- Stronger start, no follow through, and even a reversal in some key names.
- Weak but not as weak as expected EU GDP propped up by China promise to give money.
- New York regional PMI solid, Production and Capacity solid as well.
- Homebuilder confidence hits a 4 year high. Do you trust the used car salesmen of the housing industry?
- When you believe 2.9% GDP growth is a good thing, 5.2% to 6% unemployment is full employment, and growing the deficit by $5T is a good cut of spending, you have problems. In short, the US has problems.
- Trips to support increasing in frequency.
- More downside plays are setting up and providing good risk/reward potential. That tells a lot of the market story in itself.
- Remain vigilant and reasonable in expectations as the pullback looks to be taking root.

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Stocks start positive on some upbeat news but a big reversal by AAPL may signal the pullback is on arrival.

For once the futures were sporting a pretty solid upside gain premarket. They looked good. Indeed, it almost looked too good to be true and, as it turned out, it was. There was some good news on the U.S. front. The New York PMI came in at 19.5. That topped expectations that came in around 14, and it was stronger than January. Good for New York. Manufacturing continues to look solid, coming back from a little dip over the last couple of months. That is a positive for the U.S. across the board. Industrial Production was not nearly as good as expected at 0.0%. But December was revised up over two times to 1%. Capacity Utilization maintained a multiyear high at 78.5%. That was down from the 78.6% expected, though, again, December was revised up to 78.6 from 78.1%.

It was not just the U.S.. The EU came in with very weak GDP readings at -0.3% overall. Germany was down 0.2%, and France surprised at a +0.2% gain. Even with these weak showings, it was better than expected. Good grief. It makes you wonder what a bad case scenario would be. But things are tough in Europe, and the fact that they are hovering around flat and not too negative is a positive thing. China helped out. We have some Chinese ambassadors and officials visiting the U.S., and they are saying they will participate with the EU buying some more debt. They call it investing in the EU. Hey, whatever it takes.

That had futures to the upside. They looked solid heading into the day, but it did not last. We had a rally off of the open, and it looked like the market was ready to make a break to the upside. Remember, stocks have been trading in that lateral move. Even after the market pulled back some today, it is still in that lateral move, so it could make the breakout or the breakdown into the test I talked about on Tuesday. On Wednesday morning it looked like they might make the break to the upside. As noted, stocks were moving upside, but then something happened along the way. AAPL soared to a new high, hitting over $526 per share on the day, but then it reversed. Classic action. A gap to the upside, a further surge, and then a reversal to the downside. It closed at 497 after hitting 526 on the high. Yes, the old 30-point reversal, and on high volume. That is a classic sign that a stock is overdone near term.

There was similar action on NASDAQ, although not on as grand a scale as AAPL. There are other stocks that do trade on the NASDAQ. There is the rally, the gap higher, the further run, and then the reversal to negative. It was not as dramatic, as noted, because the move higher has not been as dramatic. When you look at the NASDAQ 100, you see more of what is going on. This move higher is all AAPL. AAPL makes up half of the NASDAQ 100′s move. Same action: Gap higher, further run to the upside, and then a reversal. Classic, near-term topping action. When the market showed this classic, near-term topping action and AAPL sold off, the market sold off with it. Steadily down all afternoon, and there was no last-half-hour salvation as was the case on Tuesday There was a bounce off of the lows that kept things from getting totally ugly, but there was no bid to save the downside and the indices closed lower. The Dow put in its worst day since late December. All in all, it was still not that bad of a day.

SP500, -0.54%; NASDAQ, -0.55%; Dow, -0.76%; SP600, -0.83%; SOX, +0.48%

The chips are still finding buyers even though they look kind of shaky in many respects.

THURSDAY

It is a Thursday of an expiration week. That can explain some of the action in stocks such as AAPL, some of the transports, and others that are shaky but not breaking down. There is just some jostling of positions, and that would be somewhat understandable. But the transports breaking is a bit nefarious, and that means we have to be very watchful about what happens to the indices over the next week. We have expiration, and we also have a long weekend; it is President’s Day on Monday and the markets will be closed.

Thursday we will have Initial Claims. We will have Housing Starts, and that is after that great home builders’ sentiment survey. There is Core PPI, and there is Philly Fed. All important. And that leads into the Leading Indicators on Friday and CPI for January. Those old consumer prices. Of course they will strip away food and energy, the two parts that make the most difference to our wallets and, thus, in an election year.

That is the news. The news is affecting what we see in the markets right now, but really it is bigger picture. It is more than just what the recent economic data is showing. The markets are trying to look down the road 6, 12, and even 15 months to glean what is going on. For now they look solid and they are holding their lateral ranges. Wednesday was not great. We saw key stocks turning and we saw key sectors in trouble. But as we have seen in past times where it looked like the trouble had hit looking back in late January for instance and early December that was just a transitory event in a further move to the upside. Indeed, the indices look much stronger right now than they did back then. There is not nearly as much volatility. Nice, calm, lateral consolidations. That keeps everyone relatively sanguine about the future. But of course if you become too sanguine, you can get knocked into harsh reality. We have seen sentiment indicators jumping to the positive side. We had the Barron’s cover with the Dow at 15K. It is that type of indication that would suggest that things are a bit too complacent right now and a correction would be due.

Those corrections tend to be just painful enough to shake people out. That is why we have been selling positions. We still have been taking gain off of the table. If anything gets close to looking crosswise at us, we are closing them. We are just not taking any chances. We may get burned on some upside. If this thing breaks out, we could lose some value to the upside, but we still have good positions in play. If there is a breakout before a breakdown, we will have good positions to ride that move.

Right now, looking ahead, we are not going to be chasing so much upside. If the opportunity presents and it is a great risk/reward in itself, we can pick up a few positions. But we will also be looking to the downside. We picked up some IWM puts today. Remember it had that island reversal and tried to cover. But look at this engulfing pattern today. It looks like it is going to the downside. There is GOOG that we can play to the downside. Maybe we should have gotten in today, but it recovered. We will see. There is plenty of downside there. We will look at more downside. Why? Because there are more downside plays right now that are set up. They provide a decent risk/reward compared to the upside. That tells much of the story itself does it not? There are now more downside plays setting up that provide good risk/reward versus the upside.

While the overall character of the market has not changed, while the indices are still in their consolidations, they are showing more signs of wear. We could get that test but, again, it is no foregone conclusion. And, again, even if we do get the test we are looking at the October highs. We are not looking at any major selloff. That still keeps us in very good shape to make plenty of money in this market. We may just have to rent some downside plays over the near term if things break to the downside. Then we will be looking at upside as the air and forth is taken out of some of these overextended plays and we get some good setups and better probabilities for a move back to the upside.