Sunday, November 11, 2012

Fiscal Cliff Starting to Overshadow Other News


- Not much relief in the relief bounce.
- Many news stories but fiscal cliff starting to overshadow them all.
- Fed: Bullard says Operation Twist to end, but the Fed may buy other assets.
- Wholesale Inventories climbing as prices climb.
- Michigan sentiment hits 5 year high just in time for the fiscal cliff posturing.
- Friday has the look of just a pause in the selling, but the midcaps and SP500 may try another relief move to start the week.

Just enough of a bounce to take off the downside pressure - - for the day.

Friday was somewhat of a disappointment. Okay, quite a bit of a disappointment. The market was oversold after two sharp downside sessions, but another strong decline early on could have really set a move back up of some significance.

As it was futures were mixed with NASDAQ higher given AAPL was bouncing in relief after some harsh selling. The selling pressure was escaping slowly with a modest bounce. Toward the open futures improved and stocks continued to recover on the open. Indeed, they put in a solid move into lunch.

That was the apex. Stocks tested into early afternoon, bounced decently, but put in a lower high. The upside had pretty much cashed in for the day. The faded and wandered into the close with the most modest of gains. Hardly an auspicious recovery. Indeed it was not a recovery as SP500, after rallying up through its 200 day SMA intraday, gave it back on the close.

SP500 2.34, 0.17%
NASDAQ 9.29, 0.32%
DJ30 4.07, 0.03%
RUT2000 0.17%
SP400 0.14%
SOX 0.24%

No, in the end it looked more like just a pause in the selling. SP400 looks better than the others as it holds over its 200 day SMA, but it is not an island, just as we found out NASDAQ and the Russell 2000 were not islands either. There could be another bounce to test the selling early in the week, but as noted, it let off some downside pressure Friday without getting that violent reversal.


There certainly was news to be had. Earnings are still coming and JCP missed, noting a 26% decline in same store sales. Looks as if that turnaround attempt made a 360 versus a 180 degree turn.

China logged its slowest inflation in 33 months. Indeed, its PPI was negative at -2.8% year/year.

As soon as we touted Australia a bit its central bank cut its GDP projection to 2.75% from 3.00%. Not great but twice what we are producing.

Europe was its usual downer. Germany said Greece's next payment may be delayed because votes had to be taken, parliament had to approve it, etc. Sounds as if the Germans are just leading Greece around by the leash in a little 'whose your boss?' display.

Where the hell is my money?

Michigan Sentiment came in at a 5 year high at 84.9 (82.6 prior), but how long will it keep improving without jobs and rising incomes? Those are what really drives sentiment longer term. We have seen it rise and fall more than a time or two during this weakest of recoveries. Moreover, with the love fest known as the fiscal cliff negotiations to come, it is probably a pretty good bet that there won't be so many happy people over the holidays as we watch the sausage being made.

Indeed, the fiscal cliff is overshadowing the market, and the realization that the same people were in the same places talking the same line after the election had as much to do with the 5% decline on SP500 than anything else.

The sad thing is, we are going to debate this issue without really getting to the issue. The sides will sit down and talk about revenues, spending cuts, and tax increases because those are the issues they think they understand and can at least talk about without coming to blows.

The President has a line in the sand with respect to taxes. He is bound and determined, ideologically so, to raise taxes on those making $250K or more. Now they already pay over 50% of the taxes right now while almost 50% of tax age citizens pay 0% income tax. The argument I have heard as to why this will work is because the rates he wants are the rates under Clinton, and supposedly raising rates to that level will magically return us to economic nirvana. In the 17 years since, however, much has changed. There are so many differences between then and now.

The early 1990's recession was very shallow; it was over before the election and recovery was underway. It was merely a pause in the great run from the early 1980's. Raising taxes is really never a good thing but Clinton got away with it because he simultaneously slashed capital gains taxes from high levels. He upped the marginal rates, lowered capital rates, and money was still invested in the economy and the 20 year boom continued after a brief respite.

Not the case this time. Capital gains taxes are set to rise 5 times in addition to the marginal rate increases across the board. With an economy already in the dumpster, burdened by $6T new debt in the past four years, running a $1T+ deficit already this year, raising tax rates will be, as the CBO says, automatically recessionary.

The sad truth is, it will do nothing to alleviate the problem. We could confiscate the entire profits of the Fortune 500 companies and run the government for a few weeks. In short, we can tax away everything owned in the country and we could not pay our debt. Yet if you talk about cutting taxes our leaders squeal about 'lost revenues.'

