Bernanke Makes a Shocking Prediction

SUMMARY:
- Growth leads toward the 2011 highs while SP500, DJ30 stall.
- Jobless claims continue their modest improvement.
- Productivity stalling, perhaps adding to need to hire.
- January Same Store Sales mixed and overall lower.
- Bernanke makes a shocking prediction.
- Indices start to bump the highs but stocks with room to run are still running.
- Beware of a run higher on the jobs report: will bids hold on more good news right at the old highs?

Stocks continue to push higher, but intraday volatility increases as the indices bump against 2011 peaks.

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MARKET OVERVIEW

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It was a session that saw the market continue to the upside. The indices were working at the next peak before that final April and May 2011 high. That is, of course, the post-bear market recovery high. Stocks suffered through the summer thanks to Europe, and now they have recovered and are back up to those highs. The question posted about every 23 minutes on the financial stations was whether or not the indices will break out. I even heard it erroneously reported that NASDAQ had in fact broken above its prior highs and was trading at an 11-year high. That is nonsense. Maybe they meant an 11-month high, but then they would be wrong again. Nonetheless, everyone is focused on the peaks. I guess that is warranted because that is the natural place to look over our shoulder and see where the indices are trading and gauge just how strong the move is.

The move starts with NASDAQ. I am looking NASDAQ versus the SP500 to start things off. Why? Because growth, particularly the NASDAQ, has been leading this move. SP500 and the Dow have backed off. SP500 cannot get past last week’s highs that were below its February peak. That is the first high in the top of 2011. The Dow is having the same problem. It is putting in a double top where it double topped in July at those peaks. That is below the April and May highs that mark the all-time high (post-bear market) on the Dow.

There is a struggle among the big names in trying to move higher. Growth is always good. Growth is the key to any economy and any market. The SP600 made it almost up to that 460 level that shows four touches spanning April to July of 2011. Growth is moving but it, too, is encountering those prior peaks. The question is will growth sputter, stall, and turn into non-growth (I will not say death)? Will it stall out as well and head back down? That was not the case on Thursday with semiconductors providing some great leadership to the upside. Semiconductors are not in the market lead overall, but they are making up some lost ground, recovering from lows that were deeper than the rest of the market and took longer to turn. Stocks such as SWKS. It is rallying to the upside, breaking higher out of a week-long consolidation. That was providing a lot of impetus to the market as well as some Retail Sales.

It was Same Store Sales time, and we saw a widely divergent group. 2% was about what they came in for January, and that is well off the 4.8% from January 2011. This even when people said we had a lot of gift cards given over the holidays so that would drive people to the stores. If it did drive them to the stores, it did not drive them in droves. We saw some issues. There were also some good moves as has been the case of late. LTD moved up. It includes Victoria’s Secret with its basically 90% naked women strutting around in their annual holiday fashion show. COST was moving up as well as it beat nicely. Target came back from the dead and beat nicely. TJX beat. It is still in its uptrend. ROST continues higher as well. This was in contrast to some misses from the likes of DDS, JWN, and WTSLA. Not great, but none of them imploded.

Sales were not that great, but no major hickeys. That is the trend in this market of late. You have to really stink the place up to get taken out and shot. Despite earnings beats trending below the norm, the market is still rising to the upside. Despite economic data that is softening again, the market is still trending to the upside. Despite problems that remain in Europe, the market is still trending to the upside. It is time to buy; it is the January effect. We are seeing good percentage gains being put in, but we are getting back up to those highs in the market from last year. That is going to be the big governor or liberator for the next market move. I have come full circle and I, too, am talking about those peaks like the rest of the commentators on the financial stations.

