- Stocks tested again, recover again.
- Wal-Mart laments weak February, yet stocks still rebound.
- Will the real economy please stand up?
- New York PMI positive, Industrial Production negative. Michigan sentiment higher, consumer confidence at recession levels. Part time jobs versus real jobs. Real data versus substituted data.
- Greenspan says the stock market causes economic activity: Some new major discovery? No, just how the government calculates the data.
- Recovery versus liquidity bath: This is what you get with liquidity, regulation, and debt.
- Stocks high and trending higher. El-Erian says time to take profits on 'artificially high' prices. Of course they are artificially high, but they can also move higher so take some gains along the ride.
Yet again stocks feel the presence of the underlying money, rally back ahead of long weekend.
In terms of the stock market, Friday was more of the same. After weeks of a slow trend upside that still rides the momentum from the January 2, 2013 launch to the upside that started the third leg off the summer 2011 correction, stocks faced some new yet old challenges.
Industrial production was lower in the US, this on top of the Thursday reports of GDP from Japan (negative for the third quarter) and the EU's official fall into an official recession. On the other hand, the New York PMI turned positive for the first time since August 2012 and the University of Michigan Sentiment statement jumped past expectations at 76.3.
Stocks sorted through the pros and cons through the morning, trading in rather choppy fashion as it has of late, even dipping midmorning toward lunch as has been its MO. Then the afternoon upside began at noon; the return of the bid that seems to occur each day as the new money pressing to get into the market fills in any dip.
The afternoon recovery was well underway when the major news story of the session hit. No HNZ buyout that could be bought the day before by insiders, tippers, and tippees. Bloomberg released Wal-Mart VP emails describing February sales as a 'total disaster,' the worst month this one VP has seen in his 7 years with the chain. A senior executive commented "Where are all the customers? And where's their money?" The feeling was the increased payroll taxes directly impacted the WMT customer.
Stocks plunged on the news with any gains wiped away. As I noted last week, with this bid in the market it appeared it would take a major story to derail it. With hints of better economic data perhaps buoying investors on top of the Fed's money (though quite dubious improvements given the details), the WMT story appeared to dash the 'green economic shoots' theories and hopes.
After a half hour of straight downside, however, the market caught itself . Indeed the indices were never in any danger whatsoever, at most tapping the 10 day EMA on the low. Then came the rebounding into the close. There was not a lot of time given the story broke in the afternoon session, so the indices could not recover all of the losses and only the Dow made it back to positive at the close.
SP500 -1.59%, -0.10%
NASDAQ -6.63, -0.21%
DJ30 8.37, 0.06%
Though they didn't turn positive, it was clear the bid was still present as another close shave with reality staved off by the power of liquidity.
Dollar: 1.3357 versus 1.3342. Off modestly versus the euro Friday on a week that saw dollar gains thanks to an official EU recession and of course more currency wars. The week started with the G7 apparently stating Japan's currency manipulation was no issue, a clarification, then more general undermining currencies. It is, after all, at least in the minds of central banks and spendthrift governments, to pay debts back with devalued currency. Of course that only decimates the citizens' wealth and the country's economy with it, but a government doesn't care as long as it survives; there will always be more people to rule. The point: there are no benevolent governments; that is why we wrote the Constitution the way we did. Even then it has failed to keep the government in check. Watch your wallets!
Bonds: 2.01% versus 2.00% US 10 year treasury. Down on the week overall but recovered to end the week given the European and Japanese economic woes. Still below the 10 day EMA, still weak.
Gold: 1609.10, -26.40. Gold was crushed on the week with an emphasis on Friday as it undercut the recent lows in the pattern, blew up its pullback, and is now hanging on at the August consolidation level.
Oil: 95.86, -1.45. Actually broke harder to the downside. Spent the week rebounding for a routine 20 day EMA after a strong December through January run. Stalled right below the run's peak and then Friday was clocked. Oil has been stronger than it should have been then Friday was upended on news that was not that bad. Definitely interesting again and how it reacts to this sharp Friday decline this coming week tells if it was overdone on this last rotation higher to resistance and wants to trade back down in the 84 to 100ish range.
To Tell the Truth: will the real economy please stand up?
From 1956 to 1968 the game show 'To Tell the Truth' was quite popular. A person of some notoriety and two imposters would answer questions from a panel of 4 celebrities and the celebrities would attempt to determine who the true person was. The answers were varied, degrees of made up to true, nonsense to fact.
