Weekend Analysis for Fri December 19th 2008

I don't know of another way to say it. We are approaching the time of year when the market usually drifts higher. Christmas time and the holiday week are normally good for the markets and with the loss of the 50 day simple moving average having just taken place, this isn't a time not to follow what historically takes place. The market can't afford for this good time of year not to kick in because we are very close to breaking back down below trend line support at Sp 880. We had made it through the sma's on the 50's but the ema's were not taken out and after several attempts to do so, the market reversed and is now sitting below all the 50's and hanging on by a thread. There has been a lot of unwinding on the major indexes with regards to those Macd's off the bottom. They are all back near the zero line which is normally the area bear markets kick back in. It's now or never for the bulls.

The market rocked higher this morning after the President bailed out the auto makers. I need not get personal with that decision but let's just say I don't like it. The market, desperate here, shot up on the news. We gapped up at the open and moved higher from there. We got close to be up 200 on the Dow. The Sp and Dow tested their 50 day sma's again but the rally could not hold. At the close the markets were mixed but bifurcation is not good news at these critical market levels. You want strength across the board if you're a bull. We didn't get it. The market failed to hold those important 50 day sma's. The only thing standing in the way of a deeper collapse down may be that seasonality issue discussed above, but if today's action is any indication of things to come, lower looks to be the way. We closed near the lows with no appetite for beta. The advance decline line good on the Nyse but slightly red on the Nas. Volume increased but there's nothing good there as most of the volume, after the open, was down. On balance sellers all day after the gap up is not what you want to see when you're fighting to hold 880 Sp. Based on today's close, it's going to be hard, even in a good week seasonally, to hold this market up. We need some good news and fast. Today's action says that news better come fast.

I am really troubled by the action of the vix. it continues to collapse off its triple negative divergence. The problem is the market is not moving in step. It's hanging in but not exploding as a falling vix would suggest. A small oversold bounce in the vix, which is due shortly, may send the market flying back down. If the vix then falls back down and the market can't get moving, that may be painting a picture of much lower volatility to come. That should come from much lower market levels as well. That would mean when the bear does end, the market sit along the bottom for quite some time. This is all speculation right now but I don't like what I'm seeing. The story on this subject is far from written but how can you be more bullish longer term when a falling vix can't get the equity markets to shoot higher? Let's hope this doesn't continue to play out as it right now.

If we lose Sp 880, the door is open to a full retest although we all know by now that nothing is etched in stone. We will, however, need to short further and all of you on your own should take a much more defensive posture. Certainly going long below 880 won't make much if any sense at all so please be aware of that. Going long right after that break takes place will not likely end with good results. The Sp has only been in a bear market for 15 months. The Nas, however, has been in a bear market for nearly nine years. There was a cyclical bull after the bear market of 2000-2002 but the Nas has been in a secular bear market for going on nine long years. It may time for the Dow and Sp to play catch up as only demand destruction globally can do. Poor action at the 50's can be a harbinger of weakness in the future and it may finally be time for the rest of the market to catch up to the froth of the Nas from 1999. Secular bears can last a long time and we know the pain the Nas has afforded us all over the past nine years. Over time, if the Sp loses 775 for good, you can start talking about the whole market entering a secular bear. The story is unwritten nad maybe the in coming President can do something to stop what appears to be happening. We don't know but things are not good and we need something special to prevent the Dow and Sp from joining their brother in a secular bear, the Nas.

we are at the precipice here. We have a great seasonality week coming up. The market needs to seize on this. Use it to get back through those 50's before we lose 880. We must respect 100% whichever way things break. we may hate the thought of losing 880 on the Sp but if we do we have to suck it up and deal with it appropriately. There is no denial game to be played here. There is only the truth. 880 or bust folks and of course on a closing basis and of course not losing it by a point or two. A clean nasty break on a close bodes poorly and we'll adjust accordingly. You will need to as well.

Have a great weekend. Play with a child if at all possible.

Peace

Jack