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world stock market, us stock market
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9/30/08 Investment House Daily
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MARKET ALERTS:
Targets hit alerts: None issued
Buy alerts: JPM
Trailing stops: None issued
Stop alerts issued: RMD; SGEN
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SUMMARY:
- Relief bounce in morning turns to a surge as a news triumvirate powers stocks in afternoon.
- Economic data is hanging in there as Chicago PMI, confidence surprise upside.
- Lipstick on a pig: a vote tomorrow on the same package with a few additions.
- Burden on the upside to prove it has made the turn.
Stocks surge back, aided by more bailout promises.
After slamming hard into the pavement Monday, stocks bounced in relief even in the face of not great news. The Case/Schiller home price index fell 16.3%, another record, as prices continue to tumble. Gloom and doom as usual, but that is how the housing market rights itself: prices fall to a point where they become affordable with existing mortgage rates. With relatively low rates and diving prices, that level will be hit before long. LIBOR rates surged a record level, rising 431 basis points overnight to 6.88%. This is up from 2.57% on the prior close, a level LIBOR just fell to thanks to the Fed coordinated injection of $600+B into the world financial system on Monday. Once more the credit situation goes into gridlock shortly after the world central banks try to force feed liquidity. Seems the formula is not agreeing with the system. Perhaps there is simply not enough man-made liquidity to do the job and all of this extra money is not only failing to get the credit markets working again but is piling up and threatening currency crises around the globe if gridlock remains.
Don't tell that to the dollar, however. It had, and I say this with all caution, a huge, huge day. It gained over 3.5 cents against the euro, driving the euro down to 1.4078 dollars, i.e. a 2.48% move. That is simply unheard of. All of those dollar traders and speculators trying to keep a lid on the dollar have lost control. The dollar came back to test its last down trendline in the decline from late 2005 after breaking it three weeks back, and it exploded off of that level. That is a silver lining: the dollar surging even as billions of dollars are flooding the market and the Fed Funds futures now indicate a 50BP cut in rates by November. It also shows that the dollar's weakness was not solely due to the US strength or lack thereof but some big currency players using the Fed's rate cutting and the Administration's lack of concern as aides to short the dollar. The lid has blown off the pot with Europe falling into recession and we are talking the textbook kind with negative growth rates something the US has yet to do even though we slowed first. Stronger than many think?
Let's see. The credit freeze is helping no one in the economy, but the economic data from September, the latest available, is still coming in stronger overall. There was a lapse with the factory orders, but Tuesday the Chicago PMI came in at 56.7 versus 54.0 expected. Down from 57.9 in August, but that keeps a renewed string of above 50, and well above 50 at that, readings. Fifty is the baseline, and anything above it shows expansion.
There was also the consumer confidence report. Now we don't put a lot of stock in month to month readings because the macro picture tells the story, i.e. if it is in the fifties then it is at levels that indicate significant consumer curtailment. Well, it is still there with the 59.8 reading for September, but that topped the 55.0 expected and the 58.5 prior that was revised HIGHER from 56.9. Love to see those upside revisions as it shows the economists are too negative and that is typically associated with upside turning points in the economy. There have been upside revisions in durables orders as well. Some momentum is there and we just have to see how hard the credit issues impact us. Right now we are hearing from Trump, Steve Wynn and others that there is credit out there. Of course they have pretty stout balance sheets . . .
Back to the market. It started higher, got a bump higher, but then flattened out over lunch and some were thinking the old pattern might assert itself, i.e. a peak and then an afternoon selloff. Then the news triumvirate hit. First, some key republicans said that if the bailout bill was put up again it would pass. Second, there was to be a new vote taken this week (after hours it was announced the Senate would vote on the bill Wednesday). Third, the SEC stated that the mark to market method may not be the best way to handle assets in times such as these, this ahead of a Thursday rules conference. That suggested the MTM rule would be suspended or modified. The market took off to the upside. When it did not sell back after that surge then the afterburners kicked in during the last half hour as shorts had their privates squeezed.
The result was 2.5% (small caps) to 5.9% (NASDAQ 100) gains. On any given day these would have been massive gains. As the fell on the heels of even more massive losses the prior session, however, some of limelight was stolen. I am reminded of Billy Crystal in the really bad 'Mr. Saturday Night' movie where he comes onstage after the Beatles. Tough act. Or more accurately, like Tom Petty singing after Roy Orbison in a Traveling Wilburys song: good but not great like the preceding singer (Tom Petty said himself that no one in the group wanted to sing after Roy). In short, the price gains were great. It was a good rebound, something more than just a relief move, but we all know that relief rallies in bear markets are ferocious. With the indices and many torched and burned stocks still buried in downtrends the upside has to prove it is something more than a relief bounce.
