SUMMARY:
- Not even good jobless claims could rally stocks Thursday morning, at least until stocks decided to rally back yet again.
- EU cannot win: Portugal CDS jump, UK inflation surges.
- US bond sale has a hard time finding buyers.
- Failing to learn from history, part . . . 73?  Throwing friends, even dubious ones, under the bus.
- Mubarak ‘resignation’ credited with stock market recovery. Will it sell Friday given he didn’t really leave?

MARKET OVERVIEW

Stocks are set to sell but once again don’t.

The rally that would not stop looked like it finally hit the end of the tracks on Thursday. CSCO’s earnings came out the night before, and its margins were not up to par. That had futures down sharply after hours and heading into the open. CSCO gapped lower. Its margins were not great and its outlook was not positive. AKAM’s outlook was also not good. There were a couple of major gaps lower by major tech players, and that had NASDAQ gapping lower as well.

That was not the end of the story. The SPYders gapped lower and stayed low. You may point out that the market rallied back, and it did indeed. All of the indices but the Dow made it back to positive after starting lower and rallying in the afternoon into the close. NASDAQ, flat;  SP500, flat; Dow, -0.1%; SP600, +0.4%; SOX, +0.35%. There were nice recoveries. NASDAQ recovered 28 points from low to close. The SP500 recovered an impressive 10 points, and the Dow gained 75 points from the low to its closing price. These are significant moves.

Some will say the market recovered because jobless claims were better than expected. They were 383K, much better than the 410K expected. The important point is that it was below 400K. That is the only time it is had a 3 out front since July of 2008. The other time was December of 2010. Could it be a trend? We have a couple of sub-400 numbers within a relatively short amount of time, considering how terrible the numbers have been and for how long. These are in a three-month period. Maybe things are getting better.

Note that the market did not do any better after the news came out. The futures did bounce up a bit, but they turned right back over and sold. It looked as if the rally had met its match. It was extended, it was in need of a correction, and it looked like it wanted to correct. It had the right kind of news that caused it to correct in November. After all, CSCO started the November issue   it had a massive gap lower in mid-November. That is just when NASDAQ started its selloff. It looked like everything was set for another correction to occur. Stocks sold off. Then, looking at the SPYders, they turned right back around and rallied into the close.

There was a rally back into lunch, a move laterally in the afternoon, and then a rally up toward the close. Things got a bit hairy here. What was the catalyst? A lot of the financial stations and web sites said it was due to the impending resignation announcement by Mubarak in Egypt. Even the head of our CIA said there would be a resignation announcement. Should you give any credence to that? Normally you would, but then think back to a couple of weeks ago. Hillary Clinton said the Egyptian problem would be resolved and the government and citizens were working on a resolution. It did not happen. Earlier in the day, Mr. Clapper, the US Director of National Intelligence, said that the Muslim brotherhood in Egypt was basically a peace-loving group. I think the correct quote was that it “eschewed violent tendencies.”

There was a lot of confidence instilled with respect to the impending resignation of the President. At least it was enough that the market bought it   if you want to believe that it was the cause. It may be. The market started to ratchet up when it looked like he was resigning. Then in the same speech, he grabbed defeat from the jaws of victory (as far as the population in the square is concerned). He said he was not really resigning, but he was just giving the power to the Vice President and they will hang around until September.

The market started to bounce around with a bit of volatility. Looking at the SP500 futures, it was selling off after hours. Perhaps it was the fact that he would announce a resignation. Of course we got it wrong with our intelligence agency, and we will see what happens. Maybe this will be the catalyst that makes the market sell. All I can say is the market is still extended after the gaps lower and recovery. You will notice that each of the indices tapped the 10 day EMA, the nearest support possible, and rebounded. That is not a sign of weakness. It may be a sign of something else, and I will talk about that in the technical picture.

FRIDAY

Michigan Sentiment is the major report of the morning, and it is expected to bump a bit higher. The consumer was looking stronger, but now there are questions showing up. The housing market is playing its role in the consumer psyche. We still see more and more price declines, and more and more houses under water   and I am not talking about flooding. It is that negative equity problem. We have that as the overlay, but there is also good news coming from various areas. The question is how the Egyptian news will play out.

The market was selling after hours on this news. They are afraid there will be riots in the streets. The military may have to step in, and it could get ugly. That might be the case, but I do not believe so. Although I may not be the person to talk to about that. I am about as good a person to talk to as Hillary Clinton or Mr. Clapper or the head of our CIA. Seems like their batting average is about that of a weather man. They may be right 10% of the time with respect to our foreign policy issues.

