Inflation Starts Its Rise

MARKET SUMMARY

- Another down Friday as the market swings to a near term downtrend.
- Predictions of more selling then a rebound or further selling. No one knows who is right, just know there is trouble and we can play it.
- Inflation starts its rise, almost camouflaged by all of the issues swirling in the economy.
- NASDAQ, RUTX, even SP500 already approaching the next important support.
- How to approach this post Q-eternity market.

Another weak end to a week.

Last weekend I talked about how the correction was not coming but that it was here. The past week the market demonstrated once again the sellers are in control. A solid relief bounce, at least in price and somewhat breadth terms, couldn't put in more than two upside sessions before it was hammered back down. Hard. All of the indices coughed up the most recent rally attempt, undercutting the low of the prior selling.

SP500 -17.39, -0.95%
NASDAQ -54.38, -1.35%
DJ30 -143.47, -0.89%
SP400 -1.27%
RUTX -1.44%
SOX -1.55%

Volume: +1% NYSE, -6% NASDAQ. Above average on both exchanges as they more or less matched the Thursday higher volume selling.

A/D: -2.5:1 NYSE, -3.9:1 NASDAQ

In loss terms the moves are not so bad (SOX) to fairly ugly (RUTX). Of course this is where it gets a bit weird. Not that the market is correcting. After such a run a correction had to come. It is the predictions. Ron Insana says 10% to 20% followed by a resumption of the upside. Carl Icahn Thursday night said a 'major correction' was coming as the earnings are just not that good; the Fed's easy money allowed many companies to 'fake' their results. When will the correction come? Three days or three years. Marc Faber says the major indices could lose 30% in a 1987-type crash, but Faber suspects it will be even worse. This year, 'for sure.' Maybe from a 'higher diving board' from here as Faber calls it, but overall he has shifted from a buyer during the money printing to now saying it is not a good time to buy stocks.



With the indices shifting dramatically to a near term downtrend it is pretty easy to say now is not a good time to buy stocks if you anticipate months of gains ahead. Duh. I, however, am simply not smart enough to know how much or how far. As Eastwood said in 'Magnum Force,' a man has got to know his limitations.


Lieutenant Briggs getting blown up. 'A man's got to know his limitations.'
Magnum Force, 1973

I do know the market looks to be at the start of a more significant move lower as noted last weekend and indeed even before that when I wrote of the volatility indicating the trend was at an end. The character has changed. The leaders have faltered and nothing dynamic is taking their place. The run was getting too volatile as I have discussed using the NASDAQ chart as an example with its wider range and greater volatility after a long trend higher.

I do know that the new highs are not supported by the economic growth. We have said all along that the economic data was not the driver. Just three quarters of 4% GDP growth in a 5+ year recovery does not warrant NASDAQ growing 3.5 times and SP500 2.8 times its 2009 lows. The economic data has been weak for most of the time, and when it is stronger, it is highly questionable as we pointed out time and time again. Even now with the data stronger the past two quarters, it is the headlines that show the strength while the guts of the reports still fail to show that consistent kind of underpinnings you see when the economy is truly strong. It seems the Fed easy money has made it easier not only for companies to 'fake' their earnings, but the government to 'fake' the data as well. No conspiracy theory there; it was shown the data ahead of the 2012 elections was manipulated to get to 'magical' numbers pre-election.

Now we see the data taking a nasty turn. Friday's March PPI took a nasty turn to inflation. You can only change the calculus and hide the number for so long before even the rigged numbers (using that because it is a word of appeal these days it seems) can no longer contain the facts.




It was explained away as an increase in demand for services. Increased demand or just prices? What about food rising 1.1% in March? Cattle prices surging to multiyear highs on top of already high prices. Pork prices surging as a certain disease hits the US supply for the first time ever. Eggs surging.

They even tell us gasoline and energy are not contributing to the price rise. Really? Really? Gasoline prices are up a solid 30 cents the past few weeks to an 8-month high (Lundberg Survey), and even without that spike they have been over $3/gallon for years.



Do you not think there is ANY connection between that and the lethargy in our consumer? In the plight and blight of the middle class? That is money burned, pure and simple.



We still have to drive to work. We still have to move massive amounts of goods. We are not a small area such as the EU. We need lower fuel prices or our standard of living falls. Yet, we don't factor them into the equation because they are 'stable' at over $3/gallon of gas. Let me put it this way: do you not think it would impact the economy if everyone was required each week to take an extra $30 out of his or her wallet or purse and throw it in the trash (an extra $1.50/gallon of gas times 20 gallons)? With over 300+ million people that is $9B per week, $36B/month, and $432B/year.




But I digress.

This market is not built upon economic fundamentals or even a rosy growth story. It is on Fed money and now Fed money is being withdrawn and we know that, despite the FOMC minutes proclaiming 'from here to dove-ternity' in terms of interest rates, rates will rise. Yellen, uber dove, had a moment of truth in the press conference following her first FOMC meeting as the chair. She may want the words taken back, but that does not make them any less true. Just transparent now, right?

The market started to break almost as soon as the Fed announced taper. NASDAQ chart shows the volatility in the uptrend started at that point. The fight was on as the swings down and up increased in amplitude and frequency. The fight between the buyers and sellers started. I called the top around that time, but it was not the top, it was part of the topping process, the start of that process. Thus my top was consumed by more rallies. No complaints; we made a ton of money on those moves.

With Yellen's post-meeting admission, the path is complete. The market is pricing in a market without the Fed printing money. No matter what you hear about 'gee guys, there is still $55B/month being printed and rates are low,' the fact is that tapering is tightening to market gains built on QE when there is no commensurate belief the economy can pick up the slack. Indeed, the nasty spike in PPI is the worst-case scenario: the Fed has tried to kickstart the economy with easy money, it knows it has to withdraw it or risk inflation even if the economy is not strong enough, and now it looks as if inflation is stirring. INFLATION OCCURS WHEN DEMAND, REAL OR ARTIFICIALLY CREATED (as in easy money situations) IS GREATER THAN SUPPLY. WITH NO COMPANIES INVESTING IN GROWTH (but instead in buy backs and dividends), SUPPLY STAGNATES. Inflation results. I fear we are seeing that finally appearing.


This is a pretty good cartoon. Economy big and strong, inflation low. Economy slows and supply shrinks. Fed, government push up demand. More demand, lower supply. Textbook inflation.


Pricing it all in.

Now the market is engaged in setting prices in this environment. That is not a good environment when the economic activity is so tepid and uncertain thanks to policies promulgated by the federal government. Beef prices are surging. So, let's run off a rancher from lands his family has grazed cattle upon for generations.



Gasoline prices are eviscerating the budgets of millions of middle class households, contributing to the wipeout of the middle class. So, let's kill pipelines that can transport Canadian oil to the US either for us to use or sell. Pass environmental regulations (or should I say, write executive orders) on top of those that already have US waters swimmable and fishable as per the Clean Water Act's mandates, making it impossible to build and operate new gasoline refineries in the US. Thus no matter how much oil we produce, gasoline prices will remain high.

Lots to price in, and what this adds up to is a belief that Mr. Insana's prognosis of a correction then growth in the spring (as Chauncey Gardener would say in 'Being There') may not come true. I don't ascribe to Faber's disaster scenario, but a major correction, perhaps more than Icahn predicts, seems quite possible.


Playing it.

All we can do is play and take what the market gives. As stated Thursday, that means a near term downtrend that is now in place and will likely continue for quite some time as we work through the next elections and then the 2016 elections. I kid you not; the economic course of this country will not change with the current administration in charge. Modest to moderate growth, as the Fed puts it, will be the best we get.

The downtrends will of course be punctuated by sharp upside. Always is. We got two days last week and thought we would get more but it was not ripe yet. Now you have NASDAQ at support or darn close, RUTX at the 200 day, SP500 just off its next support level. Soon, after a bit more downside, there is a tradable upside rally we can play. We will take some more gain on our downside positions as some more weakness shows itself next week, then we prepare for a bounce.

We prepare by tracking stocks that are not selling off in the selling but using the selling to set up solid patterns. Not all are boring utilities, consumer stocks, or financials that don't move much. Hell, none of them are financials because they are diving as interest rates fall again. Energy is there, electronics (yes still leading), even some tech and internet. Very good patterns even in the carnage.

When the selling gets right, when you have a big drawdown in the indices one week and it continues unabated and with vigor into the next, you look for the reversal. It is getting close to that on NASDAQ and RUTX with their six weeks of downside starting to crescendo the past 7 sessions.

The upside is played with shorter time horizons and thus shorter target expectations. You look for plays that do not necessarily have to break resistance to return 3:1 or 2:1. Move in, get to the target or close, get out. One thing this climate does: it makes you play upside very precisely, it makes you set targets and stops and stick to them. In overall upside trends we play the ripe downside just this way: precise targets to prior lows and/or key support, good risk/reward, good ratios of success, and banking the gain when it is hit.

The downside is played with more latitude. You are with the trend so you take partial profits when the initial target is hit, then let some of the position run as the trend will favor letting positions continue. Geed patterns, good entries, partial profits, let them run.



THE MARKET

OTHER MARKETS

Euro/Dollar: Down all week but now at support and may try to bounce.

1.3883 versus 1.3886 euro versus 1.3855 versus 1.3797 versus 1.3742 versus 1.3701 versus 1.3712 versus 1.3760 versus 1.3794 versus 1.3779 versus 1.3752 versus 1.3748 versus 1.3788 versus 1.3823 versus 1.3842 versus 1.3794 versus 1.3776 versus 1.3831 versus 1.3930 versus 1.3925 versus 1.3907 versus 1.3858 versus 1.3907 versus 1.3870 versus 1.3869 versus 1.3872 versus

Dollar/Yen: Down all week as well, but slowing the decline, showing a bounce coming at support.

101.43 versus 102.00 versus 101.70 versus 102.59 versus 103.10 versus 103.24 versus 103.92 versus 103.76 versus 103.68 versus 103.21 versus 102.81 versus 101.24 versus 101.99 versus 102.26 versus 102.25 versus 102.25 versus 102.42 versus 102.51 versus 101.40 versus 101.75 versus 101.29 versus 101.67 versus 102.71 versus 102.90 versus 103.24 versus 103.33 versus


Bonds: New high. Money pouring into bond funds. Escaping stocks? Probably. Worried about overseas issues? Probably. Worried about US economic prospects. Probably this as well. The yield curve is flattening, however, and that is the worrisome thing. As noted last week, that foretells weaker economic activity. Always has.

10 year: 2.62% versus 2.65% versus 2.69% versus 2.68% versus 2.70% versus 2.73% versus 2.79% versus 2.80% versus 2.75% versus 2.73% versus 2.71% versus 2.68% versus 2.70% versus 2.75% versus 2.73% versus 2.77% versus 2.78% versus 2.77% versus 2.67% versus 2.70% versus 2.65% versus 2.65% versus 2.72% versus 2.77% versus 2.78% versus 2.79%


Oil: 103.74, +0.34. Rallied back near the late February high and showed a doji Friday. Maybe a bit of softness near term given the run, but oil continues to show the ability to run right back up to this level.

Gold: 1318.60, -1.50. Two week bounce, but not much ground covered. Back over the longer term down trendline, but not with a lot of force.


CHARTS

NASDAQ: Gapped lower, fill the gap intraday, then sold off closing near the session low. This follows the Thursday 100+ point downside session. New low on this sixth week since the peak in early March. NASDAQ is now just 30 points from the February low (3968). There is some support there and with the nasty downside the past four weeks NASDAQ may try to put in a stand there. Why this particular point? Because it would be where NASDAQ would bounce to set up a head and shoulders pattern, rallying back to the January peak near 4230 for the apex of a right shoulder. Thus NASDAQ is close to a tradable, 240 point rally.

SP500: Finally broke, selling through the 50 day EMA, the 11/12 trendline, and the December and January highs. Some support at 1808-1805 from the November/December highs.

SOX: Started to crack. Lower low on Thursday, then gapped through the 50 day EMA Friday as well as the upper range of the long term trading range. It is toying with the top, but it is such a big pattern that minor breaches don't really matter. What does matter is the near term for the market and how it reacts to this minor incursion.

SP400: Crashed the lower trendline in the channel. Hard. Did this in late January but reversed it almost immediately. Only the second time it has done this the entire rally from November and it did it within two months. Nasty two weeks culminating in this move. SP400 is also approaching next support, however, and could aid in the rebound move.

RUTX: At the 200 day SMA after two weeks of harsh selling. Other support from prior lows and peaks in this range so RUTX, as with NASDAQ, is in a good area to put in a more tradable move upside.


LEADERSHIP:

Dynamic leadership is harder to come by, an indication of a market in a downtrend. Some leaders are able to make money, others you would rather ignore. There are still some very solid leaders that produce very solid returns, and if they can continue using the selling to set up, they will provide nice returns on that tradable bounce.

Electronics: Still leading. FSLR was down but holding. MXWL. OVTI. LSCC. IPGP.

Energy: AXAS, NBL, CRR

Tech: WDC in an interesting pattern. STX may set up again. More techs are breaking down than setting for sustained upside moves, however.

Financials: Tanking. JPM gapped below the 200 day SMA on earnings. BAC is down even more but getting closer to a bounce. WFC fell to the 50 day EMA and is trying to bounce.



MARKET STATISTICS

NASDAQ
Stats: -54.37 points (-1.34%) to close at 3999.73
Volume: 2.245B (-6.07%)

Up Volume: 368.8M (+213.8M)
Down Volume: 1.84B (-420M)

A/D and Hi/Lo: Decliners led 3.87 to 1
Previous Session: Decliners led 6.2 to 1

New Highs: 15 (-15)
New Lows: 98 (+40)

S&P
Stats: -17.39 points (-0.95%) to close at 1815.69
NYSE Volume: 714M (+0.71%)

A/D and Hi/Lo: Decliners led 2.49 to 1
Previous Session: Decliners led 3.43 to 1

New Highs: 36 (-39)
New Lows: 105 (+22)

DJ30
Stats: -143.47 points (-0.89%) to close at 16026.75


SENTIMENT INDICATORS

VIX: 17.03; +1.14
VXN: 22.65; +2.06
VXO: 17.19; +1.64

Put/Call Ratio (CBOE): 1.15; +0.12


Bulls and Bears:

Bulls right back up: 54.6 versus 50.5 versus 54.7 versus 52.0. Nothing like a sharp pullback to rethread the bulls' heads.

Bears holding higher level: 18.6 versus 18.6 versus 7 of 8 weeks at mid-17.

Theory: When everyone is bullish and has put all their capital to work, where does the ammunition to drive the market come from? There is always new money to start a new year. After that is used will more money be coming? That is the question.




Note the extreme bullishness: it was this high in 2007 at the crash, in early 2005 as well.

Bulls: 54.6 versus 50.5
54.7% 52.0% 54.6% 53.5% 46.5% 41.8% 45.9% 53.1% 57.6 56.1 60.6% 61.6% 60.0% 58.2% 57.1% 55.7% 53.6% 52.6% 55.2% 52.6 49.5 42.3% 45.4 46.4% 44.3% 42.3% 37.1% 37.1% 38.1% 43.3%.

Background: Last undercut 35%, the threshold for bullishness, in early June 2012.

Bears: 18.6 versus 18.6
17.5% 17.4% 15.1% 17.2% 17.2% 17.4% 17.4% 15.3% 15.1 15.3% 15.2% 15.2% 14.0 14.3 14.3% 14.4 15.5 15.5% 15.6% 16.5% 18.5 21.6% 20.6% 18.6% 20.6% 21.6% 22.7% 23.7% 23.8% 21.6%.

Background: 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

Downtrend in place near term but the indices are a bit oversold near term as well. NASDAQ and RUTX are at or very near support as is SP500. With Thursday and Friday ending on rather sharply negative notes the next week often starts weak. This past week there was not quite the downside flush out you want see in order to land a sharp and more sustained reversal. With the indices down even more and NASDAQ at a key level for a pattern to develop, a good run lower to finish the test Monday helps set up a new move.

We are looking at some positions to the upside and the downside. Long upside trends die slowly, and there will be an attempt to buy them at this next support. As noted earlier, that provides plenty of room for a tradable bounce upside. Thus the upside plays. They are stocks in good patterns that used the selling to set up, that are testing support by using the selling to digest gains, or they are at the bottom of a range and ready to bounce as they have done in the past. Those are good percentage plays and we want good risk/reward in that we don't have to necessarily break to new highs to make our money.

As for the downside, after this kind of drop you would prefer waiting for a bounce to enter new plays and for the most of our downside plays that is what we will do. There are some, however, in excellent position to continue lower as they are not oversold but their patterns are weak or weakening and there are gaps to fill. Thus even if they sell then recover some, they are going to be drawn to that gap point again. We can put some money to work on them if not full positions.

Selling is always more tumultuous than the upside. Steady gains are often sold off hard and fast. Now that we have a trend lower the downside has the upper hand but it will still be a battle. As noted, long trends tend to die hard and not without a fight. Thus nothing is straight up or straight down.

