Stocks Run Out of Some Gas
- Germany rains on the ‘dreams’ of a quick European solution, and that rained on the stock market rally.
- Indices were ready to test, get a reason to do so as they await more earnings.
- M&A tries to excite the market but bank earnings don’t help.
- NY PMI remains weak: Manufacturing still points to a weaker economy even as other economic reports bounce.
- Testing last week’s move: SP500 fade from top of range versus NASDAQ testing its breakout.
From irrational European exuberance to harsh German reality, stocks run out of some gas.
The market rallying on the idea that Europe’s agreement to agree in the future sure seemed thin, but coupled with a bounce in US economic data and the idea that the holiday retail season would be stronger stocks found plenty of bids to push them upside, ending last week with a solid push upside as NASDAQ gapped away from the top of its range.
Technically overbought in the near term after 9 days of rallying and dancing with the top of the range on all indices, even NASDAQ despite its breakout move. That left the question just how much was left in the gas tank of the rally of European hope. Sure the market likely overdid it to the downside on worries Europe would not make it, and the recovery priced out some of that scenario. As Germany reminded everyone on Monday, however, Europe is not all on board with the ‘fix.’
Specifically a spokesman for Germany’s Merkel stated the ‘dreams . . . taking hold . . . that a package . . . will solve everything on Monday . . won’t be . . . fulfilled,’ and the ‘search for the end of the crisis . . surely extends well into 2012.’ That said a lot about reality versus hope. Europe, if it does come up with a unified plan, is going to go kicking and screaming all the way. Why? Because just as here in the US there are those that are taking care of their business, having made and are still making the hard choices to remain in solid financial position, and those that are looking for others to bail them out. Germany is effectively the backstop for Europe and it is a hard sell for Merkel to get the German populace on board to rescue those countries that engaged in profligate, reckless spending (maybe redundant there but it sounds good).
With that shot across the bow of the good ship ‘World Economic Recovery,’ US futures sold off in the early hours, following European issues lower. Then there was piling on.
New York PMI was expected to come in negative again, but the -8.48 was more than twice expectations and just a fraction better than September. As noted on the weekend: some of the economic data has bounced in its downtrend with many interpreting that as a recovery and thus no second recession. The fly in the ointment, the monkey in the wrench? Manufacturing is not in the mood to recover. Philly Fed on Friday gives the next view of this.
Some M&A activity (Kinder Morgan, KMI) buying El Paso (EP) excited the energy sector (the acquisition basically saying KMI believes natural gas is the next energy wave here in the US) but that did not transfer to stocks overall.
Earnings from GOOG pushed stocks higher to end last week. Earnings were not doing the same Monday morning as C and WFC reported okay earnings, but nothing to support the upside moves the past two weeks. Financial stocks struggled all session, and indeed so did all stocks.
Stocks opened lower on the turn of European events and didn’t get better, selling into mid-afternoon before it made a bottom. With 1.5 hours left stocks bounced, shaved some of the losses, but then has a hard time keeping it up so to speak. They faded to the close though managed to hold just over the session lows.
NASDAQ -1.98%. SP500 -1.94%. DJ30 -2.13%. SP600 -3.22%. SOX -2.77%.
This move shows the next question for the market that last week’s move set up: the SP500 rallied to the top of its range and faded back Monday. NASDAQ broke through its range Friday with a dramatic upside gap. After the run to the high it is ready to test. So there is the issue presented: will SP500′s fade from the range top spark another selloff to the bottom of the range or will the NASDAQ breakout hold with a test and allow stocks to resume the upside move?
TUESDAY
More data, more earnings. PPI, Housing market survey on the economic side. As for earnings, IBM announced after hours and its light revenues had the initial reaction downside 4% or so. Tuesday after the close AAPL and AMZN show their wares.
After IBM US futures are down modestly; does not appear to have enhanced Monday’s downside action significantly. With AAPL and AMZN after the Tuesday close the market may give itself a pass until their earnings.
Earnings are of course going to provide a driving force for the market. What this comes down to is whether SP500 continues to fall back from the top of its range and sells off once more or NASDAQ just tests its breakout and then resumes the upside. The action Monday sent many stocks that rallied to resistance back over, and others look ready. There are also stocks that have patterns where they could breakout and rally, providing some leadership. Inflection point here at the top of the range.
Monday we picked up some downside positions. Still have upside positions in play, still have some upside plays to watch for entries. Planning on taking some more AAPL and AMZN gain before the close and their earnings. We picked up some downside to be ready for a drop in the range. Looking at some more as well in the event NASDAQ cannot hold the breakout, i.e. the old false breakout move. If it does hold and bounces then close out the downside plays that are breaking resistance. As you can tell, at this juncture you have to be ready for the possibilities as the big money funds that drive the trade make their next move.
