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01/26/05 Investment House Daily
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Investment House Daily Subscribers:
MARKET ALERTS:
Target hit alerts issued Wednesday: None issued
Buy alerts issued: SYD; AVO
Trailing stop alerts: TKO
Stop alerts: None issued
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SUMMARY:
- Market rebounds for second session on better volume & breadth
- Crude inventories mixed, oil still tapping at $50/bbl.
- Four down, two up, and now at key resistance: show me.
- After hours weaker as earnings roller coaster continues
- Market at resistance, ready to take a pause before making another try to break through.
Rebound picks up momentum on better volume, internals.
Stocks improved across the board both in price and in the 'internals' that are oft discussed as signs of health or weakness. It is like those cholesterol commercials where the buff person struts his or her stuff, looking to be the picture of health, but then does a face dive on the cholesterol reading. Wednesday the market's cholesterol reading was low while volume and breadth were much better. Indeed, breadth was healthy; volume was good, but not glowing.
There was little economic data for investors to mull, but no matter as this is the height of earnings season. Investors had plenty of quarterly reports to consider, and for the most part the Tuesday after hours and Wednesday pre-market reports were well-received. Large caps, small caps, industrials and techs were all posting solid results. The market went from mixed volume, weak breadth and a close well off the intraday high on Tuesday to rising volume, strong breadth and a close near the session high on Wednesday. The market gained strength as it rallied as opposed to losing strength.
It was a very solid move and as usual most after hours wrap programs were ebullient in their praise for the market. Wednesday was certainly a good upside session, but there were 4 hard downside sessions that preceded the past two upside days that pushed the indices below key support. NASDAQ and SP500 are at that key resistance, SP500 at the breakdown point from its head and shoulders base and NASDAQ at a prior top. The action was much improved Wednesday but these indices still have to make the break back through that resistance and hold it.
THE ECONOMY
Oil inventories rise overall but components fall
Overall inventories rose 3.4M bbl, and one story on the subject solemnly stated that oil 'tumbled' 14 cents to $49.50/bbl. Only in the modern 'emotion before facts' reporting in the US would a 0.2% decline be labeled a 'tumble.' Oil went nowhere on the news because the inventory numbers were basically in line.
They had to be given the reaction. It was reported that distillates from which heating oil is derived fell 2.3M bbl. That seems pretty sobering on its face, but expectations were for a 2.6M bbl drop. Thus no impact. Gasoline inventories fell 2.3M bbl as well, and that popped futures up a bit. This is an off season for gasoline but inventories are not growing. Now some would say our usage is jumping and thus drawing down stocks. Actually less gasoline is made in the off season because less is used. Gasoline does not have a long shelf life; it is one of those products you can store long term because it breaks down. Thus it was no major blow to the market when inventories fell; if you make less but use the same amount, inventories will fall.
Other than the oil report, earnings were the only other economic stories though the deficit rumble still continues. Of course, the oil report and oil prices are one of the keys ahead for the economy. Oil prices are too high though we don't hear much about it right now. $50/bbl oil will be bad for the economy. They are not the highest real dollar oil prices of all time, but the key is sustained oil prices. Gasoline prices have snaked back up over 10 cents per gallon during the heart of winter; what will happen when demand rises when spring hits? Prices will move higher still if oil prices remain high. That cuts into consumers and it cuts further into suppliers. Prices for other goods will rise more and disposable income will decline. Higher energy prices have a large ripple effect.
Trade gaps and worst case scenarios discussed at world economic summit.
The trade and federal deficits were supposedly casting a pall over the World Economic Forum in Switzerland. Supposedly the trade gap is going to cause instability in the world economies, but no one could proffer any solutions. Devaluation in the dollar alone is not going to do it most agree; if it did get low enough to turn the tide then the rest of the economies would probably collapse. Raising interest rates in addition to a currency decline would also help, but if rates go too high the US economy stalls and that has a domino effect on the other world economies.
Everyone seems to think the US needs to save more. Maybe it does, but just as with the dollar depreciation and rising interest rates, it cannot be the sole solution. What would happen if the US consumer stopped or significantly curtailed its consumption of foreign goods? Those countries (most exporters in the world) that have geared their economies toward providing US consumer goods and services as many have over the past thirty years would at least fall into recession. There is a lot of lip service about the gap, but those countries are more than willing, as seen in November, to not only fund but do so in excess of $20B that month, the trade gap. The reason is because if they don't and the US consumer then cannot buy, the foreign economies go into arrest.
We are all for saving for the future and investing in the US. Putting money in a savings account and resisting consumption is the antithesis of what government policies try to promote. The incentives today are to invest in financial instruments, not savings accounts. If you are saving for the future, that is what you have to do to keep ahead of inflation even at these relatively low levels. The incentives all around the world are geared for US consumption as well. It is a very difficult process to unwind thirty years of developing this symbiotic relationship.
