Monday, February 04, 2013

Gushing Over the Market Hits an Extreme


- Stock market gets what it wants: unemployment rate rises even as perception of economy improves, Dow crosses 14K
- Jobs report weak, unemployment up, but benchmark revisions have many dismissing the actual number, much as they dismissed the GDP number.
- Raw jobs numbers, sans adjustments, show a 155K jobs loss.
- Gushing over a 2% at best economy and lower year/year numbers. As the old song says, I guess we will take anything after 2:00 a.m.
- Maybe stocks have done what they always do, just on a grander scale thanks to QE: already priced in the perceived economic bounce.
- 2012 GDP growth total, based upon history, suggests, despite the view the economy is recovery, recession?
- How much better can the news get for now? Gushing over the market hits an extreme. Yes enjoy the ride but be ready for a jolt given everyone is so ebullient.
- Still plenty of stocks in position to move: sentiment may be getting a bit extreme, but market moves can get that way as well.

Unemployment rate rises, Fed billions secure, Dow tops 14K. All the rest of the gushing is noise.

7.9% unemployment, up from 7.8%. Fed's $85B per month tied to a lower unemployment rate. As with the key master and the gatekeeper in 'Ghostbusters,' an explosive combination.

Are you the key master?
Are you the gatekeeper? Ghostbusters, 1984

Never mind the headline jobs number missed expectations with a 157K reading versus the 180K expected or that the Work Week was 34.4 versus 34.5 expected and December was revised lower to 34.4 (why add jobs when those you have are working less?).

No, there were reasons to grab hold and run with it. First, though not that important, the benchmark revisions were released, and as in 2011 it turned sub-mediocre job creation into very mediocre job creation. That gave those believing the economy has turned ammunition to gush about how great 2% growth is. Of course they say 2% because we all know that the Q4 GDP reported at -0.1% was really 2% growth. Only a fool would think otherwise, right? Of course in Q4 2011 they thought that 4% growth was the gospel truth only to see it up and disappear like a fart in the wind in 2012 (from 'The Shawshank Redemption) . . .

The more important reason was stated above: unemployment rate rose and the Fed ties removal of stimulus to a declining number. Bingo.

Sure many explained the move on the benchmark revisions showing strength. Just as they did last year; right, I get that. As the 'coast' economists (Keynesians) beamed about the benchmark revisions, the market, secure that the $85B per month was, well, secure, rallied. A lot. DJ30 crossed above and held the hallowed 14,000 level. Not an all-time high, but getting in the ball park, about 189 points off. SP500 is about 63 points off its all-time high. Kind of a scary pattern if you look at a 20 year chart.

SP500 15.06, 1.01%
NASDAQ 36.97, 1.18%
DJ30 149.2, 1.08%
SP400 0.75%
RUTX 1.01%
SOX 1.89%

Stocks blasted off early and rallied into the afternoon. Lost a bit of ground in the back half of the session, not surprising given the run to this point, the weekend, the usual. Still, solid gains, decent breadth, though there was a volume lag. Bottom line, it was a new month, there is some money to put to put to work from a bit of bond selling, confirmation that the stimulus was here to stay. That money got put to work.

The way the pundits gushed about the economy and the market as the closing bell approached and on the post-market shows you would think there is nothing but upside ahead. The economy is stronger, the market is rallying and getting new money and clear waters are ahead as far as the eye can see.

Question: have they stopped to think the stock market has done what it always does, that is rises in anticipation of this improvement in the economic data? Granted there is no surge in the data, no surge at all for that matter, but with the super steroids of QE1, then QE2, then Twist, and now QE forever, the MARKET has surged and as a little kicker put in a few more points for the economic increase. Or I will say instead, the supposed economic increase.


Dollar: 1.3665 versus 1.3581 euro. The dollar sold down to a new 14 month low against the euro yet again during this fade, but it did come back from the session low. Now the question, as noted Thursday night, is why? Why if the US is so strong is the currency still falling? And falling against the euro, a continent that stands a few bad breaks from seeing most of the southern countries fall into feudal times.

