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us stock market, top stock pick
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10/11/05 Technical Traders Report Update
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Technical Traders Report Subscribers:
Full report issues Wednesday
MARKET ALERTS
Targets hit alerts: None issued
Buy alerts: None issued
Trailing stops: None issued
Stop alerts: None issued
SUMMARY:
- Volume jumps as NASDAQ falls through the 200 day SMA.
- FOMC minutes harp on lack of fiscal discipline. Fed should look in the mirror.
- Market still trying to find bottom on this round of selling as SP500 tries to hold and old support line.
- Earnings are not going to provide a magic bullet. Market is going to have to finish pricing in the Fed's historical missteps but will rebound near term.
Hope springs eternal early but reality returns.
Futures bounced on AA and DNA earnings and a lot of upgrades (IBM, ERTS, MCD and friends) showed analyst enthusiasm after the sell off. That helped start stocks positive, and they actually rallied a bit from that higher open. Those earnings and upgrades were good for about a half hour's worth of rallying before the market started to get choppy, struggling to hold on.
As the morning progressed it was unable to hold the early gains. Stocks did not turn negative, but the sellers kept whittling away at the gains. NASDAQ and SOX were under the most pressure, and then mid-morning NASDAQ slipped through the 200 day SMA without much of a fight. Indeed, it was without any fight. It dropped through that 2076 level and hit 2062 in one steady decline. We noted in a midmorning alert that there would be a test, but the selling would pick up speed first. It did not bottom until SP500 hit that old support line dating back to 1998 at 1184. That bounced the large caps and took NASDAQ back with it.
At 2:00ET the FOMC minutes were released. After a few minutes hesitation NASD jumped back up to the 200 day SMA as investors realized it was the same thing the Fed governors and FOMC members have been saying the past two weeks. Makes sense as this was the discussion at the last rate hike and the Fed has been out making speeches and granting appearances echoing the same theme: government is spending too much, storms could lead to inflation (kind of a two for one for the Fed in that it is saying the storms created shortages and the government spending response will cause inflation), more rate hikes are necessary. With no new damage to add to the recent statements, stocks managed to rebound.
That was the rebound to test the breach. NASDAQ tapped at the 200 day SMA for a quarter hour, could not punch through, and then started an afternoon decline. Volume was running higher and it continued to do so as the market fell back. SP500 had been running modestly positive most of the session, but in the last hour it turned negative as well. It posted a modest loss, but NASDAQ (-0.86%), SOX (-1.67%), and SP600 (-0.94%) were all significantly lower, the key being NASDAQ plowing under its 200 day SMA and failing the intraday test.
Energy rebounded after some harsh selling, but much of this move is still a relief bounce after some pretty harsh selling that led the recent market decline. Most of the hardest hit were energy stocks, and they are bouncing back some. While some are better positioned than others, what they are likely to do here is form new bases to consolidate their very strong runs. Similar to housing in its run, stocks in this sector have surged and with energy prices not ready to crater at any point soon, they will consolidate and then be ready to rebound again, pricing in strong earnings after the slowdown the Gulf storms caused. Thus they will likely not crater but will struggle for a bit, moving mostly sideways for a few weeks and then ready to go again. By the way, the very accurate Lundberg Survey calls for gasoline prices to decline by 10 to 20 cents per gallon very soon, and then by 20 to 30 cents by year end. This after prices just rose 10 cents over the last two weeks.
Volume jumped back above average on NASDAQ and rallied further above average on NYSE. Breadth crumbled once more (-2.5:1 NYSE). The price/volume action turned back to negative (distribution) and the market 'internals' remain negative. This action shows the continued weak nature of the market, and the NASDAQ break through the 200 day SMA, joining SP500, indicates there is a lot more work to do with respect to putting together a sustained rebound that has a chance to take the indices over the August highs that marked the peak of the 2005 advance.
