Monday, July 29, 2013

Stocks Setting Up For a New Move


- Another comeback to flat as indices continue the consolidation through earnings season.
- Earnings overall continue their improvement for Q2.
- Anticipating improvement in Q3 GDP, but are warnings a warning sign?
- Once again stocks setting up for a new move and will FOMC meeting provide the catalyst?

Stocks muddle through another session, but it is a constructive muddle.

Not much change from Thursday, just more consolidation and not bad consolidation at that. A good development as it keeps things status quo so the lay of the land remains the same. That is good for several reasons, one being my two sons just got back tonight from a 4 week trip to the Boy Scout National Jamboree and other adventures along the way. That means the report can be nice and short and have you more than ready to take on what the market puts out next week and I can spend some quality time with my sons. Perfect scenario.

Futures were down and down significantly in the pre-market. Japan's Nikkei fell 3% as its CPI turned positive to 0.2%, the first positive read in modern record keeping (that, of course, began after the 1980's collapse in Japan that has never righted itself). Ironic, isn't it? The US Fed led by Bernanke and his Princeton henchmen WANT inflation, but Japan, after decades of deflation has its markets dive at the first whiff of inflation or as some would say, 'reflation.'

Armand (Robin Williams): 'What we really need is a woman. We can get away with Albert as an uncle if we had a woman as a mother. Ironic, isn't it? When you need a woman . . . ' from 'The Bird Cage'

China, after talking tough on austerity and relieving the imbalances in its economy without the bailouts the West has used, suggested Friday that a 'mini stimulus package.' Indeed, perhaps more than one may be necessary to tweak the economy to avoid a slowdown below the 7% threshold set earlier in the week. I TOLD you China would go back on its austerity pledges as soon as the going got tough.

If you are talking irony, I suppose this is ironic itself: no bailout, just a small stimulus package . . . or two, or three, or four. It will take stimulus packages, but it won't take a bailout.

Earnings continued their torrent and while there were still winners (SBUX, ATVI, SWK), the misses and warnings were more predominant. AMZN and EXPE missed. KLAC beat but lowered guidance. Same with ZNGA.

It was enough to put futures in the can. Not to mention the run to this point and the current sluggish yet consolidative action in the indices. It was also enough to set up some low to high action in a continuing bull run, even if the indices are a bit weary from their prior run.

Stocks tanked in the first hour despite a beat on Michigan Sentiment July final (85.1 versus 84.1 expected). After almost 1.5 hours into the session, however, stocks found their floor and rose steadily to the close. No surge, no swoosh, just bringing prices back up towards the flat line.

SP500 1.40, 0.08%
NASDAQ 7.97, 0.22%
DJ30 3.22, 0.02%
SP400 -0.52%
RUTX -0.54%
SOX -0.90%

Volume fell 18% on NASDAQ back to average. NYSE trade faded 12%. Upside but not a lot of buyers pushing it.

Breadth matched, recovering but not making it to positive. -1.1:1 NYSE, -1.7:1 NASDAQ.

SP500 and DJ30 undercut the 10 day EMA held thus far, but then recovered nicely to hold the 10 day EMA on the close. SP400 showed similar action. NASDAQ didn't undercut; it was stronger on the session and posted a decent gain. RUTX lost ground but it held the 10 day EMA on the low and recovered some losses.

So, when it was all over the indices displayed very solid action, fading, recovering, showing another shakeout in the consolidation. In that sense Friday was a constructive session as the indices held onto what they had while working off the excess from the 4 week upside run.

It seemed unlikely they could hold the gains and continue without a further consolidation, but each session they spend with this type of action improves the chances they hold onto the gains and continue on.

THE NEWS: Earnings

Q2 results have posted overall decent earnings, i.e. bottom line, beats. That has been the case for the past several quarters. The problem is top line misses. Revenues continue to disappoint as companies cannot grow sales thanks to a 1.5% or worse economy (Q2 will be significantly worse by the time the last revision is made). That started to change the past week with more top and bottom line beats.

All is well then? Not yet. Many economists, analysts, horoscope readers, etc. are pointing to a better Q3 and entire second half of 2013 that will cure all ills. Just like 2011 and 2012. Didn't take. Surely the law of averages will catch up.

Guidance suggests maybe that, sadly, won't be the case yet again. Here are the midpoint readings on SP500 earnings.

293 reported as of Friday. The mix of the earnings is as follows:

Bottom line results: 73% report bottom line earnings topping expectations.
Top line results: 54% report sales beating estimates.

