Market Turns Lower Again

SUMMARY:
- Predictions of more carnage as a result of debt woes fail to materialize.
- Terrible GDP data turns the market lower, but again, no freefall.
- Dollar, bonds, gold and oil react as expected to very bad economic data.
- Chicago PMI hangs on to expansion.
- Michigan sentiment flat and still quite subpar.
- Okay, why is the market holding in the range?   Anticipated liquidity gratis the Fed.
- President calls our system not worthy of an AAA rating. Oh really? Versus what?
- SP500, SP600 tap the 200 day SMA and rebound. No reversal, but important action.
- Moody’s now saying no immediate downgrade coming.
- Maybe some short covering brought the indices back, but the stock market is poised for a ‘deal’ this week, and a little bit of help from the Fed.

MARKET SUMMARY

No deal, no predicted carnage, and indeed some decent action inside the trading ranges.

Given the unending angst (and in many cases drivel) on the financial stations with respect to the budget debate and its impact on equity, debt, and other markets, I am providing you parts of some of the alerts we sent today discussing the issues confronting the markets. Those of you who already saw these bear with me.  A bit off the beaten path, but given all of the hyperbole by many market analysts I felt it important to give some real time analysis of the issues unfolding and hopefully some perspective in a sea of nonsense.

>From the Pre-Market alert:

Some on the financial stations are talking as if today is going to be the end of the world. This is no LEH moment, it is fear of the unknown with respect to a downgrade. The markets are trading lower in a trading range as we all know, and this action is going to push them lower in that range. No major collapses thus far. It may lead to that ultimately but spending will be reigned in and a deal will be reached at some point because there is no choice. As the plans stand, a downgrade is inevitable. The talking heads are pushing for a deal to pass that won’t avoid a downgrade. That action in itself is absurd. If no deal is reached, one will be done for us because of no funding, and that self-correction will avert Armageddon. As stated before, not getting another credit card while paying our creditors is a signal of fiscal responsibility we have not had for 30 years. Not being Polly Anna here, but just looking at the markets and reality. Bumps of course because of the unknown, and ultimately we stand to lose our status as the default world currency, but we stand to lose that regardless without taking serious action.

>From the Mid-Morning alert:

President appeared with a statement about the negotiations. He made the comment that the US has a Triple A rating it wants to keep but that we “don’t have a Triple A political system.” As opposed to what? A dictator simply making the decision for us? This is a republic at work with representatives doing what their constituents elected them to do. Politics. Ugh.

>From the Market Close alert:

Angst in the morning followed by a recovery to positive just could not hold into the close. The indices finished lower, but unlike the predictions of the sack cloth and ashes group on the morning financial stations, there was no carnage. SP500, SP600 tapped their 200 day MA on the lows and bounced. DJ30 struggled more, unable to bounce as significantly, but it is well above its 200 day. SOX is attempting to reverse, again, off the June lows.

***

We banked some downside gain on the early blow down when we saw it was not going to be a record-breaker and indeed when SP500 held the 200 day MA. We also scored some big gain on ZOLL as it shocked the market with its results (get it?). Picked up some ISRG as it surged (get it?) on the ZOLL results. Had to bag some stocks that could not hold support or could not recover from some downside pressure.

Now the weekend comes. GDP was terrible and next week is the jobs report. Oh yes, and the budget ‘deal or no deal.’ The name calling is high. It drives one crazy to hear congressmen and congresswomen who drove up the debt to incredible levels, spending like kids in a candy store with found money, calling those demanding fiscal responsibility as part of any debt ceiling increase ‘children.’ I suppose the proper response given the level of the debate would be ‘takes one to know one.’

The market may have been covering some shorts ahead of the weekend but the market acted technically as it should inside its trading range. This despite the predicted carnage. If there is no deal Monday perhaps, perhaps, the market sells more, but it has left itself plenty of room in its range to react. It wasn’t a great day for us but it was cool taking profits when everyone was measuring coffins.

