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us stock market, trade stock
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10/19/09 Investment House Daily
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Investment House Daily Subscribers:
MARKET ALERTS:
Targets hit alerts: None issued
Buy alerts: DWSN; GS; LRCX; STLD; VMC
Trailing stops: None issued
Stop alerts: OREX
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SUMMARY:
- Latest dip used as another buying opportunity.
- Banks quietly girding for more credit losses.
- A better holiday season? That won't be hard.
- Fed policies aimed at bailing out poorly run businesses, stressing consumer finances.
- Can you trust the message of the market re the economy given the continued massive intervention?
- Apple and friends post some impressive results. A re-start to the earnings race to year end?
Buyers use early dip as a condiment.
The futures were modestly higher but when the market opened the indices faded. They faded through the first half hour and then the buyers moved in and drove the indices to 1% gains. All of the action was over by the end of lunch as the indices slid laterally into the close, but the did not give up the gains. Indeed there was no attempt to sell once the bounce took hold.
Earnings on the morning were not bad, but they were not that great. HAS and ETN both beat, but the top line revenue growth missed expectations. They both, however, raised their guidance. That seemed to help offset the revenue miss as both started higher. HAS could not hold the move, but ETN did. Bernanke gave a speech and said nothing about removing monetary stimulus but did tell the federal government it needed to curtail its spending and get its fiscal house in order. Good advice.
Barron's had some advice for the Fed: raise interest rates 2% right now. Many say that is impossible to do with almost 10% unemployment and a modern record of four quarters of negative GDP. Oh really? Recall back in the early 1980's the Volcker Fed raised rates significantly in the face of widespread unemployment and economic malaise. That helped break inflation's back and along with the Reagan economic programs ushered in 20 years of prosperity that saw the PC revolution (and I am talking of personal computers, not the later 'politically correct' attitude that permeated the Clinton era and beyond) and millions of new high tech jobs that re-launched America's economic dominance.
The dollar is key right now. It was again sold off Monday (1.4942 euros versus 1.4893 Friday) as foreign investors dump dollars. When Australia raised its rates unexpectedly the Aussie dollar surged; it surged again Monday. People WANT the Aussie dollar and that benefits Australia, underscoring its government's relatively new commitment to free enterprise and thus increasing the value of its currency in two ways (rates and economic growth potential). In the US, however, for the second straight administration we have a weak dollar policy, pursuing the path of debasing your currency to prosperity. Unfortunately, history marks the corpses of many economies that tried and failed at the same policy. If your goal is economic prosperity, this is not the path. If it is something else, and I am not going to go that route right now, it could help you out. It won't, however, help the people of the US.
TECHNICAL
INTERNALS. Very solid breadth at 3:1 on NYSE and 1.8:1 on NASDAQ. Volume faded, though from expiration levels. Though Friday was expiration, volumes were not great that session and that means trade was below average on the Monday gains, significantly so on NYSE as it showed its lowest trade in four sessions. At least the Wednesday break higher was on strong volume, an indication of good buying. Well, some indication of buying; Wednesdays in expiration week often show a lot of trade related to expiration.
CHARTS. The indices were hesitant at first but they did make a stand and reversed to post gains once again, stretching the Wednesday break higher and the Thursday gain a bit further. Not a clear runaway move, but indicative of what we think we will continue to see toward the end of the year as fund managers bolster their positions in the market in general. There is plenty of money out there to do it as we saw in 1999.
As for the charts in particular, NASDAQ tested its March/July up trendline on the low (coincident with its 10 day EMA) and bounced to a new post-March high. That is the kind of action you want to see on a test. SP500 never came close to its trendline, holding well above that level and even the 10 day EMA as it bounced, just eclipsing the Thursday new rally high on Monday's close. SOX (1.48%) again undercut the 18 day EMA but reversed and is holding a range of support from 320 to 326ish. Hardly out of the woods but holding where it needs to. The small cap SP600 (+1.01%) tested the 10 day EMA again and bounced positive though it could not take out its highs from last week. A very decent lateral move, however, as it holds over the September highs and tries to set up a new breakout.
