Monday, March 03, 2014

Oil, the Forgotten Economic Drag


- Stocks cruising to new highs when Russia decides to start invasion early.
- Weaker GDP countered by Chicago PMI, Michigan Sentiment.
- Housing in 2014 is a concern as another metric falls year/year.
- Oil, the forgotten economic drag.
- Indices mixed: some break resistance, others still fighting it, all holding gains.
- Leadership stalls on Friday except for energy.
- Will RussPutin interrupt the stock drift higher? Depends upon how much of Ukraine Putin wants for now.

Putin wants to save some of the weekend for relaxation, starts Ukraine incursion early.

Stocks showed the successful low to high action that began most successful upside sessions during this rally. Futures were lower, started to build toward the open, then stocks jumped at the open. Midday saw stocks at highs with the indices punching higher highs as well. SP500 had already broken the December/January peaks and was adding to the gains. NASDAQ extended its break over the July 2000 peak. SP400 broke through the upper channel line from Q4 2012. RUTX continued its move toward its upper channel line having cleared the January peak. Individual stocks were surging as well. VIPS, CLVS, BDSI, QIHU, YY added to good moves. Stocks were overall rocking along with the continued upside drift that was catching a bit of traction. Quite nice.

We used the morning session rally to play our plan and bank some gain on some of our March option positions, the thinking being the indices were sitting on a good rally, the first week of the March expiration ended, and the weekend could see Russia and Putin (RussPutin) invade Ukraine in some form or another. The 'mysterious' heavily armed men in camouflage that took airports in Crimea Thursday night were the clear tipoff as we noted in the Thursday report.

Glad we did and wish we had taken more. Putin apparently has some plans for the weekend, perhaps riding horseback bare-chested, wrestling with a tiger, or overseeing a few thousand Russians sent to Siberia after the issues at the Olympics (no water, then bad water, then no hot water, then cameras watching you shower, his and her side by side toilets, constant hacking of all computers and phones, the lack of snow that hampered all outdoor sports) . . . the basic weekend of a former KGB agent turned Russian ruler who has more power than any Soviet Premier ever had.

Arm wrestle for Crimea? Best grouping for Kiev?

In any event, just after lunch East Coast, word hit that 2,000 Russian troops landed at the Crimean airports taken on Thursday and military jets were using those two airports. Stocks dove. NASDAQ gave up over 60 points, DJ30 175 points in the course of an hour.

That is what happens to melts higher. Stocks in an uptrend continue to trend with the trend even with modest bids if there are no sellers willing to get out in front of the move. Then bad news hits and it doesn't take much to cancel the bids, and then just a few sellers can turn the market.

To be fair, the stock market weathered less than great news for the past two weeks, economic, foreign, you name it, and still worked higher. Slow, and more volatile the past week, but still working higher. Nonetheless, when the right news comes along a market moving on the lack of sellers versus the presence of buyers will take a hit.

Stocks did recover in the last hour, rather nicely. NASDAQ recovered 33 points off the afternoon low, just over half of what was lost, and managed to hold the July 2000 peak. DJ30 regained 100 points off its low, managing to hold a higher high on this move.

SP500 5.16, 0.28%
NASDAQ -10.81, -0.25%
DJ30 49.06, 0.30%
SP400 0.24%
RUTX -0.41%
SOX -0.07%

Volume surged thanks to the day's geopolitical events as well as the end of the month trade: +13% NYSE, +22% NASDAQ

A/D mixed: +3:2 on NYSE, -1.1:1 NASDAQ

The ability to recover a significant amount of lost ground off of the uncertainty of the news of RussPutin spreading its oligarchy back to Ukraine (and thus showing his plan to 'reunite' the old USSR), is a pretty good indication for the stock market. As noted, stocks have overcome a lot of obstacles, domestic and foreign, in keeping this rally moving, and the ability to bounce back ahead of the weekend shows buyers are not surrendering.

