Market is Using the Pause to Refresh

MARKET SUMMARY

- A rather do nothing session on rather do nothing economic data.
- Market was not ready to continue the move, but the patterns suggest it is using the pause to refresh.
- When 2.5% GDP growth is really quite bad. When, among other reasons, debt to GDP is 105%.
- Prepare for information overload: earnings, FOMC, jobs report and other key economic data.

After initial rally off support the market is pausing.

You can read the market action any way you want. There was selling on worries the Fed would fade stimulus. That took the SP500 to its 50 day EMA, the Dow to its November trendline, NASDAQ to its 2011 trendline, while RUTX and SP400 bombed through their trendlines and the 50 day EMA.

But, the economic data continued to soften. The 0.4% Q4 GDP read was not going to lead to as big a bounce as thought in Q1 as the economic data soured for the third straight spring. As sure as spring would eventually come, the Fed would surely have to remain generous with its money printing. Thus, with apparently the 85B per month still secure thanks to once again weaker economic data, the stock market recovered.

It is a perverse world where such prolonged economic weakness has led to such a prolonged stock market rally. With the fade in the economic data it looks as if the perversion is going to turn into habit. As Bloomberg reported last week, Fed talk of tapering stimulus has shifted to extending it given the economy's failure to find traction.

I think back to those who early in the year and as late as February and early March were saying this time the rebound was for real. This time it would surely stick. Housing had bottomed. Jobless claims were better. The President touting 6 million jobs created.

Yes, housing is better as the low end of the spectrum declines in numbers available. Starts, however, are dominated by apartments, somewhat late in the recovery versus the typical pattern.

Better jobless claims do not, as we have seen the entire recovery, mean job creation. Just because not as many people are getting fired there are jobs for those wanting to work. Jobs have been created, but they are all part-time and low paying with 58% of the jobs lost at the mid-level and roughly the same amount created at the lowest pay levels. Many who were holding part time jobs in hope of turning them into full time or otherwise finding full time have given up and left the work force. U6 plummeted on just 88K jobs creation in March; that tells you they left the labor pool. Of course food stamps and disability are at RECORD highs in a recovery in its fourth or fifth year depending upon who you talk to.

With that understanding it is easy to see why the thought is turning to a conclusion the Fed simply sticks with the stimulus and hopes they can keep things limping along until the economy can someday find traction. This even with a 2.5% GDP in Q1 as I will discuss later.

THUS, even though the market paused on Wednesday and again Friday after the GDP that was not as good as expected and indeed even worse than the headline showed, the market still looks as if it is setting up for a further, liquidity induced upside move. Liquidity runs this market, not the economic news. If it continues to come from the Fed the conventional wisdom is stocks will continue higher.

THE VERY interesting philosophical question is whether, once everyone is convinced the economy truly is stagnant and cannot rise under the Administration's policies of taxing producers, spending everything it can on everything it can but really encouraging free enterprise (the new GDP shows debt to GDP at 105%!), and a list that, frankly I am too tired of looking at and fretting over the cover again, WILL the jig be up?

In other words, if people believe that the only reason the market is rising is because of Fed stimulus and totally disregard any hope of economic growth, will the market still rise simply because of liquidity being pumped in? At some point there is a Roberto Duran 'no mas' moment when no correlation remains between the economy and the market, and the debt level hits the tipping point. It has happened many times in history and it will happen if we keep up what we are doing. You don't know what the level is or the exact trigger, but as the judge in 'Presumed Innocent' told counsel, you are playing with fire.

Nonetheless, we WILL continue to play with fire and may even be willing to suffer some scorching if the Fed sees no progress from the fiscal side. And by progress I am not talking about Congress just compromising for compromise sake to get things done. If you compromise on the wrong policies then you don't fix a thing. If you compromise and expand government to socialist and beyond levels, you don't get growth and you get what the USSR and the eastern block got. At 105% Debt/GDP we ARE running out of other people's money (Margaret Thatcher), or, as Milton Friedman put it, with the federal government in charge of the Sahara desert, even the desert is running out of sand.


The market action.

Friday stocks did little. Futures were sluggish ahead of GDP and after GDP. They actually rose after the miss (2.5% versus 2.8% to 3.0% expected); a miss means more Fed stimulus, right?

They rallied and sold, laughed and cried, and did it all again, giving up a gain late in the day.

