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us stock market, trade stock
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01/04/05 Investment House Daily
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Investment House Daily Subscribers:
MARKET ALERTS:
Target hit alerts issued Tuesday: None issued
Buy alerts issued: ENER
Trailing stop alerts: TEN
Stop alerts: CEDC; CMVT; ISSC; HYSL
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SUMMARY:
- More bearish action as stocks start stronger then get clubbed on high volume.
- November factory orders stronger than expected, October revised higher.
- FOMC minutes slap market with rate hiking reality and more 'irrational exuberance' talk.
- Second session of distribution sends indexes, stocks to 50 day EMA. Time for buyers to step up.
- LSI raises earnings, revenue guidance after hours.
Second day of surge and purge with a Federal Reserve kicker.
Futures were sharply higher, even more so than Monday, as early investors decided to view the pre-market news in a positive light. AAPL and MSFT were hyped some and CAT had its target raised. On the other hand we started to see some warnings pop up as EMN in the chemical sector and ZOLL in medical appliances warned while KKD said it had to restate 2004 earnings (stuffed the channel by shipping twice as many donuts as franchises ordered and bought back franchises to hide the fact they were failing). In addition, AMZN was downgraded by SSB to a sell. The good news certainly did not outweigh the bad, but the pre-market traders did not seem to mind, attempting to buy into the Monday dip.
That buying lasted about 2 minutes less than Monday. Stocks bounced, tested, and unlike Monday, tried to rally once more. SP500 broke over the opening high, a good technical move, but it did not last more than 10 minutes before it had rolled over and sold into mid-morning. Once again a lunchtime consolidation tried to hold stocks steady and set up for an afternoon bounce. After two hours of a quiet, lateral move the FOMC minutes were released. That was the final gut punch to an already heaving market.
After the Fed's comments about future rate hikes, inflation potential, and what it perceived as some 'excessive speculation' in the market buyers lost whatever wavering resolve they had as sellers stepped up the pressure. Stocks fell to new session lows in the second major leg of the session. Ultimately NASDAQ and SP500 managed to hold some lower support and bounce modestly into the last hour as some bottom fishers came in as stocks approached the 50 day EMA. No big rebound, no change in the tide, just a bounce to come up for some air.
Volume was running higher but it shot higher after the FOMC minutes. Breadth was weak (-3:1) as stocks sold across the board though there was a bias toward chips, tech and the smaller caps. Many good stocks broke through their 18 day EMA and found the 50 day EMA in a hurry. Some looked to be holding up well only to make quick drops to the 50 day EMA after the Fed release. Strong stocks should rebound at that level, so rather than bailing out after the fast drop we are letting them show us if they are strong. With NASDAQ and SP500 hovering near the 50 day EMA as well after the second session of strong downside, it is time for stocks to show that they can make a stand.
THE ECONOMY
November factory orders post nice gain.
The 1.2% gain easily topped the 1% expected, and October was revised to +0.9% from 0.5%. Transportation orders rose 8.8% increase (+0.1% in October) as civilian aircraft orders rose 64%. Finished goods shipments grew 0.4% after a 1.6% gain in October. That indicates factories slowed a bit in November even as orders rose. Take out transportation and orders were flat in November and +0.1% in October. Of course, you can cherry pick what you want to look at; with these reports the trend is the key, and the trend shows a healthy end to 2004, something the ISM report Monday showed us.
FOMC minutes released early, spook investors with 'speculation' talk.
The Fed is now releasing the minutes from its meetings 3 weeks after the fact as opposed to 6 weeks. Given the response Tuesday we would have rather seen them in February. The overall assessment was positive, citing a sustained expansion, improving employment, stable growth, etc. That was more or less in line with what the economic data have shown and was no surprise.
Nor was it a major surprise when the Fed talked of the potential for inflation. An unspecified "number" of FOMC members "cited the recent depreciation of the dollar on foreign exchange markets, elevated energy costs and the possibility of a slowing in underlying productivity growth as factors tending to boost the upside risks to their inflation outlook." Further, some noted the increase in short term rates on TIPS (inflation indexed treasuries) and narrow spreads on corporate bonds as warnings signs "that [inflation] expectations were not as well anchored as they had been over the summer." Overall, however, the Fed still sees the "risks to stable underlying inflation as still balanced," and the FOMC members "expected that inflation would remain low in the foreseeable future."
Again, this sounds familiar if just a bit more hawkish. What caught most floor traders and some of the buyers for mutual funds we talked to were two issues. First was the express statement that the Fed Funds rate was still well below the nominal or real rate of inflation, meaning that the Fed still views current levels accommodative. Given its view that the economy is in a solid, sustainable growth period and a 'number' of members view inflation potential as rising, the rate hikes are not near being over nor is the Fed considering taking a pause in its rate hiking. That had the stock market reacting as if it had anticipated a cessation in the near future but was not going to get it. Many investors decided not to fight the Fed, and they decided to give up that fight on Tuesday.
