Market Not Ready To Roll Over Just Yet

SUMMARY:
- Market not ready to roll over just yet as DJ30 leads higher on IBM’s back.
- Other indices rebound, but they still have issues and the question is whether they follow the Dow or this was just a relief bounce.
- SOX bounces nicely thanks to INTC increasing its buyback while NASDAQ rebounds, thanks to AAPL and other large cap tech.
- Earnings remain the headline story, but they are not really changing the day to day dynamics.
- Some really great individual setups and moves continue, and if money keeps moving into new sectors the market continues to hold its own and advance.
- Still watching SP500′s bounce as the key to the market action.

MARKET OVERVIEW

Rally is not dead yet as IBM and large cap tech push stocks upside.

NASDAQ and SP600 looked ready for the fork on Friday as the rally in them appeared well done. Hope springs eternal, however, and as the replay of ‘Monty Python and the Holy Grail’ last night reminded us, the rally is ‘not dead yet.’

DJ30 was impressive once more, galloping higher on the back of IBM and its 4+ point and 2.66% gain. INTC helped the Dow as well (NASDAQ and NASDAQ 100 too) as it announced an increased share buyback plan. AAPL threw in for good measure with a 10.73 point, 3.28% rally. With those horses pulling, the large cap indices clearly led. NASDAQ +1%, DJ30 +0.92%, NASDAQ 100 +1.4%.

The Dow rallied to a new rally high, just short of 12,000. It is clearly in the lead right now, IBM-aided of course, and its success suggests, as pointed out this weekend, that the economic recovery is already ‘maturing.’ Small caps and growth lead the initial move, and then when the recovery moves out of the growth stage the older income stocks take over and lead the market. Geez. Looks as if that is happening right now though how on earth could this economic recovery be already mature? At 9.4% (understated of course) unemployment, if the economic recovery has matured we are not in for a ‘golden’ economic era.

NASDAQ and the small cap SP600 (+0.76%) did bounce Monday, but with low volume it looked more like a relief bounce than a reversal from, well, last week’s downside reversal. As noted, AAPL and other large cap techs did the heavy lifting on the session. NASDAQ breadth was less than 2:1. These are more akin to relief bounces versus new upside.

Be that as it may, SOX was moving, and not just on INTC’s buyback news. If the chips start back up after the flags formed last week then NASDAQ and company, whether they want to or not, will rebound. Many solid chip stocks started to bounce off of pullbacks Monday, and if they continue, they will pull techs with them though it may not be a stellar tech move.

On Monday, however, it was good enough, and if the rotation continues, the market will find a way to the upside as money is not leaving the market, just recycling through it. That means leadership will emerge, and while the market may not surge on the rotation, it will provide continuing opportunities as we follow the money.

TUESDAY

Earnings are still the driver with AXP, TXN, CSX, AMGN and company after hours putting up mixed results with mixed reactions. CSX rolled higher while the other three were lower. Earnings have come in mixed the entire season and the market has more or less held and indeed expanded its gains. Even so, NASDAQ and SP600 are stumbling, threatening a fall.

We said that earnings season often has two halves. If it starts strong it ends with selling and vice versa. This one started more strong than weak, but definitely not weak: a pullback to near support and a bounce ahead of the results. The selling last week looks as if it could be the turning point for the season even with DJ30 heading to 12K. NASDAQ and SP600 look vulnerable still, perhaps just the victims of rotation into more staid names, but even if that is the case it is not a great signal for the economy and thus the market longer term.

Even so, as noted above, that still will provide opportunity. Rotation means money moving, not leaving. Money moves to a new area and that area rises. The sectors that are left fade. As not a lot of new money is entering, that is the most likely scenario as there is not enough money to lift all boats. Thus find the sectors where money is heading and you catch the upside sectors and plays, e.g. MTZ (construction), MGIC (software), chips.

Thus even as we close some positions as they lose their bids others open up and we move their way. There are also downside plays in those sectors losing money. As long as money remains in the market this is the pattern. If the money starts to leave, then plays naturally gravitate to the downside.

For now we see both upside and downside as the market is somewhat bifurcated with the NYSE large caps, chips, and the like moving higher while growth in general struggles. We are working both types of plays and will continue to do so until the money starts to leave the market. How SP500 responds at the recent peaks and thus follows DJ30 or NASDAQ and SP500 will tell more of that tale. We would not be surprised, however, if SP500 failed to follow the Dow for now.

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