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trading system, money investment
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9/24/08 Investment House Daily
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Investment House Daily Subscribers:
MARKET ALERTS:
Targets hit alerts: None issued
Buy alerts: NEM
Trailing stops: QID; AAPL
Stop alerts issued: None issued
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SUMMARY:
- Another early bounce struggles, gives in to the last hour as investors continue their vigil of sorts re the bailout hearings.
- Credit markets are nearing another freeze-up even as Congress argues.
- Leadership hanging on as market selling slows as hearings end. Anticipating a quick deal?
- Deal will have to be a good one to offset the overhead resistance and longer term patterns
Last hour again pushes market back down but the selling slows.
Goldman getting $5B from Berkshire Hathaway as some kind of seal of approval, but the deal for Berkshire is one that made many envious. Buffett once again stepped in at the right time and made a great deal allowing, among other things, a buyout from Goldman at a 10% premium to market if such buyout should ever come. That helped perk up GS and there was some residual benefit to other financials, but the deal's impact pre-market was less than impressive.
Even this positive was elbowed aside by a pair of last day of hearings on the bailout plan as investors watch to see the when and what with respect to congressional action. As reported in an early alert today we heard that a deal is mostly agreed to with respect to the lion's share of the Paulson plan. There are compromises helping it along such as weak regulation on executive pay, limited equity ownership in participating entities (limited to those underwater versus those participating to help make the new market work), and benefits accruing at both ends of the spectrum, i.e. homeowners as well as companies holding mortgages. The compromises make up 20% or so of the package and apparently this is palatable to all sides. Of course that does not stop the public posturing in order to show constituencies they are outraged, on top of the problem (how many times did you hear various legislators utter "as I warned over a year ago . . ."), and demanding 'fair' action.
Once more the market was somewhat hostage to the grinding process, trading up and down 4 times just on Wednesday alone, always around the flat line. In the end it went nowhere as investors are pensive and the market, despite the undercurrent that a deal is basically agreed to, is not yet showing it either buys into the belief a deal is basically done or that it is a good deal if one has been agreed to. It was flat to up most of the day but it again sold late as the indecision further gripped investors' wallets keeping them on the sidelines. Despite another last hour decline, however, the selling has slowed as the bailout process hit midweek with talks of a deal struck by Saturday. If it doesn't come that could be a problem for the upside.
TECHNICAL. More volatile intraday action with a now typical last hour selloff to bring the indices down to basically flat. Moral victory there: the selling strength, or more accurately slight majority, faded and stocks more or less held the status quo. The dollar was modestly higher for the second session, oil fell modestly (105.71, -0.90) and gold was flat (895, +3.90). Everything it seems is on hold right now.
INTERNALS. Very modest with breadth slight to the downside on NYSE (-1.5:1), a bit more so on NASDAQ (-2:1). Volume was very light; no bids, few sell orders with the financials off limits. The internals matched the market action, i.e. slowing to the downside, and that is not that bad at this juncture.
CHARTS. As noted the downside slowed Wednesday after two sharply lower sessions to start the week. At this point they have given back about half of their rally that started last Thursday, and if they hold at that point that typically indicates a bit of strength. Seems strange to call this action anything remotely like strength, but the selling slowed likely on the undercurrents that a bailout deal was in essence agreed to and would be announced on Saturday.
LEADERSHIP. As with the overall markets the leaders slowed their recent pullback, holding at support on a quiet session. Some financial leaders rallied early but faded to flat. Some retailers posted better moves . . . but not many. The money that was moving their way is withdrawing and more than that they are getting selling pressure. Energy tried to rally last week and is trying to consolidate but finished lower. The leadership on the session was large cap NASDAQ, particularly tech, but the upside was modest as the NASDAQ 100 gave up gains in excess of 1% in the last hour. Not many stepping up right now though there are defensive stocks in the medical and healthcare sectors as well as some financials holding the line. That is about all you can say at this point as investors refuse to commit any significant money to the market while awaiting the word on the bailout package details.
