Indices Approaching Top of the Range

SUMMARY:
- After lagging, tech and chips take the lead as the rally continues, at least for techs, energy, and other leaders.
- Earnings are mixed, no positives on Europe or the budget deal (no negatives either), so the leaders continue higher.
- The issue that won’t die: big companies don’t hire because they cannot do that and maintain profits growth.
- Monday blues once more? Indices approaching the top of the range, but the leaders, and some new additions, are running nicely.

MARKET SUMMARY

Nothing to drive the market on Friday, but techs and leaders rally nonetheless.

Friday was an up day for a lot of our positions, but it was a mixed day in the market overall. Technology and the semiconductors continued to lead to the upside with their recovery rally. There is a nice one ongoing in the semiconductors. The NYSE indices struggled, but just modestly. A lot of this was due to the earnings of a few key players, one of them being CAT. It burned a lot of its nine lives on this rally as it reported results that missed the mark. It was complaining that costs were rising and imploring the administration to provide some clarity as to what will happen ahead.

They were not necessarily talking about the debt issue; they were talking about clarity with respect to regulation. A lot of regulations have been passed but have not been implemented yet, or they have not even had the regulations written. Businesses cannot do anything. They may have a lot of money, but they do not want to spend it. They would be foolish and breaching their fiduciary duty to their investors if they spent money without knowing what the regulations hold. Thus we are seeing this slowdown. I will talk more about this later because I keep hearing commentary about it that is absurd.

Earnings were out, and they were mixed. There was really no other economic news out. Europe was quiet, and I suppose it will come around again on Monday. The debt ceiling negotiations stalled as Boehner said there was no deal and supposedly he walked away. The President came out after the market closed and held a “press conference” where he basically derided the republicans saying they do not want anything. I thought that was rather ironic after he said he is not interested in pointing fingers or naming blame. In the first 15 minutes of his press conference, that was all he did. He talked about the lack of leadership in the Republican Party, but you have to ask where the leadership is from the President. Whether republican or democrat, the President is supposed to be the negotiator who can bring the different sides together.

He talks about the country being tired of Congress and the administration not being able to get anything done. One of the things we are most tired of is them calling each other out all the time. The worst is when they claim to disapprove of the exact thing they are doing. It has really become absurd. I just love it when both sides say that the American people want them to do “X”. They say Americans want them to raise the debt ceiling and solve the problem in any way they can. Nope. The American people want them to stop spending our money. That is what poll after poll says, and they have to figure out the way to do it. Obviously are not there yet. But I digress.

Things were mixed. Earnings were mostly driving the market, but they were not really pushing things given that there were some big misses and big gains. You can understand why the markets were mixed. Tech had good earnings throughout the week. Sans INTC and a few other cloud computing companies, they performed quite well. MCD performed well again, blowing away its worldwide comparisons. It posted 7.7% growth versus the 3.8% prior. Unbelievable growth from MCD and the McCafe with its drinks. I have to admit that I have added to MCD’s bottom line because I like the drinks they are pouring over there. I probably added to my waistline as well, although I do order non-fat milk.

Futures were not looking that great early on, but that is often the case with such a big surge. We had a nice rally on Tuesday, a pause Wednesday, and a resumption of a move higher on Thursday. It is good to have a little softness after a pause when the market is rallying back to the upside. It allows stocks to build into the session. That is what I said in the morning alert, and that is what happened. Yes, they trended lower into the first half hour of the day, but then they rebounded. In the case of NASDAQ and the semiconductors, they moved positive. All of the indices moved back to the upside. A nice benefit of the day and having a good uptrend established. That uptrend is off of a mid-range support level in the trading range.

Remember, we are watching this because often a bounce at an important support level in a trading range or in a pattern (such as a triangle) will lead to a breakout. The indices surged up off of that higher low, and now we will see if they can make the breakout. They are doubters, and I am a doubter. I still say it has a trading range until it proves otherwise. I am a “show-me” sort of guy. I am into the technical more than the fundamentals, although I do like to play the technical patterns on fundamentally sound stocks. It is a combination, but I will never buy a stock just because it is a “great value.”

I see it as a trading range but with the possibility of a breakout. That kept us riding a lot of our positions today even though they were up 2-3 days straight and the indices are approaching their former highs. That is okay with me because we may get the breakout. We may also have a problem on Monday. Monday’s have been downers with the debt issues and with the EU coming out with new problems every Monday. This afternoon after the market closed, the President was bad-mouthing everybody he could think of with respect to the deficit deal. These are always problems we have to deal with, but as I’ll talk about in leadership, our position where running well. Why take them after the table? Particularly since we have already banked quite a bit of gain on this nice move we were playing on the rally. Getting back to the intraday action, there was a selloff and recovery. While it did not keep a lot of the indices positive, they did not suffer on the day.

