The Week Ahead

FRAUDCLOSURE IS NOT GOING AWAY ANYTIME SOON! Just as the banks are handed a major judicial defeat in the high court of Massachusetts last week which puts them in peril on legal grounds, a potentially more potent piece of news just came out. Seven Pension funds representing (this is important) nearly half a trillion dollars in assets, are now demanding that Cramer' darling, Bank of America (seriously, how far will Cramer go to defend BAC and what's the back story there?), JPM, Wells Fargo and CitiGroup's board of directors immediately “examine their foreclosure practices”. What is pressing here is the power these seven funds wield if they were to start selling their interests in these banks and the nature of the request with the keyword being “immediately”. This very much sounds like a threat, not a request and a threat from a consortium with as much selling capacity as these seven pension funds could bring to the targeted banks is a major event and a new front opening up that is not judicial in nature. They don't need to win a court case, they just have to decide whether to place sell orders. Cramer tried to down play the urgency of this communique, but there really is no downplaying it, it's right there for everyone to see. You can't argue against that no matter how many shares your charitable trust holds and whatever other reasons Cramer may have. Clearly even Cramer is concerned.

European Contagion

As we talked about last week, the bond auctions in the PIIGS countries are once again demanding higher yields as contagion fears spread. Also last week the idea of bond holder “Hair cuts” or sharing in the losses is once again on the table.Short term auctions of the Spanish 6 month bonds commanded a yield nearly double the last auction. Add to that the recent move by the Swiss National Bank in which they will no longer accept Portuguese bonds as collateral (a move expanding on the Irish bond move), auctions this week should be interesting as Portugal and Spain both have auctions this week. The results of these auctions will be very telling about the perceived or real Contagion that has haunted the Eurozone for well over a year. As I write this, the Euro opened the FX week with a gap lower, it regained some ground but is still trading around $1.2904 which is below the $1.30 level-Watch for selling in the Euro this week which will lead to a stronger dollar, probably hurt commodities, multinational corporations and if there is any correlation left, US equities. Also as of this writing, Asia is trading lower on disappointment over the US jobs data and concerns over, what else? Europe. Dow Futures are jumping around in foreign market trade, but they are lower between 11 and 22 points.

Quickly looking at a few breadth charts, one of the worst looking is the NASDAQ Advance / Decline line. Remember, breadth is an indication of the internal strength of the market, this is a much better picture of the market then the headline market averages.

In Green is the indicator, in Red is the compared average, unless otherwise specified, the comparison symbol used is the NYSE composite. Here we see the % of stocks 2 standard deviations above their 200 day moving averages, in a strong market, the green line should keep up with the average in red. You can see that the NYSE is higher then it was in November but the % of stocks above that 200 day average has dropped from over 40% to 25.75%. This means stocks are declining as the market rises-this is a function of buying heavily weighted stocks to manipulate the averages higher.

 Here's the % of stocks 2 channels above their 40 day moving averages, again in a strong market, this green indicator should look like the red indicator. From November to now, the % of stocks above that 40 day average has dropped from 45% to 11%-a huge decline.

 The NASDAQ COMPOSITE Advance / Decline line-this is the number of advancing issues in the composite less declining issues. Again a huge decline as more stocks are in decline even as the average is higher. This is very thin market breadth or market vitality.

 Here we have a 4 week new high/new low index. As you can see, new highs are in decline while new lows are advancing recently.

Finally the % of stocks over their simple 40 day moving average, from October until now, this number of stocks has declined from 85% to 64% even as the average is significantly higher.

What this tells us is market participation is very weak. This is not the strong healthy market that the averages would have you believe.

Everyone have a great week. Keep an eye on the January trade list, especially some of the trades already listed such as the European bank stocks. I'll be adding more trades and emerging themes.