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world stock market, top stock pick
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10/30/08 Investment House Alerts
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IH Alert Subscribers:
MARKET ALERTS:
Targets hit alerts: None issued
Buy alerts: EWBC; GOOG; STLD; XTO
Trailing stops: None issued
Stop alerts: AMR; BCR; GLD
SUMMARY:
- Nothing spectacular, but market holds the gains and sets up for the next leg higher.
- GDP slips to negative as the likely first quarter in a technical recession.
- End and beginning of month, some foreign investment poised to put some money to work.
Market holds some gains, still stuck at some resistance, but not rolling over this time, at least not at this juncture.
Despite all of the bad news Thursday there was some good news, and some of it was that the bad news was not as bad as feared. Q3 GDP growth fell 0.3%, less than expected and there were hurricanes, tropical storms, flooding, a Boeing strike- - plenty to throw off the numbers at least a bit. Jobless claims were flat at 479K; again, at least they didn't spike to even higher levels from already recession level readings. The dollar lost some more ground after the FOMC rate cut (1.2955 on the close after falling to 1.30+ intraday). Oil did not rise on this, however, and that is an overall positive given the tax cut lower oil gives all of us.
There was some unabashed good news. After a three day hiatus, LIBOR rates started to fall rapidly once more. Overnight fell to 0.73% (closed at 1.14%); 1 month fell to 2.85% from 3.12%; the key 3 month rate fell to 3.19% from 3.42%. After 1BP moves this is a relative opening of the flood gates. The commercial paper market came back to life with $100B in paper added, the first expansion in months. Corporate bonds are selling again and while the initial offering price is high, the spreads are tightening in the secondary market, meaning there are bids out there for the bonds that were not there just a couple of weeks ago. This is truly good news.
The market seemed to pick up on this. Stocks started higher and rallied through the 18 day EMA early on the NYSE large cap indices and the NASDAQ 100. Once more, however, they faltered and slipped back into lunch. They held the line over the 10 day EMA and put together another run higher into the last hour. Once more the late session volatility hit and the indices started to slide back down from the early session highs. We said in a lunchtime alert that if there was selling late we would look to use that to buy given the overall improved market action. Apparently we were not alone; after an initial slip lower in the last hour the indices caught themselves and rebounded the last 10 or so minutes. Rebounded, but outside of DJ30 and NASDAQ 100 they were unable to break over the 18 day EMA. Even those two didn't break it convincingly. That leaves a question on the session and its move as the indices once again dance around next resistance, not yet able to break through.
Yes it is unnerving they cannot get through this second level of resistance, holding there at this resistance. This market is skittish as seen late Wednesday with the quick turn and selloff; thin-skinned we said and it could turn on any bad news. However, after a big run such as on Tuesday it is normal for the market to take a few sessions off to rest before making the next move and taking on next resistance. Of course, not much seems normal with this market, at least according to most.
This is a good time to remember the old adage that the more things change the more they stay the same. In other words, when everyone thinks things are different and change their behavior accordingly, that is when true normalcy kicks in and history repeats itself because what is normal is no longer considered normal (basically the 'this time things are different' signal).
TECHNICAL. Market was again up and down, volatile or choppy as suits your favorite description. Started stronger, gave up a chunk of gains, then rebounded only to struggle late and recover late. Yes, clearly a market with its mind made up.
INTERNALS. Some good breadth as the small caps surged over 4%. When that happens the market enjoys good breadth. Volume was not great, shrinking back below average on NYSE. No real buying or accumulation pushing the Thursday gains. Again as this is more of a consolidation of the Tuesday move we choose to let that slide.
CHARTS. The indices were up on the session but once more the market basically stalled at the 18 day EMA. Still, they held the 10 day EMA and are basically moving laterally in a consolidation of the strong Tuesday surge. The action is volatile, moving up and down intraday as well as overall. That is characteristic of a consolidation. Volume was lower as well as the indices continued to move between the 10 and 18 day EMA. May stretch out another session or two, but there are reasons discussed later as to why it may not wait.
