Stocks Ride the QE3 Momentum Higher

MARKET SUMMARY

- Stocks ride the QE3 momentum higher in the face of daunting economic data, but close well off the early highs.
- On confusing stock market rallies with economic turns.
- Mortgage yield/Treasury yield spreads compress to a record low, just as Ben wants. But will the money get to where he wants it?
- Marc Faber: Fed will destroy the world.
- Retail sales headline jumps, take out autos and gas, it slumps.
- CPI surging, pushing the biggest gain since July 2009 on food and gas. But we don't eat and drive, right?
- Industrial production flops and Capacity posts a major backtrack in August.
- The outrider: Michigan Sentiment surges as stock market rises and inflation expectations fall.
- Manpower reports rather shocking numbers.
- Gasoline at an all-time high for this time of year.
- It would appear our image in foreign eyes is no better.
- Stocks pull back late in the session ahead of the weekend. Will a test similar to the prior Thursday rally ensue? Need a bit of backfilling for some better buys.

Stocks Spring in the Arab Fall.

Remember the old commercial about the kid who leaves Santa the cheese for a snack and receives a copious amount of Christmas booty? 'Ah the power of cheese' the commercial says. Despite outbreaks of violence at 20 US facilities around the world in what is dubbed the Arab Fall (also called the US Foreign Policy Slumber), stocks continued their rally on Friday. Ah, the power of . . . liquidity?


Ahh, the power of . . . Liquidity?

The stock indices finished well off of their highs but still logged impressive gains on top of the Thursday blowout (the second straight Thursday surge) as some sectors that sat out the Thursday surge played catch up (e.g. semiconductors).

SP500 5.78, 0.40%
NASDAQ 28.12, 0.89%
DJ30 53.51, 0.40%
SP600 0.94%
SOX 1.19%

This week saw SP500, NASDAQ, DJ30, SP600, and SP400 (mid-caps) all break to new post bear market highs, the latter two moving to new all-time highs. DJ20 transports have put in an impressive 7 session run, but for all the work, they are still well off their post-bear market highs hit in July 2011. Transports are up, but they are not confirming the Dow 30's new high. Semiconductors? Well, they look ready for a continued move up, but they were stuck in the gate. They finally broke higher and Friday traded to a new recovery high . . . only to fade and close below the early August peak. Strong overall, but still a few bugs in the system.

The Immediate Impacts of QE3.

Of course the big news continued to be the FOMC and its open-ended QE3 that started (and I repeat, started) with $40B/month in purchases of MBS added to its ongoing Operation Twist. Friday you could see the immediate impact of the action as the spread between mortgage rates and US Treasuries hit all-time lows. It won't take much more of this before the US 30 year mortgage is, in the market's pricing mechanism, AS SAFE AS Treasuries!

Confusing a liquidity rally with economic growth?

As Friday trade was ready to get underway and as stocks were up, particularly industrials ready to gap higher after somewhat of a surprising lukewarm response on Thursday,

Economic growth did not occur with the prior two QE binges, and it won't occur with this one. As I have reported before, and it is reporting versus opining, it won't create economic growth. History shows excess liquidity from loose monetary policy does not create growth, it just facilitates it when the right policies are put in place. Sure Bernanke used some lofty rhetoric Thursday about helping the middle class and creating jobs, but economic history shows liquidity itself does not do this and Bernanke knows it. Here it is again: liquidity keeps the economy afloat, from grinding to a halt. It is the super grease applied in the hope the economy can keep stumbling along until the President abandons his socialist agenda or is replaced and Congress can actually hold a vote on a budget, the fiscal cliff, or anything other than a vote to adjourn.

Of course there are those who think more with their emotions than with whatever head they have, and on Friday they were emotions and mouths were running faster than their brains. There is one certain balding fellow who has an MO of talking himself into a frenzy and then spouting off. You can see the adrenaline kick in and his speech shift gears as he feels the rush. Well, he bowed down to Bernanke Friday and said Ben was working for those without jobs. That was just the warm up.



Cramer works himself into a froth Friday morning.

BAC, CAT, JOY, FCX were all declared buys. Never mind BAC was up 18% in a week and was going to gap higher, just below the March peak. Cramer declared China has turned and India is coming back. He reiterated his buy on KO in the crescendo to the bluster. Why? Apparently because stock prices are turning along with or ahead of foreign markets. Also apparent: he is the type of emotional response person the Fed expects its 'wealth effect' polices to work on.

Once again there is confusion between a liquidity driven rally and an economic driven rally. Typically stocks do presage economic recoveries. In this instance they do not. Stocks have rallied, in some cases indices to new all-time highs, off the March 2009 lows. New all-time highs suggest things are great economically. The facts show, however, they are not.