That is not likely to happen early Wednesday with the AAPL earnings disappointment. AAPL's business is very consumer oriented, and its failure with respect to iPods shipped and revenues speaks to a weakening consumer. With the Fed borrowing from Patrick Henry and saying it has not yet begun to fight along with the weekly $70 trip (per vehicle) to the gas station, the market is still pricing in what the impact on the consumer, businesses and thus the economy will be after the first of the year. As always the future is the key, and even stellar earnings and guidance (which AAPL's were not) are not going to answer questions about what actually lies ahead.
THE ECONOMY
FOMC minutes gripe about lack of fiscal discipline loud enough for Congress to hear.
It was not as if the Fed minutes were from out of right field given the recent absurd statements about how federal spending on storm recovery would drive inflation. While we don't like huge federal spending, the notion that such spending drives inflation is absurd: the feds take money from taxes and spend it after taking their cut to pay for the overhead (a.k.a. waste). That is not any different from those making the money spending it. How is one more inflationary than the other?
Several statements concerned the market. One dealt with the federal spending, noting the "worrisome loss of fiscal discipline evident in recent years." There they go again, using FOMC policy statements to try and influence what the legislative branch does. No one seems to have much of a problem with this, but it is huge. The Fed has no business using rates as a hammer to try and mold fiscal policy. Its 'well, I guess we will have to raise rates if the feds stick to their spendthrift ways' is simply wrong. It is couched in ways to make it appear to be just a casual observation, but the statements from the governors the past two weeks show it is one of the Fed's goals.
The Fed also talked about how inflation was becoming an expectation and that would allow prices to be passed onto the consumer. Let's see, just as happened in 1982 through 1984 in that price spike? Nope, not then. How about in 1994 in that spike. No, not then either. Gee, guess we are just flat out of recent historical examples of this. Funny the Fed did not mention this given Greenspan is so ready to acclaim how flexible our economy now is. Some selective amnesia here in order to achieve its goal? Now there is something that is not new with the Fed. Oh, and the Fed also threw in another gratuitous shot at deficits when discussing inflation expectations, saying "widening federal deficits were mentioned as a factor that could further stir inflationary concerns." Yes, you and me on the street are wringing our hands over whether deficits will bring about inflation, yeah verily, concluding that deficits would cause inflation. Give me a break.
"Nearly all" (once again not all) FOMC member agreed raising rates to 3.75% was the thing to do. They felt the upside risks to inflation had increased. More hikes are expected, but the market did not like the open ended statement that :even after today's action, the federal funds rate would likely be below the level that would be necessary to contain inflationary pressures, and further rate increases probably would be required."
The market certainly does not doubt there will be future hikes and has priced in three more (4.5%). The worry is whether that will fracture the economy and lead to yet another Fed-induced slowdown. The Fed does not have a lot of choice in raising rates or at least keeping money supply under wraps in the near term aftermath of the storms given the infrastructure damage that has caused shortages in energy as well as other goods due to port closures, factory shutdowns (or in some cases demolition), etc. The fear remains how far the Fed will go. Everyone could handle the concept of more rate hikes in the aftermath of the storms due to temporary shortages. It is the theme that inflation has really picked up the pace and needs to be beaten down hard (Fisher's comments about not facing the issues of the seventies) that is giving investors the sweats.
Another Fed paradox developing.
Once again the irony might ultimately be that the Fed fears the 1970's economic malaise but brings them about by unintentionally slowing the economy to the point where growth is stalled even as energy prices remain high due to continued strong demand in China, India, and Japan. That would keep pressure on prices to rise and pressure on consumers to slow spending, further exacerbating the cycle.
We said it before, the Fed is walking a very thin line, but it is a line it helped create by trying to micro manage the economy. In doing so it has created the second great irony. Over the past twenty years it has inserted its beliefs over that of the market. Overall we have prospered, but when you pump billions into the economy to ride over the rough spots you develop expectations and commitments based upon that 'fail safe' the Fed provides. Thus the very imbalances the Fed said its actions were remedying have only grown more pronounced. Every crisis has been met with lots of liquidity, allowing us to float over the high spots. It complains of deficits and the lack of savings but its policies have encouraged both in part because of the view that the Fed will bail us out by pumping up the system even further. Then the Fed complains of 'fiscal profligacy' and 'runaway consumers' as if they are supposed to practice the discipline the Fed does not.
