SUMMARY:
- What do you know, there may not be a Greece austerity agreement after all.
- US stocks struggle all session, then in the last half hour stage a furious rebound back to flat.
- January Retail Sales half expectations due to auto sales. But are not auto sales jumping?
- December Business inventories rise in line, sales rise as well: no goods piling up unwanted.
- NFIB Small Business Confidence rises again, hanging on but showing some cracks.
- Late rebound a sign buyers are still there or a sign buyers are growing thin?

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After a modest bounce to start the week stocks struggle again at the old highs.

It may not be surprising, but once again it appears that a Greece deal is off the table. On Tuesday EU finance ministers decided not to meet with Greece regarding its petition for a next round of bailout funds. Of course that is tied to the austerity packages that Greece just passed yet again. It appears that Germany will simply not accept anything that Greece does. In other words, Germany wants Greece out of the EU. Germany does not want to pay for debts that it believes are simply unsustainable and impossible to handle. I believe Germany will make it impossible for Greece to comply, and Greece will be out of the EU.

The on-again, off-again saga reminds me of an old Bob Newhart show. Bob and his friends were drunk and ordering Chinese food. Bob asks Mr. Carlson what he wanted to eat, and Carlson said “Sweet and sour.” Then a drunken Bob said, “Make up your mind, Mr. Carlson!” It seems this buffoonery is the same. No one really knows what they want outside of Germany and outside of Greece. Thus we get the back-and-forth tennis match. Unfortunately for Greece, Germany is up two sets to none and serving for match point.

It was a rather ironic morning for many reasons. Not only the on-again, off-again deal, but Moody’s downgraded Italy’s and Spain’s debt rating. It put the UK, France, and Austria on a risk watch. The irony, again, is that Spain and Italy bond yields are hitting 12-month lows. Bonds yields are saying there is not as much risk. The bond market is typically the most accurate market in quantifying risk levels. Thus, it appears that the ratings agencies are way behind the curve once again when it comes to understanding real-world risks. As we know, the dollar LIBOR indicator has been steadily sliding, closing for a second day at 0.50. This measure is a relative indication of trust and liquidity among financial institutions between the U.S. and European banks, as well as European banks among themselves. It has been on a decline.

With the bond market, it is showing the situation in terms of the ability of sovereigns and their banks to function on a more normalized level. In layman’s terms, the heat is off the banks for now. That is allowing financial markets to rise. The question is whether the financial institutions and the sovereigns can, during this lull when the pressure is off, actually make progress in fixing the problems before the next crisis hits that freezes up the system. For now, financial markets seem to believe they can do that. But we have seen for the past two years the on-again, off-again view of whether that is possible. Right now, we are in the mode of yes, it is possible and we can do anything. Things look better.

I am still not sure whether we are simply whistling past the graveyard. Our stocks continue to perform, albeit over the past week and a half they have capped out their move and are trying to consolidate and determine whether they can continue to the upside or whether they pull back in a more sustained correction or consolidation that would be more historically in line with that markets do. Given some of the U.S. economic data, that was not quite as stellar as hoped. Along with the problems rising once again in Europe with respect to Greece, U.S. markets were under pressure early.

Futures were down and stocks did sell off in the morning. That was not the case the entire morning. Futures were relatively positive early morning, but as they moved toward the opening bell, they declined. That gave the buyers plenty of opportunity to step in. It was a soft open. No dramatic drop and nothing to rattle investors. They had the perfect ramp to come in and buy stocks if that was their pleasure. Looked like that would be their pleasure because stocks did rally after a lower open. When information about business inventories came out later, they were not able to sustain the move, but it was not a massive selloff. They just backslid into the afternoon, and we waited to see if the buyers would some back. It would have to be a late-afternoon surge if they did, unlike many of the solid days we have seen where it was a day-long process of low-to-high movement.

It looked grim at least in terms of the buyers returning until the last half hour of action. At that point the buy switch was flipped, and there was a ballistic shot upside in 30 minutes that moved the indices from down rather significantly (although no major losses) to basically flat with a mixed close across the market.