They danced around it in Davos, but no one is correctly stating the relationships that fostered the current situation. It is political correctness at its height. The US consumer is a drug many foreign economies are deeply addicted to. The US consumer is always blamed (hey, Greenspan got away with it in the late 1990's though he did more than anything else to cause the consumption he feared), but the US was the strongest economy for years and years, and foreign economies supported themselves fostering that export/import relationship. They know this and no one wants to be the economy that offers to slit its own throat by reducing exports to the US.
There is a world economy, and it is closely tied, and it also still relies heavily on the US consumer. It appears that the worry in Davos derives from foisting old models on different facts. In a world where economies were independent and traded only their excess production, one being out of balance could cause serious repercussions if its trading partner decided it would join up with another partner. Again, today many of the countries are out of balance with the US are in that condition by design. China is not, but China has tied its currency to the dollar the past 10 years so it is throwing off the entire 'balance' issue. You have to apply the rules to the correct set of facts as they exist today and not in some textbook scenario, and you have to compare apples to apples in order to make correct conclusions and decisions about how to proceed. It does not seem that is entirely what is taking place in Davos.
THE MARKET
The market posted its second up session, and it was clearly the best of the two this week. Good volume and breadth pushed SP500 and NASDAQ back to the support they just broke on volume, volume that was heavier than the recovery volume on Wednesday. Breadth was solid as noted, as the SP600 led the market, continuing its bounce off of the neckline of its head and shoulders pattern. It recovered the 50 day EMA and is trying to shake off the toppish pattern. It still has work to do, but it is in there pitching.
Maybe SP600 is a harbinger for the other indices. There were stocks breaking out to the upside; in other words, there is leadership in the market. Problem is, there are fewer leaders in position to lead higher as many stocks have broken down and are in downtrends or still below resistance even after two rally sessions. As noted earlier in the week, when this type of damage is sustained, it takes longer to regroup and set up for the next sustained move.
The Tuesday close, while near session highs for the indices and many stocks, left NASDAQ, SP500 and many individual stocks at next resistance or at the down trendline to their declines. Thus despite the volume and the breadth and holding gains into the Wednesday close, the market is still at a 'show me' point. It has to show us it is ready with a continued strong move. That probably won't happen Thursday unless this turns out to be a very strong recovery. More typically it will back off a bit, catch its breath, and then make another run at this resistance. With many stocks still in downtrends and just coming up to tap resistance along with the indices, we are not convinced Wednesday's strong internal indicators will win out.
Market Sentiment
We note that VIX did not even make its 200 day SMA just below 15 before this relief bounce began. That is off the 17ish level hit in October when the market rebounded, and well off the 20 level hit in May and August on those bounces. While volatility does not tell the entire story, it raises a concern that the quality of this move, despite the volume and breadth Wednesday, is sub par.
VIX: 13.44; -0.62
VXN: 18.92; -0.6
VXO: 13.07; -0.56
Put/Call Ratio (CBOE): 0.82; -0.01
NASDAQ
NASDAQ rallied as you would expect a market leader, up on volume and breadth. The move took it back to important resistance that will help define this downturn a bit better.
Stats: +26.14 points (+1.29%) to close at 2046.09
Volume: 2.13B (+5.51%). Volume was up as NASDAQ recovered, hinting at some accumulation along with the short covering. Just a hint, however. Volume was higher than on the Tuesday gain but on par with the Monday selling, and well below the hard selling last week that pushed it below support when it gapped lower. Better volume, but as Einstein said, everything is relative.
Up Volume: 1.56B (+215M)
Down Volume: 543M (-103M)
A/D and Hi/Lo: Advancers led 2.29 to 1. Very nice breadth, and that suggests something other than just a short covering bounce.
Previous Session: Advancers led 1.2 to 1
New Highs: 70 (+27)
New Lows: 44 (-23)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
Gapped higher for the second straight session and holding most of the gains into the close. Unlike Tuesday where the index was afraid to show much, NASDAQ rallied in the last hour. It ran right up to 2050 resistance at the close, backing off just slightly. A quality move that would look very good if it occurred somewhere other than in this rebound. As it was NASDAQ closed just off 2050 resistance and the 10 day EMA (2054). This is also where NASDAQ peaked in late June and in late April. And made a quick test in late November. It can clear this level and still fail in this bounce, however, when it fills the gap lower from last week. In short, it has to show us it can continue the move, and historically these sharp drops require a bit more lateral basing, that second test discussed Tuesday, before they can sustain a solid recovery.
NASDAQ 100 lagged NASDAQ, another indication the action was not all short covering. It failed to reach the 10 day EMA and backed off a bit more on the close than NASDAQ. It is interesting to note that QQQQ bounced as well, but volume was sharply lower than any other session the past week.
SOX rallied for the second session as well, tapping the 18 day EMA (402) on the high. It managed to tap former support at 400. This is where we would expect SOX to fail, and if it rolls over harder we are looking at downside again. As with QQQQ, we note that SMH (semiconductor holders trust) gapped higher and tapped the 18 day EMA as well, but volume was also the lowest in a week.
