Some Selling Was Expected After the Run

MARKET SUMMARY

- After reaching new highs in spite of taper and Syria, after a relief spurt some selling sets in. Expiration or something more?
- Four week rally, laggard indices selling harder along with some leaders.
- Bullard tries to put the kibosh on the no taper party.
- AKS lowers guidance, DRI (Red Lobster, etc.) misses big but has a secret plan, while CTAS (uniforms) guides higher.
- HD dumps 20K workers on public exchanges. WAG, Trader Joe's do the same.
- Some selling was expected after the run, and it was expiration and an S&P rebalance, but some leaders show sharper selling than you like to see.
- Monday is the third day of the test and will tell more of the story as for a as its depth.

Market had all of the good news it could take on this leg.

Four weeks upside from what looked to be a rollover . . . except for NASDAQ. As you recall, NASDAQ held its 50 day EMA and the July gap higher. That stand at support turned the tide and a month later almost all of the indices hit new highs or new post-bear market highs (SP400 was the notable laggard, missing by a fraction).

With the FOMC 'no taper' the market continued the run with a sharp spurt higher. This was, however, after 3.5 weeks of upside. Larry Summers was knocked from the running. Market moved higher. Syria was taken off the front burner when Russia pounced on an offhand statement from Secretary of State Kerry, pushing Russia back into prominence in the Middle East when it had none. Market moved higher. Then the FOMC topped all expectations with a non-action.

That left nothing to anticipate in the near future. Earnings are coming, but the meat is still three to four weeks away. With the run already in the bank that is an awful long time to glide higher on momentum in anticipation.

Then throw in the old 'what the Fed giveth the Fed can taketh away' scenario. Friday morning Mr. Bullard stated the economy was not all that fragile, that the no taper decision was a close call, and that there is really no difference between no taper and $10B in taper. Okay, that is understandable given everyone (and yes even those now saying 'oh we felt there could be no taper decision all along') felt there would be some kind of taper announced. It was the final comment, however, that really rattled the stock market: there could be a press conference after the October FOMC meeting, implying there may be something that needs explaining, say a taper?

Stocks were moving higher into the open and looked pretty darn decent. Then the Bullard comments hit the wires and the gains were gone. Thursday sure had the look of a market that ran a long way, got another big piece of news but then just got tired. Friday that look became reality as the indices gave back some of the move, particularly the last spurt that was Wednesday.

As we discussed Thursday, some indices were more impacted than others. DJ30 dove and SP500 and SP400 followed it with 3/4 to 1% losses. The leaders on the move higher - - NASDAQ, RUTX, and SOX - - held the line much better with 1/4 to 1/2% losses. Some leaders moved higher, some held the line. A lot of stocks that looked solid came under heavy fire Friday with losses that were more than you want to see in just a second day of testing. Thus the question still remains whether the laggards drag everything lower with them or whether, as in August, NASDAQ et al can hold the line and thus hold the market from spinning lower.

SP500

Not that anything major changed Friday in terms of the environment. Sure Bullard talked of a 'possible' press conference in October. Hell, it is 'possible' that Bernanke decides to call a special press conference as well. It is the likelihood that will occur that is important. The Fed, Bernanke specifically, said the Fed could taper and then always backtrack if things got out of hand. The Fed HAS NOT said that it will call a special meeting in order to accelerate the taper. That is just not going to happen.

What would cause it to happen? Unemployment suddenly dropping to 6.5%? I say that won't happen, but heck, if many more people leave the workforce then that becomes a reality. I also said the Fed would certainly taper on Wednesday. There you go. In any event, a meaningless reality in terms the jobs market being stronger, but a form of reality nonetheless.

So, Friday saw some sharper selling than you want to see in a second day of a pullback, but it was not market-wide. It was quad expiration and a S&P rebalance. Volume shot higher as stocks were shuffled. That exaggerated the moves. The third day following the Wednesday surge will tell you more about the character of the test, and thus far NASDAQ, SOX, and RUTX look very solid in their fade. A lot of people are once again talking about the market rolling over. No doubt it was ready for and will test. It always does.