TECHNICAL. Intraday the action was strong with a higher start, a rest, an afternoon rally, a sprint to the close. Strong to the upside, but no stronger than the downside move Monday that started tape to tape low to lower.
INTERNALS. Not bad with higher and above average volume, 4:1 breadth on NYSE and 2:1 on NASDAQ. As with the comparison with Monday for the magnitude of the gains, however, the internals pale. Strong, but the downside was stronger. Maybe that was the washout and this upside is a real positive. A recurring them tonight is, however, the upside has to prove itself.
CHARTS. SP500 recovered the prior September low by a hair. Maybe it forms a 2 week double bottom to finish off the selling. That usually doesn't happen. Typically the double bottom to end a bear selloff has a few months or so between the bottoms, setting up a wide, stable foundation to move up off of. It 3 months in 2002 for comparison. DJ30 is similar though its short double bottom looks a bit more interesting; of course its prior September low looked interesting as well as a possible double bottom with its 10 week spread. NASDAQ could not even make it to the September closing low though it did wave at it on the high before a modest fade late. NASDAQ looks, how do you say it, crappy. SP600 held some support at 350 just over the 2008 lows. Maybe we get a trade back to the upside in its trading range here. In short, the indices are not powerhouses and you have to have the eye of an ancient astrologer trying to see the shapes of Scorpio, Leo, etc. in the stars in the sky to try to see great patterns here. That goes against the old rule: if the charts are not talking to you, don't fill in the words for them. The burden is, all together now, on the upside.
LEADERHIP: All held up fairly well with the financial leaders rebounding after that late Monday tank. The defensive stocks did not rally (medical appliances, drugs) though they held their patterns; it was not the day for defensive stocks as the rebounders were in vogue. The defensive stocks will still have their day. Consumer staples were fine, homebuilders held up well, but outside of the financials (and the few leaders there) the moves by good patterns were limited. A lot of stocks rebounded but that was after a massive slaughter and they were already in pretty terrible shape. AAPL, RIMM, AGU, FCX and on and on bounced sharply but their patterns are just horrid. That is what relief bounces look like. In any event leadership has thinned a bit once more and this dive lower, while not wrecking many of the current patterns that are holding up, did not help build any new patterns just yet.
THE ECONOMY
More people saying 'let nature work.'
Last night I wrote that the Fed should raise rates right now, not cut them. Of course that would be part of a plan that lets a few dozen or more banks fail along with cutting capital gains and corporate tax rates to zero or even better, institute a flat 11% income tax or just an 11% sales tax with no income tax on anyone or any entity. Oh, I am sorry. I got carried away, dreaming things were like they were back when our founding fathers drafted the Constitution envisioning a central government with express and limited powers versus the all-powerful federal government that has rammed its way into every aspect of our lives in order to "insure our freedom and autonomy." The old phrase 'have to burn it to save it' comes to mind though it is not really accurate.
No, with the current mindset and control of Congress we will be lucky if the bill is not loaded up with massive amounts of pork and giveaways and then rammed through Congress without any bipartisan input. It is in the top two or three largest land grabs in the federal government's history with its requirement that any participant give up equity to 'the people' (read the federal government) and the desire for ALL financial institutions to participate (Barney Frank said they all need to participate or the plan won't work).
Yes there is a clear, understandable reason, albeit unfathomable by Congress, this bill failed due to lack of support from voters. As I blogged last night in response to a show with 'experts' telling us we are all too stupid to understand that we have to be for this bailout or we will suffer dire consequences:
Your guests missed the point as to why the electorate is 90% against the bailout as structured. Yes we are mad at Wall Street and the federal government for their hands in the financial mess but more than that we have a visceral reaction to the massive expansion of the federal government, e.g. taking equity in private companies, particularly financial institutions where we keep our money. We are unwilling to sacrifice our beliefs for an expedient fix that uses the Constitution as a doormat and cedes our rights and our children's rights to the federal government. A big government bailout is tempting, but at the next inevitable crisis do we fight for our rights granted under the Constitution or do we just take the government's best offer?
Many are now saying just let the market take these guys out and let's clean out the system and start from a strong base as in 1980 and 1981. We can let them fail and still maintain a strong foundation if we cut marginal tax rates, provide tax credits for R&D, for small business, cut capital gains to zero, and eliminate or drastically reduce corporate taxes. We protect against runs on the stronger banks by upping the FDIC insurance to a high amount. Our dollar would remain strong with these policies even as the rot was cut from the economy.
