Looming Specter of Europe Continues to Weigh on US Stocks
- Looming specter of Europe continues to weigh on US stocks, advance dollar and treasuries.
- Italian bond auction results in record yields as UK unemployment touches a 17 year high.
- BRCM turns the tables and actually ups its Q4 guidance.
- SP500 joins NASDAQ and SOX in the stock ‘Eurozone’.
- SP500 10 points from support. A further test makes it four days down and a bounce for a key test of the range likely.
Weight of the European unknowns drags stocks lower for third session.
The looming gloom from Europe had its impact on U.S. stocks once again. The SP500 was toying with breaking down into the August-October trading range that I now call the “Eurozone.” I call it that because every time we experience difficulties out of Europe such as in July and August and again in late November and early December we fall back down into this zone. This is where we mull over the problems in Europe and determine whether our stocks should rally or sell. Thus far they have not sold off. They tried to break down in late September and early October but have reversed immediately. If they ever do break out of this little range and fall down into the August 2010 base, we likely have a lot of problems ahead for the U.S. economy. Stocks would then be building in a recession for the U.S. in 2012. The case right now, however, is that U.S. stocks are still riding the improvement in U.S. data over the past three months. While SP500 joined the NASDAQ and SOX in the eurozone range, the DJ30 and SP600 are still holdouts. SP600 is cracking into it, but it has not done a full-fledged header into the range yet.
I have raised the issuing of which index will be the leader. It could be the SOX, as is often the case. It leads upside and downside, and it was the first to dive lower back into the Eurozone. It could also be the stoic, more staid DJ30. It is still holding above the Eurozone as it taps the 50 day EMA on the low. Very nice action from the large caps. Can they actually hold the rest of the market higher and lead a bounce to the upside? One interesting thing is that SP500 has been down now for three days straight and four out of five sessions. It is coming down toward 1200. 1200 is not only a psychological level, but it is actually a support level. You can see that in the prior action in October, again in September, and once more in August. It really does have some teeth as a support level, albeit perhaps an interim support level. But it has support nonetheless.
If it hits there in the morning, that would be four days straight to the downside. That would be the impetus to put in a bounce, and that is where things will get interesting. The selloff is interesting in itself. After all, SP500 has delved back into the zone. But it is about the test. When it comes back up to test the breakdown, does it hold or fold at that point? That will be the real story about what the market will do over the next several weeks. That story is not answered yet. Though there is enough gloom out there to make you think it will fail the test. It has not done it yet. Just when everyone thinks one thing, it will often turn the other way.
The daily action was not that exciting. The futures were near flat in the morning. As the morning progressed and got closer to the opening bell, futures continued lower and lower. The bell came and they bounced, and then they sold off hard. It was up and down (but mostly down) on the session. Stocks did bottom mid-morning and started to turn. That was interesting. At that point we took some gain on positions such as AMZN, our downside put play. We saw it heading lower. It looked like the market was starting to turn, and we sold some of our AMZN puts. It turned out to be a good call for the day. AMZN reversed sharply, up 10 clicks by the close. Quite a turn back to the upside.
We also took more gain on WYNN. It is a December option play, so we wanted to get rid of those and take advantage of a selloff to do it. We did just that and banked nice gain. Obviously it was not all gains and green on the downside. It was good for our downside plays, but a lot of upside was struggling. It was not a monumental collapse. A lot of stocks are at support, and they look as if they want to bounce. Therefore we have that talk of SP500 reaching down to 1200 maybe on a fourth day straight of selling. Then it would be ready to produce an oversold bounce that would be a much more telling move with respect to what the index will do.
The break is important, but it is how they act after the break. Do they fail the test or recover? That tells the story. How many false breakdowns have we seen over the past couple of years in this market? That has been a fairly common event. Just when you think you have a breakdown, as in late September and early October, you have a reversal and a strong rally off of that. The test is the tell. Or, as Shakespeare would say, the play’s the thing that will tell the conscience of the king. Not a great analogy to a play, but I had to drag it in somehow to show you I know Shakespeare.
THE NEWS
There was not a lot of news on the day. BRCM came out early, and it turned the tables somewhat on the other semiconductors stocks that have warned with respect to Q4 and beyond. BRCM said their Q4 looks good; in fact their revenues will be higher than forecasted. BRCM gapped to the upside and looked strong, and then it rolled over for a whopping $0.26 gain on the session. That did not exactly excite investors, but it is decent news after a lot of bad news hit.
The Italians had a bond auction, but it was not really any good. They paid record yields on whatever bond they were auctioning. It was not the 10 year, but I am not sure which it was. It did report record yields. UK unemployment hit a 17-year high. Yeehaw. Things are going well in Europe are they not? Of course they are going great here. One of the democratic spokespersons in Congress said that the economy is improving and unemployment is better. Yes, the unemployment was better. The rate fell, at least. One reason it fell was that 376K people left the workforce. Yeah, our unemployment is really doing well. We are creating a bunch of jobs and putting people back to work, right? Everyone who believes that please stand on your head. In any event, poor UK. A 17-year high in unemployment is kind of ugly.
