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us stock market, trade stock
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01/20/05 Investment House Daily
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Investment House Daily Subscribers:
MARKET ALERTS:
Target hit alerts issued Thursday: None issued
Buy alerts issued: None issued
Trailing stop alerts: None issued
Stop alerts: AMLN
The market alert service is a premium level service where we issue intraday alerts relating to the general market conditions, when stocks hit action points (buy, stop, target, etc.), and when we see other information impacting the market or our stocks. To subscribe to the Daily alert service you can sign up at the following link:
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SUMMARY:
- Stocks do not reveal any hidden strength, gap lower, fail rebound attempt.
- Leading indicators put together two up months.
- Philly Fed undercuts expectations as fresher data counters prior reports for week.
- Oil price fades on larger inventory, but recent rebound trend unbroken.
- Big names pull indexes lower as expected while smaller issues again show some relative strength. Not enough to change the renewed selling volume.
- Hard thud down will provide a test that we can put to use.
Hard selling as expected without many surprises.
Techs gapped down hard and the large caps gapped below the 50 day EMA on the open as some of the big tech names that helped lead through 2004 had the stuffing knocked out of them. EBAY and QCOM were at the top of the marquis, but the selling was broad on NASDAQ and NYSE. Volume matched Wednesday levels on NASDAQ but accelerated sharply on NYSE. Gapping down, closing at session lows, strong volume, weak breadth. Basically the antithesis of an upside follow through session.
About the only surprise was that the selling was not sharper. The bell saw sellers swarming but they backed off after that first thirty minutes. The market managed a decent rebound with SOX posting a 1% gain. That did not last and stocks folded the tent in the afternoon, but NASDAQ's 1.3% loss was the only index losing a percent or more. The small and mid-caps were solid with modest losses for most of the session until the last hour when they turned and sold with the rest of the market.
Even with that selling the losses were not as fierce as the thrashing of some of the big names would suggest. Still it was another day of distribution and a further underscoring that the attempted reversal and follow through Tuesday on SP500 was premature. Investors are not comfortable with what they are hearing from the Fed and with the resumption of the oil price rise. They are recalculating values looking down the road with a Fed bent on raising rates beyond 3%, oil more content near $50 than anywhere in the thirties, and important commodity prices doubling and then some (e.g. steel, rubber). In short, the anticipation that the Fed was close to through with its rates hiking was rudely interrupted this year by enough Fed speak to fill a book. Some rate hiking is considered necessary at times and is accepted by the market. Open ended rate hiking campaigns with warnings about trade gaps and the like tend to give the market heartburn as it has had thus far on 2005.
THE ECONOMY
Oil inventories rise, oil falls, but still in the rebound mode.
Oil inventories rose 3.4M bbl last week, much better than expected. Heating oil was down 500K bbl, but that was less than expected given all of the cold weather in the country. The news was enough to push oil back below $47/bbl, but that hardly made a dent in the rebound from the cusp of $40/bbl just a few weeks back. Indeed, oil rebounded to close at 47.61, up 30 cents. Oil has softened, but it has not turned weak once more. Maybe the January 30 election in Iraq will help quell some worries, but near term there is nothing that would clearly pressure prices other than a big glut of US inventories.
Leading Economic Indicators in line at 0.2%.
Leading indicators rose for the second consecutive month, posting a 0.2% December gain and a revised 0.3% November gain (previously 0.2%). These indicators purportedly look 3 to 6 months down the road. Thus the consecutive solid gains should bode well for the economy.
When you look at the components a bit closer you start to wonder just how much force they hold. One monitors the rise in equities markets. Another used the Michigan sentiment report, a dubious component in our view. The stock market rise is similar to the drop in energy prices in the CPI and PPI: it will likely reverse itself this month as oil rises. Similarly, the SP500 is down near 4% this year and that will have an impact on the January LEI. Overall, however, the improvement in the basket of indicators tends to predict near term trends. If you string a few positive reports together you have a good indication of a positive economic trend. Certainly the Fed seems to feel that way as its members boldly speak of continued rate hikes and even at a non-measured pace.