In any event, it could be a problem for the market. It may give it the catalyst to sell off because the market seems to be trying to find reasons to fall back. The buyers do keep moving in to punch it back up. It is a tough call. The risk/reward overall is less right now. After this kind of move, you cannot assign the same kind of risk/reward that we could assign back in November. If we get a November-esque correction near the 50 day EMA, then the risk/reward changes all over again. It still has a great base that the market is coming out of. This is only the second run off of this summertime base. We still have plenty of momentum and gas in the tank on the move. We just have to stop, check things out, and then be ready to move once more.

There are other worrisome factors. The 30 year bond action on Thursday did not get a lot of support. It was weak. It was expected that we would have to offer 4.729-4.73% in interest rate yield on the notes. It turned out we had to offer 4.75%. What does that mean? When you are selling something and there are not enough people buying it, you have to raise the ante for them. When you lower the price, that raises the yield. People want more yield in order to buy our paper, and that is never a good sign.

The bid-to-cover was 2.51. The last ten-auction average was 2.68. There were not as many bids to cover all of the bonds that were for sale. That was weak, and that is beginning to be on the minds of investors. The bond market lurks in the background a lot, but investors always keep an eye on it. If they do not, they should. There is trouble there.

There are the issues in Egypt, and we have an overbought market. On the other hand, we have a lot of stocks in great position to move higher. We will look at those and be ready for them. It would also been prudent to look at some downside as well. It is not time to buy, but it is time to be ready. If bad news hits, maybe things could drop hard. Every time we have seen a drop of late, however, they have just reversed. They did it last week and they did it today.

We will be ready for some of those, but we are also looking for plays with the trend because there are still many stocks in good shape to move higher. They are not extended, and they are making us money. It is hard to complain about that.

Before I leave for the evening, I want to get up on the soapbox for a moment. This is an interesting time. It appears that we want to repeat history once again. Back in 1979, we had the fall of Iran. The Shah of Iran was friendly to the US. He was not a great guy necessarily, although people I have talked with who knew him said he was a decent fellow. It was a dictatorship, however, and the people did not want that. He was nice to the US, so we gave him arms and money. Then there was an uprising and we threw him under the bus by not supporting him. Now Iran is our biggest problem in the area right now, and it is a problem for every other state. We found out from WikiLeaks that no one likes Iran over there and wish they were off their backs.

Whatever the case may be, that is what we have today. We did not help ensure an orderly transfer to a government that was perhaps more in line with what the people wanted. Iran was well capable of having a democracy with its highly-educated populace at the time. They could have governed themselves, but we threw the leader under the bus, did not stick around and help, and the thing went into chaos as far as we were concerned.

Now we have a situation that is not completely the same, but it is an interesting one. We have a friendly dictator, and we have come out in public and thrown him under the bus. He is not going. One of the reasons he wants to hang around until September is because we told him, in public, that he had to get out. Now he is digging in his heels. That might ultimately be the best thing that happens for the US as long as it does not erupt into a bloody conflict. If saner heads prevail and they work out a compromise with an orderly transition, it buys some time to get things right.

The problem is that we used up a lot of our capital in the area with statements from our administration about what Mubarak should do. Also, what a lot of the department heads have said has been completely wrong. We look like an inept bunch of fools, just as we did during the Carter administration. We are not learning from history; we are repeating it. The stark and almost scary parallels to what we have done in the past are amazing.

In any event, that is just a bit of my soapbox for you. It is something to think about as these events unfold. It is not unlike where we have been before, and we do not want to make the same mistakes we did 30 years ago. 30 years? It is tough getting old. In any event, it is something to consider.

We will see how the market opens. It looks like it might open down, but we will see if the buyers come back in. There are a lot of great stocks out there in good position. Be patient and let the buys show themselves. Do not rush into them because the risk/reward at this level is not great overall. Individually, it is not bad, but it is risky overall. No full positions   just do partial here and there. We can still make plenty of money right now, but this is not the time to load the boat and by everything. There is more risk now to the downside than there was two months ago. We just have to factor that in to our trades. Do not ignore the trades, but factor it in.

Keep taking gains when it is prudent. Keep your stops reasonable, but take a great play if you see one. I will see you on Friday, and we will see what the market brings. These are interesting times indeed. I was reminiscing with my kids about where I was when the Berlin wall fell. I told them to remember these key events as they move through life. This is not as dramatic as the Berlin wall, but it is always interesting to see a populace rise up. If they can come up with a democracy, that makes it all the more exciting.

 

Jon Johnson

InvestmentHouse.com

Stock Splits & IH Alerts, Editor