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us stock market, trend trading stock
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10/01/08 Investment House Daily
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Investment House Daily Subscribers:
MARKET ALERTS:
Targets hit alerts: None issued
Buy alerts: DUG; USB
Trailing stops: None issued
Stop alerts issued: DGX; TSCO
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SUMMARY:
- Market backs off, once more awaiting a bailout decision.
- GE next in line at the Buffett well. Savior or Mr. Potter with an affable smile?
- ISM disappointment is a setback for improving economic data, indicating the credit freeze has yet to be felt impact.
- What if a bailout worked as planned and didn't help the economy?
- September lives up to its infamous reputation and now we see if October can again play the market bottom month.
A quiet session after a lot of violent moves.
Big selloff, big bounce, then nothing. Stocks started lower and you could blame a 23% decline in weekly mortgage applications and GE getting its target cut by analysts. There was definitely no new money coming into the market even with the start of a new month and a new quarter. A better ADP jobs index (-8K versus the -50K expected), LIBOR rates coming down, and lower crude yet again (supplies rose 4.3M bbl versus the 2.8M expected) could not get things loosened up.
Nonetheless stocks started lower and were bouncing after the first half hour. Then the ISM came out and at 43.5 it was well off expectations and the recent range at 50ish. That rattled investors and stocks sold to session lows with NASDAQ down 45 points, DJ30 down 220 points. Buffett struck again, however, putting $3B into GE though as with the GS deal, he got a lot more value than $3B with perpetual preferred stocks with 10% dividends, rights for more shares, etc.
Everyone hangs on Buffett's every word as if he dispenses his knowledge with no motive other than to make you happy and wealthy, something like a financial Santa Clause. Buffett never uttered a word that was not designed to make him money. All he said as the financial crisis was nothing other than an occasional he saw no value. Of course not; he wanted things to get really ugly and he coveted some financial institutions for his Berkshire Hathaway. There was no commentary at all from Buffett and then bang, he puts $30B in GS. Then bang, another wad of money into GE. Then he gets on the air and says the bailout has to take place or we are in for a financial last supper or something like that. Now he wants it passed because it boosts his investments.
No, Buffett is no great benefactor out there to help us all get through this. He is doing what Potter did in 'It's a Wonderful Life' during the bank runs of the 1930's: everyone was selling but he stepped in and bought. He simply has a better smile and doesn't wish harm on anyone. He is a businessman who takes care of his investors. That is why the give him money and he doesn't let them down. Problem is, however, our legislators and others fawn all over him for advice. He will give it, and it will be sound advice of the kind that benefits his interests.
In any event that helped buoy the market and the indices rallied and took out the morning high. The rest of the afternoon was volatile and after SP500 and DJ30 turned positive mid-afternoon the indices finished lower. Couldn't hold all of the recovery, but it was not bad action. The market can stall around for a few sessions and then break higher once more and show the follow through, indicating the market has a chance at putting together a more sustained upside move. We will see.
TECHNICAL. As noted the intraday action was not that bad. A lower open, a midmorning selloff, and then a recovery close to flat on the NYSE large caps. When taking a breather after a big rebound this is what you want to see.
INTERNALS. After what the market reeled off the prior two sessions and indeed over the past month, the Wednesday action is hardly worth mention. Flat breadth, much weaker volume falling to average on NYSE and below average on NASDAQ. Flat internals matching the market, and that is just what you want to see on a market day off.
CHARTS. Before the Monday selloff and even after the Monday selloff we were talking about DJ30 and how it is still in the running for a double bottom here with this being the second bottom following the July low. Still a bit early to make that call but the sentiment levels hit extremes as the lows were made with the massive, multi-hundred point swings in the Dow. I teach in my seminars that trend changes in the market are just like changes in the weather. During the season the weather is calm, in line with the season. There is an occasional storm, but that is in keeping with the season. When the seasons change, however, the weather turns violent. Fronts come and go, warm and cold air collide, dry and wet weather collide, storms spin off. Violent storms as the new season with its different weather clashes with the season in place. When the change is complete the tempests die down. These massive point swings and widely disparate sentiment and internal indicators show there is a season change at hand.
Moreover, when you look at where DJ30 has tested, there is more credence that this level, though maybe not this particular pattern right here, is going to try and act as support. If you look at a multiyear chart of DJ30, this 10,800 level is the midrange of the 199 to mid-2001 range, and it is also basically the top of the 2004 and 2005 lateral move. A stock or index in a major selloff tends to give back the prior run and hold at prior tops. As indicated, DJ30 is at the pre-recession peak and the initial recovery peak following the recession and market recovery. SP500 is basically in the same situation, tapping at the midrange of the 2004 lateral consolidation on this weeks selling. That suggests these indices are at levels where they can find bottom and launch a new upside run. The massive bailout bill, despite its horrible implications with respect to federal government bloat, may be the trigger to the move.