Bonds: 2.02% versus 1.98% US 10 year treasury. After the jobs data bonds actually rallied with yields falling to 1.94%. What the heck? By the close, however, the ship had righted so to speak and bonds collapsed lower. Unemployment was higher, the Fed will keep buying, but bonds still sold off.

Gold: 1670.60, +8.60. Gold surged to the 50 day EMA but could not hold the move. It did pack in some gain to end the week, holding just over the 200 day SMA on the close. Still putting in a higher low and still needing to break over the 50 day EMA.

Oil: 97.77, +0.28. Still climbing, tapping the 10 day EMA on the low and bouncing, keeping the trend in place. Gasoline prices are surging, up 0.20 in just a few days. Highest gasoline prices on average ever. This could get ugly: taxes higher, gasoline prices digging into more income, disposable or otherwise.


Take away the seasonal adjustments, take away 270K+ jobs from the reported number.

Jobs are like, so cool! An interesting and somewhat different feature to the unadjusted, actual numbers: the 16 to 19 age group gained jobs while the 55+ group that had led the jobs creation lost just a fraction.

A bit of a change, but the result is the same: the most jobs created are in the low end, the $7 to $14 per hour range.

Look at the raw numbers: 115,000 net jobs lost in the raw numbers, yet the adjustments put the number at a positive 157K. In other words, in reality there were 272,000 jobs less than the adjusted number reported.

It is clear that the numbers of jobs created month in, month out is still slow and stumbling. It is also very clear that the quality of the slow and stumbling number of jobs created every month is the low end. This is NOT A US RECOVERY.

Gushing over 2% growth. My goodness, how European.

I almost had to hose off after the last 5 minutes of the session as called by CNBC and its panel of standup comedians, I mean experts, on the NYSE floor. Even Harry Dent who believes some calamity is to come was bullish near term. A veritable stock market, economic love fest.

A lesson from the 1970's and the 'free love' era: beware of love fests as some nasty side effects can come out of them. Not that I was old enough then to participate. I just read the stories.

There is an old Bobby Bare song 'I've never gone to bed with an ugly woman (but I've sure woke up with a few).'

'I've met more than one morning lying there groaning, crying "Lord what did I do?"
Hanging my head as I slipped from her bed trying hard not to leave any clues.
When I start out the evening I'm being selective,
but I'll take anything after two . . .

'. . . I'll take anything at two . . .' or it seems six years after the start of the recession.

It would seem that after 6 years of rather horrid economic activity we have hit our 'two in the morning' time and we will take anything that may look good. Once again, the annual rights of the spring are here and the pundits are gushing about how the economy is ready to run. This time they are showing even more vigor even though earnings are less vigorous and the data, quite frankly, is not as solid across the board as in late 2011 and early 2012.

It appears that if enough time goes by we will indeed stop being selective and demand what is typical for the US but will settle for what we can get. As Michael Moriarty said in the Clint Eastwood western classic 'Pale Rider,' 'if we take a thousand dollars this time, what price do we put on our dignity next time? $2,000? $1,000? Or just the best offer?'

Is -0.1% GDP that some are calling 2% growth the price of our acquiescence to what is going on?

It almost seems we are willing to take the best offer. The economic data appears to show some improvement, but as noted, it did the same in 2011 and early 2012 but it was even stronger than now. Certainly earnings are not as strong yet.

If you look at each data point cited for its strength, I can show you the same month 2012 was stronger AND data points in other reports that contradict the claimed strength.

The ISM came in at 53.1, topping the 50.5 expected. In January 2012 it was 54.1. ISM national was over 50 but all regions outside Chicago were negative. Regional reports are not used for the national report believe it or not. So you have individual regional reports compiling data for their regions, a much simpler and more accurate task than the national given the scale and scope, yet shallower samples in the national report are used for the overall number. A disconnect between the two and an overall lower ISM than same month 2012.

Michigan Sentiment topped expectations at 73.8 (71.4 expected). In January 2012 it was 75 on the final read. Then there was the Consumer Confidence number tanking to recession levels at 58.6 from 66.7; tremendous plunge in confidence.

