Janet Yellen spoke softly and slowly and the markets celebrated her continued dovish stance.

Market Statistics

Yellen's marathon testimony to the House Financial Services Committee stressed continuity of the Bernanke/Yellen policies for the foreseeable future. Yellen did not get flustered by constant badgering by members of the committee and when answering the tough questions she repeated slowly and deliberately and repeated the Fed policy script nearly word for word. This frustrated the committee members and they constantly interrupted her to try and force a sound bite they could use in their election campaigns. Yellen resisted being pushed into a forced error and stood her ground.

She held the party line even when being pressured hard about what could force a taper of the taper. She repeated the data dependent line over and over as well as the taper, while on a steady and measured pace, was not preset and could be modified at any time based on economic conditions. However, she would not specifically say what conditions could force the Fed to pause.

I believe committee members felt they were coming into a meeting where the mild mannered Yellen, facing the intimidating committee, could be pressured and forced to answer their pointed questions. When she did not fall into the trap and burned up their allotted time by talking slowly and repeating the script they became frustrated and Yellen emerged as the winner.

She said the jobs recovery was "far from complete" and reiterated that the 6.5% unemployment threshold would not force a change in Fed policy. The Fed will maintain the current policy "well past" the arrival of the 6.5% rate. The committee deluged her with questions about the unemployment rate and the labor force participation rate and she sounded almost like Greenspan as she talked around the answer rather than just answer the question directly.

Yellen speaks slowly and softly and not how you would expect the chairman of the largest and most important central bank in the world to speak. This frustrated the committee and I found it disturbing as well. I kept wanting to hit the fast forward button on my DVR remote even though I knew it would not do any good.

Since this was Yellen's first appearance as Fed Chairwoman in front of the House committee she had to establish a precedent in her mannerisms and responses. Committee members were also trying to establish a tone for future testimony. In the end I believe Yellen emerged the victor since they were unable to badger her to say something she did not want to say. The market apparently thought she was the winner as well since it rallied +200 points as she was being interrogated.

The Dow was up about 75 points when the crucial exchange occurred between Carolyn Maloney (D-NY) and Yellen. Maloney was relentless on asking the same "What could cause you to pause the taper" question in multiple ways. While Yellen repeated the "data dependent" line out of the Fed's script in just as many ways, the fact she was willing to discuss it at length with Maloney seemed to indicate Yellen was open to tapering the taper if the data warranted it. The market response to a flexible Yellen was an additional +100 point gain over the next couple of hours.

The economics for Tuesday started off well with the NFIB Small Business Survey headline number rising from 93.9 to 94.1. That was the highest reading of the Optimism Index since August. The "plans to increase employment" component rose from 8 to 12 and "Expect real sales to be higher" rose from 8 to 15. Everything else was basically flat except for "earnings trend," which decreased from -22 to -27.

Ten percent of firms reported weaker sales, a 2% increase from December. Eleven percent felt the economy would deteriorate over the next six months. That was the same as December and +9 points higher than November.

Overall this was a decent report and covers businesses up to 499 employees. With a two-year budget deal in place and the debt ceiling issue going away, sentiment should continue to improve.

The Wholesale Trade report for December showed inventories rose only +0.3% compared to +0.5% in November and estimates for a +0.5% gain. Durable goods inventories rose +1.3% compared to +0.6% in November. Nondurable goods declined -1.3% after gaining +0.3% in November. Sales rose +0.5% compared to +1.0% in November and +1.1% in October. That was the lowest gain since August. Analysts were quick to blame the weather and the report was ignored.

The Job Openings, Labor Turnover Survey (JOLTS) for December showed hiring weakened in December with slower hiring, more terminations and fewer jobs advertised. The number of job openings increased +2.8% over December 2012. Separations increased +7.6% over year ago levels. Analysts were quick to blame the weather again and the report was ignored.

