SUMMARY:
- Stocks fail to make headway after the big Tuesday move. Worried about spreading unrest, technical issues, or new money running out? Yes.
- Tuesday’s value buying gives way to Wednesday’s ‘valuation’ selling, at least according to the writers.
- ADP jobs index tops expectations, but after last month’s miss no one really paid attention.
- Materials prices starting to impact earnings, or so we are told.  It is a built in excuse as comps over the prior year get tougher.
- Better economic data cannot, as of yet, push growth indices through their prior peaks. That good data is raising expectations for makes the jobs report even more important.

MARKET OVERVIEW

Second day of February and the money runs dry?

Tuesday I pondered whether the rally was a renewal of sustained buying after the Egypt situation became somewhat old hat or motivated by new money for a new month.  Wednesday didn’t totally answer that question because tensions escalated in Egypt and the indices, particularly NASDAQ and other growth sectors, struggled at resistance.

Yesterday we read and heard that investors were out buying stocks because of the value the presented given the economic recovery (solid ISM and regional manufacturing), a peaceful uprising in Egypt, and earnings showing top line growth (sales increases versus just cost-cutting).  Wednesday, however, some companies reported some earnings misses on higher materials costs and the ADP report, while topping expectations, was much lower than in January.  If it missed by 200K in January, a lower number in February didn’t give investors any more comfort.  So the stories Wednesday talked about stocks selling because of ‘valuation,’ i.e. they were now too high in price.  One day a bargain the next overpriced.  Pin the tail on the cause was the name of the game yet again.

The real answer?  A combination of more tensions in Egypt raising uncertainty again, first of the month money getting put to work in a day, and technical issues.  Without a doubt the pop present Tuesday to start February lost its momentum quickly.  A lack of money will do that.  With Egypt struggling and possible issues in Saudi Arabia, why push after a big upside session? 

Then there are the technical issues.  SP500 pushed through its recent high on Tuesday but NASDAQ and company could not.  They rallied up to those levels and held at the close, thus making Wednesday important technically.  Would they follow SP500 and break resistance or stall out?  Wednesday they stalled out at that resistance.  No momentum to push on through.  Certainly the Egyptian news hampered any breakout attempt, but even before Egypt these indices were struggling at the prior highs.

It all looks very technical.  A strong second run following the breakout has hit resistance and has thrown off a couple of reversal sessions.  The indices recovered, but Wednesday showed the weakness once more in the absence of that new month money.  We put more stock in technical action; news simply acts as a trigger to set technical indications in motion.  Thus NASDAQ and other growth indices are still struggling at resistance just as they were before Egypt and before the new money shot the indices higher Tuesday.  In short, they have not proved they can go higher from here.

THURSDAY

Jobless claims, Factory orders, Productivity, earnings, Egypt.  Your usual lineup but it also is ahead of the January jobs report.  As noted above, expectations for jobs are growing even after the disappointment last month as ‘experts’ figure something’s gotta’ give at some point.  They are right.  It always does, but who knows when?  With brown nosed Jeff Immelt (GE CEO) in charge of increasing jobs it is likely to be much longer term.  After all GE has not created one net job in 15 years.  He was able to get the high margin spiral bulbs favored status and develop other ‘green’ programs so he can show employees (those left) line dancing in happiness and harmony about the wonderful things they and GE are doing for all of us – - at a cost of several hundred dollars per taxpayer going to GE and its ilk.  Ah the wonderful stench of DC payola.  Only there could you have a the chief officer of a company that creates no jobs in charge of creating jobs.

Thursday we may see whether it was Egypt or whether it was the new money for the month drying up.  NASDAQ and SP600 simply have the look of indices that are not going higher before they do some more consolidating or flat out selling.  Perhaps SP500 can pull them along or hold them up.  Have to admit, some tech stocks that looked as if they would be buried in consolidations for quite some time to come are actually putting it back together.  Could it be the money that rotated out of the likes of VMW, CRM, FFIV, and others already be moving back in?  If so, that is another indication that money is not leaving stocks, just moving around.

That leaves the growth indices in no-man’s land, still working on those recent peaks but looking quite volatile and in need of at least more consolidation.  What would be the catalyst to drive them higher right now?  Earnings saturation is setting in.  The economic data has been pleasantly solid but the market is not able to make the next break, at least not the growth market.  The Egyptian and related unrest is likely not to subside overnight. That leaves jobs as the catalyst.  A big number could do it as no one expects one this time after getting burned in early January.  That is the time for a surprise . . . but we are not counting on it.

With NASDAQ and SP600 still very volatile and still very much unable to break the recent peaks, you have to approach things more cautiously.  We have some good positions at hand and want to let them work if they will.  The time you get into trouble is when you start guessing at tops and bottoms.  The action can suggest one is at hand, but the Fed is still at the liquidity pump and the indices, though volatile, are not giving ground, or at least not breaking down.  You cannot assume choppy action necessarily leads to a correction.  Be ready, have some downside on the list (e.g. AAP today), protect positions if things start to turn nastier, but, as Kevin Costner said in ‘Bull Durham,’ respect the streak (in this case, the trend).

Jon Johnson

InvestmentHouse.com

Stock Splits & IH Alerts, Editor