Earnings Were Great, Jobless Claims Lower
- Does the news matter? Earnings were great, jobless claims lower, but after solid run stocks were extended. One bad story trumped the good, providing a sell trigger. At least for NASDAQ.
- Jobless claims drop, earnings solid, existing home sales perky, but China GDP remains strong and Philly weakens.
- Bonds sell hard: if they break the range to the downside then gold, bonds come back into line, answering the questions the bond market was presenting.
- Techs, commodities struggling while energy, financials hold up well.
- Market dichotomy: NYSE large caps just fine, growth correcting and looks to have more to go.
MARKET OVERVIEW
When a pile of good news doesn’t mean a thing.
There comes a time in a rally where it just doesn’t matter anymore whether the news is good or not. As noted in ‘Seinfeld’ once when Kramer said he faked it once in awhile having sex, sometimes it’s ‘enough already’ and stocks just sell. Call it the saturation point, call it apathy, call it enough already; it looks as if NASDAQ and growth in general hit that point.
Proof? AAPL’s earnings were possibly the best in the history of the earth. Problem is, everyone knows AAPL sandbags is guidance, everyone knows everyone buys AAPL products, and everyone expected the blowout. Thus, even after the stock struggled October through December in a trading range, the stock rallied into the results. The numbers were built in. Thus even with massive numbers the stock has sold back. That is AAPL, the most dynamic stock in the market right now. If AAPL has those issues do you think other tech stocks are going to fare better? Sure some will, but those are the surprises, not the FFIV’s. And when your indices are weighted by market cap and some of your biggest players stumble, the index is going to stagger.
Thus even as jobless claims came in well below expectations at 404K (425K expected) and continuing claims fell to the best level since September 2008, earnings across the market were excellent (IBM, MS, EBAY, UNH, PNC, FITB, etc.), and December Existing Home sales jumped 12.3% (down just 2.9% year/year), the market reaction was at best ho-hum. SP500 and DJ30 were just fine. NASDAQ (-0.77%), SP600 (-0.83%), and SOX (-1.04%), however, took the blows. SP600 is in trouble and NASDAQ is threatening to join it. There is a potential bifurcation developing, and a house divided, especially in terms of growth stocks lagging, will fall . . . at least eventually it will.
There was some negative news. China GDP grew at 9.8%, more than expected. How is that bad when we all want so desperately for China to continue growing and thus requiring our machinery and other goods to fuel the expansion (remember, Obama wants the US to be an exporting nation and no longer a consumption nation)? Because, in good 1929 history fashion, it means the Chinese government, already tilting against its economic growth, will try all the harder to subdue its success.
As the US central bank (pre-Fed) in 1929, it is raising rates and reserves in an effort to curtail its prosperity, fearing that inflation has to follow. The US central bank hiked rates again and again, taking on the stock market and the economy, finishing with, get this, a 100 basis point hike in interest rates. That stopped the market; broke it in fact. The economy, roaring at the time, followed it with the Great Depression. Investors are rightly spooked when a government takes on its own prosperity as China is doing and as the US has done on several occasions, precipitating economic recession, even depression.
In addition, the Philly Fed was a downer, coming in at 19.3 versus the 20.0 expected. Recall that December was revised intra-report down to 20.8 from 24.3, and this miss was another disappointment. As for that write-down, it is pretty clear someone added something in when it should have been subtracted: there was no big drop off in activity, just a scrivener’s error. Thus it was not a massive reversal in activity as some took it, just a government error. That should be no surprise at all.
IN ANY EVENT, stocks struggled, some more than others. As noted, SP500 tapped its 18 day EMA on the low and bounced in the afternoon. Same with the Dow. Heck all indices bounced, the problem is where they were bouncing from. Again, that left SP500 and the Dow and indeed SOX in great shape. NASDAQ and SP600? Not so great. Not dead, but SP600 looks ready for more downside.
Indeed the growth areas look ready for some more downside, particularly the small caps. NASDAQ could escape any serious downside, but it sure could use a November-like pullback to set up for the third upside leg. GOOG is trying to change that thought after hours with good results and good upside action. ISRG as well as it surges after hours. The market has resilience, but a lot of good stocks are under a lot of pressure. Perhaps this is just more of the rotation shown over the past several weeks, but when money leaves growth areas that is typically not a good indication for the economic or stock market future.
FRIDAY
It is a Friday without economic data for once, so it will be up to the markets as to what they do. As noted, there is something of a market dichotomy setting up. The SP500 is performing quite well with its financials and energy stocks, tapping to 18 day EMA on the low and rebounding. The DJ30 is tapping the 10 day EMA on the low and rebounding. Very strong, indeed. Even the SOX tapped the 18 day EMA and rebounded after a strong surge. On the other hand, the SP600 had the lower MACD on the higher peak, and it rolled over and broke its trendline. Not that great.
NASDAQ is not as bad as the SP600, but it is having issues of its own. Its MACD is a bit lower on this high, although that is getting somewhat stretched you cannot make that correlation as readily. Nonetheless, it has gapped lower and is back below the Fibonacci extension. There is something of an island reversal. We have the rally, we have the gap higher last week. Then there is a continued rally, a move lower, and then a gap to the downside on Thursday. An island reversal suggests more downside to come. In that respect, NASDAQ is very similar to what the SP600 is showing, albeit in a different way.
Again, growth is under pressure. Those stocks that have led the move to the upside are in a lot of trouble. They are selling off sharply. It makes sense that we would have continued downside and more of a November-like correction. As noted, a house divided typically falls eventually even though the action looked good on Thursday. It also looked very good following the engulfing pattern in November, and then there was a selloff after a couple of days. It was not an end-of-the-world type selloff, however.
I want to reiterate that this is following a very good base through the summer. There was the breakout and the test, and this is the second rally in the move, and the first rally after the test of the breakout. We still have very good foundation for much more upside. Any pullback is likely to be more of the November style and then a continuation to the upside. That is not bad action at all. Indeed, it could be like January or February, although I do not know if it will be that much. The market has not run that far in terms of the number of upside legs and the length of the upside legs versus the solid base that started in late April and did not finish until the end of September. There is still a lot of foundation and a lot of fuel in the gas tank to complete more runs.
All we need now is a test, and we have been preparing for that by taking positions off the table and preserving our gains. We have a lot of cash from gains in 2010 and the early part of 2011. When opportunity sets up again on stocks such as the semiconductors, we will be ready to move in. They have been market leaders, so they may have quick pullbacks and start leading again even as the rest of the market succumbs to more selling.
We still might be able to take advantage of some downside. The NASDAQ has an island reversal in place, and we might be able to get some money playing the QQQQ or other ETFs that play off the QQQQ that are inverse to it (you can play downside as an upside play). Those are possibilities. We will still look for some downside. The gap on Thursday messed up a lot of our nice downside plays. We may get another shot if the market rebounds a bit and shows another of those doji right after the engulfing pattern as it did in November and then rolls back over to the downside.
SP600 and the NASDAQ have more bearish patterns. They are not horribly bearish, but they show near-term weakness. I want to emphasize that. I do not want to seem pollyanna and say that the market will always go higher, but we got a good base and that set a great foundation. If the economy is still going to improve, we should get more upside.
We are protecting our gains because we do not know if a bit of downside turns into a lot of downside as in November. We are preserving gains now, and we will start taking positions again when we get more opportunity. With that in mind, protect what we have, be ready for opportunity, and above all, be patient. Let the plays come to you. When they show they are ready to buy, then we will move in. We will see if we can get any buys on Friday. It is not always my favorite entry-point day, but we may just have to take them if they are there.
Jon Johnson
