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money investment, investment help
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9/09/08 Investment House Alerts
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IH Alert Subscribers:
MARKET ALERTS:
Targets hit alerts: None issued
Buy alerts: BRCD; CHTT; DXD; SDS; SGEN; ZOLL
Trailing stops: MANT
Stop alerts: AKS; ENER; WRC
SUMMARY:
- Hedge fund liquidation continues after LEH sets the stage to give back the Monday gains.
- Pending home sales post a disappointing fade in July, but as mortgage rates plunge on the heels of the mortgage nationalization, that will change.
- Rallying dollar giving consumers, businesses immediate disposable income, curtails inflation.
- Bonds continue to rally and yields continue to fall as consumer/retail sectors rally. Another dichotomy to be resolved.
- FDX, TXN provide a bit of fresh air after the close.
- The test of the prior lows is on for real and volatility starts to make its run.
LEH, housing provide the match, ignites a new selloff after just a day of upside.
The 2 to 3 day upside run we looked for was thwarted. Monday we considered that the market may have used up all of its bounce ammunition in one orgy given the historic news driving stocks Monday. Tuesday started okay, however. Futures were flat ahead of the open. MCD topped its sales expectations, DELL reported that Michael Dell bought $100M shares of stock. Nice little bonuses. Financials, however, were the key once more, however, as LEH lost its buyer from Korea. Maybe it was something LEH said, maybe it was the news leaking out about the North Korean dictator suffering a stroke, or some combination. In any event that sent the wrong message through the financials, and it was rumored that LEH was moving up its earnings meeting; sure enough late in the afternoon it announced it would release earnings early Wednesday. This all sounds very Bear Stearns-ish.
The news gutted LEH and put the financials back under the sell button. Not at first, however. They were still undecided and indeed the indices bounced upside from the flat open. Bounced at least until the July pending home sales came in down 3.2%, worse than expectations of -1.4%. That dried up the bids and emboldened the sellers as the one-two news punch gave the excuse to put the wallet on the hip and for the sellers to push back up to the front.
The news triggered more selling that was going to happen anyway. With the Monday explosion higher the anticipated mini-rally burned itself out similar to a shooting star and when it was tested early Tuesday it reached down and found nothing there. The hedge funds needing to get rid of positions due to Fed calls and the lack of any new funds coming in to improve their liquidity position used the bounce higher to start the liquidation once more. That crushed SP500, NASDAQ and SOX, driving them to new closing lows on this leg lower. DJ30 and SP600 finished a bit better but they are teetering on the edge. Right now no index looks really safe and we bought some more SDS and DXD for the downside.
TECHNICAL. Intraday started well with that flat open and those early gains. Then the pending homes sales was enough to break the bounce's back and send the market lower basically all session. A lunchtime bounce attempt failed and indices closed at session lows. About as bearish as you get, the old feint to the upside and then a major selloff.
INTERNALS. Breadth was, how do you say it, extreme. At -7:1 NYSE and -4:1 NASDAQ, there were not many stocks trading to the upside. There were strong stocks, but it was relative, i.e. they managed to hold steady while most other stocks were beaten about the head and shoulders. Volume was mixed with NASDAQ creeping higher while NYSE faded modestly. Both remained well above average so there was no quarter for stocks. Think about it: volume surged on the historic news from the feds re the mortgage market. Yet, the next day it sold on volume that was almost matched up blow for blow with Monday. That shows the sellers were plenty strong. New lows are still fairly tame on NASDAQ though rising on NYSE to 350ish on NYSE even before those indices hit the prior lows. The key is how the SP600 holds up as it is what is holding the line on the new lows. If it breaks down then new lows surge back up to 500+, matching the prior low output. Why is this important? Because if new lows hold substantially above the new lows hit on a prior selloff to the same level, that shows the stocks in the market are stronger and indicates a good possibility of a bottom getting cemented into place. Thus the SP600 is quite important right now.
CHARTS. Another great segue. Yes the SP600 is important and it was teetering Tuesday, closing just below the 50 day SMA and at a new closing low on this test lower. It is just over some key support at 370, but it needs to hold in this range right here. If it breaks lower that shows the economic improvement is illusory, not really gelled to the point of a bottom. The rest of the indices, outside of DJ30, are already in a full flight toward a new test of the July lows on SP500 and indeed on NASDAQ. The difference is that the July lows for NASDAQ are backstopped by the March lows. For SP500 and even DJ30, the July lows are it for this selloff. A major break of them and the process of trying to find a bottom is at a minimum extended another few months. It could, of course, be worse than that if the selling really ratchets up. How wonderful to bear such good news. Thus we have more downside index positions as we watch what SP600 does here.
