Monday, August 25, 2014

Six Months is Target for Rate Hikes


- After a nice run to some new highs on low volume, stocks pause.
- Jackson Hole: Yellen postures as no uber dove, Draghi cannot deliver QE, Bullard says hike rates in late Q1. Sure sounds as if six months is the target for rate hikes.
- More upside from here? Many tech names that took time off look ready to move higher again, but then there is Russia.

Wylie Coyote time for this move?

Trying to come up with something clever to describe Fridays action just hasn't produced much. After threatening a break of its range two weeks back, a break that could have put the entire market at risk of much more downside, NASDAQ held and indeed moved to a new post-bear market high. SP500 broke hard downside, but when NASDAQ held, it turned and followed, itself moving to a new all-time high Thursday. 'The Patriot' aired recently and the action brings to mind the scene where Mel Gibson grabs Old Glory, storms up the hill, and rallies the crumbling colonial lines to turn and re-engage the British. They turned, won the day, and swung the balance in the war for independence.

Not saying that the NASDAQ move guarantees the rally is here to stay. Heck, after 200+ years, within the past several years, it is suddenly a question just how strong the US will be in a world where China chastises the US for 'looking over neighbor's fences' when China is flying a fighter jet that is identical to the one the US developed and the very one of which China stole the plans.

Thus, while NASDAQ held and helped the other indices recover through last week, it is no guarantee that move has to stand. Indeed, with the utter lack of volume on the move higher images of Wylie Coyote come to mind, the ones where he runs out of mountain and hangs suspended in the air before plunging to the bottom of the canyon.

Running out of road?
Stocks were sluggish all session. After leading the last part of the move, SP500 and DJ30 were quiet, down on the session. NASDAQ managed a modest gain along with RUTX and SOX. Nothing spectacular, nothing nefarious, just sluggish after two weeks of upside.

SP500 -3.97, -0.20%
NASDAQ 6.45, 0.14%
DJ30 -38.27, -0.22%
SP400 -0.08%
RUTX 0.03%
SOX 0.10%

Volume: Again it was low on the move higher, well below average. It was Friday in late summer so light trade is understandable, but light trade is the hallmark of this last move. At least you can say that in the absence of any serious trading, the bias is upside.

A/D: NYSE -1.6:1, NASDAQ flat.

Yellen and her central bank cohorts from around the globe met in Jackson Hole, WY Friday. Yellen was predicted to be very dovish, to walk back some of the FOMC minutes hawkishness. She did not. She was middle of the road, basically implying that rates had to rise, but the factors contributing to the timing are difficult to gauge, e.g. labor slack, what is causing slack (structural or cyclical), how fast is it ebbing? Weighty issues indeed when you have a body engaged in micromanaging the economy.

Basically, it comes down to this: rates will rise. The only question is when, i.e. are the rate hikes 'pulled forward' by the data, or are they left to whatever schedule the Fed has in mind. With Bullard piping in on Friday that a rate hike 'should be' in late Q1, that schedule looks very much the one Chairman Yellen laid out a few months back with her gaffe in her first press conference following an FOMC rate decision. End QE in October, hike rates in March; that is 5 months, 6 if you count October. Sure sounds as if that is the plan.

On top of Yellen's middle of the road stance, Draghi once again revealed he has absolutely no power to bring in US-style QE to Europe. That disappointed investors as well: if Yellen is not going to sprinkle rose petals, perhaps at least the ECB could aid world liquidity with taking its turn at full out money printing. Germany, however, won't allow it. Not surprising seeing how we have done such a good job of 'solving' our economic problems. Solved by papering over them, but it looks pretty good if you don't look too hard and don't expect it to last.



NASDAQ: Up and down all session, but NASDAQ moved to a new post-bear market high yet again. Volume tails off each session but the bias is upside so the move continues sans trade. Friday a doji, suggesting NASDAQ is a bit winded after just over two weeks upside. That may be the suggestion, but looking at stocks such as GOOG, PCLN, FB -- all in position to bounce -- as well as e.g. NFLX that is surging, the prospects for a continued move near term are not that bad. It is extended on this move, but extended does not mean automatic selling.

SP500: After striking new high territory Thursday, SP500 had a hard time keeping it up so to speak. It gave up ground but did manage to hold above the late July closing high, keeping SP500 in all-time high range for the week. As it puts in the higher high, however, MACD is not doing the same; a bit of a lag in the momentum indicator is a caution sign, particularly when you factor in the lower and lower volume.

DJ30: Close to its own all-time high on Thursday, it was no cigar for the Dow as it backed off Friday. Perhaps it can make that high still in the week to come, but as with SP500, MACD is lagging a bit. Won't really know until and unless it makes that high and what MACD does at that point. Best to say DJ30 has rallied back from the July selling, it is bumping highs, but volume is low.

SOX: Moved into the range in July that produced the triple top and selloff, but that is about all. Showing a tight doji Friday suggests, but only suggests, SOX may peel back some here.

SP400: Very similar to DJ30 and akin to SOX, SP400 threw a pair of doji to end the week, slowing at the mid-June high, the last high before the all-time high struck on July 1. Solid three week run and a bit of a pause at this logical resistance makes some sense. It can pause, test, and still continue the move.

RUTX: Still lagging well behind the other indices, but still trying to building a lateral shelf over the 50 day EMA it can use to move higher. Kind of a rickety shelf at this juncture, i.e. it needs more work, but it is showing some decent buying activity.


Big Names: Some of the well-known stocks faded the back half of the week and in so doing set up some nice upside potential. GOOG, PCLN look as if they want to join AAPL, NFLX on the upside. If they do, that adds more firepower to NASDAQ's advance.

Internet-based: NFLX strong, PCLN, GOOG look ready to move. TRLA, Z, LNKD are running, YY is starting to bounce again as it comes off a 2 week test.

Metals: Steel jumped yet again Friday (e.g. AKS, STLD), proving that a stock/sector CAN continue even after long, long moves.

Financial: Strong end to last week, helping push SP500 higher during the week if not Friday. BAC, C surged. GS rallied but is at the prior high; needs to resolve that.

Retail/Consumer discretionary: Slowed a bit Friday (in some cases), but a strong week for this group. Some impressive comebacks from some nasty gaps lower, e.g. M, JWN. Then there were the old standbys that managed to hold the line: WSM. TJX continued its comeback as well.


Stats: +6.45 points (+0.14%) to close at 4538.55
Volume: 1.215B (-7.18%)

Up Volume: 744.85M (-71.44M)
Down Volume: 521.89M (-64.44M)

A/D and Hi/Lo: Advancers led 1.06 to 1
Previous Session: Advancers led 1.23 to 1

New Highs: 86 (+9)
New Lows: 38 (-9)

Stats: -3.97 points (-0.2%) to close at 1988.4
NYSE Volume: 425.546M (-11.4%)

A/D and Hi/Lo: Decliners led 1.65 to 1
Previous Session: Advancers led 1.51 to 1

New Highs: 105 (-64)
New Lows: 18 (-1)

Stats: -38.27 points (-0.22%) to close at 17001.22


VIX: 11.47; -0.29
VXN: 12.23; -0.27
VXO: 10.56; -0.27

Put/Call Ratio (CBOE): 0.93; +0.21

Bulls and Bears:

Bulls still falling hard: 46.4% versus 50.5% versus 55.6%

Bears back down, still in the 16 to 17 range: 16.2% versus 17.1% versus 16.2%

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: 46.4% versus 50.5%
50.5% versus 55.6% versus 56.5% versus 56.6% versus 60.6% versus 57.6% versus 60.2% versus 61.4% versus 62.6% versus 62.2% versus 58.3% versus 57.2% versus 55.1 versus 55.7 versus 54.7 versus 51.6 versus 50.5 versus 54.6% versus 50.5 versus 54.7% 52.0% 54.6% 53.5% 46.5% 41.8% 45.9% 53.1% 57.6 56.1 60.6% 61.6% 60.0% 58.2% 57.1% 55.7% 53.6% 52.6% 55.2% 52.6 49.5 42.3% 45.4 46.4% 44.3% 42.3% 37.1% 37.1% 38.1% 43.3%.

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

Bears: 16.2% versus 17.1%
17.1% versus 16.2% versus 17.2% versus 15.1% versus 15.2% versus 16.1% versus 16.3% versus 17.2% versus 17.4% versus 17.3% versus 18.3% versus 19.4% versus 20.6% versus 19.7% versus 21.7% versus 20.6 versus 18.6% 18.6% 17.5% 17.4% 15.1% 17.2% 17.2% 17.4% 17.4% 15.3% 15.1 15.3% 15.2% 15.2% 14.0 14.3 14.3% 14.4 15.5 15.5% 15.6% 16.5% 18.5 21.6% 20.6% 18.6% 20.6% 21.6% 22.7% 23.7% 23.8% 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.


The indices posted gains, have surpassed or are near prior highs. Volume is weak. Still lots of geopolitical issues. Yellen is less dovish. Yet the indices are holding the rally. They look as if they are at a logical point to test, NASDAQ and SP500 the breaks to highs, DJ30, SOX, SP400 near resistance, but that does not mean they roll over. As noted, PCLN, GOOG and others are in position to move higher or are just now breaking higher; that will give NASDAQ, the market leader, more push for upside moves.

Of course there is Russia trying everything it can to keep the West guessing. Merkel went to Kiev as an act of defiance in the ongoing chess game, but all it takes is for Russia to make provocative gestures and the western markets react adversely. There are reportedly still tens of thousands of troops and war machinery near the Ukraine border. That just doesn't go away in a week or so. It cost money to get them there and to maintain them there. You think Putin will waste that money? Makes you think.

While Putin keeps the West occupied, China is developing the weaponry to win the renewed cold war. It just completed the second test, the second in THREE months, of its new low orbit-based, hypersonic (mach 10) missile, a missile designed to evade US missile defenses both on land and at sea. The Aegis missile defense system currently protecting US carriers cannot handle this threat. Thus our carrier battle groups could be, within a year, sitting ducks for Chinese missiles. With no investment in cold war technologies to fend off other superpowers, we are quickly falling behind as we rely on old technology in an extremely high tech future battlefield with an opponent enjoying far more wealth than the US has to spend. D j vu for the US al la the USSR? The Soviets could not keep up economically with the US rebuilding its military in the 1980's and collapsed. The US economy is so hobbled and hamstrung by the heavy debts, regulations, and costs, the money is not there to develop competing weapons systems as it once was. When the President talked about the new world order, I would guess that most supporting him were not thinking that meant the US in decline.

The point: the market has rallied to resistance with some success at breakouts. It has survived several scares along the way. It still can continue the move, but more items are stacking up on the scale against the market. A major one if the Fed pulling out then raising rates. Perhaps the economy can stumble along in the aftermath, but after more than $4T in Fed magical money, the economy is the slowest in recovery history, and as shown last week, wage recovery is the lowest ever as well. At this rate it simply will not generate the industry and wealth needed to fund a competition with our new old enemies. A change in direction is needed a la the 1980's but that is a ways off.

So, we deal with the here and now, and see that yes there are some quality names in position to move higher after they put in a short test. Those are our focus this week to make money as they recovery and try to push for new highs or at least match some of the prior peaks. Either way, we make money off of them if they can show the moves.

As for existing positions, we need some more upside to really start rolling in the money on the last crop of buys. NASDAQ slowed its move, but if the horses we are looking at rally, then we will be banking some nice gain before too long.


NASDAQ: Closed at 4538.55

4598 is the lower November 2012 trendline

4486 is the July 2014 high
The 20 day EMA at 4460
The 50 day EMA at 4402
4372 is the March 2014 high
The August low at 4321
4289 is the July 2000 recovery high
4277 is the March lower gap point
4246.55 is the January 2014 peak. Key level.
The 200 day SMA at 4213
4131 is the March 2014 low
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.
3968 is the February 2014 low
3946 is the April 2014 intraday low

S&P 500: Closed at 1988.40


1991 is the July 2014 high
1980 is the December 2012 up trendline
The 50 day EMA at 1952
1928 is the lower trendline from 11/2012
1905 is the August 2014 low
1902 from early May was the intraday all-time high.
1897 is the prior all-time high hit in April 2014
1883.57 is the early March high.
The 200 day SMA at 1873
The December and January highs at 1848
The April 2014 low at 1814
1808 is the November and December 2013 twin peaks
1775.22 is the October prior all-time high
1768 is the December 3013 low
1738 is the February 2014 low
1730 is the September 2013 peak
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

Dow: Closed at 17,001.22

17,068 is the early July 2014 peak
17,152 is the mid-July post bear market high

16,970 is the June 2014 former all-time high
16,946 is the June 2014 peak
The 50 day EMA at 16,787
16,736 is the penultimate all-time high from May 2014
16,341 is the May low
16,334 is the August 2014 low
16,632 is the April 2014 all-time high
16,589 is the December 2013 all-time high
16,506 is the March 2014 peak
The 200 day SMA at 16,410
16,257 is the January 2014 low
16,179 is the November 2013 peak.
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
15,340 is the February 2014 low
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)


August 25 - Monday
New Home Sales, July (10:00): 427K expected, 406K prior

August 26 - Tuesday
Durable Orders, July (8:30): 7.0% expected, 1.7% prior (revised from 0.7%)
Durable Goods -ex transports, July (8:30): 0.6% expected, 1.9% prior (revised from 0.8%)
Case-Shiller 20-city, June (9:00): 8.3% expected, 9.3% prior
FHFA Housing Price I, June (9:00): 0.4% prior
Consumer Confidence, August (10:00): 88.3 expected, 90.9 prior

August 27 - Wednesday
MBA Mortgage Index, 08/23 (7:00): 1.4% prior
Crude Inventories, 08/23 (10:30): -4.474M prior

August 28 - Thursday
Initial Claims, 08/23 (8:30): 302K expected, 298K prior
Continuing Claims, 08/16 (8:30): 2520K expected, 2500K prior
GDP - Second Estimate, Q2 (8:30): 4.0% expected, 4.0% prior
GDP Deflator - 2nd, Q2 (8:30): 2.0% expected, 2.0% prior
Pending Home Sales, July (10:00): 0.5% expected, -1.1% prior
Natural Gas Inventor, 08/23 (10:30): 88 bcf prior

August 29 - Friday
Personal Income, July (8:30): 0.3% expected, 0.4% prior
Personal Spending, July (8:30): 0.1% expected, 0.4% prior
PCE Prices - Core, July (8:30): 0.1% expected, 0.1% prior
Chicago PMI, August (9:45): 54.8 expected, 52.6 prior
Michigan Sentiment - Final, August (9:55): 80.0 expected, 79.2 prior

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

Jon Johnson is the Editor of The Daily at

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