Sellers Again Come Up Short

SUMMARY:
- Economic data, unrest give sellers another shot, they take it, but again come up short.
- CPI hotter than expected. Not scorching, but on the rise finally, though not reflecting reality.
- Jobless claims bounce back up as the 385K now looks weather induced.
- Manufacturing continues as the bright spot as Philly manufacturing surges.
- Delinquencies fall though loans in foreclosure rise.
- A ‘good environment to do business’? A response to a spreading misconception.
- Stocks again find a bid after a dip, but the fact that sellers are even showing up is notable given the length of the run to this point.

MARKET SUMMARY

Sellers play their hand again, but once more a pair of deuces comes up short.

The sellers came back to the market quickly, playing their hand Thursday morning. The futures were down on economic news that was not as strong. The CPI came in hotter on both the core and overall. The jobless claims rose, bouncing back over 400K. That may mean the prior week’s sub-400K reading was weather-related. That was able to knock futures back. It did not hurt that overseas protests were spreading. There was more violence in other countries and worry that it will continue to spread, so the market was down. The sellers were out in force. Futures were somewhat lower than they have been for awhile.

As soon as the market opened, stocks went back to the upside. It took much of the day to get there, but ultimately all the indices, save one, finished positive. The only index that finished negative was NASDAQ 100. It was down just -0.02%, mainly because AAPL decided to take a day off and sell over $4.00. NASDAQ, +0.2%; SP500, +0.3%; Dow, +0.25%; SP600, +0.6%; SOX, +1.5%.

The sellers tried their hand once again, and it turned out to be just two pair. It did not last long before a better hand was played by the buyers. Even though stocks opened lower, they never came near the 10 day EMA before reversing and closing higher on the day. It was another session where the buyers used a dip to step into new positions.

Initial claims were out on Thursday at 410K. That was a disappointment, but it was in line with the 408K expected. 385K on the prior week looked great at the time, but it is becoming apparent that it was weather related. I am not talking about it keeping people from filing their jobless claims as much as those who file them being unable to get to work. It may have been a combination of both, but they did decline dramatically because it was not filed. Once they got back into the office, it bounced immediately back over 400K. That put somewhat of a damper on the market action.

The CPI came in hotter than expected, similar to the PPI. It was 0.4% overall versus 0.3% expected. The prior month was revised lower to 0.4% from 0.5%. The core was the concern, and it doubled up expectations. You could say it was only 0.2% versus a 0.1% anticipated and in December. Nonetheless, you should look at the trend when you see these kinds of rises. The trend is a 1% gain year-over-year for the core. That is nowhere near what the core PPI showed on Wednesday; it jumped 1.6% year-over-year. Nonetheless, this is getting to a point of some discomfort.

The CPI rose 1.6% year-over-year, similar to the PPI’s core. What rose? Gasoline was up 3.5%, airfares were up 2.2% (because of jet fuel). Food rose 0.5%. Some were saying that is not too much, but that is a monthly report. It is a strong rise, and it will only get worse because of the freezes and other issues.

A benefit is that farmland is much higher in price than it has been for many years. In “Field of Dreams,” if Kevin Costner built that baseball field in the middle of his corn crop, it would be even more expensive now in terms of opportunity cost. It would cost him more for all the materials he used, and the opportunity cost would be high because corn prices are up over 35% over the past six months. If you build it they may come, but now it might be a good idea to just let the corn grow. Maybe after you harvest it you can build the baseball field. I hate to drag another Kevin Costner movie into the report seems to be all I am quoting from lately. Maybe that is a sign of my age.

As far as other economic reports, the leading indicators were up just 0.1% versus 0.3% expected. It is important to note that they were up for eight months in a row, and now they are starting to head lower. They did not turn negative, but it shows we were hitting that soft patch in the economy that I have been talking about. You would not know it from looking at the Philly Fed as it zoomed to 35.9 when only 21 was expected. It was a meager 19.3 reading in January. It is a significant move, and manufacturing is still leading the recovery while everything else is slow.

