Monday, January 20, 2014

Stocks Still Struggling to Hit Their Stride


- Stocks cannot carry the bounce to the long weekend, still struggling to really hit their stride.
- Earnings revealing a tale of two groups: those that get the free money and those that do not.
- Can't create jobs that keep people interested in working? 'Fix' the problem by raising the minimum wage. President threatens and EO to do just that.
- Sluggish indices but still in the uptrends.
- Some more stocks trying to join leadership with some new patterns for this market.

Markets struggle to finish with gains before the 3-day weekend.

From the get go Friday stocks were underwater. The economic data was not bad, not great. December Housing Starts fell 9.8% (ouch) while December Industrial Production posted a nice 0.3% advance. Capacity hit 79.2 the best since 5/08. January Michigan Sentiment faded to 80.4 from 82.5, missing expectations. Yen and yang. Maybe more yang.

SP500 -7.19, -0.39%
NASDAQ -21.11, -0.50%
DJ30 41.55, 0.25%
SP400 -0.31%
RUTX -0.40%
SOX -0.54%

Volume: Up 10% NYSE, 28% NASDAQ, but it was expiration so we can throw that out.

It was a day of lethargy ahead of a weekend, but it had a bite. There was some profit taking in recent leaders that pushed them down a bit more than you want to see, negating in many cases a solid Thursday move. Not death moves, and if you missed some entries you could pick some up on this test . . . when they show they can move back up.

All in all a disappointing finish to the week but not a bad week. The indices remain in uptrends and in decent ones at that. The big names are sluggish though DJ30 was driven higher by a small group of high-priced Dow stocks. Good patterns remain in biotechs, electronics (on fire last week), and now some telecom, internet, and even energy. New areas to mine as money continues to rotate around the market.

The key for this coming week: continued bids in the market with money staying in the market. While the indices stalled some the past two weeks other areas, the smaller stocks, prospered. We want to see these new groups continue to reap the money taken from some of the other groups that led the market during this long rally. That is a certain way for the rally to continue, i.e. money moving to 'undervalued' areas and driving them higher as well.


Do you have your free money? Better get some. Earning season reveals the new theme.

This earnings season is to us the most revealing in many quarters. Sure it is early, the season is young, there are many more releases to dissect and digest, but a rather clear pattern has emerged: those getting the free Fed money are beating on the top line. Those that are not of the privileged class and thus do not receive the free Fed money are not beating on the top line.

Who gets the free cash? Banks and those companies that the federal government, back in the TARP days and the Obama stimulus days, deemed worthy of the money in order to keep, as they believed at the time, civilized society from collapsing and then to payback allies, I mean, jumpstart the economy by giving funds, subsidies, and monopolies to key businesses (key being defined as 'friend of the administration;' ask HAL under Bush, GE along with several now defunct companies under Obama).

Even so, some of the chosen under the stimulus plan are not doing as well now. GE presented results that were, at best if you squinted real hard, in line. Equipment is piling up at GE, backlogged to record levels. That doesn't sound promising.

Financials can beat the top line using free money.

The financials, however, the true free money recipients (because heaven knows they cannot go under so we followed Japan's 1980's and 1990's model of bailing them out. Oh, and how is that Japanese model working for them?), are posting the best results. MS beats on the top and bottom line. GS top and bottom. WFC top and bottom. BAC top and bottom (though much of that was a loan loss release). JPM beat.

Hell, only the worst of the worst banks were unable to turn the free money into top line beats. That would, of course, include C. COF really stunk it up as well. Shocking as it is to believe, even in a group receiving free money there are some entities that are so bad, so poorly managed, that they cannot turn a profit using money they pay nothing for. You have to ask, why bother?

Perverse results of bad polices.

That is why in the current economy you have 42% saying they are worse off than they were last year, up from the prior year's Gallup survey. Companies are struggling (e.g. retail) and they are certainly not hiring in any kinds of numbers with any kinds of quality, bread-winner jobs. Part-time, sub-29 hours per week (even if the ACA mandate was extended), go nowhere jobs in the lowest paying sectors.