LEADERSHIP. What leadership that remains somewhat defensive yet also growth oriented. Consumer and retail remain solid. A PG downgrade failed to undermine the Monday breakout. CHTT is in a similar sector and looks super. Traditional retailers were down on the session, but they were just down in sympathy with the market and nowhere near threatening their patterns or trends. Homebuilders were down as well after their big gains. In short, early economic cycle stocks are undergoing accumulation by mutual funds ahead of an economic recovery anticipated for next year. Thus that is where we are focusing our upside buying action along with the medical, healthcare, and drug companies. On the flip side, the commodities, precious metals, and agriculture were slaughtered as hedge funds continue unwinding the 'Big 3' trade we were into at the end of 2007 and in early 2008. They still have to unwind those positions to meet Fed calls as no new money is coming into the coffers from investors to improve liquidity and buffer the Fed margin calls. Thus the selling continues and will continue until they basically eliminate all of their positions in these areas. Another downside leg will likely do the lion's share of that work and then we will watch to see if they start forming the bottom of new bases after this 3+ month selloff to form the right side of new bases. The commodity rally is not over at all; it just has to work off the excesses with new bases, setting the foundation for a new run higher as the economy improves once more.
THE ECONOMY
Pending home sales pending less.
July saw an expected 1.4% decline in contracts for homes slip to -3.2%. After a June revision upward to 5.8% from 5.3%, that was disappointing. Enough so that the market used it as an excuse to close up the bids and break out the paddles for a good spanking. As mortgage rates plunge, however, this will change given the sharp price declines in housing. Indeed, mortgage rates fell from 6.5% to 6.0% in a flash and are now 5.88%. Major decline in short order. That will start to spur more buys with housing prices down significantly.
Bonds still rallying, dollar still rising, inflation sailing away.
Consumers may not be happy, but they are suddenly doing better. The main reason: the stronger dollar and a burst in the commodities bubble are feeding on one another. Chicken or the egg? Who cares because it helps consumers and businesses? The dollar is surging as foreign markets falter and China still lags after its Olympic shutdown and no real resumption in its building binge now that the Olympics are over. Oil demand is lower and combined with the dollar's strength, the decline in price is giving consumers and businesses a nice tax cut. Moreover, inflation falls, immediately boosting buying power, as the dollar ramps, making all imports cheaper, particularly those valued in US dollars.
All of this gives the consumer more buying power as dollars are worth more and input prices are lower. Immediate buying power and just when needed as it looks as if the US is going to attempt an economic recovery well ahead of the rest of the world. Of course we entered recession first, so emerging first would be expected. In any event, as noted above, consumer oriented stocks, the early cycle economic stocks, are standouts in the market by virtue of their clear relative strength.
With the dollar surging not only commodities but precious metals are selling hard. Thus gold has collapsed below $800 (781.80, -20.70) as an indication that inflation is not going to be an issue. Indeed, as reported weeks back, ECRI's Future Inflation Gauge shows inflation pressures have significantly dissipated and that inflation itself would follow it lower. Lower inflation is so important to a recovery as it gives consumers and businesses buying power.
Bond yields continue to tank: signs of lurking trouble or some rational explanation?
Over the past week we have probed why bonds are rallying even as consumer areas improve and the US economic data improves as well. Seems to be another dichotomy at work here: fear pushing investors to treasuries yet big bets are being made on the consumer and economy recovering. Is this suggesting something evil (and yet unknown) this way comes, or is it just, similar to the 'conundrum' in the final Greenspan years (an inverted yield curve that supposedly did not mean recession), i.e. excess dollars simply taking refuge in US treasuries?
When stocks sell it is natural for money to move to US treasuries in the oft-cited 'flight to safety.' Indeed when most anything dicey happens in the world, investors from all countries buy US treasuries. Back in Greenspan's final term he explained away that the inverted yield curve by excessive investment in US treasuries as US dollars held by other countries were funneled back into treasuries. No doubt that happened but to what extent is open to debate.
Is that what is happening here? That is, as hedge funds liquidate positions in long commodities, short dollar, and US investors of all sizes pull funds from foreign established and emerging markets, are they parking the money in US treasuries sending yields lower? Most likely that is happening right now.
