Stocks Pulled Back and Forth
- Divergent news pulls the market down, up, back down, but in the end stocks basically go nowhere.
- Bernanke inflation admission appears to trump other stories, until the market opens.
- China rate hikes, Portugal credit cut, EU PMI vie with TXN/NSM merger to direct stocks.
- ISM Service index continues to lag manufacturing.
- FOMC minutes show, despite Bernanke’s inflation admission, show the Fed is staying the QE course.
- SP500, NASDAQ move past next resistance but then cannot hold the move, leaving them lagging DJ30, SP600 still.
MARKET SUMMARY
Stocks pulled back and forth at their highs by many differing news stories.
Stock futures were trading lower to start Tuesday despite the merger and acquisition news between TXN and NSM that electrified the semiconductors on Monday evening. Why on earth would stock futures be lower? There are many other things going on in the world besides that chip merger, but it just seemed to be such good news for the market. One of the primary restraints on futures, in my opinion, was Ben Bernanke’s comments regarding inflation made on Monday evening.
He did not come out and say that inflation was running away and we were going to have to tighten up the dollar and commit to austerity plans. He did make a tacit admission that inflation is present, however. He referred to inflation, and then he came back and said the Federal Reserve would have to monitor inflation “extremely closely” as it continued with its monetary policy. The mere fact that Bernanke admitted to inflation sent a lot of investors to the boards. Up to this point, he has said that the core shows no inflation and we should not worry. We have had four Fed officials talking about changing the Quantitative Easing policy, and now Ben Bernanke, the head coach, is saying that inflation actually exists. Talk about a change of opinion. Of course, it matches reality.
The Fed was straining credulity by its inability to admit that inflation existed. It was good to see the Fed join the real world. At the same time, the harsh slap of reality to the face is sometimes difficult for the market to deal with. The Fed chairman had now said that there is inflation, so the markets have to warm up to the idea that down the road (and maybe not too far down) the Fed will have to start limiting its easy-money policy.
Other issues created a drag premarket. China raised interest rates 25BP. That is its fourth move on interest rates. Portugal got its credit downgraded by Moody’s to AA1 from A3. Not great credit anyway, but we all knew that. Again, it was the harsh slap of reality in the face. Germany, the UK, and even the France PMI posted nice gains. This virtually ensures that the ECB will raise its rates when it meets later this week. That would pressure the dollar, of course.
The NASDAQ 100 said it would shuffle the weighting in the NASDAQ 100 index. It will reduce AAPL’s percentage from 20.49% to 12.33% while more than doubling MSFT’s and CSCO’s weighting. There was another down session in AAPL as a result, and MSFT surged early. CSCO enjoyed a little upside before they, too, gave their moves back.
Even though futures were lower moving in because the negatives outweighed the positives, stocks immediately moved to the upside once trade got underway. Indeed, the SPYders moved to new rally highs. The SP500 moved within six points of its February peak, but it could not hold the move. None of the indices could hold the move. SP600 and the Russell 2000 moved to new highs, and the DJ30 has joined them with a move to a high. SP500 and NASDAQ just cannot get the job done. They rallied through early afternoon but then reversed and gave almost the entire move back.
The market closed mixed. SP500 once again bumped up just below that February peak and reversed. We had a mixed close on the market. NASDAQ did hold onto some of its gain. NASDAQ, +0.07%; SP500, -0.02%; Dow, -0.05; SP600, +0.4%; SOX, +2.3%; NASDAQ 100, -0.3%.
It was not just the premarket move. There was the ISM services. It has been following the manufacturing reports, but it was not nearly as good as hoped at 57.3. Expectations were a 59.5 reading versus a 59.7 reading in February. That did not hamper the market’s move; it just paused modestly and then continued higher. What really rattled the market were the FOMC minutes. Bear with me, because what happened seems strange.
The Fed minutes came out, and it was nearly unanimous that the FOMC members want to continue Quantitative Easing at the same pace. They did not want to taper their purchases of treasuries before the June end of the buyback X indeed, even after the June buyback ended. In other words, there is a tacit Quantitative Easing III announced without actually coming out and announcing it. They will keep buying treasuries at the same pace even after the Quantitative Easing II period runs out.
It was not unanimous. Many of the FOMC members said at some point, maybe during 2011, they would need to curtail their Quantitative Easing purchases while others said we need to keep it going. There is enough dissension among the Federal Reserve to keep Quantitative Easing going as Bernanke will have the deciding vote. There was no divergence with respect to the nearer term Quantitative Easing whether it is Part II or the yet-to-be-announced (but apparently approved) Quantitative Easing III.