THE ECONOMY
Credit markets are right back to where they were before the 'plan' announcement.
For any in Congress thinking we have a few weeks or even a couple of weeks to react to the problems Paulson and Bernanke brought before them last Thursday, the credit markets are shouting the opposite.
The Fed put an additional $30B through new swap lines, adding to what was placed late last week. BOE but in $40B a bit later. There was a record premium paid for the dollars at the auction hitting the highest level since January. LIBOR rates are right back up. European corporate bond sales dropped to the lowest weekly level in six years as those bond spreads opened up to a record. 2 year swap rate hit 163BP over the 2 year treasury rate.
What all this means: No deals are getting done . . . at all. Banks are unwilling to lend to other banks without the massive spreads as a form of protection to hedge against borrower insolvency or some form of default. In short they are hoarding cash versus lending it simply because they are very concerned that their cohorts may be the next institution to go down to a run or liquidity issues due to (or not) the mark to market requirements. Just as with the options market late last week when short sales were banned, spreads explode because that is the only way for the market makers to operate. That places too much burden on the other side of the transaction and typically means nothing is done.
As we all know, this all rolls downhill. If banks won't lend to each other there is no money to lend to businesses or the average Joe's out there wanting to start a business, buy a house, remodel, buy a car, etc. The very essence of the world economies, day to day living and commerce, contracts by multiples. If things don't improve you start having more defaults on existing lines of credit, more lender panic, depositor panic, and investor panic. It snowballs and the implosions start in other 'safe' areas of world economies. That is how you get from a mortgage problem to a worldwide problem in no time.
There are also other issues discussed over the weekend such as the credit default swaps in the trillions that no one really fully understands with respect to their reach into all economies. Everyone knows they are out there insuring all of these relationships, but the system is looking more like a Ponzi scheme as they are interrelated and if a few key ones go they can take the entire network down leaving all of this 'insurance' nothing but illusory. People are starting to see that the emperor has no clothes.
Thus as we have said, something needs to be done to restore confidence and get the funds moving again. Action taken, confidence restored, prices stabilize as Michael Douglas said in 'The Game.' That doesn't mean things just roar back up and we all laugh about this at Christmas. What it does is prevent global economic meltdown.
Europe continues to slump lower and Asia is very quiet.
Yes for all of those seeing this as a diminution in US and western power, go ahead and think that. If this spirals out of control no one will win as standards of living will slide lower across the globe. Of course if your standard of living involves subsistence living to begin with you will feel relatively better off as your standard of living won't change much.
Europe is heading down at a faster pace as the US outlook darkens the longer these clouds are allowed to build. European business sentiment fell much more than expected as conditions continue to worsen. China appears to have emptied its magazine preparing for the Olympics as its economy fell off before the games and shows no signs of coming back anytime soon. Asia is sniffling given China has gone a bit cold.
As for history, Japan did not attack its problem outright when its financial sectors collapsed in the 1980's. It let the market work, though everyone knows, as with the US, that the 'market' was manipulated all along. Thus doing nothing when the manipulation and its results turned bad, and without stepping in to help fix what it broke Japan suffered through a 12 year depression. Sweden got out in front of its lending and currency issues when its socialist schema took too much and returned too little, but that only prevented a depression; it did not spring a new upside surge. The US may ultimately get a nice return from these mortgages as the feds don't have to 'mark to market' and can let the storm subside and sell the mortgages for a gain well down the road. Down the road is the key phrase.
Lack of understanding the problem.
All of this is pretty stark, pretty frightening. It is apparent, however, from the questioning in the hearings that the majority of those on Congress do not grasp this. That doesn't instill a lot of confidence in the process, but then again, every crisis is handled the same left-handed way.
