Market Bounces Back
- Stocks manage to post a rather unimpressive bounce as solid earnings fail to excite investors.
- Housing starts and permits reverse in March and post strong gains.
- Bernanke talks of post-QE2, adopts DC political speak regarding ‘reinvesting’ debt.
- Price hikes are occurring and are in the core, not just food and energy.
- Big earnings after hours have divergent results as market looks for that catalyst to send it to the February highs after holding important support.
MARKET SUMMARY
Market bounces back, but lackluster move is looking for a catalyst.
Stocks managed to post an unimpressive bounce as they continued the Monday reversal off of the February lows, both on NASDAQ and the SP500. It was good to see stocks move to the upside, but it was not all to the green from the get-go. Futures were higher, moved by decent earnings from GS and JNJ. It always helps when a broad cross section of the market posts good earnings results. There was also help from the March housing starts. These are new homes being built. They were up 7.2% versus an 18.5% decline in February.
Permits rose 11.2% after they fell 6.2% in February. These downside moves were reversed. That heartened everyone, but let’s not kid ourselves. The housing market is not going to recover anytime soon, and housing starts are not a good signal of that. Ultimately they will be, but for now we have to get rid of the inventory of new and existing homes. There are ghost towns in Las Vegas and Phoenix with new homes that no one has ever moved into. I am talking about whole neighborhoods, not just a home here and there.
With that out there, it is hard to imagine housing being healthy. Of course we are always told that housing is a regional phenomenon, and that is true. There are pockets in the country were housing is quite strong. Rents are very strong in parts of Texas and other states, and rents always go up before things turn around in the housing markets. Why do rents go higher? People cannot afford their homes anymore or they cannot afford to buy if they are first-time buyers. When the market is weak, rents are stronger because more people go into the rental market. Rents are rising, but we are still a long way from seeing any real improvement in the housing market regardless of more housing starts and permits in March.
The futures started stronger, but stocks faded as the market opened. NASDAQ and the SP500 even turned negative mid-morning, but that point often acts as the fulcrum for the next move. The bottom was hit mid-morning, and stocks managed to rally higher into the afternoon. Stocks continued to move higher even though the late afternoon session got choppy, and they closed near the session high. We have had good earnings, and there were earnings coming out after the close that could be interesting. IBM beat, but it was down after hours when it originally moved higher. INTC beat by a solid margin, although its gross margins were not quite as good. It was up sharply after hours. We have a mixed bag in the earnings, and we will see who takes precedence on Wednesday morning.
NASDAQ, +0.3%; SP500, +0.6%; Dow, +0.5%; SP600, -0.14%; SOX, +0.4%. SOX is still lagging the market, still with an unimpressive pattern at this juncture. The large cap indices moved higher, but they were not putting a scare in the March peak (and we are really looking for the February peak). They are in an inverted head and shoulders and could make the rally. We are looking for that. They did not do a lot to further their cause on Tuesday, though they did manage to shake off a selling attempt mid-morning and rally to close near session highs. That is important. It is always positive action as it shows the buyers stepping in when they perceive an opportunity.
WEDNESDAY
There is some economic data. We will have the mortgage purchase index. Existing home sales come in as well. Very important. We get an inventory read, and that will be key. We also get crude oil inventories. Given the price of crude, everyone is watching those. This would be a point where the news actually does have an impact on pricing. Oil is showing a bit of weakness after the Gulf CEO’s comments about it trading below $100 by July.
The big news is, of course, the after-hours earnings that were driving the market. IBM was up 4%. It then sold off 1.2% but managed to rally back. It was trading almost at the flat line late in the session. It started to ease back a bit further toward $163.80 or so as the evening session wore on, but it was not a total washout. Investors may find a silver lining before it is all over.
INTC was showing no weakness. A nice, strong break to the upside after hours. I am sorry to have missed out on VMW. It was right before the earnings and we got some cold feet. Unfortunately for us, it is up almost 10 clicks after hours on a strong report. There is some software action again, and that is a good, hot area. We may see this stock help drive a lot of that sector higher, once again solidifying its leadership position in this market.
Perhaps they will help be the catalyst to drive the market higher toward the January peaks. I would very much like to see just a nice rally back up here. It gives us a nice gain on our SPY calls. It also gives us a lot of good movement on stocks that are well-positioned to move higher, whether in retail, technology, software, internet you name it. We might even get some energy stocks trying to make a move higher, but we are watching those right now to see how they pan out.
All we are looking for are earnings to provide a catalyst to move up to the January high. After that, all bets are off. We had a good pullback into earnings. We had a great test of a key support level on Monday, and now we had a modest move higher on Tuesday. A melt higher would be okay, although I would like for it to run more like a scalded dog up to that level. Make a good, quick move and get those option values inflated nicely, but we will take what the market gives. If it is going to make just a melt up that way, we will rally with it and hope it gets us a good-enough move before Thursday’s bell that we may be able to take some gain.
I know, I know. “Hope” rhymes with “dope,” but we have good patterns out there. We have good leading sectors still showing great action. We saw buyers step in on Monday when the market sold off on some pretty bad news at least at first blush. The market once again rebounded. We still have buyers coming in. I hate to turn away from that, even though we may have some cold feet before a three-day weekend.
If we get some good moves, we need to take some off the table. We will have to see how far the market can rally and whether the big names (IBM, TXN, VMW, etc.) that are coming out are enough to send this market running to the upside and challenging those January peaks. We will see if we can get that upside move on Wednesday.