SP500 -2.92, -0.18%
NASD -10.73, -0.33%
DJ30 11.75, 0.08%
SP400 -0.45%
RUTX -0.54%
SOX -1.07%

Even so, the indices, particularly the large caps, remain in good position to continue the test started Wednesday, hold the initial gains on the run, and resume the move higher in the range.


OTHER MARKETS

Dollar: 1.3033 versus 1.3004 euro. Up on the week and near the late March high. Faded Friday but managed to hold the 20 day EMA after an early selloff. Seems people still want money in the US given the trouble with the rest of the world.


Bonds: 1.67% versus 1.72% versus 1.69% versus 1.70% versus 1.69% versus 1.71% versus 1.69% versus 1.70% versus 1.72% versus 1.69% versus 1.72% versus 1.79% versus 1.81% 10 year Treasury. New closing high on this move with a gap Friday off the 200 day SMA. Economic worries, Europe and US, are keeping treasuries higher.


Oil: 93.00, -0.64. Strong recovery week pushed oil back through the 200 day SMA after bouncing off support just over a week back. Took a breather Friday but remains in a strong recovery in its range. It has set up an ABCD pattern now off of the December low and it is rallying back toward the top of the range.


Gold: 1453.40, -8.60. A week of recovery took gold through the 10 day EMA with a strong $38 Thursday move. Doji below the 20 day EMA Friday as gold tests the next resistance.


THE ECONOMY

2.5% is just the Fed.

I said over a year ago that 1.5% to 2% annual growth is what you get when you pump hundreds of billions, yeah verily, trillions of dollars into the economy via monetary policy. The money HAS to be put to work and that means there will be an increase in activity, particularly investment activity. Stock prices rise, dividends are paid, some marginal increases in economic activity. Voila, 1.5% annualized growth with some 0.4% and some 3% quarters at the extremes.

Thus you have the first read of Q1 2013 at 2.5%. Disappointing yes, but it was still 2.5% and that is better than 0.4% from Q4. As with jobs, however, you have to ask just what is the quality of this number?

Many were asking that Friday, and nearly everyone outside of the Administration that HAS to say it was a 'positive' concluded the 2.5% was nowhere near representative of the actual results and more importantly, the GLIDE PATH of the economy. Indeed, glide path is not a very good choice of phrases. More like controlled crash situation where the best hoped for result is minimizing the carnage upon impact.

So, when is 2.5% GDP growth not a good number?

1. When consumption jumps to 3.2% versus 1.8% prior, but consumers have to dip into savings to pay for essentials such as heating. Yes, spending on utilities in Q1 was the largest part of the increase in consumption. Seems the cold weather forced consumers to spend more on heating.

With incomes falling 5.3%, the biggest decline since Q3 2009, they had to tap into savings to pay for staying warm. That forced the savings rate, which had been growing, down to 2.6%, the lowest level since Q3 2007. Compare that with 4.7% in Q4 before the tax hikes. You CANNOT SAVE what the government takes from you.

2. When inventory buildup makes up 1.03% of the total number but almost 100% of that buildup is grain inventory build due to draw downs, something that won't be repeated. Without that build you have a scintillating 1.5% GDP growth rate.

3. When business investment falls to 3% versus 11.8% in Q4. No jobs come from no investment. Right now it does not pay to invest in the business outside of stock buybacks and dividends. Now THAT is growth.

4. When debt to GDP climbs to 104.8% as of March 31, 2013. Just slide on over Greece, Italy, Ireland, Spain, etc. The new socialist country has become just like you in terms of massive spending and the lack of economic power to grow out of it. Fed liquidity, surging healthcare costs (IBD reports Maryland rates will rise by as much as 150% for younger insured), higher taxes, low wage and low end jobs, food stamp usage at records, disability at record levels.

There is NO way to grow out of our problems with this kind of debt and this kind of spending and anemic economic growth. We have always grown our way out of debt overloads during recessions with powerful recoveries. We have documented many times how this is the weakest recovery in history.

No, it is not because the problems were so bad. It is because we have tried to solve a debt problem with debt as we spent dramatically more than in the prior administration, an administration know for its profligacy. Strangling entrepreneurs, Mom and Pop businesses, and basically anyone trying to go it alone with higher taxes, 100,000 new regulations and more coming, higher healthcare costs, higher energy prices, etc. hamstrings any recovery attempt.

