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world stock market, us stock market
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9/18/08 Investment House Daily
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Investment House Daily Subscribers:
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Power, cell phone and internet service still out in our area and thus 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: DGX; GDI; PEP; SF
Trailing stops: None issued
Stop alerts issued: A rather violent shakeout today. AMTD; ARO; JNY; PETS; RL
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:
- Fed injects massive liquidity, short sales truncated, but market still gives up gains until rumor of an RTC-like bailout rockets stocks higher.
- Sentiment looks to have hit the necessary levels.
- The real answer to the 'How Did We Get Here?' headline.
- Philly Fed is latest indication that once the financial travails are over this economy can run.
- The tracks look to be getting laid with a massive bailout, but the deal is not done yet. Still have to work through the bottom, and things can still get quite hairy along the way.
Add an RTC bailout to the take unders, bankruptcies, and other bailouts?
The Fed was very active overnight. It injected $267B in NEW liquidity into the world last night in addition to what it usually puts in (a total of about $400B on the day). Japan got $60B to distribute to its banks. UK got $40B. The list goes one. The central banks get it then distribute it via auctions to their banks in need that are holding dollar denominated assets in mortgages and the like and cannot do business because they cannot use these assets as collateral because no one knows their value. The dollars allow them to swap these assets for hard currency to do business. Necessary? Let the numbers speak for themselves. The US Fed Fund rate is 2% (remember, just left it at that level on Tuesday). In the UK the demand for funds was so great banks were willing to pay 8% versus the 2% the Fed charges to access the money. In Australia rates bid up to 10%. Big, big demand for the dollars because these banks are fighting to simply conduct some business to stay alive.
Stocks liked it. They started higher. They faded some but a strong Philly Fed perked them up again. Still, despite Thursday seeing the debut of enforcing the no naked short selling rule, stocks still could not hold gains and turned negative through lunch. So, despite the bailouts, bankruptcies, and liquidity, the equities were still unloved.
Stocks bounced, however, after lunch for about 45 minutes. Didn't last but it was interesting to see them bounce for no real reason. At 3ET, however, it became clear why when it was reported that Treasury was considering heading the Capitol Hill with a plan for a 1990's style Resolution Trust Corporation-like (RTC) fix for mortgages and related assets. Someone got early word and bought. When the news hit the wires the market exploded higher as indices logged 4% to 6% gains.
After trying to play it one at a time with no real rules or reason behind who was anointed to survive and who was to be burned at the stake, investors found something sensible. While many including us don't like government intervention, we have argued that it is because of government intervention we are in this situation and thus it is incumbent upon government to fix what it broke. We just want the feds to learn their lesson and once the fix is made then butt out and not get involved again. Oh, by the way, call me when hell freezes over. For Thursday it was enough to have what looks to be a floor put in on the mortgage market. There is a big meeting in Washington that started at 7ET and we will see what comes of it.
TECHNICAL. Didn't look good with early gains giving way to selling and a negative tape. Despite all of the attempts to fix the problems the selling continued. Then 'the news' and a massive reversal to impressive gains. It took a major assist from the government, but the intraday action was strong.
INTERNALS. After some simply terrible, extremely terrible breadth, there was a decent showing to the upside after the news hit (3:1 upside). Volume exploded to the upside. New lows logged another 1000+ day on NYSE but that will end, at least for now. Once again the internals were extreme enough to show a bottom forming. With the aid of the feds it may just do it though there will still be the process of making a good bottom to rally off of UNLESS there is that rare 'V' or 'knifepoint' turn.
CHARTS. After a modest upside bounce stocks headed back to new lows for 2008. Then the afternoon news and corresponding surge higher to close positive. Quite the round trip for the indices, sending SP500 back over the former 2008 low at 1200. Ditto DJ30. Ditto NASDAQ. It was a reversal session as they reached new lows and closed positive on strong gains. Now there needs to be a follow through in a few days and after that a test of that low that does not take it out. Then the market will be in position to make a sustained move. That is the situation in 98% of the cases. It is possible that the market could turn right here given the outside impetus from the feds and some form of RTC that simply removes the risk from company books; that is certainly an unusual circumstance that could lead to unusual action in the market as well.
LEADERSHIP. After struggling the past few sessions and indeed struggling Thursday even as stocks were up early, retail, homebuilders, personal goods, leading financials, medical, and even transports reversed off lows and closed strong. If the fix is in they will continue to break higher and then be joined by other stocks and sectors moving in. We are thus looking for a few good (and really more than that) stocks to move into as the bottoming process continues.
