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money investment, investment help
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10/07/08 Investment House Daily
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MARKET ALERTS:
Targets hit alerts: None issued
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Trailing stops: None issued
Stop alerts issued: CFR; HCBK; WBSN
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SUMMARY:
- Commercial paper rescue plan offered some hope, but that did not last.
- Consumer credit hits a record low as the credit freeze hits Main Street.
- Heading back to where the last bull run started.
- The indications are right but the leadership and magnitude of the challenge are not.
More promised action does little to pacify the market as the $700B big stick has yet to scare any sellers.
Futures were lower Tuesday morning, suggesting the Monday afternoon rebound was dead as soon as the Monday closing bell rang. The Fed came out with some more TAF refinements, but that only disappointed the market that was looking for a rate cut. Disgruntled investors wanted something from the Fed as LIBOR was up again (up 157 points overnight to 3.94%). Australia cut interest rates 100BP versus the 50BP expected. AMD announced a cash injection in the form of ventures with an Abu Dhabi firm and AMD bounced up 25% pre-market. Nothing else did.
Then the Fed came out again and hit the right buttons with investors, announcing a commercial paper initiative where the Fed would buy 3 month commercial paper, both asset backed and unsecured, the later in exchange for some fees. Futures jumped positive on the news. The market jumped positive on the open as well. Maybe it could pick up where it left off Monday with another little Fed assist.
Stocks fought off an initial sell attempt and rallied back positive to close the first hour. That was it, however. The indices started a jagged move lower, tried something of a double bottom right before lunch, but that fizzled as Bernanke's speech at a luncheon of business executives was soft on positives other than making it clear the Fed was likely to cut rates, really the opposite of what it needs to do with respect to those. The market faltered, but then bounced on FOMC minutes that were not doom filled. Consumer credit came out down almost $8B, a record amount. It was downhill from there with the selling pace picking up into the close, undercutting the Monday lows.
TECHNICAL. The Monday afternoon recovery bounce did as feared, i.e. acted as a safety valve that let off selling panic. The market did not get sold off enough and thus the bounce attempt Tuesday failed and stocks sold hard again. Okay, so then maybe now it is oversold enough, right? It probably would be other than the intervening 500 point rebound. That allowed a recovery, a stiffening of the spine. Now we go through the process again, looking for that puking on the exchange floor. That is the new technical/sentiment indicator of the 2000's.
INTRADAY. The old high to low to really low. Monday may have been low to high, indicating some type of upside bias on that day given the emergency G8 meeting France wanted, but that turned to macaroni on Tuesday. Maybe investors were disappointed that it was only European countries meeting and that Germany, the EU's biggest country, didn't even attend. Whatever the reason the action Tuesday was modestly higher and then crushed out like the last cigarette in a chain smoker's pack.
INTERNALS. More ugly breadth (-6.7:1 NYSE, -4.3:1 NASDAQ) and still a lot of new lows (1146 NSYE). Volume was lower but still well above average. There was no lack of sellers. In other words it was not just a lack of buyers though they were not in the building at all.
CHARTS. New lows once more for the year. NASDAQ is ready to undercut the August 2004 low and head toward a consolidation range in mid-2003 with a bottom at 1650. SP500 is already at that 2003 consolidation range while DJ30 lacks another 250 points or so to get there. This is full out selling right now with this third leg lower getting much larger than the prior two legs; a bit of asymmetry there and also reaching very important levels as the gains from the rally from 2003 to 2007 are about to go out the window, or in the case of SP500, they are out the window. Definitely oversold and that 2003 level is a good point to bounce but the market is on its own schedule right now.
LEADERSHIP. Have you seen any? Food is holding its own. Outside of that, the bear market is doing what ugly bear markets tend to do, and that is thrash leaders. That means most of the stocks in decent bases are getting knocked lower. Stocks will have to form up new patterns after this selling is over and the market bounces and then tests this new reaction low weeks down the road. Now as far as all stocks there are some that are already sold out from what they are showing right now. They sold before and are now showing not only a bounce back but actual bottom formation. MU and SNDK are a couple trying to make bottoms, but they are pretty lonely. After this selling we will be watching to see what stocks quickly set up new bases and how many do that. Have to have leadership.
