Market Rally Finally Hits its Tipping Point
- Post-holiday blues: unrest spreads from individual stocks to the market.
- Market rally finally hits its tipping point, triggered by Libya threatening to pull its 1.8M bbl/day off the market.
- WMT earnings falling, Home Depot’s rising. That is as it should be in an economic recovery.
- December Case/Shiller remains in the dumps as the new home buyers stimulus is long gone from the rearview mirror.
- Consumer confidence is rising sharply, but for how long if oil prices, and thus gasoline, continue to surge?
- Oil, gold spike as fear trades renew their strength.
- Big downside session not likely the end of the selling as it was in late January.
MARKET SUMMARY
Extended market hits its tipping point.
The market was vulnerable to those post-holiday blues. Sometimes when the stock market is extended and there is bad news out, the sellers can come in with force. The sellers have been showing up the past couple of weeks. Friday I pondered whether the sporadic showing of weakness in key leadership stocks would spread to the rest of the market similar to the unrest spreading to North Africa, the Middle East, South America, Mexico  and maybe other places as well.
That certainly looked to be the case on Tuesday as the sellers flexed their muscles. This time they showed they were much stronger than the buyers. The buyers put the wallet on the hip and left. They did more than that later in the session; they started actively selling because stocks continued to erode as the day progressed.
They made their obligatory rebound attempt as they bounced up off the initial gap lower. That was the peak. It turned over and stocks sold for the rest of the day. Indeed, they hit a new low right before the close in the last hour and managed to rebound just modestly to close out the session. It was an old-fashioned tail kicking on the stock indices. NASDAQ, -2.7%; SP500, -2%; Dow, -1.5%; SP600, -2.5%; SOX, -4%.
What was the tipping point? It was Libya threatening to pull its 1.8M barrels of oil per day from the world market. That is just 2-3% of the world’s oil output, but it has a ripple effect. We saw problems during the oil spike when it ran up to $145, and fog in the Houston ship channel caused oil to fluctuate a few dollars. The fact that oil spiked was no real surprise, but the impact was not just with oil  it was across the world. Some commodities rallied but a lot sold on the day. Stock markets sold as well.
There is fear of such a large spike in oil that it will be a wet blanket on the economic recovery. Indeed, there were a lot of questions today about whether it would completely stall the recovery in countries altogether or if it would trigger stagflation. There was stagflation in the 1970′s. We had an oil shock with the embargo, and it caused a ripple effect across the world. There were a lot of other issues going on here and other places. We have massive regulations starting and other problems.
Stagflation is the high rate of inflation coupled with the very slow economic growth, and there is a worry about that now. I have been talking about it for over a year now. We are putting forth the same policies of the Depression era and the 1970′s, so it is no surprise that we have similar results. There are geopolitical issues popping up and the oil shock. It is not necessarily the oil shock that causes it, but it can be an en ingredient. It looks like it will try to be an ingredient here as well.
Gasoline prices are at $3.00 per gallon and will go higher. I already said they would hit $4.00 in the summer, and they may even move past that. A lot depends on how far the unrest goes. If it heads to Saudi Arabia, then we have some serious issues. It looks like Saudi Arabia is becoming something of an island thus far. It missed all the unrest, but we already know from years ago that there is a very vocal anti-establishment group in Saudi Arabia that is kept under wraps.
There are a lot of issues impacting the market, and the sellers finally found some traction. The market rally was quite extended and was susceptible to outside shocks that could send it lower. They certainly did so on Tuesday. The question is whether it is more of a one-day event as in late January, or if this is the start of a selloff similar to November or worse. I do not think it would be worse, but, then again, there are wild cards out there. The markets react more harshly to geopolitical trouble than with basic, run-of-the-mill stories about an issue in one country or another.
Other issues were impacting the action on Tuesday. They were side stories, but they gave more reason to sell. The Libya story gave more reason to sell, given that the market was quite extended. There were important retail earnings to start the week, and there will be more as the week progresses. WMT sold off because its sales are falling. That is no surprise. WMT does better as recessions get underway; it does not do as well when recoveries get underway. It has still not performed poorly over the past seven months. It rallied to a new rally high, set up an ABCD pattern, and it was bouncing on Friday before this news hit. Apparently investors were anticipating better news than they got.
HD announced earnings as well, and it pulled the opposite. It had a very nice day, but it could not hold it. It gapped to the upside on a beat on the earnings and an increase in its outlook. That is what you would expect if an economy is expanding. Home improvement stores like HD should do better as the economy recovers. Those two stories go hand-in-hand with a recovering economy, and that makes everyone feel better.
Then Case/Shiller came out. The market gives with one hand and takes away with the other. The Case/Shiller 20-city Index saw a price drop of 2.38% in December. That is a year-over-year number, and that is a significant drop. Authors of the study said that the first-time home buyers credit helped bolster prices, but that is well in the rearview mirror now.
