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us stock market, trend trading stock
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9/08/08 Investment House Alerts
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IH Alert Subscribers:
MARKET ALERTS:
Targets hit alerts: None issued
Buy alerts: AKS; AMTD; PG; WFC
Trailing stops: None issued
Stop alerts: AAP; AMZN; EDU; ESRX
SUMMARY:
- Treasury nationalizes home mortgages, stocks jump, but hardly commensurate with the news, and have trouble holding on.
- Too big to fail policy: We have done this before, but does wiping out equity investors instill confidence?
- Bonds rally but then give it back as treasury investors remains worried about the economy.
- Market will try to squeeze some more upside, but the Monday action did not make that a sure thing.
Need a bailout? Give your congressmen a call.
We knew there would be upside after the Friday intraday reversal following the 4.5 downside sessions. Then the Treasury announcement came after hours and we knew that the upside would be even more pronounced. It went even further with foreign markets rallying with glee on the US news. After all, if the US was backstopping all mortgages those foreign investors stood to come out well with respect to their debt positions in FNM and FRE.
That snowballed the US futures and stocks started sharply higher, but almost from the open they started back peddling toward lunch. The indices then started a three hour trading range that lasted to the start of the last hour. NASDAQ turned negative twice, once as lunch started and again to start the afternoon session. A bounce to the top of the range and then a pullback to a higher low set the stage for a last hour bounce, however, and that took NASDAQ positive and sent SP500, DJ30 near their session highs. NASDAQ 100 and SOX, however, failed to turn positive.
That was a stark contrast to the euphoria. NASDAQ struggled to post a gain while the large cap techs and chips, the latter a leader off the 2002 bottom, failed to hold a gain. SP500 and DJ30 remained below resistance and NASDAQ failed at some moderate resistance at 2300. All finished off their highs. Why?
The market liked the near term implications of the takeover as it puts a tourniquet on the mortgage market. Mortgages immediately fell from 6.5% to 6%. They will go lower as FNM and FRE were keeping rates propped higher due to their struggle to make money in this market. Longer term, however, we do make the pretense of living in a capitalistic society, and the market has a hard time swallowing the socialistic implications each time the federal government decides it has to step in to correct what it wrought. Well, what are the auto companies and airlines waiting for? Go ahead and make the call: 'Hello, Congress? Let me tell you about a problem a major industry is having . . .' After all the car makers' lending programs have people in a lot of cars and they could lose those cars and further damage the industry. Take over the car loan market? Oil industry? This makes the California Congresswoman's comments about nationalizing the US oil industry at the summer price hearings frightening.
Before I digress further (and I most certainly will with this historic event), some market analysis.
TECHNICAL. Intraday the action was not great though it was better on some than others. Started higher, faded into the start of lunch. An afternoon bounce recovered most of the lost ground on SP500, DJ30 and SP600. NASDAQ recovered some but was over 43 points off its session high. NASDAQ 100 closed lower and SOX just managed to avoid a new 5 year low. SOX was a leader off the 2002 bottom. It is currently a leader to the downside as the market tries a bottom here. There remains a real dichotomy in nearly all aspects of the market even from a technical perspective.
INTERNALS. Volume exploded on NYSE thanks to massive trading in FRE and FNM (955M shares out of 1.76B) and elevated trading in financials across the board. Trade was the strongest since the mid-July low. As those indices closed near their highs that could be interpreted as a positive but for that FRE, FNM liquidation accounting for 54% of the volume. NASDAQ trade jumped as well to its highest level since the July low and reversal, but NASDAQ barely held a gain and large cap techs were lower. Not positive volume here. Not junk, but not indicative of any kind of turn.
