Sunday, February 13, 2011

Mubarak Quits for Real and the Market Rallies

- This time Mubarak quits for real and the market does the same thing it did on the dry run: rally.
- Treasury proposes 'winding down' FRE, FNM . . . very slowly.
- Foreclosures down again.
- Michigan Sentiment continues to improve
- Market does the improbable again, i.e. extending its rally beyond most traders' comfort level.
- Extended and moving into next resistance, but big and little names continue to jump higher.


After a trial 'resignation' stirs up more trouble, the military shows you who is in charge in Egypt. Oh yes, and stocks like what they hear.

Thursday night I pondered if the market would sell on Friday since Mubarak did not really resign. Everyone thought he would resign, including the State Department, all of the administration, and thousands of people in the street. It definitely sounded that way when he began his speech. Once it became apparent that he was not quitting, the market started to sell back and futures were down after hours.

We were wondering if it would sell, and it was selling in the morning. Futures were lower. After the dry run of the resignation on Thursday, the military showed us who is actually in charge in Egypt. They politely told Father Mubarak that he better officially resign. The people in the street would not stand for it, and the military did not want to fire upon their own citizens. From the safety of his summer residence, Mubarak then sent his VP out to say that this time, no fingers crossed, he was resigning. When that happened, the market took off to the upside. It was enjoying itself with a nice run through mid-morning.

It set up a strong surge mid-morning. A pullback, a lower high, a lower low, and a little ABCD pattern. It had the expected response. It broke back to the upside and the market rallied into the close, posting gains on top of gains. NASDAQ +0.7%; SP500, +0.5%; Dow +0.35%, SP600, +1%; SOX, +0.8%. Very solid moves indeed.

Looking at the chart, after a test to the 10 day EMA on Thursday and a gap lower on Friday, buyers stepped back in and bought the stock market once more. The market continues to do the improbable, and that is to continue rallying after a run that has now equaled the August-November run. It is making traders extremely uncomfortable to see stocks continuing to surge to the upside. CAT bounced back to the upside on Friday, and WYNN surged to the upside as well. This is on top of moves Thursday that were very impressive from stocks such as JNPR and WFMI. There were moves all across the market from many different sectors Thursday and Friday.

It is not just a big rush higher; there are very selective stocks making great moves, but everything is generally drifting to the upside. The market move is extended, but how many times have I said that the market will surprise you in how far it will rally. It will go beyond rational thought and continue to the upside. Recall when they talked about the internet bubble that just had to burst. It was totally irrational, and there were people not buying into it because they said it had to break. Of course it had to break but, as they say, timing is everything.

Many people also like to say you cannot time the market. What they are really saying is, "We do not want to TRY to time the market." Are we really timing the market, however? No. We are letting the market tell us what to do. We may believe it is topping. We even tried some downside plays on the QQQQ and the SPY, but those lasted about a day before we were out of them. You see it set up and you have a good risk/reward position, but you get out if it does not work.

That is exactly what happened. And what has happened since then? The market has rallied to the upside, thank you very much. Those who do not want to participate are missing out on the great moves we are all enjoying.


Dollar: The dollar continued to the upside. It had a very strong day on Thursday, and it continued on Friday. Recall that on Thursday there were issues in Europe with Portugal as well as the UK. That helped bolster the dollar versus the pound and basically every other currency. It was still moving higher on Friday, but it was not about to hold all of its gains. It came close to the 50 day EMA and pulled back, but the dollar still put in a decent performance (1.3547 Euro versus 1.3595 Thursday).

The dollar continues to bounce off of this support level. It is coming up toward a resistance point, and it is actually starting to bump into a range of resistance. The US economy is apparently improving, and there was more evidence of that on Friday. That was helping the dollar look better and better. The US economy is looking better versus some of the emerging markets that are threatening to have some runaway inflation. It is not even emerging markets in some cases; the UK saw a big 3.6% spike in inflation just as recently as December. Ouch.

