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money investment, investment help
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11/03/08 Investment House Alerts
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IH Alert Subscribers:
MARKET ALERTS:
Targets hit alerts: None issued
Buy alerts: AAPL; DAL; STE
Trailing stops: RTN
Stop alerts: None issued
SUMMARY:
- Market tries a modest rise ahead of election day, slips into idle by the close.
- ISM falls sharply after several months hovering near 50.
- Auto sales fall as consumers wait for the offer they cannot refuse.
- Some positives tipping toward the current market rally to continue.
Market splits the baby, rallies some, sells some, closes flat.
Same old story: there was good news, there was bad news and overall the market did okay. LIBOR continues its improvement with the 3 month falling to 2.86% from 3.03%. The Libor spread fell to 224 from 236 last week. It was 364 on October 10 and topped 450 on hits high. To put it in perspective, it was 87BP on 9/12 the day before the LEH bankruptcy. Definite improvement but still a long way to go. The EU is set to get aggressive with lower interest rates. At first the dollar didn't do much, but by the close it rallied versus the euro (1.2645 (Friday 1.2730). Oil sold on the stronger dollar (64.21, -3.60). All modest positives, though nothing really new.
There were of course negatives. Why is the EU ready to get aggressive with interest rates? Because the EU said it was in a technical recession. After bounce positive after negative futures in the pre-market the ISM fell its sharpest decline in 26 years. After a positive open that dive in the ISM tipped the indices back to flat. Came right back up off that quick trip lower to challenge the early highs. No volume came with it, and with the auto sales horrid the indices slipped again, falling to session lows just as the last hour started. A last hour bounce closed things flat with the indices bracketing both sides of the flat line. Techs were leaders, but it was more of a reserved, relative strength type of leadership as they did not score any significant gains, but their action helped the market hold up and stocks to keep working on what are some fairly solid new bases.
TECHNICAL. The intraday action was mush. No real direction with up and down moves and a flat finish. Thought we might get an early rise into the election similar to pre-FOMC moves. Looks as if it was a day too early for that action.
INTERNALS. Flat, very flat, across the board. 1.3:1 breadth. 30% to 35% volume declines. The internals completely matched the action, i.e. a dead day ahead of election.
CHARTS. The indices are still holding above the 18 day EMA after moving through that second level of resistance late last week. Took the day off Monday, again in keeping with a pause or consolidation of the gains. Not giving gains up, just pausing ahead of the election. There are many good patterns in stocks and indices, e.g. AAPL, energy stocks, NASDAQ 100. They are providing some backbone to this index pause. The action still points to a break higher outside of some unforeseen or less likely occurrence Tuesday and Wednesday.
LEADERSHIP. Energy did not lead Monday as it did last week but as noted, the patterns are solid. Regional banks continue showing new strength. Key techs look strong, e.g. AAPL. Steel took the day off similar to energy, but these metal stocks look very good. Biotechs are starting to move once more and have formed some decent patterns along the way. Still others are improving as well. Again, these stocks are setting up nicely in support of the indices, and the ultimate test of any rally is what and how many stocks are in good patterns and in position to lead the market higher. While this is likely not the final bottom on this attempted bear market bottom, it is a good sign that bases are setting up, a necessary part of any ultimate recovery.
THE ECONOMY
National manufacturing sentiment hits the skids.
After hanging onto the 50 level for several months, ISM cracked in September, falling to 43.5. In October it fell to 38.9, below the 42.0 expected. That 4.6 decline while sending the ISM to its fastest contraction since 1982 was still less than the 6.4 point decline in September as ISM fell back from the 50 level it, as noted, hung onto for several months.
Orders fell to 32.2, down from 38.8 in September and 48.3 in August. Production has fallen off a cliff, down to 34.1 from 52.1 in August. Same with employment at 34.6 from 49.7. Export orders fell to 41.0 from 52.0 in September. Not good news. About the only positive is found in prices paid falling to 37.0 from 53.5 in September and 77.0 in August.
Pretty dire numbers and hard to ignore. We won't ignore them but we will also note as we did with Chicago that this is a sentiment poll that takes the temperature of purchasing managers versus hard data about what companies are purchasing and making. As this is a credit driven depression of sentiment, if the credit recovers quickly the sentiment can recover quickly. Well maybe not a full recovery. There is a lot of gloom out there about how bad the economy is damaged as result of housing and credit. Heard today from the Dallas Fed president that there would be no growth in all of 2009. Hard to get happy after that kind of prognosis even if it was from the quack out of Dallas. How could someone as sound and solid as McTeer been replaced by 'ninth inning' Fischer?
Thus there needs to be a quick credit recovery, but banks, despite improving spreads, are still not lending with anything resembling a positive attitude. Indeed there was a report today from the Fed that lending standards are getting ratcheted up. It was supposed to be a positive report to show that the Fed and banks meant business about corralling bad loans, but as we noted over 6 months ago, what is going to happen is the reaction to the crisis is a lockdown on lending just when the economy needs lending to get it back on track. That is going to be the real issue ahead: can businesses and individuals get credit even with the $250B tossed into the banks for making loans but that is not being used for making loans.
