The Campaign Plan has Started
- More problems ‘over there’ again undercut US stocks as German ECB chief economist quits amid speculation Greece defaults soon.
- Half a stimulus that did nothing is still nothing as far as financial markets are concerned.
- Things are not all roses for the big companies: TXN outlook disappoints while BAC to lay off tens of thousands.
- Terror threat increase adds to pre-weekend damper.
- The campaign plan has started: Geithner states effectiveness of Obama ‘stimulus’ bill “depends upon Congress.”
- Indices still in their recent uptrend despite falling 5 of 6 sessions.
- Potential leaders still holding onto and building their patterns.
When $447B is not enough, or more accurately, directed at the wrong things.
It was another tough session for stocks. Indeed, it was a tough week for stocks as they closed down for the fifth session out of six. That puts them down for two weeks in a row, and that is two out of three weeks that the market has closed to the downside ahead of the weekend. Not good action. Even so, the indices are still holding the uptrends off of the early-August low. SP500 is still holding its uptrend. NASDAQ is still holding its uptrend as well it actually has a double bottom and is holding off of that. The small caps are holding their uptrend as well. Remember, the early-August low is important in itself because it tested the Summer 2010 base highs and has held thus far.
The indices look rather ugly. They have had the big tumble down, and they made an ABCD pattern. They tried to bounce back up but they are selling. They could very easily sell down to the prior low. Then we just have to see whether they continue down. I opined earlier that if they sold off that low, they would probably break down into the Summer 2010 base and trade down to a very important level in SP500 at 1040. It has touched that level several times and held. That is the start of the range of next support, however, because there is the July low at about 1015-1020. There are other levels that use that as support as well, looking back to early-October 2009.
This is a support range that the indices would head down to if this upper support range from the base breaks. It is something of a positive that the indices are still holding their uptrends even after five out of six days to the downside. And we still have a lot of those leader wannabes holding their patterns together, building their bases even as the market sells off. That is a positive. If these stocks refuse to give in and build their patterns and break higher, that will be a plus to the upside for the market overall.
Looking at the action intraday, the stocks started lower. Futures were down all morning. There was some not-good news, and I will discuss that later. They recovered with an initial bounce, but that was unable to stick and stocks headed lower. There were some issues that caused them to head lower. Greece was one of them and, I will go into that more later. Stocks sold off to lows late in the afternoon session, and then they put in a token short-covering bounce late in the day. It did not do much good, although it did bounce the indices off their lows and keep them in the short-term uptrends.
SP500, -2.7%; NASDAQ, -2.4%; Dow, -2.7%; SP600, -3%; SOX, -1%.
There was a quartet of news for the day. Number one, the traders were beating their heads against the desk again. As noted, stocks were down five out of six sessions, and one of the reasons was they found no solace in the President’s major jobs speech on Thursday night. It was $447B in proposed spending. That is roughly half of what was spent in stimulus number one, and that simply was not enough. Or perhaps it was not the right kind of spending. This is the same stuff that was tried before. It is what has been tried all during the recovery. Maybe not part of the initial stimulus, but it has been thrown at the recession and has not worked. We had a little bump in GDP, but if you raise that much liquidity through monetary policy as the Fed did (basically printing money) you will get the financial increase which helps boost the ability of corporations to spend money. That is exactly what we have seen. And that is pretty much all we have seen.
There was not much joy found in the President’s plan. The chance of it passing as proposed are not that good. The Republicans are simply not going to go for some parts of the program that are pure Keynesian theory. As Rick Perry said in the GOP debate, this entire scenario has once again proved that Keynesian policies simply do not work when it comes to the economy.
One of the things bothering the market was “over there.” Europe once again was the highlight. There were two stories out of Europe that dogged the market all day. Number one, the ECB lost one of its executive council members. Mr. Stark from Germany, one of its chief economists, walked out. It was almost a protest resignation. It shows there still is some dissension in Germany even though the German courts said that the bailout was constitutional. So a pensive Mr. Stark exited stage right, and that had investors worried. Why was he leaving? Was he getting out before the storm, or was it just a protest? We will know at some point, but right now it was enough to rattle investors.
Then Mr. Papandreou in Greece was defending his austerity even as all other indicators in all of the markets show it will likely not work. Credit default swaps are surging for Greece, and currency trades show there is no faith in Greece. The bond rates are also having issues. It is saying that the country will default. That was the rumor during the day that really started to impact the market mid-morning and send it lower. It seems like it could not get much worse than that, although it will, believe me. In any event, the market was worried about that. The question is will Greece be forced to default over the weekend? That was the speculation, and it may happen this weekend. That is never good for the markets.
The third story of bad news had to deal with U.S. companies. TXN gave a lackluster mid-quarter update on Thursday night. Even though the stock traded up and chip stocks showed relative strength, it was not good news for the market overall. Then BAC announced that it could make layoffs in the amount of 40K workers. The number is not fixed yet, but that is a huge hickey. It also dovetails with what some are saying with respect to the jobs picture. The number of layoffs are increasing once again, job creation is falling, and jobless claims on a weekly basis are rising again. All of these add up to a typical indicator that a new recession is coming. In this case, it would be a double-dip. In my view and that of many others small businesses especially there was never an end to the first recession. It was only the large corporations that got subsidies and benefited from the Obama export-nation plans. There was not good news with respect to the jobs report and hence the economy as well.
The fourth bit of news was the potential credible terrorist threat for Washington, DC and New York. It could be car bombs or truck bombs going off. Something to rattle us and let us know the terrorists are still there. They are potent. They have things they can do. They think they know who these guys are, but they do not know where they are. They see suspicious activity and are taking action on it. They alerted everyone to be on the lookout. It reminds me of Fahrenheit 451 by Ray Bradbury where they get on the news and say, “Here’s your guy, now find him.” It is a bit different scenario because there are real bad guys here. It has been enough to help rattle the market. A terror attack may not be devastating to the financial markets, but it would be a major drag near term.
MONDAY
If we can make it through the weekend and all the issues (whether a potential terror attack or a Greek or other European government folding), then the market will be happy at least with a chance of bouncing. It has a stimulus package that the Congress and the President will work their way through. Some of it will be passed. We also have Ben Bernanke out with the possibility of another Quantitative Easing move. If that happens, then the market will be very pleased and ready to rally.
There is plenty of data next week. We will see the PPI, Retail Sales, the CPI, more Jobless Claims, Industrial Production and Capacity, and then the Philly Fed along with Michigan Sentiment. There will be plenty of scheduled data to go along with the daily stories out of Europe and any other stories we may have from other nations in trouble (it could be the U.S). We have plenty of news, and we have plenty of stocks in position to make a bounce. If they can fulfill the patterns they are showing, it can bounce the indices back up toward that June peak.
I am still not looking for a breakout. Maybe I am being pollyanna in trying to look for a bounce at all, but the indices keep fighting off these attempts to sell it. As long as these stocks we have been watching continue to hold these patterns, hold support, and build on them, then there is the potential for the market to rally back up. There are a lot of stocks in this double bottom or inverted head and shoulders pattern. If they get the catalyst to move higher and this is the time of year you start to see technology and growth stocks start to move then we will see the stock market break higher as well. MACD is showing the momentum change, and a lot of these look like they are ready to break higher. All it takes is a handful of them to start making the move. The buyers come in, and then we can get that nice rally up to the June low and maybe into this range.
Jon Johnson