Then you have the avarice in the government that just sucks the spirit from the people. Congress is again talking of exempting Congress and its aides from the Healthcare law because it is just 'too burdensome.' Or how about Senator Feinstein's husband being the broker on the USPS' sale of post offices, of course located on prime real estate in every town they are in? Seriously? SHE gets the benefit of this? This is the kind of stuff that makes hard working, tax paying, country loving citizens, the backbone of the country, decide we are just not going to fund it anymore. If just about anyone can get food stamps or disability or a free cell phone while you see an 87 year old grandmother hassled by the government over a few bucks of benefits she and her husband paid for every month for 50 years, you wonder what is the point? Juxtaposed against the open avarice and disconnected leadership from the administration and Congress, many people have drawn the line.

Will 2.5% GDP growth be enough to pay for the waste, graft, fraud, and avarice? Never is. Wasn't enough in the USSR. You cannot waste money as we do and spend money as we do and not have the industry to back it up. The third leg of the stool is cracked and about to splinter. The GDP report, as with the prior jobs report, reveals the recovery has no clothes.

TECHNICAL SUMMARY

INTERNALS

NASDAQ
Stats: -10.73 points (+0.33%) to close at 3279.26
Volume: 1.632B (-14.2%)

Up Volume: 816.89M (-453.11M)
Down Volume: 872.73M (+158.54M)

A/D and Hi/Lo: Decliners led 1.68 to 1
Previous Session: Advancers led 1.65 to 1

New Highs: 99 (-71)
New Lows: 26 (+5)

S&P
Stats: -2.92 points (+0.18%) to close at 1582.24
NYSE Volume: 602M (-11.21%)

Up Volume: 1.14B (-1.5B)
Down Volume: 2.03B (+850M)

A/D and Hi/Lo: Decliners led 1.49 to 1
Previous Session: Advancers led 2.02 to 1

New Highs: 243 (-278)
New Lows: 32 (-24)

DJ-30
Stats: +11.75 points (+0.08%) to close at 14712.55

BREADTH: -1.7:1 NASDAQ, -1.5:1 NYSE. Blah session, blah breadth.

VOLUME: Down on what we consider a consolidation session, -14% NASDAQ, -11% NYSE.


THE CHARTS

SP500. Continued the move up off the 50 day EMA started the prior Friday, but stalled out at the end of the week. Wednesday was weak, Thursday was up but closed well off the high, and Friday lost some ground. Still looks just like a pause in an continuing run higher in the now recovered channel.


NASDAQ. Rode the move up off the 2011 up trendline into Thursday, retaking its uptrend channel over the November trendline. Hung on by its teeth Friday as NASDAQ lost some ground, showing a doji at the trendline. Good move up, good test. If the techs join in . . .


DJ30. Good rally through Tuesday and then a tight lateral move over the 10 day EMA through Friday. Bounced off the trendline, testing the initial move, still room to run.


SP400. Up solidly all week then faded Friday to test the 10 day EMA on the low and bounce modestly. At the late March and April highs, actually looking decent here though at resistance.


RUTX. Up all week as well then fading modestly Friday. Recovered the 50 day EMA along with SP500 and extended that move on the week. Still looks heavy but it is following along nicely and actually led the move Wednesday and Thursday along with SOX.


SOX. Broke over the February and early April highs on the week. Faded Friday to a tight doji at the early April peak. It tapped the rally high from March Thursday at the high. A pullback to a higher low would be a very good sign, suggesting a breakout. Do we dare imagine that?


LEADERS

Big Names. AMZN took a shot on its earnings, but AAPL was up. GOOG was down but a very nice 10 day EMA test. MSFT enjoyed a strong week but started to struggle Thursday and Friday. Normal for a pullback after that move. CL, CLX are in rather normal pullbacks as the indices test that initial recovery off the early April selling.

Drugs, biotech. The bigger names were struggling as earnings came out (AMGN, CELG), but a lot of the small names enjoyed great weeks, e.g. BDSI, CLDX, SNSS, ACAD.

Retail. Mixed. DECK sold on earnings. COH surged in earnings. TJX rallied back up to the April highs. LULU surged, NKE continued its steady run. DRI, BWLD (restaurants) enjoyed nice gains.

Industrials, Machinery. CAT enjoyed a nice rally on the week as did TEX. Not great patterns, just rallying more.


THE MARKET

SENTIMENT INDICATORS

VIX: 13.61; -0.01
VXN: 15.48; +0.16
VXO: 12.93; -0.35

Put/Call Ratio (CBOE): 0.89; -0.08

Bulls versus Bears

Bulls faded significantly below 50 but bears were unconvinced, holding at 20.6%. Bears remain low, bulls not too high.



Bulls: 47.4% versus 50.5% versus 52.0% versus 49.5% versus 47.4% versus 50.00% versus 44.2% versus 46.3% versus 48.4% versus 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. Has hit a soft patch. Higher then rolling over below the January and February highs. That market hiccup ahead of and to the Jobs Report. Now back up so . . . probably hangs over 50. 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: 20.6% versus 20.6% versus 19.4% versus 19.6% versus 18.6% versus 18.8% versus 21.1% versus 21.1% versus 22.1% versus 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.


MONDAY

A week of major data from the ISM to an FOMC rate meeting to the April jobs report. Earnings as well, of course.

The indices are testing after a good 'rally where they had to' move off of key support. Earnings are mostly a disappointment as a strong majority of firms miss on the top line, i.e. sales are not keeping pace with expectations for an expanding economy. Perhaps, just perhaps, the economy is not expanding nearly as fast as thought. That is what the GDP numbers show and what the revenue results and guidance is suggesting for the future as well.

As alluded to earlier, that is good for continued stimulus, but the question is just how much more market benefit can be wrung out of continued huge amounts of stimulus. Quite a run thus far on the current QE phase, topping the run from late 2011 to early 2012 and again in May to September 2012. In that light, the current rally and its recent drop to support and indeed a bit lower than prior tests, is still suspect even if it looks simply like a normal pullback in the run higher.

So, with the FOMC out on Wednesday the driving question will be how committed the Fed is to continuing the stimulus. The statement won't likely tell the story, at least not what the minutes have told, and the minutes have been the market movers. Still, given all the 'tapering' speculation, if the statement is stone cold the same without referencing any need for tapering or other change, investors might take it as a positive.

It will be information overload as stocks test and that leads to emotions creeping in. So, stick with good patterns that are in position to move. Up or down. That is what we intend to do. The recovery was encouraging for the upside but it is not a move that cannot be altered by the current events and news. Weaker data keeps the Fed in the game and the easy conclusion is more stimulus.

Keep in the back of your mind, however, the idea that at some point stimulus won't matter to stocks anymore. Always have that as part of the overlay when reviewing the market. It is not there yet and has proved anyone thinking that dead wrong. Won't always be the case, so as you work good upside plays, don't blindly think that stimulus always means stocks rise. We have never had this kind of stimulus for anywhere near this long. History tells you what the result will be if it never stops, but what history does not tell you thanks to differing circumstances is WHEN the inevitability sets in. For now it has not.


Support and resistance

NASDAQ: Closed at 3279.26

Resistance:
3321 from April 2000
3390 is the upper channel line for the November 2012 to present uptrend
3401 is the May 2000 closing low

Support:
3277 is the November 2012 up trendline
3227 is the April 2000 intraday low
The 50 day EMA at 3220
3197 is the September 2012 post-bear market high
The 2011 up trendline at 3177
3171 is the October intraday high
3134 is the March 2012 post-bear market peak
3130 from some January 2013 lows
3104-3112 from August and mid-October peaks.
3101 is the August 2012 high
3090 is the mid-March interim high
The 200 day SMA at 3087
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
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 1582.24

Resistance:
1598 is the April 2013 high and all-time high
1637 is the upper trendline in the channel

Support:
1576 from October 2007, the prior all-time high
The November up trendline at 1569
1556 from July 2007
The 50 day EMA at 1548
1539 from June 2007
1531 is the recent high
1499 from January 2008
1475 is the September 2012 high
1471 is the October 2012 intraday high
1466 is the September 2012 closing peak and rally closing high
The 200 day SMA at 1458
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
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 14,712.55

Resistance:
14,888 is the recent all-time high
15,151 is the upper channel line for the trend off the November low.
9.0% above its 200 day SMA, still leaving DJ30 room to run before it gets too top heavy on this run and has to test.

