Another Important Break
- SP500 finally gets the right signals to make the upside break.
- Improvement in the US data was not enough: it took the appearance of a reversal in China to give the buyers the nod.
- French business confidence bounces along with industrial output.
- US short term auction yields record demand. ‘Stuff’ may be getting better, but investors still seek safety.
- A good day but not a great day.
- With the SP500 upside break the stage is set for the next phase of the rally, but given all the hype a bit of test may come first.
Another important break higher keeps the upside moving ahead, but it is no major surge.
I have said of late that “stuff is getting better.” That is a quote from the move The Postman starring Kevin Costner. It is a poke at what Costner said in the movie about stuff getting better, and finally the skeptical sheriff says, well, stuff IS getting better. But even though stuff may be getting better in the U.S., as seen in the past three or four months in the economic data, it was not enough to break the market to the upside. It was setting up. In August to October, we were in the “eurozone,” as I called it. That is what the market fell into when the EU became a quagmire. The market crawled back out only to fall back into it in the November selling. A higher low, and then another higher low. Then SP500 bumped its head at the October peak (the high made as the market tried to crawl back out of the eurozone). It looked good but it just could not make the move, even with economic data in the U.S. getting better and better. The employment data even followed it and posted better results, but the market could not make the breakout.
What was the change on Tuesday? SP500 did break out above that October peak, closing at 1292 versus the previous close at 1285. The move that made the difference came from China. You would think it would have been Europe. After all, that has been the major problem. Hence the “eurozone” that the market was stifled by. Yes, the French news was better. French business confidence rallied off of a two-year low, and there was an increase in industrial output. Stuff was a bit better in Europe as well, but improvements there are minuscule compared to the nightmarish problems that are ten times worse than they were in the U.S. in 2008 and 2009. Those issues still loom over the market and it could not break free.
There were two problems. China was heading lower. It was in a full-fledged selloff. There are bubbles in several parts of its economy (housing, manufacturing, the consumer), and the stock market was reflecting that. But perhaps stuff is getting better in China as well. There was a huge reversal day, and it was followed by another upside move today. That looked like capitulation. The market had been pounded to the downside, and then massive reversals. Maybe a key reversal is in place.
Markets tend to bottom and reverse before the economic data starts to improve. China has been lessening reserve requirements and collateral requirements in its banks. And that is just what it is telling us that it is doing. It is probably freeing up money, making easy money available for businesses and consumers. It has plenty of reserves to do it, and it likely has been. When you flood the economy with that kind of money, you will get improvement. It may not be the sustainable type, but you will get some improvement.
That, my friends, is what appeared to allow the U.S. market to break free. Last Thursday I said it was possible that if the jobs report was good enough, the market could finally get the okay to break free and get out of this “two steps forward, one and a half steps back” process we have seen. Upside, yes. Trending higher, yes. But it has been a slow, painstaking move that was quite volatile not only day-to-day but intraday as well.
With China on board, and perhaps some improvement in Europe (although no one is holding their breath on that), the SP500 decided to join the DJ30 as well as the SP600 with a breakout over that October peak. That officially puts all three of these NYSE indices in that playground that spans from the June low up to the April and July peaks. That is a higher trading range than the eurozone, and all this lateral consolidation between the eurozone and what I will call the new post-bear market high zone for want of a better term (if anyone has a better way to put it, feel free to send that in). Europe is still a problem. China may have had a reversal, and the U.S. data looks good enough. As Meatloaf wrote, two out of three ain’t bad.
With that, SP500 made the upside break. It had a bit of trouble making it stick, and on the close it still did not take out the October intraday high. That is still a sticking point for the purists in the charts, but I have a feeling it is just a matter of turning the crank, so to speak. When washing clothes, you turn the crank and it comes through you have already done the hard part. It looks like it will continue the move to the upside because nothing is changing right now. The only thing is earnings. No doubt that can have a game-changing effect. Our thesis is that we get a continued rally for a couple of weeks into the teeth of earnings until investors get the gist of what is going on. Then they can punt if they want to when they realize that, while stuff may be getting better, it is not great. Maybe it is not great enough to warrant sky-high stock prices (sky-high in terms of the bear-market recovery peaks hit earlier in 2011).
There are still some problems out there, as a spate of warnings and misses showed us today. PHG gapped lower. JNPR warned last night, but it still managed to move higher. TIF was warning. SIG was warning. SKS may be having trouble as well, and it rolled down. With the improved “stuff,” there is still some of the same old stuff showing problems. It is coming from surprising names. High quality names are showing some issues. That tells me and the others in the office that, while the market is moving higher just like we thought it would, the move may ultimately run out of steam. I think it will, as I have said many times.
