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us stock market, top stock pick
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8/27/08 Investment House Alerts
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IH Alert Subscribers:
MARKET ALERTS:
Targets hit alerts: None issued
Buy alerts: WFC
Trailing stops: CEPH; XTO
Stop alerts: None issued
SUMMARY:
- Durable goods, debt sale goose stocks to the upside, but no character change on the day.
- Durable goods club expectations and June is revised higher: revisions are key.
- More of the same with no definitive action putting even the day traders to sleep. That is not necessarily bad.
Stocks bounce, leaders hold up well, but market still playing things close to the vest.
There was some decent and indeed unexpected economic data that helped pick the market back up from the Monday decline and Tuesday indecision. Durable orders were much stronger than expected with revisions to the past. The FOMC's Lockhart said inflation would fall in 2008. That makes sense if the economy is picking up as some of the data suggests (e.g. the durables and housing finding a bottom). As discussed last week, when the economy starts to expand, inflation falls. Many textbooks don't say that, many do. We prefer to just look at historical data. It bears it out.
Anyway, that picked futures up, but oil was unwilling to play along. Inventories were lower (-177K) when they were expected to rise 1.4M. Well gee whiz, the prior week they blew away expectations by 8M or so. So call it even. The more bothersome aspect to oil is Gustav, no partying near Cuba. It is tracking toward the gut of the Gulf production and that has the energy market restless. Oil was, of course, up (118.31, +2.10).
Oil tried to hamper the move, but it didn't make it. Notably, FRE and FNM announced the sale of $3B worth of debt with relatively narrow spreads. The market was impressed: junk was sold at rates that did not suggest the buyers were mortified to take it. Stocks rallied nicely. They had to deal with some afternoon selling attempts, and it took a late rally to keep things looking fairly decent even though the indices could not recapture the highs by the close. Once more, the small caps took the lead, and they were joined by the mid-caps, both posting gains over 1%. The stronger dollar and potentially brighter economic outlook is keeping them quite buoyant.
TECHNICAL. Intraday the action showed a bit of that backbone as the market tries to evolve out of the invertebrate genus. Early gains, fought off a midday slump, good rally then fighting off a slump in the last hour. Not bad intraday action, but it is definitely mixed as the market wanders up and down the past three weeks.
INTERNALS. Solid 3.4:1 NYSE breadth as the small and mid-caps linked and rallied over 1%. NASDAQ was so-so at 1.8:1; techs along with the large cap NYSE are lagging. Volume was again mixed, this session moving higher on NASDAQ to 1.5B shares while NYSE volume hit a 2008 low. Both indices were so far below average they cannot really make out the line. As noted Tuesday, that makes it hard to glean much from the recent low volume moves other than the market is attempting a lateral consolidation after rallying off the July low. Not a bad thing.
CHARTS. The indices moves through the short term moving averages and made some headway, but the session outside of maybe SP600 did not alter the character of the market right now. The NYSE large caps are still below the July up trendline, not the best position, but they have now moved laterally for almost two weeks, not immediately collapsing after falling through that level. Hard to call the pattern positive, but it is putting in the effort. Still is likely to test that July low before it can seriously rally, however. NASDAQ moved back over the 50 day EMA but stalled at 2400 resistance. It is trying to stretch out laterally after falling back last week. SP600 remains the rising star of the market (once again), as it tests and holds the 200 day SMA and the 50 day EMA that are just about coincident, bouncing back up Wednesday. It has a nice pattern where the other indices are just trying. Well, it is not a great pattern; it just looks really good compared to the other indices. High praise indeed.
LEADERSHIP. There are still many good stocks in very good position to move higher. Got the nightly list from one of the researchers and it is impressive. This frustrating, sideways, up and down, curse inducing, insomnia curing action is at least allowing stocks to base out. That is really a positive because you will recall that we, as Paul Masson himself said over 20 years ago, will buy no stock before its time (apologies to Orson Wells for bastardizing one of his commercials from the 1970's; if you know where that came from, drop me a line). Back to reality: stocks need time to base out and set up a new foundation before they can move higher, and the market needs a lot of them to do so. They are getting there. The financials are not there. They are a big absent leadership group that likely still has to live through a test of the July lows. At that point the current crop of leaders will get their true test. For now, however, they continue to build their patterns very well and as we always say, the market has the last word. We may think a test has to come but that doesn't mean it will come. Thus if the current crop of leaders breaks out we won't ignore them.
THE ECONOMY
July durable goods orders top expectations, June gets marked higher.
The 1.3% gain matched June's revised 1.3% gain (up from 0.8%) and blew away the flat showing expected. Ex-transports the move was a more modest 0.7% versus 2.4% in June; transports tend to skew the tape each month.