CHARTS. As noted above, DJ30 tapped at the 50 day EMA on the high and backed off, but it held most of its gains. That only puts it back in the middle of its August range, however, and not near the peaks. SP500 likewise managed to hold onto most of its gains helped by that late recovery. It stalled at the 50 day SMA on the close, and similar to DJ30, that only puts it in the bottom half of its range. Gapped higher but could not hold the lion's share of the gain. Stalled at 2300 where there is some resistance. SP600 gapped over the 50 day EMA and held much of its gain as it maintained its pattern. Still positive in small cap land, but the mid-caps rallied and failed at the July up trendline. SOX did all it could just to close flat and not make yet another new 5 year low. Some seriously important laggards, but perhaps financials are ready to try and lead as techs struggle.
LEADERSHIP. Man what another great segue. WFC, AMTD, USB, SCHW, HCBK, BAC (trend reversal) are helping financials out and they are in solid patterns to boot. With their help financials are trying to assume some leadership though limited at this point as bases still need work. Retail was super. Some drugs and medical were great (JNJ). Homebuilders have bottomed and some broke out such as TOL. Commodities remained under pressure along with Ag and large cap tech. Not a lot of change in leadership even with all of the hype. How it shakes out over the next week, however, will tell the real picture.
A HISTORY OF SOCIALISTIC POLICIES diminishes the worry about the feds' actions . . . or enhances it.
This bailout or takeover is nothing new. We have a history of federal intervention when important markets get dicey and confidence wanes. The feds figure it is better to step in, restore confidence, and get to the next problem. This happened in the 1980's with the savings & loan and real estate crises after the domestic oil industry went bust (funny, no one was all that interested in bailing out the domestic oil companies and workers) and exposed the shady (at best) loans made for non-existent strings of drill pipe, etc. With massive incentives to drill and produce anything, there was money for the asking, and just about everyone asked for some. Then it died quickly and nastily. The US formed the Resolution Trust Corporation to take over all of these savings and loans and work out the mess. It ultimately worked, but I can tell you this: the law firms benefitted the most from this. I was a new lawyer at the time and spent more time than I cared to working cases in federal court dealing with Texas lands and loans. Legal firms made billions off of this and I didn't mind the money though the whole process was quite distasteful. Hmm. Much legal work falls into that category so what the heck am I complaining about?
The point: when the going gets tough the feds intervene to try and 'fix' the markets. Of course it works; if you have the will you make it work, make laws that get the outcome you desire, and then tell the courts how to do it. Case(s) solved. On the other hand, we are left with a legacy of new laws handed down from the federal government that burden industry for, well, ever. What happens? Money flows away from those areas of regulation, but we lose rights in the process.
Now some will say so what if the feds got involved with the markets because those markets were messed up due to excesses from the participants and needed to be cleaned out. Thank goodness for the feds, right?
No. Why were the markets messed up in the first place? Because the feds made the mess. It is incumbent then that the feds fix the mess given they wrought the hopelessly entangled markets they feel compelled to save. This housing nonsense was almost the axiomatic result of a stated federal policy to get everyone into a house (remember Bush extolling the virtues of the jobless economy? 'Yes there need to be more jobs, but look at all of this new home ownership; record highs. That's good, that's good' (Sorry, wrong Bush). Then the Greenspan Fed kept interest rates effectively less than zero for almost two years. This was after 9-11 when people were already predisposed to stay home and fix up or buy a second home with their money versus vacation overseas or put the money into stocks (still burned from the tech implosion).
Money and more money poured into real estate and housing, driven by rates artificially lower than free market rates. Mortgage writing became the new growth industry of the decade. Money begets more money. Billions were made. Then things started to change under the Bernanke Fed (started drying up money supply) and they also started to slow down on their own after an artificially long run. When that happens there is a run to keep the profits flowing, and thus all of the 'creative' (a.k.a. crap) financing and mortgages. Nothing down, no doc, floating rates; you wanted a home they would figure a way. Gee, sounds just like the late 1980's (remember 'don't have an oil well? Get one!') once more. It was, just a different chapter.
