Nice Intraday Action But Overall Character Did Not Change
- Negative start, choppy session gives way to a late rally. Nice intraday action but the overall character didn’t change.
- Case/Shiller home prices decline sharply yet again. Darkest before the light?
- Shadow Inventory shows a 49 month supply of homes.
- January Consumer Confidence hits 8 month high. Still crappy levels but the trend is turning.
- Bond market trying to rally as it and other market actions still at odds with an improving economy.
- Still a time for individual stocks as the market works through this rough patch.
MARKET OVERVIEW
Nice recovery on the day but the overall character has not changed, at least not yet.
Looking at the SP500 chart, it seems as if this was just another quiet day in the stock market. It has been moving laterally for a week, bumping up against resistance. Unable to move forward yet, but also not selling off. Looking at the intraday pattern, however, things started off on the shaky side. Futures were down considerably. There was not any news to rock the world. There were more earnings, of course, and they were less than stellar. 3M beat but it was trading lower. JNJ was down, having issues with its profitability and costs. DD beat, but everyone said it was due to tax changes and some tax benefits that would not be repeated. The quality of its earnings was not up to snuff.
The UK saw a surprise decline in GDP. It dropped 0.5%, when it was expected to rise 0.5%. Case/Shiller fell 1.6%, the most in 12 months. The housing market does not seem to be getting better, but we usually start finding a bottom when things look about as terrible as they can get. After the market topped in May-July of 2005, it may be in the position where it can just now start to bottom in 2011. Consider that there is $450B worth of Shadow Inventory in the housing market. Those are mortgages in repossession or in the foreclosure process. At current rate, it would take 49 months to work off this “Shadow Inventory.” That is bad.
Consider that it was up 11% over the prior quarter, and over the past year it has risen from 36 months to 49 months to work it off. It is not getting any better, but can it get much worse? It is certainly bleak, and home prices continue to fall. On the other hand, there is some optimism from the home builders. Existing home sale were up a bit, and the home builders are picking up some permits. There are stirrings. It is a long way from being a recovery, but it is something to watch. When things get totally black, dawn comes soon thereafter.
The session was somewhat positive in itself. It started lower but immediately bounced higher. Consumer confidence came out half an hour into trade, and stocks and SP futures really shot to the upside. Consumers were sporting a 60.6 reading in January. That was much better than the 53.5% expected and the 53.3 upwardly revised from December. That is an eight-month high in consumer confidence. That is great, but it is still at atrocious levels. It is barely above recession levels (if you can even consider it above).
When things are just OK in the economy, confidence is in the 90′s 60 is not the 90′s, but you have trends. A bear market ends and a new bull market starts long before the stock market recovers its prior highs. Just as in any recovery, it started long before the prior peaks were reached. I cannot say it is terrible at 60. It is not great, but the trend is the key and it appears to be getting better. December and the holiday season was much better than prior years. It may have just been pent-up desire to spend money after two poorer holiday seasons. There was worry whether the consumer would continue to buy into 2011 after spending the money during the winter holiday. With confidence continuing to move higher, it looks like the consumer could continue to spend. Of course jobs will have to come; consumers need income to spend, and that remains to be seen. The trend does appear to be (I hate to say it) our friend.
Getting back to the market itself, it sold off after the initial rally and then rallied back. It topped the morning peak but then sold off. Lunchtime was good, but post-lunch was not so good. There was a double bottom before the last hour started, however, and then a good run into the close. That low-to-high action put a better spin on the session. It was even able to bounce some of the indices positive. NASDAQ, +1.7 points; SP500, +0.34 points; Dow, -3 points; SP600, +0.3%; SOX,
-0.75%; NASDAQ 100, +0.16%.
The NASDAQ 100 and the small caps posted the better gains. Low-to-high action with growth stocks in the lead is very positive, but did it make any difference to the market overall? The intraday character changed without question, but the daily character did not change. SP500 is still working laterally. It is holding above the 10 day EMA, but it is bumping up against resistance. Nothing nefarious other than that it reversed and it has not been able to move through that level. On the other hand, there has been no follow-through to the downside. That does not mean there will not be. There was good volume on the session as it reached lower and bounced back to the upside. There are still positives here.