In addition to transports and their impact, some complained the number was skewed by rising metals prices. No doubt they played a role, but not the only role. After all, commodities prices have been on the decline for several months. Machinery rose 4.6%. Business spending rose 2.6%; business investment is on the rebound, posting its best gains since April. More indications the economy is trying to pull up out of its decline.
Good news, but the real test of any turn is what happens to the data from prior months. Recall that when the economy started to slow? There was still upward momentum in the economic indicators, but the prior months were getting written lower than originally reported. Those revisions showed the economists were overestimating economic strength. Now the worm is turning. They are overestimating economic weakness, or put another way, underestimating economic strength (though it is hard to call it strength right now). Revisions are so key because the data is 'harder' at that point, i.e. more data is in and the numbers are firm. Revisions also show momentum turning similar to a doji on a stock's candlestick chart indicates a run can be reversing.
Thus you can parse the number all you want and draw what conclusions you want, but if you look at the trend and the momentum you see a slowing decline, a bottoming process, and now revisions are coming in and adding strength to the moves.
How strong a turn?
Another indication that the economy is trying to make a turn. The nagging concern is the stock market is not leaping higher ahead of the numbers. Stocks typically lead the actual economic numbers higher. They raced higher in late 2002 off the October low, tested in February and March 2003, then exploded higher out of March long before the 7.4% GDP gain in Q3 2003. Maybe SP600 is starting the move with its nice leadership. Need to see more from the market.
THE MARKET
MARKET SENTIMENT
VIX: 19.76; -0.73
VXN: 23.34; -0.69
VXO: 21.68; -0.04
Put/Call Ratio (CBOE): 0.82; -0.15
Bulls versus Bears:
For the second time this year bears are crossing above bulls, doing so basically where they did in March on their way to much more extreme readings just about the time the market made the March low and started the last rally. Positive for the market and if SP500 is going to hold the long term trendline is the place to do it.
This is a reading of the number of bullish investment advisors versus bearish advisors. The reason you look at this is that it gives you an idea of how bullish investors are. If they are too bullish then everyone is in the market and it is heading for a top: if everyone wants to be in the market then all the money is in and there is no more new cash to drive it higher. On the other side of the spectrum if there are a lot of bears then there is a lot of cash on the sideline, and as the market rallies it drags that cash in as the bears give in. That cash provides the market the fuel to move higher. If bears are low it is the same as a lot of bulls: everyone is in and the market doesn't have the cash to drive it higher.
Bulls: 40.7%. Still moving up, rising from 34.0%. After this week, however, bulls should post another decline. Topped the 35% level that is considered the demarcation between bullish and bearish indications. Above 35% is not as bullish. A long way up from the 27.8% on the low this round. Hit 31.9% two months back and the 30.9% low hit in March. Steep drop from a rebound high at close to 50% on the run through May. In March the indicator did its job with the dive below 35% and the crossover with the bears. Now it is going above and beyond. Bulls and bears have crossed over again, doing so even before the prior lows are hit. The bulls and bears were eye to eye in mid-February and have crossed. A move into the lower 40's is a decline of significance. A move to 35% is a bullish indicator. This is smashing that. For reference it bottomed in the summer 2006, the last major round of selling ahead of this 2007 top, near 36%, and 35% is considered bullish.
Bears: 38.4%. Dropping hard from 43.6% and down from 50.0% a month back, the high on this move. Still above the 35% threshold so still a bearish indication. A steady rise to 50% on this move: 48.9%, 47.3%, 44.7% and 39.3% before that. A steady, strong rise. Well above the bullish level and the highest since 1995. Again, that is one of the best indications that sentiment is getting extreme on the negative side. It is again past 35%, the level that historically indicates too much pessimism. As with the bulls the jump in bears did its job after hitting 44.7% in the third week of March that was up from an already freakishly strong 43.3% the week before. Up sharply from a low of 19.6% on the last rally. 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). This is a huge turn, unlike any seen in recent history.
NASDAQ
Stats: +20.49 points (+0.87%) to close at 2382.46
Volume: 1.57B (+6.91%). Rising steadily, but steadily well below average.
Up Volume: 1.124B (+511.706M)
Down Volume: 424.138M (-403.823M)
A/D and Hi/Lo: Advancers led 1.85 to 1
Previous Session: Advancers led 1.12 to 1
New Highs: 42 (+7)
New Lows: 87 (-16)
NASDAQ CHART: http://investmenthouse.com/ihmedia/NASDAQ.jpeg
Tapped the old 2004 up trendline on the Tuesday low and started back up. Wednesday techs posted a solid gain but stalled out near some resistance at 2400, tapping the 90 day SMA and closing over a third off the session high. That is about it. NASDAQ is below the February peak that is right at the 200 day SMA (2415). That is going to be the closest test at hand before it takes on the August peak. Not bad but still a ways to go.
