Market Plays the 'Pat' Scenario

MARKET SUMMARY

- A little QE, even from Japan, and you get new highs.
- Improbable, but market plays the 'pat' scenario, selling in September and October, then turning and rallying right back up.
- Spending lower to start Q4 after Q3 showed declining consumption already.
- New month and perhaps some new money to drive stocks a bit more before a test of the breaks higher.

Japan provides the treat, stocks surge.

Seems it doesn't matter where QE is in the world, as long as there is QE. Overnight the BOJ surprised markets with an expansion of its QE. We say surprised, but a couple of weeks back recall the rumor that Japan was about to start more QE, a rumor that started with a good source, one of the administrators in Japan. A senior BOJ official immediately denied any such intention. Two weeks later, voila. So, yes it was a surprise but it was not a total bolt out of the blue.


Japan's Kuroda: 'QE for all! Why didn't I think of this sooner? Banzai QE!'



Mario Draghi's response

Of course stock markets treated it as if it were. I suppose after Mario Draghi at the ECB crying wolf for over a year about the ECB starting QE, the comments from some sub-official in Japan were dismissed. Thus investors treated the news as a complete surprise and stocks surged worldwide. Any major economy announcing QE is apparently good news for all economies and investors bought, pricing in more financial asset inflation thanks to more money printed, money that has few places to go other than financial markets.

Money was certainly heading into the US financial markets as stocks surged on huge volume. I suppose the end of month didn't hurt at all either. In any event, stocks surged to close out the month and provided a nice backdrop to go trick or treating.

SP500 23.40, 1.17%
NASDAQ 64.60, 1.41%
DJ30 195.10, 1.13%
SP400 1.22%
RUTX 1.53%
SOX 3.87%

VOLUME: NASAQ +17% to 2.3B. NYSE +48% to 1B. A little end of month trade pushed up volume. Perhaps we see the same again to stat November. .

A/D: NASDAQ 2.3:1, NYSE 3.3:1

SP500 and DJ30 bolted to new all-time highs. NASDAQ gapped to a 14.5 year high. The other indices are in various stages of their rallies, working toward new highs but with significant ground to cover before getting there. Still solid moves all around despite not new highs all around.

We picked up some TRLA on a good move. Took some gain on IDCC and INSY, closed NFLX. It was a very good week and we banked a lot of nice gain, taking profits on positions acquired when the market selloff froze many investors into inaction. By watching the patterns and not listening to the breathless and yea verily panicked advisors on the financial stations, we acquired some great positions that have already yielded excellent gains.

Of course those mouth-breathing advisors finally jumped back on board -- last Friday -- giving them a week of upside. By watching the patterns just as we did in May when Mr. Tepper said he was worried, we saw that buys were there, making their moves even as the heralded TV pundits talked of an untrustworthy market, about how there was no reason to step into the selling.

Heck, I didn't like the action either and felt more selling had to come. Nonetheless, recall how we advised to take downside gain on further downside even as the pundits were more and more skeptical. Stocks were extended downside, and more importantly, we saw some very solid upside patterns developing. We mused at the time that everything was set for a 'pat' October bottom: weak September and October, fears crescendo over Ebola and some weaker economic data, new lows exploded to extremes, the put/call ratio finally cracked, and importantly, key warnings spooked investors, and most importantly, the pundits puckered as well (Cramer advising everyone to not buy just as it was time to buy).

Others were selling their stocks while we were selling positions on our put options, taking in very nice gain on the one hand, then buying upside positions as they bottomed and broke higher. Never felt the move would make it to new highs, but that is exactly why you play the patterns and what the market is showing you versus your gut. Thus we have banked some very nice gain on the upside for over a week now as the plays we picked up early hit initial targets for the first profit taking, and indeed continue to advance past those targets.

