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10/20/08 Investment House Alerts
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IH Alert Subscribers:
MARKET ALERTS:
Targets hit alerts: IWM
Buy alerts: ANR; NDAQ; QCOR
Trailing stops: None issued
Stop alerts: None issued
SUMMARY:
- Another solid upside Monday takes the indices back to the 10 day EMA again.
- LIBOR posts another decent decline.
- Bernanke nods toward a second stimulus package.
- Leading Economic Indicators post a surprise gain.
- Stocks try to get through earnings season with just the bad and not the ugly.
Another Monday rally tests the indices at near resistance once again.
Two Mondays back the market bounced off a Friday reversal for a big gain. Last Thursday stocks reversed yet again, and after a pause Friday, they used Monday to once gain rally. On the first bounce they stalled out at near resistance at the 10 day EMA and rolled over hard. At the end of Mondays session they are again at near resistance at the 10 day EMA, moving on some pretty light volume. Another test of resolve on Tuesday and Wednesday is here.
The news was mixed but not bad. There were earnings with a scattering of beats (HAL, HAS, ETN), some misses (MAT, NVS), and some in line (WFT). The big news for the morning, however, was once again LIBOR. LIBOR rates fell nicely. Overnight fell to 1.51% from 1.67% on Friday and 1.94% Thursday. 1 month fell to 3.75% from 4.18%. 3 month, the most important, fell to 4.06% from 4.42%, really picking up speed after falling just 8BP Thursday to Friday. Even with OPEC talking cutting production to stem the slide in oil (and it did so for the day with a 75.35 close, up $3.50) didn't derail the positive open.
Stocks were backsliding off their highs pre-market, however, unable to hang onto the sizable early gains in futures. They managed to open positive and bounced after an early slip, but rolled over with NASDAQ, NASDAQ 100, and SOX turning negative while DJ30 and SP600 came back close to flat. As usual, midmorning proved the turning point and the market bottomed there for the day and started a steady recovery, hitting new session highs after lunch. They continued modestly higher, and when they did not sell off in the afternoon the short started to cover and the indices spurted higher to the close. Spurted because volume was not that great, not nearly matching the strong point gains.
TECHNICAL. Intraday the session was decent, fighting off some selling after a higher open and then a steady recovery into the afternoon. The last half hour saw a spurt higher as the shorts covered some more positions given the light volume did not turn into a downside selloff. A bit of a character change: in a lack of volume the market went up as opposed to going lower.
INTERNALS. Solid advancing issues at near 5:1 on NYSE and NASDAQ put in a respectable showing near 3:1. New lows were understandably low, but they were relatively low last week as the indices dove toward those recent 2008 lows. Volume was quite light, falling below average for the first time since the last week of September. Very light trade, but interestingly, the sellers were not out for blood. They could have easily taken the market down but they were not biting. As noted above, a bit of character change.
CHARTS. Thursday reversal, Friday pause, then a resumption of the rebound. Good to see more than 1 upside session after a reversal. Recall that the prior low enjoyed just a day and 15 minutes the next morning of upside before crapping out at near resistance at the 10 day EMA and rolling back over. Monday the indices hit the 10 day EMA again, and this time the large cap indices managed to close over those levels. Not a powerful, high volume blast, just a squirt higher at the end of the day. The real test will of course be Tuesday and Wednesday after this low volume rise to start the week. The reversal on Thursday was strong, and the point gains Monday were nice, but after that reversal session there is yet a strong follow up. The Thursday reversal did represent a follow through session to the prior Friday reversal, and that lays the groundwork for a rally. Some additional strong upside volume would provide some confirmation of this bounce upside. Now if it doesn't show up it can still rise just as it did Monday. It just won't be the bottom. Of course, we are not expecting it to be. We expect another test of this level, but after 2 to 3 weeks of rallying to set up a better rise to test from and thus put in a larger more stable base to really bottom off of.
LEADERSHP. The roughed up energy, steel, agriculture, and industrials in general were up sharply, bouncing from those lateral consolidations and some short double bottoms similar to those on the indices. Biotech found buyers (e.g. QCOR, GENZ, GILD). Airlines did not surge on the session, but they have some pretty decent bases to move out of. Hate airlines, but with oil diving of late it is not smart to ignore their technical patterns. There is still a leadership void with respect to bases that lead to long term gains, but as many are saying now with respect to putting in a bottom, it is a process.
THE ECONOMY
Bernanke advises it will take more time, acquiesces to a second stimulus package.
