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world stock market, us stock market
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9/22/08 Investment House Daily
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Investment House Daily Subscribers:
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Finally getting the utilities back on line though not all up yet. Progress is good.
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MARKET ALERTS:
Targets hit alerts: AAPL
Buy alerts: AAPL; QID
Trailing stops: FAST
Stop alerts issued: None issued
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SUMMARY:
- After the short covering, political football bailout plan has investors wary.
- Dollar getting slaughtered as the bailout package threatens to grow even larger.
- Investors slip into idle awaiting the bailout specifics, unwilling to take on resistance in light of the ambiguity.
- Burden on the leaders to hold support as the downside resumes but on low trade.
Some benefits from the rules changes fail to outweigh market worries about the big, very big, bailout.
There was some ostensibly good news Monday morning, but the market seemed as uncertain about it being good news as it was about the sensibility of the massive bailout package that is currently being debated in Washington. Some companies took advantage of the relaxed rules designed to get buyers back into the market. Companies announced buybacks given they can move in at the market open, something last seen post-9/11 when buyers were sought as well. MS announced an additional $40B in stock buyback and an 18% increase in its dividend. HPQ jumped in with $8B and NKE took up the baton as well.
There was M&A activity as well. Mitsubishi is said to seek 10% to 20% of MS. Good or bad? After it said it would go the traditional banking route along with GS this morning, maybe that is not really necessary. Of course, that raised the question whether is it good for them to go the banking route versus the investment banking model they have been so successful at. The results on the day were a big shoulder shrug as they both traded down.
Thirty more companies were put on the 'no short' list including GM and GE, ostensibly due to their financing branches. Who is next? Might as well get them all in there to take the guesswork out of the equation. This is insane, but nothing new; a strong government tries to grow stronger at any opportunity. An economic crisis is the perfect time to do so. Any crisis is a good time to take some power: war on drugs, war on poverty, war on terror.
The relative good of the news was definitely in the eyes of the beholder Monday. The buyback news helped move futures higher, but not close to opening positive. The socialist smell of the bailout plan was too much. For one it is a huge power grab with the Treasury's actions non-reviewable by court or agency. Wow. That puts a premium as to who holds the office, something our Constitution tried to mitigate with its checks and balances. None of those here. The democrats added their stamp to the process, arguing for convertible warrants in addition to buying the assets at a discount or FMV. Why would the government then need to own the companies as it will likely make money on this deal? How are companies going to find buyers in the market if the government is holding equity ownership?
Troubling, and investors showed so on Monday as the market started lower, sold off, failed a bounce attempt, and was scorched into the close as it gave up all of Fridays gains. Given the European flair to the bailout package is it any wonder the dollar was dumped while gold (an inflation hedge), oil, and all commodities surged? Of course the stocks in these industries did not perform well; it was the commodity itself or bust, at least on Monday.
TECHNICAL. As noted, the intraday action was weak: low, to lower, to lowest as stocks had no bid. No buyers were willing to step up.
INTERNALS. Breadth was bad (-4:1 on NYSE, -3:1 NASDAQ) though not as bad as it has been. Volume was much lighter, and that is generally better as it indicates no dumping. Still, with the lack of short selling on over 800 stocks it is hard to read too much into this as the shorts' hands are tied. The key is that the low volume shows not many sellers (helped by no short selling) but a lot of indecision by all market players. Many recent market leaders limped down to support with the one saving grace it was on low volume, meaning no major selling just a few sellers with no buyers. That keeps them in the game for now.
CHARTS. The indices gave up all of the Friday advance as the three large cap indices turned down from the 50 day EMA and their late summer trading ranges. SP600 dove lower but at least it filled the Friday gap and held some support on the close. Overall picture: the indices rallied back to the bottom of the summer range and failed. Buyers got back to those levels and were happy to do so and sold when the government bailout looked too big and too European. A failure at an old consolidation level shows a layer of thick ice that the indices are going to have a hard time breaking due to a lot of overhead supply there.
LEADERSHIP. The recent leadership in retail, financial, transportation took some hits across the board as bids dried up and they faded. Most moved lower on lower volume, and as noted above that indicates a lack of bids and buying interest versus dumping them. They are trading down toward support at the 50 day EMA or other consolidation levels, and that means it is, of course, important for them to hold at that level if they are going to continue leading the market. There are some new 'old' leaders trying to set up. As noted over the weekend, some energy is trying to set up. Commodities are trying to rebound as well given the diving dollar renewing that trade. None of them did really well Monday given the surge in the underlying commodities themselves, but after a bit of a test here they could be set up quite well to continue the upside bounce started last week.
