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us stock market, successful investing
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9/17/08 Investment House Daily
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Investment House Daily Subscribers:
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The storm came, went, left things in shambles. Power, cell phone and internet service has yet to be restored to our area and we remain in exile without all of our equipment. Thus we are still slower in getting the report out so please bear with us. Thank you for your patience.
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MARKET ALERTS:
Targets hit alerts: None issued
Buy alerts: HCBK
Trailing stops: None issued
Stop alerts issued: BRKR; CELG
The market alert service is a premium level service where we issue intraday alerts relating to the general market conditions, when stocks hit action points (buy, stop, target, etc.), and when we see other information impacting the market or our stocks. To subscribe to the Daily alert service you can sign up at the following link:
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SUMMARY:
- More 'calamities' confront the market, sending indices to 2008 lows as SP500 retraces 50% of its 2002-2007 gains.
- Gold rockets higher as China says it has to move out of some dollars and into gold.
- Housing starts still suggest housing is at a bottom.
- SEC to actually enforce short selling rules as of Thursday.
- AIG bailout fails to assuage investors, and with the sharp undercut of the 2008 lows, there is more downside to come before a bottom is put in.
AIG bailout fails to sooth the savage beast.
AIG got the bailout though as noted last night it is a flawed, leftist method of solving a market problem cause, regardless of the congressional howls to the contrary, by too much regulation. As discussed last night, but for policies holding interest rates artificially well below what market rates would have been and also promoting home ownership to those that had no means of making payments, the crap loans now poisoning the financial well would not have been made. As it is, these loans were FRE/FNM loans and thus had the backing of the US government. With that guarantee, money moved into very questionable areas. Blame the lenders? There is some culpability there. Blame the buyers? There is some there as well. Blame Washington's myriad of misguided incentives, regulations and policies creating the environment that promoted lenders and buyers to step too far out? Never, at least according to Mr. Frank, Mr. Reid, Ms. Pelosi, and company.
As usual, I digress. A bit of reaction to the tripe spewed on the airwaves today. Yes AIG got its bailout and that held the tide back with respect to its business relationships involving hundreds of millions of people from around the world, but there are other financials with problems out there and other economic issues that keep cropping up as well.
Russia at least is still a bit more left than the US. It simply shut its market down because losses were too great. With a history of throwing capitalists in jail and confiscating their businesses, invading countries in an attempt to regain your goose-stepping past glories, and trying to restart the cold war, what do you expect Mr. Putin? Foreign investors are going to pull their money as fast as possible. Don't be surprised if the former KGB officer seizes all foreign investments. It would sign the death warrant for the Russian economy, but no one wants that: another poor, desperate country with nukes.
In addition, a major money market fund, the Primary Fund, broke the $1 mark with respect to its unit share value. Nothing like that to make investors across the US start shifting about on nervous feet. LIBOR lending rates continue their obtuse behavior, refusing to decline appreciably even with massive liquidity injections by the world's central banks. Before the LEH bankruptcy LIBOR rate was 2.14%, just over the 2.0% Fed Funds rate. Tuesday the LIBOR rate was 6.44%, and even with huge liquidity injections central banks could only get it down to 5.03% Wednesday morning.
This finally pressured the dollar. It is on a rather ordinary pullback the past week after a strong leg higher. Wednesday it acted as if it wanted to break its near term trend (that is, frankly, straight up). The reason: the officially sanctioned Chinese newspaper reported that China was going to limit dollar investments in favor of gold. The dollar sold while gold exploded higher (870.10, +89.60). As a consequence, oil raced higher (96.47, +5.32) as the dollar fell. Oil's rise was not due to the inventory reports that saw stockpiles fall 6.3M; oil went down after that report. It was the sharply weakening dollar that spiked crude.
