Stocks Confronted With Obstacles
- Stocks struggle with some negative headwinds but manage to overcome and post gains, albeit modest ones.
- FOMC’s Evans says more QE is needed, FOMC minutes confirm others lean his way as well.
- Case/Shiller shows the possibility of ‘setting the stage for stability.’ Wow.
- Consumer Confidence heads even lower.
- Money leaving Europe for the ‘safety’ of the US, and that shows just how bad it is in Europe.
- Gold gets more life gratis the Fed, Europe . . . you know, the usual.
- Close to the November peak and the first real test on this second attempt at a relief run.
Stocks suffered headwinds from the premarket session. Why? Chicago Fed President Charles Evans gave an interview on CNBC saying he was very dovish with respect to inflation and the economy. He feels that there needs to be much more stimulus. He said the Fed had to be much more aggressive with respect to monetary policy and its accommodative stance. It is hard to imagine being much more accommodative with a 0% Fed funds rate through 2013, but Evans said there needs to be more QE3.
Instead of sending stocks higher, with financial markets saying hoorah because there might be more liquidity coming, it actually spooked investors. Why? They saw this pretty sane fellow saying they need to be more aggressive with their monetary policy, including some Quantitative Easing, and yet there is little chance that will happen. The Fed just had its meeting. There were three dissenters to the 0% interest rate through 2013, but there was no Quantitative Easing in the offing. Thus investors were spooked. They thought Evans saw something they did not realize was out there, and stock futures sold off.
They did manage to recover and started higher toward the open after the June reading for Case/Shiller came out. It was better than expected at 3.65% for Q2, and up 1.1% month-over-month. Year-over-year, however, it was down 4.5%. They were showing signs yet again of some improvement in the nearer term data as they have over the prior two months. The always-enthusiastic authors of the survey (I do say that tongue-in-cheek) said there were some pockets of strength here and there. They also said that the data might be “setting the stage for stability.” I don’t know about you, but that does not sound that enthusiastic to me.
After dropping like a stone for years, housing prices may be at the point where they are setting the stage for stability. As we now from the stock market and downturns, a bear market can sell off and stock markets can hit the proverbial bottom and stay there for a long period of time. The economy can fall and finally stabilize, but that does not mean it will turn back up. Something else has to happen to get them up, and in this case it is about getting housing prices higher. These “pockets of strength” are not exactly the stuff that roaring housing markets are made of.
Stocks still started higher as the session began, even with worries about the Fed and not getting any Quantitative Easing and Case/Shiller. Then Consumer Confidence hit. This is the decline that occurred on the Consumer Confidence numbers. Obviously they were not good; indeed, they were quite bad. In August confidence fell to 44.5 from 59.2. It was expected to fall, but only to 52. This is an atrocious reading. It is the lowest since April of 2009 when things were about as bad as they could be. They scream recession. Again, if you dropped down from another point in history and knew anything about Consumer Confidence, you would be very troubled that the number is at 44.5. You would think the U.S. is either in a terrible recession or heading there rapidly. You would not think, “Golly, the U.S. is just about to climb out of a recession.”
Some people were pointing to the Personal Income and Spending numbers, saying that the spending was higher and that was a positive. It was not bad at 0.8%. It was better than expected, that is for sure. You also have to realize that inflation is rising faster than the wage increases. You cannot keep spending if your real dollars are declining. With inflation rising faster than the wage increases, any increases in spending are transitory. Yes, I will use the phrase that Ben Bernanke used to describe the housing short fall and this recent slowdown in the economy. Of course, I am using it in the correct sense. He seems to think “transitory” means “long-lasting.” I am saying it will be of short duration. In any event, you cannot spend more than you make — at least when you were a household. If you are the federal government and have the reserve currency of the world, you can do that. That is what we have been doing. Boy, have we. But I do not want to digress down that road just yet.
That put the market back on its heels, negative, but it recovered again. The market is showing signs that it does not want to be kept down. It was a rocky road throughout the day, and it did sell back down mid-afternoon heading into lunch, but it did recover. Why? The FOMC minutes came out. It was more than just Evans who said we need to do some form of Quantitative Easing. That buoyed investors — or Evans scared them because they were thinking that we need this but there is no hope of getting it. The Fed passed on the last meeting and who knows when they will revisit the issue.
There are more people out there who feel the same way, so they took heart even though three of the FOMC members had dissented against keeping rates at 0% up until 2013. Likely some of them feel some Quantitative Easing would be better than the 0%. That heartened investors. Mr. Evans commented that we need to keep aggressive monetary policy, and we need to do some form of Quantitative Easing stimulus until the unemployment rate falls to 7% or lower, OR inflation hits 3% or more. So we are going to ease until things work or inflation busts us out. That is not a very comforting scenario.
Maybe that is what really spooked the hell out of the markets. It really scared me. These guys (who supposedly know better) are going to keep rates low. Then they are saying its either going to work and we will get unemployment below 7%, or it is not going to work and inflation will spike over 3% and then we will have to stop before we drive more nails into the coffin. Very reassuring. In retrospect, perhaps that is why the market sold off versus fears of needing stimulus and not getting it. I wonder about who is at the helm of the good ship America sometimes. That is quite frightening.
The market did not hold up that great to the end of the session; it tailed off late. The SP500 backed off considerably, back down to the mid-day peak at the close of the session, but it left it positive.
SP500, +0.23%; NASDAQ +0.55%; Dow, +0.2%; SP600, +0.5%; SOX, -0.06%.
Not a banner day, but the market got away with a victory after looking really weak early in the session. It overcame some negatives. There were quite a few out there, and it still managed a positive move on the day. That is always nice to see. I am not totally convinced it means much. I will say this kind of pause is normal after a good surge to the upside like we had on Friday and Monday, and as the SP500 comes within 7 points of its November peak. On the high it was at 1220, just 7 points from the 1227 November peak. It backed off but did not collapse. The doji suggests maybe it could pull back. There is a similar one on the DJ30 that could have the same kind of issue. We will have to see. NASDAQ looks pretty solid, on the other hand, with its move toward its 50 day EMA and its November peak. It tapped at the closing levels on the high Tuesday.
That, of course is quite important because we are looking at the November peak as the next key resistance point as the indices rebound. They have taken out that prior August relief-bounce peak. Now they are at the November high. That will exert some gravitation against it. Either it will repulse it or it will draw it to it and maybe above it. We will see what happens. Again, SP500 and the Dow did not look that stellar. They showed doji on the candlestick chart as they touched some resistance.
WEDNESDAY
Wednesday we have more economic data. We start with the warm-up for the Friday jobs report with Challenger Job Cuts and the ADP Employment Change for August. It is expected to come in at 100K, less than the 114K reported in August. The Chicago PMI is important. It is expected to cling to expansion above 50. It play flip negative. Factory Orders are expected to rebound sharply from -0.8 to 1.8. We will see.
More economic data. Everyone will be looking toward Friday. Then they will be looking toward the next week with the Obama address on the economy. Then they will look for what the Fed will do. We all know that the Congress is not going to pass any of the President’s proposals. As I have said before — and I started hearing it today, finally — they will blame the Republicans as being obstructionists because Obama said he knows what to do to fix it. “Listen and follow us. We know what to do. I am the Pied Piper.” Of course he has not done anything in three years. Why has he held us back if they know what to do in the first place? Why have we been going through this hell of an economy? It is all nonsense, but it is going to be the same old thing. Class warfare, us-against-them, “They are obstructionists because they do not want to spend money to keep our benefits coming from the federal government because we are all stupid sheep who cannot fend for ourselves.” Blah, blah, blah. That is what we will hear.
What will the market do with it all? The market wants to know about Quantitative Easing. It wants to know about any kind of good stimulus package that might have a chance of passing. It will not get much of later, so it will fall back on the Fed. That is not going to happen until after September. That leaves us dealing with the November highs on SP500 and the NASDAQ near term.
Perhaps the market stalls a bit here. This is where you gird your loins a bit. If you have good stocks in good upside positions, then let them ride. You do not want to lose gains, however. Be reasonable about it and keep decent stops. We have some good stop losses if they can hang on. We have had a good bounce. We got back up above the mid-August peak. We are up to the November highs. It is not the greatest run, and it is not up to the March low and the June low. But if it stalls here, we will take some gain, be happy with it, and play the downside. If it continues on, that is great.
There could be a rough session or two where it tests your nerve. Sometimes my nerve is not very good, and I will get the hell out of dodge. I do not want to hang around if things are bad and they could go back down. I can always get back in, and you can too. As I said, we have made pretty good money on the bounces. We will protect positions. We have taken about as many upside positions as we can at this point. I would hate to see a break through November with everyone piling in just to see it turn around and fall back down as the SP500 puts in its own ABCD pattern. Is that not correct? It is showing a doji here, so that is something you will want to take a look at and consider playing. That is why I have the SDS play on the report.
It is at a critical level. We have made money to the upside. Not every play has surged, but we have good stop losses. We have taken some gain off the table, and we will protect positions. We will be ready to play if there is a downside draft as well. We have had to close out some of the downside positions in the past day or two, but if we get move to the downside we have to play that move.
It may sound like a back-and-forth view of the market, but we are at a critical juncture right now. We have had our bounce, and now it will have to test this level and see if the indices can make the break. If there is no major selloff, we are not going anywhere; we will let our positions run. We will not let positions roll over on us. That is the way our game plan has to be right now. If the market starts back up, we can look at other positions. If it rolls, we will be heading out of those that are upside. We will take some more to the downside to make money on the downside break off an ABCD pattern. That should take us to the prior lows (if not lower). Have a great evening! We will see what the data says on Wednesday and see what those indices can do with that November peak.