Bonds: Bonds rallied back (10 year 3.63% yield versus 3.70% Thursday). A modest bounce underway, but the bigger picture is bonds have been killed after the Egyptian news broke and we found out it was not as bad as anticipated. There was a lateral move here because the bond market was anticipating something was going on. It was not sure what, and it turned out to be Egypt. It moved laterally, ready to bounce if the news was really bad. It was not, and it broke below in range. Now it is trying to rebound a bit. It is in a relief move at this point.

The treasury came out with its plan to "wind down" Fannie Mae and Freddie Mac. That helped bolster interest rates a bit and made things look better from the US standpoint. Some investors decided to put money in bonds as well, but it is just a little reallocation. Not a lot of sense there, but that is what we were hearing from our friends at the bond desks.

Gold: Gold has had a nice bounce back to the upside during the crisis in Egypt. That was a fear thing. There are also some inflation worries too, as we saw from the EU. The problem is that it has run into resistance. We will see if it can plow through. If the US economy continues to improve, that would suggest there might be inflationary pressures based on the way the Phillips curve folks read economic activity. In reality, economic activity does not breed inflation in itself. It just depends on whether the road to recovery has been skewed to push demand over supply.

That might be the case. There are a lot of small businesses were we supply a lot of the goods and services, and they have not been doing so well. There is a little US worry of inflation, but the emerging market inflation is the main concern. Gold had a good run, but then on Friday it hit some headwinds as the Egyptian story unfolded more favorably and took some fear out of the market. Gold dropped a bit ($1,357.20, -5.30). No big turn. It is just trading around inside of its range right now.

Oil: Oil also lost ground because the Egyptian fear story was dying down ($85.55, -1.18). Oil is back down, trading close to where it was before the Egyptian story broke. Remember, it was falling rapidly at that time. It was not because the word was falling apart. Oil just ran to the top of its range, got a bit extended, and it bounced down toward the bottom of its range. The dollar was rallying during the same time. As the dollar rallies, it takes fewer dollars to buy each barrel of oil and the price declines.

Recall the vicious cycle we were in last year and the year before. The dollar was diving lower every day, and the price of a barrel of oil rose every day. It was a double whammy where the oil had cost more and we could buy less of it. It was a multiplier, and it was a pernicious form of price inflation. Now we are getting a breather, but just a little one.



Volume. Volume was a bit lower. It spiked to 2.4B shares on NASDAQ Thursday. It fell to 2B on Friday down 15%. On the NYSE, it fell as well, though only a couple of percentage points to just below 1B shares.

Breadth. Breadth was decent at 2:1 on the NASDAQ. Much better at 2.7:1 on the NYSE thanks to the small caps leading with that 1% gain.


SP500. SP500 is on its second leg of this breakout run. It has now put in as much time and distance to the upside as the prior run. You would anticipate some kind of pullback, but as noted, it is not showing any signs of weakness in the armor. There may have been some churn late in the week, but Friday it bounced right back up to a new rally high. Unbelievably impressive.

NASDAQ. NASDAQ was impressive as well. It gapped lower but reversed on Thursday. Then it gapped lower but reversed to a new rally high on Friday. Strong volume on both sessions. After a lateral move, that was just a little trading range; it was about half the depth of the November correction/consolidation. NASDAQ is off and running to new highs. Hard to argue with what is happening in these indices.

SP600. SP600 broke to a new rally high as well. It bumped its head four straight days at the 430 level and then broke through. Of all the indices, the SP600 has been in the best consolidation. A nice lateral trading range, it has broken out, and it is moving higher on strong volume Thursday and Friday. I know some will say that is not strong volume, but I say that relative to other volume.

SOX. Semiconductors were coming back to life as well. They tested a bit longer with a 1-2-3 pullback. They are on the way back up. No new high on Friday, but it is aiming at one.

