Stocks Fight Back to End the Week

MARKET SUMMARY

- Stocks fight back to end the week as the Dow rides HPQ's earnings.
- German business confidence to the rescue? Seriously?
- The Fed's world according to Bullard: the liquidity will remain.
- HPQ, AIG earnings were the toast, but questionable guidance from a series of consumer stocks is worrisome.
- Chinese stock market still fading after money supply drained.
- Copper diving this month. SP500 tends to follow.
- Testing the first selling: Some stocks in position to bounce even as many are still ready to pull back. It all depends upon the BADD money.

A rebound after German business confidence rises and the Fed says money is here to stay. All must be well.

After two sharp downside sessions triggered in reality by the FOMC minutes that detailed a significant swing in concern on the committee about the Fed's balance sheet and China's draining of its liquidity pool (not to mention a two month unabated continuation of the rally), stock futures were up and stocks started significantly higher.

They almost gave it up by midmorning, however, as the sellers took their shot. Looked as if the market might just turn over and sell once more. Instead, the buyers caught the decline just above the flat line and dutifully pushed stocks higher into lunch. An afternoon trading range ensued but stocks didn't give up, indeed catching a new bid in the last hour of trade and turning a mediocre bounce into a much better looking upside move. The Dow, riding HPQ's earnings, even broke back into its lateral range.

SP500

That final push closed SP500 above its 20 day EMA. Indeed it closed all of the indices outside of NASDAQ above the 20 day EMA and thus above near support. That leaves them in position to recover. Question is, will they continue to do so next week?

Clearly the BADD money was at work, the old Buy Any Damn Dip money. Certainly there was a dip and certainly stocks recovered. Breadth was not bad at 3:1 on NYSE, 2.6:1 NASDAQ. Clearly most stocks were up, but just as clear volume was much lower, falling 23% on NASDAQ and 16% on the NYSE. Money came back in, but it was not as strong as the downside volume and many stocks simply bounced from sharp selling versus turn the tables back upside. More on this in the technical section.


THE NEWS

What drove stocks to the upside? The BADD money is out there no doubt, but what brought it back to the market Friday?


Earnings don't hurt but even as some help others are worrisome.

HPQ and AIG reported earnings beats and that aided the bounce, HPQ in particular with its 12% surge. No doubt it helped bounce DJ30 back into its range.

Ignored on the session but not boding well for the economic future, a trio of consumer stocks warned about future business. DRI (restaurants) warned on its third quarter, citing lower traffic due to higher taxes and rising gasoline prices. The stock managed a gain on high volume in any event. JWN (department stores) missed on revenues and warned on the current quarter. ANF forecast a quarterly loss and said Christmas sales were not good. Moreover it plans closing 40 to 50 stores.

It would appear that yet again there are clouds on the consumer horizon, but for now, as with all other things economic, investors overlook those and focus on Fed liquidity. After all, the economy has limped along, at best, since the recovery started yet the stock market has surged in some cases to new all-time highs. Why start worrying about economics now if the Fed is there?


Is the Fed still in the game? To stay?

The question Wednesday and Thursday, however, was indeed whether the Fed was going to stay in the game. Throw in China draining its money supply as it did in 2011 preceding that April to December dive lower and serious questions arose about the ability of the rally to continue.

Then came Friday and some affirmation. Germany reported its business sentiment rose above expectations. Seriously. That was credited by many with jumping the futures higher. Seriously. Not HPQ or AIG earnings, but German business sentiment. Of course it was reported Wednesday in another German report that business sentiment was up yet stocks plunged. The same news recycled two days later certainly accounted for the renewed optimism. Right.


Happy Germans ignite rebound rally?

Come on. We have improved business sentiment here as well but has that led to companies investing in their businesses? Investment in Q4 fell 4.3% year/year. As is often the case, sentiment has nothing to do with actions here and you can bet it is the same in Germany.