Reminds me of our economic data in a way.
Friday the New York PMI was positive for the first time since August, and at 10.04, its best read since May 2012. On the other hand there was industrial production at -0.1% versus 0.2% expected and 0.4% in December. The decline aided by a 5.5% drop in auto production. Recall the oversupply discussed in November and December? That bled into production; had to.
Friday also saw Michigan Preliminary Sentiment for February rise to 76.3. Michigan has run hotter the past three months even as Consumer Confidence has plummeted to recession-esque levels in the mid-fifties.
Thursday initial jobless claims were reported at 341K and the reading was, yet again, trumpeted as some kind of proof the economy is turning. Again, however, the BLS substituted its estimates for the reality of what states report and each time it does that the numbers fall. Then each time it doesn't, they pop right back up to the 365K+ average.
Last week at the State of the Union address the President touted 6 million jobs created. What he did not tout was the facts that, I am sorry to say, make those mostly 6 million jobs not worthy of a US recovery. Over 75% part-time jobs paying the lowest scale ($7 to $13.79). Heck, in this economy even part-time lawyers are paid in some cases only $26/hour. Some would say that is a positive (like the old joke what's black and brown and looks good on a lawyer?: a Doberman; or the one that asks why sharks don't bite lawyers: professional courtesy), but it does underscore how weak the jobs market is.
Then Friday there was Alan Greenspan on CNBC, resurrected from the ashes of his now burned away aura of 'Maestro,' discussing the stock market and the economy. Greenspan covered familiar ground such as the stock market acting as a predictor of economic activity. That is dubious in itself at this point in history given the massive, truly massive, 'unprecedented in the history of the world' kind of stimulus injected into the economy and thus the stock market.
But he went further. After answering a question on the sequestration effects, he made a point to 'add one other thing.' Seems Greenspan longs to relive the glory days where everyone hung on his every convoluted sentence, his every wry 'I know more than you' smirk. Thus he threw out the bomb that stocks not only predict economic activity but they CAUSE economic activity.
Stock prices cause economic activity. Wow.
Recall back after the 2000-2001 collapse the then Fed Chairman's call for data to support even the existence of a wealth effect? His entire attack on the economy and indeed the stock market was promulgated upon the belief that high stock prices caused consumption, and he indeed talked of the 'runaway consumer,' apparently the result of the 'irrational exuberance' surrounding the stock market. Yet after he pulled all liquidity from the economy in early 2000, crashing first the stock market and then the economy (the stock market was indeed predicting the crash to come), he still just wasn't sure of any wealth effect.
Now he is sure. He says that 'the data shows' 6% of the GDP is a result of changes in the stock market. Not sure what that data is; perhaps he was able to piece together an argument to support what was, by his own admission at the time, an unfounded experiment that left the US economy in shambles and a three year dearth of US investment that led to the rise of the tech economies in Asia, India, and elsewhere, with jobs leaving the US never to return. With that kind of disaster laid at your feet by the facts of history, I suppose you had better come up with 'some data' that supports why you ruined the future of so many.
Greenspan's conclusions are utter hogwash: anemic growth, high unemployment, and Wal-Mart sales dropping.
So, according to Mr. Greenspan the rise in stock prices is causing a further rise in the economy on the wings of a wealth effect. Wow. It must not be much of a wealth effect. The stock market as measured by the SP500 is up 128% since the March 2009 low. The economy is limping along AT BEST at 2% growth. In the entire history of the US there has been no 100+% gain in stocks without GDP growing well above the long-term growth trend that used to be considered to be 3% as the bare minimum.
Moreover, what about the jobs discussed above? The majority are part-time as the underemployed employment rate when added to the unemployed produces a number in excess of 14%. Many people lost their retirements in the collapse and the lack of good jobs has prevented many from rebuilding retirement. There is no wealth effect there, particularly with the jobs they are getting paying the minimum wage scale. Sure that is not everyone, but the data show that clearly 75%+ of the jobs are low end, part time hourly work. You DON'T amass a new stock portfolio on those wages, and the only company match you get is in the uniform you wear.
What the heck caused stocks to rally in the first place?
The clincher, the fact that puts all of this nonsense to rest, goes back to just why stocks started to rally in the first place, something that Greenspan's analysis totally ignores. In March of 2009 there was not some perception that the economy would improve dramatically and thus warrant a 128% SP500 surge through early 2013. As noted above, the economy output simply does not warrant that kind of asset value rise.