We run aground when the Fed then intervenes to put the markets back in order according to its view. We view it as the lax parent who gives the kids cars, vacations, etc. with no expectation of earning them from hard work. When the kid acts up the parent starts to carp about how bad his kids are. Then he finally takes away the money, leaving the kid high and dry without a clue as to what to do. While the Fed does not need to be our parents, it seems to view itself in that role but it does not admit to its policies promoting the actions it says it dislikes. Thus we repeatedly endure the cycles where the Fed invariably feels the need to intervene and do what it thinks is in our best interests. It is heading down that path now, and the market is bracing for it.
THE MARKET
MARKET SENTIMENT
VIX: 15.55; +0.96. Moving toward 16. Just before the end of April bottom to the early 2005 selling the VIX hit 18. We note that VIX made a higher low in September and has spiked this month almost 4 points. That is not a lot in the big picture, but with respect to the narrow range it has traded in the past 2.5 years that is a huge move. It won't take much to get to that level.
VXN: 17.28; +0.66. With NASDAQ breaking below its 200 day SMA, VXN broke above its 200 day SMA. It is below its April high (22), but that was the last time it was over the 200 day SMA and that is when NASDAQ bottomed as well.
VXO: 15.65; +0.61
Put/Call Ratio (CBOE): 1.06; +0.11. Another close above 1.0. Three in a week. Still needs more.
Bulls versus Bears:
Bulls and bears continued their positive turns for the second week. More work to do, but heading in the right direction again.
Bulls: 49.5%. Big 3.7% drop from 53.2%. Second down week after three up weeks. It never reached the 55% level considered bearish. Bottomed in May at 43.5%.
Bears: 27.8%. Solid rise from 26.6%. Second week up after a week off at 25.5%. Easily held above the 20% level that is considered bearish. Hit a high for the year at 30% in early May.
NASDAQ
Stats: -11.43 points (-0.55%) to close at 2078.92
Volume: 1.434B (-3.53%). Volume rallied sharply, moving well above average as NASDAQ resumed its selling. Distribution as NASDAQ breaks key support is an indication that the big money is still selling shares.
Up Volume: 450M (-318M)
Down Volume: 912M (+224M)
A/D and Hi/Lo: Decliners led 1.8 to 1. Not atrocious, but still much stronger than any upside breadth of late.
Previous Session: Advancers led 1.34 to 1
New Highs: 44 (-4)
New Lows: 100 (+15)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
NASDAQ broke through its 200 day SMA (2076) on a strong shot of above average volume. When a stock or index moves through the 200 day SMA, that shows the big money is getting rid of shares. The 200 day MA is a point where the big money either steps up to buy or it decides it is going to sell. That is why you often see a stock or index increase speed to the downside when the breach is made just as occurred Tuesday. Then a rebound takes place to test the move. It happened intraday Tuesday, and after a test of 2050 or so we will likely see a rebound to test this level again. What this shows us is that NASDAQ could not hold back the tide of the other indices and is heading lower as it tries to find a bottom to this selling. There is support at 2050, and as the sell off has been sharp, the index will be looking for a rebound and with the breach of the 200 day SMA and 2050 is likely. Needs to slow the descent to start the rebound.
SOX (-1.67%) dove lower again. The fall from its range has been swift and complete the past two sessions, breaking below support from the June tops and heading in a beeline toward the 200 day SMA (433). If it does not hold there it has crashed back into the seven month range the July break took it out of. We are being kind by saying it has not done so yet, but with it still above the 200 day SMA we are giving it a bit of leeway. AMD posted good results that might help, but it is not going to turn the index on a dime and take back the 44 points lost this month.
SP500/NYSE
Stats: -8.57 points (-0.72%) to close at 1187.33
NYSE Volume: 1.632B (+1.67%). Volume has held above average for over a month, and it was higher Tuesday as the NYSE indices sold further. SP500 is showing some possible bottoming action as volume jumped and it actually tried to rally.
A/D and Hi/Lo: Decliners led 2.45 to 1. The small and mid-caps are now taking the body blows after the large caps did it last week. That is dragging market internals low.
Previous Session: Advancers led 1.54 to 1
New Highs: 34 (-4)
New Lows: 160 (+58)
The Chart: http://www.investmenthouse.com/cd/^gspc.html
The large caps were positive most of the session and the loss on the close was modest. The index tapped an old support line that includes the mid-July 1998 peak (1984) and bounced modestly to close. No major turn of the tide, but the candlestick pattern suggests an attempt by buyers to pick up some values in the large caps. It held at this point last week on the low and snapped back. It did it again in July. There is also support from the August 2003/August 2004 up trendline at 1176 and late 2001/early 2002 double top (1165 to 1155); that is a lot of support stacking up. It is likely to produce a rebound to test the 200 day SMA (1200) along with NASDAQ. Whether it is the bottom remains to be seen. Thus far the distribution has not stopped, and that always suggests there is more work to be done either with further selling or with some up and down lateral consolidation.
SP600 dove lower on the NYSE volume, rapidly approaching the 200 day SMA (330) as well. It has collapsed out of its August to early October base, going from looking decent to looking crappy in a hurry. It has started to break into its December 2004 to June 2005 base, but as it is also just above its 200 day SMA we are going to see if that can put a stop to the bleeding and allow it to start basing from here.
DJ30
A positive day for the Dow as IBM enjoyed its second consecutive upgrade. It was not even enough to top the Monday intraday high on the high for the session. DJ30 looks bad, but it is also attempting to hold over 10,200 where there is some support. It looks similar to its late June, early July action where it managed a modest bottom to rebound with the rest of the market. That is another indication that SP500 and NASDAQ are, after a couple more sessions, going to make a rebound run at their 200 day SMA.
Stats: -53.55 points (-0.52%) to close at 10238.76
Volume: 261M shares Tuesday versus 236M shares Monday.
The chart: http://www.investmenthouse.com/cd/^dji.html
WEDNESDAY
Oil inventories are all that is on tap for Wednesday. Oil was on the rise Tuesday (63.53, +1.73), and as it rose in the afternoon that but the brakes on the midday rebound attempt by the market. NASDAQ hit the 200 day SMA just about the time oil started its climb; that cut the legs off the modest rebound attempt. Inventories are expected to slowly improve, but slow is the operative word as Gulf production remains largely shut in and refining capacity remains hampered. Even the slow recovery is having its impact as gasoline futures have faded rapidly the past few days, prompting the Lundberg report to forecast 10 to 20 cent reductions in gasoline prices. It isn't sub-$2 gasoline, but it beats $3/gallon fuel.
Earnings are going to try and fill the vacuum of economic data, but it might not fill it with what upside investors want. AAPL was cored after hours with an 8+% decline after it missed on iPod deliveries and revenues. AMD beat the street but it wasn't turning the tide.
The Fed on the warpath, energy prices high, flagging consumer sentiment, federal deficits, talk of repealing tax cuts, earnings not meeting expectations. These are pretty grim indications and could suggest a market top of significant proportions if indeed the Fed is going too far on top of all the other issues. Recall in 2000 how things looked rosy overall as the market topped. There were no real issues discussed in the media; all was rosy. Even the songs on the commercials the financial stations played were extremely carefree and upbeat. Then the bottom fell out.
There is an awful lot of concern right now that has come together. Some of it has lingered longer term, but a lot of it has come to the fore and gelled after the hurricanes. Investors were pretty complacent after September did not implode, but it certainly was no walk down the garden path. In short, there is a high wall of worry right now that will lead to a rebound to test the recent break lower. The higher it gets over the next few sessions, the stronger the rebound.
It likely won't be a move that continues on up to a new high. The market still has to figure out if the Fed is going to wreck the expansion and that will take time, i.e. the market will continue to build the current base through October and try to gather whether the Fed will be done at 4.5% in early 2006. The outcome of that decision will tell the outcome of the base.
There is still plenty right with the economy despite all of the perceived wrongs. The Fed and energy are the real issues that the market has to overcome; they can sink it just as they have done in the past. The other issues add baggage on top of these two, and that makes it dicier, just what bases try to figure out.
Near term we are anticipating a rebound to test the breaks below the 200 day SMA. We don't think the Fed and energy action have yet baked in a severely slowing economy just yet. A near term rebound does not have to deal with that, however. It is a technical bounce coming after so much concern and anxiety have ratcheted up. We are going to use that bounce to actually fish for leaders that have continued to hold their near support in the dive lower. That is real strength. We are also going to use the rebound to look for those stocks that have rebounded from significant breaks of support, moving back up on low trade. Those will be prime downside plays as the base continues and they continue their trends lower. We have had to slow down our buys of late as we wait for the market to give us good entry points. Being patient and letting things set up for the next quick move.
Support and Resistance
NASDAQ: Closed at 2061.09
Resistance:
The 200 day SMA at 2076
2100 was key resistance and support in the past
The 10 day EMA at 2101
The 50 day EMA at 2128
2151, the early December closing high and highs from January 2004
The 50 day SMA at 2143
2178 is the January closing high
2187 is the September high.
2191.60, the January intraday high.
2192 is the mid-July high.
2220 is the August high
Support:
2050 is price support from spring and summer 2005 consolidations
2018 is the early April high.
The August 2004/April 2005 up trendline at 2010
S&P 500: Closed at 1184.87
Resistance:
The 200 day SMA at 1200
1200 was solid price support
The 18 day EMA at 1209
1210 held in late September on the close.
December 2004 high at 1219 and June high at 1220
The 50 day EMA at 1216
The 50 day SMA at 1221
March 2005 closing high at 1225 and intraday high at 1229.11
The September high at 1243 and the recent August high at 1246
Support:
1183 - 1184 from November 2004 highs and July 2005 intraday low and a high way back in July 1998
1176 is the August 2003/August 2004 up trendline.
1165 - 1155 from late 2001/early 2002 double top
Dow: Closed at 10,253.17
Resistance:
10,350 turned out to be support in the recent pullback August and September pullbacks
The May high at 10,406 and 10,400, the bottom of the November/December range
The 10 day EMA at 10,354
The 50 day EMA at 10,478
The 200 day SMA at 10,513
Price consolidation at 10,600
The June highs at 10,646 to 10,656
10,720 is the high in the recent lateral move. This is the key resistance.
10,754 is the February high
10,868 is the December 2005 high.
10,985 is the March high
Support:
10,250 held in the June and July lows is trying to hold now
10,200 from April.
10,175 from the July intraday low.
10,000 from the April low.
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
October 11
FOMC Minutes, September 20 (2:00). More of the same with further hikes needed to offset fiscal 'profligacy' and effects of storms.
October 12
Crude Inventories, 10/7 (10:30): -246K prior
October 13
Export Prices ex-agr., September (08:30): -0.1% prior
Import Prices ex-oil, September (08:30): 0.0% prior
Trade Balance, August (08:30): -$59.3B expected and -$57.9 prior
Initial Jobless Claims, 10/08 (08:30): 360K expected and 390K prior
Treasury Budget, September (14:00): $37.0B expected and $24.6B prior
October 14
Retail Sales, September (08:30): 0.2% expected and -2.1% prior
Retail Sales ex-auto, September (08:30): 0.6% expected and 1.0% prior
CPI, September (08:30): 0.9% expected and 0.5% prior
Core CPI, September (08:30): 0.2% expected and 0.1% prior
Industrial Production, September (09:15): -0.5% expected and 0.1% prior
Capacity Utilization, September (09:15): 79.4% expected and 79.8% prior
Michigan Sentiment-Prelim., October (09:45): 80.0 expected and 76.9 prior
Business Inventories, August (10:00): 0.1% expected and -0.5% prior
End part 1 of 2
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