A Pause After the Initial Surge
- Stocks idle, a bit hung over after the new year surge.
- No major news, stocks quiet, so blame Europe.
- November Factory Orders up though miss expectations.
- Greenspan getting to the point, talks of a ‘brick wall of economic reality’ ahead for the US.
- Metals, energy, materials, financials, machinery and more. Leaders are there and likely will need to take over from retailers after Thursday’s Same Store Sales results.
- Earnings starting to show up as STX pre-releases positive results
A pause after the initial surge. Will the bids return for what looks to be new crops of leaders?
There was a lot of news out on Wednesday, but not a lot of news out as well. The U.S. had a dearth of stories out. There was the Iowa caucus, but that was not news in terms of the markets moving. It means something with the political contest though I do not know just how much. There was nothing of substance for investors to sink their teeth into, so they looked to the default story of the New Year (as well as 2011) which is Europe.
There was nothing too specific with Europe, but the news stations and financial Web sites did talk a lot about it. There were record overnight deposits with the ECB, but that is something that has happened just about every day since the ECB started its new facilities. Financial institutions on the continent do not want to leave their money with other banks. They prefer to put it with the central banks and earn virtually nothing; that is nothing new. The dollar LIBOR was still at 0.58, where it has been for the past week. There were no increased tensions leading to these financial institutions parking more money with the ECB.
There was also a German bond auction. It was solid with more bids out than available bonds. That is always a good sign. Inflation fell down to 2.8% from 3% in November. That is good. It gives the ECB more maneuvering room. On the downside, French Consumer Spending declined in November. None of those are actually major market movers, but it shows how beholden the U.S. is to Europe and whether it pulls out of its issues or spirals further and results in a breakup of the eurozone.
Right now the talk is split. On one hand Europe is in a recession (or heading into a deep recession), and it is heading into a catastrophic breakup on the other. There is no recovery anytime soon; it is about the lesser of two evils. The deep recession is better for the world than the complete break up, obviously. I am assuming that, parroting what smarter people than I have been saying. Though I am not sure that would be the end of the world. It might be the end of some countries making up the EU, but the strong would survive. The others would eventually recover, and that would mean changing their ways to recover (or not). It seems bailouts are pervasive whether it is for companies or countries, or whether in the U.S. or in Europe.
We were all in the blame game of Europe as to why stocks were down premarket in the United States. Indeed, stocks opened lower, rallied, and then sold off a bit. They managed to recover to close just about flat on the session.
SP500, 0.02%; NASDAQ, -0.36%; Dow, +0.17%; SP600, -0.73%; SOX, +0.02%; NASDAQ 100, +0.33%.
Not a big day, but stocks did recover a post a low-to-high move. That is a positive in technical terms. That shows the current theme is still the upside, whether it is overall or intraday. Looking at the SP500, overall you have higher lows and a higher high being put in. That shows the current theme of the upside move.
Why was it not another great day? At the start of the year money was put to work. After a big move like on Tuesday, stocks typically take the day off. There was too much partying in the New Year and they were hung over. They need to take it easy, and that is and exactly what they did. But there is still a group of leaders in excellent shape to move higher. They are coming from many different areas.
If retail stocks will take a hit as some of them are looking to do after leading the market higher into the end of 2011, there are other areas ready to step up. Like financials, believe it or not. Energy, materials, metals, machinery, and more. There are leaders that, if they can break higher out of their decent-looking patterns, this market could find some real leadership into earnings. That is what I have been talking about for this continued move up toward the April to July highs that market the recovery highs from the bear market.
Suffice it to say, the action on Wednesday did not do damage to the idea that stocks can continue to move to the upside. Indeed, certain areas broke higher like those that I just mentioned.
THURSDAY
Jobs warm-ups are here. Challenger is up before the open. ADP Employment Change, the private payrolls report, is also out before the open. Initial Claims are coming out, and they are expected to improve to 375K. ISM Services is out as well. That all is a lead up to Friday’s Nonfarm Payrolls Report. We are expecting to see the unemployment rate tick a bit higher.
There is a good discussion on the CNBC Web site from Rick Santelli talking about how to lower the unemployment rate without really lowering the level of unemployment. It all depends on what you do with the numerator or the denominator. The numerator is the unemployment, and the denominator is the work pool. If you decrease the work pool, you get a higher unemployment rate. The key is what you do with the numerator or the number of unemployed. They go off the rolls after four weeks. You can reduce your numerator that way and improve your unemployment rate by simply losing workers off of the unemployment list. No surprise there, but it is worth a quick look.
We have this data for Thursday. You also have to throw in Same Store Sales, and they are always a big impact. After a big holiday season such as this, it will be important and will move the stocks. Also the fact that a lot of stocks have performed very well up through the holiday season. They may be a bit tired. We are already seeing some of the retailers start to crack a bit. Not all of them. I went through some that are still looking just fine, but you have stocks like AMZN that has been struggling all along. There was some short covering just recently. It bounced back to the upside over the past week, but this has been an ugly selloff. Maybe it is primed to make a bounce to the upside with some good news. We will just have to see what happens.
Retailers may provide some opportunity. We see some we like, and we are in some obviously. We have gotten out of some recently as they started to struggle. We are looking more toward the next group. We have been moving into some of those next groups over the past several sessions. We move in as they present themselves. We will take what the market gives. We see a lot of sectors setting up with good patterns and starting to make moves. We are moving into those stocks as they show us what they are doing and make the moves. We will play those to the upside.
There could be a confluence of good news coming together that keeps the market moving. We will just see. My thesis does not change at this point, however. That is a move up through mid-January or so, riding the early earnings, or anticipation of those earnings, and the early announcements. Maybe it will take us through the third week. We will just have to see how long it plays and what kind of legs we get. There is a lot of leadership still stepping to the upside. That is very encouraging. That can all change with news, such as earnings that are not up to expectations. That can always set things back. But the fact that we have some stocks setting up decently is a good indication that the smart money is accumulating ahead of the earnings report. I am being cautious about that. I do not know how many we will hold through the entire earnings season.
We may be dumping positions as we go along. Maybe some will not move as well as we want them to ahead of earnings, and we do not want to lose anything. If we are flat or a bit ahead, we may take something off. I would love to see a nice run into earnings now. We had a great break to the upside on Tuesday. We had a pause on Wednesday. No real selling, just a pause. The bids were pulled back. We see enough good patterns out there and stocks moving well even today to buy some positions and have some confidence for a continued move upside.
That is how we will continue to play the cards for now. As noted, STX announced good pre-earnings after hours. MOS announced decent results; revenues were a bit light. It was not getting hit on the news, and we will have to see how that plays out. We will start getting these results. We have already received a bunch from the semiconductors, and the market weathered them. The plan is working out according to what we anticipated, so let us stick to the plan. If we get a good run for a couple of weeks, we will take some gain. Then we will see where it goes from there.
Stock Splits & IH Alerts, Editor
InvestmentHouse.com
