SUMMARY:
- Greek austerity agreement, Greek bondholder agreement, positive Italian bond sale allay investors’ Friday fears and markets rally.
- Negatives are not worrying investors for now: higher gas prices, Japan’s incredible shrinking economy offset by increasing optimism.
- Optimism too high? Barron’s cover touts Dow 15K, golden crosses (no, not talking about the Catholic contraception controversy) dominate technical discussions, and television traders say pull your shorts (not those shorts).
- Insiders selling heavily.
- Chips are not down but are rather suddenly struggling.
- Obama budget cuts an alleged and illusory $4T but even if true still leaves the deficit growing by $5T.
- Bad time to cut spending? What about bad spending such as corruption and waste inside the government that benefits no one?
- Sentiment may be high but the market keeps setting up new stocks and those stocks keep finding buyers. 

Stocks appear to rally on European nonsense, but you cannot argue with it. 

Friday we had a Greek bondholder agreement in hand, but the austerity deal (needed in order to get the next round of bailout bucks) was in question. That rattled investors heading into the weekend, and the market was weak. Over the weekend it was passed. Austerity is in Greece again apparently, and that allayed investors’ fears. Never mind that the cradle of democracy is no longer democratic at all. Those in one of the political parties who decide to vote against the austerity package had their offices cleaned out and their stuff left and the door by their own party. Wow. Turns out if you do not go along with the company (i.e. government) line, you are out the door.

So much for democracy. But that is what happens in trying times; we give up our freedoms when things get tough. We have done it here my times. The War on Drugs meant giving up some freedoms and allowing seizures of all assets if they find a trace of drugs. We got attacked by some terrorists flying planes into buildings, and then we threw the Bill of Rights out the window to allow “Sneak and Peek” warrantless searches in people’s homes. Now with the National Defense Authorization Act, we can use our military as a police force and pick up people in the middle of the night with no warrant, no notice, and then take them anywhere the president wants them to go. They can be taken to Guantanamo or anywhere in the world and not be given representation. That is pretty heavy stuff. Ben Franklin said those who would give up their liberty for the sake of safety deserve neither. We may be testing that soon.

There are many parallels between us and Greece. The cradle of democracy is giving up democracy, and we are giving up the protections of our Constitution for the sake of trying to make everyone prosperous. That is interesting. That should not be our goal. We should want to ALLOW everyone to be prosperous, not MAKE everyone prosperous. Other countries that have done that have failed horribly. Notably the Soviet Union. We have to watch who we emulate, and we need to look at history before we make more of the same mistakes. But more on that later. I love to digress, and if I do not slap myself back into the market every once in awhile, who knows where I could end up going.

It was enough that the Greeks had a 1-2 punch in the bondholder deal and the austerity deal to bounce markets back to the upside, not just in the U.S. but around the world. It was enough to overcome the negatives that were facing investors such as Japan’s incredible shrinking economy. It is shrinking again and it will shrink for all of 2012 from what we hear. It will probably go to 2013.

Japan had problems that it never fixed. We are doing the same things that Japan did; not exactly everything, but on the big items we are. We are supporting institutions that should have failed. I am talking about financial institutions and dinosaur-like automobile companies that probably should have failed. We might have better vehicles right now. The thing I always hear is if we did not save them, then all of our auto jobs would have gone overseas. Most of them are already overseas anyway, number one. Number two, they ignore the fact that some companies are developing really fantastic ideas out there. They might have all of a sudden been able to crack into the market and have a little free-market competition come in and produce some outstanding vehicles that wrested the automobile business back from foreign shores. Instead we just guaranteed that the foreign countries would maintain their automobile industries because we will not develop anything truly game-changing. We just decided to keep these dinosaurs in place. There I go digressing again.

We have to do something because these higher gas prices are going to kill us. Yesterday we found out that the average price of gasoline is $3.51 in the U.S. It is well on its way to $4.00, and I think it will make it before the summer. I was hoping it would hold off until summer, but it does not look like it will. There are too many tensions in the Middle East and elsewhere in the world. We just keep cutting our throats and shooting ourselves in the foot with respect to getting any supply here in the U.S. But that was not bothering investors.

Futures were obviously higher. When trading opened, they tested and came back to almost fill that gap. It was a nice setup because, once it held, there was the big reversal bar an hour into trade right at that peak from Friday. They bounced off of that and continued higher into the last hour with the indices posting solid, credible gains to the upside. Just when you think this market cannot go any further, it continues to move. I will talk more about this in the economy section and more on the sentiment as well. But this is one of those phenomena that I keep talking about and we have seen many times. Everyone feels the market cannot go any higher, and then it continues to do so. Now we have almost swung it the other way. Everyone feels the market has to go higher because it refused to go lower. That could be a problem as well, but timing is everything. Sentiment indicators are not necessarily a good timing mechanism. We just have to watch the technical picture knowing that there could be a bit too much ebullience out there. Could be. I will talk about that as well. Wow, all kinds of foreshadowing.

