SUMMARY:
 - Back and forth once more, going nowhere slowly.
 - Same Store Sales called   decent   but given the circumstances they were superb.
 - Jobless claims edging back toward 400K, but the trend is still holding.
 - Home prices continue to fall . . . further.
 - A quick and different perspective of the debt, necessary federal employees.
 - Lateral consolidation or a pullback, market continues showing resilience thanks to liquidity.

MARKET SUMMARY

Market endures more trying news, continues its lateral consolidation.

Once again it was a back and forth session (with reason) that ultimately went nowhere. The SP500 slid laterally again with a slight loss, though it was up and down on the session. It continues to hold just above the March peak but below the February rally high. Looking at an intraday chart, stocks were all over the map. Futures were down early, but the market rallied right back at the open to positive and looked good.

Then news of another earthquake out of Japan hit. It was originally touted at 7.4, but it was later downgraded to a 7.1. That is some 708 times less intense than the 9.0 previously felt. Nonetheless, it was a serious quake that caused concern, and there were tsunami warnings again. The market sold off, then it bounced in relief once it was apparent that the tsunami would not hit. Then it rolled over again. It did fight its way back into the choppy, up-and-down session the rest of the day. Once more it refused to sell off on negatives, but it still could not make a break through the recent peaks.

I have been concerned about a move to the downside. It could still occur, but the longer this lateral move stretches, then it can hold and rally once more. Looking at the history of the current rally, there are several occasions where there has been a move to the upside followed by a flat consolidation. It happened in late September, in late October, and again in late November. Each of these was a rally, a flat move, and then a further move to the upside. The difference in November was a bit of a pullback before a lateral range that sent it higher. It happened again in late December and somewhat in late January, although things were more volatile then.

There is a difference this time. There has been a deeper test than any of the prior tests in the rally. You have a recovery to just below a prior resistance point. There is also the fact that the market has run as far as it has to this point. There are a few additional factors here that would mitigate the chance of a move to the upside, but I am not writing that out of the picture. The liquidity is still in place as the Fed said it would be in the minutes on Tuesday. There is more and more talk inside the Fed as to whether any further Quantitative Easing is necessary.

The News Driving the Action.

What was the news driving the action on Thursday? I say “driving,” but the market went up and down quite a bit. It was more of a mishmash of responses to the news. The ECB raised its interest rates as expected. That was no big deal. At the same time, the EU announced a $100B bailout for Portugal. Raising rates and bailing out. I wish I had a chart this, but the money supply in Europe is shrinking and turning negative. Raising interest rates in combination with a massive shrink in the money supply is a very dangerous gambit for the ECB. It wants to curtail the inflation it is experiencing.

There is no doubt that inflation is there  X even worse than in the US. With the money supply already negative, raising rates can be a dangerous gambit. Look what happened to the US in 2000 when the Fed suddenly dried up the money pool as it continued to hike rates. There were very deleterious effects on the economy, setting the catalyst for the recession we suffered thereafter.

Some Same Store Sales were quite positive. Many people said they were just decent and a bit better than expectations. When you consider how bad data has been with all of the headwinds butting into the consumer, these results were damned impressive. The luxury end did very well. SKS rose 11.1% versus a 0.8% rise. Huge gain. BKE jumped 8.4% when it was expected to decline 0.5%. That was a big mover on the session. LTD was up 14% when just 1.5% was expected. ZUMZ was up 8.9% versus a 4% gain.

You get the idea; there were some big beats. Not everyone beat, but it was much better, in my opinion, than the $3.70 gas prices and the calamities in the world would suggest sales would have been. The key is whether they can maintain themselves now that gas has hit $3.71 nationally. It is only early April. We will see how things play out down the road. Sales were just fine for March, thank you very much.

Initial claims came in at 382K versus 386K expected, and the 392K the prior week. Of course that was revised up for the second week in a row from 388K. The trend still looks favorable even though those claims are edging back toward 400K per week. At the end of the day, the Fed released consumer credit numbers, and they turned out to be stronger than anticipated by quite a bit. The revolving debt  X the credit cards  X dropped $2.7B dollars. Very interesting. Individual credit card balances are falling while other credit has been moving higher. Of course there was also the earthquake. That was a big quake  X bigger than the California Northridge quake, but still massively smaller than the one that hit Japan in March.

ECONOMY

I want to touch on a couple of economic issues that are interesting asides from the news you hear every day. One is a different way to look at the debt. We are having the debt debate in the District of Columbia, and both sides are pointing fingers at each other. They cannot decide over $60B in cuts. I hear now it is more like $33B that the democrats want versus $40B that the republicans want. We are not even talking about the $61B originally that everyone thought they would be able to cut. That is just 0.25% of the entire US debt. They are arguing over nothing.

Japan had its horrible disaster with the earthquake and tsunami, and there are differences in the numbers of how much damage was done. It is said to be $120B all the way up to $250B, and some are even saying $308B now. Look at that range and then consider that it is only one month of the US deficit. The amount we accumulate in one month would pay for all of the damages suffered in Japan as a result of the earthquake and tsunami. Does that blow your mind or what? And we are arguing over a few billion dollars.

This is fiddling while Rome burns. We are literally fiddling while the US burns down, and they are worrying about this kind of stuff. It is a joke. It would be comical if it was not so sad. Actually, it is so sad IS comical. If well do not do anything about this, we are done. We will be another chapter just like Rome when it fell. We are doing the same things that Rome did, and we are on our way, baby. I’m using “baby” a lot tonight, adopting old George Costanza comments from Seinfeld.

Home prices are falling again. The CoreLogic data came out for February showing a 6.7% decline in home prices. That was down 5.5% in January. That is year-over-year. CoreLogic says it looks like a double dip in housing just as Case/Shiller has been saying.

