Monday, February 17, 2014

Market Again Overcomes Early Slop


- Market again overcomes early slop, rallies to close out the week.
- Market straight up for two straight weeks, but no one taking off the upside ahead of a 3-day weekend.
- Some say market move has to end, others say it just the start of more upside to come. Some index patterns look terrible near term, others look just fine. Same with individual stocks. The market nonetheless keeps producing solid upside stock patterns and moves.

Impressive low to high again even if the internals stink. Hey, it was a 3-day weekend Friday.

What's the password?
Impressive, sir!

Once more futures were lower, but as on Thursday, the lower open gave way to gains. Stocks started soft, rallied the first hour, paused into lunch, then rallied to late afternoon. Could not quite stick a close at session highs, volume and breadth were lower and lackluster, but it was Friday ahead of a three-day weekend with SP500 up 6 of 7 sessions and knocking at the January all-time high. Even so, no one was taking their upside risk off the table. That gives you an indication of the investor mentality right now, sticking with the upside for now.

SP500 8.80, 0.48%
NASDAQ 3.36, 0.08%
DJ30 126.80, 0.79%
SP400 0.39%
RUTX 0.12%
SOX 0.56%

Volume faded ahead of a 3-day weekend: -17% NASDAQ, -2% to an already lower volume NYSE.

A/D tepid: 1:1 NASDAQ, decent at 2:1 NYSE

The week saw a continuation of the sharp recovery off of the sharp selloff. RUTX joined the land of the upside with a break back in its channel on Thursday. DJ30 threw in its hand as well, clearing its trendline Friday. Slowly the laggards joined in with SOX and NASDAQ, SOX being the clear leader on the week, putting in three higher post-bear market highs.

Not all is candy and nuts. Impressive recovery with SOX and NASDAQ at new post-2009 highs (NASDAQ at its highest in 13.5 years) but SP500 and SP400 still have to deal with the January high that is close at hand while DJ30 and RUTX are up, but they are also late to the party and sport some pretty ugly patterns.

That leads to a sharply divided view of the market future as well as the economic future. As has been the case in the entire stock market rally, the debate/feud/name calling regarding the market and the economy has only escalated as the stock market climbs to new highs. One of, but not the only, points of debate is the FOMC and its taper. Will that end the market expansion as the Fed tightens (and tapering is tightening from where the Fed was)? Is it just the logical next step in a recovering economy and the market continues its gains, this time based upon economic growth versus Fed balance sheet growth? I still view the economy as a form of the old t-shirt you see: "The Fed printed $4T of debt in four years and all the economy got was three quarters of 4% GDP growth.' Not even back to back but spaced out over years. Impressive indeed.

I could go into great detail, as I am known (likely infamously) for doing. At this stage, however, we all know the arguments, the talking points, and you know where I stand on the matter. While extremely important in the long run and we must be cognizant of the economic potentiality in planning for the future, while trading, investing in, or just watching the stock market, it is the here and now that matters.

The indices broke key trendlines from November 2012 when the $85B/month asset buying commenced.

The indices recovered those trendlines last week as part of the two week surge right back up. Some were early, some such as DJ30 and RUTX came late.

Volatility, not as measured by the VIX, but as in the day to day and week to week up and down, has jumped: sharp, ugly selloff followed by an equally sharp and ugly (if you were short) recovery. Volatility after long trends up or down suggests a change is occurring. Just as violent storms appear in the spring and the fall when seasons change you see violent stock market moves when a trend is threatened. Dennis Gartman infamously stated the market character had changed three weeks ago only to see those words stuffed back in his mouth as the market shot higher. Indeed NASDAQ followed SOX to new post-bear market highs. Ouch. Hey, it happens to all of us who make market calls for a living.

Some stocks getting slammed, some stocks sporting excellent patterns and strong upside runs. The market is somewhat split as some sectors continue to set up great patterns and rally (medical appliances, biotechs, electronics/chips, internet. They are joined by some industrial metals, precious metals, some homebuilders, materials, etc. MONEY is rotating in the market. Some is leaving, but we keep seeing certain sectors set up, rally, consolidate, set up, then rally again. That is money moving inside the market, not out.

Quality patterns continue to emerge and continue to deliver solid upside breaks.

Even with several indices in worrisome patterns near term (DJ30, RUTX, SP500), they could sell back to test the recent rally and set up a good pattern to resume the upside.