Instead we have the financial institutions and their billions talking to Congress saying 'we cannot fail or we take all of you with us.' You have Treasury Secretary Paulson, former GS CEO, meeting in private with the current GS CEO and AIG; no one else allowed. Of course GS has a $20B+ exposure to AIG. What an astounding conflict of interest. Yet Congress is trotting in line behind Paulson and the financial interests, buying the entire lot without question. I posit, as do many much smarter people such as Jimmy Rogers who are not tied to the financial sector, that we would survive the loss of many financial institutions and come out stronger. The government should encourage development and investment as outlined above, however, as the government, as discussed last week, has very dirty hands with respect to the situation we are in with the absurdly low interest rates, massive liquidity, lack of oversight, promotion of bad lending policies, etc.
Of course I am off in Oz again with this kind of proposal. Did I tell you I was going to flap my wings and fly to the moon after this?
THE MARKET
MARKET SENTIMENT
VIX: 39.39; -7.33
VXN: 42.58; -6.98
VXO: 44.51; -7.33
Put/Call Ratio (CBOE): 1.3; -0.08
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: +98.6 points (+4.97%) to close at 2082.33
Volume: 2.146B (-24.51%)
Up Volume: 2.007B (+1.927B)
Down Volume: 367.456M (-2.392B)
A/D and Hi/Lo: Advancers led 1.9 to 1
Previous Session: Decliners led 6.55 to 1
New Highs: 15 (-6)
New Lows: 259 (-462).
NASDAQ CHART: http://investmenthouse.com/ihmedia/NASDAQ.jpeg
NASDAQ bounced up to the prior September closing low at 2100. Would have preferred another nasty drop early Tuesday. Now it is in the process of trying to rebound but not really having cleaned out the pipes. This is still a really weak pattern as it rebounds toward the neckline of its head and shoulders pattern it just broke down from. That is not a promising prognosis for another significant run higher right here.
NASDAQ 100 CHART: http://investmenthouse.com/ihmedia/NASDAQ100.jpeg
SOX CHART: http://investmenthouse.com/ihmedia/SOX.jpeg
SP500/NYSE
Stats: +59.97 points (+5.42%) to close at 1166.36
NYSE Volume: 1.599B (-18.79%)
Up Volume: 1.411B (+1.348B)
Down Volume: 167.783M (-1.737B)
A/D and Hi/Lo: Advancers led 3.96 to 1
Previous Session: Decliners led 16.77 to 1
New Highs: 8 (-27)
New Lows: 344 (-1048)
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
Recovered the prior September low on the close. Hard to call this a meaningful reversal but it is the start of a new rally attempt so we see if it can deliver a follow through starting Friday through Wednesday of next week, i.e. after a pause a resumption of the strong upside showing the buyers are back. It would be nice if there were more good patterns to support it. Financials are trying to set up; could be something there.
SP600 (+2.56%) was a definite laggard. Heck, it was the laggard. It did hold near the bottom of its 9 month trading range and maybe we get a bounce up here that we can play with some small cap index options. At least the economically sensitive small caps are not folding the tent.
SP600 Chart: http://investmenthouse.com/ihmedia/SP600.JPEG
SP400 CHART: http://investmenthouse.com/ihmedia/SP400.jpeg
DJ30
The blue chips rode the rebound of JPM, PG, XOM, and even its tech components rallied. It has the look of a short term double bottom attempt; as noted earlier, however, it had that look last week as well. If you look at the past 12 weeks, however, despite the dive lower two weeks back and then the Monday undercut of that low, there is still the foundation for a double bottom base that is big enough to support the final bottom. As with SP500 it has to prove it with some follow through, more good volume, etc. but it is there. We are looking at some possible upside plays on the Dow as well as being ready in the event Tuesday was just a one-day wonder.
Stats: +485.21 points (+4.68%) to close at 10850.66
VOLUME: 319M shares Tuesday versus 386M shares Monday. Lower but still well above average volume as the Dow found some buyers and rebounded sharply.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
WEDNESDAY
Here we go again with another vote on the same old bailout bag the House voted to take out to the trash Monday. This time the Senate takes a crack at it. There are some additions. The FDIC will up insurance amounts to $250K to prevent investors from running on banks. Something styled 'mental health parity'; of course that is at the heart of the financial crisis. Also, some tax measures limiting the AMT, $8B in relief for Ike victims, and renewable energy incentives are included. NY Senator Schumer called it a 'brilliant' move. Politically yes, but many in the House were unimpressed.