We should do the opposite: cut taxes that place extra burdens on investment capital, on corporations, and yes, in individuals. Don't tax investment capital 2 and 3 times. Then you get more investment capital (remember, if you tax it, it will disappear). Reduce corporate taxes to zero and take out the price of those taxes in the price of the goods and services sold. I talked with a candidate for Congress who asked me if I really believed that would happen. I explained that of course companies would try and maintain their pricing to increase their profit. BUT . . . someone who wanted the business, who wanted to enter the market, would come in with lower prices and then the spiral lower would start. Good old competition.

Cutting taxes works. There has never been an instance in US history that tax cuts did not generate MORE revenues than were taken in at the higher rates before the cuts. Kennedy, Reagan, Clinton, and even Bush. The right kinds of cuts, i.e. on capital, corporations, and marginal rates, are the most effective. The argument about 'lost revenues' is blown out of the water by the facts. Yet you still here even the republicans say they want to lower rates but close 'loopholes' so revenues remain the same. Question: if there is no net money left in the pockets of the people and the entrepreneurs, does a tax cut do any good? Hell no. It only simplifies the code. It doesn't bring the all important new investment capital into the economy.

All tax cutters. All produced a lot more revenue after cutting taxes than before.

On top of that, spending must be cut. No one should want to pay one more penny to the government with all of the waste, fraud, and avarice ongoing in the federal government. $365,000 parties for government agencies. Penthouses in Las Vegas during conventions. Two week trips to Hawaii for a one-day seminar on team building. Presidential parties with a $1M price tag. Presidential vacations costing over $1M each. But of course, we are told there is just no fat in the budget to be cut, and that all of these little items I am citing are just so small they don't really impact the equation. With that attitude of course they won't. Just go ahead and spend away because we can't really hope to get it all in control anyway, right?

Nonsense. But of course they will not do what has to be done. As I said earlier today, not a snowball's chance in hell they address the real issues and the real means to alleviate the cliff. Spending must be reined in. I posit that the proposed defense budget cuts could be entirely offset by cutting out fat and waste in our government. It used to be the government employees were paid less then private sector but the tradeoff was job security. Now they are paid more, have better retirements, and you cannot fire them short of them committing a major felony.

Cutting spending is important but just one part. Those taxes are another. Why? We have to grow our way out of this. That means investment capital is needed in an economy that has been sputtering for 6 years. There is damn little money people are willing to invest. On top of that there are hundreds of thousands of new regulations enacted during the past four years. We are now as bad as Europe and the EU in trying to regulate everything. Businesses cannot thrive if they are handcuffed. Oh, and there is more coming. In January the EPA will issue its report on hydraulic fracturing, and you can make book that the EPA will find fracturing is environmentally hazardous and must be controlled by none other than the EPA. So, you expect the bonanza of energy production on private lands to slow and our chances of becoming energy independent to slip from our hands. Hate to sound negative, but that has been the MO of this government, and with four new years it is not going to let up. Indeed it is going to go full bore.

So, we will have fighting and posturing and a deal will ultimately be struck that does not address the problems. Everyone will congratulate themselves about cuts that don't really cut anything because they are going to cut dollars that would not be spent for years and years. They will all praise themselves and most Americans will think they did a bang up job fixing the problem. The ratings agencies will be forced to agree lest they be investigated for downgrading the mighty US. And the same problems will still be there and we will lose our ability to sell bonds and to act as the world's reserve currency, dollars will be dumped, inflation will skyrocket, our standard of living that has declined the past 5 years will fall harder and faster.

Wow. Hard to be happy after that. Sorry for being so morose, but we have a nasty hole we dug and these fellows in DC are not up to the task, at least they have not shown the right stuff yet.

Sam Sheppard playing Chuck Yeager in 'The Right Stuff.'

But who knows? Christmas is coming and they may have their brains grow three sizes similar to how the Grinch's heart grew in 'How the Grinch Stole Christmas.'


Dollar. 1.2718 versus 1.2752. The dollar still looks poised to break higher. Thursday and Friday the dollar tapped the 50 day EMA on the low and rebounded to hold the 200 day SMA on the close. Looks poised to move higher but there is also resistance just over head in a potential left shoulder to a head and shoulders pattern.

Bonds. 1.61% versus 1.62%. After trading in its narrowing range in a quite volatile manner, bonds broke out on the European worries, and frankly on worries about the US economy given the reelection and the fiscal cliff and growth worries.

Gold. 1731.00, +5.00. Gold continued its post-election, Bernanke on the loose, inflation fearing move. It cooled its jets a bit, gapping to a doji Friday. A good run, slowing a bit, likely to test toward the 50 day EMA near 1720.