Some of the same issues remain, however. SOX is butting the same trendline; ditto SP400. On the other hand, SP500 is over resistance, NASDAQ is hanging onto gains, DJ30 is holding over some interim resistance, and RUTX is just over the January high. Split ticket.

Without RussPutin's actions the market likely continues its melt higher. Now, however, the market has some hard news to chew on over the weekend. NATO has no contingency plan for Russia invading Crimean region even though Russia covets that area (and all of Ukraine) for its warm water sea port. Hell, Russia is part of NATO now; what a crock. RussPutin won't turn back even though our President said 'pull back or suffer costs.' A threat without any teeth as we just admitted we cannot be the police for freedom anymore. Why we had to make that statement at all is beyond intelligent thought, but we did. You can see those words, still hanging in the air, and Putin looking right at them as he moves the troops. Whatever the 'costs,' RussPutin covets its warm water port more.

Many stocks faded; it was the thing to do. Many stocks held support, some rebounded, some didn't. We closed some we didn't like the look of, RussPutin or not. VIPS held the move well and indeed rallied into the close and we banked some nice partial profits there; again, who knows what the weekend would bring.

That said, The weekend events will tell how the market opens Monday. Total invasion? Just taking Crimea and not the rest of Ukraine? How brazen will Putin be in ignoring Obama's statement to withdraw? Perhaps the middle ground is just taking Crimea to ensure the warm water port. RussPutin can then work on a more subtle taking of Ukraine in the future, along with the other former Soviet states. In any event, a 'repatriation' of Crimea, whose residents we hear are mostly supporters of Russia versus Ukraine, would likely be palatable to our markets here in the US.


Q4 GDP second read reverts to the norm . . . of the 'recovery.'

2.4% versus 2.6% expected versus 3.2% first read versus 4.1% Q3

Personal Consumption: 2.6% versus 2.9% expected, 3.3% in first read

Inventories: Led to the big Q3 build. Not so much in Q4 revision 2.
0.14% versus 0.42% added to GDP versus adding 1.73% in Q3

Capital Investment: Improved, adding 0.58% versus 0.14% in the first read.

As with the other 4% GDP readings in this 5 year recovery (sadly the high end of the GDP growth scale), the hope that a new period of growth was starting got rocked. A 25% drop from the first reported number is not good, and it is likely to be revised even lower in the final read for Q4. Q1 2014 is running much lower than Q4, with estimates of 1% or sub-1%. Bully.

Disappointing but expected. The hope of a 'self-sustaining' recovery is a pipe dream. Oil consistently over $100/bbl and $3/gallon gasoline. Policies that produce part-time jobs and versus breadwinner jobs and retard job creation overall. Regulations hemming in businesses and individuals as to what they can do in their businesses and with their property is resulting in some businesses just closing down and individuals doing nothing, locking up our great consumption and investment power that always propels growth. Things were slow again before the weather.

Chicago PMI produces a nice bounce. What about the weather?

February Chicago: 59.8 versus 56.0 expected, 59.6 January.

What about the Polar Vortex?

University of Michigan very credible all things considered.

February Final: 81.6 versus 81.5 expected versus 81.21 first read versus 82.5 December final.

The trend continues in the right direction. Sentiment is kind of important, but more so at extremes, not in the mush middle.

Pending Home sales improve month/month, not year/year

Pending Home Sales, January: +0.1% versus +0.8% expected versus -5.8% prior (from -8.7%).

Year/Year: -9%.

Northeast: +2.1%. South +3.2%. West -4.8%
As with the Chicago PMI, where is the weather effect? It would appear the weather is in the eye of the beholder, say Janet Yellen.

Oil: The forgotten economic drag.

The weather is the in vogue economic issue. Regulations, executive orders, the ACA are also well-discussed as to their adverse economic impacts.

What about oil? Since late 2011, oil has ranged from $85/bbl to 110/bbl, averaging right at $100/bbl. Gasoline the past two years has averaged $3.50/gallon nationwide.

We have come accept higher prices. That doesn't mean they don't have an impact. Beatings are still beatings. They still inflict the same damage even if the subject becomes somewhat mentally disassociated with the physical abuse.

It still takes that money away from disposable income, from purchases other than what goes into the tank in order to get to work to make the money to burn in the tank. Not to mention the cost to get to a store to spend what little money US citizens have left from their part-time job paychecks. I know a lot of people who think twice about making runs to stores that are not close by; what if they don't have what you need? It is a costly process to drive from store to store to get what you need.

With the kind of time backlog at higher prices, the drain on the economy is huge. The Administration thinks it has pulled it off. It wanted higher prices, it has higher prices. The economy managed to avoid the abyss, thanks to trillions of Fed dollars. It has not, however, posted anywhere near the typical growth the US economy enjoys emerging from recessions. Usually the deeper the recession, the more robust the recovery. This administration, however, has managed to mute the economic recovery and barely produce a recovery (just three 4% GDP quarters scattered over 5 years). Regulations, oppressive laws, federal agencies attacking citizens and businesses, and all the while the constant drain of high gasoline prices.



Euro/Dollar: Dollar weaker again.

1.3805 versus 1.3709 versus 1.3687 versus 1.3743 versus 1.3733 versus 1.3746 versus 1.3720 versus 1.3738 versus 1.3758 versus 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

Dollar/Yen: Dollar down here again as well, but still looks as if it can make a new break higher.

101.82 versus 102.10 versus 102.38 versus 102.16 versus 102.47 versus 102.51 versus 102.35 versus 102.25 versus 102.43 versus 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: Surging upside Tuesday to Friday, prepping to challenge the late January high.

10 year: 2.66% versus 2.69% versus 2.67% versus 2.70% versus 2.74% versus 2.73% versus 2.75% versus 2.73% versus 2.71% versus 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%

Oil: 102.58, +0.20. Lateral move for two weeks, building a nice handle and prepping for a big break higher. 106 here we come.

Gold: 1321.40, -10.4. Closed lower though rallied when RussPutin started its entry into Ukraine. Still in very good shape to move higher.


Stats: -10.81 points (+0.25%) to close at 4308.12
Volume: 2.475B (+22.1%)

Up Volume: 1.03B (-240M)
Down Volume: 1.51B (+750.09M)

A/D and Hi/Lo: Decliners led 1.16 to 1
Previous Session: Advancers led 1.8 to 1

New Highs: 211 (+60)
New Lows: 16 (+12)

Stats: +5.16 points (+0.28%) to close at 1859.45
NYSE Volume: 703M (+13.2%)

A/D and Hi/Lo: Advancers led 1.5 to 1
Previous Session: Advancers led 2.12 to 1

New Highs: 240 (+86)
New Lows: 79 (+5)

Stats: +49.06 points (+0.3%) to close at 16321.71


Indices were extending their move higher, looking actually pretty good at putting some legs on what was a drift higher. Then the news hit and things changed. Changed but did not collapse, indeed coming back from the sharp afternoon session selloff.

SP500: Continued the move through the December and January peaks and held some of the move, giving back 8 points at the close.

NASDAQ: Extended the move past the July 2000 peak and then had to fight to hold it, bouncing off the 10 day EMA on the low. All in all, not a bad pattern, just moving higher over the 10 day EMA. Has drifted upside and wasn't willing to give it up Friday even on some pretty bad news.

RUTX: Moved to a new high then lost it on the close. Still holding just over the January high after four weeks straight up. In position to make a short test but thus far not willing to fade.

SOX: Moved laterally all week, holding over the 10 day EMA, tapping it on the lows and rebounding to the close. Not a bad test at all, holding the gains, sliding along the up trendline. SOX is trying to pull off the lateral consolidation, something this market has not done in a long while. Not counting on it, but it does look pretty strong.

