Market Holds Gain Despite Profit Taking
 - Market makes it 6 out of 7, holding a gain despite some afternoon profit taking.
 - Older economic news (GDP) is fine, but the newer information is not asÂ
 - Second Fed member talks about inflation. Market may be assuming QE 3 but the Fed has started dropping bread crumbs.
 - A solid week, a bit extended, but more tape painting provides a path for gains up to . . . the Jobs Report.
MARKET SUMMARY
A bit of profit taking late in the session but nothing to change the week.
The stock market performed as expected on Friday with a continuing recovery rally. It lasted at least through lunch, and then it made the pullback that we anticipated into the afternoon and the close. There was a bit of profit taking, but it was not anything spectacularly negative. It was just a little fade ahead of the weekend following a good six out of seven upside sessions. NASDAQ, +0.25%; SP500, +0.3%; Dow, +0.4%; SP600, +0.84%; SOX, -0.25%; NASDAQ 100, +0.2%.
Nothing negative at all about the action. It was just a day where the momentum continued until the afternoon when some profit taking occurred. We felt that was going to happen, and we were part of the profit taking. We bagged a few nice gains here and there on another run to the upside. With the market being this choppy over the past few weeks, having a nice run and banking some gain is a very good outcome. Moving into next week, the question is whether the tape painting ahead of the end of the quarter will continue, and will it continue into the Friday jobs report? Friday will wrap up the quarter, and it will be interesting to see if the market moves right up to the quarter or if there is an anticipatory pullback.
New money has been coming into the market on new months (excepting this month). Overall we have had good upside moves to start each month and each quarter as fresh money is put to work. There is no doubt that new money is coming into the market, but there are some issues ahead we have to examine before we can conclude that the market can continue to the upside after this end-of-quarter rally.
MONDAY
As if the rest of the issues in the world were not enough, the data parade renews itself next week with a torrent of economic reports culminating Friday with the March jobs report. There may be more news over the weekend as problems arise in Syria now, and more stirring in Saudi Arabia. I do not want too be dramatic here, but the spread of this unrest is getting to be quite dramatic. Bear with me while I digress a bit.
I am sure a lot of people want to throw off the yoke of oppression they have endured for decades, and no one other than the yoke owners have issue with that. The problem is that some people are using the uprisings in North Africa and the Middle East to score politically here in the US. They are trying to piggyback on the uprisings, but the themes are not the same at all. We do not know all of the motives of those overseas, but we can assume there are many who just want freedom. That is natural. We wanted it and it is an innate desire in everyone. Of course they do not necessarily know how they would govern themselves, and it quite possibly would not be a democracy, but they just want freedom from what is imprisoning them now. They know they are not going to get anything if they continue to acquiesce, so we are seeing uprisings.
Over here it is not the same thing. We have relative freedom, although it is being stripped away piece by piece over the years. But we do have freedom. Some of these groups using the uprisings overseas as a comparison to their actions are simply trying to perpetuate some bad decisions made in the past. Both sides have legitimate arguments. If you have a contract and you set up your life in reliance upon that contract, it is very difficult later in life to have that reneged upon and have to renegotiate the terms. It may, however, be a situation where there is absolutely no alternative because the money is not there. There has to be a compromise made at some point because too much was promised, with good intentions, but it is more than we can deliver.
The question is how we are going to make up that promise. Do you put it all on the other members of society who are not a part of these pension contracts and other retirement deals that were made? Do they have to shoulder the shortfalls all themselves because the governments may have been too profligate or they just overpromised? Some of the contracts were just unreasonable and unrealistic; there was no way they could be fulfilled but it was done for votes, expediency, etc. Nonetheless, they were promises made and reliance has occurred. Or is it fair to put it all on the taxpayers and tax more from them to pay for others  unrealistic contracts? Maybe it would be fair to work at it from both ends? Perhaps some of the benefits should be cut back and then maybe some more revenue brought in from elsewhere or redirected. These are issues we will have to deal with, but it is not the same as what people are experiencing overseas.
Educate yourselves on it, and you will see what the truths are. Do not be led to believe anything X not by what I say or what anyone else says. Just read, listen to everyone, and then make rational decisions. Wouldn’t we all be better off if we did that? What novel thoughts.