Two quarters of barely 4% growth in the entire recovery that started in 2009. 1.5% average economic growth the past year. Unemployment in reality over 11% and the jobs that have been created are massively skewed to the lowest end of the pay scale. We are still 4.6M jobs in the hole from when the recovery supposedly started. US workers are making their lowest incomes in 17 years with the median income dropping 4% in four years. 8.7M people added to the disability roles in 2012 alone. US citizens in poverty have jumped to 15% of the population. 1 in 7 citizens are on food stamps. US competitiveness has fallen from number 1 to number 7 in 4 years.

Where is the money? The Fed liquidity and the close to $1T in stimulus went to large corporations, financial institutions, and overseas (remember part of the stimulus was to give Brazil money to drill in US owned waters?). Banks get to borrow money for nothing and then choose whether to lend or sock it away in guaranteed returns. They have chosen to do the latter and many STILL are losing money. Administration initiatives and policies were geared to help the large multinational exporting companies and friends, not the small businesses who rely on the US economy and US wages for their prosperity, the businesses that create the majority of US jobs and create our wealth.

The blather was absurd and wholly unsupported by the facts. Yes liquidity is powerful. Open-ended buying of MBS (and soon Treasuries, corporate debt, small business debt, etc.) has profound effects on stocks . . . and the dollar, and gold, and retirement accounts, those living on fixed incomes (we are tossing the retirees to the wolves), etc. But IT DOES NOT MEAN the economy is strong or that China or India are back because some industrial stocks are responding to the liquidity rush.

The question is, will the money get to where Ben wants it?

It also does not mean that the money gets to the middle class as Bernanke opined or the unemployed as Cramer spluttered. Since 2009 the Fed has been very generous with its money. The Administration claims it has created millions of jobs and that the economy is headed in the right direction. Yet look again at the statistics cited above. Has the money moved to those needing it? The empirical evidence of the status of the average US citizen shows it has not.

Contrary to the Administration's stump speeches and daily press briefings touting how it is focused on the middle class and the need for a vibrant, healthy middle class, its policies have left them in shambles. Yes it was bad to begin with but in four years things have turned dramatically worse. There is a reason the above stats show 4 years as the benchmark. That roughly coincides when this 'recovery' supposedly started and when the President took over. In that period the plight of the middle class has worsened while the VERY groups vilified have indeed prospered under these policies. Handouts do not lift they impoverished; they ensure they do not rise because they are trained to take handouts versus take the risks necessary to prosper, i.e. get more education, start a business, etc.



Marc Faber: The Fed's policies will destroy the world.

Faber emphatically stated Friday that "the fallacy of monetary policy in the US is to believe this money will go to the man on the street. It won't. It goes to the Mayfair economy of the well-to-do people and boosts asset prices of Warhols."

A Mayfair economy is one that benefits the already well to do. That is EXACTLY what we have seen since 1999 even with the 'reforms' of Dodd/Frank, the banking regulation law that has managed to concentrate more assets in the five largest banks than before and will, as many economists are predicting, drive small banks out of business.

Things are not getting better for workers, for the middle class.

In the meantime, Manpower reports that 72% of the companies surveyed are NOT planning on any hiring anytime soon. Why? Because of the ongoing uncertainty with healthcare costs (we still don't know the costs even though we have passed it to see what is in it as Pelosi advised), the economy, the election, and most often cited, the fiscal cliff that will raise taxes in 7 areas at last count, including the AMT, healthcare, marginal income tax rates.


Waiting for a job fair as companies refuse to hire.

On top of that, for the first time in history gasoline prices at this time are above $4/gallon. Yes those energy and foreign relations policies certainly are working in our favor right now.



Gas tops $4/gallon on average in the US in September for the first time ever.

The terrible thing is, as the dollar further implodes thanks to the open-ended QE3, oil prices will only rise and thus gasoline prices, because oil is denominated in dollars. Every barrel we import rises in price as the dollar declines. It is a vicious cycle where the same people who have lost out the last four years continue to lose out.

With the CPI for August surging 0.6% overall (and that INCLUDES food and energy because those are the most relevant costs right now Mr. Bernanke), the largest surge since June of 2009, it does not look as if inflation is under control. That made the Michigan Sentiment Survey surge in September laughable. Why? Because the survey showed inflation expectations FALLING. How wrong can that be, and thus what a misguided report to use for any barometer of economic health. Remember this, consumers may feel good, but if their incomes are falling as they have been and credit as tight as it is despite the Fed's liquidity measures, they cannot keep spending even if they want to.

The Arab Fall as viewed abroad.