LEADERSHIP. While it is no flood, we are starting to see more stocks setting up even if they are small bases for now. Retail is in the process of setting up some double bottoms; indeed the RTH retail ETF is in one itself. Looks as if there is some more work to be done, but they are getting interesting. Energy still looks good. Regional banks have some pretty decent patterns. Metals are moving well and still setting up. Overall the bases are still short double bottoms or consolidations after trend reversals, but those are part of a larger basing process and how bottoms are formed. This market move higher is helping set up bases, and if it can continue moving higher we will see more stocks setting up bases in what will help support an overall market bottoming attempt.
THE ECONOMY
Gross Domestic Product pretty gross.
Weak, indeed bad, joke, but given it is the first negative reading since . . . Q4 2007. Okay so it was no ice breaker, but with Q4 guidance from companies basically crummy, two negative quarters and thus a textbook recession definition is baked in. That would be the first since the last official recession in 2001 and 2002. We were in recession in 2000 after the massive plunge in GDP growth from the 11% range to flat in three quarters. That is the same as diving into an empty swimming pool; you may not be dead but you wish you were.
So we move into negative territory again, but it was at least better than expected at -0.3% versus -0.5%. Q2 held at 2.8%. Not much rejoicing, though the market went up on the news as investors try to look past the near term troubles. There were storms (Gustav, Ike, etc.) taking entire states out of production, the Boeing strike, etc. Of course they alone would not reduce GDP growth from 2.8% to -0.3%.
Consumer consumption (isn't that repetitive?) was -3.1%. Housing fell 19.1%. Business spending declined 5.5%. The big 3 legs of the economy were all down so the report was going to be negative. What kept it up? The government growing consumption 5.8% and exports rising once more up 5.9% on the quarter. Obviously pre-dollar surge and foreign economic slide.
Core PCE jumped to 2.9% annual growth, easily topping the 2.5% expected and 2.2% in Q2. Inflation pressures are down and indeed inflation is now turning down, but in Q3 that was not the case just yet.
All in all there were no real surprises in the report even with the slightly better than expected overall reading. Exports helped prop up the decline, but the move lower after huge Q2 and Q3 2007 show the fast working impact of the mortgage and credit freeze on the economy and indeed world economies. As the credit crisis is taking time to unwind, the prerequisite for world economies to start operating on a more normalized basis, Q4 is likely not to show any recovery in the economic growth rates. Credit has to right itself, businesses have to start conducting business again, and there has to be demand there when the do if we are going to work our way out of this.
Broken record time. That underscores the need some appropriate stimulus to perk up economic activity when the credit finally becomes available. We have to give businesses and individuals a reason to use the credit that will once again become available given the economy has dropped as a result of the credit issues. That means the kind of 'use it to get it' stimulus discussed Wednesday, e.g. investment tax credits for investing in your business or in upgrading your technology, vehicles, etc. for individuals.
Tax credits are great motivators: if you buy you get something you need AND you get to subtract the amount of the credit from the bottom line of your taxes. In other words, if your tax bill is $10,000 and you get a credit for installing solar panels, buying a new vehicle, buying a new laptop, new communications equipment, etc. in the amount of $2,000, you get some good equipment and your tax bill falls to $8K. Good stuff and lower taxes. Moreover, you allow everyone to expense or rapidly depreciate the remaining cost of the item less the credit against other income, providing a better tax deduction and lower taxes as well. That makes it very interesting to part with the money to get the tax benefits. It is a 'use it to get it' tax incentive, and that ensures the money will be spent on capital goods versus the 'rebates' that are either saved or spent on junk.
Something will have to be done once the credit market is freed up to remedy the damage and the economic slowing the freeze caused. We need to stimulate investment yet avoid ballooning the deficit without getting a return for the money. Tax credits aimed at capital investment have worked every time they were used: 1960's, 1980's, 2000's.
THE MARKET
MARKET SENTIMENT
VIX: 62.9; -7.06
VXN: 63.19; -5.94
VXO: 65.31; -7.1
Put/Call Ratio (CBOE): 0.8; +0.01. A second session 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: 21.3%. Fading from 22.2% as the market could not move up last week. Still decline but now in dribs and drabs (22.4% the week before). Down from an already very low 25.3% that 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: 52.7%. Slipped from a high of 54.4% on this move, up from 52.9% before that after pausing at that 53%ish level for a couple of weeks. 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: +41.31 points (+2.49%) to close at 1698.52
Volume: 2.538B (-10%). Volume faded as NASDAQ moved up off the 10 day EMA and bumped the 18 day EMA. Still above average but lower, showing no accumulation but looks a lot like a continued consolidation move.