The BIG caveat (you knew it was coming): If this is THE meltdown where all of the past Greenspan liquidity bailouts for 18 years comes back on us in a flood of dollars as foreign confidence in the US tanks, then the support points from the past decade are not going to hold it. There is that massive run from 1995 through early 2000 that was part of the Reagan 'new America' created when his policies helped break inflation, but that 1995 to 2000 move was much too strong for sustained growth and was fueled by the Greenspan era of easy money and a policy of dumping liquidity at any financial hiccup. This credit crisis is of the nature of what we will see some day (and not be able to avert) as a result of that policy of massive liquidity to prevent a recession at any cost. Those billions and indeed trillions of dollars in foreign hands will some day come home. At some point we won't be able to outrun the tide with more massive liquidity injections. At some point that policy won't carry the day and they will dump dollars on us and the currency will deflate and inflation will run wild while our hard assets deflate along with the currency.
If the bailout is enough (fittingly it is the largest ever; it will take more and more each time) then we put it off for another period of time and the market rallies. All is well (except for our children who have to live with a government now in our financial institutions, a position it will be loathe to give up and of course the ultimate reckoning) and our cars and homes are safe for now. IF the bailout is not enough, however, the Dow goes down to 7000ish near term. If we take the wrong steps and don't spur the economy in the RIGHT way, e.g. marginal tax rate cuts, tax credit incentives (R&D, business capital equipment, personal investment/savings), zero capital gains tax, zero or low corporate taxes, then we suffer a sharp and deep recession that takes the Dow to the 1994 levels just below 4000 as ALL of the Greenspan liquidity fixes are overturned. That would not even do it all, but that would be enough. If SP500 follows that would take it down to 460ish with a stop at 750ish along the way.
As you can see, the stakes are big. Huge. Our point: If this is THE big meltdown, then the bailout won't fix the problem. The problem is a debased currency through excessive liquidity. The bailout only adds more liquidity on top of worthless mortgage assets, basically liquefying bad assets to make them appear valuable. The way to fix that is to let the bad assets go to zero as they should and not divert good money after them. Instead, use that money to incent real capital investment in the US to create new technologies and assets once again just as in the early 1980's when we came back from the brink after 16 years of huge federal expansion and regulation that choked our economy and our entrepreneurial drive. We need to get us back to investing in real assets in the US, not 'no doc, no credit, nothing down' mortgages that were not worth the paper they were written on.
LEADERSHIP. Strong financials, not all, are looking good. These are the ones without the crap on their books and they are looking solid; the bailout won't hurt them at all. They are getting all the money because of their strength. Homebuilders are still setting up just fine. Some health care/medical remain strong. Food purveyors, at least some of them, look pretty good (PEET, MCD, SNS). Food makers/processors also look decent (CPB, KFT). Those latter groups are not frontrunners for a strong economy. A definite mix of defensive and growth/early cycle stocks. Shows the market's indecision. Want to see new leadership groups stepping up. It doesn't help that transports, early leaders in the economic recovery story, look to be rolling over.
THE ECONOMY
ISM takes a sharp turn, signaling purchasers are very worried about the credit freeze ramifications.
After 4 months at or near 50, the breakeven point for the manufacturing sector, the national ISM fell to 43.5 versus 49.5 expected and 49.9 in September. That is the fastest decline since the 2000/2001 recession. The ISM is not based on hard numbers but projections for the period ahead. It is thus something of a confidence report, but it is more accurate than the consumer because these are business planners that have to run their businesses not buy a new purse, shoes, etc. Emotion still enters, but it is more muted.
What this shows is that there is a very real possibility that businesses stop spending. The economic data up to this point was not great, but it was improving with durable orders up, business investment, while hot and cold, hanging in there. Factory orders showed an unexpected dip last month, however, and this ISM could lead to more trouble ahead with if businesses feel a recession is coming. Maybe the bailout will instill new confidence and we spend like crazy. Maybe. ECRI still suggests recession conditions are here. Much is thus at stake. Will the bailout fix the problem if the credit freeze leads to a spending freeze and a recession?
The REAL ECONOMIC PROBLEM that the bailout won't fix.
Will the bailout help companies worried about the future? Not much. If it is a success, if it does all that the feds want it to do, it will unfreeze credit. That means companies can get money to expand, etc.