Now the large cap indices are at new highs. The US economic headlines continue to show improvement, QE may be ending but it lives elsewhere, the Fed holds out the promise of later rather than sooner rate hikes (likely a false promise), and buy backs continue with more announced last week. Nothing has kept stock prices higher more effectively than stock buybacks that, as seen in some cases such as AAPL, equaled the amount of revenues for the quarter. And people wonder why there is no hiring; if you use all of your revenues to buy stock there is not much money to spend on anything else such as additional wages. Given many of the earnings beats are still bottom line only (revenues still missing), what is the incentive to hire if your business is not expanding? Buy back stock, push up earnings per share, push up the stock price.


But look at those profits. Look at those new highs. Surely all is not only well but rapidly rising in the US. Surely?

The pundits are excited about the new highs and how strong the US supposedly is. Strong is relative. Very relative. The US economy has been so weak for so long that this activity is stronger in comparison. Other countries are so weak the US looks much stronger. France is just now experiencing riots because there are no jobs. But the US is still killing more companies than creating. Just over 50% of US households earn $28K per year. The largest employer in the US pays an average $8/hour when 50 years ago the largest employer paid $28/hour in constant dollars. The administration trumpets the 'surplus' of jobs created but the 25 to 54 demographic, the wheel house of earnings power, is still millions of jobs below 2007 levels.

Our economy has split into the large corporations that benefitted from day 1 of the stimulus, and have benefitted more and more as more and more regulations were passed. The ACA imposes costs that large companies can absorb or pass along. The burden on small companies, however, is so much larger a percentage more of their gross income that there is no way to pass the costs along without doubling or tripling prices. Either way the big companies win, further solidifying their dominance of the US economy.

That is why you see earnings for the large companies growing at rates that appear incongruous to most of the workers (or former workers) in the US who see their wages, hours, bottom line take home shrinking. That is because the small businesses that historically create 75% of the new jobs are still folding at a faster pace than they are being created as they are squeezed by regulation, additional costs, and a playing field now vastly skewed toward the largest players. Thus you see the earnings beats all over the place, figure that perhaps the rest of the economy outside of your sector is doing well, and hope that yours is the next to see the upturn. No, it is a situation where if you are not in the large cap arena you simply cannot compete and are ground into oblivion.

Thus the downfall of the US economy in terms of its ability to cultivate small, new companies that grow to big companies, creating millions upon millions of jobs along the way, the kind of jobs that raise the standard of living, not reduce it for the middle class as has occurred. Sure the headlines look good and the earnings reported for SP500 companies look grand, but this is at the cost of our former middle class prosperity, the true backbone of US economic strength (and thus overall strength) since the country's inception. When you have over 50% of the US earning less than 28K it is clear this recovery is not a true recovery. More profits yes, but more profits for fewer and fewer businesses. Is that a good thing? Is that a healthy economy for the people of the US?


THE MARKET

CHARTS

SP500: New highs as the 2.5 week run from the mid-October lows continues its improbable surge. Not improbable that it had the move but improbable that it hit new highs without a pause. After this kind of move you would anticipate some pullback to test the break higher. It will happen but when and how deep are the issues. Certainly does not look as if this was a last gasp surge.

NASDAQ: Gapped to a new 14.5 year high. Gapped, could not advance, faded some off the open to the close. Best volume in two weeks, since the turn off the bottom, so solid action but likely end of the month volume. Solid advance, new high, will test at some point, but when is the test; have not had one on this move yet, and after some more upside it would be a good time to try it.

RUTX: Gapped upside as well, rallied more into the close. Approaching the early September high, but that is just an interim peak. July and March are still higher. Okay, so it has more room to run, right? Next key resistance at 1185ish, closed at 1173.

SOX: Gapped upside, closed near the high, still has the July and September twin peaks at 651 to 659 (closed at 641) ahead, but as with the rest of the market, SOX is taking back and holding lost ground.

SP400: Gap and rally, closing at the session high. Working on clearing some interim resistance at 1430ish and then the highs at 1448 (closed at 1418). When it gets there it then has to deal with the twin peaks from July and September.

