Yesterday gave us a glimpse of what the market could look like with a breakout rally - chasing winners (Communication Services, XLC) and sifting through the ash heap of also-rans (Energy, XLE and Financials, XLF). 

Knocking on the Door

I have been using 4,200 because it’s a big round number, but the breakout could be sparked with a close above 4,170. Conversely, failure could trigger a meaningful pullback.

Several other boxes must be checked to truly get the market moving in a higher gear, including great participation. I don’t think we need 80% above the 200-day moving average, but more than 60%, maybe 70%.

Ugly Underbelly

Not only are there a paltry number of S&P 500 and NASDAQ Composite names changing hands above their 200-day moving average, but the losing streaks and new lows have also been a huge drag.

There were a lot more advancers than decliners and up the volume against the down volume. But there were more new lows on both the New York Stock Exchange (NYSE) and the NASDAQ Composite.

Market Breadth	NYSE	NASDAQ
Advancers	2,311	3,200
Decliners	675	1,292
New Highs	56	91
New Lows	80	145
Up Volume	3.22 billion	3.67 billion
Down Volume	760.50 million	817.86 million

The streak of sessions without a 1.0% move was snapped, but was it a spark or an anomaly? 

Debt Drama: Final Act?

Undoubtedly, the market will sell off on Friday without a debt deal or overwhelming conventional wisdom that a deal is imminent.

That said, many say we have already made a mess of this, and it will haunt the nation and its reputation for the rest of the year.

Ironically, those same sources give a free pass on the actual level of debt, pointing to other nations with higher levels of gross debt to the Gross Domestic Product (GDP).

With all due respect, America is not trying to mimic Japan or Italy. (I find it interesting when the media implores America to act like European nations. No, thank you. We like being the preeminent nation on the planet with the world’s reserve currency, even though our fecklessness threatens that position.)

However, I do agree the stakes are super high, and we have already learned these lessons well. Most years, the market moves higher during these sagas, but 2011 was a doozy.

Make sure to ask your rep or reach out to the research desk for a copy of this week’s Payne’s Perspective to understand what’s at stake.

Portfolio Approach

There are no sector weighting changes to our Hotline Model Portfolio this morning.

Today’s Session

Jobless Claims

The market is under some pressure after economic data came in better than expected. Initial jobless claims were 242,000 against consensus of 251,463.

Continuing jobless claims keep edging lower suggesting recently laid off folks are finding jobs.

Jobless claims in general are significantly higher than a year ago.

Philly Fed

The Philly Fed Manufacturing report came in at -10.4 against consensus of -20.0.  It was a ’beat,’ but future activity is still slumping. Moreover, there was an intriguing movement on the employment front.

• Employees -8.6 from -0.2
• Workweek -7.7 from -8.4

I think the biggest news from the Philly Fed report was in the special questions section.

Firms anticipate that compensation over the next year will grow far less than expected in February and US consumers will pay a lot more for goods and services. 

Lots of Fed speakers are out this morning, including Philip Jefferson who seems to be undecided on the next move, but right now is clearly frustrated that more carnage hasn’t occurred.

Logan is also mystified with the staying power of inflation.

I’m mystified that the Fed is mystified after trillions were dumped on the economy.  I just hope they are talking tough to help push inflation lower and not buying into the notion of more rate hikes.

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