Is this bigger than that, however? Is there something with the credit situation that has to work out, e.g. more BSC's in the picture? Maybe in the form of LEH? That seems to be part of it as well and LEH is certainly trading as if it is following in BSC's footsteps. There is likely another big failure or two along with several regional banks. That will likely be the last pieces in forming a bottom. Interestingly, that won't really hurt the consumer products stocks at all, but will indeed help them.
Thus the dive in bonds is not just a harbinger of something bad to happen. Reports are many that the Fed is working on contingency plans with respect to bank failures and outside of the Fed there are many predictions of who is going to be allowed to fail. Thus far it has been the government's play to take out the big names, so we assume it will be the little guys left to fail. And with all of the hedge fund liquidations, some failures in that realm are likely as well.
None of this, however, is really shocking though with the Fed's lending facilities it was hoped to be avoided. We suspect this is part of what is pushing yields lower, the anticipation of these announcements in addition to the parking of billions and billions of dollars in treasuries while dazed and confused hedge funds are forced to sell and then put money on the sidelines (what is not withdrawn and put directly into treasuries by individual investors) as they wait to find another trade to pile into.
THE MARKET
MARKET SENTIMENT
VIX: 25.47; +2.83. Volatility surged off the late August lows, pulled back to start this week, and then zoomed higher Tuesday, making a higher high over the mid-June peak. This action shows VIX is ready to start a more serious run. That seems intuitive given the indices turned down hard, but VIX has to gain momentum before it really spikes. It will hang around the same level as things worsen, and then bust out and explode higher in huge leaps higher in a short time period. Again it looks as if it is starting the next big surge higher after setting up to do so the past week.
VXN: 28.63; +1.21
VXO: 27.88; +3.16
Put/Call Ratio (CBOE): 1.11; +0.21. Back over 1.0 on the close where it needs to be to try and form a new bottom.
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: -59.95 points (-2.64%) to close at 2209.81
Volume: 2.616B (+0.59%)
Up Volume: 181.482M (-1.059B)
Down Volume: 2.427B (+1.093B)
A/D and Hi/Lo: Decliners led 4.15 to 1
Previous Session: Advancers led 1.54 to 1
New Highs: 57 (-19)
New Lows: 220 (+78)
NASDAQ CHART: http://investmenthouse.com/ihmedia/NASDAQ.jpeg
Tried the upside again, matching the Monday closing gains and them some, but then rolled over and dove to a new low on this session and indeed a new closing low below the July closing mark (2213). In full flight on strong volume and looks to test the July intraday low (2167) and the March low (2155 intraday, 2169 closing). Again, this is a head and shoulders pattern now, and 2200 to the lows cited above makes up the neckline for the pattern and obviously how it trades there holds the next several months for NASDAQ with respect to trade.
NASDAQ 100 (-2.35%) sold to yet another new closing low on this leg lower, undercutting the July low and heading toward 1673 (closing low) and 1668 (intraday) that, similar to NASDAQ, will spell out its near term future.
NASDAQ 100 CHART: http://investmenthouse.com/ihmedia/NASDAQ100.jpeg
SOX CHART: http://investmenthouse.com/ihmedia/SOX.jpeg
SP500/NYSE
Stats: -43.28 points (-3.41%) to close at 1224.51
NYSE Volume: 1.689B (-4.51%)
Up Volume: 141.315M (-940.449M)
Down Volume: 1.49B (+805.982M)
A/D and Hi/Lo: Decliners led 7.12 to 1
Previous Session: Advancers led 1.81 to 1
New Highs: 46 (-12)
New Lows: 357 (+215)
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
What a dive lower, failing at the 50 day SMA and leading the market lower thanks to the financial gutting. It broke the old 2002/2003 up trendline on the close, something it did intraday last Friday and then it bounced. This is its second close below this trendline, the first on the day it hit the July low. Now it needs to turn the tide here and resume the move up with a test of that prior low (1200 intraday). This is where it gets very interesting.
SP600 (-3.15%) was not left out of the selling Tuesday. It broke the 50 day EMA and the 200 day SMA, and closed just below the 50 day SMA (374). SP600 is holding at some support at 370, and this is where it needs to stem the selling to keep the idea of an economic recovery led by economically sensitive stocks that typically lead the move higher. Retail, homebuilders, consumer products, durables are trying to do it.