What triggered that rally and indeed the next 5 rallies in the stock market (and there have been five since March 2009) is quantitative easing, i.e. the free and unbridled printing and placing money into the economy. With little use for that money in terms of real economic investment and thus economic growth (recall that capital investment as recently as December fell 4.3% year/year!!), it all goes into the stock market and other markets. Gold was a runaway winner until margin requirements were such that there is practically no margin buying anymore. Bonds were big winners with the Fed buying bonds for as far as the eye can see. Now, however, with rates rising even as the Fed continues to buy, inflation is showing its head and thus bonds are falling despite Fed buying.
The rally is based upon excess liquidity. Bernanke wanted stock prices to rise. They have. 2% GDP, as noted above, is a pathetic growth rate to underpin a 128% stock price appreciation, and as we know, it is not the driver. It is liquidity.
A Good as it Gets?
Greenspan should know this as well as he has one of the seminal case histories that occurred under his watch. From May 31, 1999 to late March 2000, the NASDAQ gained 107%. Greenspan flooded the economy will billions of dollars ahead of Y2K and the uncertainties that surrounded that date. The economy didn't need the money and no one wanted it as there was no dollar hoarding. So, it all when into the stock market and it zoomed.
In March Greenspan called all of the money back at once. More than that, he clamped down hard on the money supply, fearing he had unleashed an inflationary genie. Stocks had to be sold. Margins raised. More than that, the economy lost not only the money Greenspan pushed into the system, but more as lending restrictions were tightened as well. Stocks crashed and the economy followed.
The sprint higher was fueled by massive excesses in liquidity. There was a GDP kicker added by the excess money as Q4 saw a 7.37% GDP rise. Then the crash when the liquidity was pulled with 1.05% GDP in Q1 2000.
I have said it and many others with many more letters after their name have said it: the 1.5% to 2% GDP growth seen as a best result since the crash is just about the best you can get when you live off of Federal stimulus (recall the 'Recovery Act' that was simply spending on pet projects) and the Federal Reserve's massive liquidity binge without real economic investment and growth to back it up.
What if this is as good as it gets?
Thus as Jack Nicholson queried "What if this is as good as it gets?" in the movie of the same name, the answer is this is as good as it gets until we chart a different course. Better start planning as if that is the case, particularly looking at the index charts from a longer term perspective.
Stats: -6.63 points (-0.21%) to close at 3192.03
Volume: 1.841B (-3.31%)
Up Volume: 651.73M (-438.27M)
Down Volume: 1.14B (+323.68M)
A/D and Hi/Lo: Decliners led 1.1 to 1
Previous Session: Advancers led 1.12 to 1
New Highs: 200 (+2)
New Lows: 17 (-5)
Stats: -1.59 points (-0.1%) to close at 1519.79
NYSE Volume: 666.331M (+8.7%)
A/D and Hi/Lo: Decliners led 1.18 to 1
Previous Session: Advancers led 1 to 1
New Highs: 465 (-11)
New Lows: 73 (+13)
Stats: +8.37 points (+0.06%) to close at 13981.76
BREADTH: Painfully flat . . . AGAIN.
VOLUME: Expiration Friday saw trade actually decline on NASDAQ. NYSE trade rose from 8.7% up to 42% depending upon which tape you want to use. There was a surge to near 900K on some tapes that took into account late trades. In any event, trade was expiration trade so not of much use.
Below is a recap of each index' action on the session but the bigger picture warrants a look. If you peruse weekly charts since March 2009 for any of the indices something pops out at you, something I mentioned last week: the symmetry of this last run with the prior runs.
The big initial QE run into early summer 2010, the QE2 run into May 2011, then the three shorter runs on QE3, Operation Twist, and QE4 the latest rally. Note how the last three are shorter overall and shorter in progression in the series of three.
QE has limited effects with each getting subsequently shorter in duration. That would put the current iteration near its limit. Mohammed Al Erian Friday said that stocks were artificially high at this stage and to take some profits. What do you know.
From our technical perspective the run should be just about over unless there is some other extraneous stimulus. Perhaps the economy jolts to life (dubious) or there is some way to avoid sequestration and a budget deal is struck (even more far-fetched it would appear). The point: technically there is reason to be cautious but at the same time we don't want to time the top so to speak and sell all out.
SP500. Lateral move with doji testing the 10 day EMA intraday continues. Flattening out the past week, showing some churn with higher volume as stocks can make no headway. That is typically a topping sign but volume has not been much higher.
