A Week of Gains on Less Worry About Europe
- A week of gains on less worry about Europe, but its troubles are not just ending.
- Michigan Sentiment tops expectations but it is still at recession levels.
- Note to Geithner: our politics are not terrible and don’t ever take sides with anyone against the family again, ever.
- A bit of a pause after the week’s gains would do the rally well.
- Anticipating more upside, but be ready, just in case.
Indices make it five straight even as some worry creeps back in about Europe.Stocks were able to close out five straight upside sessions with another round of very credible gains. A great return from the prior week shortened by Labor Day and a very solid move took SP500 back near its August peak and broke NASDAQ over its August peak for a new closing high off of the August low. That puts it above its June peak and trying to extend the move, basically waiting for SP500 and the other indices to play a little catch up.
It was week marked by Europe . . . again, though this time around it was not necessarily about getting stuck in the eye with a stick. Instead some order was brought to the picture as investors believed (hoped?) things under more control, at least hoping that was occurring. Big central banks put dollar facilities in place for European banks feared to be going under. They had to rely on the ECB to help them conduct their day-to-day activities, as they were unable to obtain dollar reserves. The five largest banks in the world joined together to create a lending facility to allow European banks access to dollars. It seemed to satisfy investors further and helped extend the rally. Moreover, Germany said there would be no “uncontrolled insolvency” of Greece. As I said earlier in the week, however, that leaves the question open of a controlled insolvency, but the markets took heart from Merkel’s statement nonetheless.
In general it was an an upbeat week with respect to Europe, something of a reversal of roles. Again, it beats getting stuck in the eye with a stick. Overall a positive and that allowed the stock market to rally. Other markets went the opposite way as they retrenched their moves as the stock market recovered. Those markets had rallied on the fear out of Europe. With fear subsiding somewhat, the dollar, bonds, and gold faded off of their recent sharp upside moves. Nothing major, no rollovers, just backtracking after strong moves.
One of the really bothersome issues during the week was the talk of the U.S. and its political process. This administration is really down on our political process. That is not surprising given where I think its true roots lie. Timothy Geithner was talking in Poland on Friday, and it was disturbing and offensive as a citizen to listen to him say that our “politics are terrible.” He is referring to the fact that we actually debate things. In our country people have strong convictions and sometimes they disagree with what the administration wants. I’m sorry, but I think that makes our politics the best in the world. We can have this kind of debate in the open, and principled people who have strongly-held beliefs can stand up and say the emperor has no clothes without fear of retribution.
That is the fundamental strength of our system. It does not make it terrible; again, it makes it the best in the world. I don’t know about you, but I have had enough of these punks in DC telling the rest of the world and all of us that because we have strong beliefs that are not in line with the leaders in D.C., that we are obstructionists, that our politics are bad and our system does not work. To the contrary, it works. We have the best system in the world when it is allowed to work versus strangling it with regulation (as I spoke about last night with respect to small business) and then picking winners and losers. More making excuses and apologizing to the world. Someone needs to give Geithner a Michael Corleone moment: don’t ever again take sides with others against the family, ever.
Another example. Thursday Mr. Sanders, the socialist senator, heard someone complain in Congress about the government stepping in and picking winners and losers and how that was not its business. He said we pick winners and losers. He said that is what we do, so let’s not worry about it. Let’s just worry about whether we are picking the RIGHT winners and losers. That is a bald-faced admission that the government is involved where it should not be. It is no surprise given what has happened over the last three years with GM, Chrysler, AIG, with Fannie Mae, Freddie Mac, Sallie Mae, etc. The list is endless where they have intruded upon the private sector. It has become so ingrained that these pompous asses in DC think that is their job. Can they actually read? Do they comprehend what the Constitution says? Even the most rudimentary reading leads any rational person to conclude we have a limited government. It is a government with specific, enumerated powers. Nowhere in that document does it even imply the feds are empowered to take over private businesses. Where is the due process in that? The equal protection? Alas, but I digress yet again.
The market is performing well. It was five days up on the SP500 and company. It put it right at its 50 day EMA and below the August peaks. Looking at the intraday chart, stocks were a bit soft to begin with, but they rallied right away. Unfortunately they turned and sold right away as well, putting it to negative. A bit of softness early on was no problem. After this kind of move, I somewhat expected it. I also expected a little volatility given it was expiration and we are ahead of a weekend after four days of gains.
Stocks double bottomed mid-morning (isn’t that so often the case?) and turned right back up and rallied. They never made it back to the session high but did a credible job of posting that fifth gain in a row.
SP500, +0.6%; NASDAQ, +0.6%; Dow, +0.66%; SP600, slightly negative at -0.04%; SOX, +0.2%.
The small caps are lagging, chasing the bus hollering “Wait for me.” I do not know if the market will wait. With the economy as bad as it is, it is no wonder the small caps are struggling. On the other hand, tech and the chips are leading as they should this time of year. Friday the moves were not bad, just not great moves. Considering the market had rallied five days it is natural for moves to slow down a bit. It is hard to complain with five days up as this is the first time this occurred in quite awhile, and not bad given all of the problems confronting investors and small businesses. Indeed, we have to worry about our own country in addition to Europe. We are not strong by any means as evidenced by sentiment on Friday. Better, but it still shows we have problems.