This data and the commentary on how the stock market has been reacting prompted one CNBC analyst to talk about “What a good environment it is to conduct business.” He is saying the stock market told us that the business climate was outstanding. Look at the 100% gain off of the bear market low. Obviously things are just fine for business. The stock market, as a reflection of future business actions, shows things are great.

Yes, we have seen the economic data improve, but I have two comments on that. Number one, this is the worst, slowest recovery we have ever had since the Great Depression. We do not hear much about this right now. We heard a lot about the George Bush jobless recovery and how terrible it was, but it was actually quite a good recovery. We had roaring quarters of GDP gain, and that was right after the tax policies were changed and incentives were created for business to invest in the country. It was not the rebates that happened first, which did not do anything. As one commentator correctly put it, “That stimulus package could not stimulate a dog.”

I used to make comparisons to the Reagan recovery in 1982 (a very deep recession), but this one is too pathetic. You cannot make a comparison. We need to put the numbers back together again to see how pathetically slow it is, and I will do that over the weekend. We have an economy that is producing no jobs and that is woefully behind all other recoveries since the Great Depression. Indeed, the Great Depression dragged on for years and years because the policies that were implemented by FDR were the kind being implemented now. Big government spending. Hire a bunch of government workers, spend money on programs that the government controls or directs where the money goes.

The government does not know squat. I do not mean offense to anybody they have very bright people in the government, but it is the fault of mechanics. They are stymied by the bureaucracy and cannot lead. They cannot go outside the box and get things done, or else they are fired. By its nature, the government takes smart people, pigeonholes them, and then we get nowhere near the return we should for our tax dollars. We will get lackluster performance if the government is calling the shots, designing the programs, and picking the winners and losers.

Point two, the economic improvement is there, but it has been lackluster. It is utterly ridiculous to stay that the stock market is rising on the idea that this is a good business environment. We are still talking about the need to cut the corporate tax, and we are still worried about what Obamacare will do. There are so many unknowns out there, and they will kill the economy. Obamacare is set up to destroy the insurance industry and get everybody onto Obamacare. That is all there is to it. The President is say whatever he wants, but the numbers show that it is designed to push insurance companies out of business (intentionally or unintentionally).

The liquidity has made the market rise. We are spending trillions of dollars, and other nations of the world are dumping trillions in their currency into the world money supply. The economies are still slow. You may hear that the numbers are increasing, but they are not increasing by great leaps and bounds. Considering the horrible levels where they have been, they should be surging higher. In any event, money is not being put to work in the economy; it is going into the financial markets.

Why would a bank loan money to a risky, small business startup when it can borrow money for 0% from the Fed, package bond deals, and make a guaranteed 3-5%? Why would it take a chance? It will not. Unless you are a huge company with tons of money and collateral, you will not get the loan. I am hearing this from everybody I talk to in small business.

There may be a little bank here or there trying to compete they have to because they do not have the gravy train that the big banks do. They have to earn their money the old fashioned way: sizing up potential risks and then loaning money to make money from that loan. Of course the company has to stay in business to pay them back. The federal government places a tremendous amount of restrictions on them just in loaning to these small, startup companies. They are reluctant to do it because it is so difficult. A lot of small businesses do not or cannot go through the process either.

The money that is not going into the economy is driving the financial markets higher. That money is being pushed into it just like in 1999. The Fed flooded the market with liquidity ahead of Y2K. They are flooding the world with liquidity right now, so naturally the financial markets will rise. Bernanke said he wanted to do that, for crying out loud. He was patting himself on the back about how successful it has been. He wanted people to feel wealthier through their investments, and that is happening. It is an utterly naive comment to hear that this market rally is based upon a good business environment. It is not. They are just doing the best they can in a bad environment, and that is the American way.

FRIDAY

There is no scheduled economic data on Friday, but there is always the chance of some geopolitical intrigue from our friends in North Africa and the Middle East. It could be anywhere Mexico, South America, etc. We will see where it pops up next as this protesting sweeps the globe and the US tries to look like they are on top of everything. Hopefully they are, but some of the comments of our Secretary of State and others do not instill a lot of confidence.