Compare that to the financial entities and the salaries and payouts they are making as of the 2013 year end. It is not their fault; the money is being given away and you are breaching your duties to your shareholders if you don't make the most of it.

Washington, we have a problem. The economy is trying to recover DESPITE the policies implemented, but because of the new laws and taxes, the recovery is pathetically tepid and extremely sporadic and targeted. Bizarre outcomes are emerging such as vast amounts spent on technology to avoid hiring personnel. Jobs that require serious hours and expertise are shipped overseas to avoid the issues the ACA and other regulations create.

Thus the plethora of jobs, the vast majority of jobs created as or converted to (that is my new phrase) part-time, low wage jobs.

Thus workforce participation falling to record lows as frustrated workers leave seeking low-paying, go nowhere jobs.

Those who still can receive unemployment benefits make the economic decision, consciously or subconsciously, to continue doing so while working for under the table cash jobs because they make as much or more and don't have the aggravation of a low pay, dead end job.

Thus 91.8M people out of the workforce. Adding in the unemployed still fighting for a job, you have about 105M able bodied, working age people out of a total population of 317M without employment, unable to contribute or, because of the perverse incentives due to benefits programs, unwilling to contribute, to society.

Thus you have able bodied citizens receiving food stamps jumping from 1.7M in 2007 to 3.9M (130% increase) in 2010 . . . DURING A 'RECOVERY!' Oh my gosh. Don't show me another recession, please.

Thus you have total food stamp usage surging from 26M to 40M. That is what you get when you removed, as the Obama administration did, any requirement of seeking employment to receiving food stamps. Recall, now you can look at the want ads and qualify. You can attend a parent-teacher conference and qualify. You can be ordered to bed rest and you qualify.

Intervention and bad polices lead to bizarre results. We are living that right now in this jobs market.

The DC solution: raise wages.

Friday the President threatened to pen an Executive Order raising the minimum wage for federal workers if Congress did not act. Sorry, that is the VERY REASON we have three branches of government. One CANNOT usurp powers granted to the other branches. We live in a representative republic, not a monarchy.

Besides that minor detail, however, there are other, economic problems with this type of action.

The majority of the jobs created in this economy, as noted above, are low pay, part-time jobs in the service industry. The policies in place for the past five years have failed to produce the usual higher quality, breadwinner jobs that give rise to upside social mobility. As noted, that is why they are leaving the workforce.

The President said and his Labor Secretary on the day of the last jobs report release said getting participation levels up was key in order for a jobs recovery. The solution proposed is to increase the minimum wage. Not create jobs that have progression to higher pay, but to raise the minimum wage so a father in a family of four can work there forever and manage a subsistence standard of living. Why? Because they have failed horribly at creating breadwinner jobs.

In other words, the program to raise the minimum wage is an admission that in the US, the mightiest economy in the world (and some would argue that point) the only jobs the US can create for people are minimum wage jobs. This so a father of four can work out his life at McDonald's to support his family. That is NOT the American Dream, and that is NOT the solution.



Dollar: 1.3528 versus 1.3612 versus 1.3605 versus 1.3683 versus 1.3669 versus 1.3665 versus 1.3603 versus 1.3578 versus 1.3616 versus 1.3633 versus 1.3589 versus 1.3666 versus 1.3757 versus 1.3798 versus 1.3749 versus 1.3690 euro.

Breaking to a new high on this latest move off the pullback. The dollar continues to improve, as it should if the economic data is really good.

Bonds: 2.83% versus 2.84% versus 2.88% versus 2.87% versus 2.83% versus 2.86% versus 2.97% versus 2.99% versus 2.94% versus 2.96% versus 3.00% versus 2.99% versus 3.03% versus 2.97% versus 3.01% versus 2.99% versus 2.98% 10 year.

Still moving higher, breaking to a new rally high off of the last test. Bonds and dollars are rising together. Somewhat incongruent as bond gains suggest worry about the future.

Oil: 94.33, +0.37. Flat after an early week bounce off of November support. Hitting some resistance already in its oversold bounce.

Gold: 1251.80, +10.70. Breaking back up through the 50 day EMA after a short test of the last move. Looks pretty solid here. Not sure how far it can go, but for some reason gold and bonds are stronger even as the Fed tapers and says the economy is stronger.


Stats: -21.11 points (+0.5%) to close at 4197.58
Volume: 2.185B (+10.58%)

Up Volume: 817.1M (-43.55M)
Down Volume: 1.35B (+280M)

A/D and Hi/Lo: Decliners led 1.39 to 1
Previous Session: Advancers led 1.01 to 1

New Highs: 178 (-28)
New Lows: 17 (+1)

Stats: -7.19 points (-0.39%) to close at 1838.7
NYSE Volume: 752M (+28.11%)

A/D and Hi/Lo: Decliners led 1.45 to 1
Previous Session: Advancers led 1.36 to 1

New Highs: 185 (-21)
New Lows: 78 (-3)

Stats: +41.55 points (+0.25%) to close at 16458.56


After bumping to new highs midweek stocks faded Thursday and Friday but the indices did no harm to themselves. A volatile start to the week, bids came back, stocks rallied nicely through Wednesday, then more hesitation.

SP400: still at the upper channel line, trying to hold the move and avoid a fade to the 50 day EMA that is now mid-channel in the uptrend.

SOX: rallied the next trendline Wednesday then faded Thursday and Friday, showing a doji at the 10 day EMA Friday. Still very solid though it may want to test back toward the 20 day EMA at 531 as it did the last time it tested the trendline in late December.

NASDAQ: New post-bear market high Wednesday and Thursday then a modest Friday faded, easily holding over the 10 day EMA. Tuesday was a big move and Wednesday gapped upside. Looks solid, but some of the big names continue to struggle and thus the advance while fairly steady (with some really volatile days early in the week) is slow.

DJ30: never made it back to the December peak then settled back to test the 10 day EMA. Trending higher still, but not too enthralled with the pattern.

SP500: Cracked to a fractional new high then faded to the 10 day EMA to close the week. Still trending, but hit the prior high and faded. Will need to break it to keep the move going.


Some of the stocks in biotechs and electronics took a break Friday, but strong weeks for most all.

Electronics: MONT still surging. SCTY enjoyed a strong week. CAMT. AEIS. Solid weeks, some testing Friday.

Biotechs, Medical: XON still moving higher. DSCO started upside on the week. STXS jumped. TKMR, GALE, GILD. Good weeks.

Energy improving: END, SN. Potential: EGN, PXD, KOG

Internets, internet related: QIHU, VIPS, TWTR.

Money is moving to these areas still.


VIX: 12.44; -0.09
VXN: 14.2; +0.09
VXO: 11.24; -0.66

Put/Call Ratio (CBOE): 0.71; -0.07

Bulls and Bears:

Bulls back off further, this time dropping over 4 points to 56.1. Bears climbed all off 0.1%.

Hit extremes, now fading some. Still at high and low levels.

When everyone is bullish and has put all their capital to work, where does the ammunition to drive the market come from? There is always new money to start a new year. After that is used will more money be coming? That is the question.

Note the extreme bullishness: it was this high in 2007 at the crash, in early 2005 as well.

Bulls: 56.1 versus 60.6% versus 61.6% versus 60.0 versus 58.2 versus 57.1 versus 55.7 versus 53.6 versus 52.6 versus 55.2% versus 52.6 versus 49.5 versus 42.3% versus 45.4 versus 46.4% versus 44.3% versus 42.3% versus 37.1% versus 37.1% versus 38.1% versus 43.3%. Getting even more extreme . . .

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

Bears: 15.3% versus 15.2% versus 15.2% versus 14.0 versus 14.3 versus 14.3 versus 14.4 versus 15.5 versus 15.5% versus 15.6% versus 16.5% versus 18.5 versus 21.6% versus 20.6% versus 18.6% versus 20.6% versus 21.6% versus 22.7% versus 23.7% versus 23.8% versus 21.6%. Held steady basically for the third straight week. Seems bears fall after each three weeks. Frankly, how much more can it fall? Further, I suppose.