Finally we have the government identifying what it considers are non-essential government jobs with the shutdown. I was listening to this today, and something occurred to me. I subsequently found out I was not the first to come with this, so I am a bit disappointed. It must be the lingering effects of my illness. It occurred to me, however, that if there are 800K employees that are considered nonessential, why do we even have them on duty? If 800K are nonessential, maybe we can just take half of those back. Maybe just a quarter of them back if the government shuts down. Nonessential personnel. I know that means some people out watching the parks and things like that, but maybe we need an entire review of just what is essential and what is nonessential.

One problem is we have way too many people with straws in the government milkshake that are sucking it dry. That is just me on the soapbox. The debt that is $14T right now  X without even counting any of the Medicare, Medicaid, and Social Security issues coming up  X and we are divided by $7B when we are looking to cut between $33-40B. We are worried about that? You have to be kidding me. With that, I am getting off the soapbox.

FRIDAY

Looking out to the weekend, the scheduled economic data is wholesale inventories for February. That is not going to be a great market mover. That is one of those half empty/half full measures. It is expected to rise 1% after a 1.1% rise in January. That would likely be seen as a positive because maybe companies with all that manufacturing are building inventories. A lot of it depends on what the sales are, and sales have been increasing. That would be a good indication. If sales remain high and inventories still build, that shows that companies are building inventories with manufacturing and they are still selling the stuff. They will keep the virtuous cycle going.

Wholesale inventories are not likely to move the market. There will be news at some point about the government shutdown. Heaven forbid we shut down. I heard an argument from one union person who was going off the deep end and making nonsensical arguments about the government shutdown. He talked about how people are going to be starving and they are throwing people out in the streets. That is just not going to happen. Everything will be taken care of. Even things that are shut down will be open shortly after the shutdown ends.

We have had several of these over the past 20 years, and it has never been catastrophic. It is just a matter of who comes out ahead. It is all political, and I do not want to get too much into that right now. I don’t know if that will impact the market very much; I do not think so. It is more of a technical issue. The market has had to withstand a lot of negatives, and it still rallied back. It is taking on negatives each day and parrying them like a highly-skilled fencer.

It did the same today. It parried the thrust of a new Japanese earthquake and managed to rally back for just a modest loss. It maintained its lateral consolidation with a bit of an intraday shakeout. It is a technical move now. You have a lateral move after this recovery, and I would expect more of a pullback. Again, the longer it moves laterally  X it may be a little bit lower with shaking out the sellers  X the better chance it has of making a new break from here.

We have that resistance to worry about. There are still issues out there. We have the deeper pullback which is a problem because the market has not had these kinds of pullbacks on this rally. There has been a bit of a character change, no doubt. The question is whether it can continue its upside strength or if it needs to pull back some more.

We picked up some SPY. It may be foolish to do so, but it is a good risk/reward. It is a good hedge to the downside in case it rolled back over. We can make a little money to the downside if the market does decide to test deeper toward the 50 day EMA or down to this February low where there is some support from January as well. That would be a nice test in and of itself. You have to worry because there is talk of double tops and what-have-you at this point. MACD is lower than it was back in February, but that does not come into play right now because prices are lower than they were in February. It would only be if produces blew past the February peak and MACD lagged. Then you could say there was a loss of momentum and it may slow down.

Of course momentum is down. It has had a selloff and a recovery that is now moving laterally. The market has been able to hold up to a lot of crud thrown its way. Stocks have been doing just fine; indeed, stocks have continued to set up and move higher. We went over the leadership board, and there were many quality stocks that have pulled back into good areas where they can rebound and make good potential buys. We will definitely be looking at those.

There is nothing better than having a winner already in hand that is just setting up to continue its run. I would much rather take a tried-and-true quantity and put more money toward it than one I am just hoping will maybe make a breakout and then hold and continue to run. We will not look away from those, of course. It is just always nice to have one that is already a winner and put more money their way.

The question is whether this will happen on Friday. I do not think that will be the case. There is still some uncertainty over the shutdown. There are a lot of things going on overseas. I do not think it would break out on the weekend  X maybe on Monday or Tuesday. We will have to see. We are fairly positive overall with what we have here. If there is a pullback, I do not expect it to be huge. If it continues laterally, obviously it can then break higher from there as well.

We will continue to look for opportunities to the upside along with some potential to the downside here and there. We can make some money on the SPY or the OIH and others to the downside. More of a nimble play than a long term, but you never know. In case does break down, we are well-positioned to make money as it continues lower. We would exercise our stops as the market breaks down (if it does).

We want to look for the upside. The longer this move extends, it gives us more upside potential. We want to recognize that it would sell off somewhat toward this February low, or it could even break down. That is always a possibility after a long run with the issues facing the market and the end of Quantitative Easing that will come. It is scheduled to end in June, but whether it continues remains to be seen. The market is not certain about that, and the market could start to factor that in. If so, you would see it start to trend lower as some of the liquidity is pulled out. Why is this move holding up as well as it has? There is the great liquidity. There has been a lot of issues that would have normally cratered a market  X or at least you would have thought it would crater the market  X but for the Fed providing massive amounts of liquidity.

I saw a chart yesterday that demonstrated the liquidity in the US versus the liquidity in Europe. The US was going higher each month in massive amounts, while the liquidity in the EU was heading lower each month. It has finally turned negative. There is a big difference here. We are operating in two different directions, and we will see if they are mutually beneficial and dovetail to help save the western economies, or if they are at odds with one another and one wins while the other loses. Or maybe they both lose.

That is not a rosy way to end it, but for now the liquidity train is still driving on the tracks. We want to take advantage of that as long as it is present.