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us stock market, trend trading stock
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10/29/09 Investment House Daily
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Investment House Daily Subscribers:
MARKET ALERTS:
Targets hit alerts: DIOD; SMCT
Buy alerts: ACF; HWD; ICE
Trailing stops: STE
Stop alerts: AMSC; SLAB
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SUMMARY:
- GDP provides a trigger, weaker dollar the fuel as stocks snap back.
- SP500 leads the move thanks to the dollar plays, but NASDAQ, SP600 are not convincing.
- GDP tops GS' lowered expectations, but now the worry is whether it can keep it up.
- Jobless claims just cannot gain traction.
- Watching the quality of the bounce with some good upside plays and a bit of caution.
Lower dollar calms the market. Or does it?
GDP topped expectations and not just GS' lowered forecast. Goldman must have got the tip wrong: it was BEAT by 0.3%, not MISS. That was enough to get the buyers (and the shorts as well) revved up and buying shares. That and the dollar thudding back from its gains (1.4841 versus 1.4709) overshadowed another weak weekly jobless claims report as 530K more citizens lost their jobs. Sure continuing claims fell to a new low for this decline (5.979M), but as most economists noted, it was not due to any increase in employment but chronically unemployed workers moving to other forms of unemployment coverage or falling off the rolls altogether.
Stocks didn't pay heed to the lack of jobs, apparently assuming that a robust durables report thanks to cash for clunkers and a zooming low end housing market thanks to first time homebuyers credits would pave the way to new jobs. That is a tough sell but for Thursday it was not a factor. Stocks rallied out of the gates and extended the move through the close. We kept watching for a turn back but there was enough to keep them moving at least for the day.
TECHNICAL
VIEW THE MARKET TECHNICAL VIDEO AT:
http://investmenthouse1.com/ihmedia/marketsummary.wmv
Dollar index. DXY0 has been trending lower, and then it made the bounce higher that coincided with the market decline over the past week. When the market surged higher today by 1.8% over 2%, the dollar was down. The dollar was likely not the trigger, but it was what fueled the further rally once the GDP numbers came in. The dollar was down, and therefore the market was up.
INTRADAY.
Looking at SP500, it was pretty much a classic bullish day just as Wednesday was a classic bearish day. Wednesday it gapped lower and sold to the close. Thursday it gapped higher and rallied to the close. It flipped those days around, and I will talk about what that means. You could call it a reversal, but there are other things to pay attention to.
INTERNALS.
Volume on the NYSE was still above average, but it was 13% lower than it was on the selling volume. NASDAQ showed a similar picture, though it was not as good as it was on the NYSE. The market was up with a gap, it held the gap, but volume fell back to average. Selling volume and reversal volume were above average. It was a big selloff day and above average. It closed at the low; it was no key reversal on Wednesday. Then it was an inside day on NASDAQ, where it traded inside the range from Wednesday on low volume. That says it was basically a nothing day. It did not show real strength, and that is an important factor to consider.
Breadth was at 2.3:1 on NASDAQ, which was almost twice as poor as the - 5.4:1 downside breadth on Wednesday. There were much stronger losses on Wednesday. On the NYSE, the breadth was + 4:1, but it was -7:1 on Wednesday. There was massively negative volume. With all the higher volume on the selling, that shows that there are still more sellers in the market than there are buyers. The upside volume on Thursday cannot offset all of the negative distribution volume on these prior sessions. It is the same with the NYSE. Even though it shows slightly better volume - above average - than the NASDAQ did, it was still not a powerful day and volume is still outweighing to the downside. That is very important as it shows there are more sellers still in the market. Today was not a reversal necessarily.
CHARTS.
The differences in the chart was that SP500 did not show an inside day. It showed an engulfing pattern on the candlestick chart where it gapped higher and closed above the Wednesday open. It was a more positive bullish pattern with respect to SP500, while NASDAQ (the leader on the downside as far as weakness was concerned) showed a weaker bounce. That makes sense considering it was unable to show the kind of strength it needed to show.
It is still not too bad of a picture. SP500 broke its uptrend line, and it came up to kiss it on Thursday, but it did make a higher low above the early-October low. There are a series of higher lows in place, and as long as that continues, the trend will more or less remain in place. The original trend was broken, and we have to see how this test plays out.
NASDAQ shows a similar picture as well. It was moving higher, and it still made a higher low above the October low. The string of higher lows is still in effect, and thus you still have an uptrend in place - just not as strong of an uptrend. NASDAQ recaptured its 50 day EMA as did SP500. That is not too bad. There was some damage done, but it was not a fatal blow to either NASDAQ or the SP500.