It always seems to be the case when we focus on our internal problems and design policies to address them we do so in a vacuum, pretending nothing else will impact what we do internally. Of course that is never the case as it almost always occurs that just when the Fed or Administration takes an action for a planned result, something occurs elsewhere to throw a monkey in the wrench as John McClain in 'Die Hard' would say.



The Arab Fall and attacks against US embassies and interests abroad is now something we have to respond to and spend money on. This when we don't have any money. Our enemies know we are in a precarious economic position; you only have to read a paper or scan the internet to know that. As our economic policies the past four years have damaged not helped the middle class, our foreign policy is revealed as failing as well, at least in the eyes of other nations.

German news outlets concur Obama's 'be nice to them, they will be nice to us' has failed.

Liberal leaning news outlets:

"Four years ago, Obama pledged to seek reconciliation with the Muslim world. Now, it is doubtful whether he has succeeded. The US and its European allies now have to ask themselves how much support they still enjoy in the countries of the Arab Spring."

Conservative leaning news outlets:

"US President Barack Obama's Middle East policy is in ruins. Like no president before him, he tried to win over the Arab world. After some initial hesitation, he came out clearly on the side of the democratic revolutions. In this context, he must accept the fact that he has snubbed old close allies such as Israel, Saudi Arabia and the Egyptian military. And now parts of the freed societies are turning against the country which helped bring them into being. Anti-Americanism in the Arab world has even increased to levels greater than in the Bush era. It's a bitter outcome for Obama."


OTHER MARKETS

Dollar. 1.3316 versus 1.2981 euro. It has officially broken above the 1.3 euro level, but we call it breaking below because it is a weakening of the dollar versus a strengthening. No doubt that the QE announced on Thursday had a lot to do with the Thursday and Friday declines that pushed it through an important support level and down to the next important support level, but the trend was already in place at least a month before that. It topped out in late July, putting in something of a head and shoulders, and it has rolled over and broken down.

The big break came just over a week ago on the Friday after the ECB announced that it had agreed to its deal. That plunged it through an important support level that was marked in part bit March 2012 peak. It has already taken out this range of resistance and is at the next level. It is, however, now a series of declines. There will be rebounds to test the levels that have been broken, but the dollar is in a significant downtrend, and there is nothing right now to prop it up. The Fed has embarked upon an announced, open-ended QE. It is not only open-ended as to time; it is open-ended as to amounts and as to what assets the Fed will interact with in order to achieve its policy goals which are purportedly to assist the middle class. Everyone talks a good game about the middle class, but talk and even the policies promulgated thus far have done nothing but drive the middle class further into its own depression hell.


Bonds. 1.87% versus 1.74% 10 year US Treasury. Bonds were gapping, screaming to the downside with a 13 BP decline. These are incredible moves. It gapped below the mid-August double bottom lows at the 200 day EMA. There was a gap up at that point back in May. It has totally given that up, and it has broken that support. As Bill Gross stated on Friday, "Buy a house, buy gold, buy assets." He has been selling bonds on this rally, and now he has basically sold out of bonds, maybe shorting them.

Bonds are heading lower and, as noted, Bernanke is getting what he wants in the mortgage-backed security buying as the spread between mortgages and US Treasuries is the lowest it has ever been. Indeed, it is not much further before mortgage-backed securities -- mortgages themselves --could be as "safe" as US Treasuries in terms of their yields. That is almost incomprehensible. That means Joe down the street is as good of a risk as the US government. That is a startling prospect, but that is exactly what the market is telling us based on the movement on Friday.


Gold. 1772.80, +0.70. Gold continued its uptrend, but it was nothing compared to Thursday and the Thursday prior when the ECB announced its agreement. Gold is leaping higher, testing, leaping higher, and testing. It is closing in on the prior highs at about 1920 from September 2011. It has interim highs ahead of that around 1792 to 1800, and those will be the next resistances. Gold backed off from a high at 1780 on Friday, so it is feeling a bit of the repulsion at this level. It has had a tremendous run over the past month and a half anyway. A little triangle at the bottom of the pattern and then an explosive move upside. It has had a long run. It could move up a little bit more, but it is starting to feel the resistance, and it will most likely post at least one of these flag tests. After this kind of run, you might expect something more along the lines of this lateral pennant pattern that formed before the break higher.

Is there anything to make gold go down? Not really. The Fed has open-ended buying. The tension around the world with US interests in embassies and now the embassies of other countries is exacerbating the fear and the push into gold. The question is whether it will continue such massive runs. Likely not, but we could see steady gains as inflation rallies. The CPI jumped up 0.6%. Even though that was in line with expectations, it was the biggest gain since June 2009. Craziness is out there, but the Fed says all of this is transitory, of course, and does not mean anything. Does anyone really believe that right now?