Nonetheless, we will stand behind them and see if we can do something positive in getting democracy started elsewhere. Yeah, right. I hate to be cynical, but I have to be. Jimmy Carter said that the Muslim brotherhood only has a 25% following. That is fine, but the best organized usually win. When everyone else is in disarray, those that are organized can take advantage of the situation. But I digress.

We will have to see what happens with respect to the normal market activity because it will not have anything driving it. Earnings are mostly over, and the news is at a standstill on Friday. The market will have to find out what it has on its own. Interestingly enough, the sellers have been showing up lately. They were here on Tuesday, and they were here on Thursday. There is a gap lower and reversal here, there is a gap lower and a selloff, and there is a gap lower and reversal.

They are showing their hand more and more. As noted earlier, it has been a weak hand that was easily overrun by the buyers. Every dip has been used to move in, but volume has not been huge. It has not been blowing out the moves to the upside. The market is leaving itself a bit open for that November-like correction to start.

Okay, I said it. Every time I say it, it turns out not to be the case. We just have to watch it and be ready; we do not want to catch that one in the ear. We always have to look for the potential reversals as we, of course, make the plays to the upside. Look at the move WLL showed after it formed a nice flag and bounced higher after that volume spike on Wednesday. It gave a heads up, and you have to step in. You cannot ignore those because these trades can make you a lot of money in a short period of time. If the market continues its fitful move upside, then they can still make great money for you.

You might be worried that the market is extended and will likely run out of gas. There is a MACD divergence and some volatility with higher volume and lower volume, etc. You can still make money, however, because you can focus on the trend and the stocks that are set up in position to make you money.

We will not forget about the downside. We are looking at a few plays. Of course we are already in some like WHR. We will be able to play those and make a little money – I call those my hedges. In any event, we have a couple of them running, so we can actually take advantage of some downside even as the market moves upside. We are also ready with other plays if the move does run out.

We will have some index plays, too, but right now it looks like it will continue higher. It could change at any moment, and we will be ready if it does. For now, we will play the same game plan. What choice do you have other than sitting out and doing nothing? I would rather make money every day than watch the market continue to move up and ask myself why I am not making money that day.

We may get some big losses. It could gap down on some horrific news but, if it does, what can you do? You cannot factor that in. You could just as easily be hit by very positive moves. It may not seem likely, but that can happen as well.

We will keep the same game plan going. We have bird dogged a few stocks that look good. We showed you some stocks we bought into on today’s move, and we are going to keep looking for a little downside action in case things do turn. At the same time, take care of your current positions. Do not let them get away from you to the downside. It is better to be brutal and cut them a bit at this point in the rally. It is not as good in the guts of the rally when it is starting up, has just cleared resistance, and it is starting to get into its own.

Watch out a bit more. We are seeing more stocks start to stumble a bit, and that is also an indication that the markets may be running out gas and will need to come back. Also take note of the stocks you have that have been running well. We have already taken gain on most of our positions. Only the newest positions are those we have yet to book any gain on.

There are several plays that we have already taken gain on and have moved up again to even higher levels. If the market is starting to turn over, you want to consider taking some more option gain that you have left over XOM, EW, CYMI, NVLS, XEC, ZOL, LUFK, NFLX, etc. There are many of them. Know where your options are and know when you want to take gain off the table.

We have had a great continued run. If we get another good surge on Friday, you might want to consider banking a bit more of your gain. You do not have to take all of it; just take another half or a third off of what you have, and then let the rest run. That way you have locked in excellent gain. If something weird happens, you will not get hurt. On the rest of it, you let it run. If the market turns over, comes back, and it does break a support level, let it take you out. Let the stock losses take you out at that point because you will still have great gain in them. That way you have let your winners run, you have locked in some gain, and you are letting your winners run.

This is particularly true on your option positions. Let positions run, but you also want to lock in gain. We all know that when an option gets closer to expiration and falls down, it loses value more quickly and you have a harder time regaining that value. If we get another great run up on Friday, take a little off the table. Then you will still have more if the rally continues.

Jon Johnson,
InvestmentHouse.com
Stock Splits & IH Alerts, Editor