Incomes are trumpeted as jumping 2.6% in December, but it is clear that resulted not from great new jobs (the jobs data above proves that), but from incomes such as dividends, pulled forward from 2013. That won't be duplicated.

Durable goods orders jumped 4.6% but inside the numbers it was all defense spending and Boeing planes, and when you look at key capital investment, it was down 4.3% year/year.

Again, IF the pundits on television had the facts it would be shooting fish in a barrel to undermine the notion how strong the economy is. Earnings estimates for Q4 have been steadily cut from where they were going into the season. They are lower. The ISM was lower. Michigan sentiment was lower. Consumer Confidence lower. So much stronger than before, but lower.

Grown men supposedly seasoned in the markets are allowing the hype and euphoria over Dow 14,000 and indices at or closing in on all-time highs to color their judgment and conclusions versus looking at the facts.

Madame Defarge knits her tapestry of death for the heads that will literally roll.

Again I am reminded of Madame Defarge in 'The Tale of Two Cities' chiding the peasant for being overwhelmed by the splendor of royalty and forgetting his poverty-stricken plight: while the economy struggles to produce any jobs and millions of citizens are newly on government assistance in the past year we are beguiled by the money printing that has pushed up asset prices, confusing that with real growth.

Recession anyone?

How can this face be so worried?

Thursday Art Cashin cited a little discussed but widely know stat in economic lore: Since 1948 when the records started to be kept, when the year over year real GDP growth is less than 2%, the US has ALWAYS fallen into recession.

You guessed it. The 2012 year over year real GDP growth was 1.5%.

All the excitement over how it is better now than it has been in the recovery even as the obvious facts show the economic data is worse. Even Mr. Shiller of the Case/Shiller Index that is being cited as an indication of recovery is not so sure that is an accurate conclusion drawn from the data. As stated before, the excitement is emotion as they are caught up in the stock indices pushing to 5 year highs and closing in on all-time highs.

I put it this way again: do you think that 2% growth, IF we accept what the optimists are saying about what GDP growth is right now, has driven the stock indices to all time highs (as in the case of SP400, RUTX) or within striking distance as on DJ30 and SP500? If you are intellectually honest you have to answer 'no' and recognize it is massive liquidity pushed into the financial markets that pushed the indices to these highs.



Stats: +36.97 points (+1.18%) to close at 3179.1
Volume: 1.991B (-7.82%)

Up Volume: 1.54B (+540M)
Down Volume: 475.4M (-724.6M)

A/D and Hi/Lo: Advancers led 2.6 to 1
Previous Session: Advancers led 1.56 to 1

New Highs: 275 (+140)
New Lows: 26 (0)

Stats: +15.06 points (+1.01%) to close at 1513.17
NYSE Volume: 690M (-2.95%)

A/D and Hi/Lo: Advancers led 3.19 to 1
Previous Session: Advancers led 1.04 to 1

New Highs: 655 (+402)
New Lows: 59 (+32)

Stats: +149.21 points (+1.08%) to close at 14009.79

BREADTH: Not bad at 2.5:1 NASDAQ and 3.2:1 NYSE. Maybe all fluff but good fluff moving many stocks.

VOLUME: Lower but decent after spiking the last day of the month Thursday. Not a bad showing for a new month in the new year, still nicely above average as new money jumped into the market rally.


SP500. Broke to a new rally high and post-bear market high after a 2 day test to the 10 day EMA. Regardless of the driver, SP500 is moving ahead and a sighting in on the 1576.09 all-time high hit in late 2007. Markets can run a lot farther than we think they should or can.

NASDAQ. Still below the September high of 3197 but in clearing the recent lateral move it puts everyone on notice it is seeking that level. Gapped upside Friday and closed out near the session high on a seventh straight session of above average volume.

DJ30. Broke 14,000, sold below it a few times, but then held it on the close. It too is seeking an all-time high at 14,198.

DJ20. Rebounded off the 10 day EMA test and sits just below last week's all-time high.

SP400 and Russell 2000. New high for the midcaps after a quick three day test of the 10 day EMA. As noted early last week, the doji pauses were just that, leading to a new bounce.

