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11/10/08 Investment House Alerts
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IH Alert Subscribers:
MARKET ALERTS:
Targets hit alerts: GXDX
Buy alerts: DIA; EMS
Trailing stops: None issued
Stop alerts: None issued
SUMMARY:
- China joins the stimulus game, but the result is the same: excitement gives way to reality.
- Is letting the big automakers fail turning our back on the auto industry?
- Market tries your patience as it continues to work in the lateral consolidation, trying to make the bottom.
Chinese stimulus doesn't hold US markets higher.
The Chinese $586B stimulus plan altered the course of world markets Monday. Futures were blah for the US market before the news but then they and foreign markets jumped as it hit the wires.
Outside of the China news, however, there was not much positive for investors. AIG and its initial $123B bailout package was moved up to $150B. Great. More money down that hole. Circuit City filed for Chapter 11 bankruptcy as another consumer company ate it. The dollar was down to start, moving to 1.2916 euros, but by the close it was back to 1.2732. Oil was up sharply early as the dollar weakened, rising close to $5, but as the dollar recovered oil slipped back to 62.27 (+1.23).
The China stimulus package won out at the open as all stocks jumped, particularly the China trades, e.g. energy, commodities, agriculture, industrial equipment, engineering. Futures were eroding heading into the open, however, and once the indices gapped higher they started selling. They slid into lunch then bounced as the afternoon session started. That didn't last and after an hour they rolled over to new session lows. That led to a last half hour bounce that took some of the sting out of the reversal, but they still closed negative with losses of 0.82% to 2.5%.
Outside of the reversal to negative, low volume was once more an important factor on the day. The low overall trade shows little serious selling, just a lack of any interested buyers even with the China news. That is no mystery. Each stimulus announcement is met with early cheer and hope, then the reality of the mortgage, credit and other issues comes home and the gains are tossed. Thus while the Dow lost just 73 points it traded in a 400 point range as it threw away an early 220 point gain.
TECHNICAL. Intraday was the old high to low with no real recovery attempt. This is the same action seen all during the consolidation, i.e. following the particular days action. If it is up, the intraday action is up. If down the action is down. The buyers and the sellers are flip-flopping, still unable to gain the advantage. The market is still in a downtrend, but it is trying to consolidate its way out of it for now. It is not there, but there is at least a fight ongoing.
INTERNALS. Middle of the road with no jump in new lows and there was no real jump in decliners. Volume was the key once more. It was low showing there were no real sellers as the market slipped from the highs at the open, falling lower and lower into the close. This action is very much in keeping with the ongoing process the past four weeks after making that new low in early October. Volume trailed off as the indices bounce up and down in their range. Right now they are on the downswing but outside a 'spike' Thursday, and that was a below average volume move. Volume is subdued with the market working through a consolidation range. That is just what you want to see.
CHARTS. The indices gapped higher at the open, moving past the 10 day EMA near resistance with DJ30 and SP500 up to next resistance at the 18 day EMA. There they move stalled and they rolled over. As discussed the past few weeks, the 10 and 18 day EMA are key levels to clear when trying to break free of a downtrend. The indices cleared them briefly, but gave them up and now with this move the indices are looking to make a lower high at those levels. Not great, but given the low volume and the consolidation action seen the past month after that sharp spike in sentiment, e.g. bulls/bears, VIX, put/call ratio. As we know, it takes several weeks after those extremes are hit for the market to make the final bottom, and that means for now things are right on schedule in a manner of speaking.
LEADERSHIP. A disappointing Monday in terms of the inability to hold gains, and stocks trying to take the lead struggled all session, but no more than the indices struggled. Smaller financials remain in solid shape (e.g. EWBC). Certain energy (e.g. XTO, CHK, APC) is also working. Some metals, particularly steel, is hanging in there. Agriculture as well and even some smaller tech. As for big tech, many are holding the same pattern as the indices, i.e. holding the early October lows and not violating them yet as the market works on a bottom attempt (e.g. AAPL, GOOG, MSFT). Still working on their bases as the market works in its lateral move, trying to get in shape for a move higher
THE ECONOMY
Automakers remain the next big bailout issue.
Monday there was a lot more talk regarding automakers and the need or lack thereof to bail them out along with the financials and insurance companies. Again the predominant reason for the bailout is they are too big to fail. More than once Monday I heard the old 'we cannot turn our back on the auto industry by letting the automakers fail.'
Two issues are here. First, is letting the automakers themselves fail if they cannot turn a profit due to their antiquated business models that lack sufficient automation and demand too much in legacy costs, e.g. healthcare. The automakers employ less than 300K workers and have been on the decline since peaking in 1995. That is still a lot of jobs and if these people loss their jobs all at once that is a great burden on them and the economy.
