SUMMARY:
- Despite good economic data, NASDAQ sells back from the peak, but then Bernanke brings them back.
- Jobless claims fall.  Weather holding them back?
- Productivity soars to 2002 levels
- ISM Services beats expectations but not 60
- Factory orders positive when expected to turn in a negative showing
- Same Store Sales expectations topped by two-thirds of respondents
- NASDAQ still at the prior highs, but now with a bit better standing as it just won’t die, instead consolidating laterally.
- Looking for jobs move the market off the dime here at resistance.

MARKET OVERVIEW

Good recovery from selling leaves NASDAQ right back at the point of truth.

The jobs report came in on Thursday as well as a lot of economic data, but the focus was on NASDAQ. NASDAQ is still struggling to get through its recent peaks, and it put in that new rally high. SP500 has already moved past this level and put in its high. Indeed, it was coming back to test that break on Thursday and then rebounded, but NASDAQ and the small caps have not been able to pull that off yet. They have not sold off either. Two attempts to sell the index have only resulted in a rebound back to this level.

NASDAQ did itself some favors on Thursday. It started the session weak and sold off sharply. On Wednesday, it tested that prior high three times and was unable to break through. It fell back early on Thursday. It looked like a selloff was underway after three tries on the prior session. It did sell, but then it turned and reversed. It made it not only to the market open, but it managed to climb to a session high by the last hour. That was a very familiar scene because, excluding semiconductors, the market was able to close positive. NASDAQ, +0.15; SP500, +0.25%; Dow roughly matched NASDAQ; SP600, +0.2%; SOX, -0.06%; NASDAQ 100, +0.1%.

It was a day that sold off early despite good news on the economic front. It took some reassurance by Ben Bernanke that, although the economy is improving, it will take more to improve employment. He said that the economic recovery needs employment to be sustaining. He told investors and anyone else listening that the Fed will keep Quantitative Easing as long as it takes; in other words, until employment returns to acceptable levels. Damn the torpedoes, so to speak, and damn any inflation because the Fed will not back down. At least we know where the Fed stands.

The economic data was good. Jobless claims came out at 415K when 425K was expected. Did this have anything to do with the storms? People may not have been able to file their claims. We will have to see how it comes out in the wash, but one thing is clear: Claims are heading lower and lower. That is, of course, what we need. The question is how fast they will get down. Bernanke talked about that as well, and he does not think it will be fast enough. That is okay for investors playing the liquidity game because he will keep liquidity flowing.

Productivity was much better than expected at +2.6%. That put it at the highest level since 2002. No complaints about that. The market did not make much out of it, but it did not have an issue with it. Same Store Sales were good overall. Two-thirds of companies reporting actually beat expectations, and there were some massive beats. LTD jumped 24%, blowing away all estimates. There were some surprises   or maybe not. KSS and TGT missed. Some of the big name department stores had problems hitting their numbers, but it was good news overall. At least all the talking heads on the financial stations thought things were positive.

ISM services beat expectations, bumping right next to 60, but not quite able to make the move through as the ISM has been able to accomplish already. Factory orders were not impressive at 0.2%, but that was much better than the -0.6% expected. The data was solid. It was not spectacular, but it shows the same improvement that we have seen from all the reports. Confidence, manufacturing, and jobless claims were all getting improvement, and that naturally ramps up expectations for the jobs report and unemployment reading. I do not expect much there, but you never know. They have revised the unemployment rate to 9.5%. They expected it to jump to 9.6. There are still hopes, but they are not grandiose. 148K is expected in the non-payrolls. That is not great, and it will not take care of the people who are just coming out and needing jobs. It is an improvement, however.

All of that news could not move the market to the upside, at least initially. Buyers used that to move in, particularly when Bernanke assured investors that the “Bernanke bid” would still be present in the market. That had some expected impacts on other markets outside of stocks. A problem we have been wrestling with over the last several weeks is the incongruous reading among various markets. There were issues in bonds, currencies, gold   you name it. It looks like they are sorting themselves out in favor of the economic growth scenario, but it is not necessarily a done deal.

FRIDAY

The jobs report is here on Friday. Non-farm payrolls will be a highlight as well as the unemployment rate. Unemployment is expected to come in at 9.5%. With all the good news on the economy, people are starting to get itchy for good jobs news. It often happens where there is a huge move one month, and it gets the ball rolling for jobs gains after that. The pundits keep expecting it to happen, but it has not happened yet.

One of the problems is that small business still cannot get any money, and it is very hard to expand without it. I have heard a lot of anecdotal evidence along this line. New Jersey just had a summit of small businesses, and they primarily said they still could not get money and were still playing it close to the vest. One reason for that is healthcare. It is going to cost them a lot more money, and they are not going to hire people because of that. When it is hard to get money, you cannot expand.