Oil. 99.00, +0.69. Oil closed well off of its high. It is being driven a lot by fear with respect to what is going on in the Middle East, but it is also driven by the dollar's decline. Every barrel of oil it marked in dollars, and thus every decline in the dollar increases the price per barrel of oil that we import. It will not get better anytime soon because the dollar continues to fall and inflation continues to rise. Thus oil will most likely rise.

It broke out this week above the 200 day EMA after three weeks of toiling laterally below that resistance. It was a strong break on Thursday, of course, as the dollar plunged, and a continued moved on Friday. Although, as noted, it did close well off of its high. It is in a resistance range from November through January of 2011 and early 2012. That is a point it will likely have to work through and get up to the lows of the high range from February and March. That puts it right at the late-April/early-May high near 106. It is right at the century mark. It has a little room to run higher, but the point is that it is steadily working its way higher as the dollar falls and tensions rise in the rest of the world, particularly in the oil-producing regions.


TECHNICAL SUMMARY

Internals.


Volume. NASDAQ +1.96B; NYSE +8.5%, 792M. Another upside day with some expanding volume. That is always a good sign. The indices did close off of their highs, so it was not a clean, pure move to the upside. There was some selling pushing the indices back to the downside, and that shows the VIX action. There could be a little top on this move after two huge surges over the past week. It is a big move with a breakout. Markets like to test breakouts, particularly when there is nothing to drive the market since we know what the Fed will do.

That does not mean it will not continue to rise. It simply means that the Fed has acted, the news is out, and the big surge is in. Now it is a matter of consolidating and rallying just as you would expect in a normal uptrend. The point is that we could get a bit of a pullback similar to what I showed earlier when discussing the VIX, and that provides buying opportunities.


Breadth. NASDAQ +1.8:1; NYSE +2.2:1. Breadth was not fantastic on Friday. Decent, solid, and unspectacular.


New Highs. NYSE: +133, 536; NASDAQ: 253. There was a new level of highs on the NYSE not seen in about a year. That increased even further on Friday. The NASDAQ is nowhere near that level. The big move on the NYSE was due to the small cap index and the mid-cap index punching into new all-time high territory. There are many more stocks on the SP400 and SP600 than the SP500, of course. There are many more small stocks than there are large cap stocks. It is just the nature of the game. In any ecosystem, there are fewer of the biggest predators. That is why we see the new highs perform so well. It is good news to see the small and mid caps performing. It belies the economics we are seeing.


THE CHARTS

SP500. SP500 has moved to a new post-bear market high. It closed nicely higher, but it gave back almost twice as many points as it made on the session. That just means that it may be a little tired after two huge rallies in one week. It may want to pullback just as it has done on these previous pullbacks when VIX got down to the level where it is now.


NASDAQ. NASDAQ held more of its gain. Of course it has been a little bit behind the other indices. It is due for some catch up. It broke above its March peak on Thursday, and it extended the move on Friday on more volume. It may want to come back and test a bit as well. It looks solid, but every big move usually gets tested. With the Fed out, big moves may not be as plentiful, but there will still be steady inputs of money into the market because a lot of funds will want to play catch up through the end of the year.


SP600. There was a new high here. It closed somewhat off of the high, but it was almost a 1% gain. Very strong and solid. It is continuing the move. This has been quite a blast higher over the past three weeks, and if the rest of the market wants to take a pause, it could do so as well. But I do not see anything stopping the momentum.


SOX. SOX is a bit different. It broke through the August peak early, but it could not hold the move. Even though it gained the most at 1.2%, that has not broken it out of its pattern. Still a double bottom with handle. It tried the breakout and was rebuffed on Friday. It still looks pretty good, but it is notably lagging as is the DJ20. Obviously all is not well, and the analysis is interesting.


Summary. Small caps and mid-caps are performing well, and that would suggest that the economy will perform well down the road. Of course the NASDAQ, SP500, and the Dow are performing well. Large caps get the money in these kinds of situations. Not all of it, but they are automatic buys for a lot of fund managers. They look at certain names and put money into them when the Fed or some other force says "buy stocks." That is just what they are doing. The interesting feature is that the DJ20 is nowhere near its high, and the SOX is nowhere near its highs either. They are lagging. Those are two very economically sensitive sectors. Semiconductors are commodities, and they go into everything. Some are in more demand because of the mobile revolution with the iPhone, Samsung, and the tablets. They are in great demand, but they are lagging overall, as are transports. Very important. But look at FDX. It has warned that things are not totally rosy. I have talked to a lot of trucking, transport, and shipping companies. They are doing nothing ahead of the fiscal cliff because they want to see the outcome.