So the market rallied in anticipation and Asian markets are up as well. Relief bounce may morph into something stronger. We will have to see as noted earlier. We are likely to see more recoveries in the severely damaged stocks that were crushed and are rebounding. They are in need of bases. We are going to have to look at both upside and then be ready for the downside if the move suddenly runs out of gas. There won't be a vote during market hours Wednesday as it has to wait until sundown for the Jewish celebration to end.
The market is likely to continue to the upside in anticipation but we watch the strength and how the rebounding stocks perform. The bill could pass and after all is over with the market still falls again. The fix is not overnight though it does inject some kind of confidence there won't be meltdown. Socialism, but no meltdown other than our Constitutional rights. Thus we will use a bounce to get rid of laggards that are not blasting off. We will use it for really good stocks that have shown accumulation bases or trend reversals but not so much on stocks that were slaughtered and are rebounding. And then the downside possibilities after the bounce runs its course.
In short, there is promise in the sharp dive and massively negative readings associated with the dive. Then there is a bailout. That can always act as a turning point. The two combined are powerful. There needs to be more solid leadership, but as we have often discussed, they can form up over a few weeks while the current crop does the heavy lifting. If the solid upside buys are there, we take some. At the same time we watch how the indices respond as they rise and if they start rolling over at resistance.
Support and Resistance
NASDAQ: Closed at 2082.33
Resistance:
The 10 day EMA is 2142
2155 is the March 2008 low
2167 is the July 2008 low
2202 is the January 2008 low
2261 is a March 2008 interim low
The 50 day EMA at 2267
2286 is the first April 2008 gap up point.
2300 is some resistance
2340 from the March 2007 low
The 90 day SMA at 2333
The 200 day SMA at 2367
2370 from the April 2006 peak
2378 is the mid-February peak; 2379 from the October 2006 peak
2379 is the trendline from the summer 2004/July 2006 lows, Q4 2005 consolidation
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
1912 from April 2005
1900 from August 2004
1882 from October 2003
1782 from August 2004
S&P 500: Closed at 1166.36
Resistance:
1200 is the July 2008 intraday low
The 18 day EMA at 1206
1239 is the 2002/2003 up trendline
1244 is an August 2005 peak
The 50 day EMA at 1244
1257 is the March low
1270 is the January low
The 90 day SMA at 1281
1285 is the recent July peak
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 1333
1362 is an ancient trendline
Support:
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.
1107 to 1011 from a June and July 2003 peaks
Dow: Closed at 10,850.66
Resistance:
10,962 is the July closing low
11,061 from February 2006
The 50 day EMA at 11,302
11,317 from March 2006
11,388 is the prior August low
The 90 day SMA at 11,564
11,635 is the January intraday low
11,670 is the May 2006 intraday high; 11,642 closing
11,700 is the 2004/2005 up trendline
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 12,138
12,250 from late March 2007 lows
Support:
10,827 is the July 2008 intraday low
10,459 is the recent September 2008 low
10,215 from Q4 2005
10,127 is an April 2005 low
10,100 to 10,000
9937 from May 2004 low
9814 from August 2004
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
September 29 - Monday
Personal Income, August (8:30): 0.5% actual versus 0.2% expected, -0.6% prior (revised from -0.7%)
Personal Spending, August (8:30): 0.0% actual versus 0.2% expected, 0.1% prior (revised from 0.2%)
September 30 - Tuesday
Chicago PMI, September (9:45): 56.7 actual versus 54.0 expected, 57.9 prior (revised from 56.9)
Consumer confidence, September (10:00): 59.8 actual versus 55.0 expected, 58.5 prior (revised from 56.9)
October 1 - Wednesday
ADP employment survey, September (8:15): -53K expected, -33K prior
Construction spending, August (10:00): -0.5% expected, -0.6% prior
ISM Index, September (10:00): 49.5 expected, 49.9 prior
Crude oil inventories (10:35)
October 2 - Thursday
Initial jobless claims (8:30): 475K expected, 493K prior
Factory Orders, August (10:00): -2.9% expected, 1.3% prior
October 3 - Friday
Non-Farm Payrolls, September (8:30): -105K prior
Unemployment rate, September (8:30): 6.1% expected
Average workweek (8:30): 33.7 expected
Hourly earnings (8:30): 0.3% expected
ISM Services, September (10:00): 50.0 expected, 50.6 prior
End part 1 of 3
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