- Stocks start soft, continuing the Wednesday late decline, but NASDAQ leads back upside by the close.
- Jobless claims ‘fall’ thanks to revisions higher from the prior week.
- Mortgage defaults spike in Q3 after a steady decline.
- China exports rise a mere 17%.
- Shipping remains lethargic as KSS hiring 40K apparently not preceding a big order binge.
- Early earnings are disappointing, then comes GOOG.

Stocks are soft but no collapse off of the doji at the top of the range.

Stocks were set up to suffer some pullback on Thursday given the action as of the Wednesday close. NASDAQ had shown an evening star doji with a gap higher to that doji. That typically presages a move back to the downside. It is not the first time something like this has happened in the market. After all, the market rallied for over a week to the upside and came to the top of the range. What a perfect place for it to start to test back. That does not mean it will turn around and collapse. It can, but you just have to watch for some near-term pullback. There was some, but it did not last very long.

Stocks did start the day lower. Futures were down. Stocks managed to bounce toward the open, but they were falling back. As stocks opened in the regular session, they sold down into mid-morning. As is often the case, that acted as the fulcrum for the day, and stocks turned and rallied back up. The SP futures turned positive even though SP500 did not. NASDAQ managed to do so as well, and they hung on to the close. It was not a day where they all gained.

NASDAQ, +0.6%; SP500, -0.3%; Dow, -0.3%; SP600, -0.3%; SOX, +2%.

The NYSE indices did not perform well, but they did not perform poorly. They did not roll over after that Wednesday close off the high. It was a significant close because SP500 tapped at 1220, which is some resistance. It fell back sharply from there.

On Friday they started lower and sold off. But SP500, the Dow, and the SP600 all tested the 50 day EMA and held just fine. A nice, easy pullback. That was one of our possibilities. The problem is we got in on some downside early because we were playing that move at the top of the range. Good risk/reward, and it is still not dead. Some them were thrown back in our face, but the play is not dead at all. The action was not negative on Thursday at least not negative to the extent suggested by some of the patterns on Wednesday evening. The indices are still in the range, and they still have the possibility of a further pullback. We will have to see how it pans out and what the next catalyst may be. That is where it gets much more interesting.

The catalysts on Thursday were not that grand. Jobless claims were out before the open. They actually “fell” to 404K from 405K. Remember, however, that the prior week was originally reported at 401K. It was revised up to 405K so that there could be a decline of 1K this week. It is a lot of back-and-forth b.s. When you read just the headlines, it sounds like jobless claims fell. I guess they technically did, but we all thought that they were lower than they actually were. It is a game of perception and semantics right now. Bottom line, the jobs market is bad and not getting better.

The so-called Jobs Act is a misnomer if there ever was one. That is like calling a bald guy “Curly.” It is another payoff to the Friends of Obama. In that respect, they will try to buy votes. They will put fireman and teachers back to work, I guess. That is laudable, and we need them but at $200K per anticipated job created? As I have said before, why not just give people the $200K if they are going to, say, start a new business? Of course, I digress.

Weekly mortgage claims were quite terrible. The Q3 mortgage default notices spiked, up 14%. That is the first increase in five quarters. It was still down 27% year-over-year. That is a positive, but it is always worrisome when you see these start to spike up. The reason is likely because there was the moratorium a year ago. They had to put the kibosh on them due to robo-signing of the default notices. Now that is being cleared out of the pipes. With that, the notices are heading back up. It looks like we will see those turn upside again. Seems that it will be a bit darker before it clears up. If we just let the thing crash, it might take care of itself in record time. Heaven forbid we let the market actually work.

THE NEWS

There were other worries out there. If it was not Europe, what was everyone looking at? Those who are occupying Wall Street, of course. No, not really. They were looking at China. China saw its exports rise only 17%. That is a problem. They did not go up as much as anticipated, but they still rose. But that is a small number for China, so there is worry that China may not make it back to the upside. Frankly, when you look at the Shanghai Index, you can see what I am talking about. We have had a couple days of a bounce off of a wrenching low. The stock market has been plunging. It is rebounding just as it did in August after another nasty drop there. All it has done is gone back up to this trendline and held. Maybe this time it wants to go a little higher. It is through the 20 day EMA. I am not putting hopes in it. The market does look at China. It saw this and was a bit worried, but not so much that things just sold off.

Finally, you have to look at shipping. I have talked about shipping before, and it is not doing well. It is still down. We have some new data out. Long Beach is one of the busiest ports in the country, and it said it has “not seen the peak in shipments” in this cycle. Right now they would typically see the peak coming, and they are not seeing a peak at all. That does not mean there is one coming down the road; they are saying it has remained flat as a pancake. There has been no jump in orders in the August, September, and October timeframe that usually gets the spike in shipping from retailers stocking their shelves for the holiday season.

The five biggest ports in August were at or below their 2010 levels. Long Beach was down 14%, and it is estimated in September to be down 15%. LA is the busiest port in the country, and it was down 5.7%. The interesting thing is that many analysts are quite upbeat about the holiday season to come. The back-to-school sales were better than expected overall (although there were some disappointments). A lot of them are increasing their forecasts of 4-5% gains over the prior year.