Please read over them to see what you think. It gives a flavor of “as its happening,” but hopefully with some fairly sage comments. One of things pointed out in the morning was that this is really no Lehman Brothers moment. It was not a shock to the market. This is more about fear of the unknown over what may happen if the U.S. does not raise its debt ceiling and chances a ratings downgrade. We already know there will not be a default; the President and the administration have been telling our creditors that we will not default. What has people scared is the question of what services will be cut off, what has to be closed, and how that will impact a potential credit downgrade. When people do not know, they react negatively. The interesting thing is the market is not acting as if it is ready to implode.

There was terrible economic data on Friday morning. GDP came in at 1.3% in Q2. That was a bit better than some of the Armageddon views. The real gut punch was the 0.4% in Q1 revised down from 1.9%. That shocked the market, but it did not obliterate it. Futures were lower ahead of the news, but they really fell when news of the GDP came out. Even so, you can see a test lower and a recovery by the SP futures. What happened overall is the SP500 tapped the 200 day EMA on the low and reversed. This is one of the key support levels I cited in the report where we should look for any kind of buyer response. Indeed there was.

Perhaps this was just some short covering going into the weekend where there will be a game of “Deal or No Deal” With respect to the debt crisis. We were involved in some short covering as well. When I saw the SP500 hit the 200 day EMA and start to bounce, I took some downside gain and banked it. When you consider what is happening in the world and what the markets are doing, the market is acting technically. It is trading nicely inside of its well-established trading range. Despite the predicted carnage, the market is acting as a market should on a technical basis. The market is not anticipating any kind of meltdown. Later I will talk about the reason the market is holding up so well.

If there is no deal come Monday, perhaps the market sells some more. It has left itself plenty of room in its trading range to come down and bounce off of another support level. As I noted in the last alert, it was not a great day for the market. It was not necessarily a great day for us. It was not really a great week, but we banked nice gain as the market was labeled to be in carnage. That is cool. We were able to bank nice gain all week. Of course we had to suffer some losses as things sold off and stocks suffered through some earnings, but consider how terrible this week was. You may have listened to some of the analysts, and they were truly panicked. It was amazing. Some of the pundits who panicked tend to pride themselves on not panicking and being pillars of sage advice on market moves. They capitulated and the market did not. Isn’t that the way it always is?

Looking at the intraday action, there was that initial selloff, but as the SP500 hit the 200 day EMA, it reversed. It recovered and rallied to the upside. Indeed NASDAQ was in the lead, and it pulled the other indices positive. Unfortunately, that was not meant to be on the day. They slid down in the afternoon and managed a late bounce. It just kept them out of positive, but they held a lot of their gain off the lows. As noted, there is plenty of room in the trading range for them still to sell a bit more and just have a normal move to test the bottom of the range.

NASDAQ, – 0.36%; SP500, – 0.65%; Dow, – 0.8%; SP600, – 0.4%; SOX, – 0.9%.

MONDAY

What has driven move to this stage? You know the answer as well as I do. It is not a great economic resurgence. The economy has never looked very good coming out of ye old bear market selloff that started back in late 2008. Massive liquidity from the Federal Reserve has helped fuel this twin rally off of the March 2009 lows. The initial run took the market into Q2 of 2010. A big base, and the second move on QE2 that was announced in August of 2010. Now the market is foundering again because the Fed has withdrawn QE2 and said it was not going to renew it. With the continually pathetic-and-falling economic data, the market figured (likely correctly) that we were going down into recession and the Fed would be compelled to act once more. That, I believe, is why the market is holding up in its trading range.

With the anticipation of liquidity that has driven the market higher, we can anticipate the market holding its range. Does not mean it will happen, but we can anticipate it will. If data is worse, the more likelihood the market will figure the Fed will have to step in once some kind of budget deal is arranged.