We had import and export prices for November. Export prices were down 0.1% after falling 1.5% in October. Import prices were up 0.7% overall. If you take out oil, they were down 0.2%. Oil was the cost increase in November for our import prices. Looking at November, it was straight up. Oil was moving quite higher, so that put a hammer on the inflation that we were importing. Fortunately the dollar was somewhat stronger as well. That helped offset some of those oil prices as the dollar rebounded from the selloff that it had in almost all of October.
Other than that, there was not a lot of news on the session. It was just a gloomy day again. You would have thought that the market was diving lower, but if you look at what the indices did on the day, there was not much of a downside.
SP500, -1.13%; NASDAQ, -1.55%; Dow, -1.1%; SP600, -1.47%; SOX, -1.63%.
Not great numbers, but nowhere near the carnage we have seen over the past few months when we had big upside or big downside days where stocks were just burned to the downside. The gloom comes from the failure to hold the break out of the Eurozone range. Three days total downside, four out of five to the downside. The financial stations and all the commentators were understandably gloomy. Of course just about the time they all get gloomy is when we typically have a recovery or at least a relief bounce. I will have to look back at a little recent history for instruction. In late November we had six days out of seven to the downside before we finally got a bounce. I will not count the other two days where there were doji, but now we have had four out of five days. The market may hold and bounce. There is some reason for it to try and hold here because there is support where the SP500 closed. If it will bounce here, that would be very good news because the index would put in a higher low. That is, if the test is successful and it continues higher.
That would be a positive for the market, of course, and really for the economy looking out to early 2012. Again we will have to see how it plays out. Without a doubt, SP500, NASDAQ, and the SOX are back in the Eurozone range. They have to dig themselves out of it again, and we will see if they are able to do so.
THURSDAY
Thursday brings Initial Job Claims, PPI for November, Empire Manufacturing, Philly Fed, and Industrial Production and Capacity Utilization. It is going to be a day chock-full of economic data. Thus it will be unlike the other sessions this week that were light on data and heavy on intrigue and innuendo out of Europe. The specter of Europe was there. It reminds me of The Lord of the Rings, when the shadow is growing and ever-present in some parts of Middle Earth. It is hanging over them and they are operating under the growing shadow of Mordor. It has that feel to it. It has been very strange the past couple of days as I have talked to financial advisors, traders, and arbitrageurs as to what their feelings are. There is very much a sense of growing, impending doom out of Europe. “Doom” may be too heavy a word; I am borrowing from The Lord of the Rings, but you get the idea.
It has been weighing on the market, and it would not take a lot in that kind of situation to trigger a relief bounce. Four days down. If the market starts lower on Thursday, that would be five out of six days. It is ripe for a rebound if something, say the Empire Manufacturing, comes out a bit better than expected. Maybe Initial Jobless Claims do not bounce back up to 390K. Then perhaps the Philly Fed comes out and really drives home some better-than-expected numbers. That would be a good trigger for the U.S. markets to rebound.
Of course if SP500 does trip down to 1200 and then reverses, the test will be when it gets back up to the top of the range. That puts it near 1230-1240-ish. If we want to get generous, we could take it all the way up to 1245-1250. That will be a good range to test, to see if it can make the move through. In reality it has to take out the late-November/early-December peak that topped out near 1266-1270. Any test will be touch and go until it pretty much makes the breakout. But this will tell what is going on with this market.
There is a good rally off the reversal that broke through the bottom of the range. And now a significant test down almost past the 60% Fibonacci retracement. A rebound on the lower high, and now we have this test. Will it come down and try to set up an ABCD? If it did, that would have everyone on edge. Or will it just try to hold and rebound from here? We see plays that could help the market right back up from where it is. But, as noted earlier, they will just have to show that they can make the turns. In any event, a lot of stocks are ready make the bounce. A lot of stocks are at the 50 day EMA or other significant support, ready to move if they get a reason to do so. With four days to the downside and some amorphous gloom with nothing specific, they are ripe to make the bounce if they get that trigger.
We will have some plays in the bag, so to speak, to run out and move into if they show a good move or give a good break. We can make some money on a four or five day move back to the upside. Then we see if there is a breakout. Obviously you do not want to take everything and load up. We want to wait and see if this trading range will hold sway once again. If this trading range again takes precedence after a bounce, test, and roll back over, then we can start taking more positions because it looks as if we will be in the trading range. Of course the first move would be down.
On the way up there may be some that we want to buy. Some stocks still look great right now great in their opportunity and their pattern to move higher. We can take some of those positions on the way up, but knowing that we may have to dump them if the move overall stalls and starts to roll back down. At that point, we will load back up with the trading range downside, let it come down, and then we will let the trading range move to the upside after that. Again, we just have to see how the test holds. As we know, tests are important.
We will see if the economic data can blow back some of the shadow that is covering the U.S. market and emanating out of Europe.
Stock Splits & IH Alerts, Editor
InvestmentHouse.com