Let us take a look at the SP600, an important growth index. It showed a kind of double top, and it did make a lower low. It is trying to recapture it, and maybe it can, but it lies with NASDAQ. It was an inside day on relatively weak volume compared to the selling. This is a growth index and an economic harbinger. If it is having trouble, the worries about the Q4 GDP may be justified.
The SOX also made a lower low, it also had an inside day and is below its trendline. There are a lot of issues with the semiconductors as they bump up against an old peak from August, a consolidation range from late August-early September, and then a low from October. That is a lot of resistance. If there is more upside on the semiconductors, and if they roll over near the 50 day moving average, they could be a short play to the downside.
At this juncture of the move, you have to look at the quality of the bounce. It was not bad on SP500 as it broke over the Wednesday trading high. NASDAQ, the SP600, and the SOX were not able to do that. The quality of the move on the growth indices was not nearly as good as on the large caps. That makes sense because the large caps harbor financials, and there were financials that did well. GS and other financials bounced back. The industrial stocks and the energy stocks also came back. Those are all the overseas trades and were thus doing better as the dollar weakened. That is why you saw the SP500 perform better, but will it be enough to pull the rest of the market back up from its troubles? We will have to see with the quality of this bounce.
Looking at the daily chart and at the Fibonacci pullback on SP500, this corrective move came back the 78% level. That is a key level. If it holds at the 38%, 50%, or even the 61% level, you can expect a continuation move. If it goes down to 78%, it is losing a lot of momentum and could indicate a momentum change in place. We will have to watch and see where this bounce comes up. Will it be able to retrace back up and continue higher? What you want to be careful of is if there is a retracement up that does not meet this prior level. What we would be looking at is this level from the September peak. If it stalls out there or maybe a little higher and then reverses and undercuts it, then that could be a serious problem and lead to more downside. The deeper the test, the more chance you have of a reversal situation. We just want to see how strong the move is to the upside and what kind of leadership quality you have as stocks move higher. That will be the key moving back up.
I want to touch on the kind of action we have seen. There was higher-volume selling and then the surge down on Wednesday followed by an immediate bounce back up. The volatility is rising, and I am talking about the day-to-day volatility, not necessarily the VIX and its measure of volatility. Right now, much of the nation is facing snowstorms or flooding rains. There are storms at the change of seasons, and the same thing happens with markets. Everything moves up in nice steady patterns for awhile, but they get very volatile when the seasons change. When you see the whipping back and forth action, you should get concerned. This one day may not make much of the difference - there can be a big down day, a big up day, and it can resume the move. If there continues to be big up and down days, that is more like a change of season and we have to be careful in that case.
There are two factors at play now. There are the sellers showing a lot more volume than the upside as of late, and along with that you get the volatility, and that is set against the liquidity out there that wants to buy stocks on dips and send them higher to the end of the year. That is the tension that is going to be in the market over the next week as the bulls and the bears fight out this sudden surge lower and then the sudden rebound. That is what to keep in mind when I talk about the quality of the rebound.
LEADERSHIP.
There are some breakdowns from Wednesday, but there are other good sectors that are moving higher. Industrials, energy stocks, and those related stocks tied to the dollar trade helped push the SP500 back up. If the dollar is selling again, that will help boost them higher. We are not getting a lot of help from technology, although there are a lot of smaller stocks that are doing quite well.
Some industrials are doing well, such as DE. It pulled back and posted a nice gain. It had a nice bounce - not on great volume, but it is bouncing. TEX has something of an ABCD pattern going, and it is trying to bounce. If it continues, we will be looking at that as an entry point. ITW had a nice pullback to support, and is trying to break higher. ITT is another of the machinery stocks. It has a kind of ABCD forming and some decent volume, and that could provide plays to the upside. As far as energy, HAL is starting to bounce up nicely, and there are even stocks in the independents such as XTO with good patterns. A lot of stocks are trying to bounce back from some nasty selling. APA held its 50 day EMA (as it has done all along) and bounced on good volume. That is a good sign, but a lot of other stocks are struggling to make any kind of move back. They may not even have participated much in the rally on the day.
There are stocks that have rallied higher and sold hard that are trying to come back, but they are not in great positions now. They will need more work in order to set up a pattern or base to move back up because there was some technical damage done over the past week. If the liquidity surges back in, it could wash everything away and just sweep them all higher on a tide of buying. Liquidity can do that. It changes the game from a normal basing period and then a breakout that would be normal in more rational times when there is steady accumulation ongoing.
We have some good plays in certain sectors that we will be able to play the upside in the event that the liquidity continues moving things higher. We have good plays in pocket that we can use, but we have to watch the rest of the market at the same time. If it is not following, those plays can only go so far. The generals can only lead so far before a lack of troops eventually gets them killed.