LEADERSHIP. Energy, copper, gold, some Chinese stocks, retail, semiconductors. The list remains long and strong as the liquidity continues to press into the market. An interesting missing component are the financials. They managed to rebound from early weakness, but not completely, and they were a drag on the market as it rebounded.
THE ECONOMY
Banks provisioning for more credit losses even as analysts call for stronger holiday season.
As earnings started last week a quiet theme started to emerge in the financials. Tucked away in the corners of the reports were increased credit loss provisions. In other words, financial institutions are anticipating greater credit losses in the months to come. The latest example is BBT with its Monday announcement. Earnings were fine but it seems the credit loss provisions made it to the front page this week as BBT was thrown for a loss despite its bottom line beat.
At the same time many analysts are predicting that this holiday season will top 2008. That is no prediction of that is it: 2008 holiday sales fell 4.2%, the worst showing in 40 years. The analysts are even more positive, they are predicting a 1.5% gain in holiday sales.
The reason: a little of this, a little of that. They say Americans feel wealthier than last year as household wealth supposedly gained $2T the past quarter. That would be all stock market gains because the jobs situation remains miserable along with the housing market. Any feelings of wealth are not the result of jobs or home prices; just ask anyone in Michigan, Florida, or Arizona to name some of the worst areas. Maybe in states such as Texas that suffered less of a downturn thanks to the energy business and events such as Hurricane Ike that spurred the building industry there will be a better holiday, but in many states the economics remain bleak even with the stimulus package. Did you notice over the weekend that the federal government happily reported that 30K private jobs were 'created or saved' by the stimulus? 30K might be decent in Canada given its population; in the US it takes 300K to be the equivalent of 30K jobs in Canada. Nothing to get excited about. Indeed, those are extremely expensive jobs. I would prefer to just have the money returned to me so I could invest in the US, thank you very much. In any event analysts say combined with some pent-up demand given it is a year since the crisis, this new wealth will get consumers out spending.
It will need some help and it is not getting it from oil and gasoline prices. The driving season is over yet gasoline prices are on the upswing, rising almost $0.30 in the past two weeks. There may not be any kind of summertime surge, but with oil ready to breakout to the upside, gasoline will do the same regardless of demand this time of year. Higher gasoline, higher heating oil, higher natural gas prices and you have this pent-up demand theory facing serious headwinds. We will see.
The Fed wants you to spend, gears its policy to promote consumption.
Maybe there is some pent up demand that will get consumers a bit looser with their money this year; after such a bad holiday season in 2008 it would not take much spending to have a better year. Consumption is 70% of our economy, so a bit more buying would help.
The Fed certainly does not want to do anything to hinder a better holiday shopping season. Indeed, its 0% interest rate policy is doing everything it can to help. Of course it only goes so far. The Fed may have pushed rates very low, but consumer credit rates are still quite high. Why? Earlier I discussed the increased credit loss provisioning by the banks. If they anticipate more credit defaults to come are the banks fired up about lowering interest rates on credit? No, they need to make up the difference on the bad credit with those still servicing their debt. Thus no relief in that sense for the consumer.
The Fed has another weapon, although it is the same one as noted above: keeping interest rates low. What this does is make savings accounts money losers as savers receive basically nothing on their money thanks to the low rates. This is part of what I discussed over the weekend, i.e. the banks getting free money and lending it out at higher rates. As the saver, however, we get nothing for our savings in order to help the banks 'get back on their feet.' Of course it is our tax dollars allowing the free money as well as the bailout funds, so we are getting the screws put to us several times over.
Basically, the Fed is making it foolish to save money. Remember, the Fed is comfortable with 6% inflation, yet its rate structure ensures you lose money to inflation each year on your savings (0.25% interest versus 6% inflation equals a net loss of 5.75%). Hoping that savers are rational it is holding rates at loss levels for ordinary people and thus they may be more inclined to invest and also consume.
