Monday, October 14, 2013

Market Has a Deal, Will Get Yellen


- Rally extends as the path toward a capitulation is set.
- RUTX, SP400 look really good. The others are differing shades of not bad.
- Leaders look good in some cases, look like oversold bounces in others.
- Market has a deal, will get Yellen, but maybe has stuffed itself a bit too much just ahead of earnings.

Inexorable path toward a bad deal is underway.

There was a show in the early 1990's called 'Northern Exposure.' It was set in small town Alaska (though really in a Canadian town) and had a collection of eccentric nuts (that means beyond eccentric) living there. Every year during the winter the people would eventually get cabin fever and start acting even crazier than usual. Then the ice would break in the river, signaling winter was ending and that the spring would inevitably come. Of course the men would all get naked and run through the town (their version of the running of the bulls). Just your typical Alaskan town.

The running of the bulls in Cicely, after the ice broke. Still freezing temperatures. Hmmm. I bet that took real courage for the men given the shrinkage factor in that weather.

Yes there is a point: The annual (actually more than annual) budgeting 'crisis' is upon us. We have seen some actions in Congress and the White House that some would say is crazy.

A 21 hour non-filibuster. A 3-branch government with checks and balances that require negotiation and compromise, yet the President refuses to negotiate. A House budget defunding an unpopular law (not so crazy in my opinion). The Senate doesn't even vote on it. Then several individual bills funding key parts of government. The Senate doesn't even vote on one. The Senate majority leader asking why should he help a child cancer victim.

The Executive ordering open air memorials and parks not only closed but then barricaded and guarded. The Grand Canyon, only the biggest hole in the earth (according to Clark Griswold in 'Vacation,' is shut.

Clark: '. . . it's only the biggest *** damn hole in the world.'
Aunt Edna: 'Clark! Watch your language.'
Clark: 'Make that the second biggest.'

The House passing more spending bills that the Senate refused to vote on. The Senate refusing to go to conference committee on proposed bills. The Executive ordering roads and bridges on federal lands closed and cancellation of flights of bereaving families to Dover to see the remains of their loved ones, fallen while serving our country. At the same time some House reps complain that there are no towels in the congressional gym.

Then, as in Northern Exposure, the ice breaks. They start to talk. Apparently not because the President has capitulated, but because, as usual, the Boehner-led republicans have Raisinets for testicles. Or, as Bill Murray playing Dr. Venkman in 'Ghostbusters' would say, 'It's true. They have no d**k.'

'It's true. We have no testicles.' Raisinets go to Washington

Once they fear for their reelection chances they suffer the same kind of shrinkage the fellows in Northern Exposure experienced when they run the bulls.

Now, as inexorably as spring comes post ice break, with the republicans rolling over and peeing themselves, we watch the inevitable deal take shape. I call it a deal. It is basically a debt ceiling raise, a reopening of the government, and a promise to talk about budget issues in the future, such as turning some of the sequester items into cuts in entitlements. No change to the status quo. A zero sum deal that changes nothing. Indeed, all it does is simply reinforce the eunuch status of congressional republicans.

A shutdown of the government, defunding the ACA, passing multiple spending bills for nothing but a promise to talk tomorrow? As Clint Eastwood quoted in 'Absolute Power,' tomorrow is promised to no one. Except for foolish republicans.

The irony: the republicans give up the only bargaining chip they have, and a powerful one, the constitutional authority to decide what to fund and what not to fund, for 'talks.' The reason? Because their polling numbers fell overnight. So, in order to salvage reelection they give in. But the people who put them in office are the ones they are infuriating by their lack of cajones. As they found out in the Bush era, playing it safe to preserve your reelection chances ensures your premature retirement from public office.


But what the hell does the market care about another round of republican hara kiri? Not one damn bit if it means the uncertainty of the debt ceiling debate and the attendant threat of default, social security payment interruptions, mass suicides, congressmen and the Executive branch maybe missing Thanksgiving vacation is gone.

So stocks rallied again. This despite the huge Thursday move. They started a bit softer, sporting a bit of a headache, but turned higher midmorning. A solid rally into lunch, holding the gains to the close. Not the Wednesday rocket launch, but a good follow up.

SP500 10.64, 0.63%
NASDAQ 31.12, 0.83%
DJ30 111.04, 0.73%
SP400 0.89%
RUTX 1.39%
SOX 0.18%

Volume slid on a Friday post big rally. Of course volume was lower on the big rally, but it was good enough. Friday NASDAQ trade was still above average so maybe it was good enough, but NYSE slid below average. A bit questionable, but as noted, likely good enough.

