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world stock market, us stock market
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10/12/05 Technical Traders Report
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Technical Traders Report Subscribers:
MARKET ALERTS
Targets hit alerts: AAP
Buy alerts: XLE
Trailing stops: None issued
Stop alerts: IOTN; CDIS; CMTL
SUMMARY:
- No respite for the sellers as indices dive lower in October scare.
- Mortgage applications fall again to lowest since April
- Rumors regarding Greenspan's replacement induce cold sweats.
- Chips trying to emerge from the rubble and lead a relief rally.
Market has yet to find bottom in this early October scare.
Volume ramped up once more as stocks again posted a modest early rebound only to roll over and sell once more. There was nothing new or at least positive to drive stocks. Greenspan repeated a speech he gave last week and the three other FOMC members out on the campaign trail didn't add much new. Olson, the lone dissenter on the last rate hike, did say that the only reason he dissented was that he felt there was too little information after the storms to move ahead. Now he thinks there is enough information and yes, rates should continue to be hiked. So much for the Lone Ranger riding again.
There was also a downgrade of Intel and the chip sector in general to sell, oil prices started to rise again (though energy stocks continued to slump), and Apple's less than well received earnings report. Again, the market tried to put together an early rally, but again the early fountain of hope ran dry and the same old grind lower began even before the first hour was passed.
SP500 tried to hold the old support at 1284 in the morning session but made the fateful thud lower at the 1.5 hour mark. A rebound over the next hour failed and it was heading lower again. NASDAQ tried to hold at 2050, the next support level, but it too made a sharp move lower midmorning and after it bounced up to kiss that level again it faded hard into lunch. The small cap SP600 and SOX plunged lower as well, SP600 taking out the 200 day SMA while SOX thumped the 200 day SMA on its own. After that sharp drop the indices wanders laterally before an afternoon dip took them to new session lows. A last hour bounce took them off session lows to close.
Signs of sentiment getting to extreme enough levels for a bounce.
That bounce changed little. Volume jumped again, breadth was sharply negative, and we heard more calls on the financial stations that a new bear market was beginning. After a 118 point drop on NASDAQ and a 52 point dive on SP500 you like to hear those calls of bear markets and the like. With extreme breadth readings, the put/call ratio shooting higher yet again, a perception the Fed is going to go too far, and the bear market statements emerging, it is just about time for a rally to start.
SOX, and maybe SP500, trying to lead.
Indeed, SP500 and SOX were acting along those lines late Wednesday afternoon. No they did not turn back upside and rally furiously into the close. What they did was test some important support and bounce slightly. Chips continued their move higher after hours. It was not a major turn, but after this much selling and negative sentiment this kind of action suggests a bounce is coming. SP500 held the August 2003/August 2004 up trendline on the close after undercutting it intraday. SOX plunked the 200 day SMA, but briskly bounced off that level. SOX was even positive relatively late in the session, showing relative strength it has lacked the prior two sessions. A 40 point drop in a week will do that.
We are not suggesting that this is signaling the end of the selling. It does indicate the rubber band has been stretched and with SOX and the SP500 hitting and holding key support, the confluence of negative sentiment and technical factors indicates a relief bounce is coming. We are likely to see yet another downdraft after the relief move plays out; markets typically have two lows when they bottom. Sometimes they are violent, and sometimes they are meek. Sometimes they undercut the prior low and sometimes they don't. Each plays out depending upon market conditions. Before that happens, however, there needs to be the relief move, and as noted, based on the technical and sentiment indications it is getting close.
THE ECONOMY
Mortgage applications dip, rates rise, housing market easing.
Applications fell 2.6%, the third consecutive weekly decline, pushing applications to the lowest level since April 2005. Thirty year mortgage rates averaged 5.94%; that is the highest since a 6.08% read in March. Last year at this time rates were 5.69%. Thus the drop in applications is not surprising as applications and rates typically move inversely.
Purchase applications fell 0.9% while refinancing applications fell 4.9%. Higher rates obviously hurt refinancing much more than new purchases, particularly given how low rates were at one point in the cycle. ARMS (adjustable rate mortgages) have surged in popularity as housing demand rose and rates started to rise as ARMS provide for a lower interest rate. They are almost too popular because many people on the margin used them to qualify for loans, and they are going to get hammered as rates continue to rise. Surprisingly their applications fell as well even as rates rose and the spread between adjustable and fixed rates hit their lowest level since March 2001. ARM percentage of overall mortgage activity fell to 29.5% from 36.6% in March.
These stats along with rising home inventory levels and flattening (and even declining in some cases) home prices show the housing market is continuing its steady slowdown. After such a magnificent run the slowdown should be expected. The fact that it has not rolled over but is in an orderly slowdown is excellent. The fear: rates go one step too far and activity plummets. No signs of that yet. The Fed is still targeting housing, but the market has taken back seat to its more recent concerns regarding post-storm shortages and federal spending. The Fed likes to mix up its pitches, and just as with companies reporting earnings, it will use a good excuse to justify its rate hikes when one is presented.
Homebuilders remain almost frighteningly upbeat even as all signs show housing is slowing. They say it is slowing to sustainable levels. Indeed, one CEO says to call him when rates get to 6.5%, suggesting that level is the start of the choke point for the market. They are close to 6%, and the Fed is not relenting in its push to jawbone rates higher as well as push on them from the short end. The 10 year note is ready to pop through 4.5%, and when it does we could see a rapid ascension. A rapid rate rise would stick a pin in the housing market; if rates hold it will really flatten it.
Greenspan rumored replacements are worrisome.