The House Budget committee had Bernanke at its call on Monday, the first of a series of reports to Congress this week. As usual he was peppered with questions designed to produce some campaign quotes to take out on the road. Thus he was, as usual (at least after his ill-advised interview with CNBC after shortly taking the job when he announced policy via interview), cautious. One wanted him to say whether the economy was in a recession. He didn't bite, instead saying there was a serious economic slowdown and it didn't matter what you called it. Others asked if the Fed was printing money. No, he said the Fed is 'sterilizing' the money supply so it is not growing as it floods the market. Wow that is a trick. It is not really money if it is used for a rescue. Wow.
It is wrong, however. Money supply is surging as the money injected goes to bank deposits, and that is basic M1 baby, and overall money supply is up 86% in the last six months. No expansion there, but it is necessary as there has been not enough liquidity for the past year as the monetary base was basically flat.
The questions inevitably turned to Congress' domain, i.e. fiscal stimulus. Several questions into it, Bernanke replied that given the likelihood of several quarters of weak economic activity a second stimulus package is appropriate. Okay. This went against what Bernanke said years ago when he took the job, indicating he would stay out of this kind of policy decision making, but as Greenspan commented on the prudence of stimulus before (and he was wrong about it back in 2002 though he later admitted his mistake), this was not new ground for a Fed-head.
The real surprise was when he expanded upon his answer, discussing the type of stimulus necessary. He wants to boost spending (assuming he means consumer AND business) and economic activity (kind of like the Sprint fireman commercial: 'all for increasing economic activity?' 'Yes.'). For specifics he says Congress should improve credit for consumers, home buyers, and businesses and 'other buyers' while limiting long-term effects on the government's budget deficit. He never said tax cuts; just looks like all spending though that part about limiting long term budget effects hints at tax incentives, but he never said it so he may has well not have said it as far as Congress is concerned.
Well, that is the way I see it at least. It will be another pork sausage making contest in D.C. regardless of what Bernanke says it should be.
Leading Economic Indicators show a surprise gain. Why?
September leading indicators (how can they lead if we are in October and they cover September?) rose for the first time in 5 months and only the third time in 14 months. That is a pretty sorry average. After falling 6 of 7 months from August 2007 to February 2008, however, the pattern is turning choppy with 2 positive months, 2 flat months, and 3 down months. Chop or volatility after a steady trend often indicates change.
But is this really volatility leading to change? LEI is down to 2001 levels so maybe the 'same level theory' will apply but the trend is still sharply lower despite a bit of chop the past 7 months.
What really turned the LEI to positive was, hello Mr. Bernanke, growth in money supply. All of that money pushed into the economy to thaw the credit freeze. The Conference Board's measure of money flow sure calls this an increase in money supply. After this jump in September thanks to the hundreds of billions injected in the economy, it will fall in October because nothing else in the report was positive.
Still it may be in the process of changing. LEI decreased at a 2.5% annual pace the past six months even with the choppier action. In January 2008, however, it fell at a 4.7% annual pace, and when the LEI falls at 4% to 4.5% annually it indicates recession. Things are improving though it is a stretch to say times are changing other than things were so pessimistic the market can turn and thus pump up the LEI better.
THE MARKET
MARKET SENTIMENT
VIX: 52.97; -17.36
VXN: 59.65; -11.61
VXO: 52.72; -18.34
Put/Call Ratio (CBOE): 0.81; -0.16. Two days below 1.0 after three weeks over that level.
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: 22.4%. Down from an already very low 25.3%. That prior week was the largest single week drop we have ever seen, down from 33.7% and 37.5% the week before. Well below the 35% threshold considered bullish. Down from 40.7% on the high during the rally off the July 208 lows. Surpassing the 27.8% on the low this round. 30.9% was the March low. 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: 52.9%. Modest decline from an already high 53.0%. Surging from 47.2% and 40.9% the week before. Surpassing 50.0%, the high on this move. Well above the 35% threshold so still a bullish indication. This move over 50 takes it to the highest since 1995. Extreme negative sentiment. 35% is the level that historically indicates excessive 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: +58.74 points (+3.43%) to close at 1770.03
Volume: 2.058B (-25.55%). Impressively low, below average volume, the first since late September.
Up Volume: 1.738B (+414.143M)
Down Volume: 313.041M (-1.104B)
A/D and Hi/Lo: Advancers led 2.8 to 1
Previous Session: Decliners led 1.29 to 1
New Highs: 7 (+5)
New Lows: 99 (-28)
NASDAQ CHART: http://investmenthouse.com/ihmedia/NASDAQ.jpeg
Gapped higher, filled the gap intraday, and then rallied to close at session highs. Just cracked over the 10 day EMA (1769), the lowest rung of resistance on a recovery. Thus far it has filled all the gaps down at the lows leaving just the on from the early October gap lower. While the move Monday had no volume behind it, we are looking for NASDAQ to fill that gap or come darn close to it on this rally off the lows that will likely set up the next test lower that we will look at to complete the bottoming process. There is some pretty serious resistance at 1900, the point where NASDAQ gapped down to in early October and failed at last Tuesday. If it clear that the gap down point at 1947 is easily doable. After that it can still hit 2000 or 2100, though the latter is getting pretty way out there.
Similar action on NASDAQ 100 (+3.13%) though the large cap techs lagged the move again. They did not clear the 10 day EMA as did the other large cap indices. The techs have not set up to be leaders just yet. Maybe AAPL can change that after hours Tuesday.
NASDAQ 100 CHART: http://investmenthouse.com/ihmedia/NASDAQ100.jpeg
SOX CHART: http://investmenthouse.com/ihmedia/SOX.jpeg
SP500/NYSE
Stats: +44.85 points (+4.77%) to close at 985.4
NYSE Volume: 1.227B (-29.51%). Very low volume here as well, coming in below average for the first time since late September.
Up Volume: 1.068B (+248.902M)
Down Volume: 165.684M (-748.119M)
A/D and Hi/Lo: Advancers led 4.83 to 1. Very solid breadth to the upside.
Previous Session: Advancers led 1.23 to 1
New Highs: 8 (-39)
New Lows: 105 (-106)
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
Picked up on the Thursday reversal after pausing Friday, moving through the 10 day EMA as did all the large cap indices (outside of NASDAQ 100). No volume to push it so you cannot hang a lot on this move other than it was a continuation of a solid reversal. It is at the resistance it failed at last week, i.e. the 10 day EMA, and if it is going to change its character significantly it has to decisively take that moving average out, then move over 1050 where it stalled on the first bounce, getting up to 1100 or the 50 day EMA at 1130 as a good point to test back from and thus set up a stronger bottoming base.
SP600 (3.85%) ran in the middle of the pack, below the NYSE large caps and above anything NASDAQ. Good double bottom pattern as with the other indices but it is lagging as it has not reached its 10 day EMA, the exact point it failed last week. Big test here to see if it can change its stripes a bit.
SP600 Chart: http://investmenthouse.com/ihmedia/SP600.JPEG
SP400 CHART: http://investmenthouse.com/ihmedia/SP400.jpeg
DJ30
Moved up through the 10 day EMA (9221), but as with SP500, just barely and on that same low volume. Good pattern to build off of as well, and looking for that to carry it up to 10K and if it is pretty solid, on up to 10,500 near the September lows (the 50 day EMA is at 10,454 right now). Needs that move to establish a good base to build a bottom. Right now it is in the first stage of the process, trying to show it has made that initial bottom and can rally off it. As with SP500, it needs to put some upside mileage on the 10 day.
Stats: +413.21 points (+4.67%) to close at 9265.43
VOLUME: 241M measly shares Monday versus 360M shares Friday, and Friday was already the lowest of last week.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
TUESDAY.
LIBOR is still falling as noted above. A long way to go but it is moving in the right direction, and as we predicted, picking up speed as it does, or as the spring thaw melts so to speak. Need to keep that warming trend in place as the fall gets underway, many an extended Indian Summer.
Earnings are flowing fast. After hours Amex topped expectations and held most of its after hours gains though was off the initial earnings bounce. TXN missed after hours and it missed really, really bad. The bottom line was a penny miss. Revenues missed by $10M, a fraction when you are looking at 3.4B. The problem was the poor guidance ($2.08 to $3.0B versus $3.3B expected) and weak gross margins (48.5 actual versus 50.7 expected). TXN hit the skids after hours, selling down to 16.88 after closing at 17.98. One solid, one crappy. The quad Q's after hours held steady, however. SPY was down a point post-close.
Earnings continue Tuesday with a flood more. MMM, CAT, DD, PFE, USB are just a few. AKS (steel), EAT, BRCM (semis, after), COH (Coach), FCX (copper). AAPL reports after the close and after RIMM missed on its earnings in late September, NASDAQ will be watching and reaction to AAPL.
