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trading system, money investment
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9/25/08 Investment House Daily
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MARKET ALERTS:
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Buy alerts: RIG; TSO
Trailing stops: None issued
Stop alerts issued: None issued
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SUMMARY:
- Relief bounce off slowing selling in anticipation of a bailout deal.
- Waiting for the deal to be announced but with majority of constituents in opposition, House republicans are balking.
- Economic data takes a turn back down for August though not all of that was bad news.
- FDIC seizes WM and sells it to JPM
- RIMM misses impacting techs, bad vibes from afternoon bailout meeting send SP futures tumbling for Friday.
Market gets the relief bounce it set up for a bailout announcement, but it doesn't come and the finish, while not bad, didn't change the character.
Wednesday it was pretty clear the selling following the short covering rush to end last week ran its course with modest losses, a narrower and volatile intraday range, and very light volume. Thursday, ushered by a lot of legislative comments that a deal was agreed to in principal, stocks started higher and ran upside from there. This in spite of another weak report from the EU with Ireland said to be in a 'technical' recession, meaning I suppose that it actually is experiencing 2 quarters of negative GDP readings. The upside also overcame a string of weak economic data as August durable goods turned sharply negative, jobless claims jumped close to 500K, and new home sales dropped a worse than expected 11.5%. Oil was up modestly (107.42, +1.89), gold was lower (882, -13), and bond yields rose significantly on the short end to 2.18% from 1.96% Wednesday.
Stocks were up nicely, but once again ran into headwinds in the afternoon. Stocks sold off to mid-afternoon, rebounded into the last hour only to fade 30 minutes ahead of the close. Still held the gains as noted but failed to take out near resistance at the 10 day EMA on the close (again). Financials were the early leaders but they lost their nerve as the afternoon wound down with no deal announcement. That took the front runners out for the day and the indices fell below that near resistance.
After once more approaching a near complete lockup on Wednesday, credit breathed a bit easier Thursday with TED spreads shrinking and LIBOR falling some. Not much, however, and with the deal falling apart late in the day. Moreover, about 3 hours after the close it was announced that FDIC took WM into receivership, selling and moving the deposits to JMP tonight to avoid a run on the bank. The credit lock down is going to be a big issue Friday as we skate once more on the edge of global meltdown. Things got very sober tonight.
TECHNICAL. Intraday the market started stronger and rallied, but once more it had a tougher last hour. Finished with gains as this time it did not roll over in the last hour. Still could not hold the near resistance it moved through intraday. Even on an upside day the strength was not overwhelming, indeed a bit underwhelming.
INTERNALS. Modest breadth (2.5:1 NYSE, 1.5:1 NASDAQ). Volume was up but still below average. Some more buyers and some shorts covering in anticipation of a bailout deal. Compared to the internals shown prior to the non-shorting bailout waiting period these are really modest numbers.
CHARTS. The large cap indices moved through the 10 day EMA that stalled them out on Tuesday, but by the close they could not hold on and close over that first resistance rung. NASDAQ lagged and it failed to move over the July closing low or the 2200 level. SP500 managed to close its July low (1200) but it too failed to hold a move over the 10 day EMA. Same action on DJ30, tapping the 18 day EMA on the high then fading to close below the nearest resistance at the 10 day EMA. Still struggling even with a deal supposedly close at hand. Or maybe not given the action in the indices as they reflected the afternoon breakdown in the bailout talks. SP600 rallied as well, but it was the tail of the market, and it failed at the 200 day SMA and gave back half the session's gains. An upside bounce, but no character change in the indices based on this action.
LEADERSHIP. Retail bounced back but it was nothing strong. Retail was already struggling and the bounce was from the recent selling with many bouncing up to next resistance and fumbling about. Very similar to the large cap indices: a move upside but not character changing. Financials were early leaders but they too could not hold up as the 'deal' did not emerge. Of all, energy is setting up to be the leader. Those are setting up some decent patterns as they posted some gains Thursday, bouncing off the recent 3-day pullback or test in these names following a good surge higher the prior week. That is the most promising sector as of the end of Thursday.
THE ECONOMY
Plan 'agreement' falls apart and the whining starts.
I have been on this deal and the WM developments all night and the one thing I am sure of: I am tired of the whining about the 'politics' of the House republicans presenting an alternative to a socialist plan. It is not politics it is a difference of principle as to how our country works, of it being a republic versus a socialist country. I have stated that I believe the government needs to step up and be a big part of fixing what it broke, but that does not mean we have to accept bad bi-partisan, socialist plan over a legitimate alternative.
