Market Makes It Three Straight
- Market makes it three straight to the upside led by SP600 and the other NYSE indices as they break their 50 day EMA to the upside.
- Volume drops off rather sharply following expiration.
- M&A continues with T buying T-Mobile.
- Libya intervention, some control over Japanese nukes calms investors . . a bit.
- Existing home sales are still having a hard time existing.
- Bonds, gold, and oil show the action in financial markets is just not about Libya and other geopolitical events.
- Bifurcated market continues as chips look very much like a 1-2-3 rebound on light volume.
MARKET SUMMARY
Events don t worsen so stocks continue the rally.
Business as usual on Monday, or so it seemed as stocks picked up where they left off, sort of, on Friday. Friday the stock indices closed higher but the patterns left it less than clear that they would continue this week. A bit of cold feet ahead of the weekend and potential negative developments closed them off session highs, and when things were pretty much status quo, and indeed arguably a bit better Monday, stock futures surged and stocks opened higher.
They opened higher and continued the move through the close with only nominal intraday tests before closing near the session high. That pushed SP500, DJ30 and SP600 over their 50 day EMA. Indeed, SP600 gapped through that level and rallied to the close. Very good to see the small caps showing such strength as it suggests economic strength continuing . . . if they can continue the move.
That is the big if. The NYSE indices look pretty solid in their price moves but NASDAQ and SOX are still lagging far behind, rallying but not with any gusto. Those are key growth areas not suggesting a lot of growth for now.
Another issue is the volume. You would expect trade to decline after expiration Friday, but shares barely made average on NYSE and fell far below average on NASDAQ. NYSE trade was not horrid, but the lower volume on NASDAQ suggests tepid buying and indeed this entire bounce has been on rather weak trade as you cannot count the Friday expiration volume.
Indeed, the NASDAQ and SOX charts look like 1-2-3 pullbacks in reverse: after the higher volume selling they are rebounding but volume is low and they have the look of stalling at near resistance after this 3-day bounce.
So you still have the bifurcated market I have discussed the past couple of weeks with some improvement in the split thanks to SP600. A market divided has a hard time standing, at least over the longer term. Question is, after the SOX foreshadowed the recent overall market declines and indeed led the indices lower, are the NYSE indices leading back to the upside or is the market just recovering while SOX and NASDAQ post what look to be relief bounces? NYSE indices look pretty strong with ABCD patterns rallying upside, but NASDAQ and SOX are still struggling and definitely in the show me mode.
The News on the day.
What drove the action? The usual.
Japan appears to be making progress on containing the nuclear reactor situation as it restarted cooling flow to a few of the stricken reactors. There are still worries with elevated radiation levels appearing in some produce and milk away from the nuclear plants and high radiation in the ocean up to 100 yards offshore.
Libya is still in turmoil though perhaps the beginning of the end has started as UN coalition forces took out air defense systems and established a no-fly zone. Worries about the US and others getting dragged into yet another war in the area are thus far overshadowed by the idea that stability will be brought and thus calm oil markets. Didn t happen Monday but more on that below.
Speaking of oil, gasoline prices hit $3.57/gallon on average in the US according to the Lundberg Survey. The march to $5/gallon in the summer is on, and if there is a storm in the Gulf of Mexico at the wrong place at the wrong time there is a chance for much higher prices.
M&A activity continued as AT&T offered to buy T-Mobile. Both sides look forward to the deal being completed, blah, blah, blah, but you wonder if Deutsche Telecom doesn t care one way or the other as it has a $3B termination clause in case the deal does not go through due to anti-trust or other reasons.
Existing home sales thumped sharply lower to a 9-year low. -9.6% month/month and -2.8% year/year. Median home prices fell to $156,100 a 9 year low. Inventories fell to 8.6 months, something that is necessary and a continued good trend. The housing market weakness continues to hurt the economy, but it is part of the process as the housing market works through its long decline after an overly long, artificial rise ahead of the recession. Because of the artificial highs the fall has been terrible and the economy simply does not have housing to spur the recovery as is the usual case. If it were in the mix along with the solid manufacturing, the recovery would be much further along.
Three days to the upside and SP600 along with SP500 still want to move higher. NASDAQ and SOX are problematical: they are at a point where they will run out of gas if they are going to do so. Will the NYSE drag them higher or will they lead lower once more? Right now the strength of the NYSE appears to be ready to lead them upside and that makes Tuesday and Wednesday very interesting sessions.
Given the bifurcation and the strength of some sectors and weakness of others there are plays in both directions and we are playing stocks in both directions. There is always the chance for whipsaw in those situations, but if you keep your risk/reward right, i.e. have nearby support or resistance as your firewall stop points then the risk is well-defined and limited. For instance, we still like chips to the downside but software looks good and some retail such as PCLN.
Outside forces remain at work but for now the liquidity is winning out, at least on NYSE, and the small caps look solid. I repeat what a good indication that is, particularly if they continue to improve and, of course, break to a new post-2009 high.
Jon Johnson