Oil. 86.07, +0.98. Oil bounced modestly for a second session. Holding near some support but still quite weak.



Stats: +9.29 points (+0.32%) to close at 2904.87
Volume: 1.778B (-3.58%)

Up Volume: 869.09M (+478.39M)
Down Volume: 913.5M (-566.5M)

A/D and Hi/Lo: Decliners led 1.01 to 1
Previous Session: Decliners led 2.85 to 1

New Highs: 19 (-12)
New Lows: 123 (+5)

Stats: +2.34 points (+0.17%) to close at 1379.85
NYSE Volume: 682M (-2.01%)

A/D and Hi/Lo: Decliners led 1.06 to 1
Previous Session: Decliners led 2.74 to 1

New Highs: 203 (-25)
New Lows: 145 (+29)

Stats: +4.07 points (+0.03%) to close at 12815.39

Volume: Volume again traded off the prior session but was still above average on both NASDAQ and NYSE. Distribution selling all week, showing some volume Friday as the indices tried a bounce. Nothing to suggest a turn right now.

Breadth. Finally eased up as you would expect with the indices trading flat. Still, breadth was slightly negative even with the indices slightly positive.


SP500. Rallied through the 200 day SMA with a nice move into lunch. Then came the afternoon and it gave it all back, closing below the 200 day SMA. Doji but not necessarily one indicating a turn. Very well could be an interim, continuation doji in the midst of selling, but SP500 is holding at some interim support.

NASDAQ. Holding at some interim support at 2900 NASDAQ showed a hammer doji. It is in the midst of a range of support but not expecting that to necessarily bounce it higher. A big dip needs a test, but the pressure was released a bit Friday as AAPL bounced some.

Russell 2000/SP400. Nice doji at some interim support. Looking for RUT to test the 200 day SMA up near 807 given it acted better than most before it broke.

SP400 is showing a nice doji at the 200 day SMA and is in excellent position to make the break higher. The market could use some leadership from the mid-caps but not sure they can accomplish all the heavy lifting needed. Perhaps for just a test.

SOX. Held up reasonable well Friday after diving lower from the unexpectedly solid upside move. Just over some support at 365 (closed at 369) so we will see if it can provide a bounce.

DJ30/DJ20. Big tight doji at some interim support. Nest support is 12,700 and it did test 12,743 on the low, perhaps close enough. SP400 could use the help.

DJ20 Not performing well at all, not even showing the same doji that the other indices flashed. Just over some interim support and we will see if Monday brings a renewed bounce.

Summary: The bounce attempt was rather weak after those two sharply lower sessions. It did not change the character of the decline, and indeed it may have let the sellers off the hook, i.e. relieving the pressure to rebound without generating any lasting upside.


Big names. AAPL bounced but lost about as much as it gained on the session. A doji and in need of a relief move that would help NASDAQ as well. AMZN gapped to a tight doji and looks rather interesting. EBAY is struggling still but holding up. IBM shows a big tight doji and is now in position to rebound.

Industrials. JOY showed a doji as did many stocks. CAT gapped lower and reversed upside on some volume. Not bad. TEX bounced off the 200 day SMA.

Financial. Some improvement but some damage was done. BAC gapped lower and recovered to flat. No volume. JPM shows a doji but is still the 50 day EMA. MA is holding the 50 day EMA and bounced. V gapped to the 20 day EMA and bounced to a gain. Nicely.

Metals. Struggling. Gapped to a doji below the recent range. AKS still working on the pattern at the 50 day EMA. STLD is holding the 200 day SMA and bouncing. These may develop here.

Retail. Some good, some bad. YUM bounced nicely. ULTA gapped lower. LULU is struggling at the late October highs. KSS dove lower this week. JCP is in huge trouble. Widely divergent, showing issues even with spiking consumer sentiment.

Homebuilders. Slipping. KBH slips a bit. BZH is below the 50 day EMA. TOL slid to a new low from its September peak. Some weakness in an important group.



VIX: 18.61; +0.12
VXN: 19.41; -0.73
VXO: 19.35; +0.42

Put/Call Ratio (CBOE): 1.17; +0.04

Bulls versus Bears

Bulls: 43.6 versus 41.5% versus 45.7% . Bouncing right back up as the market takes some sharp declines on top of a more orderly previous pullback. Will be interesting to see if this confidence that tracks Michigan holds next week. 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: 27.7% versus 27.7% versus 25.5%. Staying at 27.7% again as bears hold a flat line. Has to get to 35% to be significantly bearish to suggest an upside rally. March and April saw lower lows in the 21% range. On the last run never made it to the 35% that can be a bullish indication, but the bulls were weak enough back in June. 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.


