E-mini futures rally: What it needs to be sustainable

Good day! The Dow Jones Industrial Average topped 11,000 on Friday for the first time since May. There are few that would argue that the September rally was anything less than exceptional, but does this mean it will actually be sustainable? If you take even a few moments to just look at what is going on behind the scenes, the rally becomes highly questionable, particularly when tied to phrases such as "economic recovery". The fact is, the real picture on the state of the economy, recession or not, is rather gloomy indeed. Interestingly, the market has ignored that fact in recent weeks with the major indices gunning for a retest of the year-to-date highs made in April, while the Nasdaq is starting to view its highs back in 2007 as an attainable goal.

Dow Jones Industrial Average (Figure 1)

Friday's most notable data in the United States dealt with the current employment situation. September's jobs report was weaker-than-anticipated, and yet the market still managed to pull together a positive reaction. The Labor Department reported that the overall economy lost 95,000 jobs last month, while the nation's unemployment rate remained a steady 9.6% (although "actual" unemployment is closer to 12%). Perhaps part of the relief rally that followed the data release stemmed from the recent focus upon private sector employment, which was up 64,000. Nevertheless, the government shed 114,000 positions, which still leaves more people looking for jobs than there are jobs available. Even when the losses due to Census hirings are removed, payrolls fell 18,000. This is the first time nonfarm payrolls have fallen this year.

The interesting shift is in the temporary labor positions. Temp hirings were up once again in September, but this shouldn't be looked at in a truly positive light. Although in the past this often signified incoming strength, in the current environment it is merely showing that fewer and fewer employers are wanting to "pay-up" for the employer benefits that full-time employees would typically receive.

Moving on, let's look at the business of moving... namely: real estate. The recent data that came out at the beginning of October remained rather dismal. The foreclosure situation is particularly worrisome. The average estimates I've seen for clearing up the inventory just on the homes that have already fallen into foreclosure or in the process of doing so is 3-5 years. With the average foreclosed home selling at about a 25% discount to other sales and only about 20-25% of homes somewhere in the foreclosure process now on the market, the full impact of these statistics may not been known for years.

This is even further complicated by how overwhelmed lenders are in dealing with this reality. Bank of America just announced at the end of last week that it imposed a moratorium on foreclosures and the sale of foreclosed homes nationwide following concerns expressed by government officials over the potentially sloppy handling of foreclosures as a result of the substantial backlog. Bank of America became the largest mortgage servicer following its 2008 acquisition of Countrywide Financial Corp., with over 80% of its delinquent loans also acquired as a result of the merger. Although the second-largest mortgage servicer, Walls Fargo, hasn't stopped foreclosures, the third-largest, J.P. Morgan, has frozen foreclosures in 23 states.

S&P 500 (Figure 2)



And yet, despite all this depressing data, the market still pushed higher on Friday, prompting me to at last pull out my Dow 11K hat once again. The driving force of the Dow into that well-publicized price point, however, was not one that many of the mainstream public may be as excited about as the bulls. The strongest stock in the Dow year-to-date, after all, is Caterpillar Inc. (CAT), which derives a lot of its profits from weakness in the U.S. dollar. The value of its profits overseas increases as the dollar loses strength, but it also means that for the majority of us stateside our money is worth less.

The dollar's buying power against the euro is at its lowest level since the end of January. The EUR/USD is coming into a strong zone of price resistance, but the momentum of the move into this zone will make a rapid reversal highly unlikely. Once a correction begins, it will occur in the form of slowing upside momentum and/or a moderate correction in price with a gradual pullback that would have a strong chance of forming a bull flag on the weekly time frame.

Nasdaq Composite (Figure 3)

The Dow Jones Industrial Average ($DJI) posted a gain of 57.90 points, or 0.53%, and closed at 11,006.48 on Friday. The top performers in the Dow were Alcoa (AA) (+5.66%), Caterpillar Inc. (CAT) (+2.07%), Disney (DIS) (+1.77%), and Procter & Gamble (PG) (+1.74%). Only 6 of the Dow's index components posted a loss. The weakest were Bank of America (BAC) (-0.98%), Kraft Foods (KFT) (-0.83%), and JP Morgan (JPM) (-0.53%). The Dow ended the week higher by 1.6%.

The S&P 500 ($SPX) rose 7.09 points, or 0.61%, and closed at 1,165.15. The strongest stock in the index was CF Industries Holdings Inc. (CF) (+11.42%), a leading manufacturer of fertilizer. The U.S. government cut its corn-crop forecast, which has led to speculation that it may lead to more corn being planted next year, thus leading to higher fertilizer demand. Gannett Inc. (GCI) (+8.02%), HR Block (HRB) (+7.47%), and Fortune Brands (FO) (+7.40%) topped off the gainers. At the other end of the spectrum were Tyson Foods Inc. (TSN) (-7.74%), Adobe (ADBE) (-5.93%), Owens-Illinois Inc. (OI) (-4.08%), and Motorola (MOT) (-3.38%). The S&P 500 also ended the week higher by 1.6%.

The Nasdaq Composite ($COMPX) ended the session higher by 18.24 points, or 0.77%, on Friday and it closed at 2,401.91. The strongest stocks in the Nasdaq-100 were Sandisk (SNDK) (+6.09%), Wynn Resorts (WYNN) (+5.14%), Dell Computers (DELL) (+3.17%), and Logitech Intl. (LOGI) (+3.04%). The weakest were Adobe (ADBE) (-5.93%), LAM Research (LRCX) (-3.62%), Flextronics Intl. (FLEX) (-2.44%), and First Solar (FSLR) (-2.09%). The Nasdaq Composite ended the week up 0.9%.

October, which I've mentioned in recent weeks is a typical correction month, is now well underway and the November elections are looming. The overall upside momentum of September's rally is favoring a shift in the buying as an initial corrective action. The indices are not showing signs of an imminent collapse, but rather a period of prolonged congestion and uncertainty. A good comparison would be to look at the intraday action on the 24th of September (Figure 4) and the 5th of October. Both sessions were on the heels of strong upside momentum moves that gapped them higher (serving as comparable action to September's rally). Although the trends continued higher intraday, the buyers struggled by the end of the sessions and a tug-of-war ensued between the bulls and the bears for days. If we continue to see this same set of price action now play out on the daily time frame, then we are merely in the early stages of the intraday action on each of those days. The end result is typically bearish, but higher highs in the meantime, such as those throughout the afternoon on Sept. 24th and 25th, are common.

SPY (Figure 4)

Note: Unless otherwise stated, the index action described in this article relates to the E-mini futures contracts for the respective indices. Actual index action may differ slightly in terms of pattern formation, although the market bias will remain the same.

Toni Hansen is president and co-founder of the Bastiat Group, Inc., DBA Trading From Main Street. Toni is one of the most respected technical analysts and traders in the industry. She has been trading and educating new traders, money managers, professional market analysts and traders throughout the boom and bust of the last decade. She has worked in conjunction with some of the world's top financial exchanges. Learn more about Toni Hansen and the educational services she provides through her website at http://www.tonihansen.com.

About the Author
Toni Hansen

Toni Hansen is president and co-founder of the Bastiat Group, Inc., DBA Trading From Main Street. Toni is one of the most respected technical analysts and traders in the industry. She has been trading and educating new traders, money managers, professional market analysts and traders throughout the boom and bust of the last decade. She has worked in conjunction with some of the world's top financial exchanges. Learn more about Toni Hansen and the educational services she provides through her website at http://www.tonihansen.com.

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