SP500, +0.7%; NASDAQ, +0.95%; Dow, +0.6%; SP600, +1.33%; SOX, +0.38%; NASDAQ 100, +0.9%

The SP600 was leading to the downside last week and caused us some concern. I was worried about the fact that they suddenly looked shaky, but they put in a very solid move to the upside.
Now the chips look suddenly shaky. Not breakdowns and not enough that I feel comfortable in shorting them. We talked about that here in the office. There were a bunch of messages going around and a bunch of yelling back and forth about what the heck the semiconductors were up to. In an upside market they were struggling. That is a long way from wanting to short them, though. As soon as you short them, you will get your shorts squeezed, so to speak. We will keep an eye on them. It is an important group. If the semiconductors start to break lower, that is not good for the market because they are one of the areas that tend to lead. They did not lead to last move upside, but when they came around they really gave the market some zip. If they roll over, they tend to lead downside. We have to be concerned about that. Overall, everything was up and looking good on the day.

The NASDAQ 100 was lagging the overall NASDAQ even with AAPL up over 9 clicks and topping $500 on the close. What strong stock. It never wants to stop. We have had those in the past, and I talked about that over the weekend. We have had DELL in the past that continued higher and higher. QCOM and NFLX were like that. When money wants to go into them, when they are printing money in the back room, people want to own them. That is what is happening with AAPL right now.

TUESDAY

We get some more economic data. There will be more earnings, of course, but they are winding down. Retail Sales is a big number, and that is out before the open. We will see if they can move back up after a rather lackluster showing in December. There are Import/Export prices. We will play attention to the Business Inventories half an hour into the session because we want to see if they continue to rise. They are expected to rise, but we want to see how much. Are the sales rising or falling? That will tell us a lot about what the consumer and the businesses are buying. We saw disappointing consumer and business consumption in the Q4 GDP numbers. This makes that an important number. There is a lot more heavy-hitting news later in the week, but I will not go through it now.

How are we going to factor the data into what we want to do with the market? This is something we have had to wrestle with for the past couple of weeks as the market has met our plan. It has done what we want it to do. Now we will see whether it will continue the move higher or not. We keep seeing good positions set up and we keep picking them up. I had more than one subscriber ask what we are we doing now. “Are we buying partials or full?” We are still buying partials. To me we are at a low risk/reward overall although individual risk/reward is quite good with these setups. We are tempering the individual setups with the fact that the market is at the prior peaks and has not been able to break through. They may just consolidate such as the Dow is doing with this lateral move and breakout. But you always have to take the risk/reward of the market and factor it into your individual plays.

We are not taking full positions on all of these. If it is a big name in a great position we may do that, but I will say that I am taking a full position on it right now. You need to do what your account can handle. Always factor in what percentage of your account (whether you have one or many) that you will put in any one play. You have to have good probabilities with the right kind of return. Do not put your entire portfolio at risk over one or two plays. That is the way it has to be. Otherwise you get hit and lose all your good work.

Balance your trades. Balance your positions. Keep them spread and relatively even. If you buy a very high-priced stock, you cannot buy as much of it as you could on a low-priced stock. You can buy more shares of a low-priced stock because it is about the percentage of our portfolio. That is up to you to set, but a good rule of thumb is 3-5%. Do not risk more than that on any particular trade if you have a lot of them going.

We have to go with what the plays are showing. What are the leaders doing? We will move into quality stocks in good position. We run the plays based on what support and resistance they have, keeping an eye on the sentiment. It is an important factor, but it is not a timing tool. We have to fold it in and see how it reacts with the overall technical picture. Technicals are always the key. Sentiment just gives you a heads-up to say that there may be a problem. That is why we watch it, and that is what it is for.

We will still continue to look for upside plays. I just went over some of the leaders, and there are still stocks setting up nicely. Semiconductors may be struggling overall or in specific areas, but others look to be getting money. If money continues to come in, then we will continue to put it to work. While we always have suspicions about tops and bottoms, you have to let the stocks show you that they are peaking out. That is why I am so concerned about semiconductors right now. They seem to be having a bit of an issue, but not enough to short them. Not enough to say that the market has topped out. I hope this all makes sense to you. Basically you take what the market gives. If it continues to show many sectors with good setups, we will take advantage of them.