Stock Market Analysis: 11/01/2009

What a week! On Friday, we saw another massive sell-off for a third trend day in a row which concluded the biggest down week since March. We are approaching the important SPY 102 level where a wave of buyers could come into play. The stakes are high: Bears are hoping that the recent action is only the start of a much more significant pullback while the bulls are seeing this as profit taking before another move higher. This weekend is a good time for everyone to reassess his/her approach to the market. Do not let your bias affect how you are trading. The market simply does not care what any of us thinks. If you are a bull, you don’t want to be holding on to your positions for too long or try to catch a falling knife if the market continues to deteriorate. As a bear, you have to be very wary of any short-covering bear trap which we have seen plenty of since March. At this point though, we are in short the rallies mode until proven otherwise. If we break SPY 102 decisively, I expect us to get down all the way to about SPY 84 which would be a nice 20%+ correction.

Huge week coming up next with the Federal Reserve meeting on Wednesday and the October unemployment data on Friday. The expectation for that number is -173K which could be overly optimistic given last month big miss. A bad number could end up pushing the unemployment rate to the psychological number of 10.0%. We are seeing heavy distribution in the Russell 2000 and Nasdaq while the large cap blue chips are holding up much better to the downside. Levels to watch next week will be SPY 102, an important intermediate term level, SPY 105 for a very-short-term bounce, and SPY 107, Thursday’s high. The market has come down a long way in one week but surprisingly, there has been no unfilled downside gap so it is very vulnerable to one possibly after a quick bounce. Be very cautious, I doubt the market is going to make it that easy for anyone…

Economic Data:

Monday: ISM Manufacturing PMI (53.1), Pending Home sales (0.3%)
Tuesday: Factory orders (1.1%)
Wednesday: ADP Non-Farm Employment Change (-188K), ISM Non-Manufacturing PMI (51.6), FOMC Statement
Thursday: Unemployment Claims (519K), Prelim Nonfarm Productivity q/q (6.1%)
Friday: Non-Farm Employment Change (-173K), Unemployment rate (9.9%), Wholesale Inventories m/m (-0.9%)

Earnings: We are winding down, the biggest one I see are F (Monday), MA (Tuesday), ABK (Wednesday)

Weekend Reading:

A look at May 2008: The last time we saw major breadth divergences (Afraid to Trade)
The Shark Tank Risk Management System (SMB)
Managing your Positions (SMB)
9 more banks failures (Big Picture)
Ayn Rand’s revenge (NY Times)
$TRAN vs 1987 Nasdaq showing crash underway (Safe Heaven)
If you’re fighting a trend, you are defending your view (TraderFeed)
A sham GDP for a sham economy (Mean Street)
Afghanistan, October 2009 (The Big Picture – Boston Globe)