No problem at all with investment in the US but will citizens do that given their tax rates are set to rise when the prior tax cuts expire and are likely to rise further to pay for all the new entitlements and spending out of Washington DC. Further, is it good to undercut our dollar and then force consumers to spend for the sake of consumption given no other choices? Is that was the US economy has become? Dangerous, dangerous ground here.
The Message of the Market is getting distorted.
Too many commentators are falling for a trap. They see the stock market surging higher, some calling it the biggest rally since the Great Depression, and thus all is obviously well for the US economy. After all, the market foretells the economic in most situations. Most. The exceptions occur when the federal government policies so distort the markets that their forecasting ability is trumped by short term efforts to maximize returns. That is precisely what is happening today.
It is something we have seen before. 1999 is the latest example when the Fed flooded the economy with money ahead of Y2K, fearing that people would withdraw billions of dollars and shove them under the mattress. It did not happen. Thus the country was awash in money that was not being used. The institutions pushed all the money into the stock market. NASDAQ, in less than a half year, rallied 75% as money poured into the stock market as there was no better place for it. Money begat more money and the move snowballed.
Then the money was called back in March. The stock market jerked violently and sold off 40%. THAT was the true fortune telling move, i.e. the recession to come as a result of an easy money policy ahead of a long term economic expansion that was susceptible to tinkering with monetary policy.
Right now we have a stock market rally, and while stocks were bound to recover off the panic selling in the fall of 2008, this rally has gone well beyond anything that the economic data is suggesting it should. The recovery is very weak compared to prior recoveries. Today one think tank reported this recovery was less than half the strength of the Reagan recovery at this stage. Yet the market is posting one of its strongest all-time rallies even as our dollar tanks.
That is not an economically driven rally. That is, as in 1999, a liquidity driven rally as unused money is stuffed into stocks thanks to 0% interest rates making savings uninviting and total lack of incentive for money to invest in the private sector thanks to poor tax treatment now and to come. There is nowhere else to put the money and as in 1999 investors and financial institutions are putting money in the market as the only avenue to garner decent returns.
What happens when the party is declared over by the Fed? At some point it has to start raising rates, and as noted last week, it has already started the talking phase where the subject has now been broached by the Fed. It knows it has to raise rates before too long whether or not the economy can sustain its move. That is why Bernanke was pleading with Congress to get its fiscal house in order ahead of rate hikes. Of course this Administration will not do that; it has other plans that are not economically driven. Thus we face trouble.
When the money is pulled as it inevitably has to be, if there is no abatement of our spending on entitlements, new and old, and if there is no support for the dollar, we are going to have a really painful economic decline. China, India, Brazil and others won't feel it because they will sell their goods to their new wealthy and middle classes. We will find out a history lesson that only other countries have learned: you cannot devalue and spend your way to prosperity. If that were the case why not spend trillions and create millions of high tech jobs? Why not? Because it doesn't work. History shows that is the case. Yet we are trying to do it, or not. The motivations don't matter; the result does. It is rather disturbing. It is really more than that but I don't want to get accused of hyperbole or contriving conspiracy theories.
THE MARKET
MARKET SENTIMENT
VIX: 21.49; +0.06
VXN: 22.11; -0.11
VXO: 20.25; -0.95
Put/Call Ratio (CBOE): 0.91; +0.15
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: 48.9%. Paring back from the 50.6% the prior week. Tough week of selling knocked the bulls back but the bounce will bring them up again. Still well over the 35% level that is the threshold for what is considered a bullish climate. It does not mean things are necessarily bearish; that takes a reading in the 60% range. Hit a high of 47.7% mid-June on the run from the March lows. Again, to be seriously bearish it needs to get up to the 60% to 65% level. Dramatic rise from 21.3% in November 2008, the bottom on this leg. This last leg 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.