Michigan Sentiment came in at 57.8, better than the 56.3 expected and 55.7 prior. The sad part is that the future expectations were the lowest since 1980. Things might be better right now, after bouncing back from August when everyone felt bad, but they are not good long term. People do not feel that the economy is heading in the right direction. You see that in all kinds of polls measuring popularity and anything else you can think of.
It is not a great time in America. I do not think it is quite morning in America by any stretch of the imagination as our second Summer of Recovery turned out not to be a recovery. After all, according to a Wall Street Journal poll, one in three now say that we are heading into a recession. That is not a good level of confidence in the economy. Even though the Michigan Sentiment numbers were better, numbers in the 50′s are recession level. Anyone who looked at our history and were unbiased in their views would say we are in a recession based on our sentiment. Sentiment indicators are right on the button, and that is where we are.
MONDAY
Next week there is more economic data, of course. We cannot get away from it. Tuesday Housing Starts and Permits report. We have a two-day FOMC meeting on Tuesday and Wednesday, for what that is worth. We will not hear much from them. I think there are a lot of issues the Fed has to deal with. Most people will be watching and listening very closely with respect to any Quantitative Easing or other type of stimulus from them. They will not do anything unless it becomes apparent in DC on the fiscal side that the President’s so-called jobs plan is dead in water. After they give up on that, then they would like to come in with some sort of stimulus. That would help stocks given the liquidity. That is what this whole move has been based on thus far. If more comes in, stocks will enjoy it.
This is the two-day, September meeting. They said they would talk more about Quantitative Easing, but again, I do not think they will put anything out on this meeting because the President is touting his stimulus. Unless he says they will not pass it and admits defeat without a fight. It could be, because I think this is more of a campaign reelection ploy than a real jobs plan. But I still do not think the Fed will come out unless the President throws up his hands and says he cannot work with the Republicans.
Thursday you have Initial Jobless Claims and Leading Indicators. The Leading Indicators we have seen have not been very leading. They have been up, but the economy is not moving higher.
There is the economic picture. It will have some impact, but the real play is in the technical picture. Five days to the upside, a little pullback, and it sets a good ramp for a continued move higher. It is not too much rocket science at this point. I was laughing earlier because on CNBC today they were saying how everyone is being a technician right now because that is working. It always works but it is only acknowledged as working when the fundamental players cannot figure out what the heck is going on. The market goes back and forth and they see what they call value, but no one wants it.
That is the problem with value investing. A company could be a great value, but still no one wants it. Great values become even greater values they can become super values. At some point they will make a turn and be wanted. The charts show you that. You can wait until then to buy instead of putting your money in it because it is a damn good company and then waiting for six month or a year or longer for it to do something. It is just a different philosophy, kind of like Washington, DC right now, I suppose. Interestingly, one is more successful than the other.
I am looking for a pullback. It is not a good time to enter. We did not buy any new positions on Friday. Indeed, we were taking some gain off the table in AAPL and FLIR. We took those off the table, and it was worth it. Now we look for a pullback to give us some new upside positions. That is where you come in with plays at the ready. There are some great stocks that are already pulling back. There are good stocks we want to get a chance at again. We will see if we can move into those if they give us the pullback.
At the same time, you have to be ready with the just-in-case downside. Things look like they want to rally in the market overall. It is the time of the year for techs to lead and rally, and they are doing that. But if some nasty stuff comes out of Europe if all the good vibes from this week evaporate and things turn negative then we have to be ready for the downside. We already have some in hand. Some we are in are kind of sticking us in the eye right now, but they are also bumping up against resistance. If we get a bit of pullback, we can look at those and take them to the downside, or at least get a better exit point.
What is the culmination? I think we will get a bit of a pullback. Looking at NASDAQ’s chart, it has already broken through its June low. So it comes back and tests, and then it makes a new bounced to the upside. That is what we are looking for. I do not think this move is dead yet. I think the liquidity generated by the ECB and the other central banks will have a lingering effect. I think that will make investors anticipate some kind of Quantitative Easing by the Fed. That gives this rally additional legs. We will look to play it more to the upside, particularly after a pullback. Then we will look for the downside. If it turns over and starts to fall after that, then we will be ready to play that. But we also have to be ready this week in case the that good will engendered this past week dissipates on some news out of Europe.
I hate to say it, but Europe is driving this right now along with some technical aspects. We have to play the technical aspects with an idea that the European problem could arise once more and wreck everything. You cannot play solely on that, however. You do not know when that will happen. You look at what stocks are setting up as leadership. They have been doing that and have started to the upside. You play those, and then you take some profits when it is reasonable to do so. Then you continue to play the move as far as you can.
That has been the plan. That has what we have been doing all along in this trading range, and we are not about to stop. Next week we will see if we get a pullback that gives us more entries for some upside to make additional money.