THE ECONOMY
Over the weekend we said we needed to use the time the news of the new RTC and a multi-trillion dollar insurance policy on money market funds brought the financial markets. Monday the usual attempts to make the emergency legislation a Christmas present for all of the pet programs or policy agenda items of legislators (or is that 'Winter Holiday' present?) soured the market as it looked to be business as usual. There they go again . . .
Dollar is crushed as Fed loses autonomy, inflation worries surge.
The dollar broke out from a nice base in early August and surged. It was an unprecedented surge as the commodities plays were unwound and the Fed hit upon a series of funding options that did not require rate cuts. Man, that seems like such a long time ago. It was engaged in a nice rather normal pullback last week, filling the modest gap higher to start September. Looking good.
Started to sell Wednesday and picked up speed as the uncertainty rose, giving up a big move upside Friday as worries over what 'the plan' would entail started to coalesce. Monday the dollar dove lower, down to the August test low, a massive 2.1% single day move down. After that move the dollar had given up one-half of its gains from the August breakout. At the same time the dollar waffled and then tanked gold surged. From below $800 to close at $909 (+44.30 on Monday alone), gold has reversed its dive lower in a big way. What gives?
There were many reasons for the dollar to rally. Massively oversold is one. The US coming out of recession faster than the rest of the world is another. The Fed turning away from 'helicopter Bernanke' to one with creative ways to inject liquidity into the system.
All it took to undo that was a big socialist, big-government type plan that is likely much bigger than needed, looks too much like a government power grab, and strips the Fed of whatever autonomy it still had.
First, as noted above, the plan is huge with a $700B price tag. That amount alone could pay for each questionable loan whether sub-prime, alt A, etc. on a DOLLAR FOR DOLLAR basis! Of course this is not the amount the Treasury has to spend, but the fact that it is asking for the whole enchilada is daunting to many. Then there is the overreaching by some in Congress in what is a huge power play. What if the government, as I suspect it will in a few years, make a substantial profit on these mortgages? There is talk about it benefitting taxpayers but I have not heard any saying it will be paid back to the taxpayers who funded it, i.e. pay actual taxes on their income tax forms and/or through payroll taxes in dollars. This is something we as taxpayers have to demand of our legislators.
Second, the Fed has simply lost its autonomy with it bailing out AIG at Treasury's behest and holding Paulson's briefcase over the weekend. In other terms, the Fed is no longer seen by the rest of the world as fighting inflation even if it was only a token in doing so. The US is going to print huge amounts of money and borrow huge amounts of dollars short term. While longer term things could turn out just fine, over the short term this lack of Fed autonomy is gutting the dollar.
As a result the dollar halved its gains. Oil exploded higher though Monday a lot of the $16 gain was short squeezing as the October contract expired. Gold, however, has surged from sub-$800 back to over $900 in some massive moves. Commodities are exploding higher again. This is not because the rest of the world suddenly recovered from their economic slowdowns and demand ran higher; it was the dollar getting clubbed as inflation worries cut into its value. Of late when stocks sell bond yields fall as investors move into US treasuries. Monday even as stocks sold yields barely moved; some worry in the bond market that inflation will re-appear and cut into bonds. Inflation worries are destroying the dollar's hard-won gains and pushing money back into the hard assets as a hedge.
Why not remove the short selling prohibition but reinstate the uptick rule and enforce the no naked short selling rules? Back up the $2+ trillion in money markets as planned. Remove the market to market requirements that put the financial institutions in this fix as they had to write down their long term investments. Vastly reduce the dollar amount to one-third, force the government to get out of the business entirely (that means no warrants) in three years (subject to legislative extension), and require all surpluses be returned to the taxpayer. That would instill more confidence this is a realistic fix and not just an overreaction.
Or, you can take the Bill O'Reilly view and blame speculators for raising oil prices Monday. There was some of that as the shorts were targeted, but why? Because the dollar reversed field and tanked, making the short oil play a loser. Speculators are not the reason dollars are getting dumped across the globe right now; it is a run to hard assets to hedge against inflation as the US embarks upon a massive spending program that will double the debt as it requires a LOT of new foreign financing. Something was definitely needed given the dire circumstances the misguided policy decisions of the former Fed, the poorly thought out requirements place on our financial institutions (e.g. mark to market), and the lack of enforcement of existing regulation had wrought, but the size, scope, and socialist yet totalitarian flavor of the plan has completely undermined short-term confidence in the dollar.
THE MARKET
MARKET SENTIMENT
The fear of financial meltdown noted over the weekend has been trumped near term by fear of big government. Bailout news forced shorts to cover Thursday after the VIX hit 42.6 on the high. The elements were there to set the seeds of a bottom. They are still there even with the bailout news. Remember, it takes several weeks after fear crescendos to actually bottom.
