Earnings and Economics Send Stocks Higher
- Despite spreading geopolitical issues, investors focus on domestic earnings and economics and send stocks higher.
- Stocks were up but rather incongruously, other markets fell.
- National manufacturing jumps past expectations.
- December construction spending tanks but investors give it a pass.
- SP500 breaks to a new rally high, and while NASDAQ and company looked strong, they still have to deal with the recent highs.
MARKET OVERVIEW
Unrest continues but investors focus on US domestic data.
Despite the spreading unrest in North Africa and the Middle East, investors seemed comfortable with the idea on Tuesday. This was apparently because the Egyptian version of government overthrow was rather nonviolent. The government is also acquiescing to their demands for a new government, although not as fast as the protesters would like. When the king of Jordan fired his entire cabinet, it did not cause many shock waves as investors felt it may be the same nonviolent type of government overthrow. With that, they were able to turn to more domestic issues such as earnings and economic data.
Futures were up on earnings. UPS beat expectations and expects record profits for this year. Nothing like a freight carrier reporting good profit expectations to get the market revved up. If they carry more goods, that means there is more production and buying out there. UPS had a banner holiday season its first the several years thus it has the confidence to move forward with good predictions for the future.
There were other good earnings as well. CMI beat and reported that sales were up 22%. There is top line and bottom line beats. It was just bottom line through 2010 for the most part, but now the top lines are expanding. It was not just industrial stocks. ARMH, in semiconductors, had a great report as well. It managed to gap to the upside, coming off of a nice pennant pattern that it had set up over the past couple of weeks.
On top of earnings, the ISM came in at 60.8 versus the 58.4 expected. December was revised over 1 point higher. It is good news to hear, and it was the highest reading since May of 2004. Everyone was very excited about this. New orders jumped to 67.8 from 62, and backlogs increased for the first time since August 2010. They leaped up to 58 from a 47 reading in December. Of course, there is a downside to all this. Prices paid exploded to the upside, with prices coming in at 81.5 versus 72.5 in December. There is a bit of tarnish to the numbers, but not enough to upset investors.
Construction spending for December showed a 2.5% flop to the downside when just a 0.4% expected. That did not help, but construction is seen as a lagging indicator. Housing and construction used to lead the economy out of recessions. The problem is the housing and construction bust. That lead the economy down, and it will not be the first thing to lead it to the upside. It started in the 9/11 era with the “nesting” theme after the attacks. People did not want to go on vacations, and they spent their money on homes. That kept housing prices high, and the Fed kept interest rates low.
The government pushed housing onto people who could not afford it. We had an unnatural and prolonged housing expansion through the recession of 2000-2001, and it continued through the summer of 2005 when the market topped. With that bust from an unnaturally long expansion, we are not getting the boost you get out of a recession from housing and construction spending. We have to look for things like manufacturing. As we saw in Chicago on Monday and the national ISM on Tuesday, manufacturing is really picking up. If we had a decent housing market, confidence would be even higher than it is right now. We would have a much more robust recovery.
As noted, that did not appear to bother investors on Tuesday. They were looking at the ISM and earnings numbers, seeing that we have companies looking to expand their results down the road. They saw that stocks were not valued properly and started buying them up. Stocks gapped to the upside, rallied through lunch, and then flatlined through the end of the session. They did not give up any gains; indeed, they rallied back up to the session highs. They were very strong and holding onto gain with a broad move. NASDAQ, +1.9% (over 50 points); SP500, +1.7%; Dow, +1.25%; SP600, +2%; SOX, +2.6%; NASDAQ 100, +1.89%. It was not a large-cap move; it was a broad move across the board.
WEDNESDAY
On Wednesday we will focus on NASDAQ, SP600, and the SOX. They used that new money to rally back up their prior peaks. If the new money does not hang around, those indices could find themselves backsliding. There was a lot of quiet confidence with respect to the market today. It makes me concerned that there is too much apathy. Volatility tumbled back to the downside after spiking upward on the Egyptian news, and apathy is quickly setting in (apathy in terms of everyone expecting the market to rise).
On after-hours shows, many pundits said there is no way they would short the market and that you need to keep going along. They are probably right. We have to keep going along as well; every time we try to nibble at a downside play, it gets thrown back in our faces. That kind of rampant bullishness should make you a bit concerned, but do temper that with the knowledge that the retail investor is nowhere to be seen. The market has exploded higher, and the retail investor is late to the party as always. Yes, we hear of inflows into stock funds with outflows from gold funds, for instance, but that is just the start of the retail investor warming up to stocks.
The retail investor has not been here since late August. There was a tremendous run off of that low, and frankly has not been here since the bottom in March of 2009. The flash crash really put the nail in the coffin for much of this generation of investors. They endured the 2008 selloff, they hung in there and tried to catch the ride up in 2009. Then they had the flash crash in May, and they were out. They have missed this last rally, and I do not know if they will come back. Do not put too much emphasis on the rampant bullishness because retail investors still have not bought into this move.
On Wednesday we are looking at the Challenge job cuts as well as the ADP employment data. Those are the mid-week warm ups for the Friday jobs report. With the good news on manufacturing, some people are starting to expect better jobs numbers. This could be a set up for disappointment with 150K new jobs expected. Hope strings eternal; that is what they expected last time before the 103K came in. There is likely some job creation ongoing, but there are not enough small businesses creating jobs to throw off the millions required to put everyone back to work. We have to employ the immigrants as well as the college graduates. We may be setting up for disappointment, but we will have to see how it pans out.
I am concerned about how the NASDAQ, SOX, and the SP600 handle those highs. We will be watching that. We will also be watching for more upside plays because market always seems to find new life to keep it moving higher. Maybe that was just new money. Maybe it will fizzle out and these indices will roll back over. We still have some downside plays in our back pocket. Some of these stocks look like they will roll over. AAP looks very much like a rollover. DECK continues to bounce around even though it is below a resistance point on low volume. There are still stocks out there struggling that look like they want to roll back over. At the same time, we have to watch the others continue to move to the upside.
We will play the trend we are playing the game the market is showing us. We are lean and mean right now with lightened positions. We have some excellent stocks running for us and some downside in the back pocket. We will see how the growth indices handle this prior peak. That will tell us a lot about where the market is going over the next three months.
For now the upside looks to be running, and we will be more than happy to let our positions run. When we hit our targets, take some of that gain. Stick with the game plan no matter how strong things look and how confident the pundits are. When you feel bulletproof, you can get clocked. Stay skeptical and keep on your toes, but do not let it stop you from taking advantage of good plays when they say “buy me.”
