Buyers Step Back In On Selling
- Second upside session as buyers again return after an early session dip.
- Italy a drag and then a catalyst as PM is to resign. The grass is always greener . . .
- Small business confidence is up for second month, but index authors say nothing is really better.
- Oil reaching another important resistance point.
- Indices moving back up to challenge the next resistance and late October peaks.
Once again the buyers step back in on selling and stocks recover to positive.
Stocks started the session a bit upbeat on Tuesday. The futures were higher heading into the open, and it was mainly because of events in Italy. It was not that Italy is stabilizing but that the Prime Minister would resign. That is the grand irony. It is not an issue of Italy’s Prime Minister being in charge and doing what is necessary to get their debt crisis under control. That is not it at all. It is getting rid of the guys in charge and then doing a cram down of the EU and IMF plans on what needs to be done to the sovereign debt problems in Europe.
There seems to be the idea that the U.S.-style cram down will work. However, there is no clear evidence that the U.S. plan of printing more money to solve a debt crisis with more debt will ultimately work. We have come up for air after the 2008-2009 collapse, but I do not believe our troubles are over. Some of the smartest people in predicting economic activity down the road do not believe the troubles are over for the U.S. We still have an unbelievably huge outstanding debt that we cannot pay. Europe also has an unbelievably huge outstanding debt it cannot pay. Case in point: There is not enough money in Europe, particularly in the bailout fund, to rescue Italy. Its debts are simply too huge to save in the same way that they are contemplating “fixing” the problems in Greece. We have Italy on top of Greece, and there are other problems with some of the PIIGS such as Spain. There is more than the system can handle. You cannot print enough funny money and raise the debt levels enough to solve the problem of too much debt.
I have never heard of a situation where an alcoholic was cured by drinking more and more booze. Maybe it would work if the point was to kill the person and alleviate the world of their presence. In this instance, maybe the idea is to bury everything with more debt. That sure seems to be the plan. It may be that there is nothing else they can do. Austerity is painful. Drying up is not a pleasant experience, and maybe everyone wants to try to avoid that with the debt crisis. In any event, I just want to note the irony of the situation. It is not stability in Italy that is applauded by the world’s stock markets; it is the removal of leaders and Europe imposing its collective will upon individual countries.
Stocks were higher on the morning. It was Italy as well as other news bolstering the day. Small Business Confidence was up for the second straight month, rising to 90.2. That is the highest level since June of this year. 88.6 was the average in the 18-month recession that ended back June of 2009. It has bumped to the upside, and that has some people feeling good. There are a lot of people out there saying we have avoided recession and that things will steadily improve. They point to the Q3 GDP numbers, which were better, and they also point to consumer spending, retail spending and consumption. I have gone into great detail (probably more than anyone wants to hear of late) about how a rise in Retail Sales is not necessarily an indication of consumer health. It just means that consumers have to spend more money. The question is whether they are spending it on discretionary items or if they have to spend more money that they would rather save due to increased prices for energy or food.
With inflation and a weaker dollar overall, that means we have to dip into savings in order to consume. I saw one person this evening saying the consumer just wants to consume more and are dipping into savings in order to do that. I do not know a lot of people who want to dip into their savings at a time when they are worried about their jobs. There is a 9%+ unemployment rate, so most do not feel too comfortable about emptying their savings in order to consume discretionary items. That is not the case with anyone you talk to other than maybe some teenagers who do not give a damn about anything in society. I am generalizing, of course. I’m sure I will get some e-mails saying that teenagers are not that bad. They are not. I will just refer to the Mark Twain story where he said kids should be put in a barrel with a hole in it when they reach the age of 12-13. Then when they turn 15, the hole should be plugged. I am paraphrasing; Mr. Twain was much more eloquent than I am, but you get the point.
In any event, consumers are not that fired up about bleeding the bank account dry. They really do not want to do it with respect to energy and food, but you have to. If you have a job, you will do whatever you can to keep it. That means filling up the tank no matter how high the gasoline price is so you can get yourself to work and keep that job. I guess in some cases it is to get yourself down to the unemployment line or wherever you get your assistance from. Again, I do not want to offend anyone; I am just stating some facts.
I did digress and will go back to the Small Business Confidence report. The authors of it said that hiring was at nearly the same level as the recession low. Therein lies the rub. Even though confidence may be up, hiring is not. I just heard interview today from people saying they will not hire people. As one small business owner put it, if she hires someone, she has to cover her share of the unemployment insurance, and it is more than she can afford. She is opting to do that extra work herself to keep her business going.
