US Data, Earnings are Good Enough to Support the Market Move

SUMMARY:
- After a short pause stocks continue the move toward the 2011 highs.
- US data, earnings again not stellar, but with the perception of EU action they are good enough to support the market move.
- China, EU PMI numbers top expectations.
- US ISM rises, though less than expected.
- ADP jobs miss expected mark.
- NASDAQ moves through its February peak, the initial high in the 2011 top, but SP500 falls short.
- Wednesday is not a breakout, but there is still room to move.

Market shrugs off so-so US data as investors put some new money to work.

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Last night I discussed how SP500 and the SP600 looked ready to make a break to the upside. After a modest pullback that held the 10 day EMA on the SP600 and tapped at the 20 day EMA on the large cap index, it certainly appeared that those indices were ready to make a break to the upside and perhaps lead to the upside. And they did. While SP600 was a leader, SP500 really was not. It was the growth areas. NASDAQ posted a nice gain, and the SP600 rallied sharply to the upside. The SOX broke ground to the higher levels as well. We had a very nice continuation of the move. A short pullback and a break to the upside.

There were some interesting and somewhat important moves, but there was no breakout on the day. It was not a session that saw the indices smashing through the 2011 highs. Indeed, SP500 has yet to reach its February peak. The Dow is still struggling to get past the twin peaks from July so it can get a shot at the April and May peak at 12,876 on the high. Those two indices   leaders to the upside   are struggling right now. NASDAQ did move through its February peak. It still has to worry about the July peak and the April and May peaks, but it is making a strong move. Indeed it is providing that leadership to the upside. The small caps blasted through their February peak and are taking aim on the last series of interim highs before that early May and early July peak.

The point is the market continued the move to the upside, and it did so on less than wonderful data. Earnings were pretty good. Even though WHR missed, it had a good outlook for 2012. Obviously stocks that have good outlooks tend to perform better because they are looking to the future and not the past. MTW (I believe it purchased BUCY) is saying that mining equipment looks good and they are selling cranes. It moved higher as well. There was good news, but overall the SP500 is below trend with respect to those company beating estimates versus missing estimates. We are at the halfway mark for SP500 reporting, and there are still a lot of companies to report.

We have been looking at plays. While we see setups that we really like, we also see earnings looming in February, just in a week or so ahead. We can play some of those that are a couple of weeks out and any that are three or four weeks out, but it gets tight if you are looking to next week. I do not feel comfortable playing that close, although we can play earnings runs. No problem with that. Stocks certainly still seem to be having those even though, overall, the quality of the earnings is not the same.

Despite that, futures were ginned up because there was good news out of the Europe. The EU had a better PMI number at 48.8. That was more than anticipated. Everyone was excited about that. It topped the 46.9 reading in December. The Chinese PMI was greater than expected at 50.5, and that topped the 50.3 in December. It is expanding slowly. Europe is still contracting, but it is at a slower pace. In Portugal there was a decent bond yield on the short term 3 and 6 month bills. They had good demand. The yield fell, so everyone was feeling chipper on the continent, and that aided the upside move in futures.

Stocks started to the upside, and this time they did not come back; they continued higher through lunch and into early afternoon. It was only in the afternoon after a nice run was on the record books that they started to come back and post a bit of a fade. Nonetheless, all of the indices that we track scored good gains.

SP500, +0.89%; NASDAQ, +1.22%; Dow, +0.66%; SP600, +2.15%; SOX, +2.4%

Everyone was feeling chipper about the market move. It definitely did not put in a top. It took a pause and rallied, but the indices are still not through the 2011 highs. That is just fine with us for now because that is still in our game plan. We can make money to the upside on this move, but we have to watch out for the market. Even though it looks better, there is still a problem ahead. It may turn out to be nothing, but history says it will have to be tested at some point with more of a pullback.

THURSDAY

There is some more data for Thursday. Challenger Job Cuts, Initial Claims, and then Productivity. That will be the final warm up for the Friday jobs report. There will also be a lot of earnings coming out. As noted, after hours QCOM announced its results, and it was performing quite well. Several stocks performed well after hours.

When talking about leaders I spoke about the right time to buy. That is when you have a good stock in good position that is making an upside move. Then we want to buy into it. But we also have to be concerned about the resistance that is ahead. We would prefer, historically, to have more of a pullback (maybe toward the October high or deeper) and then a run at it. That would make a better entry point. Then again, sometimes the market makes its own history   in a similar way, but a bit differently this time versus last time. That is normal as well. That is why people who get tied up in looking for the exact same conditions can wait and wait and never get in. That is why we look at how individual stocks are setting up in addition to the market overall when deciding to make our plays. Even now we can still move into good stocks that look like they want to break higher because they may be the stocks that push SP500, the Dow, and the NASDAQ over those prior highs.

Now we have to be cautious because the game plan all along has been the watch out for these upper highs. We do not want to lose sight of what we have been doing thus for. It has worked up to now. Maybe we did not get every penny out of every stock that moved higher, but we made some great money to the upside. It has all been based on the game plan and the thesis that stocks would run up to this high and then have some trouble afterward. I do not know how much trouble they will have, but it does not look like it is going to be serious. That is good news. That means a shallower pullback and then a move to the upside.

We just have to be smart. We will still take positions. We may take some fulls here and there, but it will be mostly partials. Just picking our shots and trying to make some gains as stocks move up before earnings. Or if they have a nice, juicy run ahead of them, we can take advantage of it as they come off of a good test and do not have a lot of resistance to the upside. They can make us nice money, and they have broken through key levels and are ready to continue the move to the upside. Those that got a little fat in their patterns that we can take from them have been great for us. Again, we cannot lose sight of the overall picture. That is of the indices moving upside but still moving up into those prior highs. We most likely get a pullback. We will be cognizant of that.

We will continue with the game plan. We will let positions run, but if we have stocks that do not perform on a day like today when we feel they should have performed and were in position to do so, then we cut them. We did that again today. We are lightening the load near the top. We are not getting damaged that way. With most of those we were getting rid, we are making a bit of money on them or just losing a little bit. That is much better than letting this thing reverse on us up at these highs and holding some positions that we really do not want that were just nursing along to see if they would move higher. If we were down at this level back in early January, that is a different story and we would let them run. But now we are up at these peaks. The probabilities have turned on us a bit. The market has not turned on us, but the probabilities have. We have to tread with a bit more caution as we still stay in the game and, of course, take what the market gives.

It is still giving it, so we will take it as “Tin Cup” Roy McAvoy said: “You ride her till she bucks ya.” She could be getting ready to buck us, but we do not go into it blindly. We can kind of feel when that horse is trying to make that move to buck us, and we prepare for it as we have been doing. Still try to make the great shot, but prepare for it and be ready in case it happens.

I will see on you on Thursday as we warm up for that Friday jobs report. Have a great evening!

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