Upside Gains Continue
- Market hangs around the flat line keeping itself in the game, and then the upside bias kicks in for a rally to the close.
- China hikes interest rates, fanning those fearing inflation is close at hand. Gold rallies, bonds flattened.
- Fed-speak starting to flow regarding changing interest rate policy.
- Market up 6 of 7 sessions on top of the existing rally. Time to lock in some gain in anticipation of at least a pullback.
MARKET OVERVIEW
Upside gains continue as upside bias kicks in during the afternoon session.
I will start with the NASDAQ tonight because it was one of the indices that made a later break above its January peaks. It has held the break and added to that move in the past two sessions. NASDAQ exemplifies the action on the day. In an early afternoon alert, I said that if the market could stay in the game and hold near the flat line, it had a good chance of rallying late in the day. That is indeed what happened. NASDAQ sold as the market opened, but it rebounded and traded up and down in a trading range through lunch. It was barely positive after lunch. It was in the game, as were the SP500, the Dow, and even SP600. They all rallied late in the session.
The upside bias (the underlying theme in this irrepressible market) held true again on Tuesday, and stocks rallied into the close. NASDAQ, +0.5%; SP500, +0.4%; Dow, +0.6%; SP600, +0.6%; SOX traded down; NASDAQ 100, +0.6%. Stocks once more found a way to continue some impressive upside gains in this rally. This is a rally that will not quit.
The news was not great to start with. Earnings were not as stellar as they have been. TEVA missed on its earnings. AVP missed, and it is usually a perennial earnings beater. It gapped below a recent trading range. BZH missed, and it had interesting action. It gapped lower and then reversed on volume. It was a double bottom pattern off a Fibonacci retracement. That makes this an interesting stock, and it is worth looking at other home builders as well. This in light of the CoreLogic Home Price Index showing that housing prices fell 5.4% year-over-year in December.
We will not get any good news with respect to pricing, but the President of HOV was on a financial station saying that the demographic was improving. When I heard the word demographic, it sent shivers down my spine. The last time I heard a home builder talk about that it was in April or May of 2005, just as the market topped. They were talking of a 10-year demographic for homes that would continue buying through another decade. Of course, the opposite is happening now. It has resulted in selling through six-tenths of a decade. We will see if we make it to the whole decade or not before the demographic-in-reverse pans out.
There was more news related to bonds and currency. China’s markets were closed, but it raised its interest rates 25BP on both deposits and lending. It is now 6.06%, and that had an impact on bonds. They were hammered and gold jumped. There was concern that raising rates means China is worried about inflation. Gold jumped and bonds were slaughtered because inflation kills bonds.
It was a 1-2 punch because the Fed-speak is ratcheting up. Two Fed heads were out talking today. Lacker is the perennial inflation hawk, although he has voted with the rest of the Fed during the Quantitative Easing mess. Nonetheless, he said the improvement in the economy requires the Fed to reevaluate Quantitative Easing II. He sees 4% growth coming in the US. He says with that kind of economic pick up, we do not need inflation causing a Quantitative-Easing-type process. Later in the day Mr. Fisher out of the Dallas Fed was shooting from the hip as usual. We all do that here in Texas. It reminds me of the time a client from New York was in during the rodeo season. He saw the trail rides coming in with the wagon trains and people riding horses, and he asked what the heck was going on. It was a Friday, and we kidded him saying that everyone was coming into market. He honestly believed us until we told him what was really going on. But I digress.
Fisher is shooting from the hip. He said he will dissent in further Fed meetings if they do not get off of this expansion, money-printing policy. Those are my words, but he was rather straightforward. He said the Fed was “pushing the envelope” with its current policies and programs and that he was “weary” of expanding the Fed’s balance sheet any further. He is a voting member of the FOMC. You usually do not find them saying they will dissent any further moves that do not work to curtail what the Fed is currently doing.
These are the first stages of Fed speak. The Fed cannot just change policy immediately; it has to start months in advance, particularly with a policy that will be somewhat unpopular. The stock market likes easy money. What happens when you get easy money? It gets pumped into the financial system because it is not being used. That inflates financial assets such as stock prices. When the money spigot gets turned off or is turned lower, then it means less of a push on asset prices. If they do not find another reason to rally, they start to come back down.
The Fed has to get the markets ready. It has to condition them like Pavlov’s dogs to understand that it will change its policy. They say it will change, but then no one ever believes it. No one takes any action until they finally do make the turn, but they will make the turn nonetheless. Today two big names in the Fed head industry said they were going to change their course and we should start getting ready. They did not say exactly that, but that is what they were telling us.
The indices still managed to post those gains, apparently not phased at all that the Fed must ultimately change course. Bernanke has been telling Congress it needs to change its fiscal policy to help him out, and he will have to start changing his policy as well. He knows that, but he will just be the last one to speak. When he does change his tune, that will be the signal that things will change. Just a week ago, however, he was still saying that Quantitative Easing was still on the table and it would not be changed. It will take awhile and, again, it always does.