That did not do the market any good. It rolled over after the news and could not get back up. It hastened the move lower. There was a little bump up because people thought the Fed would continue to buy treasuries. That is good for the liquidity of the market, but it was not able to provide a salve that insured gains. Maybe it is just a technical move at this point because the indices are extended. They have rallied back up to the end of the quarter and have not been able to move higher at that point. Maybe a pullback and then a new move higher are in order. Watching the market action is very instructive because it shows that, technically, it may be tired even when good news hit.
There is hardly anything scheduled news-wise X but that is just scheduled. A lot of news came out on Tuesday that was not on the calendar, but it definitely impacted the market along with the news that was out for the session.
The weekly mortgage index can provide some insight, but it does not really move the market. Crude inventories are out. With crude at $108, it may have some impact, pushing a little higher or lower, but it is not going to change the dynamics of crude oil that broke out to a new high.
The real factors facing the market are a move the past three weeks that has brought SP500 and NASDAQ up to the March and February peaks (and their inability to break through them), as well as the start of earnings season looking square in the face of stocks. They have had a good run to this point. They will have tougher comps, but as noted earlier in the week, they are not going to have those kinds of difficult comparisons because we have not heard of any warnings. There are some to the upside but hardly any warning to the downside that they were going to miss. We can expect in-line-or-better earnings. The question is whether that will be enough to drive stocks higher at this point.
The SP600 already rallied to a new high in anticipation. The Dow 30 did the same. You have a good three week move up to the end of the quarter by NASDAQ and the SP500. They look a bit tired. They tried to make a move and they got the thumbs up with respect to more liquidity from the FOMC in the afternoon, but that was not able to move the stock market any higher. Indeed, stocks faded back into the close. For all intents and purposes, it looks that they are a bit tired at this point and need a pullback.
We can look to play a bit of the downside for a more nimble play. That is no problem. Looking at how the SOX performed, and you can see that even good news could not really change the character of that pattern. It is still ripe for a downside play. It looks like the market is a bit tired. I referenced other stocks that have moved well and just had a bit of a rougher session, showing more volatility. Everything would indicate that stocks are ready for a pullback. Is it a rollover? No. Indications are that things are still strong. This would just be a pullback to consolidate and rest a bit. Then they would try to make a new bounce and try to put NASDAQ and SP500 over that February peak.
Of course, just when you assume that you have everything pegged and that stocks remain strong and are ready for a pullback, it can go the other way. They can either continue to move upside and just thumb their nose at you X what have we seen in this market? When you think you have it pegged, it tends to continue to run on you. It could also even have a worse sell off. In other words, the run has taken more out of it after this larger-than-anticipated pullback through mid-March. This move up to the prior peaks could be all it can handle before it has to pull back, fall further, and regroup to set a new base.
At this juncture, I do not like to guess at tops. I would not bet against the market given that the liquidity train will continue to run thanks to the Federal Reserve. Maybe we will get a pullback. That would give better entry points on more stocks for a new move higher that would see NASDAQ and SP500 break out to new rally highs once more.
We are not in a great position to enter new plays, but there are still good stocks making moves that we can take advantage of. We will continue to look at them. We would rather get a pullback, but the market may not be in the mood to give us one. We will look for good plays to the upside that have good risk/reward. If they can show us a move, we will keep picking up some positions in those. We are also going to be looking at downside again.
If there is a pullback, we might be able to get some nimble plays. It has been tough doing that. We did make some money on MED today, just over 40% on the downside play. That worked out textbook, but it was already weak and struggling. It was not up at its peak like SP500 and NASDAQ are. Again, do not discount that liquidity continuation; that is the driver of the market. We do not want to just blow off the fact that the Fed will keep pumping money into the economy. That is what has been sustaining stocks.
We will look for some downside and for any upside opportunity that may still be out there. Overall, we are seeking a bit of a giveback before the stock market resumes its move to the upside. That would be a great scenario. Some great stocks are a bit extended. They can pull back a bit and give us some ramp to run up into earnings season without having to hit it up at the highs of the rally. A little pullback would be a beautiful thing to see. It would allow stocks to use earnings as a catalyst to continue higher and maybe deliver that NASDAQ and SP500 breakout over that February peak.
Jon Johnson