RUTX small caps: After flopping to the 10 day EMA Wednesday we said whether it held or folded would tell the tale for stocks. It held and Friday gapped and ran to a new all-time high.

SOX. A rather typical test of the 10 day EMA for the SOX and Friday the chips were up with SOX at a new rally high. Still a load of resistance from 2012 prices starting at 425 and running up to 445. Shooting them down one at a time for now.


Big names. AMZN did not participate. After gapping higher on its earnings but struggling to hold the move it has continued to struggle. AAPL was down as well. EBAY and GOOG pushed ahead with GOOG pushing to a new rally and all-time high above the October peak.

Financials. MA is holding its test after earnings gapped it but it reversed. JPM moved to a new rally high. C and BAC are bouncing from their recent tests. Not huge moves at all, just steady.

Transports. Most faded after the strong run to new highs in the index. They were up but not surging. Are these leaders losing some juice? KSU bounced off the 10 day but below recent highs. JBHT in trucking looks strong. ABFS made us money but after it turned the corner it is not following other truckers. UPS missed its earnings and has stumbled some.

Housing. Some surprise moves as TOL tanked toward the 20 day EMA. PHM did not participate and KBH faded some though it still looks to be a solid leader in the group. Materials are mixed as LPX still struggles, VMC sets up, and PATK looks good having fought off the sellers.

Retail. Still very sloppy given all the consumption and incomes. JWN is very range bound. LULU, FOSL, ZUMZ, BKE, CHS, ANN, ANF. These are not patterns to get all gushy over. On the other hand there are a few of interest, e.g. KIRK, KORS, and even DLTR as it looks to be bottoming for a bounce.

Drugs/Medical. Still interesting. SNSS surging. BMRN hits a new rally high. CELG breaking higher off its test. HNSN looks great for a new bounce as does ACAD.

Technology. FFIV holds some interest but just not sure what it is. IBM is fighting off the dips. May look at it upside as well. In the chips LSCC is interesting at that group continues to recover. FALC in software is a low price stock with some interesting action, but it is also low volume as well.



VIX: 12.9; -1.38
VXN: 13.89; -0.94
VXO: 12.44; -1.55

Put/Call Ratio (CBOE): 0.9; -0.01

Bulls versus Bears

Bulls: 54.3% versus 53.2% versus 51.1% versus 47.8% versus 46.8% versus 45.7% versus 43.6% versus 39.3% versus 37.2% versus 38.3% versus 43.6 versus 41.5% versus 45.7% . Basicallly at the September 2012. Last time the market hit that level SP500 corrected 9% over the next two months. 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: 22.3% versus 22.3% versus 23.4% versus 24.5% versus 24.5% versus 23.4% versus 25.5% versus 27.7% versus 27.7% versus 28.7% versus 27.7% versus 27.7% versus 25.5%. Holding steady at 22.3% as the bears have hit the limit of their optimism, at least for now. Summary: Over 35% is the threshold to be really be a good upside indicator. For reference, bearishness hit a 5 year high at 54.4% the last week of October 2008. The move over 50 took bearish sentiment to its highest level since 1995. Extreme negative sentiment. Prior levels for comparison: Bearishness peaked at 37.4% in September 2007. It topped the June 2006 peak (36%) on that run. That June peak eclipsed the March 2006 high (33%) and well above the 2005 highs that spawned new rallies (30% in May 2005, 29.2% in October 2005). That was a huge turn, unlike any seen in recent history.


I am going to start my look at next week saying this: markets can run or fall a lot farther than we logically or rationally believe they can run. Thus a bit of the Friday post-market euphoria is understandable, but at the same time it is concerning. USUALLY it is the pessimism that drives the move, not the out and out euphoric gushing I heard Friday afternoon. By the time the euphoria sets in, everyone is more or less all in.

There is a notion that if all the money that chased bonds over the past few years started leaving as interest rates continue to rise (and thus has a snowball effect on rates itself), that money will find its way into stocks as the only game in town in terms of getting a return. It sounds very logical and I believe it will happen at least in part.