When you talk to trucking companies, shipping companies, and the port authorities, they are not seeing the bump. They are very dubious about the ability to have that increase in sales if there is no product out there. We are not seeing huge spikes in inventories. We kind of lean on inventories. We are not seeing a lot of products being shipped to the retailers, so where will it come from? Maybe Santa will bring it.

Shippers say that retailers typically give them a heads up if there will be a spike in late orders so they do not have any logistics problems in getting the goods they need to their stores. They are not getting the traditional warnings from anyone about putting in big orders. Not a word. I think the analysts are absolutely wrong in their assessments. Maybe they already have stores of inventory that we do not know about. I hope we have a good Christmas season, but the shippers are saying that may not be the case.

FRIDAY

How apropos that we are looking at retail sales before the market opens. We will see how they performed in September. August was a bit better than expected in some instances, but not too great overall. What can you say? We will just have to see how they came out. They are expected to rise quite nicely. The rise should be much better than it was in August. Michigan Sentiment is out after the market opens. It is expected to climb up a fraction. We will be watching inventories closely. Why? Inventories will play a big role in the holiday season. If they are low, then you would expect businesses and retailers to be ordering inventory now. They are not. That is the concern I talked about earlier.

We have some important factors as far as economic reports coming up on Friday. We also had the more important stories: China and Occupy Wall Street. I am joking, of course. It is that earnings season is getting underway. Overall at his been somewhat disappointing. AA was pathetic. JPM was not good. Then after hours, MCHP said things are going to stink. But then we have GOOG. Ah, GOOG. It came in and knocked the cover off the ball. It reported $9.72 versus $8.74 earnings. Revenues are 7.51B versus 7.21B expected. It just pulverized it. As we saw earlier, the stock was screaming to the upside after hours. Very strong move.

Will that change the complexion? Will it drive the indices out of their range? Looking at the SP futures, they were down immediately after hours even though GOOG was out. There was that worry about MCHP, but they recovered late. Looking at the MCHP chart after hours, note where there is a rebound. Things were not as bad as the initial release indicated. We had a rebound in the SP futures and that bodes well for the indices.

Remember, the indices are in a position where they are up against the top of the range. Will they be able to make the break higher, or will they turn down from here? There were some ugly patterns on Wednesday, but then there was a better, more conciliatory consolidation approach on Thursday. We will see if that holds out and it can make the breakout. After all, we were looking for SP500 to someday get up to 1260 (the June low). It never came close, but maybe it will this time. Everyone is looking for 1220-1230 to be resistance that hems in the SP500 and sends it back down. Maybe not. Maybe it will break through. Again, there is still a bit of room to the upside for the index to rally.

The index has come a long way. It would be better if it just took another day or two and moved laterally and then broke to the upside. It would not hurt NASDAQ to do the same. I am not sure they will, but keep in mind that we are still in a trading range. Do not forget that. If we see the range broken, do we rush hog wild into the upside? No. We saw this break to the downside. Were we buying downside puts at that point? No. We were selling our downside positions and taking gains at that point. We were not selling out completely; we were taking good chunks of our gain off the table, and then we got the reversal. If it had reversed and not been a false breakdown and it had stalled and sold again, we would have taken more downside positions and played the downside.

If we have a breakout to the upside, we do not want to rush in after this kind of move. We will let it come back a little, test that breakout, and see if it holds. If it does, we have plenty of time to buy for the upside. If it falls from here or if it breaks out and then reverses, you have the same scenario you had at the bottom. A false breakout, and here a false breakdown. We would play it to the downside at that point.

Breaks of ranges in themselves are not the key moves. It is a necessary move in order to continue a move higher or lower to make an extension out of the range but it is not sufficient in itself these days. Maybe it breaks out and never looks back. In most cases, however, particularly now with such a well-established range, you will come back and test that range. If it holds, that is when you buy in when it starts to bounce. If it does not, then you do the opposite. We are still at the inflection point. Still at the lick log, so to speak. Thursday was not a bad session. It looked fairly bad on Wednesday, but the indices recovered nicely on Thursday. It was a positive, but not dispositive. We still have to watch and see how they trade at the top of the range and, again, whether there is a breakout or a failed breakout. That will tell us what we will do.

Will we buy much on Friday? Maybe, maybe not. I see some stocks in great position, showing that little rounded bottom type of scenario that we have seen in so many good plays that have moved up. We have a nice, little move that could set up. A lot of these have rallied and are testing. They really could use another day or two of test. But it is one of those situations where, if we see a move on Friday, these look pretty good. We do not want to be behind the 8 ball and not be able to get into any of them as they gap away on Monday.

If we see some moves in these on Friday, we will take a partial or two. That is what I like to do around these inflection points. Do not pile into any position 100%. Just take some partials and be positioned. If it makes is break, you are in good position to make some money. Then on a test you can put some more money to work. That is sensible use of your money.

We will see what happens. This is interesting, you have to admit. We are at the top of the range. Will the range hold again, or will it give up and yield a breakout? We will find out more in the morning. We will get some more data and see how the market responds to GOOG’s earnings and the others that were not so exciting. Then we will see if Friday can deliver something interesting that we could move into (or move out of, for that matter), or if we just want to wait until Monday.