Thus even though fear of meltdown is currently replaced by fear of big government and the market is selling off once more, that does not mean the fear levels hit did not do their job. Fear exploded in July of 2002 but the market still sold off again to test that July low in October, and at that point the bottom was made. There were new lows hit last week on the selling. The market could muddle through for another couple of months before it makes a bottom. It was on the 'scare them out' version last week. We suspect it will go to a more 'wear them out' over the next several weeks, then throw in another 'scare them out' decline to try and set the bottom.
The neat thing is, that allows this worry over the scope of the bailout plan to work itself out as we see what kind of compromise emerges and the plan is put into play. That could take . . . several weeks . . . to get ironed out. That is pretty good timing.
VIX: 33.85; +1.78
VXN: 35.46; +1.2
VXO: 36.28; +2.73
Put/Call Ratio (CBOE): 0.97; +0.15. Still below 1.0 for the second straight session after 10 consecutive 1.0+ closings, more than enough to show fear.
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: -94.92 points (-4.17%) to close at 2178.98
Volume: 1.915B (-51.72%). Volume dropped below average as NASDAQ sold off with a big point loss. A lack of bids after a short covering squeeze.
Up Volume: 292.283M (-2.84B)
Down Volume: 1.607B (+796.436M)
A/D and Hi/Lo: Decliners led 3.21 to 1
Previous Session: Advancers led 3.48 to 1
New Highs: 37 (-194)
New Lows: 95 (-57)
NASDAQ CHART: http://investmenthouse.com/ihmedia/NASDAQ.jpeg
Gapped lower and sold off to close at the session lows, back below 2200 where there is some support. It is still in the range of the March low (2155) but after making a significantly lower low last week you don't really expect that level to hold. Near term we have to see how stocks respond after this initial reaction post-short covering on announcement of the buyout plan.
Finished the week with a gain with two huge upside sessions. Gapped to the 50 day EMA (2312) on the high and then faded. Still a very volatile pattern with a new reaction low for 2008 it now will likely need to test over the next several weeks as the plan is hammered out and implemented. Bigger picture: it made a lower high in August, and a lower low last week. That means a downtrend and it has to prove it is going to hold last week's low. Thus our position in the QID we took today.
NASDAQ 100 CHART: http://investmenthouse.com/ihmedia/NASDAQ100.jpeg
SOX CHART: http://investmenthouse.com/ihmedia/SOX.jpeg
SP500/NYSE
Stats: -47.99 points (-3.87%) to close at 1207.09
NYSE Volume: 1.27B (-57.03%). Below average volume here as well showing a lack of buyers allowing a few sellers to push them lower.
Up Volume: 216.393M (-36.239M)
Down Volume: 1.049B (+630.189M)
A/D and Hi/Lo: Decliners led 4.18 to 1
Previous Session: Advancers led 7.35 to 1
New Highs: 23 (-188)
New Lows: 87 (-41)
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
Turned back at the 50 day EMA and the bottom of the August trading range, a double layer of ice that stalled out the large caps. Cannot short the financials, but that doesn't mean owners cannot sell them, and SP500 suffered as a result. Right back down to the July low (1200), and as with NASDAQ, given this reaction to the 50 day EMA and the end of the short covering rally, SP500 is likely going to spend some time working on a test of the recent low, though it hasn't left itself with a lot of room to test and may go yet lower before a significant move upside to get ready for a test of the new low.
Violent move lower on SP600 (-4.25%) filled the Friday gap higher that took SP600 all the way to the top of its pattern at 402. As with the large cap indices, the small caps failed at that old resistance and dropped sharply, not the best sign it is in shape to take out that resistance, break higher, and show economic recovery to come. It filled the gap and held support at 380; so filling the gap is at least out of the picture for now. Still important to see how the small caps behave here after getting dumped from the breakout cusp. If they hold near here at 380 they are still telling a pretty positive economic story.
SP600 Chart: http://investmenthouse.com/ihmedia/SP600.jpeg
SP400 CHART: http://investmenthouse.com/ihmedia/SP400.jpeg
DJ30
DJ30 matched SP500, turning down from the 50 day EMA as well and giving up the Friday move. Held some support at 11,000 near the July closing low (10,962; 10,827 intraday) on the close. Kind of an important level here; as noted over the weekend this has the classic look of a double bottom with the modest undercut of the prior low. We have to see how the concern over the federal plan plays out and how DJ30 reacts. It can hold the line here, put in some more upside, then come back to test that new low or surprise us all and move higher from the Monday close as its pullback. Not all pumped about that latter possibility but the volume was extremely low on the Monday selling.