SP600 Chart: http://investmenthouse.com/ihmedia/SP600.jpeg
SP400 CHART: http://investmenthouse.com/ihmedia/SP400.jpeg
DJ30
Could not move over the 50 day EMA and then reversed, giving back just about all of Tuesday's gain. That puts in a lower high and turns the ascending base into more of an umbrella top and sets up a new test of the July intraday low down at 10,827. That is the acid test, and while we expect DJ30 to make that full test (and give us a nice gain on the DXD position), right now DJ30 looks good to make that test and then hold.
Stats: -280.01 points (-2.43%) to close at 11230.73
VOLUME: 257M shares Tuesday versus 272B shares Monday. Lower but still strong volume as the blue chips reversed the government assisted Monday gain.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
WEDNESDAY
Crude oil is about all that is out Wednesday, but LEH moved its earnings up to Wednesday morning to answer questions about its solvency. As noted above, it sure smacks of the BSC comments and actions before it suddenly had no money. On the other side of the news spectrum, after hours FDX raised its guidance and TXN narrowed its earnings range in a positive direction. Those stocks as well as other stocks in their sectors responded nicely. Of course after that kind of whipping they all took during the session any kind of positive news would prompt a bit of buying/covering. As we have all seen of late, it is the longevity of the effect.
Right now there is mass confusion in the market among the big money players. Mutual funds, insurance companies, and the more traditional big money players are the least confused: they are buying the early cycle economic stocks we have been buying as we watched those footprints in the charts and the volume action. Hedge funds are caught in a maelstrom of forced selling that they cannot escape because the selling feeds on itself requiring more liquidity in the form of new funds or selling. The former isn't happening and thus the latter occurs, and with more selling prices head lower again, requiring more selling. It is a vicious buzz saw of a cycle from which they cannot escape. Indeed anytime these stocks bounce they immediately sell versus letting them run for a few days. Saw that this past few sessions. That only exacerbates their woes.
On top of all of this is the Treasury nationalizing the US mortgage market. The ramifications of this action still have money managers trying to figure out just what the feds are going to do with respect to all of the other institutions out there teetering on failure. Will they stay or will they go? What is 'too big to fail?' Thus while the Treasury's actions may shore up the financials in a couple of weeks, the waves created when the Treasury jumped overtly into the mortgage pool (it was always there before kind of as a lifeguard) will take time to calm. During that time there is a lot of confusion on trading desks as to what course of action to take.
In their confusion we are moving with the two predominant themes in the market: playing the downside with the indices, and playing the medical/healthcare stocks as well as consumer cyclical plays on an early economic twist given the economic data and simply the action in these stocks as big names in big money buy them. There is a lot of volatility all over the market, and we may get some better entry points even on these leaders as the indices move down to the July lows. That is why we are buying in pieces on the upside, taking some here, then seeing if we get another buy point to pick up a bit more. It is not a certainty they will hold up, but with these stocks, in all of the turmoil is the time to start moving into them if they are holding good patterns while the market overall burns.
Support and Resistance
NASDAQ: Closed at 2209.81
Resistance:
2261 is a March 2008 interim low
2286 is the first April 2008 gap up point.
2300 is some resistance.
The 10 day EMA is 2302
2340 from the March 2007 low
2355 is the trendline from the summer 2004/July 2006 lows, Q4 2005 consolidation
The 50 day EMA at 2350
2370 from the April 2006 peak
2378 is the mid-February peak; 2379 from the October 2006 peak
The 90 day SMA at 2385
2386 is the August 2007 intraday low
2388 is the June 2008 low
2392 is the April 2008 peak
The 200 day SMA at 2403
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:
2202 is the January 2008 low
2167 is the July 2008 low
2155 is the March 2008 low
S&P 500: Closed at 1224.51
Resistance:
1231 is the 2002/2003 up trendline
1234 is the late July low
1244 is an August 2005 peak
1257 is the March low
The 10 day EMA at 1260
1270 is the January low
The 50 day EMA at 1282
1285 is the recent July peak
1313.15 is the August 2008 peak
The 90 day SMA at 1315
1317 from the February low
1324 is the April low
1331 is the June low
The 200 day SMA at 1353
1355 is an ancient trendline
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:
1240 to 1221 are September 2005 peaks1234 is the July 2006 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 11,230.73
Resistance:
11,317 from March 2006
11,388 is the prior August low
The 50 day EMA at 11,563
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 11,874
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 12,312
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:
11,131 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): -3.2% actual versus -1.4% expected, 5.8% prior (revised from 5.3%)
Wholesale inventories, July (10:00): 1.4% actual versus 0.7% expected, 0.9% prior (revised from 1.1%)
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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