Today's Market

I'm writing this from my IPhone and obviously can't get to a computer. I'll post the market recap in the morning.

It's A Small World After All

From the Fed's latest Minutes:

Economic activity in most advanced foreign economies contracted in the third quarter, driven by sharp declines in investment and by significant negative contributions of net exports, as the global recession took hold more strongly. Incoming data pointed to an even weaker pace of activity in the fourth quarter. In Canada, however, real gross domestic product (GDP) increased at a faster-than-expected pace in the third quarter, though consumption and investment continued to soften. In the euro area and the United Kingdom, purchasing managers indexes fell in November to levels associated with severe contractions in economic activity. Labor market conditions in the advanced economies deteriorated further, with most countries experiencing rising unemployment rates. In Japan, real GDP fell in the third quarter as domestic demand declined and private investment fell for the second consecutive quarter. After peaking in the third quarter, consumer price inflation moderated in all advanced foreign economies, primarily as a result of falling energy and food prices. Economic activity in most emerging market economies decelerated sharply in the third quarter, though a surge in agricultural output helped to support activity in Mexico, and the Brazilian economy continued to expand rapidly. In Asia, output decelerated significantly, as the pace of real activity moderated in China and several other economies saw declines in real GDP. Recent readings on production, sales, and exports suggest that emerging market economies weakened further in the current quarter. Headline inflation generally declined across emerging market economies, primarily because of lower food and energy prices and, in some cases, weaker economic activity.

Alcoa's Job Cuts

From the WSJ:

Alcoa Inc. announced the elimination of about 15,000 jobs, more plant closures, plans to sell assets and a 50% cut in capital expenditures to contend with the sustained recession.

The moves raise the question of whether other companies that have cut costs also will feel the need to dig deeper. Alcoa, the world's largest aluminum producer, announced a round of cost cutting in October when demand for commodities and the availability of credit began to fall.

The combined restructuring will result in a fourth-quarter charge of $900 million to $950 million, or $1.13 to $1.19 a share. The company expects to report fourth-quarter earnings next week. Alcoa earned $632 million, or 75 cents a share, in the fourth quarter of 2007.

"Many of these things are painful and many of these things are drastic," Alcoa Chief Executive Klaus Kleinfeld said in an interview Tuesday. "We will continue to monitor the dynamic market situation to ensure that we adjust capacity to meet any future changes in demand and seize new opportunities.

My theory right now is that companies are getting the pain out of the way now after a terrible year. Note this will cause a 4th quarter charge -- a charge at the end of a long and painful fiscal year.

However, a contrary view would be, "isn't there a big stimulus bill coming down the pike? Shouldn't that help a company that works with raw materials?"

Translating Fed Speak

Yesterday the Fed released the minutes of their latest meeting. These provide an excellent overview of the US economy. Let's coordinate the Minutes with some charts and graphs:

The labor market continued to worsen. According to the November employment report, payroll employment fell at a rapid pace over the preceding three months, with substantial losses across a wide range of industry groups, including manufacturing, construction, retail, financial activities, and business services. Indicators of hiring plans also dropped steeply in November, and other labor market indicators suggested that jobs remained in short supply. The unemployment rate climbed to 6.7 percent in November, while the labor force participation rate fell after remaining steady for much of the year. New claims for unemployment insurance rose sharply through early December.

The establishment's year over year survey has been dropping for a few years and



the unemployment rate has been increasing for about two years.

Industrial production, excluding special hurricane- and strike-related effects, fell markedly in November after sizable declines in the preceding two months. The recent contraction in industrial output was broadly based. The steep pace of decline in the production of consumer goods reflected not only cutbacks in motor vehicle assemblies but also drops in the output of other goods, such as appliances, furniture, and products related to home improvement. The production of business equipment was held down by declines in the output of both industrial and high-tech equipment. The output of construction supplies extended its decline after a brief pause in the middle of the year, and the contraction in the production of materials intensified. In particular, steel production plummeted, and the output of organic chemicals contracted noticeably. For most major industry groups, factory utilization rates declined relative to their levels in July and remained below their long-run averages. Available forward-looking indicators pointed to a significant downturn in manufacturing output in coming months.

Industrial production has been dropping for most of the year and is currently "cliff diving".



Capacity utilization is also dropping. This means that when the economy starts back-up there will be a dearth of investment as companies seek to first utilize capacity that lay idle.

