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world stock market, us stock market
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9/16/08 Investment House Daily
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Investment House Daily Subscribers:
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The storm came, went, left things in shambles. We are trying, as Lt. Col. Henry Blake said in the 'MASH' television show, to 'de-shamblize'. Not all of the researchers and writers got to places where there is power and internet service or they simply could not leave their property. This should change within the next 2 to 3 days. Until then we will you what you need to stay on top of the market events and your investments but we may have to cut some areas shorter and try to get you the report as timely as possible. Thank you for bearing with us.
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MARKET ALERTS:
Targets hit alerts: DXD; EEV; QID; SDS
Buy alerts: CELG; CHTT; PRXL
Trailing stops: None issued
Stop alerts issued: None issued
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SUMMARY:
- Stocks dive again, reverse positive, sell post-Fed, then rally on AIG bailout talk.
- Was this a bottom-making reversal?
- Wild ride for bond market as FOMC bucks Fed Funds Futures prediction.
- Another crisis, another power grab by the federal government.
- Add the insurance business to the mortgage business comrade: AIG gets the FNM/FRE-like takeover to save the market for now, but it is a bad deal for a free market country. Oh, and MS pre-announces earnings and beats, providing financials a boost as well.
A wild session all the way around again.
Futures were lower as stocks continued the Monday afternoon selloff, mainly on fears that AIG would be the next in bankruptcy given the 'no mas' statements from the Fed and Paulson re 'bailouts' of financial entities. Oil was down again (closed at 93.20, -2.51) but that, while helping a lot with respect to consumers and business costs, is not the primary issue of the day when you are talking about financial entities that touch tens of millions of Americans and indeed hundreds of millions around the world. With the worries of more bankruptcies the market was primed for a true test of the 2008 lows.
They made it. NASDAQ undercut its July and March lows. DJ30 blew past its July low. SP500 cut further below 1200. As is often the case, they reversed in the first half hour and rallied with NASDAQ in the lead and turning positive along with SP500. Indeed, SP500 moved back above 1200. They then flat-lined waiting on the Fed.
The Fed bucked the Fed Funds futures contract predicting a 25BP rate cut, holding rates flat at 2%. The market started a sharp selloff as soon as the news hit as the decision was booed on the floor of the NYSE. SP500 shed 25 points, DJ30 170 points, and NASDAQ 25 points in the 10 minutes following the decision. The rebound from undercutting the 2008 lows was teetering on collapse when word came out that an AIG fix of some sort was back on the Fed's table. Stocks checked the rapid selloff, reversed again, and rallied to close positive across the board. Big volume reversal to positive after undercutting the lows. Looked decent.
TECHNICAL. Intraday the action was overall positive with a low to high action. It was not a pure reversal, however, thanks to the FOMC bucking expectations, but the Fed fixed its problem by leaking it was getting a deal ready for AIG. Stocks rallied back from a dip again to negative and closed positive.
INTERNALS. Massive, massive, massive. Only way to describe it. Massive. Not the breadth that was modest at -1.3:1 NYSE and +1.2:1 NASDAQ. Reversal session, and the breadth always lags. Volume was huge at 3.2B on NASDAQ and 2.1B on NYSE. A reversal on volume is what you want to see. Add to that a reversal to positive to hold over key levels and it gets better. New lows were massive at 1165 on NYSE. That is extreme times two. NASDAQ showed 464; NASDAQ is trying to quietly return to market leadership. These are reversal type readings.
CHARTS. As noted, NASDAQ, SP500, DJ30 made new 2008 lows then reversed to close above those levels. Big reach lower, rebound to hold those lows and close positive. That is the look of a double bottom with a reversal on the second bottom.
LEADERSHIP. Lots of gaps lower to support at the 50 day EMA and then rebounds to close positive. Retail showed this action, leaving them in great shape to move higher. Homebuilders, the top financials (WFC, HCBK), transports, personal products; all performed very well. The same leaders held the line and are in position to move higher, and with the news in financial markets the financials may be ready to, at long last, start joining in.
TO BOTTOM OR NOT TO BOTTOM?
There are reasons to look at this as a bottom in the selling. There are reasons not. There is always indecision as to whether certain events culminate in a bottom or just an interim bounce. The Tuesday action on balance looks to have fallen short, but the after hours Fed action may have sealed the deal, but I cannot recall when government action actually fixed the markets.
As noted above, the action looked decent. The indices breached prior lows then reversed to close positive. Big volume accompanied the move. New lows exploded to extremes. Breadth was massively negative Monday. The structure of a reversal is in place even if that makes this a very short bear market given all of the issues (housing, credit, financial collapse).
Indeed, the market acts as if it wants to bottom. There are early cycle stocks breaking out or in excellent position to breakout. Economic data is starting to move higher. The stock market is lagging, however, and that is backwards from what it should be. On the other hand, everything is in place and appears just to be waiting for the financial issues to get resolved. The AIG 'fix' (now called the Washington takeover two-step) may foster that resolution.