With all of that baggage to drag around stocks gaped lower absolutely unable to make anything out of the AIG bailout. They tried to bounce and hold the Tuesday lows and were successful for a time. But the catalyst was dead and they slid back down through lunch. An intraday double bottom set up and stocks broke higher in the afternoon on into the last hour. At that point, however, sellers moved back in, and the rout was on as the indices dove to session lows and beyond into the close. That was the closest we have seen to panic selling thus far. Even with that, however, VIX only made it to 36.22 as it closed at the high. Fear was up but it was more like nervousness versus ulcer-inducing fright. Given this is turning into a scare and wear them out selloff, you want to see VIX spiking well over 40 and indeed closer to 50. It is getting there but at the rate it is moving there is quite a bit of work to do, and then when that level is hit there can still be a month or so of price work to do before the bottom is hit. Lovely.
TECHNICAL. Whereas Tuesday showed the right stuff in terms of the intraday reversal, Wednesday showed the opposite with a dive lower into new lows for the year as the closing bell rang.
INTERNALS. Volume faded but it was still very high, well above average, and indeed just a gnat's butt lower than Tuesday. Breadth was staggeringly weak at -13.5:1 on NYSE. NASDAQ was a relative piker at -5.3:1. New lows were again impressive at 1017 though that was down from Tuesday. They really ramped up past the lows hit in July, a negative, but now they are so high they are getting to the point of extreme, and extremes mean change. Trouble is, when? Breadth is extreme as well. Now if VIX would just . . .
CHARTS. New 2008 lows for SP500, DJ30, NASDAQ. SP600 is nowhere near new lows but it is breaking its pattern and is teetering on a sudden drop to the July low. That is pumping life in our TWM play. This was a serious undercut of the prior lows and it is now not just a matter of undercutting and reversing intraday. That window has closed. Now it is a matter of getting through with this leg lower, letting it rebound to test, and then once more looking for a test lower to see if it hold and tries to bounce again or not. Notably, SP500 has given back just over half of its rally off of the October 2002 bear market low. It bottomed at 770ish, rallied to 1550ish, and has declined to 11609sh, the 50% retracement level. If it is going to avoid considerably more weakness it needs to find footing in the range it is in right now. As a point of reference, the 2000-2002 bear market did not hold at 50% of the rally from 450 to 1550, but bottomed at 768, a 71% decline. Thus the 50% rule is a rule of thumb; if it holds the underlying strength is there to propel the market nicely higher. If not, it goes substantially lower. I know, I know, that is something akin to saying if a football team ahead by 4 points makes a goal line stand in the last seconds of a game it has a better chance of winning the game. Still, it has to make the goal line stand, right?
LEADERSHIP. It was another tougher day for leaders but at the same time many showed a lot of leadership characteristics in that they still held support or ignored the selling. WFC held above the 10 day EMA. MCD, CHTT, FAST all faded but held their patterns. Problem is, this is now a game of attrition: can the bulk of the solid stocks hold the line or will they be dragged down? Usually it is the latter and the leadership ranks are thinning. Thus, given there has been some really ugly selling, if there is a bounce that does not result in new, strong breakouts from these stocks, then you close them on that bounce, keep them on the list, and then move in after the selling is over or they set up beautifully once more.
SUMMARY. The dive through the Tuesday lows in response to the Tuesday reversal indicates there is significantly more work to be done before the market bottoms. The lagging VIX was an indication that the market was just not quite ready to bottom even though many indicators had hit extreme levels. It looks a bit too early to short the market after this mauling this week though the Tuesday reversal did let off some steam. We can look at some aggressive downside plays from here after banking some excellent downside profits this week. There is still downside to come and the next question is where the market attempts its next stand to try and bottom. The end of the first big leg off the March 2003 low at SP500 1065 looks like a very key level if SP500 cannot hold the current 50% retracement that coincides with a series of peaks from early 2004.
THE ECONOMY
Housing starts continue their decline to historically significant levels while helping reduce inventory.
August starts fell 6.2% to 895K units, much lower than the 950K expected. Below 1 million on an annualized basis historically marks the bottom in the housing market. Starts have hovered just below 1M for several months now, a historical positive.