The calendar for Wednesday is lackluster with nothing that will move the market. Thursday has the Yellen testimony to the Senate and that will be a chance for senators to try and break her down worse than the representatives did today. I doubt that will be must see TV after the marathon session today that ran for six hours. That was the longest I can remember.

The House of Representatives approved a clean debt limit bill and the Senate will consider the measure on Wednesday and likely pass it. Republicans could not agree on how to proceed on the debt ceiling issue but Boehner had enough republican votes to pass a clean bill with a lot of democratic help. The bill passed 221 to 201 but the makeup of those numbers is the surprise. Voting for the bill were 28 republicans and 193 democrats. Voting against it were 199 republicans and 2 democrats.

The new bill does not raise the debt ceiling by a specific amount but allows the government to borrow money normally until March 15th, 2015. That date allows the winners of the November elections to be sworn in and get their feet wet in the methods of congress before the debt ceiling comes up again in March. You can bet that battle is going to be monumental if the republicans gain control of the senate as expected in November.

By putting up the clean bill and allowing just enough republican votes to get it passed the 199 republicans who voted against raising the debt ceiling can go home and campaign on that fact and attract more tea party support. Nothing in Washington ever happens without ulterior motives or a political strategy.

Having the debt ceiling debate evaporate so quickly was also positive for the market and probably helped the rally as much or more as Yellen's testimony. This eliminates one more hurdle for investors. With the House in session for only a sporadic 80 days before the November election there is little risk of Congress being a weight on the market for the rest of the year.

Gold rallied on the Yellen testimony but that seems to be contradictory. If the Fed continues on a steady and measured pace the dollar should gain strength and that would be negative for gold. I suspect the main mover for gold is short covering. I wrote about this a couple weeks ago that any move over $1270-$1275 would create some serious short covering. Shares rose to $1290 in regular trading, a gain of +$16.

Stock news was overshadowed by the marathon Yellen testimony. Organic food maker Annie's Inc (BNNY) fell -9% after guiding analysts to earnings of 92-93 cents for their current fiscal year that ends in March. That is down from their prior forecast of 97-1.01 per share. Analysts were expecting 97 cents. The company said food costs were higher than expected driven in part by a shortage of organic wheat. Higher costs are expected to continue into 2015 and the stock was downgraded from buy to neutral.

ConAgra (CAG) cut 2014 and 2015 earnings forecasts due to lower sales outlooks for several of their private brands. Chef Boyardee and Marie Callender were two of the brands mentioned for soft sales. They were part of the acquisition of Ralcorp in 2013 for $5 billion. The company cited poor crop quality for potatoes in late 2013 as a margin pressure. ConAgra lowered expectations for the current quarter to earnings of 60 cents and next quarter earnings of 65 cents. Wall Street was looking for 65 cents and 71 cents respectively.

Rackspace (RAX) reported earnings that declined -30% to 14 cents and in line with estimates. Revenue rose +16% to $408 million. Earnings were not specifically disappointing but shares imploded. The reason for the drop was the retirement of the 43 year old CEO, Lanham Napier. He had been CEO for only six years and there was no notice of this retirement. The announcement said he had "retired" and Chairman Graham Weston was taking over on an interim basis. The sudden and previously unannounced retirement suggested there was trouble at the company. CEO's don't just quit unannounced unless there is a problem of some kind. Shares declined -19% on the news.

Dean Foods (DF) warned that Q1 earnings would be a breakeven or possibly a -3 cent loss as a result of unexpectedly high raw-milk prices and lower sales volumes. That was significantly below analyst estimates for a 27 cent profit. Dairy commodity prices have moved to all-time highs despite higher global production. Shrinking herds in the U.S. is a growing problem and that will also be felt in meat prices in 2014. Dean met adjusted earnings estimates of 18 cents in Q4. Shares fell -7% on the news.