Then we look to next week. That makes this data germane because the market will be watching it to see if it is bad enough to keep the Fed in the game. Let’s face it, the economic improvement we have had has not been good enough to drive these gains. If we have economic improvement now, the market will not take much heart in it because it is not a recovery. This is the 1930′s and 1970′s malaise that I have talked about many times. We are experiencing it right now, and the numbers continue to prove it.

The ISM will probably come in above 50. We have not had enough regions swinging negative. They are heading back to negative but not enough of them have gone that way. Midwest Automotive is keeping the Chicago area in expansion   slower, but expansion nonetheless. That is holding up the rest of the country.

We also have personal income and spending. Very important given the sentiment and very important given the decline posted in the Q2 numbers. We have Challenger jobs and the ADP employment change. That will be important, but it is all a prelude to initial jobless claims on Thursday and the July nonfarm payrolls. The unemployment data. They are expected to show 78K versus the 18K the prior month. Hope truly springs eternal in the world of data forecasting.

The unemployment rate is supposed to fall to 9.1%. That is likely because the job pool will shrink versus any expectations that there will be more jobs out there. Not great numbers. The market will be paying attention, of course. If the numbers continue to be poor, the market will take initial hits and be sluggish as it was on Friday, but it will not likely collapse. Not as long as it has the belief that the Fed will come to its aid with new money to toss out of those helicopters. The question is whether it will be in bundles or if it will just flutter down upon us minions so we can scramble for it and try to stay alive as inflation continues to destroy our savings.

The action off of the lows on Friday was likely due to some short covering ahead of the weekend. After all, it was a very steep decline for the week. With the indices unable to break the 200 day EMA on the SP500, there was some covering to bounce stocks higher. It really was not a rush of buyers, but all bounces start with short covering. The market has set itself up well for a possible deal this coming week. It is poised to take advantage of any announcement over the weekend or on Monday of some kind of budget deal. Maybe it will happen. There was passage of the Boehner bill with the balanced budget amendment. That will never make it through Congress. I have my theories about whether it is insane or not, but that is not important.

The point is, the market is ready to bounce if there is a deal. There will probably be a compromise, and they will all walk away with nothing really done. $1T in cuts when we have $50T in debt means nothing. It is over 10 years at that. It is not an immediate chop of anything, so it really will not do much. It will just be kicking the can down the road to deal with at a later date, washing hands until after another election.

The market has set itself up for a deal, and if it is announced, it could bounce. If it is not announced, perhaps it breaks down and tries the June and March lows. That would still be normal trading range action. It could still break down. People feel like the Fed cannot rush in. If it is precluded from moving in because Congress and the President cannot get together on a deal, then the Fed might be put off. It does not want to interject itself into this discussion; it wants to wait until it is over and then act. The longer it takes for Congress and the President to reach a deal, the longer it will take for the Fed to announce any QE3. It has to have a certain requisite mourning period after the debt deal is signed before it can say we need QE3.

The market is looking for that. Again, the 2010 pullback and selloff ended with the announcement of QE2. Look at the 2011 market top; it is not really a base like it was in 2010. It has toppy action, in a range. The range has to hold, or else it is a breakdown and not a base. This action very much needs an announcement of some kind of QE3.

We will see what next week brings. We have some sectors and leaders that still look very good. Energy is still putting up good patterns for us. Healthcare is probably still generating some more, and that is a broad category. We may find an occasional retail or technical. The semiconductors are still down at the bottom of the range. If there will be a bounce, they are in perfect position to do so. We might also get some plays to the upside off of some indexes if the market is going to hold. We have many areas to try, and we have to be ready for them all.

We have our working thesis, but that does not mean it will pan out the way I think it will. One of the keys in the market is to be able to say “Well, I did not get that one right.” Then you move on and take advantage of what is happening to make money. That is what we will do. That is what we have been doing and will always do. I will see you for what will no doubt be a very fun-filled and interesting week ahead.

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