Thus the feds step in, not to help along markets that just cannot police themselves, but to fix the wreckage caused by the inevitable wheeling and dealing that results in the last gasps of a market gone crazy thanks to bad policies that paid people to take outrageous risks and commit crimes that at the time didn't seem like crimes (remember the options backdating? At the time it was legal and made sense given the tax laws on compensation. I seem to recall something in law school about an ex post facto law . . . Oh yes, the Constitution doesn't apply when the Feds decide it doesn't.). The markets got out of control but only because the policies promulgated and left in place too long fueled the outrageous behavior. Thus IT IS INCUMBENT upon the federal government to get in and fix what it broke. Problem is, it never gets out of the way entirely after it is done. It takes a piece of our rights with it in the form of 'necessary' regulation.
Question: why did Treasury wait until after the close to announce? Many investors had positions on playing the trend in the market. It was nice it bounced and many closed them and banked the gain, but not all. The market was still going to go lower off of this based upon the indicators. Announcing during hours would have allowed investors and traders to move out of positions without the gap effects felt on Monday. The feds just took those plays out of commission, at least for the morning. Was it punishment for the shorts, considered by many bad even though they play a useful role and indeed are in the form of many individual investors that have learned to play market trends, up or down? You know that was something that didn't bother them even if it wasn't a primary consideration. Leaves you feeling violated somewhat, just as you always do whenever you have to deal wit the feds.
CONFIDENCE RESTORED?
Some confidence was restored. After all the bond holders benefitted greatly from the nationalization of most of the mortgage market. Unfortunately the common stock holders are wiped out. Equitable trade? Hmmm.
We chastise other countries for their nationalistic actions with respect to foreign investment, claiming that if the rule of law does not apply then how can they attract investment capital needed to maintain orderly markets and fund growth and prosperity. If you invest in a country and then the government takes over the industry you are typically screwed. Outrage ensues.
It is a toss up decision. The decision was made the mortgage market had to be shored up or real carnage would ensue. Unfortunately, when policies alter markets to such great extents, no fix will protect all participants. Just think what would happen if we went cold turkey on welfare and other social programs that help maintain an underclass here in the US? It would be ugly and that is why little has been done on the issue. The problem with the mortgage market is, if it goes down then we get no foreign investment and the party is over; we all lose. Thus the feds step in and a 'fix' is made.
THE ECONOMY
Stocks bounce back but bonds, after initially selling, find a new slew of buyers.
The stock market volatility Monday was nothing. Really. The amazing moves were in the bond market. Friday bonds when out at 2.29% on the 2 year and 3.70% on the 10 year. All during the market's summer rally bond yields fell as investors continued moving into US treasuries, indicating that there was no confidence in the stock rally and in the economic future. Something was still out there bothering debt investors. Mortgages? Probably. Credit spreads? Without a doubt. Something no one was foreseeing or giving much credit to? Sure seemed that way.
After the Treasury announcement, bonds sold and yields jumped as investors moved out of the safety in treasuries. The 2 year yield hit 2.44%, up 15BP. The 10 year hit 3.80, up 10 BP. As with stocks, however, the moves were not set. Yields started to slip as stocks slipped. By the close the bond yields matched or undercut the Friday close (2.29% matched on the 2 year; 3.66% on the 10 year was below the Friday close by 4BP).
Something definitely continues to worry the bond market even with the federal government taking over the mortgage market and providing a backstop. That is somewhat disturbing.
THE MARKET
MARKET SENTIMENT
VIX: 22.64; -0.42
VXN: 27.42; +0.76
VXO: 24.72; -0.71
Put/Call Ratio (CBOE): 0.9; -0.1
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: 37.8%. Down from 39.3% and 40.7% on the high during the rally off the July lows. Heading back toward 35%, below which is considered bullish for the market as the number of upbeat investors is relatively low. 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: 40.0%. Up from 39.3% and 38.4% the week before. Moving toward 50.0%, the high on this move, but a long way off. As the NYSE indices test the lows you would want it higher. Still above the 35% threshold so still a bullish indication. A steady rise to 50% on this move: 48.9%, 47.3%, 44.7% and 39.3% before that. 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: +13.88 points (+0.62%) to close at 2269.76
Volume: 2.6B (+14.9%). Big volume, the best since the July low and reversal, but not the kind of strong upside volume that shows accumulation.