A/D: Breadth was cut in half but was not bad breadth at about 2.8:1 on both NASDAQ and NYSE. After the Wednesday 5 and 6:1 when everything was bought, not bad at all.

SP400, RUTX, and SOX all came close to matching the new highs (post-bear market in SOX' case) hit right before the selling took over.

SP500 and DJ30 continued fairly solid advances as well. SP500 recovered its 2013 trendline. DJ30 recovered its 50 day EMA and is just over the halfway point recovering the ground lost on that rather epic dive to the 200 day SMA.

The indices look pretty good but some stocks have that 1-2-3 bounce look to them, the opposite of the 1-2-3 pullbacks you see on upside moves.


Doesn't mean they will automatically roll over, but the moves are less than powerful as volume declines on the rebound from the Tuesday and Wednesday selling. Maybe, as the short end of the bond market is indicating, markets outside of the stock market are not buying a deal yet. Of course we have to mention yet again, the Fed has $85B/month and now Yellen is warming up in the bullpen and her fastball is right down the middle of the plate without any movement.

That gives stocks plenty of reason not to roll over, but even if there is a debt deal, earnings are here and the market has to deal with them after a sharp plunge and solid bounce, but one that leaves the indices somewhat in no man's land as earnings show up.



Dollar lost just a fraction: 1.3544 versus 1.3520 versus 1.3524 euro. Bounced off the lows, but hit the 20 day EMA and stalled the past three sessions.

Bonds lose some ground: 2.69% versus 2.68% versus 2.66% 10 year. Gapped higher then faded to flattish, still, yes still holding the narrow range in the 10 year. The short T-bills, however, spiked their yield on the week but managed a modest recovery and rates dipped Friday off of their recent surge.

Oil: 102.02, -0.99. Volatile Wednesday to Friday, but managed to hold the late September lows. Struggling still.

Gold: 1268.20, -28.40. Hammered lower below the early October low and the early August low. Weak.


Stats: +31.13 points (+0.83%) to close at 3791.87
Volume: 1.726B (-7.55%)

Up Volume: 1.08B (-650M)
Down Volume: 659.15M (+492.42M)

A/D and Hi/Lo: Advancers led 2.72 to 1
Previous Session: Advancers led 5.14 to 1

New Highs: 160 (+66)
New Lows: 18 (+3)

Stats: +10.64 points (+0.63%) to close at 1703.2
NYSE Volume: 564M (-14.93%)

A/D and Hi/Lo: Advancers led 2.79 to 1
Previous Session: Advancers led 5.88 to 1

New Highs: 189 (+74)
New Lows: 88 (+4)

Stats: +111.04 points (+0.73%) to close at 15237.11


NASDAQ: A second day of solid upside after the plunge to the 50 day EMA, the Wednesday doji, and the Thursday gap and run. Back up into the upper half of the uptrend channel. Volume faded but still well above average as it has been for the past month. After a couple of weeks of rather quiet action at the top of the channel, some serious volatility has entered: Big dump lower then a big jump upside. Don't like the volatility, but it is caused by external forces so we can forgive some of it. This week tells the tale on the rebound.

RUTX: The small caps look just about the best of all. Nice test of the lower trendline and then gapped and surged Thursday, posting another good surge Friday into the middle of its channel. Very nice and back in the lead once again.

SP400: Also looking very strong, clearing the late July high and just 5 points from the early October all-time high. Very nice.

SOX: Also back up to the recent highs, just 3 points off the mid-September post-bear market peak. SOX is much more volatile than the other indices the past three weeks, but it is bumping that old high. As with NASDAQ, the coming week tells a lot of the story about this recovery and the range over the past month.

SP500: Solid, solid, moving up through the May peak after taking back the 50 day EMA Thursday. Lower trade Friday but still solid volume Thursday propelled the move higher low with the late July peak just 6 points away. It is working.

DJ30: Moved through the 50 day EMA on the second move off the 200 day SMA doji. Recovered half of the drop. This is the opposite of the usual rate of change; typically the selling occurs fast and sharp after a long, steady rise. This time a long, steady selloff followed by a dramatic surge. Not bad, like it given the DIA calls we picked up, but not convinced the Dow just runs to a new high on this move.


Lots of stocks moved well Friday just as on Thursday. Breadth was not as strong but still plenty solid. Lots of stocks up, but in our view a bifurcation: those that put in really solid, quality moves versus those that were up but sure look as if they are simply rebounding.


Good moves on the day but lacking punch overall: PCLN, TRIP, KORS, DDD, EDU, NFLX, LNKD, CRM, CELG, MELI, PII


VIX: 15.72; -0.76. Spiked to the June high Wednesday and then the plunge. Gapped lower and sold off Thursday, down to the 50 day EMA on the close.
VXN: 17.19; -1.26
VXO: 14.77; -1.24

Put/Call Ratio (CBOE): 0.95; +0.02

Bulls and Bears:

A little selling and the bulls edged lower, but barely. Bears bounced off the lows from the past three dips. Suggests some selling still to come, but it is also due to some extraneous intervention from the federal government antics.

Bulls: 45.4 versus 46.4% versus 44.3% versus 42.3% versus 37.1% versus 37.1% versus 38.1% versus 43.3%. Backed off a hair form the sharp climb. Still a bit over-baked, but has been higher when selling bouts started in earlier moves.

Background: Last undercut 35%, the threshold for bullishness, in early June 2012.

Bears: 20.6 versus 18.6% versus 20.6% versus 21.6% versus 22.7% versus 23.7% versus 23.8% versus 21.6%. Bounced off the lows from March, April, May and August.

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.


No doubt the market was well-pleased as the ice broke in DC. But it really wasn't an ice break: the President, after again a meeting with Harry Reid where Reid convinced him not to negotiate after the republicans started to waiver (likely just as Reid correctly expected), remained frosty. It is more like the republicans are a boat dashing itself against an iceberg.

Analogies aside, the market wanted a deal and will get it. Moreover, $85B will remain in the bank because the Fed will be worried what kind of economic ramifications the shutdown would have. Now that Yellen is nominated there is little reason, after refusing to taper in September when it should have, the FOMC will taper until Yellen takes over. Even then it will take a while for Yellen to get the guts to do it. Or I guess more accurately, get hounded enough to where she has to do it. I seriously think Yellen believes this is the proper role for the Fed in any times, good or bad. She likes easy money. I once saw a bumper sticker that said 'I can't be out of money, I still have checks.' I think it applies to Yellen.

A young Janet Yellen. Uncanny resemblance to the caricature.

It appears the market gets its cake and will get to eat it as well. Of course even then if you eat too fast you get a stomach ache, and with Tuesday and Wednesday jerk lower followed by the Thursday and Friday jerk back upside, a bit of indigestion may result.

Thus while we did buy on Thursday we were not buying on Friday, not wanting to chase the bus upside just for the reason the market might want to digest a bit early in the week, deal or no deal announcement. It got what it wanted, it stuffed itself, now it has to even out and continue in a more orderly manner. Typically that means taking a bit of a rest, and that is where we get better entries on plays that gapped and ran Thursday and Friday.

Carl's Jr. market? Stuffed itself and now a bit of bulimia?

That means there are still not a lot of great buys out there BECAUSE many we were watching gapped and ran to end the week. We got some of them with decent entries but if you chase, you louse up your risk/reward odds. Sure you will win some as you get bailed out by a continued strong move, but you also increase the odds of losing and losing more if you buy inflated moves that are well off logical stop points that a stock may quite normally want to test after a big surge.

Further, don't forget earnings. This week they start to really flow though the following is when we get flooded. I don't like buying into earnings in most cases, and it is always a decision whether to hold through earnings or not. If you have a good gain built in and have not taken any off the table ahead of earnings, that is the time to really consider banking at least some profit. If you have a great gain already banked and have thus a smaller position, maybe you take a bit more and let the rest ride. Your risk tolerance and the typical performance of a stock on earnings play a big role. You know that some stocks perform well if they report good results while other stocks, unless the results are outstanding, just don't do well on earnings. That is why earnings are more of a crapshoot than we like. That doesn't mean, however, we cannot hold through the results, it just depends upon what we have done with the position to that time.

On top of the individual performance there is the overall market performance as well. There is a 'theme' for each season and how stocks go into the season matters: up, down, basing. This has been a jerky move down then up and the market, while status quo before all the upheaval, is higher in the range and has just surged. There could be some air to let out but not as much if that quick drop had not occurred.

As more earnings come out we like to counterpunch off the moves, up or down. Gaps higher are good to play off as are gaps lower. If a stock has a good pattern and is not overly altered by earnings, that can be a good entry setup because stocks often suddenly catch fire with a delayed earnings effect. Many more logical (in market terms), pattern-based entries after earnings, entries that stack the odds of success back in your favor.

So even with the rebound Thursday and Friday the number of upside positions that we really like are not that high this week. We do see a lot of those stocks that rallied unconvincingly in the recovery, and while there is $85B out there each month and a deal in the offing, that was quickly re-priced into the market, right? Thus we are also looking at some downside plays that are showing that 1-2-3 bounce back that doesn't change the weak patterns that formed ahead of the bear flag.

In any event, it looks as if there needs to be some more work and some earnings coming out before we get more really good entry points. Patience is one of those virtues discussed last week: patience to let a play set up, patience to enter (but acting quickly when the time comes), and patience to let a play work for you as long as the reasons you entered the play are still valid OR if other valid, superseding reasons emerge. Looks as if we will have to practice a bit of the first kind of patience early this week.

Support and resistance

NASDAQ: Closed at 3791.87

3799 is the September 2013 high.
3843 is the upper channel line for the November 2012 to present uptrend.
Next major resistance is around 4100 as NASDAQ hits 13 year highs

3787 is the November 2012 up trendline
3694 is the August high and a prior post-bear market high in the recovery.
The 50 day EMA at 3697
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 3415
The 200 day SMA at 3410
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 1703.20

1710 is the August 2013 peak.
1730 is the September 2013 peak

1698 to 1700 are the July and August interim highs
1687 is the May high and post-bear market high
1685 is the mid-August 2013 upper gap point
The 50 day EMA at 1677
1669 is the December 2012 up trendline
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 1602
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 15,237.11

15,318 is the June closing high
15,542 is the May 2013 intraday high
16,659 is the August 2013 peak

The 50 day EMA at 15,175
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 14,748
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

October 7 - Monday
Consumer Credit, August (15:00): $13.6B actual versus $11.8B expected, $10.4B prior

October 8 - Tuesday
Trade Balance, August (8:30): -$38.6B expected, -$39.1B prior
JOLTS - Job Openings, August (10:00): 3.689M prior

October 9 - Wednesday
MBA Mortgage Index, 10/05 (7:00): 1.3% actual versus -0.4% prior
Wholesale Inventories, August (10:00): 0.3% expected, 0.1% prior
Crude Inventories, 10/05 (10:30): 6.807M actual versus 5.472M prior
FOMC Minutes, 9/18 (14:00)

October 10 - Thursday
Initial Claims, 10/05 (8:30): 374K actual versus 318K expected, 308K prior
Continuing Claims, 9/28 (8:30): 2905K actual versus 2903K expected, 2921K prior (revised from 2925K)
Export Prices ex-ag., September (8:30): -0.1% prior
Import Prices ex-oil, September (8:30): -0.2% prior
Natural Gas Inventor, 10/05 (10:30): 90 bcf actual versus 101 bcf prior
Treasury Budget, September (14:00): +$75.180B prior

October 11 - Friday
Michigan Sentiment, October (9:55): 75.2 actual versus 74.5 expected, 77.5 prior

October 15 - Tuesday
Empire Manufacturing, October (8:30): 4.5 expected, 6.3 prior

October 16 - Wednesday
MBA Mortgage Index, 10/12 (7:00): 1.3% prior
CPI, September (8:30): 0.1% expected, 0.1% prior
Core CPI, September (8:30): 0.1% expected, 0.1% prior
Net Long-Term TIC Fl, August (9:00): $31.1B prior
NAHB Housing Market , October (10:00): 57 expected, 58 prior

October 17 - Thursday
Initial Claims, 10/12 (8:30): 330K expected, 374K prior
Continuing Claims, 10/5 (8:30): 2900K expected, 2905K prior
Housing Starts, September (8:30): 915K expected, 891K prior
Building Permits, September (8:30): 932K expected, 918K prior
Industrial Production, September (9:15): 0.3% expected, 0.4% prior
Capacity Utilization, September (9:15): 78.0% expected, 77.8% prior
Philadelphia Fed, October (10:00): 7.0 expected, 22.3 prior
Natural Gas Inventor, 10/12 (10:30): 90 bcf prior
Crude Inventories, 10/12 (11:00): 6.807M prior

October 18 - Friday
Leading Indicators, September (10:00): 0.6% expected, 0.7% prior

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

Jon Johnson is the Editor of The Daily at

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