Real personal consumption expenditures (PCE) fell for the fifth straight month in October, with the slowdown evident in nearly all broad spending categories. Sales of light motor vehicles, which slumped in October, fell further in November, but the available information on retail sales suggested a small increase in real outlays for other consumer goods. The annualized three-month change in spending on services in October was just one-third of the rate registered in the first half of 2008. Preliminary data for October and November suggested that overall fourth-quarter real spending would receive a modest boost from recent price declines for gasoline. Real incomes were also boosted by the reversal in energy prices, though the negative wealth effects of continued declines in equity and house prices likely offset this somewhat. Measures of consumer sentiment released in November and December remained low, and available evidence suggested further tightening in consumer credit conditions in recent months.

Consumers are closing their wallets big time.



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Retail sales (inflation adjusted) are falling hard and fast, and on a year over year level



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Retail sales are falling off a cliff

Broader consumer spending is also dropping.



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Personal consumption expenditures are also dropping for the first time in 10 years, and on a year over year basis



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They are falling off a cliff

Housing demand remained weak, and although the number of unsold new single-family homes continued to move lower, inventories remained elevated relative to the current pace of sales. Sales of existing single-family homes changed little, although a drop in pending home sales in October pointed to further declines in the near term.

Housing has been a mess for a few years and there is no indication that will change soon.



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Sales evened out for most of 2008 but took a big drop last month.



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The absolute inventory of existing homes has been fluctuating between 4 and 4.5 million for a year and a half now, and




The number of months it would take to clear existing inventories at the current sales pace has been between 10 and 11 months for the last 6 months.

As a result:

Home prices in 20 major U.S. cities declined at the fastest rate on record, depressed by mounting foreclosures and slumping sales.

The S&P/Case-Shiller index declined 18 percent in the 12 months to October, more than forecast, after dropping 17.4 percent in the year through September. The gauge has fallen every month since January 2007. Year-over-year records began in 2001.

The financial market meltdown that’s reverberated around the globe has prompted banks to curb lending, signaling the housing slump will persist for a fourth year in 2009. Falling property values have eroded household wealth, causing consumers to pare spending and deepening what is projected to be the longest recession in the postwar period.

The bottom line is clear.

1.) Consumers have stopped spending in a big way. The drops in PCE's and real retail sales are sharp and strong. As a result:

2.) Home sales will continue to drop, and

3.) Industrial production will remain at depressed levels.

Wednesday Commodity Round-Up

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Notice the following on the weekly chart

-- Prices have crossed over the 10 day SMA

-- The MACD is now reversing

-- The RSI is rising



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Notice the following on the daily chart

-- Prices are now above the 50 day SMA

-- The 10 day SMA has crossed over the 20 day SMA\

-- The RSI is rising

-- The MACD has been rising for the last two months

Bottom line: this chart looks like it is turning around.

Today's Markets

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Notice the following:

-- After rising through downside resistance, prices have been mellow for the last few days.

-- Prices are above the 10, 20 and 50 day SMA

-- The 10 and 20 day SMA are both moving higher

-- The 10 and 20 day SMA have crossed the 50 day SMA

Retail Sales Drop

From Bloomberg:

Purchases at U.S. retailers declined last week as post-Christmas markdowns failed to overcome what may have been the worst holiday shopping season in four decades.

Sales at stores open at least a year dropped 0.8 percent in the seven days through Jan. 3, the International Council of Shopping Centers and Goldman Sachs Group Inc. said today in a statement. ICSC Chief Economist Michael Niemira said November- December sales declined as much as 2 percent.

Macy’s Inc., Talbots Inc., Aeropostale Inc. and other retailers offered discounts of 65 percent or more on some sweaters, jewelry and pants to clear out merchandise after Christmas. Higher markdowns may put more pressure on earnings.

“December was relatively chaotic in price, with more discounts than retailers planned, especially in department stores,” Richard Hastings, a consumer strategist at Global Hunter Securities LLC of Newport Beach, California, said in a telephone interview. “Consumers have discovered that the industry is responding with lower and lower and lower prices.”

This shouldn't be a surprise to anyone; the economy is in a recession after all.

But the charts of the actual sales data are downright scary.



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Above is a graph of real retail sales. Note the cliff diving that is now occurring.

And then there is the year over year change in retail sales:



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That's one hell of a drop

It makes you wonder why



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the retail stock sector is rebounding along with the



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specialty retail sector.

How Long Can Non-Residential Spending Hold-Up?

From the WSJ:

Residential spending fell at a 4.1% rate in November to $336.3 billion, 22.8% lower than November 2007. Despite the credit crunch and worsening economy, nonresidential spending showed surprising resilience, rising 1% during the month to $742.1 billion, up 9.2% from the previous year.