Problem is, will they want it at that point? The damage is already done. What good does it do to have money available if everyone is in recession, business stinks, and they have no incentive to go and borrow because why incur interest or buy new equipment when you won't make enough money to pay for it? In short, the bailout plan could be a complete success and still not help. The Houston Texans drafted Mario Williams instead of Vince Young or Reggie Bush for the stated reason the team wanted to have a draft pick signed by training camp and they felt Young or Bush would hold out for money. Never mind the team needed serious help on offense and either of those two would have made a huge difference and filled the stadium for years to come or would provide multiple players in a trade. Nothing against Williams. The point is, Williams had the best season they could have hoped for; a great season. Nonetheless it didn't help the team significantly. Williams did everything and more that the Texans could want and they still sucked. That could very likely be the result of this package.
What will help our manufacturers of all sizes are tax cuts, tax credits, and other incentives to invest in the US. As with other weak times, we have to encourage investment such that you lose if you don't use it. If you get a $5K tax credit (taken off the bottom of taxes) for certain behavior such as capital asset purchases, employee hires, etc. you do it. Otherwise you send the money to Washington and get nothing for it. This way you spend the same money but you get something you want and need for it. The ONLY thing the planned bailout does is, if successful, make credit available. It does nothing to stimulate the economy to get out of the recession it looks that we are heading for as a result of the credit freeze impacts. The AMT extension, the renewable energy incentives are nothing; chicken feed to get more votes.
There are many tragedies with this plan: we take on huge debt, the federal government expands into ownership of our financial institutions, we benefit the wrongdoers, and if it works as expected, it doesn't cure the recession we appear to be heading to.
THE MARKET
MARKET SENTIMENT
VIX: 39.81; +0.42. Hit 42.38 on the high, its third straight day topping 40 on the high with that 48.40 peak on Monday.
VXN: 42.92; +0.34
VXO: 45.27; +0.76
Put/Call Ratio (CBOE): 0.99; -0.31
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: -22.48 points (-1.07%) to close at 2069.4
Volume: 1.931B (-10.05%)
Up Volume: 486.606M (-1.52B)
Down Volume: 1.435B (+1.067B)
A/D and Hi/Lo: Decliners led 1.71 to 1
Previous Session: Advancers led 1.9 to 1
New Highs: 7 (-8)
New Lows: 155 (-104)
NASDAQ CHART: http://investmenthouse.com/ihmedia/NASDAQ.jpeg
NASDAQ is not the leader, at least to the upside. Its pattern is not like the NYSE large caps as it broke down from a head and shoulders and has yet to make it even back up to the neckline on the rebound. It is not dealing from a position of strength and indeed with many large cap techs in swan dives they are not ready to lead back up. NASDAQ is at the 2004 highs having fallen through the 2006 and 2005 highs. It might not be in position to immediately recover, but it is in position to start to put together a bottom. It has a ways to go in doing that, but it can work on it while DJ30 tries to lead.
Haven't mentioned SOX (-1.19%) in quite awhile. Why? Because it has shown no inkling of leadership either way. It is a whipped dog, tagging along on all of NASDAQ's moves.
NASDAQ 100 CHART: http://investmenthouse.com/ihmedia/NASDAQ100.jpeg
SOX CHART: http://investmenthouse.com/ihmedia/SOX.jpeg
SP500/NYSE
Stats: -3.68 points (-0.32%) to close at 1161.06
NYSE Volume: 1.369B (-14.43%). Average volume, leading the NASDAQ and its low volume.
Up Volume: 698.382M (-712.817M)
Down Volume: 665.492M (+497.709M)
A/D and Hi/Lo: Decliners led 1.02 to 1
Previous Session: Advancers led 3.96 to 1
New Highs: 17 (+9)
New Lows: 237 (-107)
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
Held steady right at the mid-September low, holding the Tuesday rebound, taking a breather, on lower, average volume. Its test is a bit deep to hold and result in a double bottom, but if the Dow is ready to lead and some financials looking solid, SP500 will follow along. As noted above it is at the 2004 levels, a point it could find support, particularly if DJ30 does. Still that ugly multiyear double top that would be the classic pattern for that meltdown discussed in the market summary above, but we won't go there right now.
SP600 (-0.53%) again held above the January, March, and July lows, bouncing Tuesday and hanging onto the gains for the session. It is still in a trading range, not making new lows on the selling. That is an overall positive for the market and economic outlook, but it is a long way from a new breakout.