SP500/NYSE
Large caps and small caps were moving well on stronger volume. The large caps rallied to key resistance and though they did not break through, they did not completely turn tail. Definitely more strength, but definitely an important level.
Stats: +5.66 points (+0.48%) to close at 1174.07
NYSE Volume: 1.681B (+4.45%). Volume was up over Tuesday and sharply higher than Monday's low trade. Trade was still lower than last week's downside binge, so it was not redemption but it was solid trade.
Up Volume: 1.098B (+217M)
Down Volume: 505M (-205M)
A/D and Hi/Lo: Advancers led 2.51 to 1. The small caps were leaders and the breadth showed it.
Previous Session: Advancers led 1.04 to 1
New Highs: 101 (+18)
New Lows: 26 (+7)
The Chart: http://www.investmenthouse.com/cd/^spx.html
The large caps rallied up to 1175 resistance, holding right at that level on the close. It made four attempts at 1175 intraday, the last surge actually piercing that level before a late fade. Of course, we talk as if the resistance and support levels were marked with laser beams; they are general levels and as we know, the market overshoots. Thus we could see SP500 move through this level a bit before it shows its real colors, either turning back or moving on up. We expect it to back off some and make another run at the level. At this juncture it will have to show us it can make the move as we remain dubious after the hard selling.
SP600 small caps held support at 310 and moved through the 50 day EMA (314.59) easily on the Wednesday close. That is a start to breaking up the toppish pattern, but there is still resistance at 318-319, and even then it is still a rocky pattern. Good move Wednesday, however, and after a sell off you take it one drink, that is day, at a time.
DJ30
The blue chips were not as strong Wednesday, tapping at the 50 day EMA (10,530) on the high and fading back. Volume was lower and below average. It was a weak session and it looks ready to turn back down.
Stats: +37.03 points (+0.35%) to close at 10498.59
Volume: 247 million shares Wednesday versus 260 million shares Tuesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
THURSDAY
Some economic data (durable goods and jobless claims) returns Thursday, but nothing major. Earnings remain the focus. After hours earnings had more stocks trading lower than higher, something of the opposite from Tuesday night. We anticipate that after two solid upside sessions that moved SP500 and NASDAQ to resistance that the market will take a pause before trying to move through. It looks as if it will open lower, and that is always a better start for the upside after a move higher. A soft open and a solid rebound is the best upside action there is.
Right now we are not certain that it will be able to make that breakthrough and hang on. More than likely the market will come back and make another low in this pullback before it can make a more sustained move. Many stocks have likewise rebounded to resistance but are still in downtrends and need more lateral work to even out the selling, allow some accumulation, and set the rebound. Moreover, it is just the second leg down in the correction, however, and once that first leg gives way there is typically a third selling episode before there is a strong upside breakout.
Thus we were not overboard to the upside Wednesday though there were some good volume moves we moved into. We are looking for an attempt to take out resistance Thursday, likely after a bit softer open, but then we are anticipating a test back down. That means we will be looking at some downside, adding to some existing positions as they turn back over and looking at some new ones. The aim is to make them quick hitters; move in, get the drop, take some gain, and move out.
Support and Resistance
NASDAQ: Closed at 2046.09
Resistance:
2047, the June high.
2050-54, prior resistance and the June high (the 10 day EMA is at 2055)
2066 to 2070, the bottom of the January lateral move.
The 50 day EMA at 2080
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:
2000
The 200 day SMA at 1975
S&P 500: Closed at 1174.07
Resistance:
1175 second high in that double top that spanned late 2001.
The 50 day EMA at 1180
1185, the top of the November consolidation range.
The 18 day EMA at 1182
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:
1157 is solid support from January through March consolidation tops.
The 200 day SMA at 1134
Dow: Closed at 10, 498.59
Resistance:
The late April, June peaks at 10,478 to 10,512
The 50 day EMA at 10,530
The 18 day EMA at 10,545
Price consolidation at 10,600 level
10,754 is the February high
10,975 - 11,000 from Q4 2000, Q1 2001
11,350 from the May 2001 highs
Support:
10,400, the bottom of the November/December range
10342 the early September peak.
The 200 day SMA at 10,279
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
January 25
Existing Home Sales, December (10:00): 6.69M actual versus 6.80M expected and 6.92M prior (revised from 6.94M)
Consumer Confidence, January (10:00): 103.4 actual versus 101.3 expected and 102.7 prior (revised from 102.3)
January 27
Durable Goods Orders, December (08:30): 0.7% expected and 1.4% prior
Initial Jobless Claims, 01/22 (08:30): 330K expected and 319K prior
Help-Wanted Index, December (10:00): 37 expected and 36 prior
January 28
GDP-Advance, Q4 (08:30): 3.5% expected and 4.0% prior
Chain Deflator-Advance, Q4 (08:30): 2.1% expected and 1.4% prior
Employment Cost Index, Q4 (08:30): 0.8% expected and 0.9% prior
End part 1 of 3
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