MORNING THOUGHTS

February 4, 2014

Headlines this morning scream of global weakness and breached technical's - all resulting in a broad selloff -

Factory Weakness Hits Stocks! (wsj), Turmoil Across Global Markets!,  Global Stock Selloff - Rumble or Rout?,  Look Out!  Technicians See More Selling (cnbc), As Recovery Looks Weak, Stocks Take a Deep Dive (nyt), Contagion From Emerging Markets Continue To Roil The Developed World (ft)

And so it goes....global mkts got a bit crushed yesterday as some investors ran for the exits trying to avoid the oncoming train wreck that appears to be building.....as they search for safety while re-pricing the 'new' risk environment....

Yesterday's move saw the major US indexes fall to levels not seen in 3 months...the catalyst?  Well yesterday it was the broader macro data - the very data that many strategists/analysts have been disregarding as 'irrelevant' during the past couple of months as they take to the airwaves trying to convince the investing public that the turnaround is here - "jump on board", " get involved".  All the reasons cited:

Monthly NFP reports showing a strong improvement in job creation (until it didn't - but who cared - it was an outlier)  - The strong holiday shopping season pointed to the health of the consumer!  The FED making its first move to withdraw - citing the 'improving fundamentals'....... Mixed to weaker macro data relegated to the back burner as we waited for 4th Qtr earnings - sure to 'blow the doors of the bus' as companies continue to 'beat the number', Well known strategists talking about cheap valuations!  Blah, blah, Blah..... - investors watched as the mkt climbed higher and higher seemingly unable to recognize the warning signs that kept flashing - "caution ahead".   
  
Well - yesterday's ISM (Institute for Supply Management) report finally caught the attention of investors and analysts... So many of you ask - What is the ISM report and why should we be concerned?  Investopedia defines the ISM as:

An index based on surveys of more than 300 manufacturing firms by the Institute of Supply Management. The ISM Manufacturing Index monitors employment, production inventories, new orders and supplier deliveries. A composite diffusion index is created that monitors conditions in national manufacturing based on the data from these surveys.

We monitor the ISM Manufacturing Index, to better understand national economic conditions. When this index is rising, then investors can assume that the stock markets should increase because of higher corporate profits. Conversely when the index is decreasing then investors can assume that stocks and the mkts will come under pressure due to headwinds affecting corporate profits.  (Key word here is ASSUME and we all know what that means)

Well yesterday it was announced the greatest expectations miss in history.....factory index plunged from 56.5 to 51.3 - well below the expectation of 56 and the new orders index?  Hold on......it went into meltdown mode...falling from 64.4 to 51.2 - the biggest m/m decline in 34 yrs!  Well THIS - ladies and gentleman managed to get the attention of  the mkts.... What happened to Uncle Benny's growth forecast?  Was it all smoke and mirrors to get us in the taper mood?  And GDP- is it really as strong as they make it appear? 

A couple of weeks ago I pointed out that the 'Baltic Dry Index' was turning weaker....telling us shipments of dry goods were decreasing at an alarming rate.  Then corp earnings were massaged to 'beat the number' all while missing on the top line - but no one paid attention....analysts kept dismissing it as 'the cycle'..... Now we get the biggest miss in history for the ISM factory index – and what happens?  Someone yells FIRE and the place goes to "hell in a hand basket" in 6 hrs.....Causing angst for some while causing others to lick their lips in anticipation of the continued 'SALE'.....

DOW now off 7%, S&P -5.75%, Nasdaq -4.3%, UK, France, Germany all off 4% while Asian mkts have gone into overdrive.....Japan is down 14%, Hong Kong -8%, China -5.5% and Australia -4.75% and the emerging mkts?  The EEM (emerging mkts ETF) is down almost 12% since January 1 and 15% since the highs on October 22. 

Technical's scream for help.....

A look at the technical damage reveals that the DOW is leading the way lower...not so typical really in a down mkt where we usually see the small caps/mid caps lead the way.... Yesterday's drop not only took out the 200-DMA but it ended the day below also....clearly breaching this important measure....The other indexes have not done so yet...but are getting closer - so the test is on...... Beware.....The primary dealers are famous for letting the indexes fail and  breach their 200 DMA to try and suck in short sellers.....for some reason though it seems that they tend to work hard at protecting the S&P (yesterday this index closed at 1741 - well above its 200 DMA 1707.)