SP400: Rallied through the upper channel line then faded for a more modest gain. Right at the trendline but that does not mean an automatic test. In October and November it slid up this channel line for five weeks before testing. In December and January, almost four weeks of this action before fading.

DJ30: Gain, but as with the other indices, gave up a chunk off the intraday high. Still working higher over the November peak and now bumping the January range formed at the peak.


There were some great moves, e.g. CLVS, VIPS. Few held. VIPS did. Those that faded basically faded to near support after good moves upside.

Energy held up the best given the problems with Russia: NBL, PXD, SYRG, HAL, GPOR, etc.


VIX: 14; -0.04
VXN: 15.01; +0.22
VXO: 12.93; +0.38

Put/Call Ratio (CBOE): 0.82; -0.07

Bulls and Bears:

Bulls blast higher to 53.5 from 46.5 and 41.8 before that.

Bears remain pensive at 17.2 for the second week after 17.4 three 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: 53.5% versus 46.5% versus 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: 17.2% versus 17.2% versus 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%.

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.


As noted earlier, the weekend events will tell how the US stock market reacts this week. Full invasion, just taking Crimea and not the rest of Ukraine, or a 'just kidding guys' withdrawal? How brazen will Putin be in ignoring Obama's statement regarding the 'costs' of meddling in Ukraine? Again, perhaps the middle ground is just taking Crimea to ensure the warm water port and no doubt that will not cross any 'red line' the President may fancy drawing.

Friday many pretty good moves were scuttled as many stocks faded from early highs. It was the move of the day. Many stocks held support, some rebounded, some did not. We closed a few we didn't like the look of, RussPutin or not. VIPS held the move well and indeed rallied into the close and we banked some nice partial profits there; again, who knows what the weekend would bring, and with the initial target in hand we took some along with the March option gain we banked earlier in the session.

Maybe this Russian thing ends this leg of the move. The last hour action suggests perhaps not. There are many other items next week warranting investor attention with the February Jobs Report closing out the week. Once again investors will be more or less drawn to the flame awaiting the result. With Q4 GDP less than hoped and Q1 data even worse than Q4, the odds of disappointment rise.

Of course with disappointment there is Ms. Yellen. She really wants to blame the weather, but even so, she wants the market to remain high. Has to. As Bernanke knew, the Fed has to keep the top 5% or so making money in the markets and thus buy them off by keeping them happy enough to pay for the 100+ million working aged US citizens who are not working either because they cannot find a job or have given up and left the working population.

Ultimately this has to stop. The Fed knows it has to stop. That is why it is withdrawing the QE even with the softening economic numbers. Has to get out of the game, trying to get out of the game, but the question is whether the economy, burdened by higher taxes, more regulations, policies stymieing investment and job creation, and a all but vanished middle class, will let it. Maybe the market knows that and thus it continues to hold the trend higher EVEN AS the Fed pulls the stimulus.


NASDAQ: Closed at 4308.12


4289 is the July 2000 recovery high
4246.55 is the January 2014 peak
4218 is the upper channel line for the November 2012 to present uptrend.
The 50 day EMA at 4157
4116 is the November 2012 trendline
4104 is the lower gap point from 12/20/13
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
The 200 day SMA at 3817
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.

S&P 500: Closed at 1859.45


1849.44 is the recent all-time high.
The 50 day EMA at 1815
1808 is the November and December 2013 twin peaks
1808 is the December 2012 up trendline
1775.22 is the October prior all-time high
1768 is the December 3013 low
1730 is the September 2013 peak
The 200 day SMA at 1727
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 16,321.71

16,589 is the December 2013 all-time high

16,257 is the January 2014 low
16,179 is the November 2013 peak.
16,183 is a lower trendline off the 11/2012 low
The 50 day EMA at 16,042
15,739 is the December 2013 low
15,696 is the September 2013 peak
15,659 is the August 2013 peak
The 200 day SMA at 15,570
15,542 is the May 2013 intraday high
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 25 - Tuesday
Case-Shiller 20-city, December (9:00): 13.4% actual versus 13.6% expected, 13.7% prior
FHFA Housing Price I, December (9:00): 0.8% actual versus -0.1% prior (revised from 0.1%)
Consumer Confidence, February (10:00): 78.1 actual versus 80.8 expected, 79.4 prior (revised from 80.7)

February 26 - Wednesday
MBA Mortgage Index, 02/22 (7:00): -8.5% actual versus -4.1% prior
New Home Sales, January (10:00): 468K actual versus 400K expected, 427K prior (revised from 414K)
Crude Inventories, 02/22 (10:30): 0.068M actual versus 0.973M prior

February 27 - Thursday
Initial Claims, 02/22 (8:30): 348K actual versus 335K expected, 334K prior (revised from 336K)
Continuing Claims, 02/15 (8:30): 2964K actual versus 2975K expected, 2956K prior (revised from 2981K)
Durable Orders, January (8:30): -1.0% actual versus -1.1% expected, -5.3% prior (revised from -4.2%)
Durable Goods -ex tr, January (8:30): 1.1% actual versus -0.3% expected, -1.9% prior (revised from -1.3%)
Natural Gas Inventor, 02/22 (10:30): -95 bcf actual versus -250 bcf prior

February 28 - Friday
GDP - Second Estimate, Q4 (8:30): 2.4% actual versus 2.6% expected, 3.2% prior
GDP Deflator - Second, Q4 (8:30): 1.6% actual versus 1.3% expected, 1.3% prior
Chicago PMI, February (9:45): 59.8 actual versus 56.0 expected, 59.6 prior
Michigan Sentiment - Final, February (9:55): 81.6 actual versus 81.5 expected, 81.2 prior
Pending Home Sales, January (10:00): 0.1% actual versus 0.8 expected, -5.8% prior (revised from -8.7%)

March 3 - Monday
Personal Income, January (8:30): 0.3% expected, 0.0% prior
Personal Spending, January (8:30): 0.1% expected, 0.4% prior
PCE Prices - Core, January (8:30): 0.1% expected, 0.1% prior
ISM Index, February (10:00): 51.6 expected, 51.3 prior
Construction Spending, January (10:00): -0.1% expected, 0.1% prior
Auto Sales, February (14:00): 5.1M prior
Truck Sales, February (14:00): 7.0M prior

March 5 - Wednesday
MBA Mortgage Index, 03/01 (7:00): -8.5% prior
ADP Employment Change, February (8:15): 150K expected, 175K prior
ISM Services, February (10:00): 53.5 expected, 54.0 prior
Crude Inventories, 03/01 (10:30): 0.068M prior

March 6 - Thursday
Challenger Job Cuts, February (7:30): 47.3% prior
Initial Claims, 03/01 (8:30): 338K expected, 348K prior
Continuing Claims, 02/22 (8:30): 2973K expected, 2964K prior
Productivity-Rev., Q4 (8:30): 2.5% expected, 3.2% prior
Unit Labor Costs - Rev., Q4 (8:30): -0.7% expected, -1.6% prior
Factory Orders, January (10:00): -0.5% expected, -1.5% prior
Natural Gas Inventor, 03/01 (10:30): -95 bcf prior

March 7 - Friday
Nonfarm Payrolls, February (8:30): 163K expected, 113K prior
Nonfarm Private Payrolls, February (8:30): 170K expected, 142K prior
Unemployment Rate, February (8:30): 6.6% expected, 6.6% prior
Hourly Earnings, February (8:30): 0.2% expected, 0.2% prior
Average Workweek, February (8:30): 34.4 expected, 34.4 prior
Trade Balance, January (8:30): -$37.3B expected, -$38.7B prior
Consumer Credit, January (15:00): $11.8B expected, $18.8B prior

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

Jon Johnson is the Editor of The Daily at

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