Sentiment, however, is a key element that we cannot overlook. VIX hit 33.70 on the high. That is not enough to show the panic selling that flushes the system of the doubters and sets the foundation for the next big run. The fear was not palpable as it was the day the market bottomed in October 2002. CNBC commentators were calmly looking for a bottom to occur Tuesday. There was a lot of coverage of the financial problems and the teetering on the financial collapse precipice, but that did not stir the red-faced, sweaty, stomach rending fear I have seen in other bottoms. Perhaps it is because few understand what is going on; I talk to many ordinary investors and they don't know what all of this is about. To be fair, not many in the business do as well. But you have to understand it or at least fear what you don't understand enough for most of the market to sell out. Again, this does not have that fear level associated with it.
On the other hand, many commentators said this was not the bottom. Maybe it is reverse sentiment. In any event, there are leaders, there was a sharp reversal with all of the indicia of a bottom other than a spike in fear. That means, as it has meant for the past year (summer 2007, January 2008, July 2008), that a tradable bottom is likely in place. It may prove to be THE bottom given the government assist in the financial arena, but if it is, we will be well-positioned as we play this move off the lows.
THE ECONOMY
CPI in line, but inflation is a dead story for all but the Fed.
CPI fell 0.1%, in line and down from 0.8% in July. The core rose 0.2% as expected after a 0.3% in July. No real changes. But CPI is inflation, not inflation pressures that lead to inflation. Those pressures are way, way down. Indeed the pressures are closer to deflation than inflation what with the massive devaluation of financial assets.
Bonds' wild ride as the Fed still fears inflation.
Bonds anticipated a 25BP rate cut but the Fed did not see it that way and held rates steady at 2% citing the increased financial stresses making inflation worries and growth collapse worries equivalent. The market did not like that because the market trades in the real world and the real world shows inflation is not the issue right now.
Bonds are indicative of the issues in the world financial markets. Bond yields are on the decline given the uncertainty in the world and the use of treasuries as safe havens. Many malign our trade deficit, stating no one will want treasuries due to the gap. Yet the world runs to treasuries when there are issues. Thus the yields trending lower and lower. Of course the crisis brought them in; the net foreign purchases for July was a shockingly low $6.1B versus the $55.0B expected.
At the height of the fear Tuesday morning the 2 year treasury yield fell to 1.61% as investors sold stocks and ran to US bonds. It closed at 1.75% Monday. It was 2.16% Friday and 2.20% Thursday. A shocking 60BP swing in no time at all. On the close Tuesday the 2 year yield closed at 1.96%. A 35BP swing session.
This is not an inflation trade. This is a world solvency trade brought on by weakening world economies and US policy that puts insane requirements upon our financial institutions. The treasuries are moving on safety views not inflation views. The Fed is simply behind the times again but the Fed always has to turn the ship slowly lest it be viewed as out of touch with reality and is being reactionary. Irony is, in moving slowing to change its course it looks exactly as if it is out of touch when it issues these proclamations that no one believes.
ANOTHER FEDERAL POLICY MADE-CRISIS
There are many factors at work that add up to the current liquidity crisis for our major financial institutions. Most of them are man-made, specifically government made. One major culprit is the regulations requiring financial companies to quarterly price their assets according to what the market says they are worth that quarter. The idea is to give a more accurate view of what the company's financial status is. Laudable but it does not work.
Many of the investments these companies own are long term investments, not quarter to quarter investments. Just as you would expect, these institutions have long term investments in the US because they have faith in the US. These rules, however, force the companies to cast their long term investments in 3 month short term clothes. Thus if the economy is in trouble, the values fall and the companies are forced to come up with more money to give the appearance of solvency even though there is no solvency issue as these assets are still expected, over the long term, to rebound and produce returns.
Thus we have BSC, LEH and now AIG selling out for cheap, going bankrupt, or getting taken over by the US government. All of these companies were solvent; their investments were not worthless crap. They just had liquidity issues and with the reporting requirements forcing them to write down totally fine assets, they faced assaults by short sellers and other companies that lost faith in their ability to deal with them.
The demise of the up-tick rule and the current crisis.
SEC chairman Cox made a huge mistake and we hope he rectifies it soon. He took some bad advice and eliminated the uptick rule. Now bears can pick a target and sell it unmercifully without waiting for an uptick in the stock to initiate new short positions that means they can continue selling a stock as long as they get shares to borrow.
That may or may not in itself be bad. Combined with the new federal policy of taking out companies that are forced into insolvency by the mark to market rules discussed above the no uptick rule is giving short sellers absolute market power. How? They can swarm a LEH and push it until the federal government says it will or won't bail it out. If it does not and bankruptcy results, they never have to cover. If the government buys it with the FRE/FNM and now AIG 'money for warrants/stock' transaction, they again never have to cover.