It is very telling that the two important economically sensitive areas are lagging substantially, even as some of the economically sensitive areas are moving higher. Why would the small caps and mid-caps be performing if the economy will not do that great? Remember what I said last week: The market turned in 2009 when the Fed finally put together all of the pieces of its puzzle in terms of aid. The last pieces involved buying mortgage-backed securities and the debts and paper of small companies. That provided the impetus that turned the market. I believe the runs we are seeing in the small caps and the mid-caps are based upon a belief that the Fed will accomplish similar types of stimulus specifically related to them as part of its steps to drive employment higher.


LEADERSHIP

It is not so much what stocks were moving up; everything is getting a bid. It is how they reacted on Friday after the Thursday surge and an additional move on Friday to end the week.

A lot of stocks such as AAPL that have jumped and gapped higher but then posted a doji on the day. AAPL is one, AMZN is one, and GS is another. SCSS is surged higher. It has been a great two weeks. They reached near the prior peak and faded off the high. We booked some gain. BAC is a similar story. They are not reversing or falling over, but they may be a little tired now. If you factor in the VIX and its action on Friday and what happened the last time the VIX got to this level, we could be due for a pullback. As noted, that would not be a bad thing.

There is some amount of weakness in the drug sector which has been one of the stronger defensive areas. It is a little bit weak now. Utilities are a bit weak, as well. They are defensive. They have been down, and they were down on Friday. They bounced on Thursday when everything moved, but Friday told more of the tale after the euphoric rush was over. Utilities are a bit defensive and a bit weak. I am not saying that drugs are breaking down or utilities are breaking down; they are just lagging. That has been the case of late when the appetite for growth areas in the market resumed. We saw that in June and July. Drugs had led the way higher, but when the rally in June occurred when most of the market moved higher, the drugs based out and tended to consolidate more.

There are defensive areas under some fire, but that simply shows you that the buying is broad and looking for growth areas versus playing defense because of the economy. The economy had a lot of those drugs and health care stocks looking good because the economy did not look good. With the promise of stimulus and now stimulus here with more liquidity, the prospects for the rest of the market look good or even better, so that is why those stocks have jump back up as funds rush to get money to work and some play catch up before the end of the year.


THE ECONOMY

Retail sales headline jumps, take out autos and gas, it slumps.

Retail Sales, August (8:30): 0.9% actual versus 0.7% expected, 0.6% prior (revised from 0.8%)
Retail Sales ex-auto, August (8:30): 0.8% actual versus 0.8% expected, 0.8% prior



Take out Gas and Autos and you get a 0.1% gain versus 0.4 expected and 0.8 prior (revised from 0.9).
As you can see, gasoline was a large part of the increase: consumers may be buying less but the price is higher and sales are measured in overall money spent, not units.

This is the fifth expectations miss in six months.


CPI surging, pushing the biggest gain since July 2009 on food and gas. But we don't eat and drive, right?

CPI, August (8:30): 0.6% actual versus 0.6% expected, 0.0% prior
Core CPI, August (8:30): 0.1% actual versus 0.2% expected, 0.1% prior

Biggest rise since June 2009


Motor fuel up 9%, food 0.2%, rent and housing 0.3% each. Fortunately no one needs gas or food so we can strip that out and get a tame 0.1% reading. All is well. Print away.


Industrial production flops and Capacity posts a major backtrack in August.
Industrial Production, August (9:15): -1.2% actual versus -0.2% expected, 0.5% prior (revised from 0.6%)

Largest 1 month decline since 3/2009, ironically when the first QE kicked in.

Capacity Utilization, August (9:15): 78.2% actual versus 79.2% expected, 79.2% prior (revised from 79.3%)

Lowest level of the year and a big drop at that.




THE MARKET

SENTIMENT INDICATORS

VIX. The market rose on Friday. It rose on Thursday, of course, but on Friday it posted some fairly decent gains. But look what happened to volatility: It rose as the market rose. Typically, they move inversely. In other words, as fear rises, volatility will rise, and the market falls. Looking at the chart, volatility rose 3.27% on Friday as the market rallied. Look where volatility rallied from. This is the old low that I have been talking about from April of 2011, March of 2012, and this August. It bounced off of those levels each time it has hit them. It is interesting that volatility moved higher on Friday even as the stock market moved higher, because that is an abnormal type of move. The fact that it is bouncing off of this support level is noteworthy. I am suggesting that the stock market is ready to fall based on this, if this relationship remains true.

Looking at what the SP500 did last time the volatility index hit this level and bounced, it was just a modest fade. That fade formed, broke through, and it looked like it was in trouble. But then it reversed two Thursdays ago with the ECB agreement. Volatility rose off of the support level, but SP500 faded just modestly. So, yes, while the market may be in for a bit of a pause based upon this (caveat: if that relationship holds true), it may not be much of a pause. That would give us more of a buying opportunity that we would like to see after that Thursday surge followed by furthered Friday gains. We had some great positions moving into that surge, and we are happy about that. But you always want to take advantage of more gains when they show up. If you get a pullback with something like the VIX bouncing and the SP500 fading a bit, you want to be ready for that and use it to your advantage.