Have a great weekend and take note of all that is ongoing here. Standoff in Nevada with a rancher and BLM. Militia have moved in as well. High food prices. High gas prices. Wages still falling in a purportedly recovering economy. Bonds surging. There are many things bubbling on the stove as they say. And then of course, there are earnings!



SUPPORT AND RESISTANCE

NASDAQ: Closed at 3999.73

Resistance:
4070 is the series of highs from late November/early December
4104 is the lower gap point from 12/20/13
The 10 day EMA at 4128
4131 is the March 2014 low
The 50 day EMA at 4194
4226 is the lower November 2012 trendline
4246.55 is the January 2014 peak
4277 is the March lower gap point
4289 is the July 2000 recovery high
4320 is the upper channel line for the November 2012 to present uptrend.
4372 is the March 2014 high

Support:
3991 is the prior November 2013 high and the post-bear market high.
3968 is the February 2014 low
The 200 day SMA at 3936
3855 is the November low
3819 is the early October high
3801 is the September 2013 high.
The October low at 3750
3697 is the August high and a prior post-bear market high in the recovery.


S&P 500: Closed at 1815.69

Resistance:
The 50 day EMA at 1847
The December and January highs at 1848
1850 is the December 2012 up trendline
1883.57 is the recent all-time high hit in early March.
1897 is the all-time high hit in April 2014

Support:
1808 is the November and December 2013 twin peaks
1775.22 is the October prior all-time high
1768 is the December 3013 low
The 200 day SMA at 1761
1738 is the February 2014 low
1730 is the September 2013 peak
1710 is the August 2013 peak.
1698 to 1700 are the July and August interim highs
1687 is the May high and post-bear market high
1685 is the mid-August 2013 upper gap point
1657 is the late August upper gap point
1654 is the June 2013 peak
1646 is the October 2013 low just before the surge into early 2014
1627 is the August 2013 low


Dow: Closed at 16,026.75

Resistance:
16,179 is the November 2013 peak.
The 50 day EMA at 16,238
16,257 is the January 2014 low
16,506 is the March 2014 peak
16,515 is a lower trendline off the 11/2012 low
16,589 is the December 2013 all-time high
16,632 is the April 2014 all-time high

Support:
The 200 day SMA at 15,746
15,739 is the December 2013 low
15,696 is the September 2013 peak
15,659 is the August 2013 peak
15,542 is the May 2013 intraday high
15,340 is the February 2014 low
15,318 is the June closing high
15,050 from the August 2013 interim recovery high
14,888 is the April peak and prior all-time high
14,844 is the June intraday low
14,762 is the August 2013 low
14,551 is the June 2013 intraday low on the selloff (14,659 closing)


Economic Calendar

April 11 - Friday
PPI, March (8:30): 0.5% actual versus 0.1% expected, -0.1% prior
Core PPI, March (8:30): 0.6% actual versus 0.1% expected, -0.2% prior
Michigan Sentiment, Preliminary April (9:55): 82.6 actual versus 81.0 expected, 80.0 March final

April 14 - Monday
Retail Sales, March (8:30): 1.0% expected, 0.3% prior
Retail Sales ex-auto, March (8:30): 0.5% expected, 0.3% prior
Business Inventories, February (10:00): 0.6% expected, 0.4% prior

April 15 - Tuesday
CPI, March (8:30): 0.1% expected, 0.1% prior
Core CPI, March (8:30): 0.1% expected, 0.1% prior
Empire Manufacturing, April (8:30): 7.5 expected, 5.6 prior
Net Long-Term TIC Fl, February (9:00): $7.3B prior
NAHB Housing Market , April (10:00): 50 expected, 47 prior

April 16 - Wednesday
MBA Mortgage Index, 04/12 (7:00): -1.6% prior
Housing Starts, March (8:30): 955K expected, 907K prior
Building Permits, March (8:30): 1003K expected, 1018K prior
Industrial Productio, March (9:15): 0.5% expected, 0.6% prior
Capacity Utilization, March (9:15): 78.8% expected, 78.4% prior (revised from 78.8%)
Crude Inventories, 04/12 (10:30): 4.030M prior

April 17 - Thursday
Initial Claims, 04/12 (8:30): 312K expected, 300K prior
Continuing Claims, 04/05 (8:30): 2800K expected, 2776K prior
Philadelphia Fed, April (10:00): 8.6 expected, 9.0 prior
Natural Gas Inventor, 04/12 (10:30): 4 bcf prior

By: Jon Johnson, Editor
Copyright 2014 | All Rights Reserved

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

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