Here is the accompanying chart:



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Notice that non-residential spending has remained strong as residential spending has dropped. However, note this:

Vacancy rates in office buildings exceed 10 percent in virtually every major city in the country and are rising rapidly, a sign of economic distress that could lead to yet another wave of problems for troubled lenders.

That does not bode well for the coming year.

The "Paradox of Savings"

This is a video I did for a show called "Meet the Bloggers." It highlights one of the central problems of the US economy: we consume at massive rates at the expense of savings.

Here is a chart from the St. Louis Federal Reserve of the personal savings rate:



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Notice it has been declining since the early 1980s. Let's coordinate that data with this chart of household debt:



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This chart has been increasing for some time.

And finally, here is a chart of consumer debt payments as a percent of disposable income:



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This number has been increasing since the early 1990s.

Usually an increase in the savings rate is a good thing. But not now:

Usually, frugality is good for individuals and for the economy. Savings serve as a reservoir of capital that can be used to finance investment, which helps raise a nation's standard of living. But in a recession, increased saving -- or its flip side, decreased spending -- can exacerbate the economy's woes. It's what economists call the "paradox of thrift."

U.S. household debt, which has been growing steadily since the Federal Reserve began tracking it in 1952, declined for the first time in the third quarter of 2008. In the same quarter, U.S. consumer spending growth declined for the first time in 17 years.

That has resulted in a rise in the personal saving rate, which the government calculates as the difference between earnings and expenditures. In recent years, as Americans spent more than they earned, the personal saving rate dipped below zero. Economists now expect the rate to rebound to 3% to 5%, or even higher, in 2009, among the sharpest reversals since World War II. Goldman Sachs last week predicted the 2009 saving rate could be as high as 6% to 10%.

As savings increase, economists say, spending is likely to contract further. They expect gross domestic product to decline at an annualized rate of at least 5% in the fourth quarter, the biggest drop in a quarter-century.

"The idea that the American family will quickly spend us out of this recession is a fantasy. It won't happen," said Elizabeth Warren, a professor of law at Harvard University who last month was named chair of the Congressional oversight panel tasked with overseeing the distribution of the government's Troubled Asset Relief Program funds.

BUT consider this:

The flaw of looking at savings as undercutting spending and deepening a recession is that it looks at the beginning of the down cycle and not what helps bring about the end.

As prices of everything from cars to housing fall, the money which has been taken out of wages and put into savings to reduce credit balances is available for purchases. Items get so inexpensive that consumers are drawn back into the market. But, drawing them in depends on their ability to capitalize on weak demand and falling prices. A tax cut and stimulus package will increase that ability geometrically.

The trend toward savings may be bad this year, but it may be a salvation in 2010.

Translating Fed Speak

Yesterday the Fed released the minutes of their latest meeting. These provide an excellent overview of the US economy. Let's coordinate the Minutes with some charts and graphs:

The labor market continued to worsen. According to the November employment report, payroll employment fell at a rapid pace over the preceding three months, with substantial losses across a wide range of industry groups, including manufacturing, construction, retail, financial activities, and business services. Indicators of hiring plans also dropped steeply in November, and other labor market indicators suggested that jobs remained in short supply. The unemployment rate climbed to 6.7 percent in November, while the labor force participation rate fell after remaining steady for much of the year. New claims for unemployment insurance rose sharply through early December.

The establishment's year over year survey has been dropping for a few years and



the unemployment rate has been increasing for about two years.

Industrial production, excluding special hurricane- and strike-related effects, fell markedly in November after sizable declines in the preceding two months. The recent contraction in industrial output was broadly based. The steep pace of decline in the production of consumer goods reflected not only cutbacks in motor vehicle assemblies but also drops in the output of other goods, such as appliances, furniture, and products related to home improvement. The production of business equipment was held down by declines in the output of both industrial and high-tech equipment. The output of construction supplies extended its decline after a brief pause in the middle of the year, and the contraction in the production of materials intensified. In particular, steel production plummeted, and the output of organic chemicals contracted noticeably. For most major industry groups, factory utilization rates declined relative to their levels in July and remained below their long-run averages. Available forward-looking indicators pointed to a significant downturn in manufacturing output in coming months.

Industrial production has been dropping for most of the year and is currently "cliff diving".



Capacity utilization is also dropping. This means that when the economy starts back-up there will be a dearth of investment as companies seek to first utilize capacity that lay idle.

