Market Overcomes Obstacles Again

SUMMARY:
- Apple s Jobs, earnings threaten to upside the advance, but stocks recover again from a lower open.
- New York PMI solid, almost in line with expectations
- China blustering ahead of US visit, says yuan should be the reserve currency. Hell, it doesn t even float on its own.
- Fed ready for more bond purchases despite signs of economic improvement.
- After hours earnings solid as IBM and AAPL stroke the long ball.

MARKET OVERVIEW

Market overcomes obstacles again. No big gains but definitely resilient.

AAPL’s Steve Jobs and some less-than-spectacular earnings threatened to upset the market’s advance. Last week there was a nice trade to the upside as stocks moved well. It was somewhat choppy, but there were great sessions on Wednesday and Thursday that drove the indices to new rally highs. On Monday, during a closed market, AAPL announced that Steve Jobs would be taking a medical leave of absence. He is not giving up the role of CEO; he will just be making co-decisions with the quite capable COO. Indeed, the AAPL team is very solid.

Stocks were set to open lower. AAPL gapped to the downside. Looking at a daily chart, it has had a nice rally through Friday, but then there was the nasty gap lower. The stock then rallied back up and cut its losses substantially, closing down a relatively modest $7.00. It announced earnings after hours and traded up to $357, but it could not hold it. I hate to say it, but compared to the earnings it just put out, they were quite mediocre. On the bottom line, it reported $6.43 versus $5.40 expected. On the revenues, it came in with $26.7B versus $24.4B expected. It sold 16.2M iPhones versus 15.6M expected. iPods sold 19.45M versus 17.75M. iPads were at 7.33M when the most grandiose estimates were at 7M. Very strong. Indeed, gross margins came in at 38.5% when AAPL said 36% was expected. As noted, the stock surged after hours, but it gave it back.

C missed its earnings. It gapped lower and stayed down the entire session. DAL missed as well and was spiraling downward all session. On the other hand, CMA beat but did not perform very well. There was definitely downside impetus at the start of the new week. The New York Empire Manufacturing Index came in fine. It was a smidge off at 11.92 versus the 12 expected, but that was not bad at all. The problem was December was revised down from roughly 10.6 to 9.9. It was not as strong as expected, but it was not bad action.

China complained what else is new? Its President was visiting the United States, and there had to be a lot of posturing ahead of that, of course. The Chinese President said the world needed to consider the yuan as the reserve currency and drop the dollar. That is grand given that the yuan still does not float on its own. It is still tied to the dollar. Unless China will cut its ties to the dollar in the very near future, that is utter b.s. There was the usual diatribe against what the US is doing, and some of it is well founded. They do not like our socialized healthcare. They do not like the Fed and its Quantitative Easing Part I or Part II.

There is a general disdain, and they want to undermine what the US is doing to make themselves look better. It is just a lot of pre-meeting posturing. China particularly loves to do this. Heaven forbid you say anything negative about them in public, but it is okay for China to say whatever it wants about any other country. It could comment on its stellar human rights background, for instance. We know China is excellent on that front from Mao to the present day. We are indeed a closed-off, backward society compared to the Chinese. (I hope you can tell that is tongue in cheek). The Chinese stock market has been in a three-year struggle because its version of the Fed is fighting growth. It has been in a downtrend, but the economy continues to grow for now, and that is keeping everyone relatively happy.

Our Fed came out talking tough again. It will keep its Quantitative Easing program going (purchasing bonds) no matter what the Chinese say. It says there are signs of an economic recovery. They have been tracking them on the monthly data and other anecdotal data coming out. It says there is no reason for it to stop its purchases because they are actually causing this increase. Frankly, they are right. Without the Fed pumping free money into the economy and making rich people feel wealthier, then we would not have much of a recovery. They will keep that going, but will it keep the bonds prices down? We will have to see. They certainly look like they want to rally, even the with Fed’s comments on Tuesday.

The market was pushed back slightly at the open. It took a pause to reassess the situation given the news out on Jobs, earnings, and the Chinese. It did not take long for the stock market to continue to the upside. It was a choppy morning, but it set a trend to the upside. It kicked up higher into the close and after hours thanks to some earnings and strong results from AAPL and IBM after the close. It turned out to be a decent day for the market overall. There were a lot of negatives at first, but they managed to pull it out of the hat. NASDAQ, +0.4%; SP500, +0.14%; Dow, +0.43%; SP600, -0.1%; SOX, -0.4%; NASDAQ 100, +0.25%. NASDAQ 100 was aided by the turnaround in AAPL. It did not hurt that GOOG was surging as well.

