SUMMARY:
- Second thoughts on the European deal, Moody’s downgrade threat, another chip warning (Intel), and more China slowing.
- After bouncing from the top of the prior range the indices are right back to test it again.
- Down on bad news yes, but once more the indices find and bounce, albeit modestly, off of that August to October range.
- Plenty of gloom and worry, a perfect cover for a bounce attempt.

Buyer’s remorse with respect to the European deal. 

There were a lot of themes acting upon the market on Monday, and all of them were negative. Of course there was more out of Europe. The deal was viewed as relatively decent on Friday. Apparently any deal was good given that Germany said it would nix anything the EU tried to agree to. The fact that there was a deal helped on Friday, but in retrospect on Monday it was not such a great deal after all. There was not any Quantitative Easing in other words, no money printing. It was just kicking the can down the road. They said they would spend less in the future and would move up the collection of money they needed for a bailout by a year. That did not soothe any savage beasts for investors, and therefore it was somewhat of a negative on the market early on.

Moody’s was just disgusted with the whole situation, similar to S&P after the U.S. debt debacle and trying to raise the debt ceiling. Moody’s said they would put everybody the banks, the countries, you name it on negative credit watch. They we will review them all and see if they have to downgrade anybody. Of course that was a downer for the futures. They were starting low. It was a one-two punch.

Things were trying to get better but then INTC announced that it had to revise its guidance lower for Q4 and Q1. Was there a sudden collapse in demand? Not really. INTC cannot get the components it needs thanks to the Taiwan floods. It is having a shortage and will not be able to sell as much product as it wants to. It is not that there is little demand. That is the fourth or fifth semiconductor stock in the last two trading sessions that has warned about the current or next quarter. Not all of them are just component-based as is INTC, so the jury is out as to whether most of the chip sector will struggle. INTC gapped lower, but it did manage to recover off of a support level. It did so on some volume. That is not necessarily bad action given the bad news that the company had to issue in the morning.

There was also a story that China showed more signs of slowing. Its exports were at the lowest level since 2009. China is not going gangbusters, and that is not a positive for the market overall. All of these stories were not a positive for gold or other commodities because there is potential slowing and the ECB is not out printing money (yet) and following that U.S. model. Gold was counting on that U.S. model in order to pump up that inflation. There is enough fear out there, but it is a one-two punch from fear and inflation that has really driven gold to the upside. Gold really took a pounding on Monday when it became clear that a printing press would not be turning on (at least for now) in Europe.

Looking at the action on the session, it was down early with that bad news. Futures started down and then stocks gapped lower. It traded down into lunch and moved laterally, unable to get up off the floor. But as is often the case in this market, the last hour showed some upside. Stocks handsomely cut their losses. The interesting point about the loss cutting is that the indices bounced off of the August-October trading range. Remember that they bounced off of that level on Friday, but they were right back down testing again on Monday. They did tap it, they did hold, and they did bounce. It was not a huge bounce, but they put some distance off of the top of that range.

SP500, -1.5%; NASDAQ, -1.3%; Dow, -1.34%; SP600, -1.5%; SOX, -2.8%.

TUESDAY

There is plenty of gloom out there. There are worries about Europe and worries about China. There are worries about semiconductors stocks in the U.S. But as seen with INTC, maybe some of these worries are short term or are not really something to worry about in the bigger picture. There are a lot of other things to worry about in the bigger picture, quite frankly, but you get my drift. There is a lot of gloom out there, but there are a lot of stocks setting up to try making a move to the upside.

The indices have been in and out of the “euro zone.” Now they have bounced out of it and are just looking for a trigger to move to the upside. There are plenty of stocks out there set up to make a move to the upside. GOOG has already moved higher but is setting up for a new move to the upside. AVY looks like it wants to make a move after a long base. There are semiconductors out there such as ONNN that are trying to set up for a move off of a nice rounded bottom. They just need a trigger. They need some catalyst to send them higher.

Maybe the trigger is good news out of Europe, or maybe it is not good news out of Europe. Maybe Donald Trump jumps back into the presidential race, or maybe he does not jump back in. Maybe Newt Gingrich finally cannot take it anymore and has to speak whatever thought comes to his mind and implodes himself. Or maybe he does not. Maybe Mitt Romney’s hair goes back into place. Maybe he is tired of having that one strand hanging out and he smears it back with the rest of the gel. Maybe Rick Perry opens his mouth and something intelligent comes out. Or maybe he opens his mouth and then closes it again. That might be a plus in some situations.

Congress seems too low to really consider, but who knows? Maybe something comes up. Maybe they cut a bit from the budget. The super committee was a flop and there is talk that come congressional members want to do something. And maybe they will. I am just saying it could be any kind of catalyst when things are this dour. People are downright gloomy out there about the market and their futures whether it is work related or economic or financial.

They are spending money on Christmas, no doubt about that. Christmas decorations are flying off the shelves. There has been a lot of money made there are record breaking days in cyber land. There have been six days with more than $1B in sales. There is a lot going on in retail even though people are gloomy. So people are looking for something good to make them feel better and to generate some excitement for next year. The stocks are set to do that. We just have to see if something can bring it on. Near term the picture is kind of bad because of INTC and Taiwan, but in the same breath you have to say it is bad because of a natural disaster. Otherwise things would be good for INTC. It would have the parts it needs and would be making, and indeed beating, its number. There are positives out there. As Bill Murray in “Stripes” said, all we have to do is be that good American investor or trader that is inside all of us and when we see the stocks make the moves, whether up or down, we jump on them.

A belief does not hold a lot of water in the market, but I still believe that this market can break to the upside given the action. We are out of the “euro zone” again. We have taken a lot of hits because of the Europe, its inability to come up with a deal, and because things keep looking worse. Then again, bonds are looking better over there. The Italians are acting like good Italians and doing the right thing. There are positives that can build on themselves and act as a catalyst. All we have to do is be ready and make the plays when they show themselves.

There is so much information out there right now. There are so many negative opinions and also so many people saying this is the time to buy. I do not know. I do not have that crystal ball. I have bad feelings of my own about what may happen in 2012. All prognostications, however, do not mean much because a lot of them never come true. All I have learned over my many years in the market is to watch for patterns, watch where money is going, and watch for breaks. If they make breaks off of key levels if they show that the buyers are there or if they make a break to the downside showing that the sellers are there I make money when I move in regardless of what my gut may tell me.

Just keep your head straight. Watch support, resistance, trend lines, and Fibonacci. You know the drill. Make reasonable entries with high probabilities of success. We were talking about some patterns today in the office, and we were throwing some out there. It is a situation where that pattern has a chance of working, but is it all lined up the way we want it to work? LULU for instance. It has a triangle and it broke down out of that triangle. It looks bad and is very volatile. It is not selling off. MACD is not making a lower low. It has held key prior lows. It looks bad breaking down from that triangle. But if you lose the triangle or change the triangle a bit and then it is not necessarily something bad. And it is coming off the lows. It could make a break to the upside, but it is very volatile. It is one of those that could go either way. It is not totally lined up one way or the other. Aggressive can make the play, but it is tougher here. That is what I am talking about. You can make this play, but the probabilities are not necessarily lined up for you as you may want them to be. Nonetheless, if it shapes up a bit better, we will be looking at it.

We want to try sticking to the plays that have the high probabilities. If we are right, we make a lot of money. If we are not right, we do not lose much. That way we tend to make a lot of money overall. We do not lose much on our trades, but we tend to make a lot on the ones that work. That is part of money management and part of how we evaluate plays and trades. Just moving a line can make a heck of a difference. We see some things we like both upside and downside. We will just keep looking. When the market tells us where it wants to go and how it wants to go, we will be in it. The leaders will make the move, and we will make our move when the leaders do.

Jon Johnson
Stock Splits & IH Alerts, Editor
InvestmentHouse.com