Bulls versus Bears

Bulls: 51.1% versus 51.0% versus. Edging higher as investors waited on the Fed. This will no doubt soar next week as the FOMC decision and the marekt surge are factored in. Then you have to worrk about the 60% to 65% bullish levels that flash a warning sign. A big move up over the past month from 43.6% and that after five at 39%. Undercut 35%, the threshold for bullishness, in early June. You would expect it to rise and it has. Still not at a dangerous level, just working as it should. As noted, hit 34% in early June. It did its job and the market is on the rally. Hard drop to 34 from 39.3% as economic reality and a choppy stock market hit. Off the 55+ level hit in late February. That was the highest level since April and May of 2011, the peak of the post-bear market high. 35% is the threshold level suggesting bullishness. To be seriously bearish it needs to get up to the 60% to 65% level.

Bears: 25.5% versus 24.5%. Spent two weeks at 24.5%, down from 27.7% six weeks ago. Bulls were not buying it, but they will be next week. Never made it to the 35% that can be a bullish indication, but the bulls were weak enough back in June. Over 35% is the threshold to be really be a good upside indicator. For reference, bearishness hit a 5 year high at 54.4% the last week of October 2008. The move over 50 took bearish sentiment to its highest level since 1995. Extreme negative sentiment. Prior levels for comparison: Bearishness peaked at 37.4% in September 2007. It topped the June 2006 peak (36%) on that run. That June peak eclipsed the March 2006 high (33%) and well above the 2005 highs that spawned new rallies (30% in May 2005, 29.2% in October 2005). That was a huge turn, unlike any seen in recent history.


NASDAQ

Stats: +28.12 points (+0.89%) to close at 3183.95
Volume: 1.959B (+6.03%)

Up Volume: 1.58B (+170M)
Down Volume: 424.11M (-20.46M)

A/D and Hi/Lo: Advancers led 1.82 to 1
Previous Session: Advancers led 2.54 to 1

New Highs: 253 (+34)
New Lows: 23 (+4)


SP500/NYSE

Stats: +5.78 points (+0.4%) to close at 1465.77
NYSE Volume: 792M (+8.49%)

A/D and Hi/Lo: Advancers led 2.2 to 1
Previous Session: Advancers led 3.77 to 1

New Highs: 536 (+133)
New Lows: 11 (-2)


DJ30

Stats: +53.51 points (+0.4%) to close at 13593.37
Volume: 185M shares Friday versus 119M shares Thursday.


MONDAY

Next week we have more economic data, of course. September is always considered the worst month for the market. It tends to drop more in September than any other time, but we had a rousing start thanks to external forces upon the market. Frankly, trends and patterns in the market during different times of the year always have to take second chair to external forces that matter such as the policies from Congress and the administration and the monetary policy and asset purchase movements of the Federal Reserve.

Nonetheless, we still want to check out the data because it tells the rest of the story, as Paul Harvey used to say. It tells what likely happens when the Fed stimulus, even though it is there, is no longer effective at effectuating the plans for the Fed and, vicariously, Congress. Why? Congress would not have gone on break if it did not know that the Fed would act. There was the Schumer admonition to Bernanke, "Get to work Mr. Chairman," and he fell right into their hands. Since Bernanke figured they would not act, he acted. If he did nothing, then they may have had to act. That is how it works. These elected officials are there to get elected again and again and again instead of going home after a couple of terms. They will not address something if they feel it is unpopular and would inhibit their chances of reelection. I am telling you what you already know, but it is worth pointing out every once in awhile.

The data starts on Monday with Empire Manufacturing. It is expected to be negative but to improve. Why? Michigan Sentiment improved, so everyone thinks things must be getting better. But, as I talked about earlier, it was bogus. They feel like inflation expectations are down when inflation is running higher. In any event, it will be important to see since it is a regional manufacturing report.

We have a bit of housing outlook on Tuesday. It is nothing major, or at no one will really pay attention to it. Who cares about their current account or the TIC index and how many countries are actually buying our securities? On Wednesday we have the housing starts and building permits for August. That will be huge. Existing home sales will be huge as well. On Thursday we have the jobless claims as always. We will also have Philly Fed, and that is quite significant. With Empire Manufacturing, that will give us a pretty good idea of how the manufacturing sector is faring after its slowdown over the past several months.