Bad news can always scuttle a rally, i.e. bad earnings news. At this juncture, however, given the harsh selloff and reversal, the quick test and reversal again, the market has likely factored in another round of fading earnings and some downside guidance. It has, in other words, factored in the 'bad' with this selloff. If earnings are just 'the bad' then the rebound can continue. Extremes in sentiment, internals, and the straight drop set the stage for a recovery. If the earnings are 'the ugly,' i.e. outstripping even expectations for rather poor results then this bounce may not last.
Again, given the extreme negatives exhibited in the market during this selloff we are looking for the bounce to survive this initial test of resistance and the earnings coming out. We don't expect it to be the rebound that started a new upside rally without another test. We do expect it to be tradable as we are moving in with upside positions as it comes off the Thursday test and reversal. After a run up to those resistance points cited earlier then we have to see how much staying power is present.
The move is still early enough to provide more nice upside and we are looking at some more upside plays to use as vehicles for the move higher. The DIA, IWM, and SPY index plays are performing well and with AAPL's held the QQQQ can put in some good gains as well. Many industrial stocks are trying to bounce and we are looking at several sectors to give us a continued run higher during this initial bounce.
Support and Resistance
NASDAQ: Closed at 1770.03
Resistance:
The 10 day EMA is 1769
1782 from August 2004
The 18 day EMA at 1850
1882 from October 2003
1900 is the gap down point in October; from August 2004
1912 from April 2005
1947 is the point where the market gapped down from in October 2008
1984 is the lat September low
The 50 day EMA at 2050
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
2261 is a March 2008 interim low
2286 is the first April 2008 gap up point.
2300 is some resistance
The 200 day SMA at 2308
2340 from the March 2007 low
Support:
1752 from 2004
1644 from August 2003
1620 from the early 2001 low
1565 is the second low in October 2008
1542 is the early October 2008 low
1521 is the late 2002 peak following the bounce off the bear market low
1387 is the 2001 low
1253 is the March 2003 low on the test of the rally off the 2002 bear market low
1108 is the 2002 low
S&P 500: Closed at 985.40
Resistance:
995 from June 2003 consolidation peak
The 18 day EMA at 1027
1065 is the Q4 2003 level that SP500 started the run to 2007 after the first run in the recovery.
1075 from August 2004.
1106 is the late September low
1133.50 is the mid-September 2008 low
The 50 day EMA at 1136
1200 is the July 2008 intraday low
The 90 day SMA at 1223
1244 is an August 2005 peak
1245 is the 2002/2003 up trendline
1257 is the March low
1270 is the January low
1285 is the recent July peak
The 200 day SMA at 1300
1313.15 is the August 2008 peak
1317 from the February low
1324 is the April low
1348 is an ancient trendline
Support:
The 10 day EMA at 981
965 is the 2003 consolidation low
889 is an interim 2002 peak
866 is the second October 2008 low
853 is the July 2002 low
839 is the early October 2008 low
800 is the March 2003 post bottom low
768 is the 2002 bear market low
Dow: Closed at 9265.43
Resistance:
9323 From June 2003 peak
9575 from September 2003, May 2001
The 18 day EMA at 9592
9814 from August 2004
9852 is 25% off of the October 2008 intraday low
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 50 day EMA at 10,455
10,459 is a September 2008 low
10,827 is the July 2008 intraday low
10,962 is the July closing low
11,061 from February 2006
The 90 day SMA at 11,096
11,317 from March 2006
11,388 is the prior August low
Support:
The 10 day EMA at 9221
9200 is the July peak in the 2003 consolidation
8985 is the closing low in the mid-2003 consolidation
8626 from December 2002
8521 is an interim high in March 2003 after the March 2003 low
8197 is the second October 2008 low
7882 is the early October 2008 low
7702 is the July 2002 low
7524 is the March 2002 low to test the move off the October 2002 low
7282 is the October 2002 low
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
October 20 - Monday
Leading Economic Indicators, September (10:00): +0.3% actual versus -0.3% expected, prior -0.9% (revised from -0.5%)
October 22 - Wednesday
10/18 Crude oil inventories (10:35): 5.61M prior
October 23 - Thursday
Initial Jobless Claims (8:30): 465K expected, 461K prior
October 24 - Friday
Existing Home Sales, September (10:00): 4.95M expected, prior 4.91M
End part 1 of 3
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