There are problems even as things improve. It may be a false downhill run. I think I talked about that a couple of weeks ago when we went up to the Hill Country. We flatlanders down here were doing some running, and we would run those hills and look ahead and think “Thank goodness for that plateau or little downhill ahead.” But when you got there, you realize your eyes are just playing tricks on you; it was a false plateau. There was still an uphill grade. For us flatlanders, we were wheezing as if we had not had a deep breath in months.
With that tortured analogy, you can see we still have our worries about what is in store for the market after this nice run. We have had higher lows, and we have had higher highs. Things are looking good. That is just according to what we expected, and we are looking for a move back up toward these highs spanning February into April and July. After that, it may be some tough going into 2012, similar to what we saw in 2011.
On the day itself, it was not exactly the kind of day that makes you feel great. There was a lot of euphoria on the move. Futures were up early on. They held the gains, the market opened, and they rallied to the highs of the session. That happened half an hour into trading. Then it was matter of trying to hold on for the rest of the day. We have seen days that go from low to high in that bullish action. That is always a positive. You love to see the low to high action because that shows the buyers coming in on every dip. That it bullish. They want to own stocks and pick them up at better prices. That is what they have been doing. Today they got what they have been pushing for, and they had a hard time holding onto it.
The indices closed off their highs, not hugely but significantly. They had a hard time holding onto the gains. What were really good gains, by the end of the day turned out not to be so superlative.
SP500, +0.9%; NASDAQ, +0.97%; Dow, +0.56%; SP600, +1.42%; SOX, +0.96%; NASDAQ 100, +0.7%.
As a side note, there was improved small business sentiment in the United States. What do you know? Markets leading the news once again as the SP600 has moved into a leadership role over the past month.
WEDNESDAY
There will be the Weekly Mortgage Purchasing Index. That will be out before the open. Then Crude Inventories will be out. The bigger stuff comes on Thursday with Retail Sales and Initial Claims, of course. Then on Friday we have Michigan Sentiment.
Looking at the day and the day ahead. It was a good day, but it was not a great day. There was a breakout by SP500, but the indices seemed to want to give up some of the gains. They had a hard time holding it. They held onto the very solid, credible moves, but they backtracked. That will be the hallmark of this move. I said all along that it would be volatile. A step forward and a half to three-quarter step back. And that is what we have been getting.
The key on Wednesday will be whether the market moves significantly higher, or if it starts this one day up and then a lateral move for four to five days. We need to have some moves straight up into earnings so we can make our money and get out, or at least reduce our positions and exposure by banking profits in the event that the earnings turn out to be a sour end to what has been a good rally of higher lows and higher highs. It has been frustrating. I said it would be all along. Look back three to five weeks, and I was saying this move will go up but will be frustrating. It has been, but we have been making money as we saw today. We have been banking money all week, and we will continue to do that as we get the moves to the upside.
We said we would not buy as much, but we did buy some today. No doubt. We had good moves, but we were just not loading the boat. If we see a very solid stock, a good name in a good position that is not extended and can roll for us to the upside, we will take advantage of that. We can make a good trade even though we may only have a couple more weeks of this rally to go. We can make a lot of money in a couple of weeks. We just have to know where we are, why we are there, and act accordingly. You do not act as if you have a six-month play when you have two weeks of anticipated upside.
It may turn out to be six months of upside. If it does, we will let part of our plays run, and we will make great money off of that. We will continue to get new buys to the upside. We always take advantage of opportunity when it is there. You take what the market gives, and you do not trade with your gut. Let the market tell you what it will do, and you do it. But you have to be smart and enter in good risk/reward areas. You do not want to be chasing the bus two blocks down the street and try to get on there. You are already where you need to be, and then the bus turns around and goes back. We have to be smart. We have to enter into good positions in good stocks with good risk/reward. Then we will be OK. We will just keep doing that.
The stage is set with this breakout for that continued move up to those prior highs. Earnings are coming. The stage is set for them to drive stocks up to those prior highs. Then I think the move will run out of gas. There are still enough holes in our economy, enough holes in the reports and warnings we are getting from U.S. stocks. There is, of course, a black hole in Europe. China remains a big question mark, key reversal day or not.
Let us keep our heads on. Things are working out the way we anticipated. We do not want to lose sight of that simply because the market is going higher and everyone feels great. Everyone is euphoric because the market is moving up. As quick as it has come up, it could turn around just as quickly when we get up near these prior peaks and the news sours again.
That said, we have great positions. We are already taking gain on them. As it continues to the upside, we will get close to or hit our targets, and we will start taking some more gain. We will be lighter than we were when the move started, and that is the way it should be. You pile in when you get the opportunities. Then you take gain when you have days like today where other investors drive the prices of your holdings higher. As it continues to go higher, we continue to take gain. Then we are lighter up here. If it does start to come back down, then we can take the rest of the gains off the table. Then we can let it make its test and see what happens. Or if it gets bad enough, play it to the downside.
Stock Splits & IH Alerts, Editor
InvestmentHouse.com
