Stocks Advance for Third Session
- Stocks advance for third session though the close is a bit disquieting.
- Europe adds to the upside again thanks to some Geithner comments, though the news shows it is dancing on the edge.
- ‘Political dysfunction’ is the root of the world’s troubles? Give me a break.
- Retail Sales less than expected, July revised down.
- PPI slows, a welcome respite.
- Bears become more numerous than Bulls. The rare crossover.
- NASDAQ hits its August high and gives back 40% of its gain. After three upside days the market is likely to get a bit of a test from the sellers.
Good reversal signal Monday led to a bounce. Was Wednesday’s close another signal?
The action was almost textbook with some back and forth action in the futures in the pre-market and at most the suggestion of a modest upside start on the third day of the last rally attempt. Indeed, futures gave back some solid early moves as the bell approached. Stocks managed to open positive nonetheless. The specter of sellers turned into reality, however, as the first half hour of trade played out. To the point, stocks sold off of the higher open and turned negative at the half hour point. As strange as it may seem, when Business Inventories were released at 10ET and were a tick lower than expected, stocks found bottom and put in a nice reversal bar on the candlestick chart.
That put in a the session low and stocks rallied steadily from that point well into the last hour. Stocks were cruising. Then NASDAQ hit its June low and August high while SP500 hit that somewhat psychological level at 1200. The buy switch flipped to the sell switch. Profit takers entered and NASDAQ drained off 30 points in 25 minutes, or 40% of its session gains. SP500 shed 13 points, almost matching is gain on the session. Pretty sharp selling though the indices still closed with solid gains. Just not as solid and definitely the action throttled back from strong buying.
NASDAQ 40.40, 1.60%. SP500 15.81, 1.35%. DJ30 140.88, 1.27%. SP600 1.75%. SOX 2.61%.
Volume jumped on NASDAQ but just bumped slightly on NYSE. Still, upside volume is good on an upside session. The late reversal is not great to see on higher trade, but still solid gains on solid volume. Disappointing and somewhat disconcerting that the sellers were so successful in burning off market gains in such a short time and as NASDAQ touched its last high as well as the June low. Overall the indices still look fine with SP500 having plenty of room to run to its June low, but with the reaction at the NASDAQ June low that suggests at least a pause here after three upside sessions.
THE NEWS.
What drove the session, at least according to the financial stations that have to find some reason for the near term moves even though they know, or should know, that stocks move on technical and longer term economic indications?
Europe is always at the top of the list right now as it teeters on collapse. Tuesday there were positives from Merkel and China. Wednesday there was even more conviction that China would enter Europe, dropping trunk loads (not sure what the Chinese use versus trunks) and bail the union out. There was also Geithner in a CNBC interview saying that no ‘LEH would happen in Europe’ because Europe has the wherewithal to handle the crisis even without China.
Not bad and it helped the market. Of course Geithner could not resist throwing in some gratuitous comments about the President’s ‘jobs’ bill. The most outlandish statement: ‘political dysfunction’ was the root of the world’s troubles. Really? He was referring to the debt debate in the US. Was that the cause of the world’s crisis? Correct me if wrong, but that just came to a head in 2008. It started long, long before that under Mr. Greenspan’s watch, not to mention Clinton and Bush. The recent political debate was a positive attempt at trying to cure the problem. Debate is good. It is what we are about. I personally do not want one king (whether actual or just through a God complex) or a small group deciding my financial future behind closed doors. Out in the open either. We holler, yell, hold signs, argue, then we decide. We have done it since the first Congress. Get real. Grow up Timmy.
The other European news was not good but the market ignored it. Moody’s downgraded two French banks, Societe Generale and Credit Agricole. France, the EU’s second largest economy, is in dire shape as well. Wednesday the market decided to ignore the bad news.
There was also word that two European banks drew $500M in the dollar credit facility opened to European banks because they were unable to obtain the dollars in the open market. There was rumor that European banks were having trouble finding dollar lenders due to worries about solvency, and this information confirms that worry. Again the market chose to overlook it, but it is still there.
Finally, a Bloomberg story corroborated our theory stated last week that the rise in M2 here in the US was influenced by money leaving Europe. Bloomberg reported that ECB banks were experiencing a drain in deposits as money flew the Continent.
Retail Sales, August. 0.0% versus 0.2% expected and 0.3% prior revised LOWER from 0.5%. Remember the tout about how strong consumers are? Well consumers are not that strong. They are not dead, but they just don’t have that much money in their pockets with inflation eating profits for those employed, the unemployed still growing, and more falling off the unemployment rolls.
An important point: a decline in August was already blamed on the debt debate. There was likely an impact there, but note that JULY was lowered as well and that was before the debate. Always hate revisions downside as that is a more accurate read as it is the result of more data.
JOBS are the key. People are at the point they need to have a real job to keep consuming. The President wants a make-work, $500B spending bill to create temporary jobs. That would put some money in some pockets, but it takes it out of others to do so, others that are by definition productive as they are making the ‘big’ salaries the President feels makes them billionaires. How $200K makes someone a billionaire is beyond logic, but what can you expect from someone who never held a public sector job and who grew up outside the US? If you think that is a bit tacky, well, maybe it is, but it is also true.
PPI, August. Better at 0.1% versus 0.2% expected and 0.4% in June. Core was flat, matching expectations and down from 0.2% in July. A bit of a respite in prices is very nice to see because Americans are getting clobbered by a falling dollar and rising inflation, that nasty double whammy.
THURSDAY
Lots of economic data Thursday with jobless claims, CPI, Empire Manufacturing, Industrial Production and Capacity Utilization, not to forget the Philly Fed. What a day of data.
Comes at an important juncture, i.e. NASDAQ hitting its June low and reversing 40% of the gains on Wednesday. Not death, but the sellers came in. At least it was some profit taking.
That is worrisome, but this is historically the time that techs are bought and we are seeing that with the chips coming to life. They are likely not done, and that means NASDAQ is not done, but it may need to take a day or two after this 3-day run to rest and set up for the next move. Yes the selling late was something I did not like at all. But it did not damage any stock patterns that I saw tonight.
Thus we anticipate more upside with SP500 trying to get to that June low at 1260. That still leaves SP500 a lot of room to run, about 70 points worth. NASDAQ is leading the way, so SP500 may need to test and wait for NASDAQ to start back up as I don’t anticipate SP500 leading the charge.
Even so we are still only looking for a move up to 1260 on SP500 before it turns lower for some sharper selling. Perhaps it does not; perhaps it continues. If it does, we let it and reap the reward. No issues with that. The concern is that it stalls out below that 1260 level, something the late selling may have presaged. If that happens we just have to be ready. Don’t think it will happen but don’t want to ignore the possibility either.
If there is a day or two of pause we will use that as well. The upside plays are somewhat overdone here after a 3 day run upside. A pause lets some that ran away from us come back and perhaps give us an entry for a continued upside move. We will have to examine each play and see if it can deliver enough upside for an SP500 move to 1260, but they will likely be out there.
Don’t want to sound too bullish. It is all short term upside we are looking at. We remained less than convinced the August low was any kind of bottom that turns the indices around and leads them to new highs. Thus keep it real so to speak, i.e. keep realistic targets and risk/reward. After all, the indices are still, yes still, just in trading ranges.
