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February 28, 2008

By Sam Collins

Compared with the last week, yesterday was a sleeper, as stocks opened slightly lower but then traded higher just after Fed Chairman Ben Bernanke began speaking to Congress.

As is customary, the content of the chairman's opening remarks and presentation is distributed just prior to his appearance, and the latest text indicated that the Fed will continue on a path of cutting rates. However, the chairman's spoken remarks painted a picture of a somewhat-perplexed Fed -- pressured to stimulate the economy and especially the housing market on one hand, but also fearful that overstimulation will lead to rampant inflation on the other.

Despite that schizophrenia, the chairman did not rule out another rate cut when the Federal Open Market Committee meets on March 18, with most concluding that another cut is in the cards.

Just before Bernanke's meeting on the Hill, the January Durable Goods report was released. New orders for durables fell 5.3% versus an anticipated 5.1%. Then right after his opening remarks, new home sales for January were reported to have fallen to 588,000 -- below economists' expectations of 605,000.

Late in the morning, the federal government said it would remove the portfolio growth caps on Fannie Mae (FNM) and Freddie Mac (FRE). It said that it may also relax the capital requirement of the two. The market reacted well to the last point, and buyers kept prices up until some late profit-taking erased virtually all of the gains.

The Dow Jones Industrial Average (DJI) gained nine points, closing at 12,694, the S&P 500 (SPX) fell a point to 1,380, and the Nasdaq (NASD) gave up nine points to close at 2,354.

Volume on the New York Stock Exchange totaled 1.4 billion shares and 1 billion shares traded on the Nasdaq; breadth on both exchanges was in favor of buyers by 8-to-7. Note: The method we have previously used to report the Nasdaq volume, though widely accepted, overstates volume. Normally the Nasdaq will trade 40% to 50% of the volume on the NYSE, and starting today, this report will use the Nasdaq's restated figure.

April crude oil futures fell $1.24 to close at $99.64 a barrel, and the Amex Energy SPDR (XLE) lost $1.02, finishing at $77.33. Gold for April delivery rose $12.10 to close at $961 per troy ounce, and the PHLX Gold/Silver Index (XAU) broke into new high ground, closing at $197.84, up $4.71.

What the Markets Are Saying

Yesterday's action again failed to break the Dow Industrials and the Nasdaq out of the current triangle pattern, and the NYSE Composite (NYA) -- after penetrating resistance on Monday -- executed a minor Collins Bollinger Reversal down yesterday.

With the market approaching some major overhead and our internal indicator overbought, it is highly likely that the market will again try to test the lows.

The buying is slowing down, but even if it went on to break the minor S&P 500 top at the Feb. 1 closing high of 1,395, it is not likely to go any higher than 1,406. On the Dow Industrials, that equates to 12,800 and about 2,450 on the Nasdaq.

Longer-term sentiment appears to be improving, as pointed out by Mark Arbeter of Standard & Poor's. He refers to the good sign that the S&P 100 (OEX) put/call ratio (smart money) has declined to bullish territory while the equity-only put/call ratio (dumb money) has risen to bullish territory. Mark conceded, though, that this may only mean that the market lows could hold but that it is unlikely the market can sustain a major rally.

For now, I remain a cautious bear with cash in the till -- buying only sectors that are in uptrends. Tomorrow, we'll examine sentiment a little more closely.

Today's Trading Landscape

Today's Earnings: ABN Amro, Accuride, American International Group, AXA, Barr Pharmaceuticals, Bayer, BEA Systems, Big 5 Sporting Goods, Cablevision, Cal Dive International, Canadian Natural Resources, Cogdell Spencer, Cooper Tire, Deckers Outdoor, Del Monte, Dell, Deutsche Telekom, Dollar Thrifty, First American Financial, Fluor, Freddie Mac, Gap, Global Cash Access, Gmarket, Hansen Natural, Helix Energy Solutions, HMS Holdings, Hospira, Inbev, Internap, Inventive Health, Iron Mountain, iStar Financial, KKR Private Equity, Kohl's, Liberty Media, Live Nation, Macquarie Infrastructure, Mentor Graphics, Midas, Morton's, Nash Finch, Ntelos, Omnicare, Pernod Ricard, Pride International, R.H. Donnelley, Rowan Companies, Sapient, Smithfield Foods, Sonus Networks, Sycamore Networks, Talisman Energy, Toronto Dominion Bank, U-Store-It, United Rentals, Universal Health Services, Viacom, Virgin Media, West Marine, Western Refining, World Fuel Services and XM Satellite Radio.

We'll get a second look at fourth-quarter GDP estimates for 2007 and jobless claims will be reported prior to the opening.

In corporate news: Sears Holdings (SHLD) has reported a 47% drop in Q4 net income, and Sprint Nextel (S) reported a huge Q4 loss of $29.5 billion or $10.36 a share -- analysts expected a profit of 18 cents (the loss was due to the write-off of the Nextel purchase).

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Sam Collins is ChangeWave's Chief Technical Analyst and a Registered Investment Adviser who manages portfolios for a fee. He can be reached at samailc@cox.net.