THE ECONOMY
Headlines all asking 'How did we get here?' but not answering the question honestly.
Every rag I pick up asks the same question: how did the financial crisis evolve? It is a huge question and of course the summaries in newspapers only gloss over issues. Last night I poked fun at current congressional leaders who point to everyone but themselves as part of the problem, but the feds are indeed a large part of the problem. As the Bush administration and the Fed rush to nationalize and implement more regulation with the sanction of a democratic controlled Congress, the news media blames the mortgage companies for making 'risky mortgage loans' during the housing boom. That is only partly true.
Yes they made risky loans. Everyone knew they were risky. But . . . the US government had taken an even greater role in promoting home ownership than even its implicitly controlled mortgage companies, FRE and FNM, gave it. The President and congressional leaders were on television frequently, extolling the virtues of the highest home ownership in US history and encouraging more ownership given the low interest rates EVEN as the subprime shady financing schemes were sprouting as the prime market slowed. After all, it was the housing boom that helped get the country past the 2000-2001 recession and 9-11, so not many were going to stand up and malign the policies that were in place even if they were starting to promote undue risk taking.
On top of the overt encouragement by the federal government, the Greenspan Fed cut interest rates to 1%, and with inflation as it was, that effectively put interest rates at 0% or less. This rate was held for almost 2 years, artificially holding interest rates below levels they would have risen to. Cheap money, post-9/11 & tech crash home interest, and federal policies promoting home ownership led to an unprecedented housing boom in terms of length and size. Whenever that happens more money than would naturally move to an area enters markets. When the market starts to subside that money looks for ways to keep the gravy train rolling. The subprime and questionable lending programs emerged. A multitude of federal agencies already tasked with overseeing the lending and mortgage markets, overseeing the companies dealing in mortgages and their balance sheets, etc., failed to do their jobs and enforce safe practices. When the boom ended and rates rose and money supply was reduced as the new Fed had to do, the party ended, the music stopped, the tide went out - - choose your clich .
If money rates had not been kept artificially low for so long, if current agencies enforced existing oversight and regulation, this calamity would have been contained to a few companies that tried to keep the part going after the booze ran out. They would have failed, those mortgages would have been reworked and snapped up, and the mild cold would have never turned into a disease.
During this period the feds did pass new regulations, regulations requiring companies to treat long term investments as short term investments, i.e. the 'mark to market' rules that require companies to quarterly price their investments and assets at current market prices. Thus a long term investment that was down in price now could cause a company to miss liquidity requirements because they had to price that investment now and ignore the fact that it and most others still see the investment as a good one longer term. That well intentioned piece of legislation has driven solid companies to the verge of and indeed into bankruptcy or forced take unders and generated panic where none should have been. More 'do good' legislation having wholly horrid unintended consequences and of course at the worst possible time.
Yet, because the federal government again let us down it is telling us it needs to get bigger and control more aspects of private contracts so it can 'protect' us from this in the future. Do we want to give more control to the feds so they get into every contract simply because they failed to do the job originally authorized and tasked? That not only means more infringement but also more taxes as the government needs more employees to provide for its expanded 'oversight' duties. All I can figure is that means more federal employees sleeping on the public dollar. Sorry to federal employees, but you cannot argue that nothing was done to oversee these problems even with the massive agencies already in place with the authorization and duty to keep track of these developments.
It is a failure of the Bush administration. It is a failure of the Clinton administration. It is a failure of Congress to require the agencies it creates to do their jobs. It is, frankly, a failure of big government just as the Great Society and similar programs failed in eliminating poverty but instead created what they sought to remove: a permanent underclass reliant upon the federal government. We never look objectively at history and thus learn from our mistakes. It is something we learn in elementary school when we ask why we study history: so we won't make the same mistakes. Yet, when we get older we forget to look at what we have done, what we have done wrong, and then learn from those mistakes.
Of course, if we followed the Constitution and did not let the federal government meddle into constitutionally prohibited areas then we would not have these worthless entities sucking up billions in taxpayer dollars each year and returning nothing of value to taxpayers. As a result we end up paying an even dearer price for the bailouts that come after the agencies failed to do their jobs. So before you simply shrug and say a bailout was necessary, remind your congressmen that wasting your tax dollars on agencies that don't do their job is foolish; moreover, bolstering them with more tax dollars is throwing good money after bad. Why not just have no agency oversight, let the markets work, and when a problem arises, take the money saved from paying them and use it for the bailout? If that is not palatable, how about just requiring our elected officials to do their jobs and force the unelected agency people to do their jobs? What a novel approach.
