SUMMARY:
- Liquidity over reality: Central banks unite to provide European banks access to dollars the market won’t lend them and of course financial markets like liquidity.
- ECB action the equivalent of Fed Quantitative Easing, at least as far as markets are concerned?
- Central Bank action does not mean Europe’s problems are over. No, it only underscores how bad things are in Europe.
- Investors overlook more weak US data, rally stocks for fourth straight session.
- Jobless claims spike again.
- CPI jumps on food prices.
- New York, Philly manufacturing negative again.
- Air cargo declines sharply, pointing to another economic slowdown ahead.
- Four days to the upside, expiration as well. Expecting more upside, but likely a pause first.

Bad news from European banks leads to a liquidity injection, and markets love liquidity. 

There was plenty of disquieting economic news on Thursday as stocks tried to put together their fourth consecutive move to the upside. Investors were willing to overlook weak jobless claims, bad manufacturing data, and some other issues in favor of the market’s all-time favorite force. What would that be? What drove the markets up off of the March 2009 lows? You got it: Liquidity. A liquidity pump was turned on in Europe. Five central banks from the largest countries created three-month dollar facilities for European banks.

European banks have had trouble going to the market and obtaining the dollars they need in order to conduct business. They are in serious financial trouble and no one wants to lend them money, just as it was in 2008 with the credit freeze. No bank wanted to loan to another bank overnight for fear that the bank may not be there the next morning. The same thing is happening in Europe. These banks have to get money. That is one reason Lehman Brothers fell; no one was willing to lend them money, so it had to close its doors. In order to prevent that, the ECB cobbled together this group of banks to provide dollars so that European banks can conduct operations.

As you would expect, the market loved that news. Futures were up modestly, but they were tailing when this news hit. They surged to the upside on the release of the dollar facility. Of course it did not hold it, and it was volatile into the open and the early part of session. Note how mid-morning, once again, that proved to be the difference. Stocks pulled back to their pre- market futures low and then reversed nicely off of that. Check out the reversal bar on that candlestick. A nice rally into the close. It fed upon itself into the afternoon and the closing bell. That produced another round of gains with the indices logging their fourth consecutive upside move. They have not done that since August, so this is pretty positive.

SP500, +1.7%; NASDAQ, +1.3%; Dow, +1.7%; SP600, +1.3%; SOX, +1.4%.

After the growth indices led on Wednesday, it seemed like some of the more stoic indices the Dow and SP500 led the move to the upside. It is good to see rotation and a bit of participation across the board in these rallies, and we got that. Nice. An important feature was that NASDAQ managed to close at 2607, and that is above its June low. It is cracking into that resistance range, and SP500 at 1209 is still 18 points below its November high. It still has plenty of room to move as well.

Liquidity takes a backseat to nothing. Stocks and other financial instruments absolutely love liquidity. Stock indices moved higher on the belief that the European crisis was not as significant given what has happened this week. China came in, and we had Giethner saying that the EU would not let any of these banks fail and did not even need China to resolve its problems. Merkel said she would not have an uncontrolled insolvency for Greece. Again, that raises the question if that is versus a controlled insolvency. But we will get to that bridge later. I guess the market decided to not to worry about that as well.

There is plenty of news that suggests that Europe might be a bit better or at least the members of the EU are more willing to address the problem and face up to the facts rather than just ignoring a pregnancy, so to speak. They are addressing it and taking steps, and that is something they have not really done. The market approved with a nice upside rally the past four days.

FRIDAY

We are up four days, and we have had plenty of decent news out of Europe. Although that news does not mean things are better. It is more like things are so bad that they are finally stepping in to enhance liquidity and otherwise try to stave off further problems. They think that only austerity will solve the problem, but it typically does not do that. You have to have a combination of liquidity and austerity working together, and then you can work your way out of trouble. When they were not getting the dollars and banks could not perform their business to help keep things going, they had to step in and provide the liquidity.

Generally, I do not like interference with markets, but markets are broken right now because there has been so much regulation on the continent and here in the U.S. Hundreds of new regulations each month are coming out under this administration. That strangles the market, and then they wonder why no one was lending. Ken Langone and some other founders of Home Depot today said it is nonsense when the banks say they are lending. They are not. If these billionaires who know the market say they are not lending, you know they are not lending to small businesses either.

Things are not working right, so they are trying to step in and solve the problem. What the government breaks I guess the government should try to fix. But, to me, that means less regulation, getting out of the way, and letting capital flow. That is the key. Let capital flow unrestricted to where it wants to flow. Do not try to force it like they tried to force it into subprime, giving people loans who had no business getting them. That helped cause the problem we have now. Let venture capital flow into the new, better ideas, and we will all be better for it. These companies will get going and demand new employees for new jobs. That raises our standard of living.

Given that it is expiration Friday and given that we had a four-day move to the upside, I am not too wild about initiating new positions ahead of the week either upside or downside. Why? There could be a pullback. After all, you have NASDAQ already bumping into its resistance, up four-days, making really solid moves. We could have a pullback for a day or two. You do not want to move into downside positions on that, even though some look right. We will have some ready in case there is a nasty reversal or something on that effect. But if you jump into them and it is just a little pullback, you get whipsawed as the market tests a day or two and then breaks back to the upside and continues this move. I still expect SP500 to continue higher, so we could get some more upside. I am looking that way.

It would not be a good time to enter upside either at least not in 99% of the cases. We have had the move up, we are at resistance on NASDAQ, and it could come back and test. We might get a better entry point in a day or two or three after a test. Then we get a good ramp to the upside and can enhance our money-making potential by getting better return out of the next possible move. You have to like that.

That is how I am looking at this. We will probably not do a lot on Friday in terms of new positions. We will manage our positions. We have some downside plays that have bounced up past our stop point, but they are in a resistance area. After four days up, I do not necessarily want to close them. We will wait a bit, see if they come back some, and turn back down. EW is one. It has cracked over its prior high, and it has not broken away free and clear. It could come back and test back down. SHPGY is the same thing. It is in a massive level of resistance, so it could crack and fall as well. You do not want to sell into resistance on a downside play, and you do not want to sell into support on an upside play. They can end up turning around on you.

We will manage our positions. If we get another upside run early, we can take some gain. There are stocks we took some gain on Thursday, such as NVDA and RIMM ahead of its earnings. RIMM got plastered after hours. There are others such as CMG and FLIR. ISRG is moving well. If we get another strong run out of those early, we could take some gain off the table. Five days to the upside would be a good time to take some gain. We let them pull back to support afterwards, and then maybe we get some buys as stocks break back to the upside. If they do not if they stall and start to roll over then we play the downside.

Friday probably will not be a good day to move in because I still anticipate upside. It will be expiration, so there will be a bit of tape color. You do not want to jump into the downside if things just get a bit soft because it could be (and likely is) just a little pullback before resuming to the upside.

The caveat, as always, is Europe. There has been better news out of Europe. If things turn sour again, however, that could send things tumbling. We will see how that plays out. Position yourself as best you can, but you cannot plan on what governments will do. You never know. Right now the idea is that they will not let Europe fail. With that in mind, stocks have been performing better. We will pretend, for now, that the market will act technically as it has been. It is due for a pullback. Then we can size it up and either move back into some more upside plays at that point or go downside. If we get another upside run, look at taking some off the table tomorrow. We will have been up for five days, and that is a good string of gains in this market.