Auto sales tumble.
The auto results were pretty ugly with GM -45%, Chrysler -35%, Ford -30%, and Toyota -23%. Prices are falling rapidly and many wonder when consumers are going to start buying. Answer: not anytime soon given all of the headwinds.
As noted, the credit situation is a real problem. We reported four weeks back that auto dealers were finding it very difficult to get credit for even good customers. If there is no credit there are not many walking around with an extra $30K right now to throw down on a new vehicle. No they need incentives.
Last time there was a recession autos were down as well and they did not start to recover until consumers and businesses finally got the offers they could not refuse. It was a combination of tax policy that allowed full expensing of trucks and SUV's in the year you bought them and if you went over that level you could rapidly depreciate the rest. Auto makers threw in multiyear no cost financing options. Congress eliminated the ability to expense SUV's; that should change.
Problem is, automakers are so strapped they are reluctant to offer the deals needed to sell vehicles. That is rather foolish; I have known businesses that hold out at the price they want all the way into bankruptcy rather than discounting and selling in order to make something versus nothing. SUV's are falling in price but not enough. And for the vehicles that get the good gas mileage? Hardly discounted at all.
Thus consumers are not buying and auto sales keep falling as consumers wait for automaker incentives to get sweeter and also to see what the democratic stimulus package is planning. The latter will probably be a vain wait given what we hear any stimulus package will contain. It won't be the kind that will incent businesses to buy equipment but instead provide a credit to hire someone. This has been tried before, and indeed in the 2004 election I was told at a meeting with some democratic congressmen seeking re-election that this incentive would not work as it had been in place before with little result. Indeed that makes sense because an employee is a huge expense in training, and if your small business wants to implement some healthcare coverage along with maybe some 401k savings it takes a huge amount of planning or you can find yourself with expenses far beyond the cost of just the employee's salary. There is no tax credit lucrative enough outside of paying for all of the new hire's wages, that will entice a small business to hire an employee if not so inclined given the current economic condition and the current tar pit of healthcare and employee savings plans.
THE MARKET
MARKET SENTIMENT
VIX: 53.68; -6.21
VXN: 56.22; -4.08
VXO: 54.22; -7.16
Put/Call Ratio (CBOE): 0.97; +0.01
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: +5.38 points (+0.31%) to close at 1726.33
Volume: 1.81B (-27.24%). Low volume, tumbling well below average as investors await the election.
Up Volume: 916.353M (-534.501M)
Down Volume: 869.045M (-141.616M)
A/D and Hi/Lo: Advancers led 1.26 to 1
Previous Session: Advancers led 2.99 to 1
New Highs: 14 (+7)
New Lows: 55 (-44)
NASDAQ CHART: http://investmenthouse.com/ihmedia/NASDAQ.jpeg
NASDAQ held tight near the 18 day EMA (1719), taking a day off after a solid week and awaiting the election. Not as good a pattern with respect to a pause as on NASDAQ 100, but no complaints as long as it can hold the gains as it is doing and then make the next break higher to get away from the 18 day EMA that acts as resistance in continuing downtrends. It breaks that level and it shows life it has not had during this selloff.
NASDAQ 100 (flat) showed a tight doji at the 18 day EMA as well but it is working laterally, forming a very nice flat handle to its 3 week double bottom base. In excellent position to break higher and continue the rebound off the October lows and help put in some more work on the overall bottoming process.
NASDAQ 100 CHART: http://investmenthouse.com/ihmedia/NASDAQ100.jpeg
SOX CHART: http://investmenthouse.com/ihmedia/SOX.jpeg
SP500/NYSE
Stats: -2.45 points (-0.25%) to close at 966.3
NYSE Volume: 1.017B (-34.94%). Big drop off in volume as on NASDAQ, coming in well below average as SP500 and the other indices stalled on the session after a good week. No real issues with this price/volume action.
Up Volume: 493.761M (-666.517M)
Down Volume: 517.875M (+118.855M)
A/D and Hi/Lo: Advancers led 1.3 to 1
Previous Session: Advancers led 2.68 to 1
New Highs: 8 (-3)
New Lows: 65 (-34)
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
SP500 held the flat line just over the 18 day EMA (962) similar to NASDAQ. Good run last week, taking a breather here. You can call this a handle but it is more of a drift higher; still SP500 is holding the gains and is holding over the 18 day, looking for a new break higher after this pause.
SP600 (+0.08%) showed a doji over the 18 day EMA after a strong, market leading move higher the past week. It has to be a bit winded after such a run and another pause Tuesday as the election gets out of the way would be normal. Indeed another day or two after that would be normal given this run. An important move that got the small caps back in the game and interesting as well as it raises the question of just how deep a recession if the small caps come back to life and start leading the market.