WEDNESDAY
Money continues to move around the market. It continues to find new stocks and move higher. That can be a sign that the market as run out of gas, but money is staying in the market. Indeed, it is staying in the market and moving around to new areas, and there is money coming in from the bond market as those bonds sell off. People were buying bonds at their height, as is always the case. Now they are moving money into the stock market and buying stocks at their height. That means we are likely looking at correction. I might as well talk about that.
SP500 is rallying sharply over the past week. It turned and reversed sharply and then accelerated its move, increasing its angle of attack. This is on top of the strong move to this point already. One of the things you have to watch for in any stock or index is when there is a long, strong move in place, and then it accelerates the move rapidly. You are seeing latecomers moving into the market. They saw this dip, jumped in, and they are pushing it higher.
Money is coming out of bonds. People were piling into bonds, and now the market is selling hard. They are coming into stocks now. They were late in the bonds market, and they will be late in the stock market. Volume is not that high on this last move. People are coming in and putting money to work, but it is not the huge money — it is just people who came in late.
That is not a good sign. I think that it could be a movement toward the end of this leg. That would not be a bad thing. You have had this first run from August into early November. You have had close to — particularly on SP500 — an equal run up to this point in the second week of February. There was one month of consolidation, and a modest pullback in November. In NASDAQ it was working on a lateral move.
There has been no consolidation on the SP500. There have been only one or two significant downside days in the entire move. It is extended. You have to get a bit concerned that it will maybe make a pullback. It is inevitable that it happens, but it is a matter of when. You always have to let some positions run. Do not take all of your gain off because we never know how far a move can run. It always seems to surprise you in just how strong a move can be. Or sometimes it will surprise you in how it will lack strength and turn back. When a move gets going and has the momentum, it is impressive how it continues to grind forward.
Other stocks are similar. TTWO is moving up, but notice how it has taken off to the upside as well. It has a lot of days underneath it. Does it mean it will correct? No. It means it will probably pull back to test. If you are in a play, start looking to take some gain off. You have seven days to the upside without a hitch in the get along. TIBX is another similar stock. It has had over a week to the upside. Stocks that go up for a week tend to test. They do not necessarily correct horrendously, but they do test. It cannot keep that pace up, so you look for a pullback.
Individual stocks; no problem. Take some gain off the table and let the rest run. You do that also with the index. The thing is, SP500 has not corrected and it is getting due. I hate to say it, but it is pregnant for a correction. It needs to come back and test, but the question is when. Each downside play has been ground up and thrown back in your face at this point, but there will come a time that it sticks.
It is always a process of moving through to the point where you reach the apex and start to turn to the downside. Some setups that look like they will really play well do not turn out all that great. NICE looks like it could be a downside play. You have a lower MACD on a higher high. There is a gap and a bear flag. Maybe it will come back down. There are several of those around that could be to the downside, but we have to see how it plays out.
As always, be patient. You have these plays ready to go if things turn out and it starts to fold. We have had a few buys on these here and there. They looked ripe, but they will go down a little bit and then will come right back at you. The buyers are still in, but we have seen buyers coming in on less volume. We have to be cautious. It does not mean we turn our backs on the upside. That is a trend, my friend. It is in place and running.
It is getting some low volume, but it has had low volume at other times before. We do not want to get too bent out of shape because that is when your mind starts playing with you and you start thinking you know what will happen. You can have a good idea based on what has happed before, but it does not mean the market will do what you think it should.
Let your winners run. Take advantage of stocks that move into good buy points because there is still money moving their way. Notice that we are not buying as many upside positions right now. I am not finding the great risk/reward as much as I would like, so let us be picky. If they do not show exactly what we want, we do not buy into them. We are not jumping into every downside play either. It is a process of hitting a top, and it often takes time.
In October, the market moved laterally and then changed the angle of attack only to come back down. I thought it might be doing that in early January, but it did not happen. It changed its angle of attack but just tested modestly. Now it has come back. It is taking off to the upside and we will see if it turns and tests again. A move down to the 50 day EMA would not be unheard of or a bad thing. It would be a buying opportunity. We just want to be able to take what the market gives, play it on the downside, but also protect what we have made.
We have already had a really good year, and we want to protect a lot of what we have. It is time to be cautious and patient. What else is new? We will look for the downside if it develops, and look for upside plays if they continue to develop. We are making money on short term upside plays. It is also time to take some gain, and on some of our positions that have moved up well. We will have to look at some of the positions that have February options — EW, CSX, and those types of plays. We need to look at taking some of those off because expiration is two Fridays away. We have had a good week of gains, and we do not want them to come back on us and lose all of that.
If we get another upside, or maybe a gap to the upside that reverses, it is a picture perfect day to bank some gain. You don’t want to cut your runs off, but if you see the gap to the upside that reverses, that is typically an indication that a move the going to come back near term. Then it is time to take some gain off the table. That is the game plan right now. We have been banking gain all along, and we always do that. You want to start pulling the trigger on some gains in the plays that are running toward the end of their option expiration or have had really great runs to the upside. Then we will look for a downside play or two and see what kind of buys we get once it sets up.