While the SP500 looks extended in a straight run, the NASDAQ, SP600, and SOX show some volatility. They have shown some lateral movement and have consolidated somewhat to put a shelf to support the run higher. That looks to be what is happening in the market.


Financial. Financials had a big day. JPM was racing to the upside with a 2.2% gain. Not bad. GS did not have a great day, but it was trying to set up and move. WFC bounced off the 18 day EMA. Financials were enjoying the upside, continuing their trends yet again.

Industrial. Industrials were moving well. CAT broke to a new rally high. An incredible run. DE is running, though not as fast as CAT. Who would have thought a cat could outrun a deer? They are both trending higher quite nicely.

Agriculture. Agriculture is doing well; slow but steady. It started this move back in late January. AGU is moving to the upside. POT broke out of a week-long lateral consolidation and started to rally. No complaints there.

Semiconductors. Semiconductors remain solid. SMTC broke higher. Nice pattern and good volume on Friday. We picked up some of that. YGE had a nice bounce. A handle and good volume to the upside. SIMO continued its substantial break to the upside.

Medical. ISRG was breaking out of a lateral consolidation after the breakaway gap. We bought into it before the gap and loved it. The stock is in a comeback mode because it has a long base behind it. It gapped higher and made us a bunch of money. It moved laterally at this next resistance point and started to break higher again. Good volume. No issues with that.

China. China is looking decent. CTRP is interesting. Hard to tell exactly what this is, but it is worth watching. It is getting volume to the upside. It is definitely holding this level at 41. It bounced up there and could not move through. It spent over a month at that level. It came down and held it. There was that big day where it reversed and came back up. Now there is a big reversal, another big reversal, and now back to the upside. Very interesting action. You always watch for these kinds of signals when you see a stock at what appears to be an important level. That shows you buyers are pushing in.

They tried to sell it off in early January or late December, and it had no follow-through. It reversed right back up and rallied. Then they tried to sell it through that level again. Big downside day, but it reversed right back up. It tried to come back down this week, but it was popped right back to the upside on each day it went down. Watch that kind of thing. That tells you where the important levels are. If you get enough buying momentum behind it, you can see a break to the upside.

ASIA broke this long downtrend line with a nice gap and rally. It held the 200 day EMA and it looks like it is starting to move back up. Interesting. Chinese stocks are performing well even after the rate hikes. A lot of them have already run higher. We are just looking at some that have not made those big moves yet. We are trying to pick out what will be the next group of leaders.

Technology. AAPL had a great week. It ended up flat, but it held its gains. It is indicative of the move that the NASDAQ made, fighting off the gloam. GLD had a nice pullback flag pattern. It gapped through some resistance and is coming back to test. Look how it tapped at the 20 day EMA on the low and reversed. Always be watching for those kinds of moves. It was a day similar to Thursday.

While the market overall is moving up, a lot of the stocks are just moving in a nice, steady manner. There are some stocks, however, that have been blasting to the upside. The market appears to be extended overall. It may make traders a bit uncomfortable given the risk/reward, but we will not sit out and let it go by when we see really good moves in a market that is running more than we think it should. I have often said that is just what a market does.


To view the Economy video click the following link:




VIX. The VIX is back down to the level it has hit three times over the past month and a half. The market has continued to the upside, more or less, during that period. There has been a bit of volatility outside the SP500. The SP500 has made a fairly straight shot to the upside. It has not shown any real selloff. It did have a big jog lower one day and a test to the 10 day EMA another day, but that was it. There is no real volatility here. That makes me wonder if we should put much stock in the fact that the VIX is back down to levels it hit earlier this year and in April before the market was in a deep selloff during the summer. I have my thoughts about that.

Volatility can indicate there might be a pullback coming. The market does need a correction. In November, however, the market never reached this level when it started the last correction. Do we really want to put too much emphasis on the fact that it is down at this level again? It has not corrected since it has been down here. It can, but what do we have? We have a stock market that is extended. With the VIX hitting those lows, it may foretell a much needed correction from this run straight to the upside.