NASDAQ. Still over the 10 day EMA and still rending higher, just slower going as it trades right at to just over the September levels. Still be a bit careful here.
DJ30. WMT pushed up the volume but DJ30 did a masterful job of recovering to hold the 10 day EMA yet again in its lateral consolidation attempt.
DJ20. Doji after pushing to a new all-time high. Might be a bit tired but hardly anything wrong with the pattern.
SP400. Flat Friday with a doji but still trending rather effortlessly up the 10 day EMA.
Russell 2000 small caps: Gapped then reversed to negative. Hasn't done that since mid-December and that led to a modest decline.
SOX. Faded after a very strong Thursday. Trending up the 10 day EMA but some headwinds as it bumps the early April upper gap point.
Big Names. Overall they don't look all that great. AAPL started to fall, AMZN is holding up but could not follow through on its Wednesday surge. GOOG on the other hand looks solid. Mixed back and not providing unified leadership.
Homebuilders. Fell on the session with KBH to the 10 day EMA and TOL as well, but not rolling over just yet.
Financials. Down on the session but they are still trending higher. JPM at the 10 day EMA, C and BAC as well.
Semiconductors. Took a day off but otherwise in good leadership. Some solar stocks actually look interesting again, e.g. FSLR, JASO.
Energy. As with most surging areas, energy faded as well SLB, HAL faded slightly while RIG flopped and gave back all of the Thursday gain. Maybe we will get some buys on these.
Chemicals. Still look solid, e.g. AXLL holding up while MOS and MON pushed higher. AGU on the other hand continued its dive.
Retail. All over the map as you might imagine after WMT's issues, but not too bad. DECK is still in position to continue higher and PNRA might provide a buying opportunity off the 200 day SMA test.
VIX: 12.66; -0.32
VXN: 13.66; -0.75
VXO: 12.08; -0.51
Put/Call Ratio (CBOE): 0.83; -0.08
Bulls versus Bears
An interesting development. Without any decline in the stock market to push it the number of bulls declined. As noted last week they are at a level where the market corrected starting in September but some of the pressure is off.
Bulls: 52.6% versus 54.7% versus 54.3% versus 53.2% versus 51.1% versus 47.8% versus 46.8% versus 45.7% versus 43.6% versus 39.3% versus 37.2% versus 38.3% versus 43.6. Over the September 2012 level. Last time the market hit that level SP500 corrected 9% over the next two months. Background: Undercut 35%, the threshold for bullishness, in early June. 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: 21.1% versus 21.1% versus 22.3% versus 22.3% versus 23.4% versus 24.5% versus 24.5% versus 23.4% versus 25.5% versus 27.7% versus 27.7% versus 28.7% versus 27.7%. Summary: 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.
TUESDAY (Monday closed for Presidents' Day)
Virtually no change in the stock indices as they maintain their trends up near support. Yes they were up and down last week with SP500 bouncing laterally. Yes NASDAQ is bumping at its earlier highs. Same issues as before.
As noted earlier, it was enough for Mr. Al-Erian to say stocks are artificially high (QE) and that central banks will have a hard time maintaining them as their efforts become less effective.
Of course that doesn't mean they go away, just that they are still present. The risk/reward overall is diminished at least in terms of the upside. As noted in the weekly index charts, this is the third in a series of three legs higher based upon new QE announcements. Certainly the market can continue higher from here; money will do that. At the same time you have to factor in how much more it can rise versus how much it will correct when it does get to the point it tests.
There is a big gap from early January on NASDAQ. The other indices didn't gap but the way they trade is not conducive to gaps. In any event, after this run and that gap, we are keeping the QID play just in case.
There are still some upside plays that can yield nice gains if the market continues to run. Some ag chemicals still look good, energy may provide a test, chips remain solid, financials are trying to set up again. If they do set up and take the lead then the market has some solid areas to take it higher. Thus we will be looking at plays in those areas in the event the market finds new strength and continues these moves.
If it cannot then we have some downside plays we take advantage of.
Al-Erian says to take profits now. He is calling a market top and perhaps he knows more than most do; after all he is on television all the time. We prefer to take gain along the way at logical points, letting some run higher. Then if the market runs farther than anyone thinks we can participate in the upside and take some more gain. Then as the market does top we are typically lighter in positions anyway.
So we are keeping reasonable stops on current positions, still picking up some upside but partial positions, not wanting to get too heavy if a top is near but then as any market move continues we can participate in it.
Support and resistance
NASDAQ: Closed at 3192.03
3197 is the September 2012 post-bear market high. Starting to crack.
3227 is the April 2000 intraday low
3401 is the May 2000 closing low
3171 is the October intraday high
The 20 day EMA at 3162
3134 is the March 2012 post-bear market peak
3130 from some January 2013 lows
The 50 day EMA at 3112
3104-3112 from August and mid-October peaks.
3101 is the August 2012 high
The 2011 up trendline at 3098
3090 is the mid-March interim high
3076 is the late April 2012 high and the 1/2013 low after gapping higher
3062 is the December 2012 prior peak
3042 from 5/2000 low and several other price points
3024 is the gap point from early May
The 200 day SMA at 3005
3000 is the February 2012 post-bear market high
2999 is the bottom of the August 2012 consolidation
2988 is the July 2012 high
2977 to 2980 is the bottom of the late October 2012 consolidation, July 2012 peak
2962 is the April 2012 low
2950 is the mid-April closing low
2942 is the mid-June 2012 high
2900 is the March 2012 intraday low
2858 is the late July 2011 peak
2847 is the mid-May 2012 low
2838 from the July 2012 lows
S&P 500: Closed at 1519.79
1539 from June 2007
The 20 day EMA at 1504
1499 from January 2008
The 50 day EMA at 1476
1475 is the September 2012 high
1471 is the October 2012 intraday high
1466 is the September 2012 closing peak and rally closing high
1440 from November 2007 closing lows
1434 from early November 2012
1433 from August 2007 closing lows
1427 is the August 2012 peak
1425 from May 2008 closing highs and the October 2012 low
1408 is the late October 2012 range closing low
1406 is the early May 2012 peak
The 200 day SMA at 1406
1402.22 - 1400 is the closing low of the August 2012 lateral consolidation
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
1344 is the February 2011 peak
1340 is the early April 2011 peak
1332 is the early March 2011 peak
Dow: Closed at 13,981.76
14,022 from 7-07 peak
The 10 day EMA at 13,960
The 20 day EMA at 13,870
13,692 from 6-2007 peak
13,668 from 12-2007 peak
13662 is the October 2012 intraday high
13,653 is the September 2012 high
The 50 day EMA at 13,620
13,557 to 13,662
13,413 from the late September 2012 low
13,300 to 13,331 is the August 2012 post-bear market high
13,297 is the April 2012, prior post bear market high
The 200 day SMA at 13,119
13,058 from the May 2008 peak on that bounce in the selling
13,056 is the February 2012 high
12,716 is the April 2012 closing low
12,524 is a range of support from early 2012 and summertime 2012
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
February 15 - Friday
Empire Manufacturing, February (8:30): 10.0 actual versus 0.0 expected, -7.8 prior
Net Long-Term TIC Fl, December (9:00): $64.2B actual versus $52.4B prior (revised from $52.3B)
Industrial Production, January (9:15): -0.1% actual versus 0.2% expected, 0.4% prior (revised from 0.3%)
Capacity Utilization, January (9:15): 79.1% actual versus 78.9% expected, 79.3% prior (revised from 78.8%)
Michigan Preliminary Sentiment, February (9:55): 76.3 actual versus 73.5 expected, 73.8 prior
February 19 - Tuesday
NAHB Housing Market Index, February (10:00): 48 expected, 47 prior
February 20 - Wednesday
MBA Mortgage Index, 02/16 (7:00): -6.4% prior
Housing Starts, January (8:30): 910K expected, 954K prior
Building Permits, January (8:30): 918K expected, 903K prior
PPI, January (8:30): 0.3% expected, -0.2% prior
Core PPI, January (8:30): 0.1% expected, 0.1% prior
FOMC Minutes, 1/30 (14:00)
February 21 - Thursday
Initial Claims, 02/16 (8:30): 358K expected, 341K prior
Continuing Claims, 02/09 (8:30): 3150K expected, 3114K prior
CPI, January (8:30): 0.1% expected, 0.0% prior
Core CPI, January (8:30): 0.2% expected, 0.1% prior
Existing Home Sales, January (10:00): 4.94M expected, 4.94M prior
Philadelphia Fed, February (10:00): 1.5 expected, -5.8 prior
Leading Indicators, January (10:00): 0.3% expected, 0.5% prior
Natural Gas Inventories, 02/16 (10:30): -157 bcf prior
Crude Inventories, 02/16 (11:00): 0.560M prior
By: Jon Johnson, Editor
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