THE ECONOMY
Goldman missed it, but for the right reasons.
GS lowered its GDP forecast to 2.7%. In reality the first iteration of Q3 GDP came in at 3.5% versus the 3.2% consensus, led by a 23% surge in residential home construction (directly attributed to the first time homebuyer's credit) and 22% jump in durable goods orders (directly attributed to cash for clunkers). Consumer purchases rose 3.4%, the strongest showing in over two years.
The rest? It left something to be desired. Non-residential construction (everything not homes) fell a whopping 25%. Business investment tumbled 2.5%.
Inventories were the missing link, and if they were stronger GDP would have soared over 4%. That consumer buying drained inventories by $130.8B. That is a rate only topped by the second quarter's monumental, record setting decline. Goods on hand are now at 1.39 months, the lowest reading since the data was first compiled back in the early 1980's. Wholesaler inventory to sales ratio is at an 11 month low. Manufacturer's inventory to sales is at a 10 month low.
What this means is that production, if consumer demand continues, remains well below current demand. If that continues then orders will need to be placed and factories will have to start producing again.
That begs the $10T question: will consumer demand continue without the Q3 incentives and with a continued putrid jobs market? That is where GS went astray; it correctly saw the weak inventories but it missed on the consumption aspect. The consumption versus inventories interplay is where all of the hope for the future lies.
Many predict that consumption cannot continue at the Q3 pace. Given the incentives are drying up, the terrible jobs market, and the Chief White House economic advisor's forecast that there will be negligible impact from the stimulus a.k.a. spending package after Q1 of 2010, they are likely right. Thus they are looking at an increase in inventory building to bridge the gap for a couple of quarters while the consumer retrenches from some pent up spending demand, holding up the economy until jobs are created and incomes rise. Will businesses put in those orders, however, if they see the consumer back off after the car buying binge? Will jobs actually be created by this economy and stimulus that, as we all know and heard again on Thursday, has totally ignored small businesses, the epicenter of job creation?
Again, that is the $10T question. Certainly the low inventory levels provide historic evidence that businesses will have to order more goods; they have to sell after all in order to stay in business. Yet we see new home sales tanking along with regional manufacturing data fading once more. The newer data is showing a pullback from the Q3 levels. Further, this is not your father's recession; it is a once in a hundred year recession - - unless of course the federal government is successful in implementing its regulatory and other schemes and entitlements. If that is done the government will be so imbedded in our economy two things will happen. One, we have more booms and busts because of attempts at micromanaging the economy (Greenspan provided the blueprint for that bad idea). Two, with excessive government involvement and regulation we DON'T HAVE ENOUGH economic growth to have real booms; just malaise a la Eastern Bloc countries in the Cold War. The path we are going now . . . I don't even want to think about it. Hello? Australia immigration? Yes, do you still require a criminal record for citizenship?
THE MARKET
MARKET SENTIMENT
VIX: 24.76; -3.15
VXN: 25.4; -2.87
VXO: 23.64; -3.44
Put/Call Ratio (CBOE): 0.84; -0.27
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: 49.5%. Bulls have held in the 48% to 50% range for several weeks now. That is likely to change in a rather dramatic fashion with this week's reading and for certain the following week. Has been a bit too ebullient and getting slapped back won't hurt. 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: 23.1%. Bears have trended slightly lower the past several weeks but are mostly holding the line at this level. They will jump this week. 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: +37.94 points (+1.84%) to close at 2097.55
Volume: 2.313B (-16.14%)
Up Volume: 1.981B (+1.765B)
Down Volume: 318.45M (-2.253B)
A/D and Hi/Lo: Advancers led 2.34 to 1
Previous Session: Decliners led 5.43 to 1
New Highs: 19 (+2)
New Lows: 39 (-9)
NASDAQ CHART: http://investmenthouse.com/ihmedia/NASDAQ.jpeg
NASDAQ 100 CHART: http://investmenthouse.com/ihmedia/NASDAQ100.jpeg
SOX CHART: http://investmenthouse.com/ihmedia/SOX.jpeg
SP500/NYSE
Stats: +23.48 points (+2.25%) to close at 1066.11
NYSE Volume: 1.453B (-13.11%)
Up Volume: 1.294B (+1.138B)
Down Volume: 150.07M (-1.365B)
A/D and Hi/Lo: Advancers led 4.04 to 1
Previous Session: Decliners led 7.06 to 1
New Highs: 55 (-4)
New Lows: 36 (-13)
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
SP600 CHART: http://investmenthouse.com/ihmedia/SP600.jpeg
DJ30
Stats: +199.89 points (+2.05%) to close at 9962.58
Volume DJ30: 248M shares Thursday versus 257M shares Wednesday. Similar to SP500, the Dow had no inside day and closed sharply higher, making a higher low and holding its up trendline.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
FRIDAY
Income, spending, Chicago PMI and Michigan sentiment. Important, particularly the first three. Income and spending of course help determine whether the consumer remains active. The PMI helps determine if manufacturing activity continues to backslide modestly or resumes the progression higher.