A very interesting week again. Even with the election over there is no letdown in the pressure. Lots of economic data from retail sales to Philly Fed to CPI and more. A few more earnings. The fiscal cliff negotiations. The market trying to regroup after a sharp decline. Oh, and the Fed.

Yes the Fed. All eyes on the cliff for sure. Economic data? Yes a bit, but no one is worried as much about that now because the election is over, the cliff is out there, and the idea is if that is not fixed the data won't matter. In any event any shortcomings can be blamed on Sandy as well as the cliff. Oh, and let's not forget Bush, right?

Back to the Fed. Friday St. Louis Fed president Bullard had some comments but they were not heavily reported. Mr. Bullard said that Operation Twist would likely not be continued. BUT . . . THE Fed 'may' expand QE to buy other assets.

Don't need to Twist, but other asset buys just might happen.

This is not news; Bernanke and the FOMC statement said that other means would be used if necessary, even after things started to recover. What is significant is that Bullard is out there, after a quiet period from the Fed around the election, pushing this line. It is likely prep work for some other kind of asset buys. Bernanke is getting impatient. The Cliff has him worried. He wants to paper over the problem before it arises.

That sets the stage of characters. Election is over. The same players are still in place. The Cliff remains an issue because of the disparate positions and the view that no one received a mandate in the election. The economy is the hapless buffoon stumbling along. The stock market decided to avoid the Christmas rush and sold right after the election. Bernanke is still at the Fed, will stay at the Fed, and has his theories to put to the test.

Fiscal Cliff versus QE. The stock market is the hostage. Clearly the market sold first and will ask questions at some point after Obama won the election and kept the Senate. Investors are worried about the ability to resolve the tax hikes, etc. coming their way.

That said, IF there is anything positive on the Cliff the market can and will rally. The Cliff is resolved (or at least is claimed to be; it won't be because they won't do what is really necessary) and QE is in place and will remain in place. That would be a green light for stocks.

But, it is not close to green yet. The Cliff issue just received its opening remarks late in the week. Obama gave a campaign speech with a baseball bat after Boehner gave some specifics he is willing to work with. It could be very contentious yet again.

That leaves the market watching to see how it turns out but not comfortable it will get resolved. In that scenario the market is somewhat in limbo with a negative overhead even with QE in the pocket. It has had enough of a pullback to bounce. It had enough before NASDAQ and company broke the 200 day SMA. It didn't and now it has a longer term basing pattern to fill out if it is going to continue upside.

So, we don't anticipate any big upside move off of this last decline. Yes there could be a nice relief bounce to test the support just broken (SP500 did that but none of the other have), the relief bounce we have discussed. That is likely to come this week but the question is whether there is more downside first. Friday let the pressure off the selling and thus dulled the snapback chances.

Still, we have some good downside positions in place. We believe there is more downside to come at least as part of a basing process that will prepare the markets for upside again on the shoulders of some more of that QE. With a rebound we still look just for a relief move. It might take a downside session early as we wanted to see Friday to trigger it. When it comes we use it to lighten the upside and prep some more downside.

The problem we have to start the week is the market is basically where it was after two sharp downside days. Many stocks are oversold or need more work to set up for upside or downside plays. Some plays are there for stocks that are in rolling ranges and have managed to hold the bottom of the range in this selling. Those can provide us upside plays (e.g. GOOG). Kind of selective and at this point you have to be. If we see stocks close to bottoming such as GOOG we can look at them as potential bounce plays if we get a selloff to start the week that reverses. That is always a good play, and while it looks too pat to have that happen, it often does.

Have a great weekend!

Support and resistance

NASDAQ: Closed at 2904.87

2942 is the mid-June 2012 high
2950 is the mid-April closing low
2962 is the April 2012 low
2977 to 2980 is the bottom of the late October 2012 consolidation
The 200 day SMA at 2983
2988 is the July 2012 high
2999 is the bottom of the August 2012 consolidation
3000 is the February 2012 post-bear market high
3024 is the gap point from early May
3026 from 10/2000 low
The 50 day EMA at 3033
3042 from 5/2000 low and several other price points
3076 is the late April 2012 high
3090 is the mid-March interim high
3037 is the October low
3101 is the August 2012 high
3134 is the March 2012 post-bear market peak
3171 is the October intraday high
3197 is the September 2012 post-bear market high
3227 is the April 2000 intraday low
3401 is the May 2000 closing low