DJ30: Big boost by V and company Thursday and Friday, pushing DJ30 to a new all-time along with SP500. Straight down, straight up. As with the other new high indices, a bit more push on the broken resistance and a new month, then a fade to test, testing from a position of strength.


LEADERSHIP

Biotechs: Ran into some Friday after great upside runs. While the market partied, a lot of smaller biotechs that led the move faded, e.g. XLRN, XON, INSY. Some money leaving the group and we will have to watch closely this week to see if this was just an end of the month profit taking move (something we were doing as well) or a rotation out.

Energy: Still not beautiful, but still showing signs of trying to turn. XEC, RIG, HAL.

Financial: Big day Friday as JPM, BAC, C all moved higher. CME surged to a higher high.

Software: Nice week. CRM leading the pack.

Internet showing life: VIPS, TRLA. LLNW coming to life off of support.


MARKET STATS

NASDAQ
Stats: +64.6 points (+1.41%) to close at 4630.74
Volume: 2.328B (+17.03%)

Up Volume: 1.86B (+790M)
Down Volume: 557.88M (-385.44M)

A/D and Hi/Lo: Advancers led 2.33 to 1
Previous Session: Advancers led 1.73 to 1

New Highs: 243 (+112)
New Lows: 51 (-14)

S&P
Stats: +23.4 points (+1.17%) to close at 2018.05
NYSE Volume: 1B (+48.26%)

A/D and Hi/Lo: Advancers led 3.27 to 1
Previous Session: Advancers led 1.74 to 1

New Highs: 322 (+121)
New Lows: 58 (-11)

DJ30
Stats: +195.1 points (+1.13%) to close at 17390.52


SENTIMENT INDICATORS

VIX: 14.03; -0.49
VXN: 15.81; -0.8
VXO: 13.73; -0.3

Put/Call Ratio (CBOE): 0.77; -0.19


Bulls and Bears:

Bulls: 47.0% versus 35.3% versus 37.8% versus 45.5%. Bears explode upside after 2 weeks of rallying.

Bears: 16.3% versus 18.2% versus 17.3% versus 14.1%. On the fade again.

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.




Bulls: 47.0%
35.3% versus 37.8% versus 45.5% versus 47.5% versus 48.0% versus 52.5% versus 57.6% versus 56.1% versus 52.5% versus 49.5% versus 46.4% versus 50.5% versus 55.6% versus 56.5% versus 56.6% versus 60.6% versus 57.6% versus 60.2% versus 61.4% versus 62.6% versus 62.2% versus 58.3% versus 57.2% versus 55.1 versus 55.7 versus 54.7

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

Bears: 16.3%
18.2% versus 17.3% versus 14.1% versus 15.1% versus 15.3% versus 15.2% versus 14.1% versus 13.3% versus 15.1% versus 16.2% versus 16.2% versus 17.1% versus 16.2% versus 17.2% versus 15.1% versus 15.2% versus 16.1% versus 16.3% versus 17.2% versus 17.4% versus 17.3% versus 18.3% versus 19.4% versus 20.6% versus 19.7% versus 21.7% versus 20.6 versus 18.6%

Background: Over 35% for bears is the threshold to be really be a good upside indicator. The best indication is when bears cross up through bulls as the two merge. Right now bulls are coming back down from the 60 level that has consistently marked market tops over the past two years. The rapid decline in progress is pushing the bulls/bears lines toward one another. Still far from a cross with bulls falling faster than bears are rising, but bears are warming up to the notion of market weakness.


OTHER MARKETS

Bonds: 2.33% versus 2.31% versus 2.32% versus 2.29% versus 2.26% versus 2.26% versus 2.28% versus 2.22% versus 2.18% versus 2.20% versus 2.16% versus 2.14 versus 2.20% versus 2.28% versus 2.31% versus 2.34% versus 2.42% versus 2.44% versus 2.44% versus 2.41% versus 2.49% versus 2.48% versus 2.53% versus 2.51% versus 2.56% versus 2.53% versus 2.56% versus 2.58% versus 2.63% versus 2.62% versus 2.59% versus 2.59% versus 2.61% versus 2.55% versus 2.54% versus 2.50% versus 2.47% versus 2.45% versus 2.45% 10 year.


Oil: 80.54, -0.78. Still putting in the bottom along support at 79.50, working in its three week lateral range.

Gold: 1171.60, -27.40. Crashed the early October low to a new 4 year low.

$/JPY: 112.32 versus 109.23 versus 108.89 versus 108.16 versus 107.83 versus 108.13 versus 108.17 versus 107.20 versus 106.88 versus 106.38 versus 106.875 versus 106.33 versus 105.92 versus 107.05 versus 107.29 versus 107.66 versus 108.12 versus 107.95 versus 108.96

Now THAT is an explosive move. At least a 5 year high versus the euro.

Euro/$: 1.2525 versus 1.2610 versus 1.2632 versus 1.2734 versus 1.2698 versus 1.2670 versus 1.2650 versus 1.2645 versus 1.2723 versus 1.2810 versus 1.2760 versus 1.2809 versus 1.2838 versus 1.2658 versus 1.2683 versus 1.2628 versus 1.2748 versus 1.2680 versus 1.2627


MONDAY

First week of a new month and that means the jobs report to end the week. Will there be some new jobs in the 25 to 54 age demographic? Based upon the headlines re the economy, there should be surging jobs. Then again, as outlined earlier, the economy is different now. The economic yardsticks don't differentiate whether a large number of business of all sizes are contributing (as used to be the case) or a few large companies are dominating all of the activity as is the case now. The jobs reports, JOLTS, and other jobs related reports show this: despite 3+% GDP of late, there are no significant breadwinner jobs created. Plenty of low end jobs going to seniors trying to scratch out a life after the financial collapse and the lopsided, non-savers recovery fomented by the Fed's policies.

As for the technical picture, this coming week requires some analysis. Incredible surge higher, some new highs, over 2 weeks of straight up running. Hard to argue against the tape, and with the end of the month surge there could be a beginning of the new month push to put more money to work ahead of or during what appears to be the run to the year end.

Three weeks back we talked about how the market had sold as it often does in September and into October and that it was possible that the 'pat' play was in, that the market had sold as it does at this time and was set for the year end run. We saw good patterns and moved in when most people were fearing more selling. We didn't expect move to be THE move to higher highs and the year end run, but knew it was possible it could be just that. Turns out it was, and even though we were skeptical, we bought the move and now we are enjoying the nice run.

Stocks are quite extended on this run, but SP500, DJ30, and NASDAQ just cleared the prior highs. They will test at some point, and what we can see is a continued move as new money enters the market this week for the new month. After that you get a test of the break with the indices coming back down to test the old high, dealing from a position of strength. That allows stocks to test their breaks higher and provides new entry points . . . if the test holds. Nothing suggests right now that it would not.

So, we will look for the upside still but likely need more of a pullback to test the breaks higher to get the really good entries on stocks that are already running. Of course there could be new areas emerging, e.g. energy, and thus we could pick up some good upside even while the overall market seems stretched. When money rotates new plays set up. That is also why it is very important to watch biotechs this week as an indication that money may indeed be rotating, out of a winning area to others.



SUPPORT AND RESISTANCE

NASDAQ: Closed at 4630.74

Resistance:

Support:
4610 is the September 2014 post-bear market high.
The 10 day EMA at 4500
4486 is the July 2014 high
The 50 day EMA at 4450
4372 is the March 2014 high
The August low at 4321
The 200 day SMA at 4318
4316 is the lower gap point from October 2014
4289 is the July 2000 recovery high
4277 is the March lower gap point
4246.55 is the January 2014 peak
4185, the May lower gap point
4131 is the March 2014 low
4104 is the lower gap point from 12/20/13
4070 is the series of highs from late November/early December
3991 is the prior November 2013 high and the post-bear market high.
3968 is the February 2014 low
3946 is the April 2014 intraday low