We have some economic data, but we already have the Fed out. It is not quite time for earnings yet, so the market will be working in the way a market typically ebbs and flows. As noted earlier, with the VIX where it is and trying to bounce and the fact that we have had two huge surges in a week, we may get a little pullback. Maybe not as long like the two and a half week pullback we had most recently, but maybe a three, four, or five day turn (maybe not even that long) before a renewed move back to the upside.

Stocks could always come out of the gate running next week. They may try to make that move to the upside with funds feeling their oats, so to speak, and wanting to get out and play catch up toward the end of the year. A lot of funds were very negative about the market. As I often say, you can have your feelings based on what the economy and the action of stocks tell you, but you ultimately cannot let your feelings get in the way of what the market is doing. Your feelings can get you ready and have you on edge as you should always be. Do not ever assume anything in the market; as soon as you do, you will get killed. They get you ready, but you have to check them at the door when the market starts showing you things or individual stocks are saying "buy me" or "sell me." That is all there is to it. We are not smarter than the market. We can be in position, but we have to do what the market does. You are not ever smarter. You cannot tell the market what to do, but you can anticipate its moves and know how it has been moving. Then when it makes that move, you make the play because you are ready. That is why we look at all of this.

What we need now is a bit of a pullback, no doubt. We could use a test as the VIX may be indicating. The pullback lets us get some positions on stocks that jumped ahead or gapped away on Thursday or Friday. There are still good stocks out there, but they are extended, and we want to let them come back and get better entry points.

The question that always arises is, can we still look at the stocks that have run a long way? Sure you can. If they set up in this kind of environment with the Fed in the back of the market pushing, stocks that have run high can always run higher. You just want to get a good buy. You do not want to jump in because Cramer or someone on Friday was saying you need to buy BAC or CAT. BAC moved huge. CAT is up for two weeks, and it gapped to the upside on Friday. Not a good time to buy. Do not get carried away like they are. The problem with listening to these guys is that they get emotional and they tell you to buy at the wrong times. Check your emotions at the door, know what a good buy is, and know the stocks you want to buy. When they set up, you can buy them. In this environment with the Fed putting a bid in the market, you will be able to buy on pretty much every dip. The Fed is there, and the money fund managers will be coming in to push stocks higher toward end of the year.

Find stocks that you like. That is what we do every day. We make plays on the ones in good position. We always have the ones that we would love to play, but a lot of them are not in position right now. They will be after a pullback, however, and we can put more money on the table with respect to those in new plays. Or if they got away from us before, we can initiate totally new buys on them. I will see you on Monday. Try not to get down from all the news around the world.

Have a great weekend!


Support and resistance

NASDAQ: Closed at 3183.95

Resistance:
3227 is the April 2000 intraday low
3401 is the May 2000 closing low

Support:
3134 is the March 2012 post-bear market peak: broken, not forgotten.
3101 is the August 2012 high
The 20 day EMA at 3091
3090 is the mid-March interim high
3076 is the late April 2012 high
3042 from 5/2000 low
The 50 day EMA at 3029
3026 from 10/2000 low
3024 is the gap point from early May
3000 is the February 2012 post-bear market high
2999 is the bottom of the August 2012 consolidation
2988 is the July 2012 high
2962 is the April 2012 low
2950 is the mid-April closing low
2942 is the mid-June 2012 high
2910 is the March 2012 low
The 200 day SMA at 2905
2900 is the March 2012 low
2888 is the May 2011 peak and PRIOR post-bear market high
2879 is the July 2011 peak
2866 is the July 2012 closing low
2862 is the 2007 peak
2841 is the February 2011 peak
2816 is the early April 2011 peak.
2810 is the low in the shoulders
2754 is the October 2011 high
2706 to 2705 is the April 2011 low and the February 2011 and consolidation low (bottom of the trading range) 2723 to 2705 is the range of support at the bottom of the January to May trading range


S&P 500: Closed at 1465.77

Resistance:
1499 from January 2008
1539 from June 2007

Support:
1440 from November 2007 closing lows
1433 from August 2007 closing lows
1425 from May 2008 closing highs
1427 is the August 2012 peak
The 20 day EMA at 1424
1422.38 is the prior post-bear market high (March 2012)
1406 is the early May 2012 peak
1402.22 is the closing low of the August 2012 lateral consolidation
The 50 day EMA at 1399
1378 is the February 2012 peak
1375 is the early July 2012 peak
1371 is the May 2011 peak, the post-bear market high
1363.46 is June 2012 high
1359 is the April 2012 low
1357 is the July 2011 peak
The 200 day SMA at 1349
1344 is the February 2011 peak
1340 is the early April 2011 peak
1332 is the early March 2011 peak
1325 is the July 2012 intraday low
1309 is the right shoulder low from June 2012
1295 to 1294 is the April 2011 low and the February 2011 consolidation low (bottom of the trading range)
1293 is the October 2011 peak
1275 is the January 2010 low, early January 2011 peak
1267 is the December 2011 peak
1266 is the June 2012 base low