Of course, it is also a great burden on the economy to pay out the $50B or more bandied about as the cost of a bailout. Moreover, any bailout will at best maintain the status quo, i.e. maintain the same model so the jobs can remain, cars made, and healthcare plans propped up. At worst we are in the same position in 10 years or less and have to pony up even more.
The second issue is whether the automakers represent the entire auto industry. That is where the bailout proponents make their big play, saying millions of parts jobs will be lost if the big makers fail. Really? No doubt there will be immediate hardship. But why not use some of the $50+B is used to incent new companies to develop alternative energy vehicles that can really replace the internal combustion engine, i.e. that can pull horse trailers, pull the trailers in the trucking industry (53 foot vans, fluid carriers, flatbeds), pull boats, run heavy machinery? The current battery powered vehicles just are not going to do the trick. Hydrogen or some other fuel has to be developed, and if we unleash American entrepreneurship and ingenuity we will get there.
Then the jobs lost will be jobs replaced many times over with jobs driven by the new technology. Those are not dead end jobs in a dying industry but cutting edge jobs propelled by new technology. Those drive our standard of living higher as other countries want the products that we are making.
Ironically, we heard this kind of talk on the campaign trail. No kidding. Lots of talk about providing incentives for American business to develop new technology employing new, renewable fuels to get us off our foreign oil dependency.
Of course at the first challenge, now that the bailout model is in place, all of the talk about developing these new viable technologies proves to be just talk. You can make book on an automaker bailout and that means we will have the same unimaginative vehicles that cost too much because of imbedded costs and we will be all the further away from breaking dependency on foreign oil as we spend $50B on maintaining a boondoggle.
THE MARKET
MARKET SENTIMENT
VIX: 59.98; +3.88
VXN: 58.44; +3.3
VXO: 60.6; +2.22
Put/Call Ratio (CBOE): 1.11; +0.14
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: 30.2. Up from the 5 year low of 21.3% hit last week. Nothing like a rally off the prior lows to build up the confidence. Still below the 35% considered bullish for the market. It was at this level in early October just as the market started to dive lower. This move down showed us the largest single week drop we have ever seen, falling from 33.7% to 25.3%. Hit 40.7% on the high during the rally off the July 2008 lows. 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: 48.3%. Down significantly from the 52.7% last week that was off the prior week's 5 year high at 54.4%. 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: -30.66 points (-1.86%) to close at 1616.74
Volume: 1.706B (-11.4%). Extremely low volume on the selling to start the week. Again, that shows few sellers and really no buyers. It continues the low volume consolidation, and as the market sells lower, low volume indicates a better chance of hold the prior lows.
Up Volume: 389.074M (-997.885M)
Down Volume: 1.314B (+841.474M)
A/D and Hi/Lo: Decliners led 2.32 to 1
Previous Session: Advancers led 1.65 to 1
New Highs: 7 (+4)
New Lows: 210 (+33)
NASDAQ CHART: http://investmenthouse.com/ihmedia/NASDAQ.jpeg
Gapped over the 10 day EMA (1664) but never threatened the 18 day EMA before rolling over and falling to the Thursday low. In the process of making a lower high, but it has not given up on a right shoulder to a short reverse head and shoulders pattern. Being patient and letting it form up its consolidation. As long as the volume is light that is a good indication.
NASDAQ 100 (-1.62%) gapped higher as well and then rolled down. It too touched the Thursday low and held as NASDAQ 100 has the same reverse head and shoulders set up as NASDAQ and is just working through the 4 week consolidation.
NASDAQ 100 CHART: http://investmenthouse.com/ihmedia/NASDAQ100.jpeg
SOX CHART: http://investmenthouse.com/ihmedia/SOX.jpeg
SP500/NYSE
Stats: -11.78 points (-1.27%) to close at 919.21
NYSE Volume: 1.142B (-6.91%). Lower below average volume here as well.
Up Volume: 343.953M (-651.498M)
Down Volume: 788.632M (+562.823M)
A/D and Hi/Lo: Decliners led 1.98 to 1
Previous Session: Advancers led 2.28 to 1
New Highs: 5 (0)
New Lows: 191 (+39)
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
Rallied up to the 18 day EMA on the high (952) then turned over and gave it all up. On the low it held over the 900 level that roughly marks the early October closing low, and thus far that key level is holding as it did last Thursday and Friday. Low volume so no selling, just more work on that 4 week reverse head and shoulders that all the markets are showing. More consolidation action and that is just fine despite the intraday turnover. We have some downside SP500 positions and if it doesn't break through 900 to test lower toward the prior low we will not be hanging around too long in those.