Don't flatter yourself. I was following her . . . I always do . . .

Again, the question is normal test or rollover? The market was ready to dive in August. It sold but it recovered to new highs. Again, there are still $85B reasons per month not to tank. Sure it will test but will it roll with that kind of scratch still moving in? Will Bullard control the FOMC's October decision? Not. So we see how it holds early next week and that tells much of the story heading into earnings season.


THE NEWS

Bullard spoke, the upside broke, at least for the session. Egged on by quad expiration and the S&P rebalance no doubt. Other stories, meaningful ones, are out there.

Earnings: Yes the season is approaching but there are early birds (or laggards) announcing.

The Bad:
AKS (steel) guides Q3 lower.

DRI (Olive Garden, Red Lobster): 0.50 versus 0.73 expected. Revenues missed as well. But . . . management says it has identified an area that will allow it to cut expenses and turn things around. Must be shrimp month.


The Good:
TIBX (software) beat on the top and bottom lines

CTAS (uniforms): Reported in-line results, but it upped its Q3 guidance. An important stock in our opinion as it shows customers spending more on new uniforms, willing to release some money to replace tattered togs. CTAS had struggled but the increased guidance suggests something is stirring. Positive.


The Worrisome:

HD sends 20K to the public insurance exchanges. WAG and Trader Joe's do the same. These join UPS in sending 10,000 spouses onto the public exchanges.

Keep your healthcare plan if you want? How? When you provide the incentive for companies to DUMP their healthcare plans thanks to surging costs, there is no insurance to keep. Of course anyone who has looked at the law before, or as Nancy Pelosi and most of Congress did, after it was passed, you know that is the plan, i.e. making it so costly that the only economic choice is to go on the public exchanges.


Nothing wrong with the healthcare bill, however.

Friday the House voted to defund the Affordable Care Act in the continuing resolution, one of the just two opportunities Congress has to impact spending (the other is the debt ceiling). Too costly, killing jobs, jacking up healthcare costs were some of the cited reasons.

Then at the White House carnival barker Carney said 'there is no data showing the economy is losing jobs because of the Affordable Care Act.'


No 'data' showing any jobs lost under the Affordable Care Act.

I guess that depends upon your definition of 'data.' Cleveland Clinics said today that it was cutting jobs BECAUSE of the cost of the act. DRI has said the same. Dozens of companies are on record saying this is the case. Indeed, the VERY ARGUMENT those seeking and receiving waivers from the Federal government on implementation is that if the Act applied to them they would have to cut jobs.

This goes into the category of hyper-technical language such as the old 'I did not have sexual relations with that woman.' Okay then, what is the definition of . . . you get the point.


Of course I had sexual relations with that woman.

Healthcare costs soaring when we know they can go lower.

If you think the Act is working even after the exemptions, the dumping of plans, etc., look at the costs: costs we spend on healthcare, including insurance, is now up to $9,000 per person, young or old. The President told us our average costs would be -$2500. He made a scrivener's error: that should have been +$2500.

Does it have to be this way? We erred in this country when we went from insurance to cover catastrophic events such as accidents and serious illness to insurance covering everything down to a sore throat. The mantra 'insurance will pay for it' jacked up the number of unnecessary tests and procedures. The fear of lawsuit added more.

What if insurance wasn't there to pay for every little sniffle? Then you would have to be a smarter patient. You wouldn't rush in when your kid had a cold or a sore throat likely from allergies. If strep was running in your school then you would have it checked but if not, use some common sense.

