Stocks Put Aside Europe for Another Day
- Stocks put aside Europe for another day, add to the Monday reversal.
- BNP, Soc-Gen say ‘nothing wrong with our banks.’ The equivalent of a vote of confidence for a beleaguered coach?
- Germany’s Merkel: no “uncontrolled insolvency” for Greece. Okay, but a ‘controlled insolvency’ is still insolvency, right?
- Oil pushing back against resistance.
- Dollar, bonds take a breather after some impressive runs.
- Short term pattern looking for those June lows, but longer term leaves the upside questionable.
More ‘good news’ re Europe helps the market extend the Monday reversal.
Investors were able to put aside European issues for the second session. Thus, for the second session, stocks actually rose. They added to the Monday reversal off of that early selloff and posted rather decent gains. Not huge but not bad.
SP500 0.9%; NASDAQ, +1.5%; Dow, +0.4%; SP600, +1.6%; SOX, +2%
The SOX was the overall market leader again, energized by the announcement on Monday that BroadCom would buy NetLogic.
It was not all roses to start the day. Futures started lower, but then they rallied toward the open. Stocks opened and tried to move higher. They had a bit of a struggle and then made a nice, solid break. Often you will see that soft open after a move to the upside, and then the buyers step back in and push stocks higher once again. That is particularly the case with a situation like SP500 and the other indices where they put in higher lows and have continued to hold this short trendline off of the August low. When they reversed off of that trendline on Monday, the stage was set for them to continue the move upside on Tuesday, and they were able to do that. It was not a huge move, and it was not always certain that it could last. After that initial rally, stocks pulled back to negative on SP500 mid-morning (often the fulcrum for the next move). The index put in a double bottom and then rallied to a new session high by mid-afternoon. Not bad action at all.
It got a little choppy. Sellers tried to come in. They had some success, but the market moved right back up and closed near the session highs for the day. All in all, it was a very credible follow-through to that Monday reversal. That sets the stage for the move back up to the August peaks on both SP500 and NASDAQ, and then perhaps a move to the 1255-1260 level in SP500 marked by the June low.
The day was not without news out of Europe. BNP and SocGen, two big European banks, said there was nothing wrong with their banks. This sounds similar to some of the financial companies in 2008 saying they were fine and dandy only to collapse or stumble hard over the next couple of months. You have to wonder if this is the equivalent of a vote of confidence for a beleaguered coach that becomes the precursor to that coach getting laid off. Whether that is the case or not and I think it could be it did not seem to bother investors on Tuesday.
Germany’s Merkel saying she would not allow Greece to go up in an “uncontrolled insolvency.” That boosted a bit of confidence, but I have to ask if that mean she is willing to allow Greece to go into a controlled insolvency? After all, whether it is controlled or uncontrolled, insolvency is still insolvency. I guess it is the collateral damage on the way down that matters. Of course it matters to Merkel because Germany has always been rather reticent to engage in this kind of bailout. Reading between the lines, one would assume that Merkel is saying they will not let it collapse because that would be bad for them as well; if it has to collapse, they will at least try to direct what it takes out on the way down. I can assure you that Germany will not let it take anything of theirs down. It cannot because Germany is the strongest economy in the EU. If Germany is winged and goes into a tailspin, then there really no hope for the rest of the euro zone at point.
Again, that was no issue for the day as stocks rallied decently, and it built on some positive moves in some nascent leadership. That leadership is trying its hardest to get up off of the recent lows from the selloff in July and August to provide some upside momentum for the indices to again try to carry SP500 up to this June low.
WEDNESDAY
We have had two days up in the market. We will get a bit more economic data. We will get the Weekly Mortgage Index, the PPI, and Retail Sales for August. We will see how back-to-school was. Some said it was fine, and others said it was terrible. It probably was for some, either way. We will also get Crude Inventories and the Business Inventories. We saw Wholesale Inventories last week. The sales were not that good, and the production was not that good. They are stagnant. We will see what happens with Business Inventories now and see if the sales or the production levels are any better. We know production has not been stellar looking at the regional manufacturers. I am not expecting anything significant. Retail sales, of course, will be interesting. That will be what a lot of people are looking at. Some of the stocks are moving in anticipation of them. Last week we saw Same Store Sales, and the fact that retailers are holding up well and actually advancing the ball is a very good indication.
I want to get back to the technicals of the market. We have this move off of the August low. We have support from a lot of these leaders that are trying to make the break upside as well. I have talked about this already. If they can continue the move which it looks like they want to do then they give support to the indices making the bounce to the upside. We are looking for a move back up to SP500 and its June low. That puts the index around 1260. That gives it roughly 85-90 points for the move. That is a very solid move. That is why we have been buying upside positions over the past couple of sessions, picking them up and anticipating that run. We are looking at stocks that have put in good moves and have pulled back. We are picking those up off of the lows from these near-term bullish patterns. That could very easily provide the impetus to move the index up to that June low. That is what we are looking to play, obviously.
As noted, there are many things that would impede the move, primarily Europe and maybe a Greece default or someone else goes and under. That could really throw things back in our face, and it could happen. Should we sit out and miss potential moves simply because something could happen? I know the probability of it happening is high, but when you see stocks setting up and making the moves you need to participate in them. Know that there could be a setback, but that is how we have been able to make some good money on these moves. We were just banking some downside gain on the last dip, and now we have picked up some upside and are letting our other upside run that held up. I anticipate making good money up to that June low.
After that is a question. These patterns we see could easily move the indices up to that next resistance level, a new high on this rally. After that, will they be able to move further? I have noted earlier that these are really ugly patterns on the indices. That is a lot of resistance to cut through once they get up to that level. They can do it. Things can change. The economic outlook could look better, or maybe some real fiscal policy and stimulus gets passed. That could change things.
These patterns that would deliver the market up to this level have to deal with the patterns the indices have in place, plus some other stocks that are decent but do not look that good. You see these stocks that are trying to hang on. They are in head and shoulders patterns, and they could have some issues going forward. They could be a governor on the rest of the market. Look at SCSS, BIIB, CCIX. A lot of these early leaders have this pattern to them. They could act in opposition to the stocks rallying off the lows. That is why I am still skeptical about SP500 and the other indices making a breakout through this range of resistance spanning February-July. It can get there and then turn back down.
What do we do? We do not wring our hands and worry. We will play the moves as they unfold. We can make good money if SP500 rallies up to the June low. If it does not make it, oh well. We will deal with that then. If it breaks through, we will be happy and let them run. If it does not and turns, we will be ready. We will take our gains because those will be good gains for us. Then we will be ready to play them to the downside as we roll back down. That is what we have been doing thus far because we are in a trading range. As long as you are in a trading range, you play the range. You pick up the good stocks that are ready to move, and you play them as far as they will run. Then you get rid of them. If they break down, then you move into the next group.
We will continue with that strategy. Overall I am looking for this still to be just a bounce up to resistance and then a turn down that may be more significant.