SP600 Chart: http://investmenthouse.com/ihmedia/SP600.JPEG
SP400 CHART: http://investmenthouse.com/ihmedia/SP400.jpeg
DJ30
A lot of print tonight analyzing the DJ30 pattern. The flat session on lower volume shows it is still in position to make a double bottom and then make a new breakout off of the 2004/2005 peaks.
Stats: -19.59 points (-0.18%) to close at 10831.07
VOLUME: 108M shares Wednesday versus 319M shares Tuesday. Good low volume pause after the recovery, but it still has to play out, meaning it has to make its move after this pause, i.e. a follow through or roll back over.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
THURSDAY
September certainly lived up to its reputation as the worst month for the market and it saved the best for last. Now we see if October lives up to its rep as the month the market's selloffs bottom.
DJ30 is trying to put in a double bottom over the 2004 highs. The market internals were extreme. Sentiment is extreme. Violent point swings. Issues are being eliminated in the form of financial institutions that failed or were taken out. It all adds up at least to the process of bottoming.
Now you look to see what stocks break higher out of solid bases. Some have been doing so such as the leading financials. At the same time we look for the indices to provide a follow through sometime from Friday to Tuesday, i.e. another big upside move on strong volume and with good breadth. That sets the foundation for a new sustained rally. Of course the market has to produce leaders to pave the way or else the follow through will not morph into a sustained new bull run.
The indicators all suggest a bottom trying to bounce to a new rally though leadership is a bit thin. The wildcard, the thing that clouds the picture, is the bailout band aid. Maybe it works to put the bottom in; the financials will certainly like it. On the other hand, the government is spending all its potential economic rescue money on buying worthless mortgages and won't have any to stimulate the economy if the credit freeze leads to a recession as some data suggest. That is what made this bailout so difficult because many feel it is not the solution that addresses all of the problems that we have in front of us.
As always it is incumbent upon us to watch for a follow through and watch what the leaders in financials (always an important leadership group in any recovery), homebuilders (early cycle), biotech/medical (defensive yet growth) do. We have several on the report, have bought some, and if they make strong breakouts we will add some more.
At the same time the indices are at the nascent stages of trying to turn the selling into a significant advance while in patterns that are best described as downtrends. A lot can upset the cart along the way to a follow through. The House still has to pass the bill the Senate just passed. The market would rally on the bailout passage by the House, but then we see if the market then prices in a recession or continues the breakout. We have looked at some downside positions on the indices, but we will have to wait now and see the House decision. We expect that to pass, lead to a bounce, and then the real reckoning begins. That is when we will look at more downside on the indices. There are individual stocks, however, that still look ripe to fall regardless of the overall market, and we will look at those.
Basically for now we look for strong stocks ready to break higher and lead a follow through move. As noted above, the leadership ranks are still thin and a rally needs plenty of growth stocks to lead it. If more stocks don't step up that casts doubt upon any follow through and we just have to keep on our toes in the event there is a stall in the indices and a volume turn lower. The indicators suggest a bottom is trying to make the market turn but it has to be backed up with high quality stocks. Just keep that in mind as the market makes a run at a new rally following the bailout passage. With the House still to vote as late as Friday morning (along with the jobs report), Thursday could be a wait and see session.
Support and Resistance
NASDAQ: Closed at 2069.40
Resistance:
2099 is the mid-September closing low
The 10 day EMA is 2131
2155 is the March 2008 low
2167 is the July 2008 low
The 18 day EMA at 2174
2202 is the January 2008 low
The 50 day EMA at 2260
2261 is a March 2008 interim low
2286 is the first April 2008 gap up point.
2300 is some resistance
2340 from the March 2007 low
The 90 day SMA at 2330
The 200 day SMA at 2364
2370 from the April 2006 peak
2378 is the mid-February peak; 2379 from the October 2006 peak
2381 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 1161.06
Resistance:
1200 is the July 2008 intraday low
The 18 day EMA at 1201
1239 is the 2002/2003 up trendline
The 50 day EMA at 1240
1244 is an August 2005 peak
1257 is the March low
1270 is the January low
The 90 day SMA at 1278
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 1331
1364 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 10,831.07
Resistance:
10,962 is the July closing low
11,061 from February 2006
The 50 day EMA at 11,284
11,317 from March 2006
11,388 is the prior August low
The 90 day SMA at 11,545
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 12,126
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): -8K actual versus -53K expected, -37K prior (revised from -33K)
Construction spending, August (10:00): 0.0% actual versus -0.5% expected, -1.4% prior (revised from -0.6%)
ISM Index, September (10:00): 43.5 actual versus 49.5 expected, 49.9 prior
Crude oil inventories (10:35): +4.2M actual versus +2.8M expected, -1.52M prior
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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