A Weak Close Today Could Spell Trouble For Bulls.

This holiday abbreviated week has been tough for the bulls. The stock market opened higher Tuesday morning on news that the UK had nationalized troubled bank Northern Rock. European financial stocks rallied on Monday while our market was closed. When our market opened Tuesday, the SPY peaked early at 137 and that is proving to be a minor resistance level. News of a $2.5 billion write-down at Credit Suisse rattled the market. This loss was due to miss priced assets. At such a fragile juncture, the market is expecting Risk Managers to scrutinize the books. When you add the $7 billion rogue trader loss at Société Generale two weeks ago, it casts serious doubt on the transparency of financial institutions. In short order, the MBIA/Ambac rating issue will be resolved. They have to generate capital immediately in order to keep their AAA status. They have proposed spinning off the troubled CDO business from the muni bond business. On the economic side of the equation, the CPI came in at a very hot .4% in January. This is consistent with China's annual inflation rate of 7%. During the week, oil eclipsed the $100 per barrel level and commodity stocks shot higher. The Fed stated in its FOMC minutes that economic activity is the priority right now. That allowed the market to stomach the hot inflation number. The market is forming a wedge pattern. Price compression indicates that there are two sides to the coin. The market has not been in a steady decline recently. It is chopping back-and-forth and this week there were a number of intraday reversals. Believe it or not, there are a few positives at this level. Heads have rolled in the financial sector and new CEOs have mandated aggressive write-downs. They do not want to be chastised for someone else's neglect. Warren Buffett's lowball bid to capitalize the muni bond insurers indicates that there is money on the sidelines at the right price. Financial institutions have lost as much money this quarter and they made in the same quarter a year ago. In that context, things don't seem so dire. If you strip out the financial sector from the S&P 500, corporate earnings growth has come in at 11%. That is a very solid number. Unfortunately, that has not translated into a rally once the individual earnings are released. Companies that post big numbers have been taken behind the shed like the rest. I believe that there are many good values at this level. I am not supportive of the tax rebate program and the Fed’s rate cuts are ineffective. However, these actions demonstrate a willingness to do as much as possible. I am not seeing any big earnings that will drive the market next week. As I mentioned earlier, good results are being met with selling pressure. From an economic standpoint, there will be many numbers for the market to digest. The PPI, durable goods, GDP and the Chicago PMI will have the greatest impact. They are all likely to raise concerns and we will see if the market is able to shoulder the news. If the market closes below SPY 133, it will signify a breakdown from the wedge formation. This level also represents horizontal support from the capitulation lows last March/August and a retest of SPY 125 will result. The four-month trend has been down and good news has been hard to find. After a dismal week, I feel a breakdown is more likely than a breakout above SPY 137.

Daily Bulletin Continues...