Diesel Consumption Spikes in December

There was a nice low-to-high move on Monday that saw the indices gap lower, but they recovered to end the session. On Tuesday, stocks started on the flip. They moved up with a gap at the open, continued higher through midday, and then struggled in the afternoon. They managed to come back with a late-afternoon bounce to close positive across the board. They were not big moves, but it gave the financial stations a lot of heart when the SP500 and the Dow moved to positive after struggling for a couple of sessions. NASDAQ, +0.3%; SP500, +0.4%; Dow, +0.3%, SP600, +0.25%; SOX, +0.3%; NASDAQ 100, +0.2%.

There was even gain across the board, but it made a lot of people on the financial stations comfortable to see the Dow and SP500 move back into positive territory. There is a problem going on that I will discuss in the technical section, but it is not a big problem. It is normal, but there is a reason why the SP500 is having difficulty moving higher right now.

There was some economic data on the day, although not much. Wholesale inventories came in at -0.2% versus 1% expected and 1.7% in October. It is still a glass-half-full number in this case because sales were up 1.9% on top of a 2.6% increase in October. That is not bad at all. That pushes the goods on hand to a five-month low. That typically means you will have increased production in the future. The question is just when that increase will come.

It was not wholesale inventories that got futures moving earlier; it was Japan coming to Euro aid. Japan will buy some of the distressed bonds similar to what the Chinese are doing. The Japan/China one-two punch perked up markets around the world. Stocks were trading higher from Asia into Europe, and of course US futures were trading upside as well.

Businesses are still lacking in great sentiment. The NFIB posted its December survey, and it showed a decline of -0.6% to 92.6. That was one month downside after four months of moving higher. You might say it is only one down month, and that is true. The trend seems to be moving higher, but when looking at the overall picture, the 92.6 reading is at the bottom of the 1991-1992 recession. That recession was not nearly this deep. The bottom of that recession is now the top after rallying for four months. This is recovery, but it is not a strong one. After being in the bowels of hell for so long, I suppose it seem like things are coming up roses. The data shows the stark contrast to other recessions and reveals how bad this one really is.

Diesel construction jumped in December, and that is interesting. Quarter-over-quarter consumption is flat, but December was up. There are a lot of shipments going around. There were a lot of sales and the need to restock stores, so truckers were actually moving. Before the holidays, I reported that truckers were showing more activity. That has been lacking for several seasons in a row.

The Fed’s Plosser is going to be a voting member on the FOMC this session. He was warning that overly-aggressive monetary policy could “backfire” If the Fed was not careful. He said fiscal tools (fiscal policy, tax policy, how much the government spends, etc.) would be much better at reaching the objectives of the country than monetary policy. If we get too aggressive, bad things can happen such as hyperinflation. History is rampant with examples of monetary policy gone bad. When you try to bail out countries using monetary policy alone, it does not typically work. The old saying is true that you cannot devalue your way to prosperity. There is not one country that has been able to pull it off, yet we are trying. Maybe we are different and better. I doubt it, but one can always hope.

We can always hope that we have growth. The data shows that we are recovering, but it is weak. I have talked about that many times before. The policies we have are not strong-growth policies. They are depression-era policies and 1970′s policies. They did not lead to strong growth. We did have a recovery in the 70′s   there was an end of a recession before we fell into another one, but there was a malaise and no investment. Taxes were high and there was a lot of regulation. People wanted to avoid putting money at risk and thus having to pay taxes and be regulated, so the money all went into tax shelters. The economy slowed down and inflation went up. Things turned around in the 1980′s. The tax policy changed, fiscal policy changed, the money came out of those shelters, and we enjoyed a 20-year boom. We have not seemed to learn the lessons of the past, and thus we have slow, unsatisfying growth that is not producing jobs. Of course, I digress.

WEDNESDAY

There is some data coming out. There is the weekly mortgage data. There are import/export prices, crude oil inventories, and the treasury budget. None of those will move the market tremendously by itself unless the numbers are far outside expectations on something like crude inventories. Earnings are driving the market right now. There have been good pre-announcements managing to bump stocks higher. LULU raised its guidance after hours, reported good results and gapped up. We will see if it can continue. If it can, it will do well. It may reinvigorate the retail sector, but I doubt it. It will be very important to watch   it may just gap and roll over. We will have to see how that performs.

There are many stocks trying to hold their position as the overall market tries to continue its uptrend into a resistance level. They are also trying to hold their position into earnings reports. We are having good results, and the immediate effect is the market continuing to move upside. At some point during earnings season, the switch is thrown. Then good news is no longer treated as such and stocks fall back. They have to have profit taking at some point. When you combine it with the indices trading at their 127% Fibonacci extension and that natural resistance, some stocks will start to implode on earnings. That is why we took a lot of gain off the table on the last run up to this resistance point. That is why we have our stop points at logical levels that would allow our long-term positions to continue to the upside even if they suffer a bit of near-term profit taking.

We are protecting those with good gain built in from catastrophic downside that breaks their trend. If their trend continues, we want to let them continue. We have a bit of wiggle room to let them do that without having to put our stops too tight. We will also keep very logical stop points on the newer positions where we are looking for runs toward earnings. As they move higher for us, we will look to take some gain off the table.

The wrinkle is the rotation happening as we get into earnings. I think we are moving into the right stocks right now. Healthcare, tech, and software look to be getting the money. If they are getting the money, that is in anticipation of good results and further rallying in those stocks. They are not as lofty and frothy as some of the others that have moved up since this rally started in the summer. Those would be able to weather earnings; indeed, they could use a good earnings report to push them even higher.

We are also looking at taking some gain off the table ahead of earnings themselves. If we get a good run, it is kind of crazy not to take some off the table   whether you want to take half of it, two-thirds, or even all of it. You can always play a gap after the fact whether it is up or down. Lock in some good return around earnings and you have done yourself a favor. That is what we will do. On the nearer-term positions, if we get a rally up, we will look at taking some gain.

We did not buy a lot on Tuesday, but we did see some great buys on Monday. As I said, if the market shows the buys, we will move in and take them. Now we are going to see if those good buys can continue higher into their earnings. We will also be watching for downside. We have a few of those plays on the report, and we can step in as they present themselves. I think we will get some downside breaks on sectors that have had their run, look a little tired, and could roll back over on earnings.

If we get entry points, we are going to move in and see if earnings will drive them back down. I do not think earnings can drive them much higher even if the earnings are good. That is how far they have run and how exhausted they appear to be. A bit more of a risk, but it is good given the risk/reward. It is always about good risk/reward whether we are looking upside or downside. If what we want to happen occurs, then we make a lot of money. If it does not pan out, however, we do not lose a lot of money.

With SP500 bumping up against the 127% extension, that puts a premium on getting the stocks that can still move higher when their earnings are announced versus selling off. We will continue to look for those, although there are not as many of them. We will have good stop points on our existing positions. We will also look for some downside to take advantage of those that have had a good run, are still looking okay, but will fall back town and need to form a base in the near term. We want to catch that move lower. Indeed, the market itself may find that it needs to come back a bit and test. I do not want to sound too bullish, but with the Fed in the game and the right fiscal policy, the market has broken out and is making a test. It looks like it wants to run up again after it completes this test.