How fast the Fed?
Well, not all FOMC members. Minneapolis Fed president Stern suggested Thursday that while he does not see inflation fading, he does not necessarily believe it is accelerating. Thus the Fed can keep with its 'measured pace' of removing the accommodation policy. Just one voice in a struggle for power at the Fed as Greenspan slowly moves toward the exit door.
We remain torn over how the Fed should react. We don't believe in set inflation targets and adjusting the Fed Funds rate to achieve that; as seen in the last twenty years the economy is dynamic, and textbook formulas do not keep up with changing productivity and technology. We also don't like the Greenspan water torture method where rate hikes come in dribs and drabs with no clear goal articulated. As we have noted, those have always ended with an increase in intensity just when the Fed should have ceased hiking and started thinking about cutting. The Fed always, always, always overdoes it.
To us a mix of both would be best. Have a target, not for inflation or the speed of GDP growth, but a clearly articulated point where the Fed thinks interest rates need to be. Unlike the Greenspan dribble approach this would get us where we were going in a hurry and then markets could react with certainty. With that combine the Greenspan flexibility (real flexibility, not just lip service) where the Fed would quickly, and with some warning to the financial markets, adjust the rate as necessary given the economic data. The cloak and dagger hiding the ball regarding where rates should be does no favors to the economy or investors. Using a Phillips Curve to set growth goals is absurd, particularly since that only worked for about 6 years of entire economic history, and that 6 years turned out to be the exception and not the rule for economic growth.
We only hope that Bush appoints a chairman with free market roots, realizing that he or she is not smarter than the financial markets and the aggregate knowledge of millions of business owners as to the state of the economy.
Philly Fed falls well shy of expectations.
Even though the LEI is considered leading, more bond traders look to the month regional manufacturing reports as providing the most current data regarding the immediate future of economic activity. The Philly Fed January reading fell to 13.2, almost cutting December's 25.4 reading in half and the lowest reading since July 2003.
This is on the heels of a much weaker New York index reported Tuesday, and suggests a slowing in manufacturing expansion. It is still a continued expansion because any reading above zero indicates expansion.
Some are suggesting the Philly and New York reports bode for a slowdown in the national ISM next week. Typically, however, it takes a month or so before it shows up in the national report. Combining some weaker numbers from December, however, and you nave a mini trend of softening in the manufacturing sector. It is not an end to the expansion; all reports still show expanding regions.
THE MARKET
There was some relative strength scattered through the market Thursday, enough to note. With stocks selling on stronger volume and struggling to hold support a couple of rungs lower from where stocks closed Wednesday, however, noting that strength is about all you can do. A weak follow through attempt is thoroughly thrashed and the indexes find themselves on the first steps of a second leg down for the year. More distribution and more breakdowns do not offer any serious near term relief.
We note there are areas showing some strength such as the small and mid-caps, but as with the attempted rebound and follow through, that strength needs some time to germinate. If it tries to pop up now it is likely to get frozen off like a bean sprout in a snow storm. The relative strength leaders during the selling are definitely what you want to watch; when the selling lightens that strength will help push those stocks higher.
Again, given the selling strength it is premature to expect them to jump higher from the Thursday close. The selling has picked up steam again and NASDAQ has started a new down leg with its gap below the recent lateral consolidation range bracketing the 50 day EMA. SP500 is trying to hang on at some key support at 1175 and SP600 is still easily above its January lows. There is some potential there to start a rebound, but looks like more selling near term even if there is a relief bounce in between.
Market Sentiment
Bulls versus Bears: Bulls fell to 55.9%, down again after a slip last week, but still above the 55% level considered bullish. Bears rose to 24.7%, also up from last week and back over the 20% level considered bearish. Both are still miles apart. After the dump lower to start the year, this indicates there is still not enough fluff taken out of the market after bulls topped 60% and bears fell to 20% in December.