Thus they can sell a stock with impunity because there is no fear a backstop plan will leave the company solvent and the stock in place. This is similar to the dollar shorts pounding away at the dollar when the Bush administration would not support it. It was free money. This current situation is even better because all that was required to support the dollar was the Fed and/or the Bush administration to issue one sentence of support. The Fed did that and the dollar bottomed. In this situation the no bailout or bailout at the sacrifice of the common stock gives shorts the ability to sell with impunity.
This is a much worse moral hazard than just giving companies a loan and leaving their stock in place. We can see company after company ransacked due to federal regulations requiring them to devalue perfectly good assets and thus gut their financial condition under false pretenses. That opens them up to unrelenting bear raids. Once more we see the problems of misguided intentions with unexpected consequences.
Or are they unexpected? Every time there is a crisis we now look to the federal government to step in and save the day. Unfortunately, we are willing to give our constitutional rights away in doing so. We now have the federal government, owning in trust or something like that, the US mortgage business and now after the AIG deal (discussed below) much of the insurance business. Aside from the specific hazards discussed above, this is simply against our Constitution and more like the centrally planned governments in Europe. Social security, the Patriot Act, the war on drugs and the confiscation laws, the IRS and the suspension of due process. There is a long list of crisis-based rights confiscation in our history that has taken power from the states and the electorate as set out in the Constitution and given it to the feds.
There is not enough time here to discuss the full impact of policies that foster private action and flow of private funds that makes it look as if it is all private malfeasance as some like to attempt to argue. As food for thought, however, consider this with respect to housing. Would the smart money have continued to put money into what were known to be risky loans if they were not fully backed by the US government that was actively attempting to get more loans made so more people could own homes? Of course not. If there was no Fed holding rates artificially low at 1% and the US backing 'no doc' loans there is no way the money would have continued moving into those areas. This applies to other areas as well and has caused the problem and the excesses even with all of this regulation designed to legislate honesty. Thus it is incumbent upon the feds to fix the problem, but we should not stand by and let the feds 'fix' it by taking it over.
THE MARKET
MARKET SENTIMENT
VIX: 30.3; -1.4. Hit 33.70 on the high. Not the 40+ that bottoms are typically made of.
VXN: 31; -1.13
VXO: 33.03; -0.58
Put/Call Ratio (CBOE): 1.31; -0.16. Six consecutive sessions closing over 1.0. Plenty of downside fear to support a rebound.
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: 38.2%. Up from 37.8% last week but still from 39.3% and 40.7% on the high during the rally off the July lows. Turned back up before it got down to 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: 41.6%. Up from 40.0% as the bulls and bears diverge with bulls more bullish and bears more bearish. This is a positive. If the bulls turn over and crap out below 35% again that would be a strong signal. Interestingly they are still 'crossed over,' i.e. more bears than bulls. 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: +27.99 points (+1.28%) to close at 2207.9
Volume: 3.249B (+19.12%). Big reversal volume.
Up Volume: 2.148B (+1.999B)
Down Volume: 1.082B (-1.489B)
A/D and Hi/Lo: Advancers led 1.25 to 1
Previous Session: Decliners led 6.61 to 1
New Highs: 47 (+14)
New Lows: 464 (+118)
NASDAQ broke to new 2008 lows and reversed for a gain on very strong trade. Not really a double bottom as with the other indices but a hold at the prior lows and a reversal. Still in something of a head and shoulders pattern and trying to hold on at the neckline and deliver a bounce upside. Techs were a relative strength leader all session.
NASDAQ CHART: http://investmenthouse.com/ihmedia/NASDAQ.jpeg
NASDAQ 100 CHART: http://investmenthouse.com/ihmedia/NASDAQ100.jpeg
SOX CHART: http://investmenthouse.com/ihmedia/SOX.jpeg
SP500/NYSE
Stats: +20.9 points (+1.75%) to close at 1213.6
NYSE Volume: 2.163B (+15.26%). Biggest volume since March, worthy of a rebound.
Up Volume: 1.387B (+1.218B)
Down Volume: 769.293M (-936.948M)
A/D and Hi/Lo: Decliners led 1.28 to 1
Previous Session: Decliners led 16.11 to 1
New Highs: 24 (+2)
New Lows: 1165 (+442). Massively extreme.
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
Did what we said it needed to do, i.e. test lower and then reverse to positive and taking out the July low on the upside as it recovered. Big volume, huge new lows, massively negative breadth before the reversal. It is set up for at least an interim rally.
SP600 blew lower again then reversed to close just over the 200 day SMA though still a hair below the 50 day EMA. 380 is next.