It appears that most US citizens feel the same way. The consequences are dire if we don't pass some type of plan. Whining about politics because a bad plan gets competition from an alternative, more free-market plan is just tiring. Some whine about partisan politics. Maybe what the republicans are doing is just that and McCain is part of it. I don't know. I do know that all I heard all day from the democrats was blustering about how McCain was seeking an election bailout, etc. CNBC needs to realize that while its anchors live in New York City that does not mean the rest of the country is enamored with New York senator Schumer and wants to hear him politicking on CNBC every day. It was a very clear case of the pot calling the kettle black on Thursday. The senators bicker while Rome burns. Both sides need to grow up.
So, the plan that was 'agreed to in principle' as we heard last night and this morning was not so agreed to. First there was no tranche system then there was a $250B tranche system. There were pay caps to execs, but they were very weak and could be worked around. One of those good for show but not for blow or something like that. The equity interest requirement for the most illiquid participants turned into equity forfeiture for any entity that participates. The plan needs all to participate, but many won't opt to do so if they are otherwise solvent but will lose equity if the come in to help clear the bad loans out of the system as Treasury wants. Seems they are starting with requirement that many institutions won't agree to, severely crippling the plan before it even gets underway.
The early apparent deal became less apparent as the day wore on. Stocks picked up on this and stalled below near resistance. The afternoon meeting with the President turned into a shouting match as the different philosophies came to the surface of just how big we want the federal government to grow. The House republicans are trying to draw a line in the sand after 45 years of socialist growth (70 years if you go back to FDR) with only a brief respite during the Reagan years. Sorry but they have a right to try to air legitimate alternatives to a bad, big government deal. Of course, they all have to get together and do something that is better than what was 'agreed' to earlier. Thus maybe the republican refusal to go along will force all sides to come up with a much better solution, one that no one really likes but gets the job done. When I was practicing law and had to go to mediation, I knew we struck a pretty good deal when all sides didn't like it but it addressed all of the concerns. It is good to see our elected officials put to task and actually earn their perks, retirement packages, healthcare plans, etc. - - all the things we would like but they won't let us have. Time to get to work on a real deal.
Economic numbers taking a turn to the downside: not all that looks bad is totally bad.
August durable goods orders were bad at -4.5% versus the -1.9% expected and the downwardly revised 0.8% in July (from 1.3%). Take out transports and the loss was 'only' 3.0%; a 0.5% gain was expected. Seems autos and airplanes were really weak. Not surprising given that credit is horrid.
Non-defense capital goods fell 7.5% after a 3.5% gain in July looked to be a turning point. Non-defense capital goods less transports fell 2%; this is considered the proxy for business spending. After a 3.1% April gain, a flat May, +1.4% in June and a modest gain in July, they looked to have turned the corner. If they did there was a Mack truck waiting for them.
Jobless claims push 500K.
These are getting to the levels hit in the last recession, coming in at 493K over the 450K expected. The 4-week average is up to 463K, getting close to those recession levels as well. Continuing clams hit a new cycle high at 3.54M after easing a bit last week.
What does this all mean? It means that hurricanes Gustav and Ike put a lot of people out of work. Otherwise claims are basically the same as they were in the prior weeks. No rocket science here.
New home sales hit 1991 levels, i.e. recession levels.
Sales fell much more than expected, declining 11.5% in August. Prices fell to $221.9K from $236.5K. Looks pretty grim, but then again, you want sales and prices to fall so the market can turn around. That is a necessary part of the progression. Unfortunately, right now no one is lending money for anything and thus there is no wonder housing sales are falling.
Why do we have to look back at the next to last recession for a comparison, i.e. 1991 versus 2001? Because during the latter there was that nesting phenomena caused by the 9/11 attack and an aversion to stocks after the 2000/2001 market crash. That kept the housing market artificially high and indeed that is part of the struggle we are living through right now.
THE MARKET
MARKET SENTIMENT
VIX: 32.82; -2.37
VXN: 34.86; -1.54
VXO: 36.75; -2.53
Put/Call Ratio (CBOE): 0.8; -0.25
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: 37.5%. Not much of a drop from 37.9% last week. Down, but just edging lower, indicating most don't understand the gravity of the credit situation. A dive under 35% would be a positive given the inverse nature of sentiment indicators. 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: 40.9%. Bears fell from 43.7%, apparently on the belief a bailout will immediately cure the market's woes. It won't but these guys will apparently need to be convinced. Unfortunately, they will likely get that education over the next several months. 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: +30.89 points (+1.43%) to close at 2186.57
Volume: 1.874B (+3.18%). Modest rise in trade on the upside, but volume was still low overall so this was no change or switch to buyers.
