End of Quarter Run Looks to be Back On
- Economic news misses targets again, but stocks don’t mind, resuming the end of quarter move.
- Case/Shiller provides no real hope for housing market.
- Consumer Confidence falls to the lowest in more than a year.
- End of quarter run looks to be back on: pick up a few more good buys, let positions run, take some gain at the week’s end.
MARKET SUMMARY
Stocks reverse the high to low Monday selloff and put in a classic low to high session.
On Monday we had the old high-to-low syndrome in the market. That is not the best action as the buyers start things off with a positive note, but then the sellers come in and chop block the buyers, taking the market down to negative on the close. That happened with the fairly precipitous decline into the closing bell. On the daily chart, stocks started higher and closed lower, but it did not do a lot of damage when referring to the market overall and when looking at the SP500. The index held well above its 50 day EMA as well as the 20 day EMA.
What happened on Tuesday? It was the mirror image of Monday. We had a lower open that saw stocks undercut further, come down to the 20 day EMA on the low, but then they bounced. After a higher low was made early in the day, it was all upside from there. Stocks rallied, plateaued through lunch, and then stair-stepped higher into the bell. Stocks closed at session highs. Looking at the daily chart, you can see this is a new closing high for this rally X at least this two-week rally off the late-February to mid-March selloff. Stocks were unable to clear the Friday and Monday intraday highs. They are right there kissing them, but it does not look as if there will be any impediment to the market. SP500 is the leader right now, moving up toward the March peak and, indeed, making a run at the April high (the post-2009 peak).
The indices were not posting huge gains, but they were nice, steady moves. NASDAQ, +1%; SP500, +0.7%; Dow, +0.7%; SP600, +0.85%; SOX; +1%; NASDAQ 100, 1%. Very credible moves with the growth indices. NASDAQ, NASDAQ 100, SOX, and the SP600 are leading the way higher, and that is exactly what you want to see. Volume was no great shakes. It was mixed. Higher on the NYSE and lower on NASDAQ, but good enough for an end-of-the-quarter run which looks to be back on once again after a very short hiatus Friday and Monday.
This move occurred in spite of another round of lackluster and disappointing economic data in the US. There is definite a slow patch, as former Federal Reserve Chairman Greenspan used to call them. The Case/Shiller 20-city Price Index for January is in arrears by a few months. You cannot get too worked up about it, but it showed there was a decline versus the prior month’s decline. In other words, it was added on top of the prior month’s decline. It was not as bad as expected year-over-year, but it was down over 1% month-over-month, which has worse than expected.
What did the authors of the survey tell us? They said we definitely had weaker prices and there was “no real hope” for the housing market anytime soon. Prices continue to roll downhill. We have learned another lesson about markets. Number one is you cannot interfere with them on the upside or downside. If you create imbalances as we did X forcing mortgages onto banks for un-creditworthy borrowers X you will have problems when market forces come back to the median. That means when the housing boom had to end. What happens before any market comes back to a median that has been propped up for the long? Unfortunately, it has to gyrate back and forth from very high to very low before it gets back to the median point or what the average typically is. That is what we are seeing here. There has been a very sharp downturn, and it has not picked up yet.
It looked like there might have been some hope when LEN, one of the home builders, reported decent earnings. It turned out that was all about taxes. This were tax advantages that it used on its returns, it and was able to show a better result than expected. The real proof was in the pudding, however. New orders for homes were down 12% year-over-year. That is current data that tells the real story. The somewhat lagging Case/Shiller home price index shows that things are still in the pits, and more current data is showing they are in the pits even now.
Consumer Confidence hit the tape a half hour into the session, and it was a bit worse than expected at 63.4. That was well off the 72 reading hit in February. What is eroding confidence? Look to increasing energy costs and increasing food costs. Of course these are the two items taken out of the consumer price numbers. Even though the government ignores them, we all know they are paid on a daily bay basis, and that impacts how consumers feel about the future. Indeed, this was the lowest reading in more than a year for confidence. This is quite a precipitous drop off, and it is due to the higher prices and now the expectation of inflation over the coming year.
That is what the Fed always worries about. It is not actual inflation but rather the expectations; they tend to be self-fulfilling in an economy. The Fed will have to recognize that consumers are starting to expect inflation, and the majority of them expect to make less money or have their job at risk over the next 12 months, as a recent survey showed
That brings me back to something I have talked about before: The QE II and whether the market feels that the Fed will continue with its Quantitative Easing. Three Fed officials have said that the Fed needs to reevaluate its Quantitative Easing policy. Nonetheless, the market has yet to show any real concern in that regard. I have posited several reasons for that, one being that the economic data is turning down so the Fed will not want to end this. That would risk undermining what economic activity is still out there. Manufacturing is solid, but the rest of the economy seems to be dragging right now. There is also all of the geopolitical turmoil outstanding, and that raises a lot of questions and uncertainty about the future of world economies.
With that out there, it seems the market is anticipating that the Fed will see Quantitative Easing II through. There is little doubt in my mind that it will do that. The question is whether it will announce a third Quantitative Easing program. Some of the Fed officials are having second thoughts. In the EU, the ECB will most likely raise rates next week. I’ll put it this way: If they do not, there will be some comeuppance with respect to the Euro. It will likely fall like a rock if they do not. There is real inflation over there, and they need to stave it off as they typically do.
We will have to same problem here, but the US feels, via Bernanke, that the US and the Fed will have to keep easy money in order to continue the “recovery.” The recovery has had a hard time gelling as we have seen. Just look at the housing market. It has received a lot of help from the government, but it has done nothing to stem the downturn. Las Vegas and Phoenix home prices are still down 10% to 20%. It has not really helped the home situation at all. It just prolonged the agony to the downside.
Wednesday we start to run into the meaty data for the week. This is the jobs report week. We will have the Challenger job cuts, and we will have to ADP employment survey. It is expected to show decent numbers at 210K. There could be layoffs. Challenger has told us that we are well past the hump of the layoffs. The question now is whether we will get hiring. That is what the weekly jobless claims have told us as well. They have said we are past the layoff period. Are we going to get new jobs and hiring? That is the rub. We are making progress. It is just very slow progress to getting those new jobs. We will get more insight on Wednesday, and it may help us.
Will the market care at that point? I think we have a pretty technical move under way toward the end of the quarter. There is still Quantitative Easing out there. The investors still feel that the Fed will continue on and see Quantitative Easing II through. There is an outside chance of Quantitative Easing III announced. There are fund managers who did not fully participate in this run, and they are using this selloff to move back in and pick up stocks for the end of the first quarter to show their investors they were in all of these great stocks. That is likely why we have had a low-volume recovery off of that fairly sharp selling in the first part of March.
How do we anticipate playing this in the remaining three days of the week? What do we expect will happen? We kind of expect a slow, uneventful-but-nice grind higher through Friday. Friday is April 1st, and what have we seen on a lot of new-month days? The initial day we have seen more money hitting the market. The question is whether they have put all their money to work just painting the tape to the end of the quarter. Will they have any left? Typically they do have some left because some of the funds (not all of them) are painting the tape. They have their money they have and have already put to work. When the new month comes around, they like to put that money to work. We may see a continued rally through Friday.
If that happens, you can bet there are going to be people taking profits on any kind of strength on Friday. We will be doing is same, I am sure. Our game plan is to let the positions we have taken recently continue to run. We may see other buys that we want to move into. We got this little pullback, but not much of one. There are still great stocks out there that are pretty well-positioned. We were picking some up today as they rebounded off of this selling. There may be more of those out there. We see some that we like. We have talked about some of them in this report. We could very well pick up some, but we would have to know that, to the upside, there may be a limitation on what we should expect to gain on those positions.
We are going to let our current positions run. We have many stocks we have reestablished. We keep higher targets just to see how well the stock is performing. A lot of them are at the point where we would just as soon let the market take us out of them, like PCLN. We have made a ton of money on those options we had, and they are long gone. We have made a lot of money on the stock, and we have some positions left that we are just letting run. There are others that we may have just banked partial gain on or have not even taken some gain on. There are stocks we bought right around this bottom that we are letting run. If they move up, you can bet we will be taking gain on those. Maybe some of those that we have just taken one round of profits on. They are moving well, and we want to bank the option gain we have as well as the stock.
Our game plan is to let them run as long as they will. Then if we see a little issue, we will take some money off the table. There is one thing to watch for on Friday if we have a move higher Wednesday and Thursday, we get a decent jobs number, and the market gaps to the upside. If it starts to reverse and sell off, you can bet there will be some profit taking at that point. We will be in there taking some profits off the table as well. It just makes sense after a reversal and run as we have seen. A move higher Wednesday and Thursday puts us at that early March peak or maybe even beyond that toward the February peak. There will be some resistance there. It is a natural point to take some gain off the table, and we will be doing that as well. Why not?
We do not totally give up on the upside, we just recognize again that we have a two-week rally underway. We are approaching the old peaks, there is not a lot of volume here, and it is going to be the end of the quarter. We can take advantage of that on a continued move higher. We can take advantage of maybe new money hitting the market on Friday. But do you think a lot of people will want to wait until Monday to pull the trigger on that gain if it does run like that? The odds of that are quite low. They will want to take it before the weekend. There is still too much going on in the world that could turn out badly. If they have the gain in the hand, they will take some. We are, too.
That is the way we are looking to play it in a nutshell. After it gets there, maybe we will look to the downside, but that has been a tough road. Even if it does make it up to the A point, we will have to see how the market reacts then. We would much rather be in the position of having banked some very nice gain on this run up to Friday and then waiting to see what happens versus guessing whether it is a top or not. We will have plenty of time to make moves because we will have plenty of gain built in. If it breaks out, great; we let them run and we can pick up some more positions. If it rolls over, that is okay. We have taken some gain and we can take some more off the table at that time.
Jon Johnson