SP600 (-2.34%) was one of the downside leaders/laggards Monday, and unlike SP500, the small caps broke to a new low for the month. It was not a breakdown from its pattern, but have to watch it closely here. The small caps are either stronger or weaker than the rest of the market on a day to day basis. After leading the move off the October low they are now showing more weakness on the way down.
SP600 Chart: http://investmenthouse.com/ihmedia/SP600.JPEG
SP400 CHART: http://investmenthouse.com/ihmedia/SP400.jpeg
DJ30
Rallied up just through the 18 day EMA (9100) on the high then it too reversed, moving that 400 points high to low before rebounding to cut the losses. It easily held above the Thursday low (8637). May hold the line here but with the test of the 18 day EMA and rollover we took some downside positions, looking for at least a move to the 8500 level before it finds its feet and bounces. Low volume again, and as with the other indices that indicates no heavy selling, just a lack of buyers.
Stats: -73.27 points (-0.82%) to close at 8870.54
VOLUME: 221M shares Monday versus 246M shares Friday.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
TUESDAY
No economic news scheduled but earnings continue as well as the credit watch. After hours SBUX failed to brew up any good earnings and its 2009 outlook was stale. It was down again after hours. LIBOR was mixed Monday with the overnight rate rising to 0.35% from 0.33%, but the 1 month (1.54% versus 1.64%) and 3-month (2.24% versus 2.29%) falling. Improvement continues though it is slowing some after a big decline last week. The Chinese stimulus package threw some uncertainty into the market and LIBOR was cautious.
Up for Tuesday is likely more of the same, i.e. working in the consolidation with a slight downside bias as the market. Looking for more drift lower with key tests for SP500 at 900 and 8500ish for DJ30. Those are the intermediate lows, the first closing lows as the selling started to wane in early October. Still looking for tests of those levels and from there how they react tells more about the consolidation. Right now the consolidation holds even if it is on a downside leg. Low volume, holding the consolidation, with stocks holding the line and forming up bases.
Thus we will continue looking for stocks that are forming bases even as the market fades as they will be the leaders if the market finds bottom and starts to bounce again. We will pick up some positions as the opportunity presents; we are playing some for longer term position plays while with others such as the index plays we are playing a specific, more short term move. Right now it is just a matter of being patient, picking up positions when they look ready, and then watching to see if the basing action holds.
Support and Resistance
NASDAQ: Closed at 1616.74
Resistance:
The 10 day EMA is 1664
The 18 day EMA at 1694
1752 from 2004
1782 from August 2004
The 50 day EMA at 1876
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
2070 from September 2008
2099 is the mid-September closing low
2155 is the March 2008 low
2167 is the July 2008 low
Support:
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 919.21
Resistance:
The 10 day EMA at 939
The 18 day EMA at 953
965 is the 2003 consolidation low
995 from June 2003 consolidation peak
The 50 day EMA at 1044
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 90 day SMA at 1159
1200 is the July 2008 intraday low
1244 is an August 2005 peak
1248 is the 2002/2003 up trendline
1257 is the March low
The 200 day SMA at 1267
1270 is the January low
1285 is the recent July peak
Support:
899 is the early October closing low that held Thursday.
889 is an interim 2002 peak
866 is the second October 2008 low
853 is the July 2002 low
848 is the October 2008 closing 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 8,870.54
Resistance:
8985 is the closing low in the mid-2003 consolidation
The 10 day EMA at 9012
The 18 day EMA at 9100
9200 is the July peak in the 2003 consolidation
9323 From June 2003 peak
9575 from September 2003, May 2001
The 50 day EMA at 9778
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
10,459 is a September 2008 low
The 90 day SMA at 10,627
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:
8626 from December 2002
8521 is an interim high in March 2003 after the March 2003 low
8451 is the early October closing low. Key level to watch.
8197 was the second October 2008 low
8175 is the October 2008 closing low. Key level to watch.
7882 is the early October 2008 low. Key level to watch.
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 12 - Wednesday
Oil inventories (10:30): 54K prior
November 13 - Thursday
Initial jobless claims (8:30): 479K expected, 481K prior
Trade balance, September (8:30): -$55.8B expected, -$59.1B prior
November 14 - Friday
Export prices, October (8:30)
Import prices, October (8:30)
Retail sales, October (8:30): -2.1% expected, -1.2% prior
Retail ex-auto (8:30): -1.2% expected, -0.6% prior
Business inventories, September (10:00): -0.1% expected, 0.3% prior
Michigan sentiment, November preliminary (10:00): 57.0 expected, 57.6 prior
End part 1 of 3
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