SUMMARY:
- It took a couple of tries, but the market manages to start a relief bounce.
- Qaddafi rumored shot, oil retreats, stocks recover.
- Jobless claims again below 400K, suggesting, dare anyone say it, a trend lower.
- January New Home Sales fall 12.6%
- Durable Goods Orders headline is in line but ex-transports it plunges and business investment tank
- Rebound indicates the selloff is not a massive one, but likely not over yet either.

MARKET SUMMARY

Oil rally abates and stocks manage a relief bounce.

It took a couple of tries, but the market was finally able to put in a relief bounce that stuck somewhat. On Wednesday afternoon, stocks managed to rally off of the lows. While they were not positive across the board, it was an indication that perhaps the selling was not going to take stocks lower day after day.

By Thursday morning, it looked like that had dissipated. Stocks started lower with the futures, but managed to recover back to positive by the open. They could not hold onto the gain. They did tumble down through lunch, but in the afternoon they found buyers once again and rallied to the upside. The SP500 and the Dow were unable to close positive on the session, and the move was led by the growth indices. They were green on their end of the board. NASDAQ, +0.5%; SP500, -0.1%; Dow, -0.3%; SP600, +0.5; SOX, +1.7%; NASDAQ 100, +0.5%.

I cannot complain about the action since the market was able to post an upside rally that held. That is good to see. We were worried that the market would continue to sell off in a straight line to the downside. That can be worrisome. If the market tumbles without check and has violent downside days session after session, that can mean something more nefarious is afoot.

These last two sessions showed stocks rebounding late in the day. On the SP500 chart, it showed a nice doji above some support in the form of the mid-January peak. Looks quite comfortable in this test. We had an amazing rally to the upside and a three-day pullback. Will it already try to rally from here? It could it be that we have a 1-2-3 pullback on the SP500 and it moves to the upside.

Why was SP500 down at all? Energy took it on the chin. After great runs by oil itself and energy stocks such as XOM, they were a bit overdone and needed to come back. They were down a bit, and that dragged SP500 with it. Overall the action was solid.

It was interesting watching the trade for oil. It was up early and then fell. It rallied back and forth all day. During the day, there was a rumor that Kadafi had been shot and killed. The oil market retreated because people figured he was causing the issues in Libya. Its production is down 75%, and that is a major blow to the daily oil production. If he was out of the way, the market figured oil prices may be able to stabilize since Libya could get back to producing oil.

Another interesting fact about the oil price was the rumors that there would be violence in the streets of Saudi Arabia. Protests and unrest were expected, but it did not materialize. People were in the streets and it freaked out many traders when they saw the video feeds hitting the news. It turned out these people were happy, however. Their king was coming home, and they were cheering and shouting in joy. When that became apparent, oil prices faded even more. They were trading almost to $101 on the NYMEX, and Brent crude was up to $119-120 before news improved and they started to peel back.

The economic news was very important on the day. Initial claims fell to 391K. Once again, two out of three weeks coming in below 400K. That suggests that maybe it was not all the weather. Maybe there is a trend to the downside forming, and that would be a huge boon for the economy. Maybe small business is actually getting a foothold and performing better.

The four-week EMA fell to 402K. That is the lowest since July of 2008. That is getting significant. The problem is there were also downside results. Durable goods orders for January were at 2.7%. That was in line with expectations, and the prior month was revised to just -0.4% versus the -2.3% originally reported. That was good news, but then you have to look at the details.

Taking out transportation and a big jump in orders for airplanes, you have a -3.6% drop in orders. Huge. On the positive side, last month was revised up to 3% from just 0.8% gain. That was not the only story with durable goods. Business investment fell from 4.3%, and that was revised higher from 1.4% in December. That is a real positive, but it tumbled over 10% from that level, coming in at -6.9%. That is not a good indication, of course. Business investment is so important, and we found that out in the 2000-2001 recession.

The consumer remained strong, the housing remained strong, but business was weak. With a weak business sector, we did not get any investment in the US for three years, and we really suffered. We lost a lot of technological edge in that time as a lot of jobs flowed overseas. The US tried to purposefully hobble its economy to slow it down because we were afraid we were getting too far ahead of the rest of the world.