SP500, +0.1%; NASDAQ, +0.85%; Dow, -0.35%; SP600, -0.2%; SOX, +2.5%; NASDAQ 100, 1%.

NASDAQ 100 was doing quite well with the likes of GOOG pushing it higher. Very solid moves for technology and, again, the semiconductors leading the way. These were laggards of late, but now they are trying to make their move. The semiconductors have inverted head and shoulders forming in several patterns and ready to make the move higher. This is very much akin to the mid-summer 2010 action on the SP500 and many other stocks where we had inverted head and shoulders form after a selloff. That led to a break higher. There are definitely some positives in terms of leadership.

MONDAY

We have a lot of economic data next week. There will be Consumer Confidence on Tuesday, and new home sales. Durable orders come in on Wednesday. Thursday brings the jobless claims. On Friday there is the first iteration of the Q2 GDP. Remember when estimates were 2.5% to 3%? My, how time have changed. 1.6% is expected. Some very sage economists say we will be extraordinarily lucky to make 1.6% on our first iteration with GDP. We will also have the Chicago PMI. It jumped up again in the prior month, and July will be very important. Michigan Sentiment rounds things out on Friday.

There will also be issues with respect to what the President said on Friday. He made the comment that the market will open on Monday and they will be looking for some kind of answer over the weekend. He has called the heads of Congress to his office tomorrow morning to explain to him just what they are going to do. Not to offer anything   not to take some leadership and say “Here’s what I think we need to do.” It is just tell them to come up with a solution. Whatever. Maybe that is his style. I do not really care, I suppose, other than that he is not showing leadership. He is just perpetuating the name calling and finger pointing. If there is anything we do not want, it is that. We want them to do what they were elected to do. That is what the House is trying to do. I do not know what the democrats want to do other than what they always want. They think they are doing the right thing, but I do not think it is helping us right now since we have problems like what CAT is showing. But I digress.

We will have to deal with Monday, and we could have a down start to the week. I just did not want to cut off the runs we were having in the positions we had as indices were stretching toward the prior peaks. The leaders are showing excellent action. I did not want to cut any off particularly since we have already taken a lot of gain on them.

We have Europe to worry about on Monday, as always. We have the debt picture to worry about as always, and then we have earnings. The good thing is we have leaders running quite nicely. I went through a long list of them tonight to show you that they are moving very well. Maybe there will be a shock to the market. The market may wake up on Monday and think that we will not get a deal, we will default, and then the sky is falling. I do not think the sky will fall at all, however. I have always said that if we cut our spending and show real restraint, then we could show the rest of the world we are serious about cutting debt versus increasing our spending limit by $2-3T and just spending some more.

I suppose reasonable minds will differ on that. We just have to deal with what the market reality is. Again, it looked solid heading into the weekend. The leadership was really impressing me. If the leaders continue to move, obviously the market will follow. If they start to struggle, obviously market will pull back. I think we will get a continued move up to the top of the range in the indices. After that, we may have a problem. As I showed you earlier, they are closing in on those highs just as volatility is heading back down toward its lows.

Volatility is a little over halfway down to its recent lows, just as indices are above halfway up to the tops of their range. I think we will get more of a bump higher. I will not say all bets are off then, but at that point the market probably struggles a bit and falls back. Maybe it is able to make the breakout as this higher low at support would suggest. History says that puts it in the higher probability of a breakout. I’ll take that if we get it. If there is any sign of trouble, as far as on the debt front or with Europe, some investors will hedge their bets. Some of the big money will start hedging and start taking some profits at the top of the range. If that is the case, we will take some profits, too. We have had a bounce. If it cannot break out, then we will take the profits and let it fall back town.

As I have said all along, we are in a range. We have gotten a lot more out of this range than I ever thought we would. Maybe we do ultimately get the breakout on this move, and maybe not. It has to show it to us. By looking at the VIX, looking at where the indices are, and looking at what is happening with Congress, you have to surmise that there would be a stumble. On the other hand, there is that leadership that has been performing superbly. Can they continue to do that after such a long run? Keep in mind that not all the leadership has made such a long run. They have broken out and tested and are starting back up. They are in excellent shape.

We have the scales of the market, and we will see which one wins out. We have a lot of gain, and we have taken a lot of gain. We will take more if need be. If not, we will let it run and take partials as it comes. We will be ready to play it either way. I hope you are ready to have a great weekend and then another interesting week in the stock market and the game of world finance.

Jon Johnson
Stock Splits & IH Alerts, Editor
InvestmentHouse.com