At the same time mortgage applications are surging, though mostly through refinancing (88% in fact). Nonetheless this helps reduce the outstanding inventory and the combination along with falling prices helps get a market at the bottom moving toward a market in recovery. No sign of recovery just yet of course, but the structure of a rebound is getting placed.
THE MARKET
MARKET SENTIMENT
VIX: 36.22; +5.92. Closed at the session high and the high on this latest leg.
VXN: 35.88; +4.88
VXO: 39; +5.97
Put/Call Ratio (CBOE): 1.37; +0.06. Seven straight above 1.0 on the close. Lots of downside protection and now speculation with put options. It is doing its part in getting extreme.
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: -109.85 points (-4.94%) to close at 2098.85
Volume: 3.139B (-3.38%)
Up Volume: 456.957M (-1.691B)
Down Volume: 2.671B (+1.589B)
A/D and Hi/Lo: Decliners led 5.37 to 1
Previous Session: Advancers led 1.25 to 1
New Highs: 29 (-18)
New Lows: 425 (-39)
NASDAQ CHART: http://investmenthouse.com/ihmedia/NASDAQ.jpeg
Broke the neckline to its 8 month head and shoulders pattern. The height of the pattern was roughly 350 points and that would put the rule of thumb bottom of the selling as a result of the pattern at 1850. Expecting a test from NASDAQ, however, of the neckline near 2150 to 2200, however, before it gets too much further to the downside.
NASDAQ 100 CHART: http://investmenthouse.com/ihmedia/NASDAQ100.jpeg
SOX CHART: http://investmenthouse.com/ihmedia/SOX.jpeg
SP500/NYSE
Stats: -57.21 points (-4.71%) to close at -57.21
NYSE Volume: 2.147B (-0.75%). Still very big volume and this time on the downside right after an upside high volume day. Answered the upside with hard selling.
Up Volume: 125.265M (-1.262B)
Down Volume: 2.027B (+1.258B)
A/D and Hi/Lo: Decliners led 13.46 to 1. Impressively weak.
Previous Session: Decliners led 1.28 to 1
New Highs: 12 (-12)
New Lows: 1017 (-148). Two sessions of 1000+ new lows.
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
SP500 has now significantly undercut the July low and will need more basing and another test, and that means more time to get the foundation set for another bull run. As noted earlier, 1065 looks like a very logical point for SP500 to try and put in its bottoms if it cannot do so here at the 50% retracement.
SP600 (-4.12%) broke back below 370 and that opens the door for a deeper test to 350 to 340. They can recover before that but after this kind of break lower the pattern is broken as the small caps undergo some distribution and indicate that the economic gains seen the past few months are likely illusory as opposed to real changes. Of course, the financial issues have colored all action, and once resolved the economic data suggests the economy is ready to pop higher. Problem is, if things continue to get gloomier, the consumer and small businesses may get too conservative.
SP600 Chart: http://investmenthouse.com/ihmedia/SP600.jpeg
SP400 CHART: http://investmenthouse.com/ihmedia/SP400.jpeg
DJ30
Broke below the early 2004/mid-2005 peaks and mid-2006 lows and now looking at a move own to 10,100 to 10,000. Not a whole lot of good to say about this, especially since I closed my last DXD position on Tuesday. Now we look for another opportunity to make that play again. After such a harsh decline you hate to move in the downside without some kind of bounce.
Stats: -449.36 points (-4.06%) to close at 10609.66
VOLUME: 463M shares Wednesday versus 494M shares Tuesday. Heavy volume all the way around
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
THURSDAY
After hours there was once more talk of more deals as MS is said to be in talks with several banks including Wachovia. As on Tuesday evening, that managed to jump futures after hours. Longevity is the key; thus far every bounce has been used to sell with abandon.
Of course on Thursday the 'new' rules regarding short selling go into effect, earlier than the end of month timetable the SEC originally set. These rules basically enforce the rules in existence before the SEC started allowing naked shorting, i.e. shorting without having borrowed the stock. Now shorts must present the shares at the end of the contract. It only makes sense: I would love to buy stock and never really have to buy it, just say I wanted to do so and just have enough collateral in my account to cover if needed, and then 'sell' the stock when it appreciated.
