus column for the five day period. According to Optionetics’ resident statistician Jay Kaeppel this type performance in the Dow Industrials (DIA) has led to yearly gains of 82% of the time.

In conjunction with the third year of a presidential cycle notoriously bullish with the last 17 showing gains, the market immersed in its “best six months” period and the first part of the earnings season prone to optimistic / relief felt responses, there appears to be very decent evidence to be doing business as a bull.

On the other hand or hoof and cognizant of bulls quick ability to stampede for the exits sometimes, there are a non-stretched but nominally-prone CBOE Volatility Index ($VIX) and whole lot of surveyed bulls out there according to Investors Intelligence to consider before diving in too aggressively in the short-term.

The technical opinion from this strategist continues to err on the side of caution when looking to capture the longer-term brass, maybe silver or copper ring of historically favored upside gains still to come. Specifically, due to Santa’s strong rally and our concerns regarding overall sentiment levels, we’d still like to see a now slightly less modest percentage pullback into the 1220 - 1230 area in the SP-500 where prior highs were broken and some attached fear by market participants before seeing stronger risk to reward potential within a more friendly-looking trend to some.

MARKET LAB
Bullish Technicals

Seasonally strong “Best Five Months” and Santa Rally period.
Golden Cross major averages.
Year Three of Presidential cycle.
Bullish first week gains in majors.
Anticipated 3% - 5% pullback in conjunction with bullish VIX Stretch.
Bearish Technicals

1930 Bear Market Rally repeat states EW Intl.
10-Yr. anniversary mark of ATH top in broader market.
Current levels in SP-500 with nominally fragile VIX and weekly RSI.
Investors Intelligence bulls data at three year highs.
Unmitigated Santa Rally gains of seven straight weeks.
China's canary in the coalmine corrective activity.

Index or Sector Proxy
Ticker Symbol
Support
Resistance

S&P500
(SSO)
45 - 46
49.50 – 50.25

Chris Tyler
Senior Staff Writer & Options Strategist
Optionetics.com ~ Your Options Education Site