Stocks Back In Rally Mode

The market sold off yesterday morning, but by the end of trading it rallied back to close with just a small loss on the day.  Investors hoping for a bigger pullback continue to be frustrated with the stair-step action of the market, and today we are back in rally mode with the S&P 500 breaking above the highs of its recent trading range.

In economic news, the US trade deficit shrank in December, but the brief strikes at the ports of LA and Long Beach likely contributed to the lower numbers.

In earnings news there are lots of stocks moving, especially for a Friday.  I continue to find more stocks showing positive reactions than negative ones.

Stocks rising on earnings:  LNKD, FLT, ATVI, ATHN, AOL, SIRO, AGNC

Stocks falling on earnings:  NUAN, MCO, CSTR

Asian markets were mostly higher overnight.  China also posted better than expected trade data, with it's trade surplus rising to $29.15 billion on a 25% jump in exports.  That should please those looking for improving economic strength in China.  For its part, the Reserve Bank of Australia lowered its GDP projections for 2013 to 2.50% (from 2.75%).

European markets are mostly higher as they rebound from recent weakness.  Germany's trade surplus came in ahead of estimates, and France's trade deficit was smaller than expected.

The dollar is higher again today, and commodities are mixed.  Oil prices are a bit higher near $96.45 while gold prices are flat around $1670.  Silver and copper prices are higher. 

The 10-year yield is bouncing today to 1.98% and still consolidating below the 2.0% level where we continue to look for a breakout.

The VIX is down -4% today back below the 13 level to 12.90.

Trading comment: Sentiment continues to grow more bullish to the point where complacency is now a red flag for the market.  Extreme bullish sentiment is not the best timing indicator, as bullish sentiment can persist for weeks before the market tops.  But is has served as a good warning indicator in the past.  At these junctures when sentiment is overly bullish, the best course is usually to raise a little cash and be patient.  There is often a larger pullback at some point and that will offer a better buying opportunity than chasing extended stocks in a rising market.

KAM Advisors has long positions in AGNC

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The Wisdom Of Dave Trott.

1) Don't define yourself by your department.

2) Being professional means being objective.

3) People must notice the advertising (words that never appear in the brief).

4) It's all about Bernbach's "Timeless Human Truths".

5) Branding: being unable to repeat the ad without naming the product.

6) You don't need twelve housewives from Slough.

7) Ads don't run on the boardroom table.


Photo by Nicole Yershon, shoulder by me.

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ECB Keeps Interest Rates Steady, Euro Falls

The market is lower in early trading mostly on profit taking and a couple slightly weaker economic reports.

This morning Q4 productivity came in at -2.0%, below estimates.  Also unit labor costs increased by 4.5%, well above the 2.4% estimate and a higher figure than we have seen in a while.  Unit labor costs are one of the biggest inflation components, so if this is a trend it could worry inflation hawks.

Asian markets ended mostly lower overnight.  Australian unemployment held steady at 5.4%.  China fell -0.7% to snap its 8-day winning streak.  Next week various Asian markets will be closed in celebration of the Golden Week.  Wouldn't it be nice if our markets closed for a week?

Europe's markets are mixed this morning after the ECB held interest rates steady at 0.75% and the Bank of England held its rates at 0.50%.  The British Chancellor of the Exchequer called for more monetary easing to stimulate growth, but the income BofE governor struck a more hawkish tone in recent remarks.

The dollar is getting a big boost with the euro down today, but commodities are mixed.  Oil prices are lower near $96.25 but gold prices are bucking the trend and moving higher today to $1680.

The 10-year yield is fading back a tad to the 1.96% level.  And the volatility index is up 6% this morning back above the 14 level to 14.25.  But it's still early.

Trading comment: Markets don't go up in straight lines forever, and even strong bull markets need time to rest and rebuild their internal energy.  We have commented recently about bullish sentiment reaching extreme levels on some of the indicators we follow (NAAIM).  We haven't seen much more than a 1-2 day pullback so far this year, but that increases the odds that a more meaningful one is in store for investors.  We have been trimming stocks that have had big runs so far in 2013, and are raising cash levels just a bit.  We would like to see a pullback in the S&P 500 below the 1500 level to be more comfortable putting that cash back to work.  A pullback to somewhere like the 1475 level would be more attractive.  As well, some of the leading stocks that look extended need some time to consolidate their recent gains.  So overall this feels like a spot where investors would be well served to be patient.

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Japan Surges On Hopes Of More Quantitative Easing

Markets are slightly lower this morning on the heels of some weakness in Europe and mild profit taking.  But the indexes found their lows in the first hour of trading and have since started to bounce back into positive territory.  Dip buyers continue to surface quickly on declines.  It is still early in the session, and it is how the market closes that counts.  But recent selloffs have not been able to gain much traction.

Overnight Asian markets were higher, led by a 3.8% surge in Japan.  That puts the Nikkei at its best levels since September 2008.  To put that 3.8% move into perspective, if the Dow rallied that much it would equate to a 530 point surge.  China was up only 0.1%, but that was good enough to push its winning streak to 8 consecutive days.

It's a different story in Europe, where concerns over derivatives losses at Italian banks are weighing on sentiment.  Italy and Germany are both leading on the downside.

On the earnings front, we are seeing more stocks rising that falling in reaction to their reports.

Stocks rising on earnings: RL, DIS, CERN, CMI, STE, TWXS, WYN, MAC, CMG

Stocks falling on earnings: EXPE, NUS, SYT, SU

Commodities are mixed with the dollar index in positive territory today.  Oil prices are a bit lower near $96.15 while gold prices are up a bit to $1675.

The 10-year yield continues to consolidate around that 2.0% level, currently hovering just below it at 1.99%.  The longer the TNX trades sideways around these levels the more likely it is that we see another push to the upside in yields.

The volatility index is up slightly today, but still below the 14.0 level.

Trading comment: We are always looking for signs that bullish sentiment is hitting extreme levels.  Last week the NAAIM investor survey surged to a level of 104.  We went back and looked for another reading above the 100 level and could not find once instance.  This indicator started back in 2006, so this is the highest reading it has ever registered.  Food for thought as the market continues to churn near its highs.  This is the first red flag among the sentiment indicators, but if more join the fray on the bullish side it would make this rally more risky and raise the odds of a more meaningful pullback.  Food for thought.

KAM Advisors has long positions in EXPE

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Was That The Pullback??

The market is sharply higher after closing on its lows yesterday.  We commented that depending on how desperate portfolio managers are to put cash to work we could see dip buyers emerge quickly.  But for the market to only be lower for one day is surprising.  Although the day is still early.

It is unclear what the real catalyst is for this morning's move.  It could be the news that Obama will seek a package to avoid the sequester.  Outside of that there aren't too many datapoints that would boost stocks.

Earnings continue to trickle in, but are a mixed bag for the most part.  In economic news, the January ISM Services Index came in at 55.2, which is below last month's reading of 56.1.

Asian markets were mostly lower overnight, led by a 2.3% decline in Hong Kong and -1.9% in Japan.  China actually closed a bit higher after its HSBC Services index rose to a 4-month high of 54.0.

Europe's markets are bouncing from yesterday's selloff.  A number of countries in Europe released their services PMI readings.  Overall, the Eurozone PMI came in at 48.6.

The dollar is slightly lower today, while commodities are mixed.  Oil prices are higher near $96.85 while gold prices are weak around $1671.

The 10-year yield is rising again today and back to the 2.0% level reached last week.  The volatility index is down -5% after a big spike higher yesterday and back below the 14.0 level.

Trading comment: We have been looking for a pause in the market, but didn't think it would only last one day, especially given that the selloff yesterday was more pronounced than we have seen in weeks.  That said, the S&P 500 is back above the 1500 level but not by a meaningful amount.  The SPX first hit 1500 on 1/24, and at the time we said there would likely be some consolidation around that key level before moving convincingly above it.  So far it has been 8 trading sessions that we have oscillated around that 1500 level.  So the market may have actually built back up some of its internal energy, although we still think the consolidation last a bit longer.