Be careful what you wish for, because we got exactly that. To this day we are lamenting the loss of a lot of those technology jobs overseas. I do not mind losing underwear and T-shirt manufacturers to overseas; it is low-tech labor that does not command a very high wage. When we lose our good tech jobs overseas because we just want to slow our economy down for the hell of it, that is absurd. We are still paying the price today. But, of course, I digress.

The last piece of data coming out for the economy was new home sales for January. They dropped 12.6% month over month. That was following a 15.7% increase in December. What a drop. 284K when 310K was expected. It was expected to drop, but it was not expected to fall like a stone. Median prices were down 3.7% to the lowest price level since April of 2002. $158K is the median home price.

Inventories bounced back up. They came in at 7.9% versus 7% in December. That is still well off the 8.3% in November and 8.5% in October. The economic news was not great, and that is in line with what we have seen over the past few weeks — a softening of the economic data. It was having a good run, improving month after month, and then it got ahead of itself. We are going through something of a soft patch, and it looks like the stock market will go through something of a soft patch as well.

FRIDAY

We will get the second iteration of the Q4 GDP, and it is expected to rise to 3.3%. We can deal with that. The final Michigan Sentiment for February will be out, and it is expected to match the 75.1 reported originally. That is much better than it has been. It is not the 90′s and 100′s that show things are rocking along well, but it is doing okay in the recovery mode.

What happens with respect to the market overall? I think Thursday afternoon was a relief bounce. We could get more of that. It is definitely possible that stocks bounce in relief into the weekend. After all, there has been some aggressive selling. Some of those sellers that were recovering on Thursday afternoon could cover some more on Friday, extending the relief bounce. That is great.

You can take it two ways. You can say it is still bouncing so we are going to stay with our plays. If they are holding up above a support level and bouncing nicely, that is something to consider. On the other hand, you can say we have had some bad news and a couple days of a selloff. We are trying to bounce back up. We know that in November we had more than a couple of days where we ended up heading much lower.

After a bounce like this, are we likely to continue to the upside unabated, or will we likely pull back and test some more? I am more in the latter camp. This has been a long run, and it needs more of a correction than it has shown thus far. A rebound on Friday would set up a Monday to the downside. We have seen it many times in selling; that is how things work.

On Friday if we get another good bounce, consider lightening up any stocks you do not feel good about. Use that bounce to close some upside positions. At the same time, we will be looking for downside plays. If we get another good bounce to the upside on Friday, that will give us a day and a half of upside. That is typically all you get on a rebound and a relatively shallow correction.

We could look at some downside plays on some of the indices or on other stocks that have bounced back up from some sharp selling. NASDAQ would have to bounce considerably to give us a better downside play — it has made two days of holding near the 50 day EMA. I would like to see it move up some more before jumping onto the QQQQ’s to the downside.

The SP600 could bounce a little more in relief and give us a good entry point to the downside. That is one to consider if we can get a decent upside bounce. Maybe this time we can catch it a bit cleaner. We will be looking for index plays and some individual stock plays along those lines (rebounds that fail), and we can make some money on the next leg down in this correction.

Again, I do not think it is a major selloff. The fact that it is trying to bounce right now after just a couple of days of selling suggests it will not be an all-out gutting of the rally. It will be more of a pullback like we saw in November — maybe a little deeper because we have some added issues with oil prices. Once investors get their hands around that — and if they see it will not continue to run higher — then it will have a relatively short half-life and the market will be able to recover.

The market is in a good uptrend after a solid base in the summer. This is the second leg after the break to the upside. We are looking for a correction here, no doubt, and we will plan on using the upside to lighten some positions. We are also going to look at the upside bounce to take some new downside and make some money during the chop.

Once we see good stocks bottom at support and start to bounce, we will like to play them. With most of the upside we have right now, we are still just looking at trades like DECK and RVBD. We are not looking for long term. If it so happens, we will be more than happy to take it. If not, that is the plan and we will just live with it.

I do not think this is over yet. I do not think it will be a horrendous selloff, but we have to wait and see what the market will do. For now it is acting as expected. We will use this bounce we anticipated, and we will use it the best we can to get out of some positions that are lagging and to make some money to the downside. All the while, we will keep our eye on good, quality stocks that have been market leaders and are still showing good strength — holding up at near support or at a key support level. If they hold this through the selling, they will be the first to take off when the selling is over.

I will see you on Friday. We will see how this short week winds down and if we get that short-covering bounce heading into the weekend. Do not forget about Monday because that could be the one “in your ear.”