Tuesday, May 28, 2013

Another Test Lower, Another Recovery


- Another test lower, another recovery. Good action, not convinced the market rallies from here, but with good stocks set up, if they go, we go too.
- World markets on edge as the US Fed talks of stimulus removal. With the economy as poor as it is, this does not feel good for the US market.

Everyone was watching Japan Thursday night after its wild ride for the week and the US' down and up, or at least up off the lows, session. Japan sold off hard overnight. Then Japan recovered to a modest loss. After the Nikkei closed its futures dove down to the lows during the session. Japan is a train wreck in progress.

The Finance Minister said he doesn't have another plan if this massive liquidity gamble doesn't work.

If things get really ugly excellency, I will clear a path there and you make a run for it.

You know, he is right. There is no answer. If it doesn't work it won't matter what the plan is because everything will have imploded, blown apart, ___________ (interactive report: you fill in your favorite descriptive word/phrase).

Thus even though Japan recovered, US Durables Orders recovered (3.3% versus -5.9% March), Business Investment improved by 1.2%, US futures were less than impressed.

Again stocks started lower, mimicking the Thursday open. Similar to Thursday, stocks recovered off of near support. No major rush higher, just a grind higher through the session.

The slow recovery grind bumped up the pace in the last hour of trade and that pushed DJ30 positive and the other indices erased their declines. A wash day in the end, but constructive as again the indices sold off then recovered. Shaking out the weaker holders and then coming back.

SP500 -0.91, -0.06%
NASD -0.28, -0.01%
DJ30 8.60, 0.06%
SP400 -0.42%
SOX -0.05%

Volume -28% NYSE, -20% NASDAQ

That is good action, but I can tell you the sentiment here: good yes, but has not proved a thing at this point. Bumped the top of the channel on SP500, DJ30 and not much of a pullback. Resilient, showing good action, but . . .

So you watch the leadership and see how they hold up. GOOG is testing the 20 day EMA. STX fine. BIDU fought off selling. Financials held up. LL held support. KORS held the 50 day EMA and bounced. DDD is holding support at the 20 day. NFLX is in a nice 20 day EMA pullback. PCLN is testing the 10 day EMA. Not all are textbook flags, but they are holding support and working on a pullback.

There were some solid moves as well, e.g. WWWW, VVTV. Not necessarily household names, but performing just fine and frankly they have been making just as much or more than the well-known names.

Dollar stronger: 1.2929 versus 1.2934

Bonds flat: 2.01% 10 year

Oil flat: 94.15, -0.10

Gold off modestly: 1386.90, -4.90

Again, so far so good but not resolved yet. That leaves many of these plays looking good for next week, just need to finish the test and make the move back up.

Around here, despite the patterns and the good action on the pullbacks, we think there is more downside to come. That is a gut feeling based upon years in the markets. I will, however, be the first to tell you that no matter how strong my gut feeling, you have to go with what the market shows you. So we are ready to act even if we don't necessarily believe the market will manage a significant rally without a further test.

But what about the longer term?

That is the short term take. What about as the year progresses? I don't have a good feeling about how the US market and other stock markets will react to the US withdrawing stimulus. If the US economy was worth a flip the Fed could more or less get away with pulling some stimulus. Nothing like growth to help markets. It's the next best thing if the Fed is not providing all the free money the financial system wants.

World markets started to struggle on the US news this past week. Markets have a sense of economics. They rally ahead of economic improvements. This one has rallied because of massive stimulus even in the face of pathetic economic activity. Even with improvements in the housing market, you see top line earnings, the sales, falling far short. Indeed, top line misses outnumbered bottom line misses this last earnings season. Companies are selling less and those that are making the bottom line estimates have to cut costs somewhere. People? We know that is happening in terms of more part-time jobs thanks to the structure of Obama-care that rewards making employees part-time, hiring more, working them all less. Thus the modest increase in jobs is a FALSE POSITIVE. It does not mean what it has meant in the past for the economy.

