Stocks Post a Modest Gain
- Italian issues subside, French downgrade not real, stocks manage some modest gains.
- Jobless claims below 400K, again for the ‘first’ time.
- US bond sale demand tepid, another economic issue raising concerns for 2012.
- Moving higher but a tepid low volume rebound does not instill upside confidence.
- The outcome of this second test of the August/October range will tell the year end market story.
Italy cools, France becomes a temporary target, stocks post a modest gain.
The Italian issues subsided a bit on Thursday, and that helped the futures snap back. At 7:30 CST they were quite sharply higher than on Wednesday. Just the day before, the Italian issues helped cascade the market back down to the peak of the August-October trading range. It was back down again to where they had just tested a week before. Stocks were able to bounce off of that level, and that is what the futures were showing.
The Italian bond yields fell back below 7%. Italy was able to conduct a rather decent auction. It was just enough to get bonds back below 7%, but who was doing the buying? It was the ECB. It was buying in the background yesterday, and it was buying again on Thursday. It had more success on Thursday in controlling the run of the yields higher in Italy.
If the yields get too high, there is no way that a country can generate enough economic activity to grow its way out of any problems. Indeed, the ECB downgraded the European growth rate on Thursday. Looking out for 2012, it said it would only grow 0.1%. That is hardly what is needed to grow its way out of these problems if it gets a bailout. Even if it does not get a bailout, it would need 3-4% GDP growth. Obviously it is multiples away from reaching that level. We still have the same issues out there without a doubt, but the market was able to swallow the problems on Thursday because interest rates did fall in Italy thanks to the ECB. That took it off of the front burner of the stove. It will be revisited, no doubt, but for the day it went back on one of the middle burners.
There is also an issue with France. I am looking at a chart of the SP futures. A story came out mid-morning that France had been downgraded by SP. SP then issued a retraction of that, and the market was able to recover. When that happened, of course, French bonds started to sell and their yields exploded to the upside. The cost of credit default swaps jumped 8 BP to 204. That is a record high, eclipsing the September 22 high of 202 BP. SP was in the middle of controversy again. It was embroiled in it after it downgraded the U.S. The funny thing is France still has a AAA rating. The U.S. is down to AA+. I do not know if France is necessarily better than the U.S. They are all in a pickle. None of them are AAA at this point, but I do not want to get in trouble with anyone like the administration by saying that. But, as you know, things are not good here in the U.S. and in many of the leading and not-so-leading economies on the continent.
Some other news out on Thursday helped gap the futures to the upside in addition to the Italian situation improving somewhat. Jobless Claims were below 400K, coming in at 390K. That was better than the 400K expected and the 400K reported the prior week. That was revised up from 397K. So once again, but for the first time, jobless claims are below 400K on this leg. In other words, they have been below it a few times, but they have been revised back above it both times on this leg. Now we see 390, and that is great. The economic data that has bumped higher over the past two and a half months and the employment numbers that lag economic data are following them up and bumping to the upside as well.
That is good news without a doubt, but I do not think it will last. As I said last night, I am very worried about 2012, and there are a lot of reasons to be worried about it, particularly since many have a somewhat pollyanna view heading toward next year. They are thinking things are fine right now because we have had a bit of improvement in the U.S. economic data. There are too many factors out there that point to real problems that have not been addressed. We will have to deal with them in the next year. And it will be an election year. This could be very interesting.
I will go out on a tangent, but I have been watching the debates and election intrigue. The machines are definitely working, digging up trash on everybody and trying to get rid of candidates well in advance of any primary vote. There is talk that the Republicans may end up killing themselves and giving it back to the Democrats, etc. That may very well happen, but I think this could all be sidebar. I think the economy could get so bad in 2012 that it will not matter. Maybe I am wrong. In any event, I think things will get much worse before they get better. That is just me, but I have reasons that I have stated before and will talk more about later.
The market got this better news and was feeling good about itself. As we saw on Wednesday, Wholesale Inventories where rather tepid. Import Prices fell as did Export Prices That was a welcome respite. I was concerned that we would have a spike higher, but it did not happen. That helps us out a lot. We do not have to pay extra for oil, and that was a big factor. That reduces our costs and helps the consumer out at a time when the consumer definitely needs to be helped. I will talk about some of the other issues when I discuss other markets. There are some very important ones out there that dovetail with my worries about the economic situation. For the day, stocks were ready to move higher and they did just that. They sold off on that France story but recovered. Then they traded up and down into the close. They managed to score gains on the session for the most part.
SP500, +0.86%; NASDAQ, +0.13%; Dow, +0.96%; SP600, +0.9%; SOX, +0.85%.
Not huge gains when put in the context of the Wednesday dump lower, but the indices held where they needed to (i.e., at the August-October trading range peaks) and bounced modestly. Tepid and low volume. Nothing to get excited about other than the fact that they did what they had to do where they had to do it. Given all the headwinds out there, that really was not a bad day. The market continues to swallow a lot of bad news, but it is holding a key support level. It is getting the crud kicked out of it when European issues emerge. We saw that on Wednesday and also at the end of October and beginning of November. But they keep coming back. Thank you, sir, may I have another? Perhaps at some point we get that break up higher toward the end of the year. It could be right now that the indices are setting up a smaller trading range running between 1225 on the low side to roughly 1285-1290 on the high side. Not a very big range, but it is holding up and not breaking lower.
FRIDAY
We do have a bit of news. The Michigan Sentiment preliminary for November comes out. It is expected to rise because the economic data has been improving. We will see what happens. Beyond that, we have the weekend and we will have to deal with what happens to this little relief bounce after the European news went on simmer versus a boil.
Many stocks are still in good shape to move higher. We also are looking more to the downside simply because of the action. Big volume to the downside and a little light relief bounce to the upside. If it breaks down, it could break down pretty big. It has had a breakout and a test of the breakout that held. Now a lower high and then an immediate test once more. If there is a breakdown, it could continue lower, and it would not necessarily be a pretty move. This next test of the August-October range top will tell us the story with respect to where the market will head between now and the holidays. It will either hold and continue to the upside, or it will break down and give us a little precursor to what will happen in 2012.
I am not excited at all about 2012 in terms of upside. We will probably make a lot of money to the downside in 2012. For now, we are trying to make a bit of upside because we see a number of funds that want to play catch-up at the end of the year. That could make us money if we can just get a few days where we do not have issues with Europe. That is the wild card. As we have seen, it can take away gains very rapidly that have built up nicely. We will just have to play the conditions we have, and we can make money. We will continue to look for opportunities and take advantage of them. It is important to get good entries and not chase the bus on the pullbacks. We can pick up good positions here and there to make us money. Not home runs necessarily, but a lot of singles, doubles, and triples.