VIX: 13.83; +0.65. VIX probably needs to get near 16 to 17 before the market will be ready to put in a more serious rebound attempt.
VXN: 19.5; +0.26
VXO: 14.34; +0.6
Put/Call Ratio (CBOE): 0.98; +0.11. Solid jump in put activity. It will likely take a few closes over 1.0 to really start to lay in a rebound.
NASDAQ
Again led the downside move with a gap below the recent consolidation level on continued strong volume, and toying with breaking below the June 2004 peak. Looks to have started the next leg lower.
Stats: -27.71 points (-1.34%) to close at 2045.88
Volume: 2.245B (-0.38%). Volume lagged all session but shot higher in the last half hour to close right at Wednesday levels.
Up Volume: 591M (+158M)
Down Volume: 1.634B (-174M)
A/D and Hi/Lo: Decliners led 2.28 to 1. Downside breadth remains much weaker than the puny advancing ratio on the upside gains.
Previous Session: Decliners led 2.14 to 1
New Highs: 46 (-28)
New Lows: 50 (+24)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
NASDAQ gapped through the recent lows (2065) and traded the rest of the session near the June 2004 peak (2047). That is the most recent peak prior to NASDAQ's August to December run, making it a significant support level. If it fails there is downside to 2000 and then 1975 near the 200 day SMA. Before that happens NASDAQ will likely show a rebound attempt to test the breakdown from the recent range. Typically a big blow down through support begets a bit more selling and then a pretty quick rebound to test just as the indices did intraday Thursday. When we get that move that will be the chance to take some shorts on and sell some struggling positions.
NASDAQ 100 was the weakest of the techs what with the big names such as QCOM and EBAY getting wiped. As with NASDAQ, it is at the June high but threatening a quick run to 1500. The Thursday move pushed it back down into the 2004 base as the breakout failed.
Showed strength all session, posting a 1% gain on the high and moving above resistance at 400. It gave that gain up and finished down on the day. Still weak, and if it continues from here, 375 is next support.
SP500/NYSE
Large caps sold through the 50 day EMA and down to critical support level at 1175. volume was huge. A breakdown here completes a short head and shoulders.
Stats: -9.22 points (-0.78%) to close at 1175.41
NYSE Volume: 1.69B (+12.99%). Strongest volume since the first of the year selling. Dubious honor.
Up Volume: 438M (+77M)
Down Volume: 1.242B (+130M). All sellers.
A/D and Hi/Lo: Decliners led 2.15 to 1. Downside breadth expanded. After showing some relative strength Wednesday and even some Thursday, the large cap and small caps joined the downside.
Previous Session: Decliners led 1.55 to 1
New Highs: 66 (-91)
New Lows: 32 (+19)
The Chart: http://www.investmenthouse.com/cd/^spx.html
The large caps gapped to the 50 day EMA (1182) and then sold down to next support at 1175 on the close. That keeps it at the November consolidation range and still holds the breakout from the 2004 base. As noted, this puts it right at the neckline of a 10 week head and shoulders top. A break lower opens the door to the early 2004 tops (1156) and likely the 200 day SMA (1133). Now the pattern is 44 points and that is a general rule of thumb of how far it falls if the pattern is completed (a break through the neckline). It is a general rule of thumb and it is never a straight line (down and up as it heads that way), but that would put the index right at the 200 day SMA (1133). Amazing how these things work out in the market.
The SP600 small cap index struggled Thursday as well, its second consecutive selling session. The move took it through its 50 day EMA (314.98) just after retaking it Tuesday. It still was a relative strength leader, however, and it is also still above the recent January lows at 310. As with SP500, that level is the neckline of its own 9 week head and shoulders base. Important level for SP600 to hold if it is going to try and lead a rebound.
DJ30
Broke out the bottom of its recent lows at 10,500 and is heading for the bottom of the November to December consolidation range at 10,400. Below that is 10,342 from the September peak and the 200 day SMA (10,280). Volume was lower, indicating DJ30 was more along for the ride than leading lower. That gives 10,400 the likelihood of producing a bounce.
Stats: -68.5 points (-0.65%) to close at 10471.47
Volume: 242 million shares Thursday versus 242 million shares Wednesday. Still below average.
The chart: http://www.investmenthouse.com/cd/^dji.html
FRIDAY
Michigan sentiment is the only scheduled economic release Friday. It carries more weight than it deserves, but it is out there. More important will be the continuing earnings parade. After the recent misses investors will be looking for some hits and some good guidance. The market was already struggling with a Fed threatening to be more pro-active and the return of higher oil prices. Now it has to deal with earnings misses and weaker guidance. Earnings were expected to weaken in comparison with the prior year, but they were not expected to miss and then lower guidance.
There is obvious damage with NASDAQ gapping lower to a new low for the year and SP500 breaking lower and threatening a head and shoulders breakdown on strong volume. The knee jerk reaction is often further selling and then a relatively quick rebound to test. Then if the test fails, more downside to come.
Friday we anticipate an attempt to rebound and test some of the downside, mostly likely after some more early weakness. Some leadership has given up the torch and the market has to find the next ones to take up banner. There are still many stocks holding up well as noted above, and they will be the best leadership candidates when the selling abates.
We will continue to look for solid upside plays even as the market peels back; again, they will be the leaders when the selling abates, and if they give us an entry point we can venture a partial position if they remain strong. Some stocks avoided selling hard Thursday and are still a below resistance and ready to roll down. Those may provide us some near term downside as we also look for a rebound to set up other downside plays as the market continues to seek the bottom of this correction.
Support and Resistance
NASDAQ: Closed at 2045.88
Resistance:
2066 to 2070, the bottom of the January lateral move.
The 50 day EMA at 2090
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:
2050, prior resistance and the June high.
2023 from the early June 2004 high.
2000
The 200 day SMA at 1976.
S&P 500: Closed at 1175.41
Resistance:
The 50 day EMA at 1182
1185, the top of the November consolidation range.
The 18 day EMA at 1189
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:
1175 second high in that double top that spanned late 2001.
1166 is some support.
1157 is solid support from January through March consolidation tops.
The 200 day SMA at 1133.
Dow: Closed at 10, 471.47
Resistance:
The 50 day EMA at 10,547.
Price consolidation at 10,600 level
The 18 day EMA at 10,621 turned the index back Wednesday.
10,754 is the February high
10,975 - 11,000 from Q4 2000, Q1 2001
11,350 from the May 2001 highs
Support:
The late April, June peaks at 10,478 to 10,512
10,400, the bottom of the November/December range.
10342 the early September peak.
The 200 day SMA at 10,280.
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
January 18
NY Empire State Index, January (08:30): 20.08 actual versus 25.0 expected and 27.07 prior (revised from 29.93)
January 19
CPI, December (08:30): -0.1% actual versus 0.0% expected and 0.2% prior
Core CPI, December (08:30): 0.2% actual versus 0.2% expected and 0.2% prior
Housing Starts, December (08:30): 2004K actual versus 1905K expected and 1807K prior (revised from 1771K)
Building Permits, December (08:30): 2021K actual versus 1985K expected and 2028K prior (revised from 1988K)
Initial Jobless Claims, 01/14 (08:30): 319K actual versus 345K expected and 367K prior
January 20
Leading Economic Indicators, December (10:00): 0.2% actual versus 0.2% expected and 0.3% prior (revised from 0.2%).
Philadelphia Fed, January (12:00): 13.2 actual versus 25.0 expected and 25.4 prior (revised from 29.6)
January 21
Michigan Sentiment-Preliminary, January (09:45): 97.5 expected and 97.1 prior
End part 1 of 3
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