Overall, however, I do not believe that VIX is saying anything about the long-term effects of the rally. It had a good base. There has been one run, a test, and now a second run. I think another test will come. The VIX is not saying this will be the last run at all. Volatility can remain low for a long time. As long as it is declining as the market is rallying, there is no major selloff in the works.

VIX: 15.69; -0.4
VXN: 17.18; -0.73
VXO: 14.27; -0.36

Put/Call Ratio (CBOE): 0.82; +0.05

Bulls versus Bears:

This is a reading of the number of bullish investment advisors versus bearish advisors. The reason you look at this is that it gives you an idea of how bullish investors are. If they are too bullish then everyone is in the market and it is heading for a top: if everyone wants to be in the market, then all the money is in and there is no more new cash to drive it higher. On the other side of the spectrum if there are a lot of bears then there is a lot of cash on the sideline, and as the market rallies it drags that cash in as the bears give in. That cash provides the market the fuel to move higher. If bears are low it is the same as a lot of bulls: everyone is in and the market does not have the cash to drive it higher.

Bulls: 53.4% versus 52.7%. After dipping a week the bulls are on the rise though still below the 55.1% three weeks back. Down from 58.8% high on this leg. Still at a high level in a string of high readings but below the 5 year high at 62.0. Fading back from the level considered bearish, i.e. where so many are in the market and believe it is going up that the ammunition to send it higher runs low. This is where you start to be careful and watch for breakdowns, but there is also a lot of liquidity being pushed into the market and that can continue the move despite excess bullishness. The crossover level at 29% bulls is long gone, but it did its job. The high on the last leg was 56.0% after starting at 35.6% on the low in February, the lowest it has been since July 2009 . . . until this last leg. 35% is the threshold level suggesting bullishness. Again, to be seriously bearish it needs to get up to the 60% to 65% level.

Bears: 23.3% versus 22.0%. While bulls may be getting back their strength, bears are not as sanguine about the market's prospects. Still below the 28.3% in September, but up from the 19.1% level where they dallied for almost a month. The 37.7% peak at the height of the crossover is well in the rearview mirror but bears remain well below the 35% level, above which is considered bullish for the market overall. Hit 18.7% on the low in April. Hit a high of 27.8% level on the prior leg in February. For reference, cracking above the 35% threshold considered bullish. Hit a high on the prior run at 47.2%. For more 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.


Stats: +18.99 points (+0.68%) to close at 2809.44
Volume: 2.033B (-15.6%)

Up Volume: 1.285B (+157.37M)
Down Volume: 761.223M (-530.126M)

A/D and Hi/Lo: Advancers led 2.13 to 1
Previous Session: Advancers led 1.07 to 1

New Highs: 234 (+61)
New Lows: 27 (-1)





Stats: +7.28 points (+0.55%) to close at 1329.15
NYSE Volume: 995.392M (-2.01%)

Up Volume: 712.977M (+236.447M)
Down Volume: 256.765M (-270.038M)

A/D and Hi/Lo: Advancers led 2.73 to 1
Previous Session: Advancers led 1 to 1

New Highs: 584 (+456)
New Lows: 61 (+29)




Stats: +18.99 points (+0.68%) to close at 2809.44
Volume DJ30: 184M shares Friday versus 150M shares Thursday.



This coming week is loaded with data. We have retail sales, the regional manufacturing reports with New York coming out. There are Fed minutes, housing starts, building permits, industrial production and capacity. Of course there is also the usual stuff. We have continuing claims, the Philly Fed, and the CPI is out on Thursday. There will be no dearth of news to help drive the market. That might help since earnings season is winding down and stocks may be looking for another reason to move up.