Support:
The November up trendline at 14,581
The 50 day EMA at 14,417
14,198 from the October 2007 high
14,149 is the February 2013 high
14,022 from 7-07 peak
14,010 from the early February 2013 consolidation
13,784 is the late February 2013 closing low
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
13,557 to 13,662
The 200 day SMA at 13,548
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
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


Economic Calendar

April 22 - Monday
Existing Home Sales, March (10:00): 4.92M actual versus 5.01M expected, 4.95M prior (revised from 4.98M)

April 23 - Tuesday
FHFA Housing Price Index, February (9:00): 0.7% actual versus 0.6% prior
New Home Sales, March (10:00): 1.5% versus 0.7% expected (417K actual versus 415K expected, 411K prior)
Richmond Fed: -6.0 versus 3.0 prior.

April 24 - Wednesday
MBA Mortgage Index, 04/20 (7:00): 0.2% actual versus 4.8% prior
Durable Orders, March (8:30): -5.7% actual versus -3.1% expected, 4.3% prior (revised from 5.6%)
Durable Goods -ex transports, March (8:30): -1.4% actual versus 0.0% expected, -1.7% prior (revised from -0.7%)
Crude Inventories, 04/20 (10:30): 0.947M actual versus -1.233M prior

April 25 - Thursday
Initial Claims, 04/20 (8:30): 339K actual versus 351K expected, 355K prior (revised from 352K)
Continuing Claims, 04/13 (8:30): 3000K actual versus 3060K expected, 3093K prior (revised from 3068K)
Natural Gas Inventories, 04/20 (10:30): 30 bcf actual versus 31 bcf prior

April 26 - Friday
GDP-Adv., Q1 (8:30): 2.5% actual versus 2.8% expected, 0.4% prior
Chain Deflator-Adv., Q1 (8:30): 1.2% actual versus 1.6% expected, 1.0% prior
Michigan Sentiment - Final, April (9:55): 76.4 actual versus 72.4 expected, 72.3 preliminary versus 78.6 March Final

April 29 - Monday
Personal Income, March (8:30): 0.3% expected, 1.1% prior
Personal Spending, March (8:30): 0.1% expected, 0.7% prior
PCE Prices - Core, March (8:30): 0.1% expected, 0.1% prior
Pending Home Sales, March (10:00): 0.1% expected, -0.4% prior

April 30 - Tuesday
Employment Cost Index, Q1 (8:30): 0.5% expected, 0.5% prior
Case-Shiller 20-city, February (9:00): 8.7% expected, 8.1% prior
Chicago PMI, April (9:45): 52.0 expected, 52.4 prior
Consumer Confidence, April (10:00): 61.0 expected, 59.7 prior

May 1 - Wednesday
MBA Mortgage Index, 04/27 (7:00): 0.2% prior
ADP Employment Chang, April (8:15): 155K expected, 158K prior
ISM Index, April (10:00): 51.0 expected, 51.3 prior
Construction Spending, March (10:00): 0.4% expected, 1.2% prior
Crude Inventories, 04/27 (10:30): 0.947M prior
FOMC Rate Decision, May (14:15): 0.25% expected, 0.25% prior
Auto Sales, April (15:00): 5.3M prior
Truck Sales, April (15:00): 6.7M prior

May 2 - Thursday
Challenger Job Cuts, April (7:30): 30.0% prior
Initial Claims, 04/27 (8:30): 346K expected, 339K prior
Continuing Claims, 04/20 (8:30): 3050K expected, 3000K prior
Productivity-Preliminary, Q1 (8:30): 1.2% expected, -1.9% prior
Unit Labor Costs, Q1 (8:30): 1.6% expected, 4.6% prior
Trade Balance, March (8:30): -$43.5B expected, -$43.0B prior
Natural Gas Inventor, 04/27 (10:30): 30 bcf prior

May 3 - Friday
Nonfarm Payrolls, April (8:30): 150K expected, 88K prior
Nonfarm Private Payrolls, April (8:30): 166K expected, 95K prior
Unemployment Rate, April (8:30): 7.6% expected, 7.6% prior
Hourly Earnings, April (8:30): 0.2% expected, 0.0% prior
Average Workweek, April (8:30): 34.6 expected, 34.6 prior
Factory Orders, March (10:00): -2.5% expected, 3.0% prior
ISM Services, April (10:00): 54.0 expected, 54.4 prior

By: Jon Johnson, Editor
Copyright 2013 | All Rights Reserved

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

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