SP600 Chart: http://investmenthouse.com/ihmedia/SP600.JPEG
SP400 CHART: http://investmenthouse.com/ihmedia/SP400.jpeg
DJ30
The Dow remains in solid position to move higher, taking the day off on very low trade following its own good move last week. It is just over the mid-October highs and the 18 day EMA (9160), and after a rest here where it holds most of its gains it is in very good position to continue the rally higher toward 10K as an initial point for it to seek on a bounce.
Stats: -5.18 points (-0.06%) to close at 9319.83
VOLUME: 180M shares Monday versus 311M shares Friday. Very low trade as the blue chips basically took the day off.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
TUESDAY
Election day is here though whether we get the results tomorrow night or later, if there are no irregularities the market tends to rally right after the presidential election. The only time in the past 20+ years it has not was in 2000 and all of the problems related to that election. It could always turn out that way if there are large scale complaints about the voting given the anticipated large turnout overloading the system. That remains to be seen as well along with what happens in the Senate. The market wants democrats left well short of the 60 filibuster breaking level in order to prevent the two branches of government having an unchecked alliance.
The election could be a landslide or a historic upset. The polls are tightening, the early voting is not showing the big turnout in new and/or young voters; indeed in Georgia and Florida the secretaries of state are noting that the early voters are mostly people who voted in the 2004 election. Suffice it to say that the polls we keep hearing about are best guesses given the unknowns the new registrations and apparent high interest in the election. Again, it could be a landslide or an upset.
We have been building positions since the last low, indeed moving into our index plays before that big 900 point turn on the Dow last Tuesday and adding positions as the opportunity presented itself. NASDAQ 100 is in excellent position to break higher and lead the market; it showed relative strength Monday and with this pattern it is solid.
We were looking for the market to melt higher ahead of the election and it tried that Monday but could not hold the move. We are looking for it to try again Tuesday similar to an FOMC announcement; that means not likely a lot of volume, but if we get good stocks making good price moves we will again look at picking up positions in anticipation of a post-election bounce that continues the rally off the October low. All of this is part of the larger base building pattern currently in progress, and if the election comes off relatively straight forward and there is no filibuster busting majority in the Senate the market is likely to continue higher in the rally.
We will use that to take some choice positions as well as bank some gain as many of our positions taken at or just after the last low and the start of this rally will be in position for us to cash in. It is interesting because just a week ago finding patterns to buy after the initial move was difficult. In the interim we have seen many areas form up nicely, setting up some solid patterns and indeed breaking higher. That is part of the bottoming process, and the more that set up the better the odds of making the ultimate bottom here. Right now we do not view this as the bottom; it is an interim bottom but one that is giving us a nice tradable rally. We intend to continue buying into this move as it makes the continued move higher, led by stocks in good technical position.
Support and Resistance
NASDAQ: Closed at 1726.33
Resistance:
The 18 day EMA at 1719 is bending
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 1923
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 1680
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
1493 is the October 2008 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 966.30
Resistance:
The 18 day EMA at 963
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.
The 50 day EMA at 1067
1075 from August 2004.
1106 is the late September low
1133.50 is the mid-September 2008 low
The 90 day SMA at 1177
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 1277
1285 is the recent July peak
Support:
965 is the 2003 consolidation low
The 10 day EMA at 943
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 9319.83
Resistance:
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 9941
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
The 90 day SMA at 10,755
10,827 is the July 2008 intraday low
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:
9200 is the July peak in the 2003 consolidation
The 18 day EMA at 9160
The 10 day EMA at 9044
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 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.
November 3 - Monday
September Construction Spending (10:00): -0.3% actual versus -0.8% expected , prior 0.3% (revised from 0.0%)
ISM Index, October (10:00): 38.9 actual versus 42.0 expected, prior 43.5
November 4 - Tuesday
October Auto Sales: 4.3M prior
Truck Sales, October: 5.3M prior
Factory Orders, September (10:00): expected -0.8%, prior -4.0%
November 5 - Wednesday
October ADP Employment (8:15): expected -100K, prior -8K
ISM Services, October (10:00): expected 47.0, prior 50.2
Oil inventories (10:30): 493K prior
November 6 - Thursday
11/01 Initial Claims (8:30): 476K expected, 479K prior
Productivity Q3 Preliminary (8:30): expected 1.0%, prior 4.3%
November 7 - Friday
October Average Workweek (8:30): 33.6 expected, prior 33.6
Hourly Earnings, October (8:30): 0.2% expected, prior 0.2%
Nonfarm Payrolls, October (8:30): -200K expected, prior -159K
Unemployment Rate, October (8:30): 6.3% expected, prior 6.1%
Pending Home Sales, September (10:00): -3.4% expected, prior 7.4%
Wholesale Inventories, September (10:00): 0.3% expected, prior 0.8%
Consumer Credit, September (3:00): $0.0B expected, prior -$7.9B
End part 1 of 3
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