I think that is being missed in Washington. They do not understand that small businesses have to pay for the costs of the programs that are intended to do right by people. Once again it is the unintended consequence of the “do-gooder mentality” where you try to help everyone. A job is lost because the small business person cannot pay for a new hire as well as cover the extra costs associated with it that do not contribute to productivity and the bottom line of the company. When you add healthcare on top of that, you can forget it. So we remain mired in this job recession. Even though small business confidence is up, that is why the hiring levels are just as bad as they were at the bottom of the recession. That pretty much sums it all up economically.
The stock market is not necessarily looking that far out not right now. Typically it looks 6, 12, or 15 months down the road. Maybe it is overlooking somewhat of a recession in the start of 2012 and thinking things will get better past that. That very well could be the case. I believe it is more important that there are near-term trends in place. I have talked about those a lot over the past week; that is the seasonal trends that we are in with techs and semiconductors doing well (although they have not led the market in the last week or so). And then there is the catch-up factor with some of the funds who did not participate in some moves to the upside this year. They will try their best to get involved, particularly since we are seeing a lot of stocks forming decent bases and breaking to the upside. Those are the trends that I think will continue to remain in play. Indeed, I think we have seen that over the past few sessions.
Stocks started lower on Friday and recovered. Stocks started basically flat on Monday, sold off, but then recovered to positive. Stocks started a little bit higher on Tuesday, sold back, but recovered and rallied back to the upside. Those are the buyers stepping in as stocks were down. They are putting in a higher low yet again. I noted on Monday that that was bullish and constructive intraday action. On Tuesday, though not a huge run, stocks made good on it. They were moving up and posting gains. As I said in the last market alert, we are more with the tortoise and not the hare at this point. We will see steady gains with setbacks.
We have the European issue still out there, but overall the upward bias is moving stocks higher. We saw it again on Tuesday. There was a higher open that was tossed away by mid-morning. It got a good test. It held, reversed, and moved higher into the afternoon and closed near session highs. Maybe it was a little boost from some more news out of Italy. Maybe it was more certain that the Prime Minister would resign. Whatever it was, stocks recovered. They showed the same low-to-high action, albeit giving up a little gain at first. They did show the buyers stepping back in and driving stocks to positive once more. Not huge gains but, as I said, it will be the tortoise and not the hare on this move as stocks move back up into the next range (or do their best to do that) and maybe bump up near the April 2011 highs.
SP500, +1.2%; NASDAQ, +1.2%; Dow, +0.84%; SP600, +1.36%; SOX, +0.6%.
WEDNESDAY
There is some news out. You have the Mortgage Index and Wholesale Inventories for September. It will be interesting to see if they rise or not and what the reason will be. Did their sales increase or did sales fall? They are expected to rise 0.5%. We will see Crude Inventories and find out a bit more about what is going on there. Oil is going higher as things are right now because the idea is that we are not going to have a recession. China’s PMI comes out overnight. That will be a big factor tomorrow. The bigger day is Thursday. We have a lot of information coming out with Initial Claims, Import and Export Prices, and Trade Balance (always important but seemingly always overlooked).
There is no mystery with respect to what we are looking for. This is a situation where we have the indices breaking back up into a range that they just fell out of after testing it two weeks back. Good move back up. Not afraid and moving forward. It has not been spectacular, but it has been steady. Sells off early and comes back with buyers late in the day. That is positive, constructive action. It suggests a continued move to the upside. Plenty of resistance ahead. 1300-ish on SP500 would be the next target to shoot at. Not that far away, but it gives us room to make money on. The plays that we already have working will work just fine for us as they continue to the upside.
Basically this is the showing of a little backbone in the market. After it looked like things would roll back over, stocks keep coming back. They will not give up, and we will continue to play the move higher. We will continue to look for some more upside. I still think we have a buy window. It may be closing a bit as the indices broke back up into this range, but we feel like there is still room to make the play up toward the prior peaks. We do not think it will make it that high, but we can make money on the move. If we get well-placed stocks, we can pick up some new positions, augment what we already have and make some more money to the upside.
That is the game plan, and that is what it has been. It is good to see it working out. That was what we thought would happen. There were some logs thrown into the road along the way, but they have been cleared. Stocks are moving higher again. It will not be straight up. It will be back and forth. This is tortoise move and not the hare. We just want to play a steady move higher and bank gain when we can. Then when things get toward the end of the year or the holidays come in and they start to waffle a little, we can start taking some profit if we have it built in. Maybe things continue to run into the first of the year, and that is fine. But let us take some gain and then see what happens after that.