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.

TUESDAY (Market closed Monday)

Earnings dominate the news with the floodgates opening. Thus far disappointing outside of some financials, but we discussed that already now didn't we.

The indices hit new highs midweek and now the question is whether they can ride higher with the new crop of earnings

Rotation will continue to play a big role. That has pushed many stocks higher in great moves, making us excellent money to start the year. Now with earnings ramping up we are still looking for those type of plays but have to factor in earnings. Most that we are looking at have earnings in February and March, but some have relatively short fuses. On those we primarily look to play a good pattern that breaks higher and runs to earnings, then bank most if not all of the move ahead of the results. If there is no movement, the same plan likely applies outside of special situations that we will call note to.

Stay up on the earning dates, be ready to take gain ahead of results or at least have a plan of action you will follow. Earnings add that wildcard into the mix. They just require you to be more on your toes, right?


NASDAQ: Closed at 4197.58


The 20 day EMA at 4147
4104 is the lower gap point from 12/20/13
4098 is the upper channel line for the November 2012 to present uptrend.
4070 is the series of highs from late November/early December
The 50 day EMA at 4064
3998 is the November 2012 trendline
3991 is the prior November 2013 high and the post-bear market high.
3967 is the October 2013 post-bear market high.
3855 is the November low
3819 is the early October high
3801 is the September 2013 high.
The October low at 3750
3697 is the August high and a prior post-bear market high in the recovery.
The 200 day SMA at 3694

S&P 500: Closed at 1838.70

1849.44 is the recent all-time high.

The 50 day EMA at 1805
1775.22 is the October prior all-time high
1765 is the December 2012 up trendline
1730 is the September 2013 peak
1710 is the August 2013 peak.
1698 to 1700 are the July and August interim highs
The 200 day SMA at 1696
1687 is the May high and post-bear market high
1685 is the mid-August 2013 upper gap point
1657 is the late August upper gap point
1654 is the June 2013 peak
1627 is the August 2013 low
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

Dow: Closed at 16,458.56

16,589 is the December 2013 all-time high

16,175 is the November 2013 peak.
The 50 day EMA at 16,120
15,739 is the December 2013 low
15,696 is the September 2013 peak
15,659 is the August 2013 peak
15,542 is the May 2013 intraday high
The 200 day SMA at 15,408
15,318 is the June closing high
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
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

January 17 - Friday
Housing Starts, December (8:30): 999K actual versus 986K expected, 1107K prior (revised from 1091K)
Building Permits, December (8:30): 986K actual versus 1000K expected, 1017K prior (revised from 1007K)
Industrial Production, December (9:15): 0.3% actual versus 0.3% expected, 1.0% prior (revised from 1.1%)
Capacity Utilization, December (9:15): 79.2% actual versus 79.1% expected, 79.1% prior (revised from 79.0%)
Michigan Sentiment, January (9:55): 80.4 actual versus 83.0 expected, 82.5 prior
JOLTS - Job Openings, November (10:00): 4.001M actual versus 3.931M prior (revised from 3.925M)

January 22 - Wednesday
MBA Mortgage Index, 01/18 (7:00): 11.9% prior

January 23 - Thursday
Continuing Claims, 01/11 (8:30): 3030K prior
Initial Claims, 01/18 (8:30): 327K expected, 326K prior
Continuing Claims, 01/11 (8:30): 2900K expected, 3030K prior
FHFA Housing Price I, November (9:00): 0.5% prior
Existing Home Sales, December (10:00): 4.90M expected, 4.90M prior
Leading Indicators, December (10:00): 0.2% expected, 0.8% prior
Natural Gas Inventor, 01/18 (10:30): -287 bcf prior
Crude Inventories, 01/18 (11:00): -7.658M prior

By: Jon Johnson, Editor
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Jon Johnson is the Editor of The Daily at

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