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Monday Morning Musings

Markets are trading lower in early trading, taking their cues from overseas where European markets are under pressure.  But I don't think we are entering another period where Europe will be driving sentiment for US markets.  Rather, we have talked about the market being overbought and overdue for a small pullback.  So today's news could just be the catalyst.

Earnings season is slowing down a bit, but there are still reports that will be coming in all week.

Stocks rising on earnings:  HUM, CLX, TDG, BRO

Stocks falling on earnings:  SYY, RCL, GCI, CYOU

Asian markets were mixed overnight.  China rose another 0.4% after its non-manuf. PMI rose to 56.2, its highest level since August.  But Europe's markets are down across the board, with selloffs in excess of 1.0%.

In Spain, the spotlight is on PM Rajoy as allegations swirl that he received as much as 250k EUR in regular payments from a secret swiss bank account.  And in Italy several banks are under scrutiny over questionable derivative deals.

In other news, Acme Packet (APKT) is spiking 22% after news that it will be acquired by Oracle (ORCL) for $29.25 a share.

The 10-year yield is lower today falling below the 2.0% level to 1.97%.  And the volatility index is spiking higher after a big plunge on Friday that took it back down in the 12- level.  Currently the VIX is 8% higher just below the 14 level.

Trading comment: Most traders and investors are looking for a pullback since the market has rallied so much already this year.  Often times the market doesn't do what the majority of people are looking for.  If that's the case, we could see this pullback again fall on the mild side of the equation as underinvested portfolio managers eagerly put money to work on signs of weakness.  This is the type of pattern that eventually brings out too much bullishness among investors which then sets the market up for a larger correction.  But we don't think we are there yet.

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It's The Reaction To The News That Counts

Despite some lower than expected economic reports this week, the market is powering to new highs this morning.  Great traders always say its the reaction in stocks to the news that counts more than the news itself.  On Wednesday when we got the weak GDP headline, a weak market would have plummeted.  But instead we saw a mild, orderly decline.  And today's jobs report came in below expectations which normal causes selling in stocks but instead we just saw the Dow hit 14,000 for the first time since 2007.  You can call it anything you want, but that's the type of action one sees in a bull market.

Although the payrolls report came in below expectations at 157,000 (vs. 180k consensus) the January ISM manuf. index rose to 53.1, which is nearly a one-year high in that index and points to stronger manufacturing activity.  There has been lots of chatter about corporations moving jobs back to the US and an upturn in the manufacturing sector. 

There were also strong ISM manuf reports in other parts of the world.  China rallied +1.4% overnight after its HSBC manuf. PMI rose to 52.3 from 51.9 previously.  And the PMI for the Eurozone rose to 47.9, above expectations.  While this is a better reading for the Eurozone area, the sub-50 figure still points to an overall contraction in economic activity in Europe.  Readings above 50 mark expansion.

I would have expected further selloff in bonds, but bond prices are up today pushing the yield on the 10-year down to 1.95%.

The volatility index is seeing a big plunge so far today, down -9% back below the 13 level.

Trading comment: We talked about bullish stampedes this week and how they often last 17-25 session with only 1-2 day pullbacks along the way, according to Raymond James.  So it isn't that surprising to see the market spike higher this morning after it's 2-day pause Wednesday and Thursday of this week.  But the market remains extended and still likely needs more consolidation.  We don't think that the first test of Dow 14,000 since 2007 will be successful.  It is more likely that we see some backing and filling before a second successful attempt.  We also don't want to chase stocks that are extended, and you can find lots of them.  From healthcare to industrials, many charts look unsustainable.  That doesn't mean you can't buy new positions in stocks that are breaking out, just be careful of chasing extended stocks that could be vulnerable to pullbacks.

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