Up Volume: 1.24B (+159.626M)
Down Volume: 1.334B (+163.41M)
A/D and Hi/Lo: Advancers led 1.54 to 1
Previous Session: Decliners led 1.18 to 1
New Highs: 76 (+48)
New Lows: 142 (-36)
NASDAQ CHART: http://investmenthouse.com/ihmedia/NASDAQ.jpeg
Gapped higher to 2300 where there is some resistance and it failed there. It sold off and turned negative though it recovered in the last hour to post a gain, but it was just 27% of the 48 point gain on the high (2303.89). It did nothing to change the complexion of its pattern, and that has turned into more of a head and shoulders spanning mid-January through present, working on the right shoulder now. The neck is right at 2200. Has a lot of work to do to recover after the breakdown that started with the advent of August.
NASDAQ 100 (-0.30%) gapped higher as well but it also found resistance at a moderate level at 1800. Desperately trying to hold on at 1750 where there is some support. Tough duty given the distribution in the large cap techs.
NASDAQ 100 CHART: http://investmenthouse.com/ihmedia/NASDAQ100.jpeg
SOX CHART: http://investmenthouse.com/ihmedia/SOX.jpeg
SP500/NYSE
Stats: +25.48 points (+2.05%) to close at 1267.69
NYSE Volume: 1.769B (+47.45%). Strong volume on the gain but a lot of this was attributed to the FRE/FNM selling. Definitely some accumulation in limited areas but not across the board.
Up Volume: 1.082B (+367.525M)
Down Volume: 684.241M (+206.185M)
A/D and Hi/Lo: Advancers led 1.81 to 1. So-so.
Previous Session: Advancers led 1.01 to 1
New Highs: 58 (+39)
New Lows: 142 (-159)
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
Gapped higher off the Friday reversal. Even though it was spurred by the takeover news this very similar to the kind of move you would expect in a bear market rally coming off 4.5 days of harsh selling and an intraday reversal. Think about it. It did move through the 50 day SMA (1269) on the high but could not quite hold the move into the close. Has the possibility of the old double bottom here, but it has to prove it with a break over 1300 after this base sets up a bit more. The burden is still on the upside to hold the gains and continue setting up for the breakout move.
SP500 (+2.05%) matched the SP500 in terms of percentage gains. Gapped over the 50 day EMA, tested it on the low and rallied to hold all but 3 points of session gain. Still below some resistance at 391, and of course the June high at 402. It has made it more difficult, and it is like going to have to base out more for a breakout versus jumping from here and breaking out from its 3.5+ month reverse head and shoulders. It could surprise us, but that would really be a surprise.
SP600 Chart: http://investmenthouse.com/ihmedia/SP600.jpeg
SP400 CHART: http://investmenthouse.com/ihmedia/SP400.jpeg
DJ30
Strong move by the blue chips, rallying to the middle of the August range and stalling at the 50 day EMA (11,577) on the high and fading slightly. Trying a little double bottom here, but as with SP500, the burden is on the upside to prove itself. It was diving Thursday on volume and needed a historic government intervention to really bounce to the upside. Lots of work.
Stats: +289.78 points (+2.58%) to close at 11510.74
VOLUME: 272B shares Monday versus 198M shares Friday versus 229M shares Thursday. High volume selling, low volume bounce, higher volume bounce (fed assisted).
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
TUESDAY
Well, there were no federal takeover or nationalization announcements after the Monday close so now we see how much gas is left in the tank from the current nationalization and what any strength is left in leaders trying to break higher. Monday saw some break higher from good patterns; doesn't matter what the impetus is as they were set up to make the move anyway even with all of the angst in the market. They were strong. The overall market is not in the same position they are in.
