Market Update

For the last few weeks, the bulls have been arguing that we are on the cusp of recovery--- that the worst is now over.

Federal Reserve chairman Ben Bernanke explained to CBS Corp.’s “60 Minutes” on March 15 that he sees “green shoots” in some financial markets, and that the pace of economic decline “will begin to moderate.”

Treasury Secretary Timothy Geithner has also been beating the rallying drum.

The media is now focusing in on anything hopeful, spinning things now in a positive light but we’ve been here before with Bernanke hyping things.

There are positive developments but it is still inconclusive that an economic trough has been reached.

For example, we now have an uptick in new home sales here in the Spring like most years, but home prices are still falling sharply because of distress sales and bloated inventories.

The contraction in manufacturing is moderating, but a rebound is not imminent. A new wave of consumer retrenchment would dash hopes for a recovery in manufacturing by slowing the inventory adjustment underway.

The non-manufacturing (Service) survey contracted rapidly in March, worse than the previous month, dashing hopes that a bottom is being made.

The financial sector is about to get better because of a new accounting rule or so they want us to believe. But today, bank analyst Mike Mayo downgraded bank stocks and said the government measures to shore up banks may not help as much as expected and loan losses will exceed levels from the Great Depression.

Supposedly, we are beginning to see stabilization in consumption, with a small uptick in consumer spending, but wage income proxy fell 0.8% in March, its largest drop of the cycle and Friday’s unemployment continues to soar, showing no signs of a recovery anytime soon and predicting April’s unemployment is likely to be just as bad.

We saw a modest improvement in both March vehicle sales. Vehicle sales increased to a pace of 9.8 million units from February's 9.1 million. Although vehicle sales are still depressed, the 8.1% increase could provide a boost to retail sales. The preliminary forecast calls for retail sales to increase 1% in March.

Yet, while this is good news and helps the auto industry unload its inventory, we are on the verge of seeing General Motors and Chrysler go bankrupt, which will affect hundreds of dependent industries and add further damage to the economy.

The stock market is now turning its attention toward corporate earnings announcements this week.

The consensus of industry analysts are pegging S&P 500 companies as earning $12.26 a share on an operating basis during the first quarter, versus $16.62 a share for the year-ago period, and $22.39 a share for the same time two years ago.

Let me point something out to you. Earnings in Q1-08 were $16.62. Q2-08 earnings were $17.02. Q3-08 posted at $15.96, but look what happens in Q4-08. Earnings drop to -$0.11. The first negative number since records began.

With the new Mark to the Market accounting rule change, banks will be able to change the way they calculate their balance sheets and earnings. This is really anybodies guess what kind of earnings we are going to see.

Lastly, it is fundamentals that drive technicals. It is all about corporate earnings and this spectrum is all over the place.

Institutions have been buying high volume, blue chip technology stocks, such as Amazon.com (AMZN), Apple (AAPL), Qualcomm (QCOM), and Research in Motion (RIMM), which dominate the Nasdaq 100. They can move in and out fast if earnings disappoint and they can add to their positions if earnings surprise.

This is a very volatile sector, which is now extremely overbought on an intermediate-term basis with %K at 89 and %D at 75. As we approach May, I fully expect the big boys we’ll start looking to unload here.

The truth is demand for technology products is also suffering. Challenger, Gray & Christmas Inc. on Monday said high-tech companies announced job cuts totaling 84,217 in the first quarter - the steepest reduction since 133,511 layoffs were disclosed in last three months of 2002.

Look at the advance/decline line of the OTC.

We still have a left translation, lower lows and lower highs. Based on this chart the OTC is in a major downtrend.

The McClellan Summation index for the OTC is at -155. This is much better than it was but still short of the mark to declare a new bull market has started, especially as we approach seasonality peaks ahead of May in intermediate-term overbought conditions.

None of the indexes are anywhere near their 200-day moving averages. None of the indexes are anywhere near their monthly middle Bollinger Band lines. The 50-day moving average is a long way from getting anywhere close to touching the 200-day moving average.

Play it safe.