SP600 Chart: http://investmenthouse.com/ihmedia/SP600.jpeg
SP400 CHART: http://investmenthouse.com/ihmedia/SP400.jpeg
DJ30
Reached below the July low and then reversed for a gain back up through those lows. Huge volume as it reversed and sets up a double bottom attempt. Did what it had to do and now we see if the federal action resolved the financial issues.
Stats: +141.51 points (+1.3%) to close at 11059.02
VOLUME: 494M shares Tuesday versus 432M shares Monday.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
WEDNESDAY
A good reversal but an iffy Wednesday was ahead until a deal re AIG was announced after hours that sent futures soaring similar to the aftermath of the FNM/FRE takeover. The Fed, with the Treasury's stamp all over it, offered AIG $85B in a 'bridge loan,' but in return took warrants worth 80% of the common stock. In other words, the US now took over one of the largest insurers. The US government has now nationalized the mortgage market and much of the insurance market. Hello comrade. Where is Hugo Chavez to toast with?
Yes being a bit facetious as we are not Marxist, but we are heading that way. I know the reason for the warrants: the government doesn't want to give the impression these are giveaways to fat cats but that a quid pro quo is taking place as we get something for our money. Hopefully this deal will be such that once the company gets past this liquidity crisis it pays the loan back and the warrants are cancelled. We will see. This is a slippery slope. Necessary to bail them out given the federal government policies fostered the misallocation of funds and then placed unrealistic solvency requirements upon companies with the 'mark to market' fiction that forced the liquidity issues that would have NEVER arisen. Once again we have manufactured a problem and it is incumbent upon the policy makers that created the problem to fix it.
In any event, futures jumped on the news because AIG was going down Wednesday without it. That makes this a 'whew' response. Will it be a 'bottom' response as well? MS pushed up its earnings to after hours and it beat on revenues and the bottom line. It jumped $3 after hours. That won't hurt things.
As noted above, the pattern is there for a double bottom as well as new lows, breadth, volume, some leadership. The fear is not there, however, at least not the usual indicia of fear, and we are loathe to say 'it is different this time.' Thus we play this as some kind of potential bottom by looking at solid leaders and moving in if they make strong moves higher.
Support and Resistance
NASDAQ: Closed at 2207.90
Resistance:
The 10 day EMA is 2251
2261 is a March 2008 interim low
2286 is the first April 2008 gap up point.
2300 is some resistance.
The 50 day EMA at 2327
2340 from the March 2007 low
2370 is the trendline from the summer 2004/July 2006 lows, Q4 2005 consolidation
2370 from the April 2006 peak
The 90 day SMA at 2372
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
2392 is the April 2008 peak
The 200 day SMA at 2393
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
Support:
2202 is the January 2008 low
2167 is the July 2008 low
2155 is the March 2008 low
S&P 500: Closed at 1213.60
Resistance:
1215 is the July 2008 closing low
1235 is the 2002/2003 up trendline
1235 is the late July low
The 10 day EMA at 1237
1244 is an August 2005 peak
1257 is the March low
1270 is the January low
The 50 day EMA at 1272
1285 is the recent July peak
The 90 day SMA at 1305
1313.15 is the August 2008 peak
1317 from the February low
1324 is the April low
1331 is the June low
The 200 day SMA at 1347
1360 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:
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 11,059.02
Resistance:
11,061 from February 2006
11,131 is the late July 2008 low
11,317 from March 2006
11,388 is the prior August low
The 50 day EMA at 11,499
11,670 is the May 2006 intraday high; 11,642 closing
11,690 is the 2004/2005 up trendline
11,700 is the January intraday low
11,731 is the March 2008 low
The 90 day SMA at 11,778
11,867 is the August 2008 peak
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 12,266
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:
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 15 - Monday
NY Empire State PMI, September (8:30): -7.4 actual versus 1.4 expected, 2.8 prior
Industrial production, August (9:15): -1.1% actual versus -0.3% expected, 0.1% prior (revised from 0.3%).
Capacity utilization, August (9:15): 78.7% actual versus 79.6% expected, 79.7% prior
September 16 - Tuesday
CPI, August (8:30): -0.1% actual versus -0.1% expected, 0.8% prior
Core CPI (8:30): 02% actual versus 0.2% expected, 0.3% prior
Net foreign purchases, July (9:00): $6.1B actual versus $55.0B expected, $53.4B prior
FOMC decision on monetary policy (2:00): Rates left unchanged at 2.00%.
September 17 - Wednesday
Building permits, August (8:30): 925K expected, 937K prior
Housing starts, August (8:30): 950K expected, 965K prior
Crude oil (10:30)
September 18 - Thursday
Initial jobless claims (8:30): 440K expected
Leading economic indicators, August (10:00): -0.2% expected, -0.7% prior.
Philly Fed, September (10:00): -10.0 expected, -12.7 prior
End part 1 of 3
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