Bears: 24.4%. Climbing on the market selloff, up from 23.6%. That puts it back up to the level hit three weeks back, still showing sufficient pessimism. Hit a low of 21.3% on this leg. Rebounding some from the big drop 31.1% and 35.6%. For reference, cracking above the 35% threshold considered bullish. Hit a high on this run at 47.2%. For reference, bearishness hit a 5 year high at 54.4% the last week of October 2008. The move over 50 took bearish sentiment to its highest level since 1995. Extreme negative sentiment. Prior levels for comparison: 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). That was a huge turn, unlike any seen in recent history.
NASDAQ
Stats: +19.52 points (+0.91%) to close at 2176.32
Volume: 1.907B (-12.29%)
Up Volume: 1.375B (+839.431M)
Down Volume: 569.147M (-1.09B)
A/D and Hi/Lo: Advancers led 1.82 to 1
Previous Session: Decliners led 2.14 to 1
New Highs: 184 (+68)
New Lows: 17 (+9)
NASDAQ CHART: http://investmenthouse.com/ihmedia/NASDAQ.jpeg
Nice action with a test of support and a solid rebound to gains. Volume was disappointing, but when you start these liquidity moves volume doesn't mean a whole lot.
NASDAQ 100 CHART: http://investmenthouse.com/ihmedia/NASDAQ100.jpeg
SOX CHART: http://investmenthouse.com/ihmedia/SOX.jpeg
SP500/NYSE
Stats: +10.23 points (+0.94%) to close at 1097.91
NYSE Volume: 1.082B (-21.99%)
Up Volume: 749.397M (+414.919M)
Down Volume: 327.143M (-713.523M)
A/D and Hi/Lo: Advancers led 2.97 to 1
Previous Session: Decliners led 1.91 to 1
New Highs: 638 (+387)
New Lows: 83 (+47)
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
SP600 CHART: http://investmenthouse.com/ihmedia/SP600.jpeg
DJ30
Stats: +96.28 points (+0.96%) to close at 10092.19
Volume DJ30: 186M shares versus 307M shares Friday. After some really strong trade a day off is not that big a deal.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
TUESDAY
There are all kinds of rather dire issues facing the US that have never presented themselves in quite this way before. The primary issue for us and our self-induced dollar shredding is the new wealthy classes in China, India, Brazil, and Southeast Asia in general. No longer do they need us to buy their goods as their own citizens now have the wealth to do it. That makes this dollar liquidation gambit a very dangerous ploy for our futures and the standard of living for our children and their progeny.
Even with that, however, there is a liquidity driven rally underway and it showed its strength again on Monday with a weaker start followed by more buying. Volume was not that great but these liquidity moves do not require a ton of volume. They just require dips to get more money into play.
We saw that on Friday through Monday morning. After hours AAPL posted more shocking numbers. AAPL typically sandbags its results; if this is sandbagging, my goodness. We will see if AAPL has the coattail effect that can send stocks even higher from here. Apple faded modestly ahead of results and was trading over $200 after hours. Tuesday may give us a big pop and you have to watch how they are treated. Always watch for a reversal, but that liquidity is standing at the ready even if there is a reversal by Apple.
That leaves some stocks extended; no complaint with that as a lot of our plays are those extended stocks. It also keeps money flowing into new areas, however, and that continues to give us good buys on quality stocks. With liquidity still coming in we continue to buy into the market and we don't see any reason to change right now.
Thus we are continuing to look for new buys as money flows to stocks set up in position to make strong surges for us. We are not going to fight the move though we will take a downside position now and then when they look good just to have some downside exposure. Stocks continue to set up and we are going to play them and make as much as we can now before the punch bowl is taken away and then the dollar weakness is exposed even if it is flat to where it was 2 years ago. That is not the point. It is the changing landscape and the perception of the dollar IN THE FUTURE, not where it has been in the past, that is the problem. So, we make money now when the liquidity is pushing stocks higher, rather irrationally at that.
That is a long-winded way (that is frankly my way) of saying 'when in Rome . . .' There are still very good buys setting up and we are going to take the opportunity as they do. Maybe we turn out to be totally wrong and the economic data is really foretelling a super economy ahead. If it does then cats and dogs will be sleeping together, pigs will fly, and Castro may someday die. Maybe that is the 'new normal' that we hear thrown about so much these days.