Look at Lasik eye surgery. It is not covered by most insurance as it is considered an elective choice versus glasses or contacts. Indeed many people don't have coverage for their vision correction needs. That add on is very expensive per dollar received. When Lasik was first introduced, costs easily exceeded $10,000. Costs have decline approximately 70%, however, while the technology has improved dramatically. With no insurance buffer to maintain higher prices, companies are forced to compete for business. Consumers are forced to do more research and homework, but by golly, they make better decisions. Voila.


Lasik prices down 70% as insurance doesn't cover it and companies have to, oh my, compete.

It can happen in healthcare in general. HSA's are great ways to insure for the big problems and cut costs. The Healthcare Act does all it can to make them unattractive, e.g. eliminating deductibility of non-prescription drugs and healthcare items. So what do the consumers do now? They get their doctors to write prescriptions for basic over the counter items. Senseless to have to do this, but where there is a regulation, there is a way around it. Unintended consequences, eh?

But when HSA's are allowed to work you get a smarter patient who discusses healthcare plans of action with the doctor, participates in the plan, and can actually negotiate better prices. That is precisely what my family does. You would be surprised the 'fat' that are in the prices quoted by doctors. It reminds me of buying an auto and negotiating down from the sticker price (or up from the dealer's cost). If you are informed, and you find it pays to be informed both in savings and in a better healthcare plan, it is a great and empowering thing.

Alas, try to tell that to our government that thinks we, the people of the most inventive and productive country on earth (at one time), are too stupid to understand healthcare when we virtually invented the technology revolution. Only a government could have that hubris.




THE MARKET

OTHER MARKETS
Dollar fell: 1.3518 versus 1.3527

Bonds: 2.74% versus 2.75% versus 2.69% 10 year.

Oil faded some more: 104.67, -1.72

Gold reverse surged: 1332.60, -36.90


INTERNALS AND STATS

NASDAQ
Stats: -14.66 points (-0.39%) to close at 3774.73
Volume: 2.371B (+34.64%)

Up Volume: 1.1B (+102.08M)
Down Volume: 1.57B (+818.18M)

A/D and Hi/Lo: Decliners led 1.15 to 1
Previous Session: Decliners led 1.19 to 1

New Highs: 188 (-48)
New Lows: 17 (-4)

S&P
Stats: -12.43 points (-0.72%) to close at 1709.91
NYSE Volume: 1.183B (+82%)

A/D and Hi/Lo: Decliners led 2.57 to 1
Previous Session: Decliners led 1.41 to 1

New Highs: 215 (-310)
New Lows: 94 (-18)


DJ30
Stats: -185.46 points (-1.19%) to close at 15451.09


THE CHARTS

NASDAQ: Again found the upper channel line tough to cross, faded slightly. Volume surged but that was expiration and S&P rebalancing. NASDAQ has struggled at the upper channel line; noted it before, but what else are you going to say? The question is whether it goes all the way to the 50 day EMA again. Leaders were split on the session. Still very solid, but this is why we have been taking some gain on the way to these highs.

SOX: Rolled back from the break to the new post-bear market high on the week. Holding right at the July intraday highs, the prior high. Still looks solid, but it is just the second day of the test. The 10 day EMA is another 4 points lower and a logical point to test. There are, of course, a pair of gaps higher that are out there, lurking.

RUTX: Nice, easy fade, hardly giving up any ground. Looks like a leader, and with stocks such as CTAS raising guidance, that is a positive for the small caps.

SP500: Falling, a big more than you want but not an out and out gutting. Back at the late July/early August high. Nothing extraordinary thus far, just testing the move. Has some room to give still. It won't hold the old high but it can test the 10 day EMA, another 10 points lower. It can also test much further and still put in a higher low and continue the uptrend. So, again, that is why we take gain on the way and look go bank more if this is not just a 1-2-3 test.

DJ30: The last to catch up, and as we opined, one of the first drop hard. We picked up some DIA puts in the event it wants to do a crash course in crashing.

SP400: Not bad at all. Yes it was the goat and failed at a new high but the decline was not morbid and perhaps the small caps will help it.