Up Volume: 1.918B (+670.842M)
Down Volume: 654.212M (-844.894M)
A/D and Hi/Lo: Advancers led 2.67 to 1
Previous Session: Advancers led 1.44 to 1
New Highs: 5 (+4)
New Lows: 153 (-64)
NASDAQ CHART: http://investmenthouse.com/ihmedia/NASDAQ.jpeg
Gapped higher, fell back to the 10 day EMA on the close, and then fought back in the afternoon to close near the top of the range. Good intraday action but it left NASDAQ still just below the 18 day EMA (1718), the second resistance point in any downtrend. Thus it is key for NASDAQ to make the break over this level but a couple more days of consolidation between these two moving averages would allow NASDAQ to consolidate that big Tuesday surge and gas up for the next run higher. That is what NASDAQ appears to be doing right here.
NASDAQ 100 (+2.44%) was the other index besides DJ30 that crossed the 18 day EMA on the close, showing a doji just over that level. It is in prime position to work laterally as well and then make the next run higher. While some are getting unnerved by this action it looks pretty good to us.
NASDAQ 100 CHART: http://investmenthouse.com/ihmedia/NASDAQ100.jpeg
SOX CHART: http://investmenthouse.com/ihmedia/SOX.jpeg
SP500/NYSE
Stats: +24 points (+2.58%) to close at 954.09
NYSE Volume: 1.375B (-15.09%). Volume slipped back on the gains, indicating not the kind of steady accumulation you want to see. More of the consolidation between the moving averages.
Up Volume: 1.142B (+285.354M)
Down Volume: 224.564M (-532.678M)
A/D and Hi/Lo: Advancers led 4.11 to 1. Very nice breadth thanks to the 4+% surge in the small caps.
Previous Session: Advancers led 2.72 to 1
New Highs: 7 (+1)
New Lows: 103 (+1)
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
SP500 again tapped the 18 day EMA on the high (962) and the 10 day EMA (931) on the low. After the Tuesday surge it is looking like a lateral consolidation seeing up even though SP500 has stalled at the 18 day EMA for two sessions. Surged then working laterally, trying to get tanked up to make a move to break through the 18 day EMA.
SP600 (4.28%) gapped upside and surged higher, clearing the 10 day EMA in a very impressive 3-day run of 13.9%. Even with that run, however, the small caps are well below the 18 day EMA. They were crushed on the way down and they are moving faster on the way up, but they have a lot farther to go. No really good pattern here, but if they move laterally for a few sessions they can continue to recovery.
SP600 Chart: http://investmenthouse.com/ihmedia/SP600.JPEG
SP400 CHART: http://investmenthouse.com/ihmedia/SP400.jpeg
DJ30
Rebounded to hold the gains for the session that took DJ30 through the 18 day EMA (9120). Below average volume on the move so no real power as it matched the highs from two weeks back. Still, DJ30 has the best little double bottom of the indices, and it is now working on a lateral handle that could set the stage for a nice break higher to continue the bounce and move DJ30 toward 10,000 (50 day EMA is at 9992) where it can stall, fall, and put in the second low. Getting a bit ahead of ourselves here. For now it is resting, setting up for the next step that is a jump higher toward 10K.
Stats: +189.73 points (+2.11%) to close at 9180.69
VOLUME: 267M shares Thursday versus 316M shares Wednesday.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
FRIDAY
Retail sales, Chicago PMI and Michigan sentiment are the lineup for Friday. After hours KLAC in semiconductor equipment misses big along with ERTS in electronic gaming software. The chips were down, but there was no real damage on the quad Q's. That leaves the market in good position in its rest from the Tuesday surge as it sets up to continue this leg off the October and of course the 2008 low.
It looks as if the indices could use a couple more days of lateral movement over the 10 day EMA to consolidate the Tuesday surge and tank up for the run higher. That would be best, but there are some other factors that may jumpstart the move. One, it is the end of one month and the beginning of another, and we are starting to see some of the money on the sidelines coming into the market. Even with all of the redemptions there is money to be put to work with these low valuations. The first of the money is when it is typically worked into the market.