Up Volume: 1.394B (+297.284M)
Down Volume: 453.959M (-241.232M)
A/D and Hi/Lo: Advancers led 1.48 to 1
Previous Session: Decliners led 1.92 to 1
New Highs: 15 (+3)
New Lows: 139 (+6)
NASDAQ CHART: http://investmenthouse.com/ihmedia/NASDAQ.jpeg
Rallied up through 2200 on the high (2210) but could not hold that move over the July closing low as it slumped late. A quite modest bounce given the low volume and the inability to even hold a move through the lowest resistance. It definitely did not change NASDAQ's character. Indeed the lack of strength in the bounce shows the same character, i.e. weak.
NASDAQ 100 (+1.58%) showed the same action as NASDAQ, rallying through the 10 day EMA but unable to hold that move. It is at the March lows, bouncing where it had to but also unable to break near resistance even with an upside bounce on the belief a bailout deal was near. Not much hope or belief in that deal, and it looks as if that was the market making the right choice. After hours RIMM missed earnings. The tech indices were lower.
NASDAQ 100 CHART: http://investmenthouse.com/ihmedia/NASDAQ100.jpeg
SOX CHART: http://investmenthouse.com/ihmedia/SOX.jpeg
SP500/NYSE
Stats: +23.31 points (+1.97%) to close at 1209.18
NYSE Volume: 1.207B (+11.64%). Rising but still well below average volume. As with NASDAQ it shows more interest in stocks to the upside, but it was not clear an convincing by any stretch.
Up Volume: 862.211M (+437.698M)
Down Volume: 339.693M (-310.636M)
A/D and Hi/Lo: Advancers led 2.53 to 1
Previous Session: Decliners led 1.48 to 1
New Highs: 8 (+1)
New Lows: 138 (-23)
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
Bounced off that Wednesday doji at the old mid-1998 peak. Tried the 18 day EMA, fell short, then sold back to close with a gain, but unable to take out the 10 day EMA. Hey, it got over the July low at 1200; small victories can add up to breakouts. This move, however, didn't do much to alter the large cap index' pattern. Trying a higher low indeed, but it has to clear the mid-September peaks with some authority. A deal could do that. Still don't think that would be the bottom but we have to see how the financials react after a deal and the initial upside reaction.
SP600 (+1.05%) was the market laggard. That is the most telling. The small caps are the most economically sensitive stocks and when there was hope for a deal they still lagged. That means the market is not suggesting any bailout will accrue immediate economic benefits other than staving off the Great Depression, Part 2. The small caps rallied to the 200 day SMA on the high and then fell back. A gain, a gain of greater than 1%, but below key resistance and lagging the market.
SP600 Chart: http://investmenthouse.com/ihmedia/SP600.jpeg
SP400 CHART: http://investmenthouse.com/ihmedia/SP400.jpeg
DJ30
The blue chips posted a solid gain, beating out the small caps and the techs to the upside. Tapped the 18 day EMA on high then faded back to close below the 10 day EMA. Still below average volume, still struggling to get back the July lows, but that is still not that bad a picture as it can still make something of a double bottom here. It will need to be a leader if the market is going to hold the line here and avoid a deeper selloff.
Stats: +167.89 points (+1.55%) to close at 11022.06
VOLUME: 218M shares Thursday versus 183M shares Wednesday.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
FRIDAY
No hearings Thursday and the market rallied, but it was rallying on an imminent deal. Tonight that one deal looks dead but a new deal (not the FDR kind) is on the rise. Have not seen many of the details but texting with some savvy economic minds indicates House republicans have come up with a much cleaner, effective, and very importantly, acceptable plan for those 9 to 1 voters who were against the $700B socialist bailout.
While that has thrown the bailout lottery into turmoil and is sending futures lower after hours (along with an earnings miss by RIMM). The House republican Cantor plan calls for a mortgage backed security insurance fund paid for by MBS holders instead of saddling the taxpayer with $700B in debt. It provides temporary tax relief to allow financial companies to free up capital. It suggests financial institutions should suspend dividends and take other steps to address liquidity issues. Hmmm. The financial institutions tighten their belts versus us? That will have some appeal. I don't think the government should be left out, however. As you know, it played a big role in this as well. But if the taxpayers don't have to pay most of the freight, that is good.
At some point a deal has to be struck, but it does not have to be the first plan announced. I always tell people to totally reject a first idea and come up with something that does not buy into the precepts of the initial idea. Then see which is better or if there are good points from each. We are all too willing to buy into what is on the table instead of saying the emperor has no clothes and coming with something new, something that gets the job done better. That is where we are now.