The four year average of top line beats: 58%. Some improvement last week but needs to pick up to match the average.

Guidance: 54 companies have issued guidance. 43 negative, 11 positive.
80% providing lowered or negative guidance. 5 year average is 62%.

Beat margin: This is the percentage of companies beating estimates. The 4 year average is 7.0%. At the midpoint of Q2 earnings it is running 3.2%. If this holds it is the second lowest since Q1 2009 when QE1 was announced.

There is still time for earnings to recover and they have improved the last week. If they do great. The worry is the guidance. It is not good.

Statistics provided by Factset.



Dollar: 1.3287 versus 1.3248 euro.

Bonds steady: 2.56% versus 2.57% versus 2.58% versus 2.50% versus 2.48% versus 2.49% versus 2.53% 10 year Treasury.

Oil: 104.59, -0.90. Holding the 20 day EMA on the low.

Gold: 1321.60, -7.10. Still at the 50 day EMA, still trying to break higher.



Stats: +7.98 points (+0.22%) to close at 3613.16
Volume: 1.687B (-18.11%)

Up Volume: 786.56M (-763.44M)
Down Volume: 977.67M (+372.02M)

A/D and Hi/Lo: Decliners led 1.66 to 1
Previous Session: Advancers led 1.92 to 1

New Highs: 148 (-83)
New Lows: 18 (+1)

Stats: +1.4 points (+0.08%) to close at 1691.65
NYSE Volume: 533M (-12.05%)

A/D and Hi/Lo: Decliners led 1.13 to 1
Previous Session: Advancers led 1.38 to 1

New Highs: 147 (-56)
New Lows: 117 (-68)

Stats: +3.22 points (+0.02%) to close at 15558.83


VIX: 12.72; -0.25
VXN: 12.93; -0.39
VXO: 12.08; -0.35

Put/Call Ratio (CBOE): 0.98; +0.02

Bulls and Bears:

Bulls faded slightly as did bears, but negligible. After a lateral to slightly lower move in some of the indices, a bit of bullishness left. Didn't quite hit the levels in February and May.

Bulls: 51.5% versus 52.1% versus 46.9% versus 43.8% versus 41.7% versus 46.8% versus 43.8% versus 45.8% versus 52.1% versus 54.2% versus 52.1% versus 47.9% versus 44.3% versus 47.4% versus 50.5%.

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: 19.6% versus 19.8% versus 22.9% versus 25.0% versus 21.9% versus 22.9% versus 20.8% versus 19.8% versus 19.8% versus 19.8% versus 18.8% versus 19.6% versus 20.6% versus 20.6% versus 19.4% versus 19.6% versus 18.6% versus 18.8% versus 21.1% versus 21.1% versus 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.


Huge week of news. The second half of SP500 starts reporting earnings. Consumer Confidence. First read of Q2 GDP. Chicago PMI. FOMC rate decision. ISM index. Jobs report.

Last time the FOMC announced a result or Bernanke talked the stock market rallied. That is different from the February, April and other occasions when tapering was broached and investors choked. We were told this past week there wouldn't be any issues in keeping interest rates low.

As noted Thursday when this Hilsenrath article was released, interest rates are not the issue. Interest rates were low long before March 2009. Long before. It was not until the Fed started on QE, i.e. injecting liquidity directly into the system, that stocks bottomed and rallied. The QE has maintained all of the gains thus far. Each time a QE episode ran to its end the stock market stumbled. Each renewal of QE and the rally continued.

Interest rates remained low the entire time. They are the least consequential of the Fed's actions. Indeed, the Fed may even be losing its ability, if it ever had it, to control interest rates once they want to do something on their own as they have of late.

The Fed keeps talking about interest rates. The market rallies on QE. It's like an irresistible force and an immovable object on a collision course.

They are talking but neither appears to be listening to the other. I remain concerned about when they figure it out. Maybe I am wrong and it is all understood: taper starts in September but rates remain low. But, does it seem logical that the market would rally if this is what it believed Bernanke was saying?

Thus I remain concerned about the rally if all of the sudden the market realizes Bernanke is serious about taper. Again, I am likely wrong, but I hear the Fed talking interest rates remaining but not anything else.

Until that turns out to be the case, if it does at all, as long as stocks continue to set up we continue to participate in the move. With earnings producing some upside moves or helping set up patterns further there are more plays coming online to take advantage of. The consolidation action in the indices helps form those patterns. As they make the upside breaks, we plan on moving in until the market transitions lower. Ride her until she bucks you as Roy Tin Cup McAvoy said in 'Tin Cup.'

