- Range? What range? SP500 turns and rallies through the August high.
- Some modest improvements in Europe, better housing starts in the US, basically nothing really that great, but stocks surge to the upside.
- Broad rally bounces DJ30 and SP600 off the top of their range, sends SP500 out of its range. Now can or will NASDAQ and SOX follow.

Impressive recovery tries to reignite the Santa Clause rally.

Just when you are getting used to the idea that the market will be back in a trading range or will be trading inside of a trading range, you get some rather innocuous data that springs the market to the upside. Last week I talked about stocks that were set to make the move higher but that needed a catalyst to give them a reason to rally. They did not get it, and consequently SP500 and NASDAQ slid back into their eurozone range. Of course they were aided by some more trouble in the EU. They could not get their act together. Comments by Germany and the new ECB chairman had a cooling effect on any attempted market upside.

On Tuesday there were reports from Europe that Spain had a better bond auction. The rates actually declined. They did that last week on a bond auction, and Italy’s as well. Nothing new there, but repetition is important. Germany had some relatively solid consumer and business sentiment. Business sentiment rose for the second straight month.

US Housing Starts promising, part of the process, but maddeningly and unnecessarily slow.

In the U.S. we had some good Housing Starts. They jumped up to a year high, rising 9.3%. Permits rose very solidly as well, moving up 5.7%. Not bad numbers at all, but not that they mean a lot. Housing Starts are important, however I do not want to get kicked too hard on that. This is where we get all of the ripple effect in the economy. We have houses built, and then they need to be carpeted, they need appliances, and then people move in and want furniture. Many things are associated with the building and acquisition of homes. We have that synergistic effect that helps the market along. But the irony of it is that we have housing starts, but the sales are not up that much.

We have the same issue we always have after a bubble pops: The Fed and banks are too tight with money. We have record low interest rates, but we also have record low loans. We cannot get loans to the people who could really turn things around. There are loans being made to some businesses, no doubt, but they are the big companies and multinational businesses. The small companies that need the money cannot get it. You have to collateralize every loan out there. There is no one willing to take a chance on a business that does not have the assets to back up a loan. Start-ups are basically out of luck. I would say something stronger, but this is somewhat of a family show. You are “blank” out of luck, and then you do not get the money you need.

The Fed has very strict lending requirements with the housing market, as did the Greenspan Fed coming out of the last bust. There are banks that were burned and are scared to lend money. There are also banks that would rather borrow money from the Fed for nothing and buy bonds to get a guaranteed return rather than actually loan money. The money is not getting loaned and people are not buying houses. We have the age-old problem, exacerbated this time by Dodd-Frank piling onto banks and other institutions. They will not lend any money or no one qualifies for the loans. Therefore we are hamstringing ourselves in an effort to climb out of this Great Recession by just not making money available. It is like dying of thirst in the ocean. There is water everywhere, but the Fed will not turn the fresh-water spigot on.

It bears noting that housing starts include multiunit housing, a.k.a. apartments. This is always the case after every bust in housing or the economy in general. It is even more so this time around given the massive housing bubble and the aftermath of distrust in housing as a store of value. A similar event occurred in the early 1980′s when the real estate market was on fire in the US. I grew up in central Texas and the Austin area was exploding in property values. Many people became wealthy in months ‘flipping’ properties, i.e. buying them with the intention of holding them short term and selling them for a profit. Some properties exchanged hands 10 times before a final developer bought the land and developed it. Talk about middlemen inflating the market. Speculation was rampant, the oil boom was just cresting, and banks and savings and loans were lending as fast as they could.

All such things end and they do not end well. The oil boom turned bust. The real estate market followed relatively quickly. Loans were exposed as at best shaky and at worst fraudulent. The Savings and Loan bailout cost $500B, a piker by modern day standards. Lawyers made hundreds of millions, indeed billions, off of the workouts, bankruptcies, and lending practices lawsuits. I cut my teeth in the US District Court for the Southern District of Texas defending fraudulent lending practices cases, seeing firsthand how when things go south things get ugly in a hurry.

Houston turned from the ‘Urban Cowboy’ boom town (“Houston is my favorite city in the whole wide world” waxed Bud’s (John Travolta) mistress Pam) to a half-vacant, half-built sprawling slab of concrete where the promotional phrase ‘Houston Proud’ turned to ‘Houston Poor’ (and the fellow who came up with the latter made quite a bit of money). The oil boom that helped fuel the real estate boom also helped break property values (I wonder what happened to Pam’s father who, according to Pam did ‘oil and all that implies’?). People walked mortgages on homes and condos at record rates. A cottage industry developed telling people how to do it and how to avoid serious credit damage. The damage to the real estate market was long term. It took until the early 1990′s for the worm to turn so to speak. Up to that time you could still steal a house in Tanglewood or other high end, close in neighborhoods.

What did turn long before single family housing? Apartments. No one had money to buy more expensive homes even at their deflated prices. If you had money to qualify for a loan but not enough to just buy outright it was nearly impossible to get the funds. Why? The usual scenario: AFTER THE BUST the Fed and the banks swung the lending pendulum so far the opposite direction that no one could qualify. The very time they needed to be lending to get out of the mess, when the economic bust was over but the recovery was just taking root, the lending restrictions forced most into rental units.