Real personal consumption expenditures (PCE) fell for the fifth straight month in October, with the slowdown evident in nearly all broad spending categories. Sales of light motor vehicles, which slumped in October, fell further in November, but the available information on retail sales suggested a small increase in real outlays for other consumer goods. The annualized three-month change in spending on services in October was just one-third of the rate registered in the first half of 2008. Preliminary data for October and November suggested that overall fourth-quarter real spending would receive a modest boost from recent price declines for gasoline. Real incomes were also boosted by the reversal in energy prices, though the negative wealth effects of continued declines in equity and house prices likely offset this somewhat. Measures of consumer sentiment released in November and December remained low, and available evidence suggested further tightening in consumer credit conditions in recent months.

Consumers are closing their wallets big time.



Click for a larger image

Retail sales (inflation adjusted) are falling hard and fast, and on a year over year level



Click for a larger image

Retail sales are falling off a cliff

Broader consumer spending is also dropping.



Click for a larger image

Personal consumption expenditures are also dropping for the first time in 10 years, and on a year over year basis



Click for a larger image

They are falling off a cliff

Housing demand remained weak, and although the number of unsold new single-family homes continued to move lower, inventories remained elevated relative to the current pace of sales. Sales of existing single-family homes changed little, although a drop in pending home sales in October pointed to further declines in the near term.

Housing has been a mess for a few years and there is no indication that will change soon.



Click for a larger image

Sales evened out for most of 2008 but took a big drop last month.



Click for a larger image

The absolute inventory of existing homes has been fluctuating between 4 and 4.5 million for a year and a half now, and




The number of months it would take to clear existing inventories at the current sales pace has been between 10 and 11 months for the last 6 months.

As a result:

Home prices in 20 major U.S. cities declined at the fastest rate on record, depressed by mounting foreclosures and slumping sales.

The S&P/Case-Shiller index declined 18 percent in the 12 months to October, more than forecast, after dropping 17.4 percent in the year through September. The gauge has fallen every month since January 2007. Year-over-year records began in 2001.

The financial market meltdown that’s reverberated around the globe has prompted banks to curb lending, signaling the housing slump will persist for a fourth year in 2009. Falling property values have eroded household wealth, causing consumers to pare spending and deepening what is projected to be the longest recession in the postwar period.

The bottom line is clear.

1.) Consumers have stopped spending in a big way. The drops in PCE's and real retail sales are sharp and strong. As a result:

2.) Home sales will continue to drop, and

3.) Industrial production will remain at depressed levels.

Treasury Tuesdays

There's been a lot of talk lately about a treasury bubble. All of that talk seems to be getting investors' attention:



On the longer end of the curve, notice how prices have moved through both the 10 and 20 day SMA. Also note the strength of the bars and the higher volume on the sell-off. Also note the 10 day SMA has turned lower.



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On the IEFs note the same technical developments as the TLTs -- prices moved through the 10 and 20 day SMA on higher volume. Also note the 10 day SMA has turned lower.



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Note the strength of the sell-off with the high volume mark. Also note prices have moved through the 10 and 20 day SMAs and that the 10 day SMA has moved through the 10 day SMA

So -- what's the reason for the sell-off?

Investors may be glad to see 2008 in the rearview mirror, but in the Treasury market, they already are worrying about 2009.

A chief concern is the amount of issuance on tap. Goldman Sachs Group Inc. puts the amount the U.S. government needs to raise at about $2 trillion, including new issuance and rolled-over securities. Goldman said it could be more, depending on the size of the incoming Obama administration's stimulus package.

The worry: Just as this onslaught of debt hits, investors could turn their noses at the Treasury market's historic low yields and venture instead into riskier assets. That likely would be even more the case once government programs to kick-start financial markets and the economy gain traction.

And as Barron's noted in this week's issue:

THE BIGGEST INVESTMENT BUBBLE TODAY may involve one of the safest asset classes: U.S. Treasuries. Yields have plunged to some of the lowest levels since the 1940s as investors, fearful of a sustained global economic downturn and potential deflation, have rushed to purchase government-issued debt.

