Upside Move Remains Slow Going
- Once again a good move is followed by . . . lethargy.
- Stocks recover from early declines, indicating the upside bias is still there, but the upside move remains slow going.
- MSFT the latest to join the list of those concerned about the quarter.
- Money is moving into the downtrodden as well as the favorites, and perhaps that can help this rally get a move on.
The recent story: strong move, then a stumble.
About all you can say with respect to Wednesday is “I told you so.” No, no. It was just one of the scenarios I postulated on Tuesday that the market would have difficulty moving higher after a strong Tuesday gain. Why? There was so much euphoria as the SP500 broke above its October closing peak, and that tends to warrant some giveback. As we saw intraday, most of the indices gave back gains off of the highs of the session. On top of that, there has been a frustrating pattern in this market where a good upside move is immediately followed by sideways action. That was the case over a week ago on the last strong move before Tuesday. Once again we have almost identical action on the day after. On the third of January, the big day to start the year, there was a nice burst higher. There was a pull off from the high, and then the next day it showed a hangman doji. The last two days we have had a nice burst to the upside, it faded off its high to close, and then a hangman doji the next day. Of late it seems the market cannot put together two solid upside sessions back-to-back.
I will note that the intraday upside bias remains. Stocks started lower. There was a negative view of the world to start Wednesday. There was nothing major — I think it was the lack of anything major that really played a role. There was no U.S. data coming out, and that left the playing field open for any foreign intrigue. There were stories from Europe, but it was not bad. It was mixed. Germany said it was willing to put more money into the EU rescue fund. It also said, however, that its GDP probably slowed in Q4. But it slowed to pretty solid levels. That was not any kind of negative.
There was something that spelled a bit of trouble, and it is a somewhat disturbing trend we have seen over the past week. I am referring to warnings about the future. MSFT did not exactly warn about its future, but it did so in an indirect way. It said that it expected that Q4 PC sales would be less than forecast. That is another way of saying the sales are not that great and we will not sell as many chips that went into those PCs. Do not expect great things. They (kind of) join a list of companies that have had issues with respect to earnings. There is TIF. SIG sold down but had a nice rebound today. PHG had another ugly day to the downside. There is JNPR, although it does not look too bad. The list goes on and on.
Outside of tech, there was even a semi-warning from F. It said that the Thailand floods were hurting its profit margin. Although F had a decent day. It gapped lower and reversed to put in an upside engulfing be pattern. Of course it is at the top of the range, so that does not mean as much as it would if it was an engulfing pattern to the downside at the top of the range. There is an unpleasant counter-economic data warning season ongoing. A lot of name-brand companies are saying things are not that great. We have had improving economic data over the last four months, and there is improving employment data as a result. Employment lags, and it is catching up and looks solid.
It has been good. The market has rallied up, and now we are looking at earnings season. The market seems to be overlooking a lot of these warnings. Not all of them, but in some of the charts we will look at, it is as if they did not have an issue at all with what the companies said. Is there some sort of denial going on? Is the market ignoring something out there that could come up to slap us in the face when earnings start coming out? That very well could be.
You are seeing a lot of beaten down stocks, such as NFLX, making a strong move to the upside. It is not the only one. Solar stocks such as FSLR that were downtrodden and fairly roundly despised are now making a comeback. LDK is jumping to the upside as well. Stocks that have been maligned are now being wined, dined, and generally loved. JPM continues higher. BAC continues higher. Those are financials, and they are finding love after a long, long downturn and general scourge and hatred after the financial collapse.
Former laggards are getting money and bad news is being ignored. Those are the things that rallies are made of. Of course the stock market is moving higher, and we have to like that. Our thesis has been that we will have a run up into earnings and even after the results come out. After that, I am somewhat worried about what will happen. We would like to get more mileage between SP500′s October peak. We would like to see it get to the top of the range. If we could do it quicker before a lot of earnings come out, we could bank our money and see what happens with earnings. If it is the big, slow rush up and then sidestep a few days, that is harder to deal with. It makes it harder to stick to your game plan, but we are doing it because we still thing we have upside.
Moving into earnings, the concern is that after the initial euphoria runs out, harsh reality will slap investors in the face. All of these warnings and cautions heading into the season will surface in terms of the actually earnings results, and then there is some selling. It kicks in, the rally ends, and then maybe we will see some 2011 action to start 2012. We will see.
For now the thesis remains intact. The market is moving higher, and we will let it run higher. Again, we had that low to high action as stocks overcame the early lethargy and rallied up for a gain almost across the board.
SP500, +0.03%; NASDAQ, +0.3%; Dow, -0.1%; SP600, +0.25%; SOX, +0.42%
SOX is a more volatile index, and it will usually lead either to the upside or the downside.
THURSDAY
It is already Thursday, and that brings the weekly jobless report. It is always there, and I think it gives us the better read of what is going on. It is expected to move up to 375K, but that keeps us well below 400K. As long as that happens, everyone will be happy — well, most everyone. We still have a long way to go, but it is improvement. We have to be pleased with that. We have to be pleased with what we have seen over the past four months with the data. If it can only continue.
There has been such a drought of economic activity that this recovery has seemed to wonderful. But it is really quite a pathetic recovery when stacked up against any others in history other than the Great Depression. This one mirrors that. Of course there is also the depression in Japan, which this one mirrors as well. But I digress. We also have Retail Sales out before the open. It is important to see how they were for December. Business Inventories are on the back of those Wholesale Inventories that fell sharply as we saw on Tuesday.
That will set the stage, but then we come back to a market that had a big move on Tuesday and could not move on Wednesday. We are still looking for a more significant move. I would love to see one of these moves such as in late November where we had one strong move, then a day off, and then another couple of good moves before it peaked out. It would be so nice to get another good surge or two under our belt. That would push several of our stocks up to their targets, and we could bank more gain. That is something we have been doing all week. We even started last week. Some of the leaders started to hit our initial targets, and we started to take gain off the table. We took gain off the table yesterday on many stocks that had January options because we had a good move that pumped up the volatility of those options. We figured that today may be a slow day and that volatility would start to bleed back out of those options, so we banked gain on several positions. Just playing the strategy, knowing where you are with respect to the stocks’ move, and knowing where you are with respect to expiration and how volatility works in conjunction with expiration.
We will be looking to take more gains if the market can continue to move. We would love to see a good burst higher. That would also mean we could take some new positions. Although, as you can tell, you have to be more selective. And we are. We are catching the ones that are not extended. We are catching those that are coming off the bottom and have not had the big rallies. They are nowhere near extended. That is what we have to look for. Those are the stocks that will be able to run quickly, make us money, and not get turned back quickly because they have already run a long way and are extended.
We love to play stocks that are turning, that have broken their trend and tested that trend. DFS is breaking out of a triangle pattern that set up as a consolidation of a long move higher. LDK had a long trend to the downside and a double bottom. It put in a reversal off of that level and is breaking to the upside. There are stocks that are not extended that we can still buy into even though the market overall is reaching toward the peaks that we say may result in a top and some selling.
We are looking for the market to move up toward that April to July peak range. As it does, it will make us money. We can still pick up a few stocks along the way to make us money even at this late date. We just have to be selective and pick the ones that are not extended. Pick those can run when the money floods into them. Remember what I started with earlier: There is money moving into sectors that have been downtrodden and generally despised for quite some time. It is also going into areas that are still solid and moving higher — areas that have been loved for quite some time. We can make money on both of those because people go back to the areas they love. Then when money funds look to make percentage gains (the January effect kind of event) they look for those stocks that are beaten down and are ready to turn. We look for rounded bottoms that are breaking higher.
Remember, I started talking about these rounded bottoms months ago. The leaders were forming those rounded bottoms way back and started moving higher. Now we have others coming along and doing the same thing. That is a positive. Perhaps this market runs further than we anticipate. Maybe it goes up another couple of weeks, pauses, and then continues. It will have to prove it, but we cannot close our minds to that possibility.
We will stick with our game plan, of course, because it has opinion working for us. If the market continues higher, then we have banked some good profit, and we will make a lot more good profit as our positions continue to move upside. That way we do not miss out on upside moves thinking we are smarter than the markets. A lot of analysts say this or that will happen. They can be right sometimes and look like geniuses. I know that I can be wrong as many times as I am right with respect to how far the market ultimately runs. I also know that I will take advantage of that run even if I am wrong because I will listen to what the market is doing and what my stocks are telling me they are doing versus some preconceived notion in my little mind. It is my mind versus the entire market with its millions of investors.
Stock Splits & IH Alerts, Editor
InvestmentHouse.com
