Overnight, China reported that its economy surged +10.7% in the fourth quarter which was the fastest pace since 2007. The double digit reading topped the Street's estimate for a +10.5% reading. The stronger than expected result led many to believe that China will continue taking steps to curb its red hot economy which may hinder the global economy. Elsewhere, the Labor Department reported that jobless claims jumped by +36,000 to 482,000 in the week of January 16. The stronger than expected reading reflects a backlog of applications from the 2009 holiday season. This was the highest level in two months which led many to lower their estimates for this month's non-farm payrolls report.

The tepid economic data offset better-than-expected results from Goldman Sachs (GS -4.12%), Google Inc. (GOOG +0.44%) and Starbucks Corp (SBUX +1.66%). This week, more than 60 companies in the S&P 500 are slated to report their fourth quarter results which will help investors gauge how companies fared last quarter. The latest estimates suggest that earnings rose +67% last quarter which will snap a record nine quarter losing streak. Analysts believe that first quarter earnings will rise +30% as the economy continues to improve. Last week, the benchmark S&P 500's valuation rose 25 times its companies’ reported operating profits which is the highest level since 2002!

The major averages and leading stocks are pulling back to digest their recent gains as investors make their way through the latest round of economic and earnings data. So far, the market's reaction has been tepid at best, but distribution days have been adding up, and the latest damaging action puts serious pressure on the current rally.  The market is in the middle of its 46th week since the March lows and the rally remains intact, albeit under pressure from our point of view. The Dow Jones Industrial Average closed below its 50-day moving average (DMA) line on heavy volume for the first time since October. The Nasdaq Composite Index and the S&P 500 Index closed above their 50 DMA lines which, in the near term, is a healthy sign.

PICTURED: The Dow Jones Industrial Average suffered a triple digit loss on heavier than average volume and closed below its 50 DMA line. Its weak action and putting the current rally under pressure.

Charts courtesy www.stockcharts.com

PICTURED: The Broker/Dealer Index ($XBD +0.29%) was a standout on Thursday as it posted a small gain on an otherwise widely negative session for most groups. As long this influential financial index remains above its 50-day moving average (DMA) line its outlook and the overall market outlook is more favorable. Among the group's best gainers today were Knight Capital Group Inc. (NITE +7.73%) and Raymond James Financial Inc. (RJF +6.33%),. however neither company has demonstrated a strong enough sales and earnings history to be included on the watchlist of serious followers of the investment system.

ArcSight, Inc. (ARST -$1.10 or -4.14% to $25.50) suffered a considerable loss today with above average volume. Technically, it closed just below its 50-day moving average (DMA) line (now $25.56), raising more serious concerns. Distributional pressure last week negated its latest breakout.  Today's deterioration close under its 12/31/09 close could prove to be a more ominous sign. When last analyzed in this Featured Stock Update section under the headline "Breakout With Triple Average Volume Triggers Fresh Buy Signal" on January 4, 2010 it had gapped up and triggered a technical buy signal as it blasted above its latest pivot point. However, it failed to follow through with additional gains, then losses with above average volume negated its breakout and led to a close back in its prior base, raising concerns. 

ARST needs more time to potentially form a new sound base, meanwhile its weak action and deteriorating market conditions (the M criteria) suggest that investors be especially cautious. The high-ranked Computer Software - Security firm has continued putting up solid sales revenues and earnings results since first featured in yellow at $19.91 in the 9/01/09 mid-day report with an annotated daily graph (read here).

Color Codes Explained :
Y - Better candidates highlighted by our staff of experts.
G - Previously featured in past reports as yellow but may no longer be buyable under the guidelines.