In any event, they are having trouble despite what the SBA is trying to tell us. Maybe there will be a new facility out in March that they are talking about, but it really is difficult to get money. You have to spend money to get it, and a lot of small businesses trying to start up do not have the kind of documentation they need. But I digress.

What I truly think will be the focus after the jobs report is how the market reacts to it. NASDAQ and the growth indices have been bumping up against their highs in the rally over the past three weeks. They have not been able to push through. There have been some serious reversal sessions along the way. Of course we had an equally positive reversal to the upside on Tuesday, so it is not dead by any means. The reaction to good news had been less than spectacular, however.

Earnings continue to come in well, and the economic data continues to come in above expectations   maybe not the market’s expectations, however, because it is not moving higher on those. It has moved up in advance of these numbers, but it is not moving now. During earnings season there comes a point of good-news saturation with respect to results, and you do not get any more push out of the market. Maybe it is there right now, but we are not getting that selloff either. We are just getting a lateral consolidation in a fairly narrow range. This is not a horrific range at all.

Again, the response to the jobs will be telling. If the jobs report comes in at 200K or better and stocks cannot make any hay with it, that is a bad sign for a continued rally (at least at this point). We still expect stocks to move up again after a consolidation. We had the breakout of this base, and we have had the initial run and the first test. Now we had the second run and the second test. It is just a matter of how long and deep this correction/test will be. Thus far, it has been trading in a relatively narrow range.

NASDAQ tapped the 20 day EMA on the low and rebounded Thursday. It is putting itself in a better position to rally. Unfortunately, we had some Q’s that we bought early on. We did not load the boat with them, of course. Whenever the market is choppy like this, we never load the boat. Just take partials here and there and see if you can make incremental money. You do not try to make a game changer when the market is bouncing back and forth in a relatively narrow range. Although, we can make this play from the peak to the valley and make a nice profit.

What we are really hoping for   and I know this will upset the bulls   is a negative reaction to a good jobs report. It will get this thing to sell back down toward the 50 day EMA and get the pipes flushed out a bit. That will set the stage for a really good renewed run to the upside. Why? There are a lot of stocks trending nicely higher, but they are not in buy position. They have gone a long way and need a pullback of some sort before they are ready to buy. A pullback to the 50 day EMA by NASDAQ and some of the other indices sets up a good bounce point and buy point for the continuation of the rally into the third upside leg.

We are not terribly bearish about all this. The other markets are starting to believe there might be some kind of recovery, and stocks have been doing that all along. The issues are all wild cards: Egypt, Tunisia, Jordan, and Saudi Arabia. Things could erupt. There is a geopolitical risk out there, and we just have to live with it hanging over us. If it hits and is bad, we cannot do anything about it.

We do have some downside plays at hand because they keep setting up   the problem is that they keep recovering. They start to sell, and then they bounce. Every time we get out there to make a good play and it starts to go our direction, Bernanke comes out saying, “We are going to stand behind the market.” That is the way it goes. Do not load the boat on anything. Get good risk/reward positions. If this QQQ play on the NASDAQ, for instance, does not pan out for us and bounces from here, then that is an insignificant loss compared to what we were hoping to gain.

In my view, the telltale point will be how the market reacts to the jobs report. A good jobs report without a good reaction begs probably some consolidation. At least it will do what it is doing now   a lateral move and likely a pullback down to the bottom of the range. That will not be a major crisis. We will just make a little money off of it and look for more opportunity to the upside when the third leg gets ready to start.

We made it through most of the earnings season with some violent days but no major cratering. If we get a pullback, one that undercuts this recent low, then we will probably get closer to the bottom and the next rally. I am not in the camp that we will have a major selloff, despite all of this volatility. After all, there was volatility aplenty in November with upside moves, downside gaps, and then gaps back to the upside. With that kind of action, you will get volatility. Do not let it scare you to death. Overall, things are acting as they should. An improving economy should lead to improving jobs. Small cap growth is an issue, but it always happens. You get rotation out of the small caps into other areas, and the market continues on for a little bit longer.

We will keep an eye on what is going on. We are still uncomfortable with how the growth indices are trading, but not so much that we are ready to dive out of the market. I do think we will get a pullback, and that will give us more buying opportunities and make us a little downside money on the way. It is not going to be catastrophic. Keep your eyes open for buys   buys that are in line with the overall trend, which is up. When they set up, be ready to move in. At the same time, be willing to take a chance on a good downside play that has the right risk/reward. Just do not load the boat.

We will see how the market trades and maybe, just maybe, we will get a bit of short covering or some selling ahead of the weekend. Note that this recovery at the end of the day may have also been some short covering ahead of the jobs report. The economic data came out pretty well and Bernanke was being upbeat (he may have some pre-notice), so the market may have a little short covering just in case the jobs number comes in better than expected. That was Thursday, but Friday could be a totally different story when the rumor becomes the news. We will take what the market gives and make money no matter which way it goes.

 

Jon Johnson

InvestmentHouse.com

Stock Splits & IH Alerts, Editor