Market Rebounds Yet Again
- A more ‘old fashioned’ expiration with a return of a modicum of volatility, but in the end the market rebounds yet again.
- Sellers show up a bit more on the week as the economic data hit a soft patch.
- Even with some headline headwinds, the market rises, showing the power of liquidity.
- Overall the indices hold the trend, remain in great shape, but more stocks are struggling as the market extends its move.
- Will the unrest in some of the market leaders spread similar to the unrest in world?
MARKET SUMMARY
Stocks continue the incredible rally, displaying the power of liquidity.
I will start with the SP500 because this was one heck of an impressive rally. It started back in August, rallied into November, had one correction, and then made a long, straight knife to the upside. A nice 45-degree angle rise, showing no signs of wear and tear even as it becomes further and further extended. There is the no way but “extended” to describe what is happening, although we are getting more sessions with sellers showing up. Even when the sellers do show up, as they did on Tuesday and Thursday, the buyers use the opportunities to move in and buy.
Looking at the intraday chart on Friday, it was a return to an old-fashioned expiration Friday with a bit of volatility and a bit of volume. Stocks were flat as a pancake to start. They rallied positive, sold off to negative, and then the irrepressible buyers came back in and bought into the close. President’s Day closes the markets on Monday, and I said there might be some profit taking ahead of the three-day weekend. Selling started in the afternoon after the early rally into lunch. We were taking part in that profit-taking as well.
We anticipated there might be some pullback, so we were going to take gain on another rally to the upside. We booked nice gain on stocks such as BC, CAT, NVLS, TROW, and ZOLL. There were lots of great moves out there and a lot of great gain to take. We took it because this market is incredibly extended. It could be even further extended two weeks or a month from now. I don’t know if it will break down. I do know that sellers are showing up more and more of late. There are trying to mess with the market a bit, but they have not been that successful. The market did gyrate up and down a bit with a modicum of volatility on Friday (in the real world this is not much volatility at all). Nonetheless, the market continues to the upside.
It was not a great day for stocks. Indeed, not all the indices managed to finish positive. NASDAQ, +0.1%; SP500, +0.2%; Dow, +0.6%; SP600, +0.3%; SOX, -0.4%, NASDAQ 100, -0.2%. It was not a great day, but it was a continuation of the same theme. Sellers are trying to show themselves a bit more, but they have no strength. As soon as the market dips, the buyers move in and drive stocks back to positive. They even threw in a little inverted head and shoulders in the afternoon to give the warning that it would try to rally into the close.
The news was not that great this week. There is the spreading unrest in North Africa, the Middle East, and even in Mexico. On Friday it was fanning out. Jordan was hot again, and we know Bahrain is a problem. There are more issues inside of Iran as the government there vows to kill traitors to the country and is threatening mass executions of protesters. They are not wasting any time this time around. Kuwait is now joining the problems, and they are also spanning out west in Africa all the way to Nigeria. We could see it happen in India, Pakistan there is no telling how far this could go, but the market continued higher.
I noted sellers were coming in somewhat as the US economic data softened. Retail sales did not come in as well as anticipated. Empire Manufacturing was solid but not as good as expected. Import prices rose a lot more than we wanted to see, and that was not a good indication as we have to spend more for our goods and services. Housing starts were fine. Permits were down. They did a flip-flop from the prior month, so we are calling that a wash for now.
The PPI was much too hot with the core rising 0.5% and 1.6% year-over-year. Industrial production and capacity for January were much less than expected. Not positive. Initial claims bounced back over 400K the sub-400K read was too good to be true. The CPI came in hotter than expected at 0.2% versus 0.1% expected. That does not seem like much, but it was also up sharply year-over-year. Prices are no doubt moving up.
The Philly Fed was strong as manufacturing shows it is still the leader just as it was at the start of this recovery. Overall, the news was a bit sluggish compared to the crisp gains we have seen to this point. The sellers tried to use that to push the market back on this soft patch in the data. They were not successful, but they are showing up now. Sometimes where there is smoke there is fire, particularly with a market that looks like this. This is unsustainable, and at some point it will break. We do not know when. We are seeing issues, but there have been issues with this rally several times over the past two months. They start to erode, and then things fall. I will talk about that more later.
Even the with these headwinds, the market was rising. It is a tribute to liquidity rather than the great business environment that is out there right now. It is not a great environment for business. States still have to find ways to make ends meet. They are in the initial stages of cutting their budgets, and look what has happened in Washington: an AWOL estate government. That is not what the people elected them to do. The people elected their representatives, and they need to represent them like an adult. You do not act like a child when things do not go your way by picking up your marbles and running home. We do not do that in the real world.
The problem we see in Wisconsin happened in Texas in 2010. The minority parties were voted out because the electorate said they are tired of this nonsense. If they continue this, there is going to be a problem. The irony of it is the people in most of the country are behind what the governor is trying to do. He is trying to tell public workers that they have to pay for some of this healthcare cost just like everybody else.
You can understand some of the angst the teachers are having, however, because they cannot go anywhere else. Their pensions at those local school districts are non-portable. If they want to go to a better place, they have to start from scratch. The system is definitely broken, and they are trying to fight for their livelihood. At the same time, the rest of the state feels this is all on their backs and they need help with the cost. There is a tension here that is not going to go away, and we will see it spread across the country.