LEADERSHP

Vastly varied. A day that saw some move higher, many take another moment to rest, but many falling quite hard.

The up: NFLX, AMZN, PCLN, GOOG, XOOM, FB, ERII, EBAY. Some powerful, some so-so.

Taking a breather: VIPS, DDD, YY, YNDX, WWWW, TSRO, AFOP, SBUX, LVLT, BMRN, GILD.

Got kicked (or at least look heavy): AAPL, BZH, ATK, NEM (gold), LNKD, HLF, UBNT


Bud (John Travolta): What happened to your face?
Sissy (Debra Winger): Got hit
Urban Cowboy, 1980



SENTIMENT INDICATORS

VIX: 13.12; -0.04
VXN: 12.97; -0.8
VXO: 12.95; -0.26

Put/Call Ratio (CBOE): 1.05; +0.29


Bulls and Bears:

Clearly diverging again with bulls running higher and bears falling, just as the market makes a turn for the worse. Similar action in June.




Bulls: 42.3% versus 37.1% versus 37.1% versus 38.1% versus 43.3%. Diving below the early July, late June levels. 48.4% versus 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: Last undercut 35%, the threshold for bullishness, in early June 2012.

Bears: 21.6% versus 22.7% versus 23.7% versus 23.8% versus 21.6%. Finally breaking free from the 20 level that held for three weeks, and now matching the highs from late June and early July. Starting to get there but needs to jump toward 30.

Background: 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

No data Monday but it is a pretty full week with Consumer Confidence Tuesday, Durable goods, new home sales, GDP third revision, personal income and spending, and Michigan sentiment.

Earnings warning season is upon us as well as we saw Friday when Blackberry warned earnings would be way off and it was laying off 40% of its staff worldwide (4500 workers). A great phone and legacy is going to be history. That new phone is something else; it was just too late to the market and the moment had passed.

This week will tell the story of a short 1-2-3 pullback to test the Wednesday surge upside or a more sustained pullback of several percent. The last two times NASDAQ played around with the upper channel line it was spanked lower. In August it was the 50 day EMA that caught it. It could easily do that again. Doesn't have to, but it is the pattern thus far even with $85B/month. Of course there were threats of taper that started and extended the selling, but it is still a very technical pattern and reacted to natural resistance and support levels.

Is it likely a 1-2-3 pullback? Not really. It will show more Monday and then Tuesday after the third day. Look at stocks you may want to sell calls on, stocks that moved to the 127% Fibonacci extension and are ready to roll back to the prior peak are great call sale opportunities.

With the fade we will look at some downside as well in the event it turns into a more extended decline, e.g. NASDAQ falling to the 50 day EMA again. As noted, picked up some DIA puts on the day in the event the Dow wants to dive.

At the same time, if this is going to be a more modest fade then some leaders will be testing and setting up for new moves. Have to watch for that as well. Many were just taking a day off again, posting modest or now losses. Those that hold the line will be ready to pop if it is just a short pullback. If it is longer you have to see which ones hold the line and also watch for bases in others to finish forming.

As you can see, it is early in the test so how deep is the question. No one knows for sure, so that is why you simply take actions to stack the deck in your favor. We took some good profits on the way up, we can sell some calls and play some downside on a fade, and of course look for opportunity to set up on the upside. After all, there are still $85B reasons per month for the leaders to continue to lead.

Have a great evening!


Friday is quadruple expiration for September. We banked our last September option gain Thursday, selling CAMP options for a decent gain (50%) though not what we wanted when the play started. Not bad for a 'failure' of sorts.

The session could be a bit up and down given expiration, but the key for us is how the lagging indices hold up (DJ30, SP400) and if they put any pressure on the leaders. NASDAQ, SOX, RUTX still look solid. A few days of testing is no issue for them and lets the market work off the froth from Wednesday. Still good stocks in position to move, but of course fewer in number now versus when the move started 3.5 weeks back. Duh.