THE ECONOMY
Consumer credit dives when expected to rise: credit freeze hits consumers.
In August, before the major seize up in September, consumers already experienced frosty credit. Credit is measured in two main categories: non-revolving (autos), revolving (e.g. credit cards). The overall credit level fell $7.9B versus the $5.0B gain expected. July was revised higher to $5.2B from 5.0B.
Breaking down the $7.9B decline you see a $0.6B decline in revolving; there is no trouble using the credit cards right. The decline was a $7.3B drop in non-revolving, i.e. the auto sales. Not much of a surprise given the sharp plunge in auto sales announced last week, but it simply shows how there are no sales in autos because there are no loans getting approved. There are cars and buyers; acres of each. Yet there is no money or no willing money to take the sale.
That is a shame and could be a tragedy. It won't be too long before the market dive and the negatives in the news will cause consumers to pull in their horns, close the wallets and purses, cinch up the belt, etc. When that happens it takes quite awhile for them to return. If taxes are raised they are going to get worse and we return to a 1970's like deep recession.
THE MARKET
MARKET SENTIMENT
VIX: 53.68; +1.63. VIX hit 54.19 on the high.
VXN: 58.51; +3.15
VXO: 63.06; +3.56
Put/Call Ratio (CBOE): 1.1; -0.41
Bulls versus Bears:
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: 33.7%. Big drop from 37.5% and below the 35% threshold considered bullish. Now with the bulls down and the bears up big there is plenty of pessimism here. Down from 40.7% on the high during the rally off the July lows. Heading back toward the 27.8% on the low this round. Hit 30.9% low hit in March. In March the indicator did its job with the dive below 35% and the crossover with the bears. 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: 47.2%. Surging from 40.9%. Closer 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 move over 50 takes it to the highest since 1995. Extreme negative sentiment. 35% is 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. 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: -108.08 points (-5.8%) to close at 1754.88
Volume: 2.906B (-17.73%). Down but not that far down. Still hefty selling. Getting it out of its system.
Up Volume: 90.471M (-282.657M)
Down Volume: 2.755B (-361.656M)
A/D and Hi/Lo: Decliners led 4.36 to 1
Previous Session: Decliners led 5.47 to 1
New Highs: 5 (-3)
New Lows: 708 (-433)
NASDAQ CHART: http://investmenthouse.com/ihmedia/NASDAQ.jpeg
After a nod to the upside NASDAQ was down hard again setting a new low for 2008 on continued strong volume. This leg lower has just outstripped the first leg from October to March. NASDAQ is right at the 2004 low (1752), ready to head lower toward the mid-2003 consolidation and the early 2001 low coincident at 1630. That is a key support level ahead for NASDAQ and with this rate of spending it is likely to try and hold. The selling cannot keep this pace forever.
SOX (-9.41%) has hit the 2003 lows. As with NASDAQ, it has been a straight drop and if nothing else, that pace cannot sustain itself and we can look for a bounce near this level. It may just be a bounce, but with the rubber band stretched so tight it will likely be quite a bounce.
NASDAQ 100 CHART: http://investmenthouse.com/ihmedia/NASDAQ100.jpeg
SOX CHART: http://investmenthouse.com/ihmedia/SOX.jpeg
SP500/NYSE
Stats: -60.66 points (-5.74%) to close at 996.23
NYSE Volume: 1.725B (-12.63%). Lower but well above average as with NASDAQ.
Up Volume: 72.957M (-100.423M)
Down Volume: 1.65B (-150.944M)
A/D and Hi/Lo: Decliners led 6.7 to 1. Down but still very negative.
Previous Session: Decliners led 12.12 to 1
New Highs: 7 (+5)
New Lows: 1146 (-517). Dropped 500 but still over 1000.
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
Dove to a new low in 2008 with the resumption of the selling after a modest bounce attempt. A straight dive of 255 points that has taken SP500 to the mid-2003 consolidation, the first one of the rally off the March 2003 test of the October 2002 low. This is a critical test from here to the 970ish level marking the bottom of that consolidation.