S&P 500: Closed at 2018.05

Resistance:
2053 is the December 2012 up trendline

Support:
2011 is the September prior all-time high
1991 is the July 2014 high
1995 is the lower trendline from 11/2012
The 50 day EMA at 1956
The 200 day SMA at 1912
1905 is the August 2014 low
1902 from early May was the intraday all-time high.
1897 is the prior all-time high hit in April 2014
1883.57 is the early March high.
The December and January highs at 1848
The April 2014 low at 1814
1808 is the November and December 2013 twin peaks
1775.22 is the October prior all-time high
1768 is the December 3013 low
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


Dow: Closed at 17,390.52

Resistance:

Support:
17,351 is the September 2014 all-time high.
17,152 is the mid-July post bear market high
17,068 is the early July 2014 peak
16,970 is the June 2014 former all-time high
16,946 is the June 2014 peak
The 50 day EMA at 16,832
16,736 is the penultimate all-time high from May 2014
16,632 is the April 2014 all-time high
The 200 day SMA at 16,606
16,589 is the December 2013 all-time high
16,506 is the March 2014 peak
16,341 is the May low
16,334 is the August 2014 low
16,257 is the January 2014 low
16,179 is the November 2013 peak.
15,739 is the December 2013 low
15,696 is the September 2013 peak
15,659 is the August 2013 peak


ECONOMIC CALENDAR

October 31 - Friday
Personal Income, September (8:30): 0.2% actual versus 0.3% expected, 0.3% prior
Personal Spending, September (8:30): -0.2% actual versus 0.1% expected, 0.5% prior
PCE Prices - Core, September (8:30): 0.1% actual versus 0.1% expected, 0.1% prior
Employment Cost Index, Q3 (8:30): 0.7% actual versus 0.5% expected, 0.7% prior
Chicago PMI, October (9:45): 66.2 actual versus 60.0 expected, 60.5 prior
Michigan Sentiment - Final, October (9:55): 86.9 actual versus 86.4 expected, 86.4 prior

November 3 - Monday
ISM Index, October (10:00): 56.2 expected, 56.6 prior
Construction Spendin, September (10:00): 0.7% expected, -0.8% prior
Auto Sales, October (14:00): 5.6M prior
Truck Sales, October (14:00): 7.5M prior

November 4 - Tuesday
Trade Balance, September (8:30): -$40.1B expected, -$40.1B prior
Factory Orders, September (10:00): -0.5% expected, -10.1% prior

November 5 - Wednesday
MBA Mortgage Index, 11/01 (7:00): -6.6% prior
ADP Employment Chang, October (8:15): 220K expected, 213K prior
ISM Services, October (10:00): 58.0 expected, 58.6 prior
Crude Inventories, 11/01 (10:30): 2.061M prior

November 6 - Thursday
Challenger Job Cuts, October (7:30): -24.4% prior
Initial Claims, 11/01 (8:30): 285K expected, 287K prior
Continuing Claims, 10/25 (8:30): 2380K expected, 2384K prior
Productivity-Prel, Q3 (8:30): 1.4% expected, 2.3% prior
Unit Labor Costs, Q3 (8:30): 0.9% expected, -0.1% prior
Natural Gas Inventor, 11/01 (10:30): 87 bcf prior

November 7 - Friday
Nonfarm Payrolls, October (8:30): 235K expected, 248K prior
Nonfarm Private Payr, October (8:30): 228K expected, 236K prior
Unemployment Rate, October (8:30): 5.9% expected, 5.9% prior
Hourly Earnings, October (8:30): 0.2% expected, 0.0% prior
Average Workweek, October (8:30): 34.6 expected, 34.6 prior
Consumer Credit, September (15:00): $16.0B expected, $13.5B prior

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

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

Technorati tags: stock trading stock market investing Jon Johnson InvestmentHouse.com