SP500, -0.1%; NASDAQ, +0.02; Dow, +0.03%; SP600, -0.5%; SOX, +0.4%; NASDAQ 100, +0.2%

The NASDAQ 100 gain was on the back of AAPL, of course. It posted yet another day in its accelerated rise above the 10 day EMA. People are piling into AAPL as it reaches for 500 and tries to close in on GOOG and some of the other big NASDAQ stocks. This is perhaps not a ballistic blow-off top move, although it has a lot of people concerned about what will happen when the move runs out. With the P/E ratio of AAPL, it probably will not collapse anytime soon. If it all of a sudden surged to 650 points over a weeks’ time, that would be reason for concern. But it would also be a reason for cheering because we would make a whole lot of money. Then we would sell some of our options and, if it fell, that is okay. We could sell some calls on our stock plays, buy them back when the stock bottoms out, and then buy new positions. But that is all a technical issue. We will see how it pans out. AAPL is providing support for the market, and thus for NASDAQ as it holds above its post-bear market highs.

WEDNESDAY

I will start with the SP500 where I left off. Again, right now the game appears to be between the October highs and the prior peaks. Nothing is suggesting there will be a major selloff beyond that. Of course you always have to be careful at that point. Here comes my oft-cited movie quote from Field of Dreams where Shoeless Joe Jackson admonishes Moonlight Graham to “watch for in your ear.” While we are looking to play between the stripes, so to speak, something could be brewing out there. There are some shakier stocks, as noted. Insider trading is up at 2.3B in February thus far. That is high. Perhaps the insiders are not too pleased with what they see, or perhaps they are just taking advantage of a nice run in the market. It is probably a little of both. Some weariness of what 2012 is holding because it is hard for them to keep up the pace they have had over the past several quarters with the easy comps when it comes to earnings. And don’t you think there is a little bit of concern going into the election about what may occur in November? Of course there is.

There is also worry about what happened with the market. It was down most of the session before a late surge of buying. Will that appear again? Is that a sign that the buyers have stepped in once more with ferocity, or is it just an indication that there was some money thrown at the market late? Perhaps it is doing what I have said it has done in times past, where the bids finally wear themselves out and you have the decline. There are fewer stocks in really good risk/reward positions. The probabilities of moving to the upside and taking on some major resistance are lower for success because of all that resistance. Stocks have made the easy runs that have rallied up off of the lows where there was really no resistance. Now some have already broken out and there is no resistance ahead of them. That is great. Those could provide very nice plays to the upside, but there is just not the same quantity out there. As Elrond said in the Lord of the Rings, “The list of our allies grows thin.” Our allies in the market are sectors and quality stocks that are in great position to rally higher. That is a bit thin now.

Am I talking about collapse? No. I reiterate, I am talking about whether the consolidation continues to hold and breaks higher or it comes back to test the October peak. The probabilities historically speaking and what we are seeing with some of the leadership growing a bit thin is that they come back to test somewhere toward the October peak. But it has not shown it will do that yet, so we let our current positions ride. We let our positions ride as long as they can hold support. We are pretty ruthless if it comes to cutting. We were going to close several positions, but the late rally surged them right back to the upside, so we held off. They held key support such as the 50 day EMA, the 20 day EMA, or some other support level. If they come right back down, if they cannot get off of that, if the bids do not return after that late surge, that is a very good indication that the market will have trouble pushing through near term and they might have a shakeout first. We want to be ruthless and close positions before they go all the way down so we are not banking on a rebound to get us out, or at least to give us a good opportunity to exit.

If we do not get a good surge to the upside, we need to watch our stop points. We will continue to look for the upside because there are plays that are still there. We are trying to get just the plays that have the better probability of success. We want those that do not have to break through a lot of resistance to give us our gains. At the same time, we are putting on more downside plays. Why? Because they are there. There were not many downside plays up until the past week or so. We have some stocks after earnings that have damaged themselves and are ready to fall further. When you put on top of that that other stocks have rallied and are exhausting themselves maybe at some resistance, and we could get the pullback to those October highs, they become more ripe to play.

We will have a different mix starting to show up on the report as we let our current winners run for us. That is how we play the game, and that is how we will continue to play it. We will protect what we have made. We may be a little overcautious. If the market does what we think, whether it pulls back near the October highs or breaks out from here, we will still be in position to make some great money. We just do not to want lose any money along the way.