NASDAQ 100 (+0.74%) rallied as well, it also testing the 90 day SMA and fading back. It was also over the 200 day SMA intraday but could not hold that either. Still in a handle for its 11 week cup with handle base, but it has work to do in order to make the breakout, and indeed it has a long way to go to make the breakout by clearing the August high that is another 74 points higher. That is a big move in itself.
NASDAQ 100 CHART: http://investmenthouse.com/ihmedia/NASDAQ100.jpeg
SOX CHART: http://investmenthouse.com/ihmedia/SOX.jpeg
SP500/NYSE
Stats: +10.15 points (+0.8%) to close at 1281.66
NYSE Volume: 820.385M (-4.13%). Even lower volume, the lowest of the year.
Up Volume: 638.924M (+107.007M)
Down Volume: 173.293M (-137.085M)
A/D and Hi/Lo: Advancers led 3.41 to 1. Great breadth thanks to the small and mid-cap indices.
Previous Session: Advancers led 1.54 to 1
New Highs: 19 (+2)
New Lows: 65 (-48)
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
SP500 again tested the July up trendline on the high (1285) and faded some. It is working laterally in a shallow up and down range below the 50 day EMA (1289) and above 1261). Narrow range on low volume; that is basing action. It has stumbled trying to overtake the trendline again, but that did not send it down. It still looks weak, and historically after a new low in a selloff is hit that low is tested before a long term upside run can begin. Thus while SP500 is consolidating, a test down to 1200 is still quite likely.
SP600 (+1.11%) was, along with SP400 (+1.26%), the market leader on the session. It again showed it is a market leader, helped by the dollar's recent strength (though the dollar was down for the day) and the apparent bottoming in some economic sectors. A breakout over the June and August highs and out of its 11 week reverse head and shoulders would show the economic strength is indeed gelling.
SP600 Chart: http://investmenthouse.com/ihmedia/SP600.jpeg
SP400 CHART: http://investmenthouse.com/ihmedia/SP400.jpeg
DJ30
DJ30 continues to copycat SP500, moving laterally in its own range though just below the July trendline. Basically we can say 'see SP500 comments.' Okay, we will.
Stats: +89.64 points (+0.79%) to close at 11502.51
VOLUME: 120M shares Wednesday, up a hair from the 119M shares on Tuesday. Did I mention volume was low?
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
THURSDAY
GDP expectations are getting revised higher and higher, though the 2.7% remains the consensus, up from 1.9% in Q1. The whisper is closer to 3% or even 3% itself. Exports are up, durables are up, imports are down; that means higher GDP. Now that is prosperity. Of course exports are going to fall thanks to sliding foreign economies and a rising dollar. Imports are lower because US citizens are in a recession and have a sour mood. When we are prosperous and in a good mood we buy both imports and domestic goods. So, the way GDP is figured, it should rise given imports are lower. It thus won't give a totally accurate picture of the current situation, but it is better than it was.
Will it change things? It could help. Economic data lags the market so the market does not hang on economic data. It anticipates it. Right now the market is up off the lows, but outside of the small caps it has not put in a strong move off the lows. The small caps can lead as the economy recovers, but ultimately SP500 has to join, pushed by the financials. Each day this week we note that the financials are trying to base but have a long way to go. That means likely another test of the July low for the NYSE large cap indices in order for the financials to complete their bases and set the stage and foundation for a new sustained move higher.
That does not mean the entire market collapses, however. There are many solid leaders in great shape. They can continue to lead while the financials complete their bases. Indeed, that is usually how the market works. Not every sector breaks higher first. Moves come in waves with early leaders followed by a second wave while the early runners rest. This repeats over and over, as more sectors complete bases while others do the heavy lifting to the upside. Then they move to the front and take their turn pulling.
Sounds pretty optimistic and some would even say Polly Anna-like. It is a tough time of the year immediately ahead. Indeed, the Thursday before Labor Day is usually down, and there are times in the past that following Labor Day the market really hurts. There are times in the past that the market does well after Labor Day. What we think is setting up is this: SP500 and DJ30 fall back in September and into October to test the prior low; they have to do that for the market to have a chance at bottoming. If the firming we see in some of the economic data is not false, they should hold that and make a double bottom. Need to see strong moves to the upside off of that. During that time the growth indices struggle due to the issues with the financials, but they hold their bases, continuing to set up for breakouts or testing prior breakouts. After that we start seeing the breaks higher.
