Market At A Crossroads
- Stocks recovery from early weakness only to get slammed after the Franco/German summit, but even then they fight back again.
- Higher volume selling, but stocks do manage to recover decently.
- Housing starts and permits fall more than expected, but that is not necessarily bad news.
- EU GDP clinging to its guns, religion . . . I mean, to positive.
- Industrial Production and Capacity are a breath of fresh air.
- WMT selling tons of merchandise as URBN wonders where the buyers went in the last 10 days of the quarter. Not good signs re the consumer.
- Obama says ‘we know what to do’ in order to create jobs. Well, gee, why have you waited to now?
- Market at a crossroads as the relief bounce is tested.
MARKET SUMMARY
Europe raises its head almost on cue.
Just when you think it is safe for stocks. They made an important move in the relief rally and looked like they would extend up to at least the November peaks, but then the ugly news raised its head again. On Monday I said perhaps something from Europe could cause an issue. I was just kidding, guys you did not have to do it just because I said so. But, sure enough, that is what happened. The EU said its GDP growth was a whopping 0.2%. German GDP growth was a scintillating 0.1% versus a flaming hot (by comparison) 1.3% growth rate in Q1.
Futures were down on the news, of course. Way down. They started low, but they were moving higher in towards the open and got a little boost. The boost was not from Housing Starts which totally reeked at -1.5%. That was much lower than expected. Permits fell 3.2%, also much weaker than expected. Obviously those did not help stocks. What did help stocks may have been Industrial Production that came in at 0.9%, which more than doubled what was expected. The prior number was revised double as well, up 0.4% versus 0.2% originally reported in June.
Capacity Utilization was 77.5%, topping expectations and pulling ahead of June. June was revised higher as well. That was (drum roll, please) the highest reading since August of 2008. That was three years ago when the financial crisis was exploding onto the scene, and credit default swaps rose thousands of percent in a matter of days and weeks.
That news actually did help the market bump higher. Stocks really took off on that news, but it was not that pretty when you see where they closed the day before and the futures. Do note that the momentum was upside and stocks continued to move to the upside as the session got underway, moving into lunch. Actually the futures turned positive; they cleared the Monday peak. But then there was more. The second head from Europe, emerged, and this was the Franco/German meeting. Two powers from World War II were coming together to basically determine the fate of the continent. What did they determine? Nothing. They could not get anything done. There is too much trouble over there, and that is very worrisome. It is not just the EU it really could collapse tomorrow, and that is not the big deal. The big deal is what will happen to all the countries.
I might wax philosophical a bit, but this crisis of debt on the continent could lay as much waste to Europe as WWII. That is somewhat figurative, but it is true in an economic sense. There may just be one or two powers left after this is all over. They will have to rebuild and pick up the pieces. They could not come up with an answer, and the market started to sell off when they failed to produce results. It is a bit more dramatic you look at some of the other charts.
SP500 came just a gnat’s rear end from turning positive, but then the word came out that the Germans and French could not come to any resolution (not for a lack of trying). The market tumbled to session lows. SP500 hung in there. It held at 1180, which is critical. Why? Look at the November consolidation level from 2010. Lo and behold, the lows and the October 2010 consolidation are right at 1175-1180. It held there and managed to rebound into the close. It never got positive. Maybe it gave a little scare again, but it never got that mojo back. It was on the rise until the last 15-20 minutes when it decided it had enough, pulled back, and all the markets closed negative. Disappointing.
NASDAQ, -1.25%; SP500, -1%; Dow, -0.7%; SP600, -1.75%; SOX, -2%.
Growth definitely took more of the hickey than the more staid large caps on the NYSE. Volume was a bit higher, just above the red average line. While it was not runaway volume, it is always worrisome when, after a move to the upside on declining volume, you get selling on rising volume. That shows the sellers are coming back in with a bit more force, but you cannot completely eliminate the fact that SP500 tapped at support on the low and bounced. Indeed, all of the indices bounced off of their lows, and that put a bit of a better picture on it. That means as the indices tested that support, the buyers came back in and pushed them back up.
It was an ugly session overall, judging from what you heard on TV and my not-so-pleasant rendition of all the economic data confronting the market on Tuesday. Technically, however, it was not that bad. You can get a little pause in a relief bounce and then resume the move. We may be hanging too many hats on this test of 1175-1180 by SP500 and the subsequent bounce, but we have seen it before and rallies continue. We will see if it can. There is a plethora of stocks that have bounced off of their lows and are at resistance. We have a bunch of downside plays, these bear flags that have bounced back up to those resistance levels. If they collapse, then the indices (which are made up of the stocks) will collapse as well. This is the first real crossroads for the relief bounce. We have had three days up, and on the fourth day it has taken a pause. Now we will see if it can continue higher. Interestingly, this is really the sixth day. What will happen on the seventh? I do not want to get biblical, but it makes you think. Of what, I am not sure. Those that want to think, can.
WEDNESDAY
We have more economic data, and there will be more retail earnings results as well. Tomorrow is the PPI, and that is always an important precursor to the CPI. The latter is considered the most significant since the Fed uses that more than what the poor producers have to pay for their goods. The economic picture is the key, of course, as everyone is worried about jobs. That is really the only cure, but you cannot just create jobs out of thin air. You cannot just say, “I will take this money and create some jobs.” We just learned that, after all; the stimulus package did not create any jobs. There have been no net jobs. And yet President Obama was out on the stump today talking about how to create more jobs saying, “We know what to do.”
Well, that is interesting. Is he saying that they figured out what to do after three years of screwing up the economy and producing no jobs? Or will they try to same things they did before but on a grander scale? I wonder. I know they have talked to Art Laffer. He is the genius behind the Laffer Curve and the Reagan tax incentive plans that helped spur that 20-year boom. I find it nearly impossible to believe that they would adopt any of Mr. Laffer’s recommendations. They are obviously Reaganesque, and thus free enterprise, pro-capitalism, pro-individual, and smaller government. This administration is pro-government and in favor of public control of everything. I cannot see it ever agreeing to any of those types of changes.
We will see what the plan is. I have a feeling it will be the same old thing. We have heard this many times before: “We know how to fix it.” I have talked to local representatives from the more liberal side, and they swear by the Princeton School of Economics that it is always about demand. They say demand is always the creator of economic recoveries, and it is just not true. The economy went into recession in 2000-2001 even though consumer demand remained very strong. It proved that consumer demand does not control whether we have recessions or prosperity. It is not an end in itself. It is part of the equation, but it is not THE equation. I will be curious to hear what it is that Mr. Obama knows what to do. We will see if it is anything new. I am not holding my breath.
The market is at an important crossroads at least in terms of this relief bounce. This is the first test or pause of the move off of the very sharp July and August selling. Very sharp tumble to the downside. It is now back up in the November consolidation range. Trying to get to the top of that range. If you are the more pessimistic kind, you would say the bounce is over. You have a chance of being right. It is all about probabilities in the market, and this is a sharp selloff. It has recovered, but it has recovered back to a resistance level.
SP500 has bounced back up almost to the 38% Fibonacci retracement of this move off of the early-July peak. If it turns over here, it has a good likelihood of breaking these recent lows and moving even further to the downside. This does make it an important level even though the bounce has not been that significant. We have to watch here. We entered into some downside positions. As noted, we did not go in whole hog we are just stepping in. If it works, that is great. If it does not, we will just bide our time, pick our shots again, and add to them when the index gets up to the November peak and stalls. Maybe even this little hitch in December. More likely, if it gets that far, is to look at the 1250-1260 level from late-December, March, and June.
We are still in the position of looking for additional upside, but we are ready for the downside. Will we look for a lot of new upside plays? Not necessarily. Only if we see great plays. I have been scouring the market, and they are harder and harder to come by given the bounce to this point. If we do see them, we can put them on. If they make a move, we can participant in that move for an additional run higher. However, we keep in mind that we do not have as much upside potential. The risk/reward has changed at this point. It was much different down at this level, of course, than it is after a significant bounce off the lows that is taking SP500 and the other indices into their first level of resistance.
As you would expect, the indices are showing a bit of giveback right here. I was hoping it would continue to the upside, but they are feeling a little pressure from that resistance. It did a decent job of bouncing off the lows. Now we will see if they can resume the move and hit that November peak, or even get up to the 1250-1260 level.
Again, we are not looking to play a lot of new upside positions at this point. We already have a good handful of them that we bought at lower prices to make the run for us. We are more than happy to let them do that. Then we can exit out if this market really slams into wall a bit higher and starts to roll over. Of course you have to watch out for the “in your ear,” right? If it stalls right here, we have to be ready to get out of dodge and let the downside plays work for us that we started to enter today.
