Stocks Give up an Early Move

SUMMARY:
- Stocks give up an early move, but then recover to flat once again, preserving SP500′s best January in 14 years.
- Europe working on it, but there are the strong and the weak.
- US data continues on its recent weakening kick.
- Case/Shiller continues to fade.
- Chicago PMI still solid but misses expectations
- Consumer Confidence wanes, misses expectations by a significant margin.
- SP500, SP600 still have room to the upside, but still not expecting a breakout from this move.

Once again a dip and recovery as the indices hold up very well.

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It was another session where the market had to deal with some adversity, but in the end it came right back. Again, I have to state that if this is a test or if it is the consolidation, it is one you have to be happy with if you are on the upside because stocks simply will not give up many gains. They are sliding back, but it is ever so slightly. Then when they do sell off, buyers come back and pick up them up.

Futures were higher in the premarket. Once again Europe was in the forefront, but this time Europe was coming across as a positive versus the negative we saw on Monday. Europe has come to a budget deal. There will be more austerity or stricter budget requirements with EU members, and that was seen as a win for Germany. Germany is doing quite well. Its unemployment rate hit a decade low at 6.7%. Germany has already been through this. It had its austerity when the two Germanys merged and it had to absorb the dead weight of the East German former soviet country. It was tough to get it out of that communist state. It did it, and it is reaping the rewards. Now it has to deal with the other countries that are mired in socialism and that have not dealt with their problems. Germany is the strongest country in the EU, so everyone looks to it to pull the freight. Germany will probably do it reluctantly, but it will extract what it feels it needs and wants out of the rest of those countries so it is not too painful for the Germans.

That was considered a positive even though there was no deal with respect to the Greece creditors. They are still at a stalemate. And Portugal’s bonds continued to surge to the upside with the 10 year yield moving above 16%. Pretty incredible stuff we are seeing out of the Portugal. Again, it is considered a relatively small economy, so it is not a major problem for the EU to deal with. They just do not want a contagion to spread and have it turn into an Italy thing. Earlier in the year we saw how Italy’s bonds started to rapidly rise before the facility was put in place with the help of our Federal Reserve. That brought interest rates back down.

Futures were higher on that decent news, and then stocks turned over and sold. The US news not that great, and it contributed to the action, although there is that news and earnings saturation point. We have had good news on the economic front up to now. We have had earnings news. There comes a time when the market can only absorb so much after its run and continue to the upside. Now it is shading some. Again, it was not much of a shade.

Looking at the intraday chart, after a mid-morning double bottom, stocks started the long recovery. They did not get all the way back to positive across the board, but they did well enough. If this is a consolidation, if this is a test, if this is a selloff, then this is not bad at all. The buyers have yet to run out of the ammo, and they keep putting the bids up when the market dips.

SP500, -0.05%; NASDAQ, +0.07%; Dow, -0.16%; SP600, +0.25%; SOX, +0.05%, NASDAQ 100, +0.11%

Once again, the key point to take is weakness followed by a recovery. I looked at the SP chart earlier, and there is a very similar pattern to what we saw on Monday. A reach lower toward the 20 day EMA and a rebound. Tuesday a nice, tight doji right at the 10 day EMA, fading early but coming back once more. Indeed even though the index trailed off for the past week, the ability to come back will help the SP500 post its best January in 14 years. The NASDAQ posted its best January since 2001.

We have some milestones hit, and it is a good start to the year. The question is, as goes January, will go the rest of the year? It does not always happen that way. That is a statistic that seems to work, but again it is a probability. It depends on how the economy is doing as well, although it is a predictor of the economy. There are some issues with what we see in the economics ahead. There are concerns with the consumers. I will talk about that in the economy section.

WEDNESDAY

We have the ADP employment index on Wednesday. We also have the ISM index, which is very important. Construction spending is always important, but it will not be that big. Auto sales were great over the end of the year. With consumers getting a little bit bought out, we will see what they do at this point. That all sets up the Thursday jobs number and the Friday payrolls number.

More earnings? You betcha. We had earnings after hours; some were good and some were disappointing. AMZN was restructuring, and it was getting kicked around. One that hurts even more is STX because initially it was down but it reversed. It has some good guidance, and it is going higher. Ouch. But we got a great gain off of it, so no crying over that one.

There are others that we look at from time to time. There will be some stocks driving the action higher, some stocks will be driving the action lower, but overall the earnings responses have been pretty solid. If you do well, you get rewarded. Again, it is all about risk/reward. For example, after a big move to this point in STX, do you want to leave any on the table or take some off? It would have been good to leave some on the table. We do that on some, and we take it off on others based on how we think the stock is performing, how far it has run, and how much we have taken at that juncture.

As noted earlier, we can still make plays that would take advantage of a continued run in SP500 and the small caps up to resistance. We just have to find good plays that are not bumping resistance and that we do not have to get any breakout from. Those where we can just catch some momentum or catch a bounce off a test of a breakout and let them run for us. Earnings put that overlay on there, and sometimes it makes it a built difficult. I found a lot of plays that were interesting for tonight, but earnings are tomorrow or after hours, and that makes it difficult to make a play on those without playing some kind of spread.

What will we do ahead? We will continue to look for good plays. We have lightened our positions on the way up. We have taken a lot of gain off of the table. We have managed plays that were not performing, taking a lot of trailing stops where we were not comfortable with letting them ride higher. We can still get more upside. We will continue to look for plays to the upside. We can still find them out there, and they can still reward us. We just have to truncate our views toward returns and realize that what we get into quickly we may have to get out of quickly based on where the market is overall.

Again, it is bumping up against these highs. Maybe it breaks out. If it does, we let our positions run and do not really care about it. We will also get other buys along the way, particularly when it tests. If it does not, we have been tending our positions and we will continue to do so. Then we will wait for setups to come. We are still in the position where you cannot just say it is time to rush in and buy or that it is time to just sell out. We are being cautious. We are seeing if the bids will last or if they will run out of buyer support and want to just fall into a deeper test. I still think that has to come before we get a really good push to the upside that can even threaten a breakout over the April to July peaks.

We have been able to take advantage of the move to this point. We will continue to do so, but again keep your feet on the ground and know where we are in the market. Realize that if things turn, we may need to take the rest off of the table posthaste and then revaluate the situation. That is just trading and being in the market. That is the way things always are. If you are going to be in the game, just know where you are.

I will see you on Wednesday with more earnings, economic data, and maybe some more positions that we can move into.

Have a great evening!

Jon Johnson
Stock Splits & IH Alerts, Editor
InvestmentHouse.com