Philly Fed rises nicely: times are getting a bit better despite financial issues.
Once again the economy outside of the financial arena continues its improvement. The Philly Fed for September posted a 3.8 reading, much better than the -10 expected at -12 in August. Manufacturing, factory orders, durable orders, business investment, housing are all improving, showing there is growing activity despite the credit issues.
Now these credit issues are touching more mainstream the past weeks and that may truncate this improvement, but if there is a 'solution' that can take this off the table and get rates back to normal then the economy can continue to log these gains.
THE MARKET
MARKET SENTIMENT
Sentiment is getting to the point it needs to be, that is, close to panic. There was panic selling Wednesday afternoon before the Fed injected all of that money. The put/call ratio has put in 8 straight sessions above 1.0 indicating there is a lot of belief that there is more downside ahead. VIX hit 42.16 on the intraday high, the highest reading since October 2002, and we all know that was the start of the run to October 2007. Newspaper headlines and magazine covers trumpet the end of our times. People now know what credit default swaps are. Runs on money market funds were occurring when Putnam's fund fell below $1 and investors started losing principal (pulled $169B last week alone). Worries about the 'sound' banks such as WFC and BAC were getting ready to boil over. That is why Paulson and company are on the Hill tonight talking with all of the relevant committee heads from both parties. Fear is here.
VIX: 33.1; -3.12. A reader queried why we were looking at a move well over 40 when moved over 30 have in the past year precipitated rallies. Two points. First, while it is true that moves over thirty have precipitated rallies they have ultimately failed to advance the market out of its decline or impending decline. Moreover, after a bear market is running for quite some time these moves over 30 lose their efficacy, i.e. they fail to bounce the market. Second, we are at the stage to start looking for THE bottom as opposed to a trading bounce. That occurs when VIX moves well over 40. The last time VIX was over 40 was during the double bottom formation in the second half of 2002, spiking well over 40 on both bottoms in the double bottom. Thus we are looking for a VIX that gets over 40 to actually start setting a bottom. This is just the start. There will likely be a test of the recent low and that will jack VIX back up over 40 again and really cement things. That is historically how it works.
VXN: 32.82; -3.06
VXO: 36.06; -2.94
Put/Call Ratio (CBOE): 1.18; -0.19. Eighth consecutive session above 1.0 on the close, more than enough to show that there is worry more downside is ahead and funds are buying protection and others are speculating on the downside. That typically accompanies the bottoming process.
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: 37.9%. Down from 38.2% though not as much as you would have anticipated givn the volatility. Down from 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: 43.7%. On the rise as bulls fall, what you want to see for a bottom. Up from 41.6% last week. 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: +100.25 points (+4.78%) to close at 2199.1
Volume: 3.914B (+24.69%). Strongest volume since the July 2007 bottom.
Up Volume: 3.496B (+3.039B)
Down Volume: 406.26M (-2.264B)
A/D and Hi/Lo: Advancers led 2.82 to 1
Previous Session: Decliners led 5.37 to 1
New Highs: 97 (+68)
New Lows: 396 (-29)
NASDAQ CHART: http://investmenthouse.com/ihmedia/NASDAQ.jpeg
New low for 2008 and then a big reversal back to the important 2200 level on the close. The start of a turn and we will now see if it can hold, deliver a follow through starting sometime next Tuesday through Friday, and see more buyers to the upside with staying power.
NASDAQ 100 CHART: http://investmenthouse.com/ihmedia/NASDAQ100.jpeg
SOX CHART: http://investmenthouse.com/ihmedia/SOX.jpeg
SP500/NYSE
Stats: +50.12 points (+4.33%) to close at 1206.51
NYSE Volume: 2.43B (+13.19%)
Up Volume: 2.162B (+2.037B)
Down Volume: 261.281M (-1.766B)
A/D and Hi/Lo: Advancers led 3.01 to 1
Previous Session: Decliners led 13.46 to 1
New Highs: 72 (+60)
New Lows: 1041 (+24)
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
Reached past the 2005 lows and then a big surge back up to positive and over the original 2008 low at 1200. Okay, it has started another rebound attempt and as with NASDAQ we have to see if it can hold, show some follow through buying and continue to recover. Made the 50% retracement and held it, kind of.
