Stocks Incur Second Loss for the Week

SUMMARY:
- Stocks recover from a softer start, but a veto threat helps them ease over for a second loss for the week.
- Earnings decidedly mixed as many opt to use DC uncertainty as a hedge on guidance.
- Case/Shiller Index still shows no relief.
- Richmond PMI flips back to negative.
- New Home Sales decline when expected to grow.
- Consumer Confidence is up . . . to still recessionary levels.
- Indices fade back toward near support, still, after all, in the range.

MARKET SUMMARY

Early recovery has to deal with more Capitol Hill wrangling, loses its bid.

Stocks were not cruising on Tuesday, but they were not doing badly. There was a weaker open and futures were down. There was a bit of aftermath from the continuing battle in D.C. It has been the battle of the television press conferences as well as the battle of earnings. Earnings have been coming in fast and furious, and they are somewhat mixed. Stocks that beat and have good guidance are rewarded mightily, such as BIDU and BRCM. Then there are those where guidance is not as good, such as UPS and AKS. After hours JNPR was following in CSCO’s footsteps. On the other hand, AMZN is following in AAPL’s footsteps and screaming to the upside after hours.

The mixed action on earnings has the stock market showing some mixed action as well. It pulled back Monday and Tuesday to test. It was not all earnings, just as it is not all on the news out of DC. On Tuesday there definitely was a problem with what came out of Washington. Stocks started weak but recovered. That was one of the things I was looking for; a soft start in an otherwise upside move. The indices can be classified in an upside move after that higher low at the mid-range of their trading ranges pushed them back upside. They got that extra bid and moved to the upside. Indeed, they broke positive in the afternoon. It was just about in time, however, for the White House to issue a formal statement. There is intent to veto the bill that Boehner is pushing in the House. That put the kibosh on the move and stocks sold off. Indeed, all of the main indices were unable to revert to positive. About all they could do was hold above the early session lows.

NASDAQ, – 0.1%; SP500, – 0.4; Dow, – 0.75%; SP600, – 0.8%; SOX, +0.8; NASDAQ 100, +0.2%.

Not major moves. The only thing you can say is it was somewhat disappointing that stocks were unable to hold the move after making the comeback from a softer start and moving back upside off of the test lower and the Monday pullback. It was not carnage, however. Looking at the charts, it was not a total rout. SP500 tapped the 10 day EMA on the low and bounced modestly to close. No harsh selloff. Volume was a bit higher, though still well below average on the NYSE.

WEDNESDAY

Wednesday is not a huge day for economic data. Durable orders for are out, and that is always important. It gives an indication as to who is ordering the longer-term goods. That shows what kind of confidence there is about the future, maybe more so than the consumer confidence number itself. It is not going to be a big game-changer in itself. The DC issues are still ongoing. There is still the threat that the EU could pop off with some harebrained problem any day and really start the pressure on our stock market once again.

The market has been down for two days now, and it is struggling a bit. It is still higher in the trading range overall and holding above near term support. Earnings are big players right now. The investors are getting a bit of the gist of how the season is going. They are rewarding those that perform well and have good guidance, and they are punishing those that do not. Are we going to have the JNPRs of the world, those on the downside, getting slammed lower after hours? Are they going to be the stocks that control the fate of the market on Wednesday and further tests, or will it be the likes of AMZN screaming to the upside after hours with very good results? Investors in the market overall are treating individual stocks either well or not based on their earnings results   mainly their guidance. Thus far it has been overall a positive. There is some erosion of late as the earnings come in mixed compared to what they were at first blush.

The indices are at near support. We still have good leadership in position that can move. We also have issues. Some are giving up the ghost, but we still have a lot of good stocks in very good position. Many of them needed a pullback, and they are getting the pullback with this market test. If they hold and if the market will hold, it will do so in this general range above the 50 day EMA on the SP500 at 1316. Anywhere above that is still a go to the upside. I would prefer to see it hold near the 20 day EMA at 1323. This whole range has support in it. There are gaps, prior lows and, of course, the 50 day EMA.

I want to make another point. I am looking at the Fibonacci chart of the SP500. This was the last move to the upside. It was that relief rally that went further than anticipated. We had the pullback. It pulled back to the 61% retracement on the intraday low, mainly holding at the 50% retracement. It surged off of that level, and it came close to the peak of the move. That is what you typically look for out of a 50% Fibonacci retracement. Now the question is whether there will be a subsequent move. As you run up near the prior peak, there is a pullback. Then comes the moment of truth. Is there going to be a resurgence that tries to break the stock or index out of this range? That is exactly what is happening right now.

Will this 50% retracement die here and just fall back down inside the range? That would be relatively normal. Or maybe it can find strength and make the breakout and run toward the 127% extension at 1382; in other words, another 50 points or so. We will see if it can do it. That is why I say this is a very important test for the market. It will determine if we get a breakout or just trade in the range some more. After all, it is still just a trading range. It has yet to even break through that February peak again.

With that in mind, we will watch for the break. If it makes it is move, that is great. We will play other buys to the upside. We will also let our positions run higher. If it does not and slides back, it can still hold at the 50 day EMA. We have to be careful with positions at that point. Some of them will be hitting stop points along the way. We just have to play what the market gives. If it pulls back further, we will mind our stops and mind our positions. We will play a little downside. We have some going right now   it was a little hedge. When it bounced off of the February peak we opened SDS and some other downside. If we need to let those run, that is great. If we need to close up our other upside plays, we will.

We are in a trading range. Treat it like a trading range, but watch for change in this area. It is all because of this higher low at the 50 day EMA. It tested this relief rally that went further than we thought it would.

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