- Bin Laden head shot adds some zest to the morning futures, but didn’t change the technical picture as the early moves evaporates and stocks start to flip.
- Market has all of the good news it can hold for now as more good news fuels but cannot sustain another upside move.
- ISM manufacturing report tops expectations for April but is nonetheless a bit weaker.
- Indices, stocks show near term reversal patterns, indicating the breakout test will start shortly.

MARKET SUMMARY

More good news ramps up the new month, but it cannot hold the gains.

Over the weekend we outlined the scenario we felt would transpire, i.e. new money coming in for the new month to bolster the rally two week earnings rally a bit more and then gravity and earnings saturation would likely take over and the market would test.  That was our primary scenario but noted the market could rally farther than any notion we had about how high it should rise on this move.

Then late Sunday the news hit that Osama Bin Laden was dead, shot by one of our Navy Seals in a raid on his Pakistan compound located in the midst of a retired generals enclave.  Certainly Pakistan was doing all it could to locate him.  After all who would notice a 5 year old compound with an 18 foot wall eight times as large as any in the area?  The irony: the compound left enough open space for a pair of Blackhawk helicopters to land INSIDE the walls.  Bet the next Bin Laden wannabe terrorist changes those plans. 

It was a precision operation where the Seals showed adaptability when one of the helicopters ‘lost air’ and suffered a hard landing, requiring the abandonment of that aircraft.  The Seals had a few seconds to decide whether to abort or continue.  They opted to continue with the knowledge they may not have a bird to carry them to safety after completing their task.  No comments are necessary about their courage and professionalism.  They are incredible.  It was not a walk in the park.  The shot that took out OBL was tricky: he cowered behind one of his wives, using her as a shield.  No problem for the Seals, however; remember, they were the troops who picked off the pirates that had kidnapped the captain of a US freighter with simultaneous head shots while treading water in heaving seas. 

As you would expect, futures were up in the morning.  Oil was lower, supposedly on the notion that OBL’s death might stabilize the Middle East.  Hardly.  The unrest in the area is not about Al Qaeda though it does involved the Islam extremists that comprise AQ.  The issues transcend AQ, and just because OBL was sleeping with the fishes (you will see the tie-in shortly) doesn’t mean hostilities cease.  Maybe Khadafy sleeps a bit more restlessly knowing that US troops could show up in his bedroom with his last bedtime story whenever they want, but OBL’s death wouldn’t end the uprisings.

The Market Action

Stocks started higher, tested the early move and then rallied to new session highs, aided by a lower but better than expected ISM Manufacturing report (60.4 versus 59.7 expected, 61.2 in March).  Midmorning the sellers showed up and took the indices negative.  Gap higher followed by a reversal to negative; not good action, particularly sitting on top of a two week run.  Buyers moved in once more, however, and doggedly drove the indices back to positive by mid-afternoon.  Once again it looked as if the Fed’s liquidity bid was going to win the day and push stocks positive again.

Looks can be deceiving.  Stocks made it to the morning gap up point, and then the sellers tried again.  At first they couldn’t make much ground but the bids dried up and the indices fell back to negative.  A late bounce tried to recover positive territory but the indices just missed; NASDAQ 100 scratched out a 0.01% gain.

The gains or losses were not the key on the session.  It was the gap upside on more good news but then the inability to hold the gains despite the good news.  You know how you can water a plant when it is dry and it responds really well.  You keep watering it and at some point the water just rolls off because the soil is so saturated.  The plant doesn’t do any better with the extra water and indeed it can hurt it.  The market can rally on good news but at some point good news makes no difference.  The market suffers from news saturation and corresponding diminishing returns.  At some point even good news has no effect.  Indeed, it can be used to bounce a market and then sellers use the gap to sell. 

That occurred Monday.  No major selloff on the first rollover, but when buyers came back in at lunch they didn’t have the numbers.  The indices couldn’t hold the second bounce at all. 

NASDAQ showed an engulfing pattern on the candlestick chart as did SP600.  SP500 and DJ30 show evening star doji.  All indicate near term weakness, and that makes sense after the breakout over the February highs en route to a two week run, spurred by solid earnings reports and guidance. 

In summary, the news of the OBL head shot helped energize the early market action, but the indices already rallied well and looked to be ready to test.  The fact that they struggled and closed lower, reversing early gains, after this kind of news simply underscores they are ready to test and digest the gains right now.

Bin Laden’s death and its meaning to the markets.

To us stocks showed their take on the Bin Laden death perfectly.  It was a feel good event, high fiving event that stirred some to buy but it is not a defining market event.  The issue is whether Bin Laden plays such a role in Al Qaeda, and then Al Qaeda in the world, that his death amounts to anything more than a psychological boost. 

That is a legitimate question that the facts are unclear on.  For a long time we have been told that OBL was relegated to a figurehead, not involved in day to day Al Qaeda operations.  That the Pakistani compound had no telephone or internet access could lead you to believe that.

On the other hand, it is known that OBL was paranoid about being electronically tracked.  Thus having no connectivity makes sense.  Instead he has couriers who transfer information back and forth.  As this incident tells us it is VERY hard to track that kind of information trail.  It took water boarding of Khalid Sheik Mohammed to get the nickname of this courier, a couple of years to figure out who he was, and then another two years to keep tabs on him, track him to this location, and put together the facts to show it was where OBL was (the compound was WAY out of place with other buildings where it was located).  Perhaps OBL was like Pauli in the movie ‘Goodfellas.’  Pauli was the head of a crime syndicate and he used no phones to discuss business, just couriers.  There.  That is the ‘sleeps with the fishes’ tie-in discussed above.

Whether OBL is hands on or not, the market was not that impressed with his death on Monday.  More pressing appear to be the issues in Libya, Syria, and perhaps locations still to come, and their impact on oil and other commodities prices.  There are still VERY pressing issues here that those conflicts impact.  Oil prices are higher and they are bleeding over into our prices here when we can ill-afford to suffer them.  Many challenges face the US and thus the stock market, and the nation has to get back to dealing with the debt ceiling, the debt itself, and the host of ripple effects across the economy.

TUESDAY

Some more earnings are on tap along with March Factory Orders and Auto/Truck sales.  Warm-ups for the Friday jobs report.

Do they matter given my earlier long-winded discussion of saturation and plants?  Yes; any extremes matter and can help or hinder.  Will they likely be of the level to do that given the technical picture?  No. 

This move was solid and was what we anticipated and then a bit more on top of that.  Great.  Now it looks as if it wants to test given the reaction to some good news.  That is normal and indeed expected.  We sold the last of the SPY upside calls and issued an alert for some downside puts on SPY.  Those are still in position to buy. 

At the same time many stocks showed closes off their highs, some evening star doji, some engulfing patterns.  If they are still in a solid trend with no other signs of fatigue we are not that worried and will let the trend show if it can hold up.  The exception is if there are May options in which case consider taking some or all of the remaining gain off the table given the upside run.

We still anticipate any selling to be a rather normal test so we will watch good stocks for good pullbacks and new buys.  For existing positions, watch those trendlines and support levels; if stock positions and options with longer term expirations are holding up fine then there is no reason to close them.  As for the downside, there is the SPY we can take advantage of and we are looking for a few more to make us some money.  The SPY trades have been good to us on the downside rotation and then the upside rotation.  We will see if some others can join the SPY and giving us some gains.