What pundits such as Harry Dent are worried about is that after that run occurs, what happens next? The money will be all in, the Fed is out of bullets, we have on the upside $100T in debts, and we had better pray that the economy has sparked to more than the 2% growth the experts claim the -0.1% Q4 GDP number actually showed. If not, beware the Zimbabwe effect.

What about Zimbabwe? It enjoyed the best performing markets in the world for a decade. Now the country has $217 of real currency (US dollars) left and its own currency is nothing but stacks of printed paper thanks to hyperinflation taking hold once the country passed the tipping point. What is the inflation rate? Cato Institute puts it at 89.7 sextillion percent. FYI a number in sextillion has 24 zeros after it. Its markets produced great paper gains. The only ones who survived are those who turned the paper into hard assets, something I have been telling you to do the past two years with some of your stock market profits. Take the money the Fed is giving you via its policies pushing stocks higher then convert some of it to hard assets while their prices are cheap. A balanced approach, right?

It's all a lot of fun until your money looses 89,700,000,000,000,000,000,000,000% in value.

But of course we are not Zimbabwe yet and we won't be there next week. So we again go about using the market run to our advantage so we have the dollars to convert into some hard assets just in case inflation gets a grip and things get a little sour.

I would not be surprised at all next week if the market sold. Lots of euphoria over what I have demonstrated are weaker year over year economic numbers mixed with liquidity-induced new market highs. As noted, however, that is a timing issue; euphoria does not mean automatic selling.

To me the market ended the month strong as new money came to stocks to start the year and a lot of funds that are still behind kept the ball rolling in the month. The old saying 'as goes January' has many revved up fearing they are missing out. Then February comes and new money hits Friday and push stocks higher despite a weak jobs report and economic numbers that are worse than January 2012. A lot of new money hit. A bit of letdown is normal.

Thus with the upside gaps Friday we opted not to engage in chasing that bus, figuring we will get a shot to buy this week. Indeed there are quite a few stocks we have looked at that could still participate with or without a test.
Don't count out an even more impressive run higher.

That statement is important: with or without. Why? Because even if we believe the market will test that does not mean it will test. As I always say, a market can run farther than we logically think it can or should. Thus if it does not come back there are plays we can make.

INDEED, if this is the start of a shift from bonds to stocks with retail investors coming back on board the rush higher could be impressive for several months. In that case there will be many buying opportunities. We just opted on one day to wait and see if the excessive excitement yields a deeper snap test for a few days and then we can move in with a better risk/reward situation. If not, we see many plays we can use to capture a further move higher for now until that next test comes.

The interesting point is this: if there is a sharp jolt, some of the newcomers will get burned by it and put off again just as it turns back and starts to rally once more. Psychology and markets are a devilish thing. Know what you want to do and do what you know. When stocks say 'buy me' based upon their patterns and their move it is best to listen to them versus our keen logic and wit. You don't have to be too terribly smart to make money in the market, you just have to think about it in the right mindset. Thus even though I think the excitement over the economic data is potentially cataclysmically wrong if the right people believe it is true and make decisions based upon it, I am not going to let that belief cloud my view to what stocks are doing and what a good risk/reward play is.

Support and resistance

NASDAQ: Closed at 3179.10

3197 is the September 2012 post-bear market high
3227 is the April 2000 intraday low
3401 is the May 2000 closing low

3171 is the October intraday high
The 10 day EMA at 3146
3134 is the March 2012 post-bear market peak
The 20 day EMA at 3124
3104-3112 from August and mid-October peaks.
3101 is the August 2012 high
3090 is the mid-March interim high
3076 is the late April 2012 high and the 1/2013 low after gapping higher
The 2011 up trendline at 3079
The 50 day EMA at 3078
3062 is the December 2012 prior peak
3042 from 5/2000 low and several other price points
3024 is the gap point from early May
3000 is the February 2012 post-bear market high
2999 is the bottom of the August 2012 consolidation
The 200 day SMA at 2997
2988 is the July 2012 high
2977 to 2980 is the bottom of the late October 2012 consolidation, July 2012 peak
2962 is the April 2012 low
2950 is the mid-April closing low
2942 is the mid-June 2012 high
2900 is the March 2012 intraday low
2858 is the late July 2011 peak
2847 is the mid-May 2012 low
2838 from the July 2012 lows

