Market Takes a Breather After a Steady Rise
- Stocks try a modest gain, run out of gas, sell in the last hour.
- Some important data but stocks pay it no mind for now.
- Income growth falls to 0.3% while spending doubles its rate, topping expectations.
-Third Fed member talks down QE policy.
- February pending home sales rise but drop significantly year/year.
- Market takes a breather after a steady rise toward quarter end.
This time the profit taking closes stocks on the downside.
Friday stocks rallied into the afternoon and then suffered some profit taking late, still finishing out the weeks with gains. Monday stocks started upside and held modest gains toward the close. Unlike Friday, however, the bid ran dry and stocks rolled over for a negative close though SOX did cling to a 0.11% gain. NASDAQ led the downside with a 0.45% loss led by the larger cap techs (NASDAQ 100 dropped 0.57%). SP500, DJ30, and SP600 sported more modest declines at 0.2% to 0.3%. Nothing really got out of hand, particularly given the indices rallied nicely the prior two weeks.
The session was lethargic times two. A higher open followed by flat-lining into the last half hour. Investors somewhat applauded a solid if unspectacular Personal Spending and Income report that saw spending rise 0.7% versus 0.5% expected and 0.3% in January while incomes fell to a 0.3% growth rate compared to 1.2% the prior month. Investors absorbed a 9.1% year over year decline in pending home sales (but +2.1% month over month).
They also pondered the third Fed official questioning the Fed s own QE policy. The market implications of a change in Fed policy are huge. The question among the experts is whether these three rapid-fire statements are rogue comments or represent a change in policy by the Fed. They are neither and are both. The more outspoken always make the first splashes about policy change. When a single official makes statements you can ignore them. A second in a day or two and you start to wonder. A third inside a week and you start watching for more and anticipating a change in course.
Some argue it is not Bernanke or a key Fed official making the statements so they carry no weight. That commentary is rather juvenile in its analysis. By the time Bernanke or his favored of the twelve engage in these type of comments, it is a done deal and the markets have already started factoring a change in policy. The action Monday does not suggest that though it bears watching as the market certainly ran out of gas on the session.
Overall, however, it was not a move that upended the gains to this point. After 6 of 7 days to the upside the market ran out of gas, ran out of bids. No roll over, just couldn’t sustain the gains. Monday was not the interesting session. Those will come the rest of the week as the first quarter draws to a close ahead of the Friday jobs report. The pause was normal. Now can the bid return to the market with some more of that tape painting that helped push the rally the last week and one-half? The index patterns are not the most lovable you could want given the selloff that preceded this bounce; that is why we are not so excited about a lot of new positions at this stage. If they hold a modest pullback to the 50 day EMA on SP500, however, then the potential for another upside bounce opens the door for some more upside plays. We may have jumped the gun a bit today by picking up some upside, but we like the positioning.
TUESDAY
Tomorrow things get more interesting with Case/Shiller followed by March Consumer Confidence. The SP500 s play off of this test is of the gap through the 50 day EMA is going to be quite interesting as well, indeed the more interesting move. As noted earlier, a nice easy test to the 50 day EMA sets up the potential for a run to the end of the quarter. Not much time to do it, but the momentum has been upside.
Of course the rub is that the market is starting to sense the Fed is indeed going to end or sharply curtail its quantitative easing policy. Liquidity has driven this market. Yes some economic improvement is helping out, but this recovery is the weakest since just about ever and certainly not enough by itself to justify the type of market move experienced since early 2009. So if the liquidity runs dry who is going to give the banks the free money so they can turn a profit, at least those such as C and BAC? They are not lending money now; if they cannot get it for free will they lend then? Well, just maybe they will. The free ride, the government teat, will not be there any longer and they will have to make money the old fashioned way, by lending, charging excessive fees, etc.
More to my point than the banks making money: what will drive the market? Unless the economic activity really increases, not much. With the fiscal mess the US is in and the insane regulations being foisted upon businesses by unelected officials (the new ADA regulations state that diabetes is a disability. With the US government s food pyramid foisted upon our kids for the past 50 years and creating a nation shaped like that very pyramid, diabetes is going to go viral in the population. With these new regulations that cover conditions well beyond diabetes, we could see 80% of the US population classified as disabled. Wow.
Back to the market. The Fed issue is now out there but likely not going to cause major divestiture of stocks for now. Thus we look for the test back to the 50 day on the SP500 to set up a new bounce. We took some positions on a test today though we may have been a bit early. More of those will set up on this test as not all stocks are extended. Those extended leaders, the timing, and the near resistance from the March peaks are all governors on any further bounce, however, and thus we have to have expectations commensurate with the market position, i.e. not reaching too far beyond what the market will likely give. If it surprises us with more upside than expected, great.