Second, was the statement that there was "potential excessive speculation" in the financial markets based upon the accommodation policy. The Fed cited narrow spreads in corporate bonds (indicating little risk built in), the housing market run, and the increase in IPO's in the equities market. This has shades of 'irrational exuberance' from the late 1990's as well as the comments over the Thanksgiving holiday about investors should be 'fully hedged' by now with respect to the Fed's tightening monetary policy. What is again amazing is the 'evidence' used to support the assertion.
Greenspan has spoken many times regarding the housing market, and has always answered any question concerning a housing bubble in the negative. He cites low interest rates and a healthy recovery as spurring investment in homes, and does not see general speculation in prices. He has noted there are pockets of speculation but that is always the case in any market. Why housing is now considered a threat just further undermines the Fed's credibility regarding its decisions. Certainly housing is a factor that should be in the mix, but to say it is no problem to Congress and then talk about how it is a potential problem inside their chambers can cause some understandable consternation to the rest of us outside those closed meetings.
What was really concerning was the mention of increased IPO activity in the stock market as a potential sign of speculation. Maybe if the market had been on a rampage for several years and IPO'S were issuing by the dozens each month there would be a sign of some speculation. After the 2000 crash, however, IPO's dried up for over three years. Only recently has any activity at all resurfaced as new companies finally have the underwriters to take them to market. IPO's are a sign of health in the economy and the financial markets: there are new companies and ideas coming to market, and there is enough faith in the market to support those new technologies and ideas. Right now IPO's are just starting to reappear after a long, nasty drought. That is hardly a sign of speculation. It is a sign of confidence in the economic future.
Shades of the 1990's Fed the past few months as rising interest rates look to be the key for 2005.
This has a disturbing sound to it. The Fed is back to making up stuff to support its gut feel that things are getting a bit too hot. After the slump we had in the markets and economy, we have not yet tapped the potential of this recovery that is going to create more technology and jobs in different areas than before. That by definition will spawn new IPO's. Again that is a sign of health, particularly given the early stages of the recovery and the relatively few IPO's emerging. Back in the late 1990's the Fed made up a bunch of new inflation indicators and was able to sell them to the academic crowd and media. We saw those results when no one was questioning what the emperor was doing. This "excessive speculation" and need to be "fully hedged" evoke visions of the Fed throwing a wrench into the recovery.
Investors certainly viewed it as a problem. They acted along the adage 'you cannot fight the Fed' when it was clear the Fed was not through with rate hikes and it talked of 'excessive speculation' that dovetailed with Greenspan's November statements about the need to be fully hedged against rising interest rates. That certainly sounds like a Fed that is bent on raising rates higher for the foreseeable future.
At the end of 2004 we cited interest rate hikes as the key to the 2005 market. Tuesday investors certainly acted as if that was indeed the key for them when they decided not to fight the Fed, at least for Tuesday.
THE MARKET
Thus far January stinks. Two distribution sessions with the second nastier than the first with mushrooming NASDAQ volume and quite negative breadth. Once more the 2004 winners were flogged though the chips, laggards in 2004, led the selling. Techs and smaller caps were hammered again, but the small caps were not left out of the drubbing.
As the smoke cleared from the second consecutive distribution session NASDAQ and SP500, SP600 (small caps), and the SP400 (mid-caps) were either at or just above the 50 day EMA. A quick, nasty drop to that level at the start of the new year. More than just profit taking given the volume. More likely it is portfolio readjusting, clumsily affected, by some big money funds, exacerbated by the Fed's clearer intentions on continued rate hikes and that damn specter of an overactive Fed fearing things it should not be worrying about. In short the market acted as if it was trying to adjust for further Fed rate hikes all in one session.
The combination was a tail kicking the likes of which have not been seen in since early August. That is hardly a good comparison, however, as volume was nowhere near this strong. It succeeded in pushing NASDAQ further back into its 2004 base and take back just about all of the December move for all indexes. Lots of hard selling typically means a recovery and rebuilding period.
It could be the first of the year reallocation; as noted Monday, rallies are often punctuated by sharp selling, particularly at month, quarter, and year changes. If that is the case, the rebound from the 50 day EMA test could be just as strong. That remains to be seen. Many stocks, including leaders, are back near their 50 day EMA. It is a point where the institutions, if they are interested in continuing to own and accumulate shares, will start stepping in to pick up stocks. We will see how strong the move is over the remainder of the week.
Market Sentiment
Sentiment was an area we noted was showing problems but was not a timing mechanism. Sure enough the price/volume action turned negative just on the heels of our comments re timing. It acted as a caution flag ahead of the recent distributive action.
Very little movement in volatility Tuesday as stocks were whacked. Volatility is still pretty much out of sync with the market though a spike to 16 could set the stage for a rebound from this selling.
VIX: 13.98; -0.1
VXN: 20.06; +0.56
VXO: 14.13; -0.07
Put/Call Ratio (CBOE): 0.78; 0. Put activity did not move at all, somewhat surprising given the virulence of the selling.
NASDAQ
NASDAQ tanked toward the 50 day EMA, finding some psychological support at 2100. Investors like round numbers, but the key is how it reacts to the 50 day EMA from here.
Stats: -44.29 points (-2.06%) to close at 2107.86
Volume: 2.696B (+21.16%). Huge volume on the selling. You can call it potential reallocation, and perhaps it was, but with everything getting pummeled, that is not the clear answer. For a second session big money dumped stocks of all shapes and sizes. If there is a knifepoint turn off the 50 day EMA, it needs to be accompanied by strong trade.
Up Volume: 536M (-84M)
Down Volume: -2.146B (-1.523B). That is a lot of downside volume.
A/D and Hi/Lo: Decliners led 3.06 to 1. Breadth expanded to the downside once more as the internals remained very negative for a second session.
Previous Session: Decliners led 2.34 to 1
New Highs: 69 (-89). Recall how we said new highs never really expanded as NASDAQ moved to new 2004 highs.
New Lows: 16 (+7). No real expansion in the new lows yet.
The Chart: http://www.investmenthouse.com/cd/^ixq.html
Large caps and small caps were sold hard on NASDAQ. It blew through near support and managed to find some purchase at 2100, just over the 50 day EMA (2093.70). That is a key support level, but NASDAQ made it in two sessions. Not the easy, gentle drops that suggest it stops at that level, consolidates, and then recovers. This will take pretty much a knifepoint turn at this point, something that is not out of the question despite the hard drop. First of the year reallocation can cause a sharp drop in an otherwise continuing uptrend and then give way to buying once the reallocation concludes. Thus far, however, we have poor price/volume action on the heels of steadily deteriorating sentiment. NASDAQ needs to hold the 50 day EMA on the close and start a strong recovery to show the action thus far this year was related to reallocation.
Large cap techs tanked to the 50 day EMA, tapping and holding that level. Their percentage losses were on par with the overall NASDAQ. With DELL, AMZN, etc. falling hard the index was fighting a stiff wind before the bell.
SOX crashed through the 50 day EMA, failing its lateral consolidation between the 200 day and 50 day EMA. Some support near 400.
SP500/NYSE
Strong volume selling as well, slicing through 1200 and heading toward its own 50 day EMA.
Stats: -14.03 points (-1.17%) to close at 1188.05
NYSE Volume: 1.72B (+14.36%). Volume surged to the recent levels hit as SP500 rallied well in December. Not the blowout negative volume as on NASDAQ, but clear distribution as SP500 heads toward its 50 day EMA.
Up Volume: 191M (-134M)
Down Volume: 1.479B (+331M). Ten to one downside volume. This is quite extreme. If it occurred after more of a pullback it would suggest the end of the selling. Given the circumstances, i.e. the start of a new year, it may suggest the same here.
A/D and Hi/Lo: Decliners led 3.11 to 1. Really ugly once more as large and small caps were hammered.
Previous Session: Decliners led 2.68 to 1
New Highs: 48 (-132)
New Lows: 9 (-1)
The Chart: http://www.investmenthouse.com/cd/^spx.html
Fell through the 18 day EMA and 1200 down to 1185, the top of the November consolidation range. That most likely won't hold as SP500 seems bent upon testing the 50 day EMA (1180) at a minimum. Unlike NASDAQ, SP500 retained its breakout from the 2004 base. That allows it to consolidate here at the November consolidation level and then resume the move. Despite the ugly selling, there is still plenty of upside potential here; SP500 broke out in early November, rallied nicely, and is suffering a sharp pullback. If it holds near the 50 day EMA and can rebound on decent trade, the move remains in tact.
SP600 fell toward its 50 day EMA (316) as well, closing at the session low just above that level. Small caps had been showing some questionable action in December, and this is some confirmation of that poor action. It too, however, can be the result of some less than artful reallocation of assets by some big funds. That remains to be seen, and the 50 day EMA is the focal point for this test as it coincides with the late November consolidation range.
