Market Struggles After More Strong Earnings
- Market struggles after more strong earnings, begging the question is all the good news built in for now?
- June Existing home sales put 2011 on track for the worst year in housing since the worst year in housing.
- Another last minute bill is in the works, ready to be rammed through with no one knowing what it says, what it means, or what it does.
- Stocks already looking for another reason to keep the mid-range bounce going.
MARKET SUMMARY
More great news and the market finishes flat.
IBM supercharged the market, bouncing SP500, NASDAQ and SOX off key levels. SP500 and NASDAQ were mid-range in their trading ranges, and bounced off of the 50 day EMA. That can lead to breakouts. Auspicious Tuesday move driven by auspicious guidance from IBM and the hint of a deal on the budget.
Wednesday looked good with more auspicious earnings from AAPL and some M&A thrown in with ECL buying NLC. Great earnings, more talk of a budget deal in the works. Futures were up again.
Didn’t take. Futures were up nicely, but as noted in the morning alert, they hit a peak very early in the session and flat-lined into the open. That can sometimes provide misleading indications and that was the case Wednesday. Yes stocks opened higher but they immediately fell to flat and slightly negative. A weak June Existing Home Sales report (-0.8% versus an expected increase) did not help. As it turned out it did not hurt that much either. AAPL gapped sharply higher on its earnings, but after a huge run into the number it gave back half of its move. The overall market basically mirrored that action, though unlike AAPL, they were not up over 2.5% on the day. It was a big flat session with the indices trading flat, at least compared to other sessions the past several weeks.
SP500 -0.07%; NASDAQ -0.43%; DJ30 -0.12%; SP600 -0.38%; SOX -0.58%
Is it the realization the same old problems remain despite another earnings season where the leaders hit the long ball on earnings coming out of the 2008-2009 dive? Europe is still a huge problem. The budget situation is still present even with the hints a deal is in the works. Once more when you look at what is taking place you get that sick feeling another ‘Obamacare’ moment is coming, i.e. when legislators feel they have to do something, and in the rush we get stuck with a horror show that plays out over the years to come.
What do I mean? We hear of a deal Tuesday where there is a net tax reduction after loopholes are closed but marginal rates for individuals and corporations are lowered. Turns out it is not a net tax reduction but a net tax increase of $1T when put in place. Then there are $2T to $3T in ‘cuts’ to be made but they are unspecified, and in the terms of DC that means illusory. EVEN IF they were expressly and specifically detailed it would mean nothing. How many times has Congress limited its spending and then the next Congress or President or both ignored them? They are not bound to do so, and as former President Clinton stated Tuesday, the President can even supposedly use the Fourteenth Amendment and just extend the debt ceiling himself. Of course Clinton was a huge Executive Order kind of guy; his staff bragged about their ‘stroke of the pen, power of law’ form or ruling. I thought we fought our revolutionary war to get away from a single person making such hugely profound decisions about our future without our sanction. We have come a long way from 1776, and not in a good direction the past 95 years. But, as always, I digress.
THURSDAY
Already Thursday and the weekly homage to new jobless claims. They are expected to hold above 400K for the fourteenth week. Watch out for expectations. There is no reason to expect a change, but that is often when an outrider hits. It won’t last because there is nothing in the economy to support improvement in the jobs situation, but a week below 400K would help charge up the indices again after they sagged Wednesday immediately on the heels of the Tuesday surge.
There is also the very important Philly Fed manufacturing report at 10:00ET. Important because manufacturing is in trouble. Recall that after the ISM experts on the cable stations proclaimed across the nation that manufacturing was just fine. Then some more negative regional reports left the rest of the nation wondering if that was the case. Thus each regional report is very important as the national ISM lags the regions by a month or two.
I talk about follow through quite a bit. There are two kinds. They both involve second moves after an initial thrust, but they have different timing and meaning. The longer term is after some long selling or buying and there is a rebound or reversal. You look 7 to 11 days later to see if the indices put in a strong day in the same direction as the initial move. That shows the same forces are still at work down the road and suggests a longer term move.
The second and shorter term deals with a move to support or resistance and a move through that level. There needs to be some follow through in relative short order. Doesn’t have to be the next session but after a short fade to test you look for the move. If a support level is breached you see if it continues after the test. Look at SOX. It broke the June low but managed to reverse. If it continues upside there was no downside follow through to the break. Those false breakdowns occur after a long selloff. Just when people feel there is a breakdown for certain as support is broken on the close, the stock or index reverses. It is a function of how far it has sold and how many programs are trading these days.
Thus with this current move we are watching for a follow through of the second kind, a shorter term move in line with the Tuesday surge. A pause such as Wednesday is not bad and it can extend for another session as well. DJ30 and SP600 can easily handle a further test, NASDAQ as well. That also gives those stocks that ran away from us on the Tuesday gap time to test that move, though you don’t want too much testing: after all, they were just coming off a test and that was the initial move higher. They need to get over the pullback and resume. If they do we can move into some more of the positions for a run to the index peaks and then see if there is a breakout.
If they cannot manage any follow through, then you have to anticipate a continued move toward the bottom of the range. That means some more downside to play the move and taking care of upside positions if they cannot hold near support. It is, after all, just a trading range until it proves otherwise.