Second, there are reports there are European income funds with a lot of liquidity they have to put to work and they are looking at the US stock market given the valuation levels here. Sure with the economic turmoil it is hard to affix a hard value because many companies are simply unable to give meaningful guidance given the sharp downturn in the economy. Nonetheless, if the money comes, stocks will be under accumulation and may make the break through the 18 day EMA faster than would normally be the case.
Does that change our approach? Not at all. We don't view this as the bottom, but as a tradable rally off the lows as the market tries to set up the first leg of a double bottom base that could put this part of the bear market to rest for awhile. Maybe the current short double bottom will do it. A more lasting bottom, however, takes several weeks of 'spread' between the two bottoms.
We will continue to look for stocks in position to make moves higher and continue the rally. As noted earlier even with the Tuesday surge and some continued gains since, there are stocks that are starting to move laterally and form handles to their short double bottoms. They may take a couple of more days to form the handles, but as noted, if the foreign money comes in they could jump right on up. We need to be ready to buy if they show the moves so we can continue to play the rally higher with some new plays along with our index and individual stock plays already taken.
Support and Resistance
NASDAQ: Closed at 1698.52
Resistance:
The 18 day EMA at 1718
1752 from 2004
1782 from August 2004
1882 from October 2003
1900 is the gap down point in October; from August 2004
1912 from April 2005
The 50 day EMA at 1939
1947 is the point where the market gapped down from in October 2008
1984 is the lat September low
2070 from September 2008
2099 is the mid-September closing low
2155 is the March 2008 low
2167 is the July 2008 low
Support:
The 10 day EMA is 1659
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 954.09
Resistance:
965 is the 2003 consolidation low
The 18 day EMA at 962
995 from June 2003 consolidation peak
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 50 day EMA at 1075
1106 is the late September low
1133.50 is the mid-September 2008 low
The 90 day SMA at 1185
1200 is the July 2008 intraday low
1244 is an August 2005 peak
1245 is the 2002/2003 up trendline
1257 is the March low
1270 is the January low
The 200 day SMA at 1281
1285 is the recent July peak
Support:
The 10 day EMA at 931
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 9180.69
Resistance:
9200 is the July peak in the 2003 consolidation
9323 From June 2003 peak
9575 from September 2003, May 2001
9814 from August 2004
9852 is 25% off of the October 2008 intraday low
9937 from May 2004 low
The 50 day EMA at 9993
10,100 to 10,000
10,127 is an April 2005 low
10,215 from Q4 2005
10,365 is the new 2008 low
10,459 is a September 2008 low
10,827 is the July 2008 intraday low
The 90 day SMA at 10,804
10,962 is the July closing low
11,061 from February 2006
11,317 from March 2006
11,388 is the prior August low
Support:
The 18 day EMA at 9120
8985 is the closing low in the mid-2003 consolidation
The 10 day EMA at 8906
8626 from December 2002
8521 is an interim high in March 2003 after the March 2003 low
8197 was 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 27 - Monday
September New Home Sales (10:00): 464K actual versus 450K expected, 452K prior (revised from 460K)
October 28 - Tuesday
October Consumer Confidence (10:00): 38.0 actual versus 52.0 expected, 61.4 prior (revised from 59.8)
October 29 - Wednesday
September Durable Orders (8:30): +0.8% actual versus -1.1% expected, , -5.5% prior (revised from -4.5%)
10/25 Crude Inventories (10:35): 493K actual, 3.2M prior
FOMC Policy Statement (2:15): Fed Funds futures cut to 1.0% from 1.5%
October 30 - Thursday
Q3 Chain Deflator-Adv. (8:30): Expected 4.0%, prior 1.1%
GDP-Adv., Q3 (8:30): -0.3% actual versus -0.5% expected, prior 2.8%
Initial Jobless Claims, 10/25 (8:30): 479K actual versus 473K expected, prior 479K (revised from 478K)
October 31 - Friday
Q3 Employment Cost Index (8:30): Expected 0.7%, prior 0.7%
Personal Income, September (8:30): Expected 0.1%, prior 0.5%
Personal Spending, September (8:30): Expected -0.2%, prior 0.0%
Chicago PMI, October (9:45): Expected 48.0, prior 56.7
Michigan Sentiment-Rev., October (10:00): Expected 57.5, prior 57.5
End part 1 of 3
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