SP600 (-5.58%) has broken the bottom of its range in such a big way that is now down at the 2005 low in just a week. There is, however, a solid range of support at the 285 range (closed at 302).
SP600 Chart: http://investmenthouse.com/ihmedia/SP600.JPEG
SP400 CHART: http://investmenthouse.com/ihmedia/SP400.jpeg
DJ30
More of the same story as the Monday afternoon rebound reversed for a new 2008 low. Volume was lower but at the same range it has held for the past week. DJ30 broke through the 2004 lows and it too is heading toward the 2003 consolidation range SP500 is already at. That is at the 9350 to 9000 range. As with the other indices, this first consolidation off of the March low is a key support level as it is the gateway to the rest of the rally gains from the October 2002 low.
Stats: -508.39 points (-5.11%) to close at 9447.11
VOLUME: 362M shares Tuesday versus 391M shares Monday. Hanging in at the same high levels for this entire selling.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
WEDNESDAY
Pending home sales and crude oil inventories are on the marquis, but investors will continue to watch for a Fed rate cut as well as some form of unified action with respect to the global credit issues. In addition it would help if Treasury would get the program in gear with respect to the $700B baby that was passed last week. As one commentator put it, as soon as it was passed Treasury should have announced the person in charge and started buying. If we are going to go this route lets get it in gear so it can start helping the Fed and its massive liquidity binge. The figures being thrown around boggle the mind. $700B to buy crappy loans. $900B for institutions to exchange their bad loans for dollars. Now billions more to actually inject into companies that are deemed needy and worthy of such action. Where do I get in line? Oh yes, at the tax collector's office.
Why the market bottoms in October.
This is ugly selling. The bounce we were ready to try and play if the Monday afternoon reversal held crumbled as hedge funds used a really modest bounce to sell into. They continue to sell as they jump ship on their losing positions to meet margin requirements and raise money for the redemptions to come this month. The market literally has to clear out all of those positions before it can rebound. Pundits often talk of getting the investors to give up as the sign of a bottom, but that is simply a part of getting the positions closed out and liquidity calls satisfied. When done they don't want to do anything with stocks except forget them and go watch football. When they are sold out and can focus on football then we know all of the excess is out of the market and institutional money starts moving back in.
Okay, football is not really the reason why the market bottoms but it often sets up this way and football season is just a coincidence. There is a crisis, positions become less valuable and have to be unwound, the selling continues until it is abruptly over, and then the market starts moving higher. In more recent history that happened in 1987 (bank failures), 1998 (Russian Ruble), 2001 (9-11), 2002 (no crisis, just the end of the bear market).
Now we have the mortgage and credit crises that have paired up to start the market lower in October 2007. The selling was not overly vigorous, but it was tenacious. Many sectors still rallied and posted nice gains, but more and more gave in to the selling. The early summer selling picked up the pace with a straight drop into July. A modest rally in late summer gave way to the full unfolding of the crisis. The selling, as noted above, has been brutal.
As of yet it has not shown the bottom's face. DJ30 had a shot, but it was not time. Most of the leadership areas have been yanked lower and need to rebuild. That can happen when the major indices bounce higher in relief and then test this third leg lower. For now it is hard to play the downside when this oversold as it can reverse and rip positions apart in less than half a session. Thus we are following it lower, looking for the bounce to move in with some upside positions on the indices and some other names that, even in the selling, are attempting to hold the line and set up for a bounce. We can move in on them and make some money as we did with the downside positions but as with those positions we have to look at them as just bounce plays given there is a dearth of leadership ready to break higher.
That lack of leadership is becoming a critical issue for any bottoming process. The sentiment and internal indicators suggest a bottom is very possible. The action of the indices is in line with a three-leg bear market though as noted earlier this week, is it really deep enough given the magnitude of the problems the economy still faces? That aside, there has to be a group ready to take the point on a bottom and bounce. We are looking but there are fewer and fewer quality growth stocks that are not in out and out selling similar to the major indices.