Know that when any  major index trends below its 50-DMA or 200 DMA (levels that had been support now becomes resistance) then the tone begins to change a bit.....the up trending trend line now becomes a descending trend line.....This is important because the longer it trades below these levels then the resistance strengthens and any rally ends up hitting  resistance at a lower high!  the deeper the selling from present levels, the harder it becomes for the next wave of buying or short covering to overcome a descending technical resistance pattern. So the focus now is on whether the major indexes can muster buying power at or near their 200-day moving averages.

This morning we are seeing a technical bounce as the S&P future is +6 pts trending at 1738 - bouncing off of that important 1735 level..... short-term oversold conditions, appear to be building in global mkts...so a bounce is not unusual... any bounce could see the mkts regain up to 1/2 of the pullback since 12/31/13 highs which would take us back to the 1785/90 range.   (For those who feel like we are approaching a 'capitulation' - I would argue that we are not there yet.....it just does not feel like investors are ready to throw out the kitchen sink just yet)....... In order to believe that this 'move'  is complete though - the mkt will have to move decisively  and CLOSE above 1765 on the future or 1770 on the cash. 

Overnight in Asia - mkts under more pressure.  Japan -4%, Hong Kong -2.9%, China -0.8% and ASX -1.75%....

In Europe - mkts are also down across the board in early trade.  FTSE -0.5%, EUROSTOXX -0.57%, CAC 40 -0.15%, DAX -1.13%, SPAIN -0.36% and ITALY -0.54%. News?  UK construction PMI beat estimates. Emerging markets and their respective currencies are calm this morning and up small versus the dollar. 

Here at home - traders will be licking their wounds....as they try to discern the next move.  We get speeches from FED Pres Lacker and Evans this morning... What will they say?  1730 is key on the future...if we test and breach then expect the momentum to pick up and test the 200 DMA at 1707.  Strap in....

Take Good Care
KP


Spaghetti Arrabiata

After all of the action - the mkt is angry, investors are angry...so try the Spaghetti Arrabiata....

Spaghetti with Arrabiata Sauce.  Arrabiata - is the Italian word for angry.......created in Rome - this sauce is simple to make and gets it anger from the red chili pepper.....You can serve this with any type of pasta you want - but spaghetti or linguine is best.  
 
You will need:  olive oil, onion, garlic, red wine, sugar, crushed red pepper (or chili peppers if you want hot, hot, hot), lemon juice, oregano, s&p, crushed tomatoes, tomato paste and chopped parsley.....
 
Bring a pot of salted water to a rolling boil -
 
In a large pot (or deep sauté pan) on med-hi -  heat up olive oil and garlic.... sauté a bit - but do not burn - 3 mins or so....now add sliced onion and sauté until soft - like 5 mins more.  Next - add 1/2 cup of red wine, 1/2 tblspn of sugar, fresh squeezed lemon juice (about 1 tblspn) , oregano, bit of tomato paste and a 28 oz can of kitchen ready crushed tomatoes (not in puree - just crushed tomatoes), crushed red pepper (or crushed chili pepper if you prefer) - bring to a boil and then reduce to simmer and cook for 15/20 mins....
 
Add 1/2 lb of spaghetti to boiling water and cook for 8 mins or until aldente - strain - reserving a mugful of the pasta water.  Return pasta to pot and add back about 1/4 cup of the pasta water to re-moisten.  Stir.....Now add pasta directly into the sauté pan with the sauce - toss well - add a handful or two of grated parmegiana cheese and serve immediately in warmed bowls.  Enjoy with a nice bottle of Brunello di Montalcino.  Always have extra cheese on the table for your guests

 
Buon Appetito.
  
 
"The market commentary is the opinion of the author and is based on decades of industry and market experience; however no guarantee is made or implied with respect to these opinions. This commentary is not nor is it intended to be relied upon as authoritative or taken in substitution for the exercise of judgment. The comments noted herein should not be construed as an offer to sell or the solicitation of an offer to buy or sell any financial product, or an official statement or endorsement of O’Neil Securities, Incorporated or its affiliates”


MORNING THOUGHTS

Photograph: Reuters/Lucas Jackson