What this has shown is a classic, textbook example of how businesses react to regulations: they seek the lowest cost. They will try to find a way to exist. It may be a reduced profit, it may be that many go out of business and just a few survive, but those that do will have cut costs to the bone given the regulations in order to survive. It is not their potential, just, as in the third 'Matrix' show, a form of existence.

So they survive, but our standard of living falls.

I have a feeling the Fed wants to remove stimulus even if there is a flicker of economic improvement such as seen in the housing market. The Fed has too much debt with a $4T balance sheet. Unwinding that, if it can, will take untold years.

Of course there could be problems along the way forcing the Fed to defer unwinding. Those unforeseen consequences are a bear when you have it hanging out so far. Kind of like miscalculating the landing on that 720 with rotation.

The Fed fears it has created other problems and continuing its actions will cause more harm. The market I feel senses this and thus the shudders as the Fed discusses it, sets plans in place. Unless there is serious economic growth to drive stocks, pulling the driver of stocks for four years will cause serious issues. It starts as some hiccups, but can turn over fast and hard (didn't want to go into fast and furious for obvious reasons) when the market figures it all out.

Have seen it before but not to this extent. The distortions are massive with the amount the Fed has on its books, the extraordinarily low interest rates, and banks that are still over-leveraged and unable to make money the old fashioned way. The Fed has turned the banks into a welfare class just as a section of the US has become a welfare class.

Maybe, maybe the Fed can successfully kick this down the road. With the policies in place the past 5 years, however, with the regulations, increased taxes, and laws that hem in and retard investment and entrepreneurs, growing our way out of this is a pipe dream.

Thus I am worried about the market and the economy as the year plays out and the Fed acts as it feels it must, i.e. withdrawing stimulus. The market and the economy will then have to fend for themselves and we can only hope they don't fall flat. Indeed, we ALSO don't want them to just stumble along for years and years to come as well, a la after the Great Depression when the New Deal and the massive social programs it initiated drained the life out of the US economy until WWII gave businesses a reason to again invest in technology to fight the war. That fortunately continued after the war and launched the US into economic dominance given that the other technologically powerful countries were in ruins.

Energy independence could help accomplish that again. It can open the door to other technologies because we free up money shipped elsewhere to be used here at home. In an ironic twist, energy independence could be the very thing that fosters and accelerates new energy technology and sources that truly work. When we let businesses and entrepreneurs do what they do best, we generate capital and that capital is used in ingenious ways to come up with ingenious inventions.

A pep talk and a request.

Every good trader knows he or she can be wrong half the time and still make fantastic money in the stock market. Indeed it is the fact of recognizing you WILL be wrong, accepting that and acting accordingly when you are wrong . . . and when you are right. When you do that you will be more right than wrong in terms of making money.

That is a powerful truth to recognize: you can make great money being right half the time. Your confidence goes up, you are further empowered to stick to your plan, and then the plan rewards you more and more. Powerful. Life changing.

That was a long way around saying we are uncomfortable that this little pullback is all the selling on this leg but if the market does rally from here that is what it does and we use it to make money. Sometimes it helps to say it out loud (or at least write it). It is no secret. It is great to see the light and fire in the eyes of those who finally get it. It is even better to hear from them six months, a year, 2 years later and how they are successes in trading and in other things in life because of that. Awesome.

Speaking of awesome, we have had an awesome year thus far. Part of the reason for that are those outstanding people who have sacrificed for our liberty. Millions have fought for not only our liberty but for people in other countries who do not enjoy our freedoms. My father fought. My father in law fought. The greatest generation. And now a new great generation of more volunteers willing to pick up the fight for our freedoms. We need to honor them not only with gestures and kind words as we see them, but also in our actions in DOING OUR PART to make sure the liberties and freedoms they fight for are not squandered on the home front by lack of diligence. Right now with these various DC scandals we see the result of our complacency. Honor the millions who died and were wounded in defense of liberty by speaking out, asking 'why?' to our elected officials, and demanding that our government honor those men and women by not trampling what they sacrificed so much for to protect.

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

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

Technorati tags:

No comments: