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trading system, option trading
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11/19/08 Investment House Alerts
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IH Alert Subscribers:
MARKET ALERTS:
Targets hit alerts: None issued
Buy alerts: SSO; SPY
Trailing stops: None issued
Stop alerts: CMC; STLD
SUMMARY:
- Market starts decently, but rolls over to new lows on all but DJ30
- More economic downside records, FOMC outlook start deflation talk.
- Auto bailout called a 'loan to the middle class' as lawmakers prepare us to pony up more money. What, however, is wrong with Chapter 11 bankruptcy?
- The Dow is left standing over the prior lows, most doubt it will hold against the tide. Be ready nonetheless.
Despite the gloom market cannot hold the prior lows, killing the rally attempt.
The market had a better look in the morning. There were no surging futures, up or down, just a modestly negative pre-market as consumer prices dropped a record 0.96% in October but housing starts tanked 4.5%, a record as well. Even with the housing negative futures were holding their own, cutting their losses.
By the open stocks were down but within the first hour the indices were positive. Nice recovery, and given the Tuesday reversal following the Thursday reversal, the move looked quite plausible.
Looks were indeed deceiving. Just before the first hour ended stocks started to slide. Oil inventories jumped 1.6M bbl, topping expectations. Oil ultimately fell to close at 52.05, -1.34, but it didn't want to give up much ground. The dollar moved higher (closed at 1.2521; closed Tuesday at 1.2615). The market didn't like the setting. Sellers used it to sell and the indices spent the morning into lunch selling off.
A 3.5 hour lateral trading range ensued. At 2:00ET the FOMC released the minutes of its last meeting where it had a gloomy outlook, indicating 2009 growth could be negative for the year and 'normal' growth would not return until 2011. That with the pricing data fanned the deflation conversation. Stocks imploded in the last hour once again. SP500, NASDAQ, SP600, SOX all hit new 2008 lows in that selloff.
TECHNICAL. Intraday the action put on the look of some developing strength with the modestly negative pre-market and improving futures. That did not last and the market rolled over hard. The predominant intraday action has a downside bent.
INTERNALS. Massively negative again with NYSE breadth -11:1 and NASDAQ -8:1. New lows jumped over 1000 on NYSE as all but DJ30 hit new lows. That is high but it is still lower than in early October. Some positive there. Volume was mixed, rising slightly on NYSE, brushing close to average. NASDAQ remained below average with volume basically a push. While volume remains light overall, it is clear the internals took a sharp turn negative, hitting extremes yet again. Thus as they hit extremes that suggests a bottoming process, but as of yet the price action shows no inclination outside of a couple of reversal attempts to turn the market.
CHARTS. Early in the session all but SP500 and DJ30 moved to new 2008 lows. In the last hour selloff SP500 joined them. DJ30 closed just 115 points over its early October intraday low (7882). SP500 is just 30 points over its October 2002 low. SP600 broke sharply lower; no hope of a double bottom there. That leaves DJ30 as the last index standing after Wednesday, and most feel it will fail to hold the lows. The action tends to support that. At the very best DJ30 can hold and then try and bring the other indices back up for some more work on putting in a bottom, i.e. testing their lows just hit. The likelihood of a bottom has pretty much evaporated with this move.
LEADERSHIP. Airlines broke lower, financials that didn't break down Tuesday were heading lower Wednesday. Metals caved in. Energy is trying to hold up along with smaller drugs and healthcare. All stocks were under pressure Wednesday so they were not breaking higher but holding in their bases or ranges. Tuesday we said to watch small caps. They dove sharply lower Wednesday, indicating no recovery in the economy in sight yet. Of course that was aided by the Fed's particularly gloomy economic outlooks.
THE ECONOMY
Consumer prices mostly fall, rise in the 'normal' places.
The losses were impressive with prices down 1% overall. Core prices fell just 0.1% (+0.1% expected). The overall price drop was the largest in 61 years. That is back when they started keeping track.
Energy fell 8.6%. Gasoline -14.2%. New vehicles -0.5%. Airfares -4.8%. Apparel -0.1%. On the other hand food (+0.3%), rents (+0.1%), and medical care (+0.2%), all the stuff you need to live every day, were up again. Modest gains in medical care, but still heading upside.
Housing starts post a . . . record low.
October starts fell 4.5%, the worst reading ever. They should be called lack of starts. This is gloomy news but it is what the market needs, i.e. stop making more houses. Foreclosures are putting more on the market every day, there is no credit available to buy them, so quit building them. That looks to be happening.
Here is a forecast. The housing market bottomed but it is not going to recover until the credit market recovers. The credit market is not going to recover for quite some time because the Treasury abandoned the procedure to repurchase bad assets in favor of giving money away for bonuses and other day to day business activities to companies deemed 'too big to fail.' That has stalled the progress in the credit market thaw with credit spreads and costs much too high to conduct business. Unless changes are made it is going to take a long time to fix the problem.
The problem is as big today as it was when TARP was announced. The ad hoc approach to bailouts is still in place with Treasury deciding who gets the money. Congress wants to expand the scope to include nonfinancial entities but Treasury says no. So Congress will simply authorize more giveaway money to the businesses it feels need it, e.g. the automakers. This WILL NOT fix problem.
If you give everyone with a mortgage a 3% interest rate for free of cost via FRE/FNM (that we now own) you will immediately start curing the problem. Nonperforming loans are suddenly manageable. They start to perform and the asset has value assigned to it again. Those individuals or businesses not in trouble get a lower mortgage as well. They can use the savings to invest in assets or capital business equipment. Why everyone? Because that is the only way to make it fair, i.e. make it a 'we are all in this together' situation and not just bailing out the people and companies that did not tend to business. That makes it palatable to those paying the freight so to speak.
The automaker bailout is coming. What, however, is wrong with the bankruptcy laws?
But Congress won't take that road. The plan FDIC rolled out was nothing more than a continuation of the teaser rate/alternative financing game that got us into this trouble. Instead it is going to copy Treasury and go the bailout route. More and more people are asking, however, why the bankruptcy laws that apply to all of us not applicable here?
For some reason this is not considered an option, but it is exactly the option created to handle this situation. A company files, continues to operate under a new plan without creditors and vendors driving prices and collateral requirements up to the point the business cannot operate. Labor and other contracts can be adjusted or renegotiated under the bankruptcy court's umbrella. In short the companies can continue operating as the filing gives them time and the opportunity to restructure their businesses into profitability. That is exactly what the automakers require.
Many in Congress are dead set against this, however. Why? Because they want to use this opportunity to work a little social restructuring. At Wednesdays hearing Barney Frank talked of the need for 'wage equality' in the US as he dismissed the idea that the automakers should take advantage of existing remedies and laws, i.e. Chapter 11 bankruptcy. He vaguely referenced that bankruptcy likely would not abrogate labor contracts, but that point is hardly settled. We hear that the plans are for structuring a deal that is not as onerous as the Detroit deals in existence that can be exported to other nonunion areas of the country in order to make unions more alluring to workers. Thus many in Congress have no intention of requiring automakers to use the bankruptcy vehicle, but instead are going to use the lure of $25B in aid to impose Detroit-like worker/employer relationships on other parts of the country. Have to love politics.
At the same time you hear talking points from others that tell you they are going to go forward with the loan or bailout or whatever you want to call it. They are simply in the process of laying the groundwork for when it is passed. It is being touted as 'a loan to the middle class' as one Michigan Congressman put it. I though loans to a person when to that person. Another lamented we were the only country that doesn't help its companies with items such as healthcare. Gee, we have a system that created the strongest economy the world has ever seen. Surely we want to adopt the methods of those countries that have perennially weak economies that require a strong US to buy their goods so they can stay afloat. We left Europe for many reasons, one being economic freedom. Seems some won't be happy, however, until we copy their 'fair' system. As one person put it their way of economics is trickle up poverty.
THE MARKET
MARKET SENTIMENT
As the indices broke one by one through the prior lows the angst among floor traders and at brokerages jumped. It is frustrating and maddening to see this happen. Sentiment indicators are at extremes once more and many are giving up. This is the scenario in 2002. It does not mean it will happen this time but with DJ30 holding its prior lows and the other indices making new lows the scenario is just as it was in October 2002 just with DJ30 rather than SP500 holding the prior lows as the other indices broke sharply lower. Just keeping that in mind given the high level of gloom clouding a lot of minds right now.
VIX: 74.26; +6.62. Heading back up toward the October highs though still well off the 89.53 peak. This is a very high reading nonetheless. VIX is holding at historically high levels for a very extended period.
VXN: 74.66; +6.35
VXO: 79.63; +7.29
Put/Call Ratio (CBOE): 1.41; +0.33. Ramping sharply higher as more look to buy downside protection and play the downside. This is a very high reading, as high as any hit during the early October selling.
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: 31.9%. On the rise again, up from 30.2 and the 5 year low of 21.3% hit to start November. 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: 46.1%. Down from 48.3% last week and well off the 5 year high at 54.4% hit the last week of October. 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: -96.85 points (-6.53%) to close at 1386.42
Volume: 2.388B (-1.42%). Still below average but the selling continues nonetheless. No buyers want to step in.
Up Volume: 61.49M (-1.019B)
Down Volume: 2.326B (+1.045B)
A/D and Hi/Lo: Decliners led 7.94 to 1. Very negative.
Previous Session: Decliners led 1.46 to 1
New Highs: 3 (-4)
New Lows: 823 (+230). Moving higher, but not topping the early October highs even as NASDAQ moves to a new 2008 closing low. That suggests it is sold out but that is about all as the index is not slowing its descent.
NASDAQ CHART: http://investmenthouse.com/ihmedia/NASDAQ.jpeg
NASDAQ feinted to the upside early but then rolled over with two serious down legs on the session. NASDAQ easily broke to a new 2008 low. No question as it dove 55 points in the last hour, again putting on half the losses in the last hour. It is still well over the 2002 low but this new break lower indicates there is no expectation of tech recovery over the next quarter or more. That said, NASDAQ is getting massively oversold on this November dive that has shown just 5 upside sessions as NASDAQ has turned over 400 points from the November high. It can get more and more oversold but after breaking to a new low we are going to see a rebound to test that move in the next few sessions.
NASDAQ 100 CHART: http://investmenthouse.com/ihmedia/NASDAQ100.jpeg
SOX CHART: http://investmenthouse.com/ihmedia/SOX.jpeg
SP500/NYSE
Stats: -52.54 points (-6.12%) to close at 806.58
NYSE Volume: 1.635B (+2.45%). Volume moved higher toward average as the NYSE indices dove lower. This shows the sellers taking back the reins after the price/volume action tried to swing to the upside.
Up Volume: 27.925M (-695.086M)
Down Volume: 1.606B (+752.771M)
A/D and Hi/Lo: Decliners led 11.19 to 1. Very ugly, very extreme.
Previous Session: Decliners led 1.78 to 1
New Highs: 20 (+12)
New Lows: 1037 (+383). Over 1000 but still less than the big numbers hit in early October.
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
SP500 was the last holdout outside of DJ30 to break its prior low, but it did so in the last hour with that harsh selloff. At the end of the session SP500 was close to the losses in October, though you have to remember that the market rallied pretty sharply the last week of October ahead of the election. It was down over 22% before that rebound. Semantics. The market is getting torched again in November and this new low indicates more downside though the large caps will likely test higher after the breach before turning down again.
SP600 (-7.56%) dove lower as well. They are indicators of the economy and their dive to a new 2008 and a massive dive at that tells you that there is no near term turn higher in the US economy coming. Not surprising given the continuing credit freeze that is refreezing of late. The problems that started the downward spiral have not changed.
SP600 Chart: http://investmenthouse.com/ihmedia/SP600.JPEG
SP400 CHART: http://investmenthouse.com/ihmedia/SP400.jpeg
DJ30
DJ30 was in its own dive in the last hour and closed on the low. It flirted with the Thursday low (7965) and is 115 points above the 2008 low (7882). DJ30 is the lone index holding above the two prior lows. It is possible it can hold and rebound, pulling the other indices with it. In October 2002 NASDAQ, DJ30 and the other indices undercut their July lows, looking as if they had rolled over and were heading lower. SP500 held its low and rebounded. All indices went with it and they didn't look back. Thus while all was pretty much despair Wednesday, this action is not outside of historical patterns. The gloom itself was not outside of historical patterns; it is exactly as it was back then. It is a tough hand to win, but typically bottoms are made with unlikely cards.
Stats: -427.47 points (-5.07%) to close at 7997.28
VOLUME: 350M shares Wednesday versus 366M shares Tuesday.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
THURSDAY
Well, at least futures were not diving further after hours. In any event, Thursday is likely to start lower though late tonight Congress decided not to vote on a bailout package for the automakers. You never know what may turn a market.
There is little right now, however, for investors to be excited about. November is turning out as bad as October for stocks as a couple of reversal attempts, one really strong one, could not keep the indices from hitting new lows. Very negative tape, very negative view of the market.
So as everyone assumes the market is in the toilet then you have to keep your eyes open so you don't get clocked by a ball out of right field. DJ30 did hold over the lows Wednesday, and as noted above, back in 2002 sentiment was as negative as you can get when the other indices broke to new lows leaving just SP500 holding its prior low. We heard that the 'old indicators just don't work anymore.' That along with all of the other readings was a clue that the market was ready to turn. Sounds pretty familiar.
There were also leaders ready to move at that time, ready to lead higher. They may not have been pretty bases but they had stopped the bleeding and moved laterally, forming small double bottoms, etc. Those exploded higher as the market recovered. Energy, agriculture, some techs are in that position. There are also stocks in good bases, e.g. healthcare, drugs, medical labs, some retailers of all things, biotech. Enough to take the point in a rally.
So we expect nothing but will be ready if DJ30 plays the SP500 roll from October 2002 and rallies up. We can try to play that though the last plays this week have been the first not to work for us right out of the gate. Things are just negative enough right now to make you give up, so we won't. We will watch and see if they bounce. One main reason is because stocks are so clubbed and beaten and bruised that the downside here is somewhat limited from a risk/reward standpoint. Tough period in the market and sitting it out for a bit until it finds direction is not bad, but if we start hearing on the financial stations about things being different this time that will be just a bit too much to lay off of. Will look for some more positions on the indices for a bounce as they tend to be the easiest to move in and out of during this high volatility.
Support and Resistance
NASDAQ: Closed at 1386.42
Resistance:
1428 is the November 2008 low
1493 is the October 2008 low
1499.21 is the 2008 closing low
1521 is the late 2002 peak following the bounce off the bear market low
1542 is the early October 2008 low
The 10 day EMA is 1529
1565 is the second low in October 2008
The 18 day EMA at 1586
1620 from the early 2001 low
1644 from August 2003
1752 from 2004
1782 from August 2004
The 50 day EMA at 1785
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
Support:
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 806.58
Resistance:
818 is the November 2008 low
839 is the early October 2008 low
848 is the October 2008 closing low
853 is the July 2002 low
866 is the second October 2008 low
The 10 day EMA at 876
889 is an interim 2002 peak
899 is the early October closing low
The 18 day EMA at 902
965 is the 2003 consolidation low
995 from June 2003 consolidation peak
The 50 day EMA at 1000
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 1130
1200 is the July 2008 intraday low
1244 is an August 2005 peak
Support:
800 is the March 2003 post bottom low
768 is the 2002 bear market low
Dow: Closed at 7,997.28
Resistance:
8175 is the October 2008 closing low. Key level to watch.
8197 was the second October 2008 low
8451 is the early October closing low. Key level to watch.
The 10 day EMA at 8519
8521 is an interim high in March 2003 after the March 2003 low
8626 from December 2002
The 18 day EMA at 8716
8985 is the closing low in the mid-2003 consolidation
9200 is the July peak in the 2003 consolidation
9323 From June 2003 peak
The 50 day EMA at 9445
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 90 day SMA at 10,415
10,459 is a September 2008 low
10,827 is the July 2008 intraday low
Support:
7965 is the November 2008 intraday low.
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 17 - Monday
November NY Empire State Index (8:30): -25.4 actual versus -26.0 expected, -24.6 prior
Capacity Utilization, October (9:15): 76.4 actual versus 76.6% expected, 76.4 prior
Industrial Production, October (9:15): +1.3 actual versus 0.2% expected, -2.8% prior
November 18 - Tuesday
October Core PPI (8:30): 0.4% actual versus 0.1% expected, 0.4 % prior
PPI, October (8:30): -2.8% actual versus -1.8% expected, -0.4 prior %
Net Foreign Purchases, September (9:00): $66.2B actual versus $17.5B expected, $21.0B prior (revised from $14.0B)
November 19 - Wednesday
Housing Starts, October (8:30): 791K actual versus 780K expected, 828K prior (revised from 817K)
October Building Permits (8:30): 708K actual versus 772K expected, prior 805K (revised form 786K)
CPI, October (8:30): -1.0% actual versus -0.8% expected, 0.0% prior
Core CPI, October (8:30): 0.1% expected, prior 0.1%
Oil Inventories (10:30): 1.6M actual versus 1.0M expected, 220K prior
FOMC Minutes, October 29 (2:00): Said economy would stay back through mid-2009. No recovery to 'normal' economic activity until 2011.
November 20 - Thursday
11/15 Initial Claims (8:30): 503K expected, 516K prior
Leading Indicators, October (10:00): -0.6% expected, prior 0.3%
Philadelphia Fed, November (10:00): -35.0 expected, prior -37.5
End part 1 of 3
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