There is no more buying. Indeed, they feel a lot of the sales were stolen from this winter, and therefore we are seeing dearth of sales that are even worse that you would normally think. They say the market for houses bottomed in mid-2009, but it has been unable to get off that bottom ever since. It is similar to stocks in a bear market: They may hit bottom, but that does not mean they necessarily go up anytime soon.
Consumer Confidence was quite nice. It rose to 70.4, much better than the 67 expected and the 64.8 in January. Note January was revised down from 65.6. What was the reason for the confidence? It was the stock market. Most people felt good about stock market and their job prospects. Now we have had an oil spike, however. Now we have serious problems, and we are seeing results in oil and other markets. Will that dampen enthusiasm about the future?
The combination of stock market losses and the potential of $4.00-$5.00 gasoline had just about every commentator post-market in a fairly dour and sour mood. You can hardly blame them. When the market gets kicked around like that, that is what happens. They bring the bears out when things are the worst, and they bring the bulls out when things are topping at their best level. That seems to be the way it is. It is amazing how sentiment continues to repeat itself over and over again. Recognizing sentiment is a very important part of being in the stock market.
WEDNESDAY
On Wednesday there is the MBA mortgage index and existing home sales. The latter is the most important because housing is everything; that is where most people have their wealth, and there has not been much of a change as the Case/Shiller shows. We have seen improvements in home sales, but will they continue? That comes out half an hour into the session, and the market will take some lead from there. The question is what will happen before that.
HP announced earnings after hours. It was clocked almost 10% because it missed on its revenues. It was not looking that great. The post-holiday blues hit, and now we are having a little piling on after hours onto HP. This was a big decline. There is no question about the session being a sharp kick in the rear and a stick in the eye.
The question is whether it will be a knifepoint turn as in January, but I am not looking for that. If stocks can hold support, we are willing to let them run. There are leaders that will hold and bounce. They are leaders after all, and sometimes market sellers do not affect them. Most stocks do get affected by the market, however. We were closing positions today that were unable to hold any support. If we do not get any bounces, we will have to close more.
Again, we would get a selloff in the morning and a reversal. It can happen, but the odds are against it. There are real issues out there, the market is extended, and a lot of people that wanted to get into the market got in. Now that they are in, there is no one for them to pass the stocks off to. They are stuck right now, and I am anticipating more selling to the downside.
Will we get any more downside plays here? We could be aggressive and jump into some, and we may do that. We have a few downside plays we were able to get into. The gap today made it difficult. That is the real aggravating part. You can be set up and patiently waiting for it to happen, and then without making any kind of rounded top on SP500, you can get a sharp snap to the downside. That does not mean all downside plays are gone. We will still look for some of those.
We were able to take a bunch of upside gain early in the day as stocks gapped lower and then recovered quickly. Some stocks did well because of oil prices and other issues that came out over the weekend and Tuesday morning. We were able to take advantage of that and bank some gain. We had to take some off the table, but we still managed to make nice money off of some of them (e.g., DE) because we had great gain built up in those stocks already. You cannot do that with the more recent ones because you do not have the gain built up yet. I hate to say it again, but you have to play that rally until it bucks you, just like Kevin Costner said in “Tin Cup.”
The market still looks like it will sell, so we just have to stay on top of our positions. If they cannot improve and cannot hold support, we will have to close them. I do not like to sell into support. In other words, I do not sell into a stock that looks to be moving into a support level. You leave it because it can stay if it is hitting support (if it turns out to actually be support).
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Take a look at PCLN. It gapped lower but it tapped the 50 day EMA on the low and held it. You do not want to sell right now because it could very well bounce. That is what we will be looking for. If stocks bounce but then start to roll over, that is an opportunity to take some more positions off the table that are lagging or that were struggling. It makes sense to do that because we do not know if we are going into a two-or-three week pullback or a two-month pullback after such nice gains on the indices.
We will protect our positions. We will take opportunity as it arises such as on a relief bounce. If it cannot hold support, if the stock market continues to sell without a relief bounce and they cannot hold support, we will need to close some of them just to be cautious. They may bounce back up on us, but that is just the way it is. We will try to play some downside plays if we can get decent entries. We could get a bounce to the upside that gives us a chance to exit some of the upside plays. What a perfect opportunity to take some downside positions as they test to the upside after that big selloff, and then roll back over for further selling.
That is the game plan at this point. It looks like the selling is on for now. We could be wrong and it could be thrown right back in our face  it has done it before. It did that in late-January, but it will have to prove it because it would be defying the odds in doing so.
It was not a great day. We did manage to bank some nice gain, but I do not want to lose anymore ground. Watch your positions. Take advantage of the downside the best you can, and be ready for the downside or the upside as it presents itself. We will get you ready for both ways as they get back into the right buy point.