As noted in the Technical section, we will be watching the quality of this move. SP500 and DJ30 look as if this was just a normal pullback though somewhat violent. NASDAQ, SOX and particularly SP600, well, that is the quality part. Will SP500 and the dollar related stocks drag them higher or vice versa?
Again we see some of the leaders that were not ripped in this selling holding support and a good pattern and still in position to move. We picked up some of those Thursday and will continue to do so if they show the move. There is reason to be a bit skeptical with the depth of the pullback but there is that liquidity out there and if a good stock in good position shows a buy point then we take advantage of it and just keep our heads on if things stall out at a lower peak on this rebound.
Support and Resistance
NASDAQ: Closed at 2097.55
Resistance:
2099 is the mid-September 2008 closing low
The 18 day EMA at 2123
2143 is the October range low
2155 is the March 2008 intraday low
2167 from the July 2008 intraday low
2168 is the September 2009, intraday peak
2169 is the March 2008 closing low (double bottom)
2177 is a low from March 2008
The March up trendline at 2186
2191 is the October 2009 peak
2210 (from September 2008) to 2212 (the July 2009 closing low)
2275 - 2278 from the February 2008 and April 2008 lows
Support:
The 50 day EMA at 2083
2070 is the September 2008 intraday low
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
The 200 day SM A at 1785
1780 is the November 2008 closing peak
1773 is the May intraday peak
S&P 500: Closed at 1066.11
Resistance:
The 50 day EMA at 1047
The March/July up trendline at 1066
1070 is the late September 2009 peak
The 18 day EMA at 1073
1078 is the October range low
1080 is the September 2009 peak
1101 is the October high
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:
1044 is the October 2008 intraday high
The August peak at 1040
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 918
Dow: Closed at 9962.58
Resistance:
10,120 is the October 2009 peak
10,365 is the late September 2008 low
10,609 from the Mid-September 2008 interim low
10,963 is the July 2008 low
Support:
9918 is the September 2008 peak
The 18 day EMA at 9890
9855 is the early September peak in its lateral range
9835 is the late September 2009 peak
The 50 day EMA at 9679
9654 is the November 2008 high
9625 is the October 2008 closing high
9620 is the August 2009 peak
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
The 200 day SMA at 8586
8581 is the July peak
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
October 27 - Tuesday
CaseShiller Home Pri, August (09:00): -11.32% actual versus -11.90% expected, -13.26% prior (revised from -13.30%)
Consumer Confidence, October (10:00): 47.7 actual versus 53.5 expected, 53.4 prior (revised from 53.1)
October 28 - Wednesday
Durable Orders, September (08:30): 1.0% actual versus 1.0% expected, -2.6% prior (revised from -2.4%)
Durable Orders ex Transportation, September (08:30): 0.9% actual versus 0.7% expected, -0.4% prior (revised from 0.0%)
New Home Sales, September (10:00): 402K actual versus 440K expected, 417K prior (revised from 429K)
Crude Inventories, 10/23 (10:30): 0.78M actual versus 1.31M prior
October 29 - Thursday
Chain Deflator-Adv., Q3 (08:30): 0.8% actual versus 1.4% expected, 0.0% prior
GDP-Adv., Q3 (08:30): 3.5% actual versus 3.2% expected, -0.7% prior
Initial Claims, 10/24 (08:30): 530K actual versus 525K expected, 531K prior (no revisions)
Continuing Claims, 10/17 (08:30): 5797K actual versus 5905K expected, 5945K prior (revised from 5923K)
October 30 - Friday
Personal Income, September (08:30): 0.0% expected, 0.2% prior
Personal Spending, September (08:30): -0.5% expected, 1.3% prior
PCE Prices, September (08:30): -0.5% expected, -0.5% prior
Core PCE Prices, September (08:30): 0.2% expected, 0.1% prior
Chicago PMI, October (09:45): 49.0 expected, 46.1 prior
Michigan Sentiment-Rev, October (09:55): 70.0 expected, 69.4 prior
Employment Cost Index, Q3 (10:00): 0.4% expected, 0.4% prior
End part 1 of 3
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