Stocks Hang Onto Gains to Start a Second Week Higher
- Europe helps start a second week higher but Europe almost kills off the day’s rally as well.
- Italian austerity proposals spark no riots, heartening investors.
- Standard & Poor’s communication to the EU nations placing them all on negative watch gets leaked and the market gains leak as well.
- Online sales post a strong initial week.
- ISM Services miss but good enough to keep the expansion
- China Services PMI lower but as with the US, holds to the expansion.
- October Factory orders negative and September is revised to negative.
- Still bumping next resistance, but after a big move the past week a bit of testing is just fine.
Not a straight shot upside, but stocks hang onto gains to start a second week higher.
For the second straight week, stocks started to the upside with a gap. Europe was once again the catalyst for the move. Italy was proposing some austerity plans, and there were no riots in the street. Europe has come a long way when a Prime Minister can go in front of his people and talk about austerity and cutbacks, and the police and citizens do not have to wear riot gear in order to “discuss the matter.” Stock markets around the world took heart at this show of statesmanship and citizenry among the Italians. I am being a bit facetious, of course. I do have to give them credit when they do something that does not result in street riots and cars ablaze. Or am I thinking of Oakland?
Stocks did start high. They rallied nicely through mid-morning, and they held the move into lunch. It looked like a solid session in the making. Stocks were up well over 1%, looking strong as they were last week. Indeed, they were continuing that rally from last week without taking a pause at all. SP500 was back above the June low, looking pretty salty. Europe started the week up, and then Europe tried to end the rally the same day. It was not necessarily Europe, but it was Europe-related. In the afternoon, an S&P story was leaked out. S&P communicated with all the EU countries all 17of them that they were all going on negative credit watch. No one was to be spared, not even Germany. They are the only country that has the credentials to live up to the EU charter.
With even with Germany being put on negative watch, the wind came out of the sails of the rally. It was a sharp selloff, but it was not a complete collapse. Stocks were still holding up quite nicely above the Friday close. They never really threatened negative, they just peeled away a lot of the gains on the day. That is understandable given another threat to the sovereign debt issue. But investors seemed to recover. They figured that this was pretty much the case anyway, right. Let’s face it, if S&P will downgrade the U.S. because of supposed bickering over the debt ceiling in the U.S. and whether we would increase it, then you would think a negative credit watch would be appropriate for countries that are teetering on the verge of collapse.
About all I can say, and apparently what a lot of investors said, was that it is about time S&P got to the party. That does raise an interesting aspect. The conspiracy theorist in me has to throw this one out. Timothy Giethner is heading to Europe again to talk with them while they had their big summit. Last time that happened, they pretty much threw him back across the Atlantic. They said you can take your American-style monetary policy ideas and go back from whence you came. This time maybe something is different. Why? We have this S&P downgrade. Gee, the timing is interesting, is it not? Remember when S&P downgraded the U.S. debt and how there was this uproar? It just so happened that the Justice Department said it was “looking into” irregularities with respect to S&P’s activities and ratings with respect to the mortgage crisis. Of course it was not looking into any of the other companies that were involved. And S&P’s CEO lost his job. My goodness. Could it be part of S&P’s penance to get back in the good graces of the administration that it would come out with this communication? And it was just leaked, mind you. It was not announced; it was simply fortuitous that the news companies got their hands on it. This occurs just days before Giethner heads to Europe. Perhaps it was to give Giethner a bit of leverage in talking to the people in Europe? Makes you wonder a bit. That is the way things happen in this administration and, frankly, other administrations. It is not isolated to any one administration. You have to wonder if it was all planned. There is my conspiracy theory for the day.
In any event, stocks did recover late with that leveraged ETF move that we are getting used to. That is when the market is closing in a direction that the ETF’s managers do not want it to go or did not expect it to go. Then they have to play catch up at the end of the day. The market started higher, and maybe it was anticipated it would not do that. They held off running their ETFs up. Remember, a lot of these leveraged ETF’s are managed the two times and three times whatever sector or commodity or index they are following. They do not automatically track. At the end of the day, they make decisions as to when they want to make their moves. That is why you can get very frustrated playing options on these things or actually playing the ETF itself. It will not move as the underlying commodity is moving, and that is very frustrating. Then at the end of the day they will have to make their play. Because they are two or three times the index or commodity they are tracking, that means for some pretty hefty moves at the end of the day. There is a lot of buying or selling going on, and that will drive the overall market up and down as they buy and sell stocks at two to three times what they are in their ETF to make the difference. So we have had these dramatic moves during the day.
Stocks managed to recover, and the indices closed mostly above 1% on the session.
SP500, +1%; NASDAQ, +1.1%; Dow, +0.65%; SP600, +1.4%; SOX, +0.95%.
The action pushed SP500 above the June low, and right up to the 200 day EMA. It could not hold the move, and it backed off to the close. Not death for the index at all. It has had a good rally to this point, and a few days of rest of a natural resistance point are totally normal. It gets everyone worried right now because the index is so volatile and because it fell back into this range. Breaking out of the range can be a difficult thing to do. It has peaked its head over it. The question is whether it can move back up and actually take out the level that stalled it the last time it tried the breakout.
TUESDAY
There is no scheduled data tomorrow. It will be all about any new stories that leak or are reported from Europe or anything coming with respect to Treasury Secretary Giethner’s trip. Maybe he will get thrown out by the Europeans again. I dare say he will get a much better reception this time. I believe the people in charge are there to try to do whatever they can to keep things from tumbling. We will see. I think his return will be much more triumphant than earlier this year.
There is no real news out there. The jobs report was last week, so there will not be a lot to kick the market and really move it other than perhaps individual reports from companies as to how they are performing. We saw some of that on Monday when DG came out. It had a very good report for earnings, but it was not able to do much with it. Of course it has had a lot of success going into the number. I am kind of worried. Dollar stores like DLTR and DG are performing very well while some of the others may not be. But looking at leaders in retail , there are a lot of strong stocks moving well overall, and they continue to rally into Christmas. What will happen after that? I am not sure. I am kind of concerned. I think they are building the good news in early. If there is anything that is a bit disappointing, they are setting themselves up pretty bad. But that is life in the big leagues.
For tomorrow, I do see some stocks I like. There are stocks that are setting up and can still move to the upside. Unfortunately there are some stocks we were looking at that just gapped away from us again. But we do see stocks that could set up over the next few days if the SP500 and other indices continue to move laterally, test last weeks’ break higher, and then we will be in position to make the next move if that European bid remains. That is primarily what we will look for.
At the same time, you have to put some plays on the report that will take the other side of the trade just in case the bid does not hold or something happens and the hopes are again dashed with respect to Europe. You have IBM with its lagging MACD as it limps to a new rally high. GOOG shot to the upside, but it is a bit gassed right now. Again, I am not saying that is a short. I prefer IBM for that, but those are the stocks you have to watch. The momentum looks to be waning a bit. If it does, those big names control the indices so they would drag them lower.
For the most part, I think the bid remains for now. Europe will want to play this card as best it can. It saw the U.S. do it, and we are actually having some economic progress now. I think the Europeans will want to emulate what we did. If that is the case, that means more liquidity. There will be some form of Quantitative Easing on the continent, and that is good for stock prices around the world.
Stock Splits & IH Alerts, Editor
InvestmentHouse.com