No, the real strength of Friday was the Fed. It giveth back what it taketh away as of Wednesday. After the minutes roiled the stock markets and triggered the harshest selling of 2013 the Fed got rattled. It cannot, after all, let stocks slip with a still below trend economy and jeopardize whatever wealth effect it thinks it creates with the higher asset prices. As an aside, it is ironic that given the stock indices have risen from the ashes of 2008 to new all-time highs in several cases yet there is still worry about the consumer and the economy's ability to sustain growth on its own. The wealth effect must have an extraordinarily weak impact on the economy if that is the case. Nonetheless Friday after the close there were the pundits on the financial stations talking about how the economy was ready to really climb now as the 'wealth effect' kicks in. Right.

Back to the Fed. St. Louis Fed president Bullard appeared on CNBC Friday morning. After the 2-day drop the Fed wasted no time in getting the word out that just because its members are actually TALKING about and indeed appear quite worried about how long it can keep up this massive liquidity pump, it was just talk. It's their job to be prepared and thus they were just throwing that out on the table as good Fed governors should do.

True, you have to talk about possible courses of action, but the Fed's MO is to start talking when it starts wanting a change. Naturally the market took that (not to mention the statements made in the minutes) as the usual course of action: start talking to get everyone used to the idea, then start acting on the talk.

But Bullard indicated that was just wrong-headed thinking. EVERYONE is on board with the current 'very aggressive' monetary stimulus currently in place according to Bullard. His comments were so sticky sweet you got the impression that some on CNBC did not believe things were so cordial on the FOMC in terms of current policy.


I give you the solution: the printing press. The effect on the dollar's worth . . .

But Bullard insisted and they relented. You see, as Bullard put it, the monetary policy in place is assuredly going to stay for a 'long time' because it will take until 2014, maybe 2015, before the unemployment rate hits 6.5%, the level Bullard insists is the point where the Fed will 'consider' whether and how much stimulus to remove.

Wow. That was a completely different interpretation from what a read of the actual minutes appeared to indicate and indeed is different from what a couple of FOMC members stated before the minutes release. Oh well. This is the latest iteration so we must believe.

It appears investors did. That was the talk on many stations though the headlines in some cases still cited German business sentiment. Let's face it: Fed liquidity drove the markets since March 2009 when it announced QE1 and then all the subsequent QE iterations since. When that was threatened Wednesday the market stumbled. When reassurance was administered and confidence in QEternity restored, the markets resumed the upside.


OTHER MARKETS

Dollar: 1.3183 versus 1.3166 euro. Down against the euro given that German business confidence right? Up against everything else as the dollar index consolidated its move through the 200 day SMA and over the early November peak. Breakout to the upside despite the overall bearish pattern the past year. The Fed is going to continue printing money according to Bullard but perhaps not ALL markets bought into his comments.


Bonds: 1.96% versus 1.98% US 10 year treasury. An up week for bonds by a hair as they recovered from the early week selling and bounced off of some support. Still below the 20 day EMA with a doji, the resistance it failed at in mid-January.


Gold: 1572.70, -6.00. Gold rallied for a second session off of the gutting it endured from last Friday to Wednesday. Unfortunately the rally stalled and gold faded on the session. A relief bounce and not much of one.


Oil: 93.13, +0.29. Bloomberg said that oil rose, all of 29 cents mind you, on that increase in German business sentiment. Kid you not. Let's see, oil was gutted almost 5 points in less than a week and touched some support on the Thursday close. A response to a much stronger dollar perhaps? Or could it even be just an old fashioned relief bounce after getting pounded like abalone in an upscale restaurant's kitchen? German business sentiment? Are you serious? Is anyone over there actually READING the headlines and stories the reporters are putting out?


China: Since we are talking other markets, let's throw China in there. The Shanghai exchange lost just over 5% in four sessions, dropping stone-like after the announcement the PBOC cut off the liquidity and was withdrawing liquidity with reverse repos. Last time it did that was in 2011, and as noted above, its stock market sold off for nine months. Much of the world markets went with it.


Copper: Let's take in copper as well. Copper imploded the past week. Major decline in a short period. Note how it traded laterally for all of January while SP500 moved higher. It was slowing in momentum and then rolled over. Look back at the typical historical tracking. Copper fell hard in May 2012 similar to the current drop; the stock market followed it lower and then recovered as copper recovered. The current divergence is even more stark: SP500 has not faded at all in terms of what happened in 2012. That suggests, some would argue strongly, that stocks are skating on thin ice right now and are ready to fall.