The market also has been supported by comments from the Federal Reserve that it, too, may buy long-term Treasuries. - As a result, the benchmark 10-year Treasury note yields just 2.40%, down from 3.85% as recently as mid-November. The 30-year T-bond stands at 2.82%, and three-month Treasury bills were sold last week for a yield of just 0.05%. - Many investors argue it's dangerous to buy Treasuries with such low yields. While a holder can expect to get repaid in

full at maturity, the price of longer-term Treasuries could fall sharply in the interim if yields rise. The 30-year T-bond, for instance, would drop 25% in price if its yield rose to 4.35%, where it stood as recently as Nov. 13. The bear market may have begun Wednesday, when prices of 30-year Treasuries fell 3%. They lost another 3% Friday. - "Get out of Treasuries. They are very, very expensive," Mohamed El-Erian, chief investment officer of Pacific Investment Management Co., warned recently. Pimco runs the country's largest bond fund, Pimco Total Return (ticker: PTTPX). - Treasuries offer little or no margin of safety if the economy unexpectedly strengthens in 2009, or the dollar weakens significantly, or inflation shows signs of reaccelerating. Yields on 30-year Treasuries easily could top 4% by year end.

Today's Markets

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Notice the following on the daily chart:

-- Prices are still above the downward sloping upper resistance level

-- The 20 day SMA is now above the 50 day SMA

-- The 10 day SMA has moved higher, although it is a preliminary move

Bottom line: the market wants to rally, but it needs a fundamental reason to do so. I think the markets are waiting for a better read on Washington's policy response.

Janet Yellen Calls For Fiscal Stimulus

From the Federal Reserve of San Francisco:

For all of these reasons, I support Marty's conclusion that there is an exceptionally strong case for substantial fiscal stimulus over the next few years. In ordinary circumstances, there are good reasons why monetary, rather than fiscal policy, should be used for stabilization purposes. But these are exceptional circumstances, and fiscal policy can help get the economy going.

.....

If ever, in my professional career, there was a time for active, discretionary fiscal stimulus, it is now. Although our economy is resilient and has bounced back quickly from downturns in the past, the financial and economic firestorm we face today poses a serious risk of an extended period of stagnation—a very grim outcome. Such stagnation would intensify financial market strains, exacerbating the problems that triggered the downturn. It's worth pulling out all the stops to ensure those outcomes don't occur.

More on Manufacturing

In the post below, we learned that global manufacturing activity is dropping like a stone. However, according to manufacturing industry stock charts, traders are anticipating a rebound in this sector. The charts below are from Prophet.net.



Notice that on the overall manufacturing index prices sold-off hard at the end of last year but have since rallied through resistance.



Farm and construction is rebounding and is approaching the 50 week SMA.



Diversified machinery has also broken through resistance levels.



Machine tools are already bouncing back.



Metal fabrication formed a reverse head and shoulders pattern and appears ready to move through the pattern's neckline.



Pollution treatment machinery has moved through key resistance levels as well.



Small tools stocks have moved through key resistance levels as well.

Traders are speculating there will be a big stimulus bill that will help all of these stocks -- at least that's my assumption.

ISM Tanks; Global Manufacturinig Does As Well

From the ISM:

"Manufacturing activity continued to decline at a rapid rate during the month of December. The decline covers the full breadth of manufacturing industries, as none of the industries in the sector report growth at this time. New orders have contracted for 13 consecutive months, and are at the lowest level on record going back to January 1948. Order backlogs have fallen to the lowest level since ISM began tracking the Backlog of Orders Index in January 1993. Manufacturers are reducing inventories and shutting down capacity to offset the slower rate of activity."

Get use to hearing reports like this for a few months. My guess is we're at the low point for this cycle.

Let's look a bit deeper into the numbers. Here is the big chart from econoday:



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The proper term for that chart is "cliff diving." Simply put, manufacturing is falling off a cliff. As the report says, "Manufacturing contracted in December as the PMI registered 32.4 percent, 3.8 percentage points lower than the 36.2 percent reported in November. This is the lowest reading since June 1980 when the PMI registered 30.3 percent."

In addition, consider these points:

ISM's New Orders Index registered 22.7 percent in December, 5.2 percentage points lower than the 27.9 percent registered in November. This is the lowest reading on record for this index going back to January 1948.

Lowest since 1948. Translation: no one is buying anything right now. That means everyone is deeply concerned about the future. They are conserving cash and making their inventories very lean.

And there is an issue of deflation:

The ISM Prices Index registered 18 percent in December compared to 25.5 percent in November, indicating manufacturers are paying lower prices on average when compared to November. This is the lowest reading for the index since June 1949 when it registered 10.6 percent.

And worst of all, this slowdown is occurring all over the world:

Manufacturing activity contracted in Germany, France, Italy and Spain, pushing the Markit Economics survey of euro-zone manufacturing last month to the lowest level in its 11-year history. In Russia, the VTB Bank Europe manufacturing index fell to its lowest level since it began in September 1997.

The data from Asia also looked grim. A survey by brokerage firm CLSA showed employment and output fell at a record clip in Chinese factories in December. Indian manufacturers cut jobs for the first time in the history of a survey by ABN AMRO Bank.

The simultaneous woes of manufacturing in rich countries and poor countries are something new in the global economy. In the past, weaknesses in U.S. and European manufacturing meant a windfall for developing economies, which took up the slack.

Hong Kong, which like the euro zone slipped into recession in the third quarter, saw manufacturing activity as surveyed by Markit decline for the sixth straight month. Earlier this week, Japan's Nomura/JMMA index of manufacturing sank to a new low, due to a reduction in overseas demand and the deteriorating global economy.

The spreading and deepening manufacturing slump has some experts worried that the global economy in 2009 won't fare much better than last year. J.P. Morgan's global manufacturing index, released Friday and compiled from surveys in 19 countries, reached a new low in December, consistent with a "severe" 17% annualized contraction in global activity. J.P. Morgan estimates global output declined 4% in the last three months of 2008 compared to the previous quarter, reflecting reduced spending and available financing on autos, housing and capital equipment.

Market Monday's

Welcome back to the first full week of the new year. I hope everybody had a happy and safe holiday season. Let's jump right into the fray because there are some good things happening in the market.



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Notice the following on the three month daily chart:

-- Prices have broken through the downward sloping trend line that started in early October.

-- Prices are above all the SMAs

BUT:

-- The SMAS are bunched together, indicating a lack of overall direction, and

-- The break-through happened on low volume (which is to be expected in end-of-the-year trading.



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-- On the P&F chart, note the market formed a triple top at the end of the year and has now broken out of that top.

Also consider the following points from this week's Barron's:

Stocks kicked off 2009 with a sprightly rally, but the longevity of that start will ultimately depend on stocks' ability to attract that record dry powder.

And it's quite a cache of capital. The amount of money stashed in money-market mutual funds had surpassed that in stock mutual funds as of the end of November, according to the Investment Company Institute, a national association of investment companies. In contrast, money-market funds were just 48% of stock funds when 2008 began. "If all the money currently sitting in U.S. money-market funds left and went into buying shares of the Standard & Poor's 500 index, it would absorb 42%" of that benchmark's market value -- the highest in at least 25 years, says Jason Goepfert of sentimentrader.com.

That's not all. Stocks' 38.5% pummeling in 2008, their third worst year ever and the biggest annual loss since the Great Depression, had sent investors scurrying. Today, Americans are setting aside just 42% of their investment money for stocks, says the American Association of Individual Investors. At the same time, 42% of their portfolio is in cash, the highest ever. "Never before have these investors allocated as much or more to cash as they have to stocks," Goepfert says.

Individuals aren't alone, and even professional money managers are hiding in short-term Treasuries that yield next to nothing. A time will come when earning zero interest starts to get old.

And consider the following points from an interview with Laszlo Birinyi:

An indicator that we developed is the number of stocks that are down 50% from their highs. At the market bottom recently, 322 of the S&P 500 stocks were down 50% from a year ago; that's an extremely oversold condition. The previous record, which was set in July of 2002, was 130 stocks. To us, that's a very useful measure of whether the market is oversold or overbought.

.....

You published a note last month titled "S&P 750: The Bottom." What led to that conclusion?

A few things caught our eye. One was that we started to have some very bad days in November but the market still recovered. On Dec. 5, the unemployment news was really terrible and yet the market recovered that day, with the S&P closing up 3.7%. To us, those are signs of a positive market where people are starting to look beyond the bad news.

It seems traders are looking at current economic news as occurring at or near the absolute bottom in the economic cycle. Assuming that to be the case, people are trying to get in early on a perceived rally that will occur in the first half of the year.

What else caught your eye in calling a market bottom?

We did an analysis that came out of our cycle study, and it showed that the greatest amount of decline in a bear market is always at the very end of the bear market. As we saw it, if indeed the market did bottom in November, as we suggested, a total of 70% of the decline occurred in the last quartile of the bear market. We also noticed that financial stocks were starting to show some stability, as well as large-cap stocks.

Consider the from September to mid-October the market (the SPYs) fell from 120 to 84, or a drop of 30%. That's a big drop and could easily fall into the point made above.

Bottom line: there are a lot of bullish elements lining up for the year. Whether they play out is a different story.