|
|
top stock pick, stock trading pick
* * * *
04/14/05 Investment House Daily
* * *
Investment House Daily Subscribers:
MARKET ALERTS:
Target hit alerts: None issued
Buy alerts: None issued
Trailing stop alerts: HMX
Stop alerts: NGPS; TSCO; LMT
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:
http://www.investmenthouse.com/alertdly.htm
SUMMARY:
- Earnings provide no relief and selling continues on volume.
- In line economic reports mean little as economic slowdown fears grow.
- Does the Fed and oil mean a recession ahead?
- Another clean break lower as NASDAQ joins distribution, breaks consolidation attempt.
- IBM reports early, misses significantly, sets up lower Friday open.
Another sharp break lower as consolidation attempt breaks down.
If the market was waiting on earnings to decide if it wanted to rally, it appears as if that decision has been made. AAPL reported good results, but the future is what counts; it said that sales could slow, and that was all she wrote for the stock, down over $4 on the session. While there are not a lot of earnings to digest just yet, those that have hit are causing major indigestion. After the close IBM reported two days early that it missed earnings by 5 cents. RFMD in the semiconductor sector missed as well and blew apart. More sauce for the goose. Stocks, already battered into the close, suffered some fresh selling after the bell.
The selling was broad. About the only thing relatively clean were the drugs and the consumer stocks. After hours a favorable patent ruling for LLY against some generic drug manufacturers lit a fire under pharmaceuticals as well. These are all defensive areas, and these are the areas that are, as a group, working better.
Volume was up on NASDAQ and NYSE as NASDAQ joined in with the distribution, that higher volume selling that shows the big money institutions are selling their stocks. Typically distribution means further selling is ahead. With the breaks through the consolidation range lows, at a minimum the higher volume means there is a lot more work to do before stocks find a bottom once more and work on building a base and setting up the next break higher. Indeed, SP500 and SP600 are still in the breakdown mode from their head and shoulder patterns; they still have to find bottom in the current selling. The indices had a chance to make a stand, and they are selling instead.
THE ECONOMY
WSJ declares a slow patch.
It must be official now that the major rags are saying so. With that lead in to the day the in line initial jobless claims and business inventories were ignored. The slowing is no secret as we have discussed the past few weeks, and now it is hitting the headlines. Higher energy prices are the main culprit though the Fed is having a psychological impact. The rate hikes have not had time to really impact the economy themselves, but the Fed's stance is doing a lot of the work. Rates started higher soon after the Fed started hiking rates. They were not matching the move, however, leading to Greenspan's 'conundrum' comment. That was enough to get longer rates moving higher, and now there are higher interest rates in addition to the higher cost of heating, driving, and flying.
That has pressured the consumer and as we are seeing in the earnings guidance, that pressure is pointing toward some slower sales down the road. Once more the Fed has managed to tighten into a slowdown, and as noted earlier this week, the majority of the rate hikes have not yet hit economy. Hard to imagine the solid growth experienced the past two years could be slowing so soon into the hiking, but it is within historical precedent. Three years of expansion and then some rough spots. Why? Because usually the Fed cannot hold off getting involved after that length of prosperity and it starts shutting things down. The Fed, despite all of its pro-market, pro free enterprise talk is more like a bitter, grumpy old man who wants everyone else to be as miserable as he is. We are not speaking to Greenspan's age; he was like this when he first took over back in the eighties.
Everything pointed to a slowing economy, but just how slow is this slow patch? Growth is still solid right now. The problem is not right now at all as investment and spending are still at strong levels. The real issue, at least for the market, is what lies ahead in the summer and fall when gasoline prices hit $3/gallon and those Fed rate hikes start dropping on the economy from above. The market is looking at that right now and selling off. It started to weaken earlier this year just ahead of the softening economic data we started noting. Now that is all common knowledge, and that would lead some to think the problem is already over. Maybe, but there has to be more downside here because the Fed is still the unknown quantity of the two major factors impacting the market this year. Oil is still high, but it is starting to show the limits of its range.
Does this mean we have a recession?
Wednesday we discussed briefly the Fed's overall crappy record at producing 'soft landings' when it starts to fight inflation or more particularly, prosperity. The Fed is in a hard spot with some inflation and the possibility China could start to loosen the yuan's float with the dollar. It wants room to lower rates if it needs to in the future, so it is set on getting rates in the 4% range, higher if it can. We have seen this Fed overlook clear signs of trouble to get to a target. The results are ugly. The Fed and some others talk about how it engineered a 'soft landing' from the late 1990's boom. There was no inflation at that point. What it engineered was an end to the boom and a dramatic drop in GDP growth rate from 8% to negative in a few short quarters. We all know the ramifications of that drop; we are still feeling them.
The Fed is still in hiking mode. We said more comments would come out after the minutes, and Thursday two speeches hit the wire. FOMC governor Kohn noted that inflation, while contained, was still on the rise and would only remain contained if the Fed kept up its rate hiking. It could continue in a measured manner IF its expectations of moderate inflation gains remained, well, moderate. If inflation picked up it would pick up the pace. No objective was given other than the Fed would raise rates as dictated by the economy, and even noting the retail sales figure, Mr. Kohn said the economy was expanding as was inflation. That means more rate hikes to come.
Moreover, the Dow transports, a leading index in the economic recovery, have rolled over and broke the 200 day SMA Thursday. It showed something of a double top spanning the past three months, but the collapse has come the past two weeks. The transports are falling, and DJ30 is following, confirming that move.
While the market does not trust the Fed and its history and there are those signs of slowing we have noted before, one of the most important indicators is the bond yield curve. After threatening to flatten out as the Fed started raising short term rates but long term rates held steady, the long end has finally jumped higher. The curve never hit threatening levels though it was heading that way. In the first part of a rate hiking campaign the curve flattens some; it just took longer this time for it rise. Indeed, it has not turned lower since, nor is it threatening to do so.
The yield curve is a very reliable indicator. There has not been one recession in the past 60 years that the yield curve did not invert for at least a month before ahead of it. That happened in the 1920's, but as discussed Wednesday, the economy went from roaring to snoring in no time at all because the Fed was in an all out, declared war against the stock market, and it jacked rates higher so fast that things crashed before any inversion in the bond market and major economic weakening.
Thus the economy is still showing growth indications even with the Fed and the higher oil prices. It is slowing down, hitting another soft patch. The Fed is raising rates into that slowing as well as higher gasoline prices ahead. It is enough to put the market on edge, but the bond market is not giving the clear signal of trouble yet.
THE MARKET
NASDAQ tried but failed to hold its consolidation, starting the third leg lower in the 2005 selling. Moves typically come in threes, thus the significance of a third downside move. Volume increased as it fell lower, and that shows that the improved price/volume action ended as the big institutions started dumping tech shares once more.
They were doing the same in the NYSE indices, just as on Wednesday. After threatening to break lower in their topping patterns they did just that. High volume on NYSE showed those stocks were in disfavor as well. SP500 and SP600 are still holding their January lows, but they are close to a breach that would open the door even lower.
The return of distribution typically indicates more selling to come as the institutions start to unload their shares once more. Until they are done the selling continues. After the break lower below the recent range the door is open for a test of the next levels. On SP500 that is the 200 day SMA, but as seen with the other indices, that did not do the trick. The 200 day SMA is an interesting support level. It is basically the support of last resort. Stronger stocks and indices in a stronger market will hold the 50 day EMA on a test. If the market is weakening the 50 day EMA gets breached. The 200 day SMA is where a stock or index makes an important stand. At that point the big money will either step in and buy it or they will sell it. NASDAQ got sold. DJ30 was sold Thursday. SP500 has a date with that level coming up. From there we may see the start of the next attempt to build a bottom. For now the market character went from a negative bias trying to improve to an all-out negative view once more.
Market Sentiment
Volatility has continued to climb, matching the late March highs and clearing the 200 day SMA, but it still has a long way to go to indicate any 'fear' according to this measure.
VIX: 14.53; +1.22
VXN: 18.01; +1.94
VXO: 14.28; +1.29
Put/Call Ratio (CBOE): 1.07; +0.1. Another close over 1.0, making 8 in the past month. Unlike 2004, these readings alone have not prompted a rebound in stocks.
NASDAQ
NASDAQ dove lower from the 200 day SMA and some interim highs from October 2004. Starting the third leg lower.
Stats: -27.66 points (-1.4%) to close at 1946.71
Volume: 1.958B (+12.41%). Volume roughly matched the Tuesday reversal volume. In any event, stocks were getting dumped on higher volume as NASDAQ broke down from its recent consolidation attempt.
Up Volume: 369M (+98M)
Down Volume: 1.563B (+100M)
A/D and Hi/Lo: Decliners led 3.1 to 1. Breadth gets uglier. This is the kind of breadth you like to see on upside follow through sessions. Now we are having follow through caliber breadth to the downside.
Previous Session: Decliners led 2.49 to 1
New Highs: 24 (-12)
New Lows: 160 (+60)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
NASDAQ broke to the bottom of the trading range at 1970 on lighter volume. It then broke through that level Thursday on stronger, above average volume. Distribution as the index broke lower on the third down leg of the 2005 selling. There is a raft of consolidation from 1950 to 1900 from October 2004, and a low at that level from March 2004, and the bottom of the October to December 2003 consolidation range. 1900 is thus some serious support for NASDAQ, and we look for the index to hold near that level and then try to form the bottom of its base once more.
The large cap NASDAQ 100 fared no better, falling the same 1.4% as the overall NASDAQ. It was equal opportunity selling as the downside breadth shows. Blew through 1450, roughly the bottom of the trading range, with no problem.
SOX continued its selling, breaking through 400 on another hard day of selling and for all intentions destroying its attempt at holding the remnants of a reverse head and shoulders base.
SP500/NYSE
Broke past the March low and cracked just below the January low, setting up further selling. The 200 day SMA is not far away and a logical point to try and bounced after two ugly selling sessions.
Stats: -11.74 points (-1%) to close at 1162.05
NYSE Volume: 1.982B (+18.63%). Strongest volume since the big spike in March. Clear distribution has again taken over in the NYSE indices with back to back high volume selling. Shares being dumped and now the NYSE indices have to seek the next level lower. They may try to bounce before then, but they have breached the important point and will likely ultimately continue the selling.
Up Volume: 446M (+57M)
Down Volume: 1.911B (+302M)
A/D and Hi/Lo: Decliners led 3.45 to 1. Even worse than on NASDAQ as the small caps led the selling on the big board.
Previous Session: Decliners led 2.35 to 1
New Highs: 18 (-34)
New Lows: 118 (+65). Higher but hardly at an extreme level.
The Chart: http://www.investmenthouse.com/cd/^spx.html
SP500 fell below the recent March lows and closed below the late January low (1163), making the breach on stronger volume. Unlike many of the moves the past month, this one was clear: stocks were being sold by the big money. They have no faith right now in the economic future as governed by the Fed and oil, and they are selling out from the market. A test of the 200 day SMA (1153) is just a short hop lower and almost a guarantee. There is some higher support at 1157ish from a series of peaks in early 2004. Below the 200 day there is some decent peaks at 1145 to 1142 from March and October 2004.
SP600's head and shoulders pattern is being fulfilled as it dives lower through 310, the lower neckline of the base formed with the January double bottom at that level. It pierced that level and will likely test the 200 day SMA (305) or the early October peak at 301 before this is close to being over, though it most likely won't be a straight drop.
DJ30
The blue chips dove through the 200 day SMA (10,380) Thursday on rising, above average volume as DJ30 broke through the bottom of its trading range as well. It is following the DJ20 (transports) lower. The transports are an important index for the economy as well as Dow theory. The transports have already breached the 200 day SMA after something of a double top in the index. This is more indicative of a slowing economy; without it, DJ30 has lost some of its leadership.
Stats: -125.18 points (-1.2%) to close at 10278.75
Volume: 303 million shares Thursday versus 274 million shares Wednesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
FRIDAY
Economic data picks up again Friday with some manufacturing data, production capacity, and Michigan sentiment. They will be in the mix, but the overriding concern will be earnings with the IBM early confession and other notable blowups (e.g. RFMD). That will only foster the divergence between the drug, pharmaceutical, and healthcare sectors with the rest of the market.
That divergence is likely to continue, but Friday is also options expiration, and that will add some additional volatility to the session. The early action will likely be negative on the IBM news, continuing the move lower toward SP500 200 day SMA. That is where we likely see a rebound. When there is a sharp break lower below support there is typically a short covering rebound to test that level. That will be bolstered by it being Friday following 2+ days of hard selling. They will cover ahead of the weekend though there is not a lot of potential that some upside surprise will come out over the weekend. After a strong tank lower, however, it will be very hard for the shorts to hold all positions over the weekend.
Thus we see further downdraft early on the heels of IBM, RFMD, and friends, but we don't think it will last through the session. Two days of hard selling, the break below the trading range, the weekend, and SP500 200 day SMA are all reasons why it will bounce after this drop.
That means we have to exercise patience Friday, forgoing some decent downside possibilities (though there may be a few that are still ready despite all the prior selling) and looking at possibly closing some of those positions if we get a good early dive lower. We let the stronger stocks finish their tests of the 50 day EMA or other near support and then rebound. Undercuts of support are often followed by a rebound attempt, particularly when the selling to get them there has been sharp. In this instance the market has sold hard and that means the rebound from this level is more likely. Again, patience, take the downside that is there early, then let the stronger stocks rebound. We can see how they close Friday and decide how we move from there.
Support and Resistance
NASDAQ: Closed at 1946.71
Resistance:
1954 from October as well.
Late 2003 highs from 1960 to 1970.
Early October high at 1971.
The 200 day SMA at 1992
The 50 day EMA at 2025
The 50 day SMA at 2035
2050-54, prior resistance and the June high is stronger
Support:
1950 (top of October to December 2003 consolidation)
1921 at the September 2004 highs.
1900 from October 2004, March 2004, October to December 2003 (consolidation range bottom)
S&P 500: Closed at 1162.05
Resistance:
1170 is the bottom of the recent consolidation.
1175 second high in that double top that spanned late 2001 and early 2002 is trying to hold
March 2003 up trendline at 1186
1185, the top of the November consolidation range.
The 50 day EMA at 1186
The 50 day SMA at 1193
1196, the mid-January high and the early December peak in the left shoulder.
1200
Q1 1999 lows at 1215
December high at 1218.
Support:
1163 is minor support from January is trying to hold.
1154-1157 tops from early 2004.
The 200 day SMA at 1153
1145 to 1142 from March and October 2004
Dow: Closed at 10,278.75
Resistance:
The 200 day SMA at 10,381
10,400, the bottom of the November/December range
The 18 day EMA at 10,509
The 50 day EMA at 10,585
Price consolidation at 10,600
The 50 day SMA at 10,658
10,754 is the February high
10,868 from the December 2004 high.
10,975 - 11,000 from Q4 2000, Q1 2001
Support:
April 2004 low and Early October 2004 high at 10,250.
September high at 10,342.
10,065 from March 2004 lows.
9988 from September 2004.
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
April 12
Trade Balance, Feb (08:30): -$61.0B actual versus -$59.0B expected and -$58.5 prior (revised from -$58.3B)
FOMC Minutes, March 22 (2:00)
Treasury Budget, March (14:00): -$71.2B actual versus -$69.8B expected and -$72.7B prior (revised from -$72.9B)
April 13
Retail Sales, March (08:30): 0.3% actual versus 0.8% expected and 0.5% prior
Retail Sales ex-auto, March (08:30): 0.1% actual versus 0.5% expected and 0.6% prior (revised from 0.4%)
April 14
Initial Jobless Claims, 04/09 (08:30): 330K actual versus 330K expected and 340K prior (revised from 334K)
Business Inventories, Feb (08:30): 0.5% actual versus 0.5% expected and 0.9% prior
April 15
Export Prices ex-ag., March (08:30): 0.1% prior
Import Prices ex-oil, March (08:30): 0.2% prior
NY Empire State Index, April (08:30): 18.0 expected and 19.60 prior
Industrial Production, March (09:15): 0.3% expected and 0.3% prior
Capacity Utilization, March (09:15): 79.6% expected and 79.4% prior
Michigan Sentiment-Prelim., April (09:45): 91.5 expected and 92.6 prior
End part 1 of 3
|
top stock pick
stock trading pick
|