Tesla (TSLA) shares rallied over $200 intraday after China moved to increase subsidies for electric cars to combat the extreme smog in China. The country announced that 2014 subsidies would be higher than previously expected. Previously subsidies were expected to be cut -10% in 2014 and that is now going to be -5%. The 2015 subsidy reduction will be cut from the previously announced -20% to -10%. Tesla said they are not currently eligible for the subsidies but they hope China will realize the role Tesla can play in catalyzing electric vehicle adoption in China and extend those incentives to the Model S as well. The Model S costs $80,000 in the U.S. but sells for $121,000 in China due to massive tariffs imposed by China on imports. Earnings are February 19th.

Natural gas prices rebounded again after a new winter storm that is being called "historic" takes aim at the Northeast. The ice storm will impact 60 million people from Atlanta to the far Northeast. It is expected to drop up to a foot of snow on the Northeast in addition to the ice. Gas prices rose +25 cents after hitting two week lows on Monday.

The S&P broke through resistance at 1,800 and powered to 1,820 before losing traction. The breakout puts the S&P less than 30 points from a new historic high. There is a lot of resistance between 1820 and 1848 so I would not expect the current rally to just charge higher and higher. With the S&P up +80 points in five days it is already over extended and due for a rest. Whether that rest includes a new dip or just consolidation at the current level is of course unknown.

The +80 point spike is confounding the bears and now has the bulls worried. Even the most ardent investor does not want to see the markets go vertical. Excesses to the upside are always followed by excesses to the downside. The best market is one that proceeds higher in the two steps forward, one step backward process.

If the market does continue higher we are going to start hitting serious resistance beginning at 1,828 and then continuing to the prior high at 1,848. That is liable to blunt any enthusiasm and produce a further period of consolidation.

Support is now 1,793 followed by 1,775. The S&P did move over the 50-day average at 1,809 and the 30-day at 1,823. Those averages should now be light support. We are not yet far enough above 1,800 to avoid the potential for a right shoulder to form. Be watchful!

The Dow rallied intraday to move over 16,000 but could not hold it at the close. The 16,000 level represents resistance from December and could be tough to break. Only one Dow component was in the red today and that was Cisco. The networking company has earnings on Wednesday and traders were probably taking profits ahead of that event.

Boeing, Goldman Sachs and IBM were the big gainers but most of the Dow components had a decent day.

If the Dow does roll over the first level support is 15,800 and that would erase all of today's gains. While I am not expecting that we have to be aware of the +650 point gain over the last four days. That easily overextended the index and should require a period of consolidation. With a lack of news events on Wednesday it would be a good day for a rest before Yellen's Senate testimony on Thursday.

The Nasdaq 100 briefly moved to a new 13 year high intraday at 3,628.59. Sellers appeared at the close and knocked -7 points off those gains. This is a critical level for the NDX and a breakout here could drag all the other indexes higher.

The Nasdaq Composite came within a point of the 4,200 level again but sellers appeared in advance to prevent it from happening. The Nasdaq eased over resistance from early January but not quite far enough to escape the pull of gravity from that level. We need another day of gains to push us to the next resistance level at 4,223 and put us within striking distance of a new 13-year high. Maybe Cisco's earnings will be the catalyst for that event.

At this point support is well below at 4,050 with a possible pause at 4,100.

Despite all the bullishness outlined in the charts above the Russell 2000 small caps are still lagging and that should be troublesome for investors. When the small caps lag there is a low confidence level in the market. When they lead there is strong confidence. This suggests the rally is more short covering and price chasing than actual investing by fund managers.

I would look for a pullback in the markets and hopefully just a small one for consolidation of our recent gains. If it is lackluster I would buy it. If it comes on heavy volume I would avoid it until we see where the decline stops.

The Good Ship Lollipop lost her captain this week when Shirley Temple died at age 85. I can still remember watching reruns of her movies on our new black and white TV when I was a kid in the 1950s. It is hard to believe she first sang that song in the 1934 movie Bright Eyes. She won an honorary Oscar at the age of 6. When she turned 21 her film career ended because her little girl roles disappeared.

Enter passively, exit aggressively!

Jim Brown

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