THE ECONOMY

Go for the sequester.

It is not much; Larry Kudlow and others say that we are talking about just $44B in cuts. Even with these 'cuts,' however, the US will spend $15B more than last year. That is correct. These cuts won't cut ANY EXISTING program, just limit the additional spending the federal government desired.

What does that mean? There needn't be any air traffic controller cutbacks, no TSA shortages leading to longer check-in lines, no first responders laid off, no uneducated kids because teachers are furloughed, no criminals released because prosecutors cannot prosecute cases, and no hungry children. No program has to be cut because we are still going to spend more; again, just won't be able to spend it on new programs.

That is, UNLESS the administration wants to make a political point and actually cut back on services that need not be touched. All the sequestration will do is hurt defense because it is earmarked for the lion's share of the cuts. Not that it can't use cutting as well.

There is not one government agency or department in the history of government that could not be tightened and streamlined. Private sector companies, at least in the small and medium categories, have had to tighten and streamline for 5 years now. Survival mandated it. If a department's existence was on the line, it would find ways to cut and still deliver.

So, let the sequestration come. If we cannot survive that without so much as a ripple we have serious problems that won't be resolved without some almost cataclysmic event that alters the foundations of those currently engaged not in governing but in fighting for the extinction of the other. Things look more and more as they did in the run-up to that event back in the 1860's.


TECHNICAL SUMMARY

INTERNALS

NASDAQ
Stats: +30.33 points (+0.97%) to close at 3161.82
Volume: 1.561B (-23.14%)

Up Volume: 1.12B (+745.67M)
Down Volume: 435.11M (-1.215B)

A/D and Hi/Lo: Advancers led 2.58 to 1
Previous Session: Decliners led 2.3 to 1

New Highs: 100 (+43)
New Lows: 29 (-8)

S&P
Stats: +13.18 points (+0.88%) to close at 1515.6
NYSE Volume: 612M (-16.16%)

A/D and Hi/Lo: Advancers led 3 to 1
Previous Session: Decliners led 2.42 to 1

New Highs: 158 (+51)
New Lows: 26 (-34)


DJ30
Stats: +119.95 points (+0.86%) to close at 14000.57

BREADTH: Finally matched the downside breadth with some upside moves. 3:1 NYSE, 2.6:1 NASDAQ. Good breadth tends to suggest not just a narrow relief move.

VOLUME: On the other hand, volume was pathetic, falling 23% on NASDAQ and 16% NYSE. Back to below average on both exchanges after volume spiked well above average and the highest in a couple of weeks on the Wednesday and Thursday selling. More sellers showed up on the week, and even though Friday was positive, volume tells you there were less buyers on the upside day versus sellers on the downside. Basically the sellers took the day off and let stocks rise.


THE CHARTS

SP500. Recovered the 20 day EMA and indeed the 10 day EMA thanks to that last spurt that closed the large caps out at the high. Some help from financials though mixed action in that sector. Heavy equipment didn't help the move, but enough other sectors joined in. a recovery, but not convincing given the volume. Then again, with the money ready to move in, SP500 put itself in position to resume the upside.


NASDAQ. Gapped and rallied upside to the 20 day EMA. Filled the gap lower from Thursday but low, low volume. NASDAQ looks the weakest of the indices as this is just a weak bounce thus far.


DJ30. Rode HPQ's 12% gain back through the 20 and 10 day EMA and indeed into its three week lateral range. Stronger volume thanks to HPQ. Quick test, quick recovery. If the Dow is dictating the market moves then the market is fine. Of course, it does not.


DJ20. Held the 20 day EMA on the selling and bounced off of it Friday. No volume but held the trend and is still in great position.


SP400. Recovered the 20 day EMA after a quick 1-2 selloff. Keeping itself alive but as with NASDAQ it depends upon if the buyers return again next week. Interesting in that the midcaps are actually lagging SP500 and DJ30 in the recovery. Not by much but SP400 has not retaken its 10 day EMA.


Russell 2000 small caps: Russell recovered both the 20 and 10 day EMA after the sharp two days of selling. We will see if the buyers return here as well.