Support and Resistance
NASDAQ: Closed at 2176.32
Resistance:
2177 is a low from March 2008
2210 (from September 2008) to 2212 (the July 2009 closing low)
2275 - 2278 from the February 2008 and April 2008 lows
Support:
2169 is the March 2008 closing low (double bottom)
2168 is the September 2009, intraday peak
2167 from the July 2008 intraday low
2155 is the March 2008 intraday low
The March up trendline at 2150
The 18 day EMA at 2124
2099 is the mid-September 2008 closing low
2070 is the September 2008 intraday low
The 50 day EMA at 2066
2060 is the August peak
2016 is the early August peak
1984 from late September
1962 is the bottom of the August 2009 range.
1947 is the October gap down point
1897 is the October post gap intraday high.
1880 is the June peak
1862 is the July peak
1786 is the November intraday high
1780 is the November 2008 closing peak
1773 is the May intraday peak
1770 is the mid-October interim peak
The 200 day SM A at 1764
S&P 500: Closed at 1097.91
Resistance:
1106 is the September 2008 low
1133 from a September 2008 intraday low
1185 from late September 2008
1200 from the July 2008 low
Support:
1080 is the September 2009 peak
1070 is the late September 2009 peak
The 18 day EMA at 1069
The March/July up trendline at 1050
1044 is the October 2008 intraday high
The August peak at 1040
The 50 day EMA at 1038
The early August intraday peak at 1018
The November 2008 peak at 1006 closing 1007.53 intraday
992 is the August 2009 consolidation low
956 is the June intraday peak
944 is the January 2009 high
935 is the January closing high
932 is the July peak
930 is the May peak
919 is the early December peak is bending
The 200 day SMA at 911
Dow: Closed at 10,092.19
Resistance:
10,365 is the late September low
10,609 from the Mid-September 2008 interim low
10,963 is the July 2008 low
Support:
9918 is the September 2008 peak
9855 is the early September peak in its lateral range
The 18 day EMA at 9840
9835 is the late September 2009 peak
9654 is the November 2008 high
9625 is the October 2008 closing high
9620 is the August 2009 peak
The 50 day EMA at 9583
9387 is the mid-October peak
9116 is the August low
9088 is the January 2009 peak
8985 is the closing low in the mid-2003 consolidation
8934 is the December closing high
8878 is the June peak
8829 is the late November 2008 peak
8626 from December 2002
8588 is the May high
8581 is the July peak
The 200 day SMA at 8534
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
October 16 - Friday
Net Long-Term TIC Fl, August (09:00): $28.6B actual versus $30.0B expected, $15.3B prior
Capacity Utilization, September (09:15): 70.5% actual versus 69.8% expected, 69.9% prior (revised from 69.6%)
Industrial Production, September (09:15): 0.7% actual versus 0.2% expected, 1.2% prior (revised from 0.8%)
Michigan Sentiment-Preliminary, October (09:55): 69.4 actual versus 73.3 expected, 73.5 prior
October 20 - Tuesday
Building Permits, September (08:30): 595K expected, 579K prior
Housing Starts, September (08:30): 610K expected, 598K prior
PPI, September (08:30): 0.0% expected, 1.7% prior
Core PPI, September (08:30): 0.1% expected, 0.2% prior
October 21 - Wednesday
Crude Inventories, 10/16 (10:30): 0.33M prior
October 22 - Thursday
Initial Claims, 10/17 (08:30): 517K expected, 514K prior
Continuing Claims, 10/10 (08:30): 5990K expected, 5992K prior
Leading Indicators, September (10:00): 0.9% expected, 0.6% prior
FHFA Housing Price I, AUG (10:00): 0.3% expected, 0.3% prior
October 23 - Friday
Existing Home Sales, September (10:00): 5.35M expected, 5.10M prior
End part 1 of 3
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