SP600 (6.15%) tested some support at 360 and reversed massively to close back over an important level at 380 on its way to test 393. A step at a time.
SP600 Chart: http://investmenthouse.com/ihmedia/SP600.jpeg
SP400 CHART: http://investmenthouse.com/ihmedia/SP400.jpeg
DJ30
Same action here with a new low for the year then a reversal on the news to recover the July low. Massive volatility but recovering key levels on the news.
Stats: +410.03 points (+3.86%) to close at 11019.69
VOLUME: 488M shares Thursday versus 463M shares Wednesday. Not the strongest volume of the week but strong volume.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
FRIDAY
Some crazy talk, some palatable solutions being kicked about.
The crazy: the now certifiably insane SEC Chairman Cox wants to ban short selling as if that will solve the problems he and his predecessors allowed to germinate and grow under their watch. Stock futures are rallying after hours on this news as the shorts are going to get further killed as we move into the former European eastern block economic structure.
The more realistic: Congressional leaders are ready to work with the administration on hemming in the problem and they expect to get the proposal in a matter of 'hours not days' according to Senator Reid. We hear it is to include extending FDIC coverage to the $3 trillion in money market accounts and create some kind of RTC to hold the bad mortgages, get them in shape to sell as the economic conditions improve, sell them, and then shut down, problem solved. We will see.
As noted, stock futures were up even more after hours on the news. The extending of FDIC coverage to money markets is to fend off a run on money markets after Putnam broke $1 and investors yanked $169B from money markets last week alone. That is part of the immediate solution to keep things afloat until something can be done to keep the mortgage and credit losses from cascading across the globe.
Much of what the market does Friday will ride upon what kind of plan is presented and then agreed to. Paulson indicated it would be a 'financial institution solution' and cover assets versus institutions. With the possibility of an agreement reached over the weekend, the shorts will have to cover given futures are holding up even after it was indicated there would be no immediate deal for Friday.
Do you buy more or sell some on the news? We are going to do both, i.e. sell stocks that were lagging while look to buy some positions in others that are in good patterns and worth our money. Keep in mind, however, that this is not a straight rocket shot higher to new highs and we are very likely to see more sharp declines as the bottom is put in. The biggest factor is whether this is the fix and stocks form a V bottom or the much more common and typical W bottom. The circumstances are different here given a 'fix' by the government. Historically, however, the RTC was created in August 1989 and the stock market rallied 32% before it was created and then it moved in a wide trading range for 9 months before breaking higher once more.
So we are basically in old charted territory and will thus look for opportunities in strong stocks that are in good patterns and other strong stocks that were boxed around and are ready for a big run on this news. We have to keep in mind that we will get volatility as more news hits and the attempts to implement the fix and indeed even agree to it hit snags. Overall we look for a further move higher ultimately, but the ride will be volatile nonetheless.
Support and Resistance
NASDAQ: Closed at 2199.10
Resistance:
2202 is the January 2008 low
The 10 day EMA is 2219
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 2314
2340 from the March 2007 low
The 90 day SMA at 2365
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 2388
2392 is the April 2008 peak
2419 is the January 2008 peak and the early February peak
Support:
2167 is the July 2008 low
2155 is the March 2008 low
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 1206.51
Resistance:
1215 is the July 2008 closing low
The 10 day EMA at 1220
1237 is the 2002/2003 up trendline
1244 is an August 2005 peak
1257 is the March low
The 50 day EMA at 1265
1270 is the January low
1285 is the recent July peak
The 90 day SMA at 1300
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 1345
1360 is an ancient trendline
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
1065 is the Q4 2003 level that SP500 started the run to 2007 after the first run in the recovery.
Dow: Closed at 11,019.69
Resistance:
11,061 from February 2006
11,317 from March 2006
11,388 is the prior August low
The 50 day EMA at 11,447
11,670 is the May 2006 intraday high; 11,642 closing
11,695 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 11,735
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 12,241
Support:
10,962 is the July closing low
10,827 is the July 2008 intraday low
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): 455K actual versus 440K expected versus 445K prior
Leading economic indicators, August (10:00): 0.5% actual versus -0.2% expected, -0.7% prior.
Philly Fed, September (10:00): +3.8 actual versus -10.0 expected, -12.7 prior
End part 1 of 3
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