Support and resistance

NASDAQ: Closed at 3613.16

The July 2013 at 3625
3641 is the upper channel line for the November 2012 to present uptrend.

The 10 day EMA at 3586
3549 is the November 2012 up trendline
3532 is the May intraday high
3521 is the August 2000 low.
3502 is the May 2013 closing high
The 50 day EMA at 3480
The 2011 up trendline at 3306
3295 is the June 2013 low selloff
3227 is the April 2000 intraday low
The 200 day SMA at 3220
3197 is the September 2012 post-bear market high
3171 is the October intraday high
3134 is the March 2012 post-bear market peak
3130 from some January 2013 lows
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
3062 is the December 2012 prior peak
3042 from 5/2000 low and several other price points

S&P 500: Closed at 1691.65

The November up trendline at 1702

1687 is the May high and post-bear market high
The 10 day EMA at 1683
1654 is the June 2013 peak
The 50 day EMA at 1643
1576 from October 2007, the prior all-time high
1569.48 is the 78% Fibonacci retracement of the April to May 2013 run
1560 is the June 2013 reversal low
1556 from July 2007
1541 is the April 2013 closing low in that pullback inside the uptrend
1539 from June 2007
1531 is the recent high
The 200 day SMA at 1531
1499 from January 2008
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

Dow: Closed at 15,556.49

The November up trendline at 15,810

15,542 is the May 2013 intraday high
The 10 day EMA at 15,500
The 20 day EMA at 15,392
15,318 is the June closing high
The 50 day EMA at 15,199
14,888 is the April peak and prior all-time high
14,844 is the June intraday low
14,551 is the June 2013 intraday low on the selloff
14,198 from the October 2007 high
The 200 day SMA at 14,181
14,149 is the February 2013 high
14,022 from 7-07 peak
14,010 from the early February 2013 consolidation
13,784 is the late February 2013 closing low
13,692 from 6-2007 peak
13,668 from 12-2007 peak
13662 is the October 2012 intraday high
13,653 is the September 2012 high

Economic Calendar

July 26 - Friday
Michigan Sentiment - Final, July (9:55): 85.1 actual versus 84.1 expected, 83.9 prior

July 29 - Monday
Pending Home Sales, June (10:00): -1.7% expected, 6.7% prior

July 30 - Tuesday
Case-Shiller 20-city, May (9:00): 10.5% expected, 12.1% prior
Consumer Confidence, July (10:00): 81.6 expected, 81.4 prior

July 31 - Wednesday
MBA Mortgage Index, 07/27 (7:00): -1.2% prior
ADP Employment Change, July (8:15): 175K expected, 188K prior
GDP-Adv., Q2 (8:30): 1.1% expected, 1.8% prior
Chain Deflator-Adv., Q2 (8:30): 1.2% expected, 1.2% prior
Employment Cost Index, Q2 (8:30): 0.4% expected, 0.3% prior
Chicago PMI, July (9:45): 51.5 expected, 51.6 prior
Crude Inventories, 07/27 (10:30): -2.825M prior
FOMC Rate Decision, July (14:00): 0.25% expected, 0.25% prior

August 1 - Thursday
Challenger Job Cuts, July (7:30): 4.8% prior
Initial Claims, 07/27 (8:30): 345K expected, 343K prior
Continuing Claims, 07/20 (8:30): 2995K expected, 2997K prior
ISM Index, July (10:00): 51.5 expected, 50.9 prior
Construction Spending, June (10:00): 0.2% expected, 0.5% prior
Natural Gas Inventories, 07/27 (10:30): 41 bcf prior
Auto Sales, July (14:00): 5.7M prior
Truck Sales, July (14:00): 6.8M prior

August 2 - Friday
Nonfarm Payrolls, July (8:30): 175K expected, 195K prior
Nonfarm Private Payrolls, July (8:30): 195K expected, 202K prior
Unemployment Rate, July (8:30): 7.5% expected, 7.6% prior
Hourly Earnings, July (8:30): 0.2% expected, 0.4% prior
Average Workweek, July (8:30): 34.5 expected, 34.5 prior
Personal Income, June (8:30): 0.5% expected, 0.5% prior
Personal Spending, June (8:30): 0.4% expected, 0.3% prior
PCE Prices - Core, June (8:30): 0.2% expected, 0.1% prior
Factory Orders, June (10:00): 2.2% expected, 2.1% prior

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

Jon Johnson is the Editor of The Daily at

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