Think about it. We have fantastic news built into the market. We had an earnings season that surprised everyone again to the upside. It beat some tough comps because last year things were in the pits. It was easy to walk all over your prior year's competition. Now things are a bit tougher, and they are actually able to beat. Then we have the Egyptian issue, and it seems to be resolving favorably. The military, similar to Turkey, is in charge and keeping things at bay. They are trying to let a little democracy take shape perhaps. That is a good result.

The US economy continues to show improvement. Unfortunately there is a big sector of the economy that is not participating yet, but it is trying to get involved. There may be some help from the Feds, and it might actually do something constructive. I have talked about the shortened SBA form and process that is supposed to hit in March. There may be a few other things coming out. The Treasury announced its plan to wind down Fannie Mae and Freddie Mac, and that is a start. It gives people some hope that some of the right things may be done.

We have some hope, but what do we see in the market? When looking at the SP500, one wonders if it can continue to move higher. I think it can overall. I do not think the run is nearly done. I think this is just the second leg of a breakout, and we could get one, two -- maybe even three more such legs on this move. That would take us easily through the end of 2011.

I am hearing it already. "Man, Johnson is off his rocker. He is too bullish. It is time to abandon everything." You know, I am a skeptic of most everything, but that is what you do. You should be skeptical when you trade. I like to quote a lot of movies in reference to this, like Field of Dreams. "Look for low and away, but watch out for in your ear." That is one you always have to be careful of. As soon as you are not watching for in your ear, you get it in your ear.

Markets tend to run further than you would ever expect they would, but do not expect that they are going to run. As soon as you expect that your trades will automatically win, the ice gets thin and you will fall. Just as in Shannon's Deal, that classic, much-heralded-but-apparently-underappreciated television series from the early 1990's: When you think you know the cards before they are turned over, then you are in trouble.

I am concerned. I think that this move will continue, but you do have to watch out in the short term. Stocks are exploding higher everywhere. There is money hitting this market, coming in as some of the retail investors finally give in and throw some of the money to their brokers or their mutual funds. They are putting that money to work.

We are more than happy to ride the move to the upside. We just have to keep our wits about us and keep reasonable stops. We are still looking at place that offer good risk/reward. They are out there. There are stocks that have not rallied. ISRG had great bases beneath them. They are really set up nicely to take advantage of the rally because they have not rallied that far. Those stocks that have a great base under them still have plenty of room to move, just as I think SP500 and the other indices have.

We look for those that have good risk/reward, and if it does not work out, we will get out. Just like the QQQQ play and the SPY play that we were in for a day before the market went back up. We bailed right out of that. There was good risk/reward and it was worth a shot. We just kept piling into the upside plays, and we have taken a lot of gain since then.

That is how you play it. Do not get too cocky. Look for good moves. If they are not there, you do not take them. If they are there, however, do not sit around cursing at the darkness and saying things cannot keep going up. It can, and we have all seen it happen. Just as in a bear market when you think it cannot keep going down. It certainly can.

We will keep playing it. I will give you a bit of wisdom from another Kevin Costner film, Tin Cup: "You ride her till she bucks you." That is just what we will do. Ride the trend until it bucks you, but keep your eyes open for in your ear. You can see indications when it is ending that make you naturally want to keep tighter stop losses and maybe not take risks on a few plays. Maybe you will not take as many positions on those plays, but you still ride until you get bucked off.

I will see you on Monday. Stay warm and enjoy your weekend!

Support and Resistance

NASDAQ: Closed at 2790.45

2825 is the 2007 closing peak.
2862 is the 2007 peak

2766 is the January low
The 20 day EMA at 2745
2735 from late 2007 interim peak
2729 is the 127% Fibonacci extension of the August 2010 run
2725 from July 2007 interim peak
2688 is the recent January low
The 50 day EMA at 2684
2676 is the January 2010 low
2593 is the November 2010 high
2580 is the November 2010 closing high
2569 is the November gap up point through the April 2010 peak
2550 from May and June 2008 peaks
2540 is the gap up point from early November
2535.28 is the April 2010 intraday peak
2530 is the April 2010 closing peak
2518 is interim peak from April 2010
2511 is the lower range of the November gap up point
2482 is the recent October peak
2460 is the November 2010 low.
2434 is the May interim peak and the 78% Fibonacci retracement of the April selloff.
2425 is an interim peak from May 2010
The 200 day SMA at 2413