Indeed, after hours Warren Buffett told CNBC that the market was 'fairly valued' at this point (17x earnings on average). Of course that doesn't mean growth stocks don't get much, much more levered than that, but it tells you that some big money is a bit cautious at this juncture with new highs popping last week.

Cautious and things are a bit fluffed up near term, but there is also $85B/month still out there with no timetable for pulling back. Indeed Bernanke made it sound as if nothing would be trimmed (tired of using taper) until employment and perhaps other markets get substantially better.


Support and resistance

NASDAQ: Closed at 3774.73

Resistance:
3795 is the upper channel line for the November 2012 to present uptrend.
Next major resistance is around 4100 as NASDAQ hits 13 year highs

Support:
3694 is the August high and the post-bear market high.
3727 is the November 2012 up trendline
The 50 day EMA at 3638
The July 2013 intraday high at 3625
3573 is the August 2013 low
3532 is the May intraday high
3521 is the August 2000 low.
3502 is the May 2013 closing high
The 2011 up trendline at 3380
The 200 day SMA at 3353
3295 is the June 2013 low selloff
3227 is the April 2000 intraday low
3197 is the September 2012 post-bear market high
3171 is the October intraday high


S&P 500: Closed at 1709.91

Resistance: Just how far it gets over the 200 day SMA

Support:
1710 is the August 2013 peak
The 10 day EMA at 1698
1687 is the May high and post-bear market high
1698 to 1700 are the July and August interim highs
1685 is the mid-August 2013 upper gap point
The 50 day EMA at 1670
1657 is the late August upper gap point
1654 is the June 2013 peak
1627 is the August 2013 low
The 200 day SMA at 1583
1576 from October 2007, the prior all-time high
1573 is the June 2013 closing low
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
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 15,451.09

Resistance:
15,542 is the May 2013 intraday high
16,659 is the August 2013 peak

Support:
15,318 is the June closing high
The 50 day EMA at 15,227
15,050 from the August 2013 interim recovery high
14,888 is the April peak and prior all-time high
14,844 is the June intraday low
14,762 is the August 2013 low
The 200 day SMA at 14,603
14,551 is the June 2013 intraday low on the selloff (14,659 closing)
14,198 from the October 2007 high
14,149 is the February 2013 high
14,022 from 7-07 peak
14,010 from the early February 2013 consolidation


Economic Calendar

September 24 - Tuesday
Case-Shiller 20-city, July (9:00): 11.5% expected, 12.1% prior
FHFA Housing Price I, July (9:00): 0.7% prior
Consumer Confidence, September (10:00): 80.0 expected, 81.5 prior

September 25 - Wednesday
MBA Mortgage Index, 09/21 (7:00): 11.2% prior
Durable Orders, August (8:30): 0.4% expected, -7.4% prior (revised from -7.3%)
Durable Goods -ex transports, August (8:30): 0.9% expected, -0.8% prior (revised from -0.6%)
New Home Sales, August (10:00): 416K expected, 394K prior
Crude Inventories, 09/21 (10:30): -4.368M prior

September 26 - Thursday
Initial Claims, 09/21 (8:30): 325K expected, 309K prior
Continuing Claims, 09/14 (8:30): 2775K expected, 2787K prior
GDP - Third Estimate, Q2 (8:30): 2.5% expected, 2.5% prior
GDP Deflator - Third Revision, Q2 (8:30): 0.8% expected, 0.8% prior
Pending Home Sales, August (10:00): -2.3% expected, -1.3% prior
Natural Gas Inventories, 09/21 (10:30): 46 bcf prior

September 27 - Friday
Personal Income, August (8:30): 0.4% expected, 0.1% prior
Personal Spending, August (8:30): 0.2% expected, 0.1% prior
PCE Prices - Core, August (8:30): 0.1% expected, 0.1% prior
Michigan Sentiment - Final, September (9:55): 77.3 expected, 76.8 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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