Back to the market.Â
Whether we want to face it or not, those are the realities that the market has to deal with every day as an overlay to what it normally factors into the equation, e.g. be income and spending, profits and losses, manufacturing, orders, confidence, etc. And we have a week full of those factors. Personal income and spending is on Monday along with pending home sales. Case/Shiller on Tuesday along with consumer confidence, and then Challenger and ADP on Wednesday. Then we have initial claims, Chicago PMI and factory orders on Thursday. This all leads up to the granddaddy of them all: Nonfarm payrolls on Friday. That is expected to fall back a bit to 185K, which is still a pathetic number.
The Unemployment rate is expected to stay at 8.9% after dropping unexpectedly to that level the prior month. Will it bounce up or not? The way they count unemployment now, it is hard to tell. It is no longer if you are working or not. It is whether you are working or trying to or out of the market, et cetera. In any event, it is still bad, but it may be improving as the weekly jobless claims are showing.
We will get a lot of data next week, no doubt. What has happened this past week when we have gotten a lot of data? The market went up, even though a lot of the news was negative from overseas and with the US economic numbers. The market said, what the heck, we are going higher. That led everyone to believe it is painting the tape or anticipating some further Quantitative Easing in the form of QE III.
We have been playing the devil’s advocate on all of the theories we have put out lately, whether it is tape painting (likely some of that) or the anticipation of Quantitative Easing III from all of the bad data and bad news in the world. We have come back and poked holes in all of that. It could be pretty much any game at this point. Why? The government is involved so deeply in businesses, monetary and fiscal policy, and in our lives and how we run our businesses. They are making sure GE pays no income taxes whatsoever from the stimulus money it received and all the other loopholes it can find. There are many things the government has to be involved in order to make everything work the way it wants to. It is a tough job indeed.
In the technical picture, we see a market that has rallied six out of seven days. We also see a rally that has a bunch of big-money players that may have missed out on some of the move and want to get in and drive the market higher. Not just to drive it higher, but to get in these stocks they want to have in their quarterly reports. They only have a few days to accomplish that, and as they pile in, they push the market to the upside.
Friday was not a particularly strong day, but for reasons discussed earlier, it was not that weak either. We do not want to put too much into the two doji on the candlestick chart the indices showed in the week. What we anticipate is a further move to the upside. That means some stocks that are already extended will get more extended. That will not make them good buys. There will be stocks out there still in good shape we can try to pick up. We have to realize we may only get three to five more days of upside before more profit taking hits at the end of the quarter or right at the beginning of next quarter. That would get us through Friday, April 1st X watch out for April Fool’s Day. Early the following week we may see some pullback.
The question is how much? For now, all you can say is there is likely some more profit taking. We just have to play this buy ear because, technically, it has made a good move back up but has not been that powerful with the low volume. We do not want to chase too many positions here. I know some do not want to hear me say that, but we have picked up a lot of good positions over the past few weeks and started taking some gain off the table. We will use a further rally to primarily take more gain off the table versus initiating a bunch of new positions.
It is all about the risk/reward. We need good entry points where we have a close and logical stop point at hand. We need something that, upside, gives us enough return if we are right to warrant the risk. We do not want to go into 1:1 plays where we are risking a dollar to make a dollar. Those are not odds to continually win. We will have to look for very good risk/reward plays, and those are simply harder to find right now. They are out there. I see them right now when looking through the market, but they are just not as prevalent as they were two weeks ago. The market was sold off then and stocks were falling back towards support and that 50 day EMA that so many of them were hitting and holding.
We have to just throttle back on new positions, let continuing positions run, and take gain as we have to opportunity. If we get a few good plays to the upside that we can buy into, so be it. We can hopefully get some that run decently for us in a week or a week-and-a-half and that give us a nice return.
I do not want to get you discouraged in thinking we will have a slow week ahead in terms of bias. We may. Things may turn around and all of a sudden money may flood into the market. Then we could buy more and ride the wave higher and just keep our stops close at hand. We will play it by ear. We will find some plays and, if we need to, we will make those plays. The intention will be to make money. You do not want to trade either just to trade or in the hope you will make money. We want to know going in that the odds are in our favor and that we expect to make money on the plays. If we do not have that feeling about it, we might as well not be entering that particular trade.
Keep abreast of what is going on. We will let our positions run and look for opportunity. The market always gives us opportunity no matter what. While we may not be taking ten or twelve positions next week, we may be taking two, three, or four. They can make us nice money nonetheless. I will see you on Monday at the start of a week full of data.