If the economic data firming is a short term blip, and we note the indices have not raced higher off the lows with abandon as in late 2002, then the NYSE large caps won't hold those lows. Moreover the growth indices will not withstand their slump and they will breakdown from their patterns and sell on volume and we play the downside for another six months or so.
What we do in this situation is play the fattest plays, the stocks with good fundamentals and very solid patterns. As noted above, the report has many of these and that makes one more optimistic that this action is setting the building blocks for a more sustained upside. It likely won't be all cake and ice cream into September and October, so we stay with good moves and play things with a bit tighter rope. If we don't feel great about a move, we can let it go and not worry about it. Then when we see an NSC or something similar, we move in on it. Let them show us they deserve some of our money in a difficult market.
Support and Resistance
NASDAQ: Closed at 2382.46
Resistance:
2386 is the August 2007 intraday low
2388 is the June 2008 low
2392 is the April 2008 peak
The 90 day SMA at 2395
The 200 day SMA at 2415
2419 is the January 2008 peak and the early February peak
2451 is the August closing low
2474 is the July 2008 peak
2483 is the mid-June interim peak
2500 from interim August 2007 lows and early May 2008 interim peak
2551.50 is the May peak; 2550 is the June peak
2603 is the early January gap down point
Support:
2378 is the mid-February peak; 2379 from the October 2006 peak
2370 from the April 2006 peak
The 50 day EMA at 2367
2352 is the trendline from the summer 2004/July 2006 lows, Q4 2005 consolidation
2340 from the March 2007 low
2286 is the first April 2008 gap up point.
2261 is a March 2008 interim low
2202 is the January 2008 low
2155 is the March 2008 low
S&P 500: Closed at 1281.66
Resistance:
1285 is the recent July peak
The 50 day EMA at 1289
1317 from the February low
1320 is a 50% retracement of the May to July selloff
1324 is the April low
The 90 day SMA at 1326
1331 is the June low
1351 is an ancient trendline
The 200 day SMA at 1361
1370 is the August 2007 intraday low
1374 is the March 2007 closing low
1387 is the April 2008 intraday high
1396 is the February 2008 peak
1406 is the August and November 2007 closing low
Support:
1270 is the January low
1257 is the March low
1244 is an August 2005 peak
1240 to 1221 are September 2005 peaks1234 is the July 2006 low
1234 is the late July low
1224 is the June 2006 low
1176 from the Q4 2005 lows
1167 is the January 2005 low
1154 from the May 2005 lows
1142 is the 2005 closing low
Dow: Closed at 11,502.51
Resistance:
11,545 is the up trendline off the July low
The 50 day EMA at 11,617
11,634 is the January intraday low
11,655 is the 2004/2005 up trendline
11,670 is the May 2006 intraday high; 11,642 closing
11,731 is the March 2008 low
11,982 is a 50% retracement of the May to July selloff
The 90 day SMA at 12,000
12,050 from the March 2007
12,070 from the early February 2008 lows
12,250 from late March 2007 lows
The 200 day SMA at 12,379
12,518 is the August intraday low
12,573 is the mid-February high
12,743 is the November low
12,750 to 12,768 is the February 2008 peak and a series of lows and highs from August 2007
12,786 is the February 2007 peak
12,845 is the August closing low
13,092 is the December 2007 intraday low
13,133 is the May 2008 high
Support:
11,388 is the prior August low
11,317 from March 2006
11,131 is the late July 2008 low
11,061 from February 2006
10,912 peak from March 2005
10,854 from December 2004
10,701-10,705 from July 2006, July 2005
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
August 25 - Monday
Existing home sales, July (10:00): 5.00M actual versus 4.90M expected, 4.85M prior
August 26 - Tuesday
Consumer confidence, August, (10:00): 53.0 expected, 51.9 prior
New home sales, July (10:00): 525K expected, 530K prior
FOMC minutes (2:00)
August 27 - Wednesday
Durable goods orders, July (8:30): 1.3% actual versus 0.0% expected, 1.3% prior (revised from 0.8%)
Crude oil inventories (10:35): -177K actual versus +1.4M expected, +9.39M prior
August 28 - Thursday
GDP, Q2 preliminary (8:30): 2.7% expected, 1.9% Q1
Chain deflator, Q2 (8:30): 1.1% prior
Initial jobless claims (8:30): 425K expected, 432K prior
August 29 - Friday
Personal income, July (8:30): -0.2% expected, +0.1% prior
Personal spending, July (8:30): 0.2% expected, 0.6% prior
Chicago PMI, August (10:00): 50.0 expected, 50.8 prior
Michigan sentiment, final August (10:00): 62.0 expected, 61.7 prior
End part 1 of 3
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us stock market
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