Once again the market had a decent start. Futures were down early, but they were recovering into the open. Jobless Claims, Productivity, Challenger Job Cuts and Same Store Sales were all out before the open, and futures were picking up some speed after stumbling around premarket. The move was basically over in the first hour. Stocks peaked, sold off, and rallied back in the afternoon (although they never came close to taking out those morning highs). Looking at the NASDAQ, for instance, it traded in a big range all day. Up, down, and back up. A lot of volatility crept into the market on Thursday. It was not just the “start low and rally higher” that we have seen of late. Looking back to Wednesday, there is a start higher and a rally higher. On Tuesday it was low to high. We saw more volatility creep in. While the market did come back, it could not come back all the way. When you combine that with the fact that (yes, I will mention it again) the indices were near those 2011 peaks, that has some meaning. A bit more volatility creeping in, and then the indices struggling a bit   at least the SP500 and the Dow. Some of the pieces are falling into place. We might have trouble continuing the move to the upside.

The market put in a good showing overall.

SP500, +0.11; NASDAQ, +0.4%; Dow, -0.09%; SP600, +0.5%; SOX, +0.43%; NASDAQ 100, +0.31%

FRIDAY

That brings us to Friday and the jobs report. 155K is expected, and that is down from 175K earlier in the week. We will see what happens. It is one of those problematic reports. The trend is some minor job creation. We will again hear the administration officials and members of Congress saying that at least we are not where we used to be. But it should not be about where we used to be. The problem is that we are not where we SHOULD be. This is the worst recovery we have ever had outside the Great Depression. You can blame how deep we were, but you have to also blame the policies. We are implementing the same policies that we did back in the Great Depression, and we are getting the same results. It will take a war to get us out   oh, wait, we are already in wars. It has not worked.

We have serious problems, and implementing failed policies from the past will not get us out of them. We have the worst recovery since the Great Depression, and it will not get better this way. We are eking out modest gains and we think that is good? Our Federal Reserve Chairman thinks that 5.2-6% unemployment is the new normal. He does not think it is good, but he seems to have resigned himself to it and is accepting that that is where it will be. That is not going to do it for the United States.

Be that as it may, the indices still rallied. They have come off of the lows. If you flood the economy with money, it is what happens. It happened with QE2 and with QE1. We have a form of Quantitative Easing right now in the extension of the 0% interest rates and the twist until the end of 2014. Frankly, listening to the Federal Reserve Chairman, you have the strong suspicion that there will be more monetary easing in some form ahead of the election. It is just the way he is talking. He is downplaying the improvement in the economy, citing the negatives that are still out there. That shows the mindset of conditioning the market and conditioning the economy that there will be further Fed action. It is already conditioning gold, as we have seen, as gold shoots to the upside.

What can we expect for tomorrow? That is more of our immediate concern. We have had a good run, and we are at the old highs. We will have to make a move to the upside or the downside. The jobs report means something this time. We have a lot more riding on it given where the markets are. They have rallied into the number, and we could have an adverse reaction to a mediocre result. I am not saying that will happen, but we have to be ready for it.

We have been taking positions still because there have been so many good stocks moving well and that are in position to run. We could get more push to the upside. SP500 still has room to get to the February peak. Unfortunately it has been struggling. SP600 is almost there, but it has some room as does NASDAQ. It still can move up to that prior high and make us more money. We have to be cognizant of those peaks, however. We will just have to see how the market reacts.

We have positions we are letting run. We have already taken gain from them. They continue to move higher. We are moving up the stop losses behind them. Some of them are hitting targets or they are getting right up to earnings. We want to take some off the table ahead of that, banking some gain so we do not get a nasty surprise. We have been doing that as well. We are just playing what the market is doing right now. This jobs report and the reaction to it up at the highs will give us the next barometer of where it is.

I go into Friday with some trepidation. It probably will not be a great day to buy. We have run up to the peaks. We have an important news release. Even if the markets race higher early, they could turn around. That is something we have to be careful of right now: The good news, the rush higher on the news, and then the bids running dry. I am not trying to forecast doom, but you have to be careful of that at this peak. We may get a test after that, and then we would have a new buying opportunity. Buying on the next rush up would not be good. We will likely take a lot more gain if we get a run in the morning after the jobs report.

I will see you on Friday. Have a great evening!

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