Thus while we watch for the mid-2003 consolidation ranges to hold and bounce the indices upside, that move is likely not the bottom. The problems facing the country may be generational in nature, and what I heard on the presidential debate did not fill me with comfort that the next administration will do the right thing when faced with such challenges as we have here. There is a relatively new book on the Great Depression and how a country should react to such a situation, and what the leader in the polls said tonight has me thinking my kids are going to live through a 1970's like malaise. Sorry for the interjection of politics, but I am a history-based person and we are making the same populist mistakes as we have made before, not that the choices here are great.
That said, on any bounce we look for short term upside plays as we still look for what stocks are setting up even as the bounce runs out of steam and tests the prior low. If they start emerging in good bases in good numbers, then we get more excited about a bottom. If not we play the downside again because it is likely to be another wild one. It is all a matter of staying detached, looking at what is transpiring, and acting accordingly. We like all of the indications in the market other than the leadership and the poor reaction to all the proposed bailout plans. Those are telling aspects. To that we say 'whatever.' We will prepare for a bounce and play it when it comes, bank some green and then see what the market is telling us at that point. This commentary in itself could suggest the bottom is at hand; after all it could be viewed as a giving up on a current bottom. Geez, the analysis never ends.
Support and Resistance
NASDAQ: Closed at 1754.88
Resistance:
1782 from August 2004
1882 from October 2003
The 10 day EMA is 1985
1900 from August 2004
1912 from April 2005
The 18 day EMA at 2067
2070 from September 2008
2099 is the mid-September closing low
2155 is the March 2008 low
2167 is the July 2008 low
2202 is the January 2008 low
The 50 day EMA at 2204
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 200 day SMA at 2350
Support:
1752 from 2004
1644 from August 2003
1630 from 2001
S&P 500: Closed at 996.24
Resistance:
1065 is the Q4 2003 level that SP500 started the run to 2007 after the first run in the recovery.
1075 from August 2004.
The 10 day EMA at 1113
1133.50 is the September 2008 low
The 18 day EMA at 1151
1200 is the July 2008 intraday low
The 50 day EMA at 1215
1240 is the 2002/2003 up trendline
1244 is an August 2005 peak
1257 is the March low
The 90 day SMA at 1264
1270 is the January low
1285 is the recent July peak
1313.15 is the August 2008 peak
1317 from the February low
The 200 day SMA at 1323
1324 is the April low
1326 is an ancient trendline
Support:
995 from June 2003 consolidation peak
965 is the 2003 consolidation low
Dow: Closed at 9447.11
Resistance:
9575 from September 2003, May 2001
9814 from August 2004
9937 from May 2004 low
10,100 to 10,000
10,127 is an April 2005 low
10,215 from Q4 2005
10,365 is the new 2008 low
The 10 day EMA at 10,384
10,459 is a September 2008 low
The 18 day EMA at 10,650
10,827 is the July 2008 intraday low
10,962 is the July closing low
11,061 from February 2006
The 50 day EMA at 11,099
11,317 from March 2006
11,388 is the prior August low
The 90 day SMA at 11,432
11,635 is the January intraday low
11,670 is the May 2006 intraday high; 11,642 closing
11,720 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 12,062
Support:
9323 From June 2003
8626 from December 2002
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
October 7 - Tuesday
FOMC Minutes, September 16 (2:00)
Consumer Credit, August (3:00): -$7.9B actual versus $5.0B expected, $5.2B prior (revised from $4.6B prior)
October 8 - Wednesday
Pending home sales, August, (10:00): -1.2% expected, -3.2% prior
Crude oil inventories (10:35): +4.2M prior
October 9 - Thursday
Initial jobless claims (8:30): 475K expected, 497K prior
Wholesale Inventories, August (10:00): 0.4% expected, 1.4% prior
October 10 - Friday
Export price ex-ag, September (8:30)
Import prices ex oil, September (8:30)
Trade Balance, August (8:30): -$59.0B expected, -$62.2B prior
End part 1 of 3
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