This will help blunt the unending waves of bear attacks that helped send LEH into bankruptcy and threaten BSC before it with the same but for the take under. There is still the absurd mark to market rules requiring firms to price long term investments on a quarterly basis, thus driving many into liquidity crises due to regulation as opposed to investing techniques. Why does the SEC require brokers to ask clients their experience, risk tolerance, and goals? So the investments can match their needs. How can we require firms making long term investments to price them as short term investments? It is the most glaring example during this crisis as to why well intentioned regulations, just as those being blathered about by the politicians today, are overwhelmingly mistakes as the unintended consequences cause even greater imbalances and distortions in the financial markets.
Thus even with that change the markets are nowhere near out of the woods. Everyone knew this change was coming yet Tuesday the market was still hammered. Maybe the bears were getting in their last shots. Maybe. More than likely with the sharp breaches of the prior lows there is more downside ahead as the indices must again work through the latest wave of fear and then work on bases. Remember, even if VIX, the one holdout in the indicators, hits 45 tomorrow or Friday, it typically takes several weeks for the bottom to complete. Thus gloom will remain high and the indices will be volatile.
We are interested in more shorts, but again, we closed most of our open positions Tuesday with that test and start of the reversal. Looked very prescient Tuesday morning, but I sure wish I had some open Wednesday afternoon. We can chase here, but that is a dangerous game after 4% losses Wednesday. We are looking to see if there is anything in position out there.
As for the upside we still have positions that are holding support, and as long as they do so that is fine. Still, on a rebound from the selling we will look to close some if we see lackluster rebounds. As noted above, given the July lows gave way there is more likelihood that the selling starts tearing down these stocks that were in the lead during the moves over the July lows. Now that they broke the game rules have changed and these leaders are suspect.
Basically that leaves investors in a temporary no man's land with respect to new positions given the sharp break lower through support and the need to see what kind of response the SEC short selling rule change and additional mergers/buyouts engender. Unless there is a sea change in events, however, we have to anticipate more downside and another attempt at a bottom at a new support point (1065 for SP500 as noted above).
Support and Resistance
NASDAQ: Closed at 2098.85
Resistance:
2155 is the March 2008 low
2167 is the July 2008 low
2202 is the January 2008 low
The 10 day EMA is 2224
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 2319
2340 from the March 2007 low
The 90 day SMA at 2368
2370 is the trendline from the summer 2004/July 2006 lows, Q4 2005 consolidation
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 200 day SMA at 2390
2392 is the April 2008 peak
2419 is the January 2008 peak and the early February peak
Support:
2043-47 from the July 2006 low and October 2005 low
2020 from January and April 2005
1912 from April 2005
S&P 500: Closed at 1156.39
Resistance:
1167 is the January 2005 low
1176 from the Q4 2005 lows
1200 is the July 2008 intraday low
1215 is the July 2008 closing low
The 10 day EMA at 1222
1237 is the 2002/2003 up trendline
1244 is an August 2005 peak
1257 is the March low
The 50 day EMA at 1267
1270 is the January low
1285 is the recent July peak
The 90 day SMA at 1302
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 1346
1360 is an ancient trendline
Support:
1154 from the May 2005 lows
1142 is the 2005 closing low
1065 is the Q4 2003 level that SP500 started the run to 2007 after the first run in the recovery.
Dow: Closed at 10,609.66
Resistance:
10,827 is the July 2008 intraday low
10,962 is the July closing low
11,061 from February 2006
11,317 from March 2006
11,388 is the prior August low
The 50 day EMA at 11,464
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 11,755
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 12,253
Support:
10,215 from Q4 2005
10,100 t0 10,000
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): 854K actual versus 925K expected, 937K prior
Housing starts, August (8:30): 895K actual versus 950K expected, 954K prior
Crude oil (10:30)
September 18 - Thursday
Initial jobless claims (8:30): 440K expected versus 445K prior
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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