NASDAQ rebounded modestly, and it was good intraday action, but it is still below this gap point. Notice that it gapped higher about two weeks ago and rallied. Then last week it gapped lower through that level and created an island reversal. There has been no follow-through here either. It did so on Friday, but Monday was up. Tuesday threatened, but NASDAQ could not be kept down. It is bumping up against this gap point, and it is a very important test for the NASDAQ. It has not recovered, but as with SP500, it has not broken down either. I still do not like the look of this. It looks like it could correct from here.
The SP600 showed very similar action. There is the reversal, the gap, and it is below the trendline. It is still below the December and January consolidation range and is moving laterally. No real improvement here. The character overall has not changed other than the indices were able to stave off some selling and move laterally for another day. It did not move up but did not move down. Is neutral good in this situation? It can be, but NASDAQ and SP600 are still leaning toward the downside. They did post some great moves to recover, however, and I want to emphasize that.
NASDAQ went from the low in the last hour to the close with a 22-point rally. SP500 rallied 10 points from the low to the close. Four points does not sound that big for the SP600, but it is only trading at 414 points. That is a significant move. NASDAQ 100, similar to NASDAQ overall, posted an impressive 22-point run to the upside from the low to the close. There was good intraday bullish action, and it adds to the daily action. It puts some positive there, but it does not change the overall character.
I remain concerned about a November-like pullback. Then again, the November pullback was not that bad at all. There were some good stocks that held up through that pullback. They gave us good buys and rallies to the upside even as the market pulled back overall. Once the pullback was completed, we had a bunch of good buys coming out of it and made good money. It is not as bad as one could make it out to be when talking about a correction and the market losing its momentum. I am not talking about a rollover and crash; I am talking about a pullback similar to November. No big deal.
WEDNESDAY
There is more economic data on Wednesday. Mortgage purchases come out each week. New home sales will be closely watched because there is a bit of confidence in the builders. There are also crude oil inventories. The FOMC rate decision may be big news (based upon the statement). Nothing is expected with respect to rates, but the interest is what the FOMC members have to say regarding how long they will continue to buy bonds.
The first hint that the Fed will no longer print money (I say that in terms of Quantitative Easing), we will see some turns. We will have to wait and see. There has been no indication by the Fed that it will terminate its activities anytime soon. We will have to get some more readings from the unemployment rate before the Fed does anything. It has been very clear that its target is the unemployment rate rather than the recovery and other economic indicators.
There were more earnings out after hours. There will be a continual torrent of earnings over the next two weeks. JNPR was out after hours, and it was not being treated very well. YHOO was out, and the quality of its earnings was considered poor. We do not ever expect much help from YHOO. JNPR is more of a concern because it is a well-known, heavily capitalized NASDAQ company. It will have an impact on that index.
The problem the market still has is NASDAQ, SP600, and others are struggling. They are below resistance levels and have shown a reversal. They have not been able to make the break back to the upside. They have not sold off. The recent action has been more positive than last week, but not positive enough to change the character. The market has run a long way, and it still needs a correction. Again, it does not mean I think this will be a deep, rally-killing correction. It is just another one similar to November.
We will continue the same game. We will look for those stocks that are showing good moves individually and that do not have earnings for awhile. There are many that do not have earnings until late February or even into March. They can make runs for us regardless of what the other stocks do that are reporting. Those that have already reported provide opportunity as well. Maybe they gap higher, maybe they gap lower, or maybe they do nothing at all. We can take advantage of them if they set up. We will keep minding the store on other positions as the rotation continues. If they can hold support, that is great. If they struggle and cannot, we will have to get out of them.
We did not take a lot of new positions today. On Monday there were good buys, and those were individual plays that looked good. We are being stock pickers, and we just buy when things look right for a particular play. We will continue to do that. There may be some downside play developing, and we will continue to look at those and make the plays if they present themselves. If NASDAQ and SP600 are going to turn down and SP500 joins in a little correction, that will provide downside we can play. The index plays do not have too great of a yield, however. The risk/reward is not as good right now, but we will be looking at some of those just in case.
Again, we will be picking particular plays. We are not looking for home runs right now; we are looking for obvious plays obvious in the aspect of having a very good risk/reward. That means great patterns from good stocks that are not overheated, and preferably do not have earnings just around the corner. Be patient, and we will work our way through this time. We will take what the market gives whether it comes back deeper or is able to swallow the losses at this point and continue higher from here. I still think there is more downside, and I am more than willing to let that come because it will produce more upside buys. There were still upside buys all through the November correction, but it was in individual stocks. Have patience, stick with the stocks that are in good shape, and do not get overextended on any one position.