When considering the headwinds and where the market has been to this point, it was not a bad session at all. The market is rallying well after that test, the breakout over the 127% Fibonacci, and last week’s spurt to the upside. They tried to sell it back on Tuesday, but there is still upside before the next resistance. The market looks bound and determined to get there unless something nefarious comes along like earnings that really disappoint. It may not make it in that case, but for now it is doing its best to get back to that level.

WEDNESDAY

There is a bit of economic data on the table. The Chinese President is here, so we will be getting some news periodically from the visit. We will also get housing starts and building permits. They are out before the open and will be important. On Thursday we get existing home sales. They will be important, of course, along with the Philadelphia Fed. Given its revision mid month, there will be a lot of eyes on it to see what it does.

There will be some data out, but the important points will be with respect to earnings. After hours, IBM was really strong. Very solid earnings report. It is up just under four clicks after hours. It is not running wild to the upside, but it is solid. It often goes into earnings and fades. It can be 50/50. It looks like it will try to help lead the market to the upside, but IBM often does not lead the entire market. IBM is a strong indicator with respect to those areas, and they have been performing well heading into this number. There have been a lot of software stocks performing well and setting up well. I anticipate that they will continue to do so with this kind of news.

It will be interesting to see how AAPL shares are handled in the morning. It was gapping up after hours, but it was coming back. Staying power will be the key. That will tell the story for AAPL and all the stocks that trade off of AAPL; in other words, those that provide what AAPL needs to make its products the screens, the flash memory, et cetera. Many stocks trade with respect to how AAPL trades, and it is knocking the cover off the ball with respect to its products. It is just a matter of perception if it will continue to do so with Steve Jobs taking a medical leave of absence. I do not think there will be any difference. We will see where it finds bottom and can continue to the upside. If it holds above its recent base lows or where it started this last run, that is a positive for the stock and for techs in general.

We are moving into earnings season, no doubt. It is getting thick. The question is how much further do you think this run has? Without a doubt, we are letting our current positions ride. There is no reason to sell. We are taking gain on stocks that are rallying to the upside that we have not taken gain on before. That is our plan: Take partial profits and let them run. That is especially true moving into earnings when there will be some upset. Whether it is to the upside on downside, it always occurs.

We are going into earnings season moving up on the results, and that is great. We are more than willing to let our positions run. At some point, earnings typically start to turn, however. We want to be ready for that, and we have our stop losses in good position. If something turns sharply negative, then we will be okay. We will be able to preserve a lot of gain. We have those in reasonable places.

We are taking new positions as the opportunity arises because we know there is money moving through the market. It is moving through in a rotation fashion. That means some areas go down while others prosper. On Tuesday, stocks started low but most of them rallied to the upside. There is plenty of new money helping a lot of stocks and sectors prosper whether they have been down recently or not.

If more money comes in and rides the market higher, again, we have no complaints. We will continue to look for opportunity as it presents itself. There are also potential downside setups. We are still looking at those, and we are willing to play them if they give the entry points. Earnings can eventually turn and struggling individual stocks could easily continue to struggle while the rest of the market moves higher. With money rotating around the market, some sectors are going to lose their money, and that means they are going to decline. Perhaps it is not a catastrophic decline, but one down to support or to fill a gap. That can make us good money to the downside. We will take advantage of what the market gives.

It always gets a bit trickier at these points. It has been a good rally, and this is the second nice surge off the late August base. The indices are approaching a point where they will want to rest and test and come back a bit. My expectations are not that lofty with new positions, but we will still take advantage of good stocks in position to run. That is the game plan we have had all along. We will stick to it because the market is certainly sticking to its uptrend.

We may have to take some positions off the table if we get a pullback, but we will be watching for the opportunity to turn back up if it holds just as it did in November. During that period, we may be able to take some downside positions and make a little gain that way. Interesting day tomorrow with respect to AAPL. We will see how it trades, but the market is looking very healthy overall. It is reacting well to negatives and vigorously rewarding positive news.

Jon Johnson
InvestmentHouse.com
Stock Splits & IH Alerts, Editor