How hold trends on next test will tell much of that story. Near term for us we just have to play the patterns presented, be aware of where a stock or index is in its bigger picture, and make logical plays inside of that context. In short, you continue to evaluate and examine individual plays in the context of the market and the individual stock's life cycle. That way you can play the upside when it is there, knowing logical points for targets, and you can play the downside even inside of an overall uptrend because you know where a stock is in its overall move.

For example, recall during the stock market run as each different sector made its move off the lows. It was not an en masse move, but leaders took off, followed by new groups and sectors as more money worked into the market. A predominant pattern off the low and indeed off each subsequent test and basing period was the inverted head and shoulders. We have seen that pattern time and time again set up excellent, indeed outstanding, upside moves.

VIPS, BDSI, XON, TKMR, AEIS, WBMD, CLVS, SRPT, EGHT, LVLT, SP500, SP400. The list is long.

Right now we see a lot of ABCD consolidations setting up in the market volatility. The ABCD is a pattern that forms in bigger pullbacks that don't reach the base stage. Sometimes you see them in modest pullbacks to the 38% Fibonacci retracement, still a good signal, but more times you see them to the 61% or 78% Fibonacci retracement. Lots of the latter right now. That suggests these stocks are still trending higher but are just using the back and forth action to consolidate and set up the next move.


Right now DJ30 could be forming an ABCD. A solid run from October to January, a dip to the 61% Fibonacci Retracement, and now a rebound. Maybe. It has that November/December dip in the run higher that mitigates the pattern, but almost ironically, that dip was an ABCD itself that set up the December to January run.

THE POINT: We are not trading or investing in theories. We are acting based upon what the market tells us, factoring in the overall context as to what the moves might mean, but not letting theories or human biases direct what we do. It is interesting as much as aggravating to listen to financial stations such as CNBC, Bloomberg, Fox Business. If you also listen to the people talking their book that is called 'advice' on those stations, well you are in most cases doomed to fail. Those stations are part of the noise, the distraction from what the market is telling you versus what they want you to believe. As Woody Harrelson playing Roy Munson in 'Kingpin' said, a bowler's two worst enemies are his eyes and his ears.

Hate to compare bowling to stock market trading and investing, but the point is the same for both: stay focused on what you should be looking at versus getting distracted by what someone wants you to believe about a stock he or she likely already owns or is already short.


Looking at just the indices right now, I really don't like the market. Yes it showed great resilience in its reversal off the selling to storm right back, to new highs in some instances. The patterns, however, are worrisome.

Individual stocks, however, continue to show some excellent action. The same stocks that started 2014 in the lead have undergone and some are still undergoing consolidations and are moving back up. Big manes such as CMG, PCLN, NFLX still look to have some life. Others are moving up such as energy and industrial metals.

Good quality though not all of the market quality is represented on the move. Thus the so-so index patterns that leave you less than satisfied.

Even so, I go back to what I mentioned at the outset: ahead of a 3-day weekend and a two week shot upside, no one was taking off risk. Combined with the good patterns that is not a bad indicator. The market will likely undergo some further testing in the near future even if it is going to move higher ultimately. How the market tests the 2012 trendlines on the next pullback from this 2 week rally will put the overall market strength in much clearer perspective.




1.3698 versus 1.3681 versus 1.3591 versus 1.3625 versus 1.3645 versus 1.3633 versus 1.3588 versus 1.3537 versus 1.3514 versus 1.3529 versus 1.3496 versus 1.3551 versus 1.3655 versus 1.3667 versus 1.3671 versus 1.3676 versus 1.3695 versus 1.3545 versus 1.3562 versus 1.3528 versus 1.3612 versus 1.3605 versus 1.3683 versus 1.3669.

Dollar/Yen: Dollar fell further versus the yen.

101.86 versus 102.14 versus 102.41 versus 102.41 versus 102.21 versus 102.33 versus 102.10 versus 101.37 versus 101.62 versus 101.37 versus 101.40 versus 102.30 versus 102.72 versus 102.11 versus 102.89 versus 102.64.

Bonds: Held steady after gapping back off the 50 day EMA test.

10 year: 2.75% versus 2.73% versus 2.76% versus 2.72% versus 2.67% versus 2.68% versus 2.70% versus 2.67% versus 2.62% versus 2.60% versus 2.67% versus 2.70% versus 2.68% versus 2.75% versus 2.76% versus 2.73% versus 2.77% versus 2.86% versus 2.83% versus 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%

Oil: 100.29, +0.01

Gold: 1319.00, +18.60. Big week for gold, breaking through the 200 day SMA Friday.