S&P 500: Closed at 1321.87
1325-27 is the March 2008 closing low and the May 2006 peak
1364 is the March 2007 low
1370 is the August 2007 low

1313 from the August 2008 interim peak
The 20 day EMA at 1299
1278 is the 127% Fibonacci extension of the August 2010 run
1275 is the January 2010 low
The 50 day EMA at 1270
1227 is the November 2010 peak
1220 is the April 2010 peak
1185 from late September 2008
1174 is the May 2010 high, 78% Fibonacci retracement of April peak
1173 is the November 2010 low
1170 is the prior March 2010 high
The 200 day SM A at 1161
1156 is the Sept 2008 low
1151 is the January 2010 peak
1133 from a September 2008 intraday low
Bottom of the January 2010 consolidation 1131 to 1136
1129 to 1131 is the June and August 2010 peaks

Dow: Closed at 12,229.29
13,058 from the May 2008 peak on that bounce in the selling

12,110 from the March 2007 closing low
The 20 day EMA at 11,997
11,893, from March 2008 closing low
11,867 from the August 2009 high and peak on that bounce in the selling.
The 50 day EMA at 11,739
11,734 from 11-98 peak
11,452 is the November 2010 peak
11,258 is the April 2010 peak
11,205 is the April closing high
11,100 from the 7-08 low
10,963 is the July 2008 low
10,920 is the recent May high
The 200 day SMA at 10,866
10,730 is the January 2010 peak

Economic Calendar

These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.

February 11 - Friday
Trade Balance, December (08:30): -$40.6B actual versus -$40.4B expected, -$38.3B prior
Michigan Sentiment Preliminary, February (09:55): 75.1 actual versus 75.5 expected, 74.2 prior

February 15 - Tuesday
Retail Sales, January (08:30): 0.5% expected, 0.6% prior
Retail Sales ex-auto, January (08:30): 0.6% expected, 0.5% prior
Empire Manufacturing, February (08:30): 16.0 expected, 11.92 prior
Export Prices ex-ag., January (08:30): 0.6% prior
Import Prices ex-oil, January (08:30): 0.3% prior
Net Long-Term TIC Fl, December (09:00): $85.1B prior
Business Inventories, December (10:00): 0.7% expected, 0.2% prior
NAHB Housing Market Index, February (10:00): 16 expected, 16 prior

February 16 - Wednesday
MBA Mortgage Purchases, 02/11 (07:00): -5.5% prior
Housing Starts, January (08:30): 540K expected, 529K prior
Building Permits, January (08:30): 580K expected, 635K prior
PPI, January (08:30): 0.7% expected, 1.1% prior
Core PPI, January (08:30): 0.2% expected, 0.2% prior
Industrial Production, January (09:15): 0.6% expected, 0.8% prior
Capacity Utilization, January (09:15): 76.4% expected, 76.0% prior
Crude Inventories, 02/12 (10:30): 1.9M prior
Fed Minutes (2:00)

February 17 - Thursday
CPI, January (08:30): 0.3% expected, 0.5% prior
Core CPI, January (08:30): 0.1% expected, 0.1% prior
Initial Claims, 02/12 (08:30): 410K expected, 383K prior
Continuing Claims, 02/05 (08:30): 3900K expected, 3888K prior
Leading Indicators, January (10:00): 0.2% expected, 1.0% prior
Philadelphia Fed, February (10:00): 21.9 expected, 19.3 prior

By: Jon Johnson, Editor
Copyright 2011 | All Rights Reserved

Jon Johnson is the Editor of The Daily at

Technorati tags:

No comments: