WEEKLY SUMMARY

A dove being heard on one hill was the bull's centerpiece for stampeding onto higher ground this past week. All told though, decent and inspirational corporate news, short-term seasonal influences hard at work and mixed (but mostly benign) economic reports all played a part in a solid week of gains for the broader averages. For the five-day period the S&P500 ($SPX) and NASDAQ Composite ($COMPQ) are up 1.22% to 1.48%.

Congressional testimony from the Fed Chief offered a decidedly dovish tone according to the voters on Wall Street. Tidbits of ‘Bernanke Speak'—including "there are some indications that inflation pressures are beginning to diminish"—were offered and swallowed up heartedly by the bulls. Further, the overall tone of his two-day economic address was also hailed as being upbeat on the economy and suggestive of easing concern over the possibility of rising prices. While the testimony didn't signal a neutral outlook on monetary policy, the overall message did surprise most investors expecting a more hawkish stance from the guy in charge.

Gentle Ben's Valentines gift to the bulls wasn't the only bovine and kind card received this past week. For instance, with one-third of the S&P500's value based on the thirty component stocks of the Dow ($INDU), that relationship most certainly played Cupid during the week. Although, it is appreciated that Ben's sweet nothings were certainly embraced by investors. As for Cupid's angels, rumors of aluminum giant Alcoa (AA) being courted for possibly $40 billion lifted the stock nearly 6.50% to a ten month high. A trifecta of component stock buybacks from 3M (MMM) [$7 billion], Caterpillar (CAT) [$7.5B] and Honeywell (HON) [$3B] were also good for more than fading headlines as bullish price gaps in each were witnessed. And finally, an all-around earnings beat, decent guidance and investor belief of a global agricultural bull cycle bulldozed machinery giant Deere & Co. (DE) to all-time and closing highs of 113.93 and gains of nearly 11% on the week.

A couple of other factors were also hard at work for bulls finding safe passage into northern territories. The Dow Transports (IYT) along with the utilities index (IDU) procured a rare signal for a few technical theorists out there. All three Dow indices scored fresh all-time-highs this week. The last time this event occurred was back in 1998. Notable heavyweights bullying along the "All Aboard!" heard this past week include air delivery monster FedEx (FDX) on an analyst upgrade and railroad operator Csx Corp (CSX) after announcing a $2.0 billion stock buyback and 20% dividend increase.

The bulls might also thank a couple of short-term seasonal biases for some of the gains witnessed. A 3-Day Presidential Cycle has shown a positive bias of about 70% since 1968. At the same time, a non backtested knack seems to have triggered as well. Since the July lows (and maybe beyond), the bulls ability to charge forward midway through expiration week does have another feather in its quiver. That same abrupt behavior by investors comes to the dismay of staunch bears. In this instance those grizzly folks were possibly looking at further sub prime lending woes, angst over corporate growth and more tough talk from the Fed to pick up steam after a couple of sessions of home field advantage.

There were a few catalysts worthy of headline drama, but not enough for the bears to gain possession of the market. January retail sales of 0.00% fell short of Wall Street's expectations by .3%. However, an upward revision to December netted the two months out and a steady trend of consumer spending still in place. An unexpected -.5% drop in industrial production enjoyed a bit more cause for alarm. However, sans a weak automotive sector which pulled down the manufacturing component by -.7%, the report wasn't entirely bad. Further, a regional manufacturing survey via the NY Empire Index shot up more than 13 points above estimates to 24.4. Meanwhile, a weaker-than-expected reading out of the Philly Fed [.2% vs 6%] was served up Thursday during the lunchtime nap. All told, though, some mild digesting of strong gains already established was all that was served to investors for the remainder of that day.

To end the week, some potential reasons for profit-taking and bears to point to another top were offered. Yet, in an ode to typical Expiration Friday action [i.e. wiggles without much punch] and an operating system clearly set on bull, fractional results of -.03% to -.09% satisfied no one but the profit-takers themselves. The headliner of the day was an in-line reading on wholesale PPI data. The data looked to confirm the Fed's appraisal of moderating price pressures. Bond traders paid homage to the report by rallying prices and dropping the yield on the 10-year to a one-month low of 4.69%.

For equities, with the more important CPI looming, solid weekly gains in place and a thorny bias needing to prove its mettle once more: a day of rest before the long weekend might have been expected. There were a couple of market fires that did need tending. The three alarm variety was offered by a January housing starts that plummeted -14.3%. The figure also marked a ten year low for builders. However, bulls dutifully pointed out December's stronger-than-expected results due to unseasonably warm weather. Similarly, the effect of January's deep freeze across much of the country surely had an impact on the monthly decline as well. Further, bulls could also take solace in Thursday's housing market index. That reading offered up improving expectations by industry members. And finally, Microsoft (MSFT), the world's largest software company, sent out an S.O.S. of sorts to investors. CEO Steve Ballmer announced that analysts' forecasts for sales of the new Vista O/S rollout are "overly aggressive." In cahoots with sales of the new operating system coming in 59% below those of XP, investors sent the heavyweight falling from another window of sorts and down to three month lows.   

ON TAP THIS WEEK

For earnings hounds, the abbreviated work week is going to be made even shorter. Aside from the Q4 earnings season tapering off, market movers of note are limited with Tuesday and Wednesday being the headliners. Key reports include Home Depot (HD), Wal-Mart (WMT) and Hewlett Packard (HPQ).

For economic watchdogs, Wednesday will be in the spotlight. Last week's less influential PPI came in "just right" in matching expectations, so traders will be focused on what inflation at the consumer level ushers in. With relief over dovish Fed testimony last week, the report should prove to be a market mover. Stronger price readings would likely generate out-the-gate profit taking, as the primary catalyst behind last week's triumphant rise would be deemed suspect. With the Fed still maintaining a vigilant watch over inflation, a turn in investor psychology isn't a stretch with strong profits on the table. On the other hand, benign data would confirm investors' newfound convictions over a more Street-friendly Fed. That being said, while a rallying point might be expected, a sell the news response at this juncture still seems more likely, unless the evidence presented is truly persuasive to bulls and bears alike.

Elsewhere, the wild card of energy prices and the influence of index component sectors (XLE, OIH) might get a bit more interesting. Twelve sessions of mostly lateral testing slightly below the $60-a-barrel level and key moving averages should be nearing a technical conclusion. Milder temperatures late last week had bears breaking lateral supports in Thursday's trading. However, an intraday reversal and follow-through in Friday's session sent the March contract rallying back towards resistance within the established trading range.

Tuesday
Economic:  NA
Earnings: Alltel (AT), Boyd (BYD), Home Depot (HD), Wal-Mart (WMT), Century Aluminum (CENX), Hewlett Packard (HPQ), Medtronic (MDT), Ultra Petrol (UPL), Sealy (ZZ), Powerwave (PWAV)

Wednesday
Economic:  CPI & Core (.1%, .2%), Leading Indicators (.2%), Weekly Crude, FOMC Minutes
Earnings: Jack Box (JBX), Mittal (MT), Nice Systems (NICE), Orbital (ORB), Perficient (PRFT), TASER (TASR), Abercrombie (ANF), Agnico Mines (AEM), Analog Devices (ADI), Gen Maritime (GMR),  Oceaneering Intl (OII), Pan Am Silver (PAAS), Salesforce (CRM), Whole Foods (WFMI)
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Thursday
Economic: Weekly Claims (320K)
Earnings: Barrick (ABX), Berry Petrol (BRY), JC Penney (JCP), K-Swiss (KSWS), Newmont (NEM), OfficeMax (OMX), Patterson (PDCO), Toll Bros (TOL), Aventine (AVR), Cabela's (CAB), Dynamic Matls (BOOM), GFI Group (GFIG), H & R Block (HRB)

Friday
Economic: NA
Earnings: Clear Channel (CCU), Domino's (DPZ), Lowe's (LOW), NICOR (GAS)

TECHNICAL PICTURE



Figure 1: Russell 2000 (IWM) Daily

It was a very good week for some market bulls. However, the directional road higher wasn't necessarily a straight line or one without incident. Shown above is the daily chart of the Russell 2000 (IWM), which does a fair job of conveying a potentially difficult ride away from the headline gains. Out-the-gate this past week, back-to-back fractional breaches of weekly chart supports and a Doji reversal candle (not shown) likely took out many bulls out of their longs and many shorts jumping into the mix. Per this market observer's analysis, the idea certainly can't be faulted. How traders reacted to the ‘false breakdown of the false breakout' is more difficult to determine. Bottom line, a small loss up to 2% by Wednesday's weekly upside breach seems the likely result.

More recently, a dual Doji topping pattern set up heading into Friday's session. Looking at the daily chart once more, we find that when combined with the prior highs, the overall pattern takes on the shape of a double top. A bit of secondary weakness (not shown) is also evident. Profit-taking in the first hour did trigger textbook counter trend shorts through pattern lows. However, chalk it up to the typical even keel of expiration day or Presidential biases, the IWM finished in testing mode in more than one way.

Heading into work Tuesday, intermediate concerns continue to dictate strategy for this market observer. A genuine lack of corrective action in the major indices, an extended 4- and 20-year cycle in force, lopsided bullish sentiment and low implieds ($VIX) are factors that continue to weigh in favor of cautious behavior and hedged strategies.