We were looking at the bounce from the 4.5 days of selling to last 2 to 3 days. It has day one under its belt, federal takeout assisted. The action was disappointing overall given the import of the news; there are lingering issues out there even with the mortgage bailout, and it is not just worry about renaming the USA to United Socialists of America. As noted above, been there, done that every time we have a financial crisis wrought by misguided federal policy. It is rather humorous to hear those complaining of a bailout by the Feds to get us out of trouble caused by federal policy. I tell my kids they have to clean up the messes they make; still seems to be good advice but of course the goal is to learn and not make the messes. That is something the feds, even after 232 years, don't get.
We head into Tuesday rather cautious. We picked up some upside looking to see if we can ride a rebound for 2 to 3 sessions, looking mainly at stocks in good patterns though we did take in some AKS as a rebound play. The problem with the Monday action is that it was news driven and begs the question if it used up all of its upside ammunition in the Monday excitement. That is one reason we closed some upside on the bounce yet left some downside in place as the upside Monday was not a total strength move as evident by the action in NASDAQ, NASDAQ 100, SP400 and SOX.
The market continues to be one where the upside has the burden after the failure of the summer rally and the mixed response to the federal bailout. Given the big moves we are not going to be looking at many bounce plays unless something gels to the upside and provides a reason for more upside momentum. We will look at some new downside and see what develops there as well.
Support and Resistance
NASDAQ: Closed at 2269.76
Resistance:
2286 is the first April 2008 gap up point.
2340 from the March 2007 low
The 10 day EMA is 2322
2353 is the trendline from the summer 2004/July 2006 lows, Q4 2005 consolidation
The 50 day EMA at 2355
2370 from the April 2006 peak
2378 is the mid-February peak; 2379 from the October 2006 peak
2386 is the August 2007 intraday low
2388 is the June 2008 low
The 90 day SMA at 2388
2392 is the April 2008 peak
The 200 day SMA at 2404
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:
2261 is a March 2008 interim low
2202 is the January 2008 low
2167 is the July 2008 low
2155 is the March 2008 low
S&P 500: Closed at 1267.79
Resistance:
The 10 day EMA at 1267
1270 is the January low
1285 is the recent July peak
The 50 day EMA at 1284
1313.15 is the August 2008 peak
1317 from the February low
The 90 day SMA at 1317
1320 is a 50% retracement of the May to July selloff
1324 is the April low
1331 is the June low
1354 is an ancient trendline
The 200 day SMA at 1354
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:
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
1215 is the July 2008 closing low
1200 is the July 2008 intraday 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 11,510.74
Resistance:
The 50 day EMA at 11,577
11,615 is the up trendline off the July low
11,670 is the 2004/2005 up trendline
11,670 is the May 2006 intraday high; 11,642 closing
11,700 is the January intraday low
11,731 is the March 2008 low
11,867 is the August 2008 peak
The 90 day SMA at 11,894
11,982 is a 50% retracement of the May to July selloff
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 12,320
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
10,962 is the July closing low
10,912 peak from March 2005
10,854 from December 2004
10,827 is the July 2008 intraday low
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.
September 8 - Monday
Consumer Credit, July (3:00): $4.6B actual versus $8.5B expected, $11.0B prior (revised from $14.3B)
September 9 - Tuesday
Pending home sales, July (10:00): -1.4% expected, 5.3% prior
Wholesale inventories, July (10:00): 0.7% expected, 1.1% prior
September 10 - Wednesday
Crude oil inventories (10:35): -1.89M prior
September 11 - Thursday
Export prices, August (8:30): 0.8% prior
Import prices, August (8:30): 0.9% prior
Initial jobless claims (8:30): 444K prior
Trade balance, July (8:30): -$58.0B expected, -$56.8B prior
Treasury Budget, August (2:00): -$105.0B expected
September 12 - Friday
PPI, August (8:30): -0.5% expected, 1.2% prior
Core PPI (8:30): 0.2% expected, 0.7% prior
Retail sales, August (8:30): 0.3% expected, -0.1% prior
Retail sales ex-Autos, August (8:30): -0.2% expected, 0.4% prior
Business inventories, July (10:00): 0.5% expected, 0.7% prior
Michigan sentiment, September preliminary (10:00): 64.0 expected, 63.0 prior
End part 1 of 3
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