SOX. As with the others, through the 20 and 10 day EMA, attempting the recovery from that 2 days downside.

SUMMARY: Bounced right back to keep in the upside game and now we see if the buyers return again on Monday. Recall the discussion this past week about the 1999 run that would suffer a sharp couple of days downside only to resume the move. Volume was high on those downside days as well, but the liquidity won out. If buyers believe the Fed is in the game for still a long time to come as Bullard promised then this could very well have been a 2-day hiccup followed by a continued run.


'Son your ego is writing checks your body can't cash.'

After the FOMC minutes, however, regardless of Bullard's assurances you have to ask if his ego is writing checks he cannot cash a la Maverick in 'Top Gun'? It will take some other Fed-speak from other Fed officials to drive his point home in terms of investor confidence.


LEADERSHIP

Big Names. GOOG gapped to a modest doji and still looks unscathed; strongest stock in NASDAQ large caps. EBAY gapped up modestly off the 50 day EMA test but not inspiring as volume was extremely light. AAPL was higher but no volume here either. Just not a lot of life even with the overall market recovery.

Homebuilders. TOL looks weak, bouncing for a second session but to a tight doji below the 50 day EMA. Looks as if the current trend is over. KBH trying to hold the 50 day EMA but not looking strong.

Financials. Some were fine such as JPM as it bounced off the 20 day EMA. C looks weak. BAC could not move off the 50 day EMA. On the other hand V made a nice move.

Semiconductors. Still not ready for the most part. KLAC bounced but could not cross the 20 day. SLAB still below the 50 day EMA. But, solar looks better, e.g. FSLR.

Energy. Still needs work in some cases (APC) and decent in others (CVX). Overall, in much better shape than many sectors despite oil's sharp drop on the week.

Industrial Machinery. Did not help. CAT, CMI, TEX could not provide any real upside push.


THE MARKET

SENTIMENT INDICATORS

VIX: 14.17; -1.05
VXN: 15.68; -0.81
VXO: 13.74; -1.2

Put/Call Ratio (CBOE): 0.9; -0.2

Bulls versus Bears

Bulls continued their decline, really before this round of selling started. Anticipating the peak a bit and not so much so that they fostered a further grind higher. Bears rose a point as well. Lower and higher but still not at points that would suggest the selling ends. Indeed as chronicled the past two weeks they just got to the point where they suggested some selling and it is here.



Bulls: 48.4% versus 52.6% versus 54.7% versus 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. Over the September 2012 level. 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: 22.1% versus 21.1% versus 21.1% versus 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%. 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.


MONDAY

Friday was the bounce, the almost expected obligatory buy attempt after two sharp downside sessions. Money wants to come in and with Bullard's comments it would have been almost strange if stocks did not mount a recovery attempt.

Okay, they attempted. It was not much of one what with the light, light volume, but the move had breadth and most indices recovered at least one level of near support. There were some stocks posting good moves in good patterns or off good pullbacks versus the jerk lower and reflex bounce. Not that they cannot make knifepoint turns; if the money wants in then that can happen. It is just not normal, not all that healthy, and definitely a product of excess liquidity.

Many other stocks made more of the latter type of move, the reflex bounce lower that didn't leave them in great position to continue higher. That suggests more downside to come, but it all depends upon the money, the BADD money and how bad it wants to get into the market.

With copper selling hard, insiders selling hard, questions about the Fed, and China drying up its money supply it would appear the market has a lot against it. I would say the sequestration issue, but that, as discussed last week and the additional points mentioned above, is not an issue at all. In any event, even without sequestration and any worries it might generate, that is a beefy lineup of negatives for stocks to deal with.

So it comes down to how bad do they want it, i.e. how much do those looking for some kind of return want into the market to play catch up. I expect them to come around once more, but I also believe that after this run to this point this lineup could send stocks on a further test near term before the run resumes. That is what I believe but just in case there are still some quality upside plays we will have ready, just in case. That desire to play when there is this much money in circulation can overcome a lot of problems. I think they call that throwing caution to the wind but the market has done that more than once in its history.