Frankly, I think this is a good tension. We have to throw off the yoke of the federal government dictating how our school systems works, how healthcare should be used and purchased, and dictating every other aspect of our lives that it is not supposed to be in. That is why we are in all of these problems right now. I hate to paint with such a broad brush, but the federal government is involved in areas it should not be. The founding fathers were smart enough to write the Constitution to keep them out of it. We were too smart for our own good and have circumvented the Constitution. We have not changed things by amendments like we should; instead we are using legislative edict and courts that are too willing to let unconstitutional matters pass muster.
But I digress as always. We have issues approaching, but the market is still moving higher because of that liquidity. Every time there is a dip, the buyers return with enough vigor to keep a steady uptrend in place. Very impressive in a case history of the power of liquidity.
TUESDAY
The market is closed on Monday for President’s Day. We start on Tuesday with the Case/Shiller and a little consumer confidence. Those are always important to get a lay of the land. Confidence is expected to rise, but it is still at pathetic levels. We are just above the levels of flat-out recession.
Existing home sales are coming out, and they will be very important for the week. That is 80% of the market, and we have to see how they are doing and what the home inventories are. We also have initial claims and durable orders. Then the new home sales come out. They will be important as well because they typically require new furniture and all the other things that go in a new home.
Friday brings Michigan Sentiment and the GDP second estimate. It will be curious to see if it will bump up. Those imports and exports all play into that. We cannot put too much into this. I would suggest that 3.3% is likely overstated. Unrest over the weekend will also factor in. I am not talking about overseas necessarily; I am talking about Wisconsin and other states where they have to make some tough decisions.
Next week we come back from a holiday, and you always have to be somewhat concerned about that. Markets can change over holidays, and we have seen it many times in the past. This market is potentially at an inflection point. It has had a long run. There are stocks having more trouble now than in the past. Not that they are breaking down, and not that we are seeing the market struggle overall. The indices are still moving up, and they are made up of individual stocks. Just as there is concern that the unrest in the world will continue to spread, I wonder if the issues seen in a few of our stocks are going to grow and spread as well. Will we see these great stocks start to fall over? That is a big story that would be the changer for this uptrend.
Our game plan is to be very careful and watch for in your ear like Shoeless Joe Jackson tells us. We have a lot of plays to the upside right now. That is one reason we were taking nice gain off the table all week, and especially on Friday. We were banking more big gain to put in our hip pocket. If that one in the ear comes, we will be ready to get out of the way. If it comes down the middle, we will hit it.
That means we will continue to look for good plays. There are still great setups out there. If the market continues to shrug off the inflation problems and the unrest overseas, we will not sit in the background and watch the market continue to moves. No, sir, we will be in there just as we have been all along. We will take our cuts and drive those big fat ones coming down the middle into center field. Maybe we will not hit home runs on these although it sure looks that way with the returns. We will be happy with singles and doubles; those will drive in a lot of runs.
The point is we will continue to look for opportunity because the trend has not changed. You cannot look at the chart of SP500 and say that you have to fear that. It is a love/hate relationship right now because it has gone so far and you do not have as many great entry points. With that kind of trend, it is tough going if you try to short this with no reversal and test back to give a good entry point. That said, we will be ready. We have the Boy Scout motto in mind. I participate with the Boy Scouts quite a bit, and I have a son who will be an Eagle Scout at age 14. I am very proud, and I want to always be prepared as well.
We will watch for that downside. If the opportunities set up and they are starting to we can take advantage and make money. We have gotten our heads chopped off on a few of them, but we look at them as hedges. If the market turns over, we will make good money on them. We have WHR right now. It had a bit of an up day on Friday, but it has been heading lower for us. There are others that will be heading down. NTGR looks like it will roll over for us. Maybe we should have been in on it today. We will get it early on Tuesday if we need to, and we will look for more of these. We will have them in our back pocket. Maybe in our hand, too, ready to fling them out there.
It is a time to be cautious. It is not time to load the boat on any one play because markets in transition can be very tough. You can be surprised at how the market continues to move higher, but sometimes you see your account suddenly whittling back somewhat. We look a bunch of gain, so that will help. You can understand that if a few of these areas start to erode and do not recover, it starts to have an impact. That is why you take gain on the way.
In any event, the old game plan is to continue taking advantage of the trend in place and to be ready for changes. Opportunity presents itself in many ways now, and we will be ready. You cannot have long uptrends last forever, as FFIV showed. Have an excellent weekend and a great President’s Day. Remember those truly great Americans that started this country.
Sometimes we seem to use them like punch lines instead of understanding how truly great they were. If we could capture some of that greatness in our lives and put that example out for everyone else, just think how fantastic we would be. We could recapture the spirit of patriotism, the entrepreneurial spirit, and our individuality. We could pull ourselves up and make this country great by ourselves without having to look to big government.
The government did not build this country; we did. We need to take it back and make it great again. By being a success in the stock market, you are taking charge of your life. If you take charge of your life, you do not need to look to the government. Ron Paul has asked if you would pay 10% just to get the government off your back. Every year, 10% of what you make is just a kind of toll to go about living in the country with no other benefits or services. You benefit naturally from the infrastructure, the defense, and the things the government is supposed to do under the Constitution, but you would not participate in Social Security, Medicare, etc.
You know what line I would be standing in. I think you would be in that line with me because of the kind of people you are. You are taking hold of the reins because you are stock market traders who know what you are doing. That is where all of the founding fathers were, and that is where we need to be, too. Have a great weekend. I know I got up on the soap box, but I think it was somewhat important.
