Many Stocks Reverse Sharply
- Just when it looked as if the liquidity trade was back on and SP500 could take on the February high, stocks lost their bid and the move waffled.
- Many stocks reverse sharply, not breaking support but turning weaker as NASDAQ and SP500 cannot break near resistance.
- Inability to break recent highs, haggard action in many stocks suggest a near term pullback.
MARKET SUMMARY
Early move looked solid but it turns out to be more of the same for NASDAQ, SP500.
Futures traded sharply higher on little news after a disappointing Tuesday session that saw stocks once again give back gains. It appeared investors digested what Bernanke said Monday night about inflation and the FOMC minutes from Tuesday afternoon and decided that the liquidity trade would remain on.
It did, at least through midmorning. Then the sellers took over and the indices gave the entire move away. An afternoon rebound returned the indices to positive though at the close they could only recover half the morning gains.
During the morning run NASDAQ cleared the March highs and SP500 came within 4 points of its February high (1343 closing). Don’t get confused by CNBC; its journalist anchors keep talking about 1333 as the prior high; someone must have entered a typo on his iPad and they have parroted that number ever since. Thus as SP500 closed at 1335 the journalists were all excited. In any event, SP500 could not make it to the February high and even though NASDAQ managed a nominal close above its March closing high the action was the same: the inability to hold a gain at this next resistance.
After the 2.5 week run to quarter end we expected a pullback. It is a modest victory that the indices have held their ground without any appreciable selling, likely a continuing testament to the Fed liquidity that is still flooding the markets. Liquidity won’t avoid all selling. The indices have run to resistance as expected, are encountering some issues as expected, but though they cannot advance the ball, they are not selling.
That had us looking at some of the other action on the session. Many solid stocks from several different sectors sold rather sharply. They did not crater or reverse their patterns, but there were quite a few engulfing patterns. Energy showed several even as oil moved to new highs, e.g. FTO, OIH, HAL. The action in individual stocks, added to NASDAQ’s and SP500′s inability to break resistance, suggests the market may now give that pullback we looked for after the run into quarter end. Not a major selloff, just a pullback to digest and consolidate the move. Of course the indices can always slide laterally as they have done this week, consolidating without giving any ground. Either way the market puts in its consolidation and then can try to break the February highs, at least in terms of NASDAQ and SP500.
After hours BBBY reported excellent earnings and surged. The consumer is still spending, but for how long with gasoline prices holding gains (now $3.71/gallon nationally) and eating up the benefits of the tax increase reprieve.
That remains to be seen. What about Thursday? The inability to punch through the February peaks on NASDAQ and SP500 and the ragged action many good stocks showed Wednesday have us on the watch for a pullback to test near support. As noted above, not a big selloff but one that digests the gains and sets up a new run at those resistance points.
That means we are still looking for a few downside plays to catch some of the downside action if it materializes. SPY still looks like a possibility, and we will troll for some of those downside engulfing patterns to see if any provide a good enough risk/reward for a short-term market pullback. At the same time keep watching the pullbacks for quality stocks as they will provide good upside plays when any pullback runs its course.