The market is not liking this, not because investors don't like the second plan but because they don't like uncertainty. They want a deal and are guilty of wanting any deal and fast versus a better deal a day or so later. Still the modest gain Thursday may be lost on the open Friday as the bailout remains at issue and RIMM missed its earnings by a penny. It closed at 97.53 and was trading at 77 and change as the late session closed. It is going to get roasted Friday and take other NASDAQ stocks with it (AAPL closed at 131.93 and was trading at 127 late).
Thus a bailout bounce rally is deferred. The bill cannot, however, be delayed too long because the credit markets are locked up again and the world needs to know that the US is going to act on the bad mortgages and in some manner back up the paper and thus allow the world banks to lend money without fear the borrower disappears overnight.
Looks like a downside open and then we have to see how stocks respond, and a lot of that will turn on what happens with the bailout plan's progress. After all, Thursday rallied on that hope after selling to start the week; primed to bounce and talk of a deal pushed the bounce along. When it didn't materialize stocks fell back below resistance. Thus if there is not news of a deal, and given the radical change offered by the adamant House republicans there likely won't be one ready Friday before the close, things could get dicey for stocks, credit, and currencies. Last week we were close to meltdown and the run to Capitol Hill by BP (Bernanke/Paulson; or PB, but that sounds too much like peanut butter) helped calm world markets. Everyone, down deep, still believes a plan will be hammered out, and thus the market will be ready for one. It will take until the weekend, however, to get it done UNLESS the new republican plan gets overwhelming positive support in opposite amounts to the derision the first plan received from voters. If that is the case the democrats and indeed the republicans supporting plan one cannot politically stand in its way. If that happens then a deal is cut, the debates can go on, and they argue about the taxpayers having to cough up $700B or having the financial institutions fund the amount.
With the market likely to open lower we have to wait for the plan announcement rally to take upside plays that are struggling off the table. A gap lower will also prevent taking new downside unless some stocks hang on at the open some. We will simply have to see what the market gives us. In this environment of up 300 and down 300 day to day on the Dow you just have to be patient and not rush into or panic out of positions. You will do that regardless, but you have to just be aware of it and fight it as best as possible. We look at support and resistance, how stocks trade around them during the session, and how they are closing with respect to those levels. That keeps some discipline in the picture but the important thing now is to go slow. That is why we bought just a partial position today.
Some upside we are looking at Friday, however, is energy. We are looking at more positions there as they showed the best strength Thursday. Now they may come back some early given no plan was announced and oil may slide on worries of world economic slowing if no plan is reached (oil was fading after hours on the plan news), but that could give us some good entry points if they hold the line and start back up.
The defensive stocks may also look good such as health and medical as the market worries a bit. They have tested back and could bounce nicely after that pullback as investors dive for some cover.
Again, just need to be patient, keep positions limited, pick our shots, and let the bigger macro mess work itself out. Once the deal is announced and stocks have their initial reaction we will see the market's course it will take for the next few months.
Support and Resistance
NASDAQ: Closed at 2186.57
Resistance:
The 10 day EMA is 2197
2202 is the January 2008 low
2261 is a March 2008 interim low
2286 is the first April 2008 gap up point.
The 50 day EMA at 2291
2300 is some resistance
2340 from the March 2007 low
The 90 day SMA at 2347
2370 from the April 2006 peak
2372 is the trendline from the summer 2004/July 2006 lows, Q4 2005 consolidation
The 200 day SMA at 2376
2378 is the mid-February peak; 2379 from the October 2006 peak
2386 is the August 2007 intraday low
2388 is the June 2008 low
2392 is the April 2008 peak
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 1209.18
Resistance:
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
The 50 day EMA at 1255
1257 is the March low
1270 is the January low
1285 is the recent July peak
The 90 day SMA at 1289
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 1338
1362 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 11,022.06
Resistance:
The 10 day EMA at 11,038
11,061 from February 2006
11,317 from March 2006
The 50 day EMA at 11,369
11,388 is the prior August low
The 90 day SMA at 11,630
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
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 12,179
12,250 from late March 2007 lows
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 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): -4.5% actual versus -1.3% expected, 0.8% prior (revised from 1.3%)
Initial jobless claims (8:30): 493K actual versus 450K expected, 461K prior (revised from 455K)
New Home sales, August (10:00): 460K actual (-11.5%) versus 518K expected, 520K prior (revised from 515K).
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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trading system
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