Dow: Closed at 13,593.37
Resistance:
13,668 from 12-2007 peak
13,692 from 6-2007 peak
14,022 from 7-07 peak

Support:
13,331 is the August 2012 post-bear market high
13,297 is the April 2012, prior post bear market high
The 50 day EMA at 13,087
13,058 from the May 2008 peak on that bounce in the selling
13,056 is the February 2012 high
12,971 is the early July 2012 high
The 200 day SMA at 12,785
12,754 is the July intraday peak
12,716 is the April 2012 closing low
12,391 is the February 2011 peak
12,369 is the left shoulder low from May 2012
12,284 is the October 2011 peak
12,258 is the December 2011 peak
12,110 from the March 2007 closing low
12,094 is the April 2011 low
12,035 is the June 2012 base low
The June 2011 low at 11,897 (closing)
11,734 from 11-98 peak
11,717 is the late August 2011 peak


Economic Calendar

September 10 - Monday
Consumer Credit, July (15:00): -$3.3B actual versus $10.0B expected, $9.8B prior (revised from $6.5B)

September 11 - Tuesday
Trade Balance, July (8:30): -$42.0B actual versus -$44.0B expected, -$41.9B prior (revised from -$42.9B)

September 12 - Wednesday
MBA Mortgage Index, 09/08 (7:00): 11.1% actual versus -2.5% prior
Export Prices ex-agriculture, August (8:30): 0.4% actual versus -0.3% prior
Import Prices ex-oil, August (8:30): -0.2% actual versus -0.4% prior
Wholesale Inventories, July (10:00): 0.7% actual versus 0.3% expected, -0.2% prior
Crude Inventories, 09/08 (10:30): 1.994M actual versus -7.426M prior

September 13 - Thursday
Initial Claims, 09/08 (8:30): 382K actual versus 369K expected, 367K prior (revised from 365K)
Continuing Claims, 09/01 (8:30): 3283K actual versus 3300K expected, 3332K prior (revised from 3322K)
PPI, August (8:30): 1.7% actual versus 1.2% expected, 0.3% prior
Core PPI, August (8:30): 0.2% actual versus 0.2% expected, 0.4% prior
FOMC Rate Decision, September (24:30): 0.25% actual versus 0.25% expected, 0.25% prior
Treasury Budget, August (14:00): -$190.5B actual versus -$192.0B expected, -$134.1B prior

September 14 - Friday
Retail Sales, August (8:30): 0.9% actual versus 0.7% expected, 0.6% prior (revised from 0.8%)
Retail Sales ex-auto, August (8:30): 0.8% actual versus 0.8% expected, 0.8% prior
CPI, August (8:30): 0.6% actual versus 0.6% expected, 0.0% prior
Core CPI, August (8:30): 0.1% actual versus 0.2% expected, 0.1% prior
Industrial Production, August (9:15): -1.2% actual versus -0.2% expected, 0.5% prior (revised from 0.6%)
Capacity Utilization, August (9:15): 78.2% actual versus 79.2% expected, 79.2% prior (revised from 79.3%)
Michigan Sentiment, Preliminary September (9:55): 79.2 actual versus 73.5 expected, 74.3 prior
Business Inventories, July (10:00): 0.8% actual versus 0.4% expected, 0.1% prior


September 17 - Monday
Empire Manufacturing, September (8:30): -3.0 expected, -5.9 prior

September 18 - Tuesday
Current Account Balance, Q2 (8:30): -$125.6B expected, -$137.3B prior
Net Long-Term TIC Fl, July (9:00): $9.3B prior
NAHB Housing Market , September (10:00): 38 expected, 37 prior

September 19 - Wednesday
MBA Mortgage Index, 09/15 (7:00): 11.1% prior
Housing Starts, August (8:30): 772K expected, 746K prior
Building Permits, August (8:30): 800K expected, 812K prior
Existing Home Sales, August (10:00): 4.58M expected, 4.47M prior
Crude Inventories, 09/15 (10:30): 1.994M prior

September 20 - Thursday
Initial Claims, 09/15 (8:30): 375K expected, 382K prior
Continuing Claims, 09/8 (8:30): 3292K expected, 3283K prior
Philadelphia Fed, September (10:00): -5.0 expected, -7.1 prior
Leading Indicators, August (10:00): 0.0% expected, 0.4% prior

By: Jon Johnson, Editor
Copyright 2012 | All Rights Reserved

Jon Johnson is the Editor of The Daily at InvestmentHouse.com

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