DJ30
The blue chips sold through their 18 day EMA (10,705) and tapped what was a key resistance level in November and December at 10,600. That marks the top of the November to December consolidation or handle to the 2004 base. DJ30 has dropped back below the early 2004 high (10,754) but still holds the breakout from the base. This is where it should roughly hold though it too could easily test its 50 day EMA (10,534).
Stats: -98.65 points (-0.92%) to close at 10630.78
Volume: 293 million shares Tuesday versus 270 million shares Monday.
The chart: http://www.investmenthouse.com/cd/^dji.html
WEDNESDAY
After two sharp selling sessions the indexes find themselves looking at the 50 day EMA, dropping to that level on a hurry. The new year has ushered in some major selling that we have a real suspicion is associated with portfolio reshuffling. 2004 was a long base and stocks broke out late in the year. After that long base stocks are set up for a longer rally. To show us this was reallocation we need to see buying resume off of the 50 day EMA.
The Fed's 'happy new year and don't forget the rate hikes' greeting to investors to start the year has brought harsh reality of a rate hiking Fed back into the picture. In 1984 and 1994 the Fed raised rates and then stopped. That set off the rallies over the next few years. In late 2004 stocks broke out after a similar base, but then the Fed basically said 'not so fast,' and even hinted that it felt the modest gains at the end of 2004 after a 10 to 12 month base somehow presents an overheated, speculative picture. Sadly this is not new territory for investors the past 5 years, and Tuesday they reacted to it as if they truly remembered what the Fed can do when it gets its sights set on a goal. We have said before that the Fed is looking at 3% as a minimum for its rate hiking campaign.
Tuesday many positions were holding near support then sold quickly to the 50 day EMA. We opted with many positions to let them rebound for us. Others are holding well above the 50 day at higher support. Some rebounded on us after tanking early. It was that kind of session. Again we have a suspicion we are going to see buying resume at the 50 day EMA. The key will be its strength. Volume does not have to top NASDAQ volume on Tuesday, but we want to see the leaders post strong upside trade and volume on the indexes remains strong as well.
After hours LSI (semiconductors) provided an earnings preview raising both earnings and revenue guidance. Earnings were revised to a positive range from a negative range, and it was a substantial increase. After the clubbing stocks took Tuesday, there was some but not a lot of reaction. This places a thread of positive thinking in with all of the smoke from the scorching stocks received Tuesday. We doubt it will turn the tide, and anticipate a further test down to the 50 day EMA on the major indexes. At that point we have 2+ days of sharp selling. If the rally is to continue we would expect it to do so at that point. One last plunge lower to the 50 day and slightly undercutting it would provide a good scare that can trigger some short covering and buying.
Support and Resistance
NASDAQ: Closed at 2107.86
Resistance:
2110 - 2112, the top of the November consolidation.
January high at 2154 (early 2004 high)
2250 - 2260 from January/February 2001 highs and lows.
2282 from 5-2001 high.
Support:
Price support at 2090.
The April high at 2079
The 50 day EMA at 2093.70
2050, prior resistance and the June high.
S&P 500: Closed at 1188.05
Resistance:
The 18 day EMA at 1200
1200 acted as resistance on the last trip higher
Q1 1999 lows at 1215
October 1999 low at 1233
Q2 2001 peak at 1310.
Support:
1180 to 1185, the top of the November consolidation range.
The 50 day EMA at 1179.99
1175 second high in that double top that spanned late 2001.
Dow: Closed at 10, 630.78
Resistance:
10,754 is the February high
10,975 - 11,000 from Q4 2000, Q1 2001
11,350 from the May 2001 highs
Support:
Price consolidation at 10,600 level
10,570 is the early April high
The late April, June peaks at 10,478 to 10,512
The 50 day EMA at 10,534
10,400, the bottom of the November/December range.
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
January 03
Construction Spending, November (10:00): -0.4% actual versus 0.4% expected and 0.3% prior
ISM Index, December (10:00): 58.6 actual versus 58.5 expected and 57.8 prior
January 04
Auto Sales, December: 5.2M expected and 5.1M prior
Truck Sales, December: 8.3M expected and 7.8M prior
Factory Orders, November (10:00): 1.2% actual versus 1.0% expected and 0.9% prior (revised from 0.5%)
January 05
ISM Services, December (10:00): 61.0 expected and 61.3 prior
January 06
Initial Jobless Claims, 12/31 (08:30): 330K expected and 326K prior
January 07
Non-farm Payrolls, December (08:30): 175K expected and 112K prior
Unemployment Rate, December (08:30): 5.4% expected and 5.4% prior
Hourly Earnings, December (08:30): 0.2% expected and 0.1% prior
Average Workweek, December (08:30): 33.8 expected and 33.7 prior
Consumer Credit, November (15:00): $6.0B expected and $7.7B prior
End part 1 of 3
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