Stats: -372.75 points (-3.27%) to close at 11105.69
VOLUME: 213M shares Monday versus 655M shares Friday. Very low trade as the blue chips faded.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
TUESDAY
We had the short covering on the bailout news and the short selling prohibition and on Monday the sober pause as investors took time out to consider what the federal government was proposing and the additional power grab many legislators are now trying to incorporate into the package under the auspices of helping out the average Joe taxpayer. Limiting executive compensation has a very chilling Marxist flavor to it. Investors were rightly disturbed.
We would like to say that Tuesday would resolve this. It of course cannot. While many say these populist notions are just political bluffs in order to get the other side to come out against them to create campaign sound bites and other campaign fodder, many of the proponents believe what they are espousing. Many of us cry for the Constitution.
But we have to make money in a market where the government does not seem to abide by the law of the land and where a huge plan is being proposed with only limited historical precedence. Monday simply was not enough time to absorb all of the ramifications and price them into stocks.
Investors were quiet Monday, continuing the stagnation that resulted after the early Friday short covering surge. There was a theme in place, however, and that was not to get involved along with 'when in doubt, sit it out'. That allowed a few sellers to take stocks lower on that low volume. This stagnation is likely to continue until a consensus forms with respect to what the package contains, and then the market can trade with some conviction. That can take a week to several weeks, and then getting it voted on is a crapshoot as well.
That will definitely allow the market to come to grips with the final package well before it is actually voted on. While we wait on that we are watching the leaders and how they hold after selling to support on light volume. It is there burden to hold the line and show they still have support. We are also watching the small caps to see if they hold the support they fell to on Monday and thus keep alive the recovering economic story. As strange as that sounds right now, if this financial mess is cleaned up and confidence is restored by a palatable bailout package then the economic improvement could proceed right along. That WILL REQUIRE, however, the dollar to firm back up and slap oil and commodities prices right back down. If that does not happen then the benefits of the improving economy will quickly evaporate.
Given the low volume we let upside positions test Monday, but they have to hold the line at support. It is their burden to carry and they really struggled Monday. If they continue to hold support and base laterally that is fine given the low trade. Many remain in solid position but will have to marshal buying support once more, something totally lacking Monday.
The federal tidal wave makes it very hard to gauge investor commitment but you have to rely on traditional indications such as support, price/volume action, leadership. Thus if stocks cannot hold support after the initial reaction downside following the short covering rally we don't want to see just how far they go lower. We will watch for recoveries on volume that give us good entry or add-to points, but no reason to buy heavy, just build some positions. We also have to look at some more downside to go with the AAPL and QID positions picked up on Monday given the large caps tested resistance and rolled back down. We are likely to get a trading range forming out of this action if there is no solid buyside response to Mondays selling, thus we will turn to trading the range as investors make their decision on the Federal bailout plan. In short, don't expect a lot of action given investors are watching what the Feds do, but at the same time be ready to step in either way to take advantage of what investors decide after digesting some unprecedented financial issues and government response.
Support and Resistance
NASDAQ: Closed at 2178.98
Resistance:
2202 is the January 2008 low
The 10 day EMA is 2220
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 2307
2340 from the March 2007 low
The 90 day SMA at 2359
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
The 200 day SMA at 2384
2386 is the August 2007 intraday low
2388 is the June 2008 low
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
2070 is the recent September 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 1207.09
Resistance:
1215 is the July 2008 closing low
The 10 day EMA at 1223
1238 is the 2002/2003 up trendline
1244 is an August 2005 peak
1257 is the March low
The 50 day EMA at 1262
1270 is the January low
1285 is the recent July peak
The 90 day SMA at 1296
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 1342
1361 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
1133.50 is the September 2008 low
1065 is the Q4 2003 level that SP500 started the run to 2007 after the first run in the recovery.
Dow: Closed at 11,015.69
Resistance:
11,061 from February 2006
11,317 from March 2006
11,388 is the prior August low
The 50 day EMA at 11,428
11,670 is the May 2006 intraday high; 11,642 closing
11,695 is the 2004/2005 up trendline
The 90 day SMA at 11,697
11,700 is the January intraday low
11,731 is the March 2008 low
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 12,220
Support:
10,962 is the July closing low
10,827 is the July 2008 intraday low
10,459 is the recent September 2008 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 24 - Wednesday
Existing home sales, August (10:00): 4.93M expected, 5.00M prior
Crude oil inventories (10:35)
September 25 - Thursday
Durable Goods Orders, August (8:30): -1.3% expected, 1.3% prior
Initial jobless claims (8:30): 455K prior
New Home sales, August (10:00): 518K expected, 515K prior
September 26 - Friday
Q2 GDP final (8:30): 3.4% expected, 3.3% prior
Michigan Sentiment, September revised (10:00): 70.9 expected, 73.1 prior
End part 1 of 3
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