Thus multi-family housing boomed. Indeed in similar circumstances today, multi-family housing is leading the housing start recovery this time around as well. It always happens in this order, always for the same reasons. This time people are even more gun-shy as noted above because housing lost so much value so fast. But it did the same in the 1980′s, so we can expect a faster than expected recover . . . when it starts.

We hamstring ourselves every time because we are so scared we will create a bubble. Right now the last thing we have to worry about is a housing bubble. Prices have tanked. Inventories are high. They are trying to improve, but the money is still hard to come by. If we would just let things go and let people borrow money, we might have some improvement. Of course there are a lot of things that can improve this economy. The pipeline from Canada would help. We could get jobs right away.

Then there is the nonsense in DC about the payroll tax cut. All it does is drain money from Social Security that we will have to pay back anyway. We are just creating a larger deficit in Social Security for some attempt at a short-term gain. As we have seen, this last payroll tax holiday did not do a lot. We are cursing the darkness and not really doing anything to help ourselves. Maybe it has to get so bad before we finally do get someone or something in there that can actually be a game changer. Now they are talking about how American businesses have just gotten lazy over the past 20 years. That kind of thing. Yes, let us blame the people who are doing the work. But I will get off of my soapbox and back to talking about the market.

Housing Starts and the European data were good enough to provide a catalyst. Whatever the reason, markets seemed destined to be trading in their ranges. Then, boom, they break right back. At least SP500 did, clearing the August peak in a very strong upside move. It was joined by the other indices, although NASDAQ did not get out of its range itself. The Dow, which has always held above its range, was storming back off the 50 day EMA. The SP600 did the same, breaking higher off of its 50 day EMA and easily out of that eurozone range. Out of danger? In this market, you can be whipsawed on any given day. It was a strong session, and it does provide some confidence that perhaps the move can hold.

The news had the futures up premarket. When the market opened, it was just straight up. There was a test in the first hour, and we used that to buy into positions. After that initial gap, we saw them holding. This is a very strong lateral move. No giveback of the early morning gains. When we saw it narrow off and stocks start to break higher, we were buying. Those were the stocks that we wanted to buy in the morning that were already starting to move higher. Then the market rallied way up. Every time it paused or came back, it was met with buying. For every pullback during the day to a near term intraday moving average, the buyers popped back in and bid the market back to the upside. They did this all the way into the close. In the last hour we were buying other stocks. We wanted to see if they were going to hold their moves into the close. They were doing that, so we were buying in the last hour as well.

It was a broad, strong move across the board in terms of gains.

SP500, +2.98%; NASDAQ, +3.19%; Dow, +2.87%; SP600, +4.13%; SOX, +4.48%

Very solid upside runs. The indices said to heck with the trading range, we are going for the breakout. They moved back upside briskly. Very nice. Can it continue? Again, this market is a whipsaw market. If you get some bad news such as ORCL after hours, that could knock things back. Of course that is counterbalanced by NKE’s good news after hours. It was popping to the upside. NKE was bouncing to the upside after hours, and ORCL was bouncing sharply lower after hours, closing after around 2920, and trading near 2620. That, my friends, is what you call the after-hours haircut. It shaved over 10% off of ORCL’s price.

The question is whether this will be a problem for the market overall on Wednesday. We will see. SP futures have been holding up pretty well. There have been a lot of reaches down. They have all been slightly off their highs but holding up rather nicely.

WEDNESDAY

There was big news after hours. ORCL, which is getting beaten about the head and shoulders, had its earnings miss on the top and bottom line. Then there was NKE, a stock that was moving higher after it beat on the top and bottom line. Once again, we have an earnings bifurcation. We had it this morning as well. Before the market opened GIS missed on its earnings, and it gapped to the downside. CAG beat to the upside and gapped higher quite nicely. NAV missed on revenues but was up nonetheless. The poster child for the financial sector was JEF, the financial services company. It posted strong earnings and, boy, did it break its downtrend. Big, strong upside move.

We will see more and more earnings. There are warnings. The season is coming up after Christmas. We will see more and more earnings coming out such as ORCL and NKE after the close. ORCL sets a bad tone for this earnings season as far as techs, but NKE continues to show that retail can do well. NKE experienced higher costs, but it was able to pass those costs along to consumers and consumers are paying them. For now. At Christmas time, people are willing to pay a bit more. After that will be the key.

As I said, just when it looked like we were going to be in a trading range, now it is trying to make the break higher. It does not mean it is a lock; we have been here many times. Just three weeks ago we were surging higher. It looked great and made the break only to give it up. Now we have a higher low and are trying again. If we get some follow through, then we have the chance to really put in a challenge to those prior peaks and break into that April-July range. We can have a nice Santa Claus rally to the end of the year at least.

That is what we have to play. We were looking for that back in this range when we saw all the great bases. Then they broke higher and the market was unable to hold. Now we are right back at it. So we will try it again. We were picking up positions today. We will continue to look for upside positions that we can take advantage of. We will look for those that are not extended but are in good patterns and can give us good gains to the upside. We have very good positions now, but we are always willing to take a few more. We will have to watch the prior tops. We will see if that will create a new trading range above the old floor and a bit higher than the prior high, but not taking us up to those previous peaks. We will have to see. For now, we take what the market will give. We had good upside plays in place that we were ready to buy, and we picked them up. We will continue to do so if the market shows us that is the move.