Some do grasp the issues but are operating as usual, i.e. using the crisis to posture, playing the class war card instead of realizing that while you don't want to reward wrongdoers, it is cutting off your nose to spite your face to go after them while allowing the rest of us millions to get crushed just to teach those guys and girls a lesson. Or, some want to change the system right now as if that is going to solve the current problem. While we do not agree with all of the Paulson plan we do agree with his statement that the hearings are not to debate policies that have been in place since the 1970's that caused this problem but to come up with a way NOW to solve this problem. Or we can let things cascade and fall where they may and suffer a decade of flat to negative growth just as the Japanese did, in the process wiping out the US small and mid-level business class in the process.
THE MARKET
MARKET SENTIMENT
VIX: 35.19; -0.53. The market's quiet action did not push VIX higher, but there is a lot of fear out there in the credit markets.
VXN: 36.4; -0.12
VXO: 39.28; +0.74
Put/Call Ratio (CBOE): 1.05; +0.01. Two days back above 1.0 after 3 days off, 10 days on prior to that.
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: +2.35 points (+0.11%) to close at 2155.68
Volume: 1.816B (-9.16%). Third straight session of low, below average volume as bids faded but sellers backed out Wednesday as well.
Up Volume: 1.096B (+568.963M)
Down Volume: 695.191M (-751.758M)
A/D and Hi/Lo: Decliners led 1.92 to 1
Previous Session: Decliners led 1.82 to 1
New Highs: 12 (-13)
New Lows: 133 (+1)
NASDAQ CHART: http://investmenthouse.com/ihmedia/NASDAQ.jpeg
Started higher and rallied some but didn't come close to making a run at resistance. It didn't sell on the session either, however, and after the sharp declines post-bailout plan announcement that was a modest positive. NASDAQ did manage to hold at the March low, the prior 2008 low before last week's selling. That means something but not as much as it did before last Wednesday and Thursday morning. It might bounce in relief but the pattern is bad as it is below the neckline of the head and shoulders pattern formed from March through early September, and that means the downside is the open lane after a bit of a relief bounce. Techs led on the session but calling them leaders is like putting lipstick on a pig. Oops. There I go again.
NASDAQ 100 (+0.78%) was the market leader but it gave up a solid gain well over 1% intraday. It also failed to scare the upside much with this rather modest move. It is trying to hold the March lows as well, another 'big deal' attempt, however, given they were broken last week. There are some large cap techs ready to try a bounce here but it will require nimble fingers to get in and out of that outside a quick plan approval.
NASDAQ 100 CHART: http://investmenthouse.com/ihmedia/NASDAQ100.jpeg
SOX CHART: http://investmenthouse.com/ihmedia/SOX.jpeg
SP500/NYSE
Stats: -2.35 points (-0.2%) to close at 1185.87
NYSE Volume: 1.081B (-6.21%). As with NASDAQ, third day of lower and below average volume.
Up Volume: 424.513M (+154.323M)
Down Volume: 650.329M (-226.577M)
A/D and Hi/Lo: Decliners led 1.48 to 1
Previous Session: Decliners led 2.58 to 1
New Highs: 7 (-4)
New Lows: 161 (+9)
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
Doji just over the mid-1998 peak. That doesn't mean a whole lot. When you look back at a multiyear chart that dates back to that time what you do see is a massive double top at the 2000 peak and the 2007 peak with the market not even half way back down to the lows of the pattern in 2002 at the bottom of the bear market. That puts into clear contrast what will happen if there is not a successful resolution of this mortgage and credit problem. Oversold near term and a deal will help it along but whether it changes the overall downtrend character remains to be seen. Lots of pressure to overcome.
SP600 (-1.67%) broke down, making us quite disappointed with closing it out Tuesday after a rebound to resistance. Undercut the 200 day SMA further and is looking at the September lows at 360 now 9 points away. Not a good indication for the economy as the mortgage and credit worries are dragging them back down from the early cycle money that was pushing them higher just a week back.