Support and resistance

NASDAQ: Closed at 3161.82

Resistance:
The 20 day EMA at 3163
3171 is the October intraday high
3197 is the September 2012 post-bear market high. Starting to crack.
3227 is the April 2000 intraday low
3401 is the May 2000 closing low

Support:
3134 is the March 2012 post-bear market peak
3130 from some January 2013 lows
The 50 day EMA at 3120
3104-3112 from August and mid-October peaks.
3101 is the August 2012 high
The 2011 up trendline at 3101
3090 is the mid-March interim high
3076 is the late April 2012 high and the 1/2013 low after gapping higher
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
The 200 day SMA at 3008
3000 is the February 2012 post-bear market high
2999 is the bottom of the August 2012 consolidation
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 1515.60

Resistance:
1531 is the recent high
1539 from June 2007

Support:
1499 from January 2008
The 50 day EMA at 1482
1475 is the September 2012 high
1471 is the October 2012 intraday high
1466 is the September 2012 closing peak and rally closing high
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
The 200 day SMA at 1408
1406 is the early May 2012 peak
1402.22 - 1400 is the closing low of the August 2012 lateral consolidation
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 14,000.57

Resistance:
14,022 from 7-07 peak
14,198 from the October 2007 high

Support:
The 20 day EMA at 13,899
13,692 from 6-2007 peak
The 50 day EMA at 13,671
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
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 13,134
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 21 - Thursday
Initial Claims, 02/16 (8:30): 362K actual versus 358K expected, 342K prior (revised from 341K)
Continuing Claims, 02/09 (8:30): 3148K actual versus 3150K expected, 3137K prior (revised from 3114K)
CPI, January (8:30): 0.0% actual versus 0.1% expected, 0.0% prior
Core CPI, January (8:30): 0.3% actual versus 0.2% expected, 0.1% prior
Existing Home Sales, January (10:00): 4.92M actual versus 4.94M expected, 4.90M prior (revised from 4.94M)
Philadelphia Fed, February (10:00): -12.5 actual versus 1.5 expected, -5.8 prior
Leading Indicators, January (10:00): 0.2% actual versus 0.3% expected, 0.5% prior
Natural Gas Inventories, 02/16 (10:30): -127 bcf actual versus -157 bcf prior
Crude Inventories, 02/16 (11:00): 4.143M actual versus 0.560M prior

February 26 - Tuesday
Case-Shiller 20-city, December (9:00): 6.5% expected, 5.5% prior
FHFA Housing Price I, December (9:00): 0.6% prior
New Home Sales, January (10:00): 385K expected, 369K prior
Consumer Confidence, February (10:00): 62.0 expected, 58.6 prior

February 27 - Wednesday
MBA Mortgage Index, 02/23 (7:00): -1.7% prior
Durable Orders, January (8:30): -4.0% expected, 4.3% prior (revised from 4.6%)
Durable Goods -ex transports, January (8:30): 0.2% expected, 1.0% prior (revised from 1.3%)
Pending Home Sales, January (10:00): 1.0% expected, -4.3% prior
Crude Inventories, 02/23 (10:30): 4.143M prior

February 28 - Thursday
Initial Claims, 02/23 (8:30): 360K expected, 362K prior
Continuing Claims, 02/16 (8:30): 3150K expected, 3148K prior
GDP - Second Estimate, Q4 (8:30): 0.5% expected, -0.1% prior
GDP Deflator - Second, Q4 (8:30): 0.6% expected, 0.6% prior
Chicago PMI, February (9:45): 54.0 expected, 55.6 prior
Natural Gas Inventor, 02/23 (10:30): -127 bcf prior

March 1 - Friday
Personal Income, January (8:30): -2.4% expected, 2.6% prior
Personal Spending, January (8:30): 0.2% expected, 0.2% prior
PCE Prices - Core, January (8:30): 0.2% expected, 0.0% prior
Michigan Sentiment - Final, February (9:55): 76.3 expected, 76.3 prior
ISM Index, February (10:00): 52.4 expected, 53.1 prior
Construction Spending, January (10:00): 0.5% expected, 0.9% prior
Auto Sales, February (14:00): 5.6M prior
Truck Sales, February (14:00): 6.5M prior

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

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

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