Market Ignoring the News?
- Market continues ignoring softening economic data and geopolitical events, rallies fifth day out of six.
- Anticipation of QE3 or end of quarter tape painting?
- Jobless claims trend continues to improve with a 30 month low on new claims.
- February Durable Goods Orders post consecutive downside as capital investment stays negative.
- NASDAQ rallies through its 50 day EMA, following SP500, SP600 upside.
- Tape painting or not, the bid appears to be up toward quarter end.
MARKET SUMMARY
Market ignoring the news or using it to conclude the Fed has to continue its QE program?
Investors appeared to ignore a lot of negative news related to the world economies once again. There is the ongoing natural disaster issues in Japan, the escalating war and unrest in Libya, there are debt issues in the EU, here at home, and likely other economic problems in New Zealand. There are a lot of problems out there, but the market is up for its fifth day out of six. It is bouncing back nicely as the SP500 comes off of its ABCD pattern and has moved through its 50 day EMA. Not only that, but the NASDAQ has joined. It gapped through its 50 day EMA as well as other resistance along the way on Thursday. There is very upbeat market action in the face of not-so-great economic data in the US and continued negative world economic news.
What could be causing that? Given all the negatives facing the US and other world economies, the market may be factoring in a Quantitative Easing III. They may not have been ignoring the bad news; perhaps they were using it and calculating that Quantitative Easing III would be necessary because of the bad news. Then it would not been an ostrich head-in-the-sand approach, it would be a very cognitive approach that would require the Fed to continue acting.
There is another theory. It may be exclusive of the anticipation for Quantitative Easing, or it may be in conjunction with it. There is perhaps some tape painting at the end of the quarter. There is a lot of new money still coming in because a lot of people are coming into the market. They are being dragged in from the bear camp, and the market continues to go higher. It is moving back up and regaining the issues that started when the Libyan events began. With a decent recovery, a lot of bears cannot take it anymore. They are throwing in the towel and wondering what will bring the market down.
There are also those who want to be involved but maybe were lagging in entering. They are moving in and buying some good names X names that have been leaders X and further pushing the market back to the upside. That is called tape painting. They want these in their quarterly statements. They want to be in good stocks that have been leading and point to that to show what a wonderful job they have been doing.
There is another phenomenon ongoing, although it did not occur last month. It is the first-of-the-month new money. There is a lot of money coming in right now, and I think it will continue into the new month (at least for a session or three). That does not mean the market will rally straight to the upside from here and continue without missing a beat. There will be ups and downs. We have had some good moves, and if we have another on Friday, Monday could likely see a bit of a pullback. It rallies upside, takes a breather, and then rallies again. The money is coming in right now, and I think the path of least resistance is to the upside (believe it or not, after that selloff). Indeed, part of that is the way NASDAQ is reacting to its resistance as it moved through that 50 day EMA with a gap. Even the SOX, which has been lagging, moved through its 50 day EMA on the Thursday close. It did not gap through as NASDAQ did, however.
There you have two good reasons that the market is moving up, even though it seems inconsistent given the economic data and events surrounding the world. What do I mean about the economic data? On Thursday we received more news out of the US economy that was not necessarily great. We have already seen the terrible existing home sales, and new home sales tumbled dramatically in February. We learned on Wednesday that new home sales were down 16.9%.
The data was mixed on Thursday, but it was decidedly negative. The market took some heart from the continuing jobless claims that showed a continuing trend to the downside. That is a positive. 382K new claims versus the 384 expected and 387K the prior week. It was revised up a bit, but it is clear now that the move below 400K is here to stay. That was actually a 30-month low for initial jobless claims. That is great news.
On the other hand, durable goods orders fell 0.9% when they were expected to rise 1.1%. That was on top of a 3.6% rise in January. That is a fairly precipitous and unexpected decline. Taking out transportation, it was down three times what was expected, coming in at 0.6% when a 1.8% gain was expected. The prior was revised a bit better to -3% versus -3.6%. The big factors that stand out: Capital goods, the business investment, is down for another month. It was only down 1.3% versus the 6% drop in January, but now we have a back-to-back decline. Machinery was down -4.2%, telecom communication equipment was down -2.3%. Autos actually rose 1.9%, but there were drops X not as substantial as in January, but still drops.
What is going on? There are likely worries with respect to global events. Now we have Japan on top of the unrest in North Africa and the Middle East, and the New Zealand earthquake. There is a wait-and-see attitude by many businesses out there. Our contacts that we have made around the world tell us that things have slowed down rapidly as businesses want to wait and see what will happen before they buy more.
Of course businesses have been buying quite a bit, riding that manufacturing X I will call it a boom; the numbers are strong in the US. That is the one thing leading the economic recovery. They have been buying capital equipment in order to feed that boom. They can afford to step back and not buy for awhile, and they are doing just that. We have a bit of a pause here.
The Irish GDP was down -1.6%. Moody’s downgraded 30 Spanish banks. The debt issue in Europe is not getting any better, and the story out of Libya is not getting any better. There is more fighting as the allies bicker over who will be in charge. Then we have Japan with more radiation showing up with unexpected rapidity and force. There are bad issues out there. We have some mixed economic data leading to a slowdown (the soft patch I have been talking about for the past month). Given the nice rebound it has experienced, it is normal for it to have an impact. The market is nonetheless ignoring what is going on.
As noted, it may not exactly be ignoring it. It may be using that data to conclude that the Fed’s hand will be forced to continue with Quantitative Easing. In any event, it resulted in nice gains on the session. For the second day, the market started low and rallied high. NASDAQ, +1.4%; SP500, +0.9%; Dow, +0.7%; SP600, +0.65%; SOX, +2.5%; NASDAQ 100, +1.8%.
FRIDAY
There is some economic data on Friday. We have the third and final of the Q4 GDP. It is expected to come in a little better at 2.8% after being written down in the second iteration. Michigan Sentiment’s preliminary for March is out almost a half hour into the session. It is expected to decline slightly to 68 from 68.2. There has been a softening of consumer sentiment. The investor sentiment has been improving because some bears are giving up and being pulled into the market right now.
Consumer sentiment has been flagging with all the geopolitical events hitting them. They see their prices moving up, yet the government is saying there is no inflation. That they know that is BS, and it is a little disconcerting and causes a little despair among consumers. They see what is happening. It costs them $100 to fill up their truck. Their milk, meat, corn, cereal X everything is moving higher in price, but the government says there is no inflation. That indicates that the government will not do anything about it or adopt policies that would help fight inflation.
That is where the consumer starts changing his opinions. The sentiment drops and they start expecting inflation (as we have seen with the reports out this week). That is a self-fulfilling cycle. When the consumer starts to expect inflation, then he tends to get it because the policies of the government try to buck up the sentiment of the consumer. That means more easy money and then the problem only worsens. We have these issues confronting the market, but the market is either ignoring them or it views them as positives for a Quantitative Easing III.
What do we have moving into Friday? Whether there is tape painting coming into the end of the quarter or not, the market continues to move higher. The bid is there. At the same time, the market has been up five out of six sessions in a pretty much straight, knife-point rebound from that week of sharp selling. It turned the corner and bounced right back up. It fell that far and it had to bounce. It was oversold and did bounce, and now it has gone up almost six days straight.
Could it be a bit overbought on this move? Yes. Even though we see some tape panting in the process and maybe some first-of-the-month/first-of-quarter money moving in, the market does not go up straight without end. It has to pause and come back. It never goes in a straight line. While the market as performed well and it was up again Thursday, we may see some profit taking on Friday, particularly if the market starts to the upside once more.
As noted, the market has been moving in a series of low-to-high moves. Buyers have been using dips to step in and drive the market higher. On Thursday they did not even wait for a dip; they started out of the gates and drove the market to the upside. If we get another gap to the upside on Friday, there could be some profit taking later in the day. It would be six out of seven days to the upside. That is a good run. With the indices hitting near this next resistance at the early-March peak, investors might be ready to take some gains off the table moving into the weekend. Who knows what will crop up from all of the geopolitical worries over the two days until Monday.
We anticipate getting some pullback if we get a move to the upside. If we get another good bounce upside, we may pull the trigger on some stocks that have moved well for us and have some profit built in them. We can take some off the table. We will see. Some of them that we have already taken gain off of are hitting secondary targets we have set. If we get a good surge to the upside that starts to run out of gas, we may very well consider pulling the trigger and banking a little more money. I think that is what others will do, and that is why we can get a little pullback into the close or in the afternoon on Friday.
We have had a great rebound move. It seems to have some legs to it, but it is also approaching important resistance. It is not up and breaking free and clear of resistance, so it could still have some issues. Friday we typically do not buy too much. We have picked up a lot of positions on the way up, and it is up five out of six days. I am not too wild about taking a lot of new positions on Friday. We would prefer to use any gain to take some profits if they are there on Friday afternoon, and then let it come back Monday. Then maybe we can catch the run into the end of the month with a few more positions as we catch come good stocks that we did not get on the way up. We can catch them as they test and rebound. We can make some nice trades into the end of the quarter, and then catch the new money as it comes in for the new quarter in April.
I will probably not have a lot of new trades tonight. I will look for some to see what is out there. If it is, we will take what the market gives. If not, we are not going to worry about missing plays on Friday given that the market has been up for over a week. The risk/reward is a little skewed. We want to get better entry points now. Again, if it is there, we will take it. We will look for new plays to the upside. We will still have an open book and look at those plays to the downside. After all, the indices are not above the March peak.
If things turn over and suddenly get worse, we could have some issues. Still, I do think it will rally into the end of the month and the end of the quarter. That will give us more upside to take advantage of. Maybe we get some downside after the new money for April and Q2 is put to work. We will see what the reports bring and see whether the market can sustain the move or will succumb to a bit of profit taking on Friday.