SP600 Chart: http://investmenthouse.com/ihmedia/SP600.jpeg
SP400 CHART: http://investmenthouse.com/ihmedia/SP400.jpeg
DJ30
Similar to NASDAQ and SP500, the blue chips showed a doji basically at the July intraday low and just over the early 2004 peak/mid 2005 peak/mid-2006 double bottom lows. So it is in position to bounce. After that bounce we see how strong the move is and whether it is a character changer when a deal is announced. If not, a break below 10,700-10,650 sets up a new significant run lower. Again, important to get a good bailout package in place.
Stats: -29 points (-0.27%) to close at 10825.17
VOLUME: 183M shares Wednesday versus 204M shares Tuesday.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
THURSDAY
No hearings. The market won't know what to do. As noted above, the large cap indices are in position to bounce after fading worrying about what Congress would say and ultimately do. Now that the hearings are over the can bounce in relief and take back some of the lost ground.
Again, an agreement will help the market near term, but it is not a panacea. In short, it will help relieve the credit issues tied to the mortgage cancer but it won't guarantee all problems disappear, that the market takes off in anticipation of a new economic boom, and that happy days are generally here again. Thus we can get a bounce, but it has to prove that it changes the character of the market, one in which the major indices are in downtrends and are at points where a breakdown means significantly more selling before another real rally attempt can muster.
If the market senses a deal we get a relief bounce from this week's selling. It drifted lower as bids dried up during the worry nothing would be done. Wednesday the indices were flat as word a deal would be done. More confirmation of that and we get a bounce and we gauge how strong it is. The ultimate test is whether it can ultimately break through the August peaks and clear some major overhead supply/resistance. Maybe a bailout can do that and turn the tide of some pretty negative longer term index patterns.
Near term on a bounce there are some plays that held up well in the selling and other stocks that can drive higher near term. We can look at those but do so with lower profit horizons, something we have been doing for the past year it seems. That is the most conservative upside play in a market that makes most upside plays aggressive plays. For now we look for a bounce on the news of a bailout, play some solid bounces, see how strong the move is, and if it has so-so volume and stalls out at the August range then we close the upside and get ready for more downside. If a deal is in place and that happens that means significantly more market downside but if that is what the market is giving, that is what we will have to be taking.
Support and Resistance
NASDAQ: Closed at 2155.68
Resistance:
2155 is the March 2008 low
2167 is the July 2008 low
2202 is the January 2008 low
The 10 day EMA is 2198
2261 is a March 2008 interim low
2286 is the first April 2008 gap up point.
The 50 day EMA at 2295
2300 is some resistance
2340 from the March 2007 low
The 90 day SMA at 2350
2370 from the April 2006 peak
2371 is the trendline from the summer 2004/July 2006 lows, Q4 2005 consolidation
2378 is the mid-February peak; 2379 from the October 2006 peak
The 200 day SMA at 2378
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:
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 1185.87
Resistance:
1200 is the July 2008 intraday low
1215 is the July 2008 closing low
The 10 day EMA at 1211
1239 is the 2002/2003 up trendline
1244 is an August 2005 peak
1257 is the March low
The 50 day EMA at 1257
1270 is the January low
1285 is the recent July peak
The 90 day SMA at 1291
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 1339
1362 is an ancient trendline
Support:
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 10,825.17
Resistance:
10,827 is the July 2008 intraday low
10,962 is the July closing low
The 10 day EMA at 1,041
11,061 from February 2006
11,317 from March 2006
The 50 day EMA at 11,383
11,388 is the prior August low
11,670 is the May 2006 intraday high; 11,642 closing
The 90 day SMA at 11,650
11,695 is the 2004/2005 up trendline
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
The 200 day SMA at 12,192
12,250 from late March 2007 lows
Support:
10,459 is the recent September 2008 low
10,215 from Q4 2005
10,100 to 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): 4.91M actual (-2.2%) versus 4.93M expected, 5.02M prior (revised from 5.00M)
Crude oil inventories (10:35): -1.5M actual, -6.3M prior
September 25 - Thursday
Durable Goods Orders, August (8:30): -1.3% expected, 1.3% prior
Initial jobless claims (8:30): 450K expected, 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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