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 1377.51

The 200 day SMA at 1381
1402.22 is the closing low of the August 2012 lateral consolidation
1406 is the early May 2012 peak
The 50 day EMA at 1421
1422.38 is the prior post-bear market high (March 2012)
1425 from May 2008 closing highs and the October 2012 low
1427 is the August 2012 peak
1433 from August 2007 closing lows
1440 from November 2007 closing lows
1464 is the June up trendline
1463 is the September closing high
1466 is the September closing high
1471 is the October 2012 intraday high
1475 is the September 2012 high
1499 from January 2008
1539 from June 2007

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
1325 is the July 2012 intraday low
1309 is the right shoulder low from June 2012
1295 to 1294 is the April 2011 low and the February 2011 consolidation low (bottom of the trading range)
1293 is the October 2011 peak
1275 is the January 2010 low, early January 2011 peak
1267 is the December 2011 peak
1266 is the June 2012 base low

Dow: Closed at 12,815.39
The 200 day SMA at 12,992
13,056 is the February 2012 high
13,058 from the May 2008 peak on that bounce in the selling
The 50 day EMA at 13,228
13,297 is the April 2012, prior post bear market high
13,300 to 13,331 is the August 2012 post-bear market high
13,653 is the September 2012 high
13662 is the October 2012 intraday high
13,668 from 12-2007 peak
13,692 from 6-2007 peak
14,022 from 7-07 peak

12,716 is the April 2012 closing low
12,391 is the February 2011 peak
12,369 is the left shoulder low from May 2012
12,284 is the October 2011 peak
12,258 is the December 2011 peak
12,110 from the March 2007 closing low
12,094 is the April 2011 low
12,035 is the June 2012 base low
The June 2011 low at 11,897 (closing)
11,734 from 11-98 peak
11,717 is the late August 2011 peak

Economic Calendar

November 5 - Monday
ISM Services, October (10:00): 54.2 actual versus 55.0 expected, 55.1 prior

November 7 - Wednesday
MBA Mortgage Index, 11/03 (7:00): -5.0% actual versus -4.8% prior
Crude Inventories, 11/03 (10:30): 1.766M actual versus -2.045M prior
Consumer Credit, September (15:00): $11.4B actual versus $10.6B expected, $18.4B prior (revised from $18.1B)

November 8 - Thursday
Initial Claims, 11/03 (8:30): 355K actual versus 370K expected, 363K prior
Continuing Claims, 10/27 (8:30): 3127K actual versus 3250K expected, 3262K prior (revised from 3263K)
Trade Balance, September (8:30): -$41.5B actual versus -$45.4B expected, -$43.8B prior (revised from -$44.2B)

November 9 - Friday
Export Prices ex-ag., October (8:30): 0.2% actual versus 0.7% prior
Import Prices ex-oil, October (8:30): 0.3% actual versus 0.2% prior
Michigan Sentiment, November (9:55): 84.9 actual versus 83.0 expected, 82.6 prior
Wholesale Inventories, September (10:00): 1.1% actual versus 0.4% expected, 0.8% prior (revised from 0.5%)

November 13 - Tuesday
Treasury Budget, October (14:00): -$113.0B expected, -$98.5B prior

November 14 - Wednesday
MBA Mortgage Index, 11/10 (7:00): -5.0% prior
Retail Sales, October (8:30): -0.2% expected, 1.1% prior
Retail Sales ex-auto, October (8:30): 0.1% expected, 1.1% prior
PPI, October (8:30): 0.0% expected, 1.1% prior
Core PPI, October (8:30): 0.1% expected, 0.0% prior
Business Inventories, September (10:00): 0.6% expected, 0.6% prior
FOMC Minutes, 10/24 (14:00)

November 15 - Thursday
Initial Claims, 11/10 (8:30): 388K expected, 355K prior
Continuing Claims, 11/03 (8:30): 3125K expected, 3127K prior
CPI, October (8:30): 0.1% expected, 0.6% prior
Core CPI, October (8:30): 0.1% expected, 0.1% prior
Empire Manufacturing, November (8:30): -9.3 expected, -6.2 prior
Philadelphia Fed, November (10:00): -1.0 expected, 5.7 prior
Crude Inventories, 11/10 (11:00): 1.766M prior

November 16 - Friday
Net Long-Term TIC Fl, September (9:00): $90.0B prior
Industrial Production, October (9:15): 0.0% expected, 0.4% prior
Capacity Utilization, October (9:15): 78.2% expected, 78.3% prior

By: Jon Johnson, Editor
Copyright 2012 | All Rights Reserved

Jon Johnson is the Editor of The Daily at

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