Stats: +3.35 points (+0.08%) to close at 4244.03
Volume: 1.846B (-17.26%)

Up Volume: 1.06B (-350M)
Down Volume: 754.9M (-56.12M)

A/D and Hi/Lo: Advancers led 1.09 to 1
Previous Session: Advancers led 2.64 to 1

New Highs: 134 (-1)
New Lows: 10 (-10)

Stats: +8.8 points (+0.48%) to close at 1838.63
NYSE Volume: 549M (-2.18%)

A/D and Hi/Lo: Advancers led 2.02 to 1
Previous Session: Advancers led 2.87 to 1

New Highs: 158 (+8)
New Lows: 71 (-10)

Stats: +126.8 points (+0.79%) to close at 16154.39


VIX: 13.57; -0.57
VXN: 14.8; -0.69
VXO: 12.13; -0.57

Put/Call Ratio (CBOE): 0.83; +0.04

Bulls and Bears:

Bulls fade to 41.8 in another big drop of 4.1 on top of the prior week's 7.2 point decline.

Bears steady at 17.4 after clearing the 15.3 resistance two weeks back.

Theory: 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: 41.8% versus 45.9% versus 53.1% versus 57.6 versus 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: 17.4% versus 17.4% versus 15.3% versus 15.1 versus 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%.

Finally breaking 15 and in a big way.

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.


NASDAQ: Closed at 4244.03

4246.55 is the January 2014 peak

4185 is the upper channel line for the November 2012 to present uptrend.
4104 is the lower gap point from 12/20/13
The 50 day EMA at 4102
4076 is the November 2012 trendline
4070 is the series of highs from late November/early December
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 200 day SMA at 3777
The October low at 3750
3697 is the August high and a prior post-bear market high in the recovery.

S&P 500: Closed at 1838.63

1849.44 is the recent all-time high.

1808 is the November and December 2013 twin peaks
The 50 day EMA at 1801
1775.22 is the October prior all-time high
1792 is the December 2012 up trendline
1768 is the December 3013 low
1730 is the September 2013 peak
The 200 day SMA at 1717
1710 is the August 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
1657 is the late August upper gap point
1654 is the June 2013 peak
1646 is the October 2013 low just before the surge into early 2014
1627 is the August 2013 low

Dow: Closed at 16,154.39

16,175 is the November 2013 peak.
16,257 is the January 2014 low
16,589 is the December 2013 all-time high

16,088 is a lower trendline off the 11/2012 low
The 50 day EMA at 15,981
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 15,519
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

February 14 - Friday
Export Prices ex-ag., January (8:30): 0.2% actual versus 0.5% prior (revised from 0.3%)
Import Prices ex-oil, January (8:30): 0.3% actual versus -0.1% prior
Industrial Production, January (9:15): -0.3% actual versus 0.3% expected, 0.3% prior
Capacity Utilization, January (9:15): 78.5% actual versus 79.4% expected, 78.9% prior (revised from 79.2)
Michigan Sentiment, February (9:55): 81.2 actual versus 80.2 expected, 81.2 prior

February 18 - Tuesday
Empire Manufacturing, February (8:30): 7.5 expected, 12.5 prior
Net Long-Term TIC Fl, December (9:00): -$29.3B prior
NAHB Housing Market , February (10:00): 56 expected, 56 prior

February 19 - Wednesday
MBA Mortgage Index, 02/15 (7:00): -2.0% prior
Housing Starts, January (8:30): 964K expected, 999K prior
Building Permits, January (8:30): 980K expected, 986K prior
PPI, January (8:30): 0.2% expected, 0.4% prior
Core PPI, January (8:30): 0.1% expected, 0.3% prior
FOMC Minutes, 1/29 (14:00)

February 20 - Thursday
Initial Claims, 02/15 (8:30): 335K expected, 339K prior
Continuing Claims, 02/08 (8:30): 2973K expected, 2953K prior
CPI, January (8:30): 0.1% expected, 0.3% prior
Core CPI, January (8:30): 0.1% expected, 0.1% prior
Philadelphia Fed, February (10:00): 7.4 expected, 9.4 prior
Leading Indicators, January (10:00): 0.4% expected, 0.1% prior
Natural Gas Inventor, 02/15 (10:30): -237 bcf prior
Crude Inventories, 02/15 (11:00): 3.267M prior

February 21 - Friday
Existing Home Sales, January (10:00): 4.70M expected, 4.87M prior

By: Jon Johnson, Editor
Copyright 2014 | All Rights Reserved

Jon Johnson is the Editor of The Daily at

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