S&P 500: Closed at 1513.17

1539 from June 2007

1499 from January 2008
The 10 day EMA at 1497
The 20 day EMA at 1484
1475 is the September 2012 high
1471 is the October 2012 intraday high
1466 is the September 2012 closing peak and rally closing high
The 50 day EMA at 1457
1440 from November 2007 closing lows
1434 from early November 2012
1433 from August 2007 closing lows
1427 is the August 2012 peak
1425 from May 2008 closing highs and the October 2012 low
1408 is the late October 2012 range closing low
1406 is the early May 2012 peak
1402.22 - 1400 is the closing low of the August 2012 lateral consolidation
The 200 day SMA at 1399
1378 is the February 2012 peak
1375 is the early July 2012 peak
1371 is the May 2011 peak, the post-bear market high
1363.46 is June 2012 high
1359 is the April 2012 low
1357 is the July 2011 peak
1344 is the February 2011 peak
1340 is the early April 2011 peak
1332 is the early March 2011 peak

Dow: Closed at 14,009.79

14,022 from 7-07 peak

The 10 day EMA at 13,836
13,692 from 6-2007 peak
The 20 day EMA at 13,687
13,668 from 12-2007 peak
13662 is the October 2012 intraday high
13,653 is the September 2012 high
13,557 to 13,662
The 50 day EMA at 13,447
13,413 from the late September 2012 low
13,300 to 13,331 is the August 2012 post-bear market high
13,297 is the April 2012, prior post bear market high
The 200 day SMA at 13,074
13,058 from the May 2008 peak on that bounce in the selling
13,056 is the February 2012 high
12,716 is the April 2012 closing low
12,524 is a range of support from early 2012 and summertime 2012
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

February 1 - Friday
Nonfarm Payrolls, January (8:30): 157K actual versus 180K expected, 196K prior (revised from 155K)
Nonfarm Private Payrolls, January (8:30): 166K actual versus 193K expected, 202K prior (revised from 168K)
Unemployment Rate, January (8:30): 7.9% actual versus 7.7% expected, 7.8% prior
Hourly Earnings, January (8:30): 0.2% actual versus 0.2% expected, 0.3% prior
Average Workweek, January (8:30): 34.4 actual versus 34.5 expected, 34.4 prior (revised from 34.5)
Michigan Sentiment - Final, January (9:55): 73.8 actual versus 71.4 expected, 71.3 prior
ISM Index, January (10:00): 53.1 actual versus 50.5 expected, 50.2 prior (revised from 50.7)
Construction Spending, December (10:00): 0.9% actual versus 0.5% expected, 0.1% prior (revised from -0.3%)
Auto Sales, January (14:00): 5.5M prior
Truck Sales, January (14:00): 6.5M prior

February 4 - Monday
Factory Orders, December (10:00): 2.4% expected, 0.0% prior

February 5 - Tuesday
ISM Services, January (10:00): 55.6 expected, 56.1 prior

February 6 - Wednesday
MBA Mortgage Index, 02/02 (7:00): -8.1% prior
Crude Inventories, 02/02 (10:30): 5.947M prior

February 7 - Thursday
Initial Claims, 02/02 (8:30): 360K expected, 368K prior
Continuing Claims, 01/26 (8:30): 3200K expected, 3198K prior
Productivity-Preliminary, Q4 (8:30): -1.2% expected, 2.9% prior
Unit Labor Costs, Q4 (8:30): 2.4% expected, -1.9% prior
Natural Gas Inventories, 02/02 (10:30): -194 BCF prior
Consumer Credit, December (15:00): $11.9B expected, $16.0B prior

February 8 - Friday
Trade Balance, December (8:30): -$45.4B expected, -$48.7B prior
Wholesale Inventories, December (10:00): 0.3% expected, 0.6% prior

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

Jon Johnson is the Editor of The Daily at

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