Some good names have been floated for Fed chairman by the administration, and that gave us all heart that the executive branch was looking for a free market champion that believed in solid supply side principles as opposed to the Phillips Curvers who see inflation in the shadow of each cycle of growth and prosperity and raise interest rates to choke off the economy before the supposed inflation gets out of control. If supply is unfettered, you don't need to worry about demand because supply will meet it. Moreover, supply will create its own demand. If you don't get that you push policies that purposefully hurt economic growth and US citizens.
Well, we got a call last night from one source in DC high up on the republican party who indicated that current Fed vice chairman Ferguson and current FOMC member Kohen were recently upgraded in the administration's decision-making process. These two believe the demand side controls, i.e. believe in the Phillips Curve. Many good economists tell us so as if their actions and speeches were not clear enough. The problem with this belief is that the Curve only worked for about 6 years total in the entire history of the world economy, and those 6 years had many issues that made them unique. Be that as it may, it entrenched itself in economic lore because of its seeming sound logic: if too many are working and making more wages there is more money chasing the economic output. Thus if the economy grows too fast and creates too many good jobs there has to be inflation coming. Again, that ignores that the reason there are good jobs and a booming economy is that there is a lot of business activity creating a lot of supply. If there wasn't there would not be any need for all of the high paying jobs. In short, the system takes care of itself if it is left alone and not micromanaged and overregulated.
This is of major, major importance to our economic future. Greenspan had a ton of faults, the main one being he was a chameleon. He would tout free markets and no intervention while things were easy, but when it came to crunch time he would pull out the Phillips Curve and use that as his playbook. Fortunately he believed in baby steps. That averted many disasters (of course a 2 for 10 batting average does not leave many more disasters left to happen). At least he talked a good free market talk to Congress and was for free trade, lower entitlement spending, and continual tax reductions as part of necessary balancing of the economy. These other two guys are not in the same ballpark. Greenspan's go slow approach helped offset the calls to hike rates every six months by some FOMC members and kept the dogs at bay enough to give the economy a chance.
With the recent bungling of the Supreme Court nominations we cannot rest assured that the Bush administration will do the right thing by us and the economy. As with the Supreme Court vacancy, there are many, many good choices out there with excellent credentials and known track records that dovetail with a free market, supply side economic approach, the approach that has made us the greatest economic power ever seen on earth. The administration is either distracted by all that is going on elsewhere (low opinion polls, a firestorm with this recent Court nominee, the continued Iraq conflict, storm recovery, spending issues) or just out to lunch.
We all need to call our senators and congressmen and voice immense displeasure with these two candidates and instead suggest someone such as Jack Kemp who has the knowledge and credentials to head the Fed. He helped construct the Reagan 1981 Economic Recovery Act that jumpstarted 20 years of economic growth. He has put forth the best ideas on how to fund the post-Katrina and Rita rebuilding efforts (e.g. tax free zones). He knows what deficits mean. A great choice versus disastrous choices. Hell, Steve Forbes knows how what makes an economy work as well. Sharp does not being to describe him when it comes to economics. Make the call. You can go to www.senate.gov for senators and www.house.gov for House reps.
THE MARKET
MARKET SENTIMENT
VIX: 16.22; +0.59. VIX is making a steady move but you want to see it peel off some sessions where it moves 3 to 4 points. That along with the overall higher reading shows that fear is reaching a level that will support a rebound. VIX needs another 2 to 4 points to show real fear. If SP500 breaks down from here for one more test lower that will really ratchet it up. With SP500 at support and SOX as well, that may not happen.
VXN: 17.76; +0.61
VXO: 15.48; +0.02
Put/Call Ratio (CBOE): 1.32; +0.13. Four out of five sessions closing above 1.0. This is starting to get there along with the other sentiment indicators.
Bulls versus Bears:
Cannot wait to see Thursday how far the bears ramped up this week. Again, we heard more than one pronouncement of a bear market being here or just around the corner today. That does not mean they are wrong but it does mean that a rebound is just around the corner. Bears could easily hit 30% this week given the intensity of the selling.
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: -23.62 points (-1.15%) to close at 2037.47
Volume: 2.073B (+9.6%). Volume surged again well above average as NASDAQ continued lower below the 200 day SMA and next support. Distribution continues and that means there will likely be more selling even after a rebound move. That is not scary; that is how markets act.
Up Volume: 405M (+16M)
Down Volume: 1.647B (+221M)
A/D and Hi/Lo: Decliners led 3.12 to 1. Another sharply negative breadth session as the small and mid-caps were pummeled. The negative breadth is consistently pushing the 2.5:1 on NASDAQ, and this session is really starting to step it out for NASDAQ.
Previous Session: Decliners led 2.53 to 1
New Highs: 25 (-19)
New Lows: 232 (+104). Not there yet but finally starting to move.
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
NASDAQ continued the dive lower, following through on the break of the 200 day SMA (20.75) and falling through 2050 as well. That takes it below the mid-summer consolidation and has pushed NASDAQ back into that base. That is never good technical action. Kind of like finally climbing out of a hole you fell in and then jumping back in. NASDAQ appears more than ready to fall to the up trendline through the August 2004 low and the April 2005 low. If you look in Webster's under the definition of weak, you would see this chart. It is in freefall but it is also getting the rubber band stretched out. A rebound is coming relatively soon. Again, that does not mean that is a bottom; it means it is a relief bounce. It will try the 200 day SMA and likely fall again. If it can bottom from there and show a follow through with some leadership that held up breaking out, that will be the time to move in heavier again on the upside. We will play the bounce and the drop. Then we will see if it can bottom again and follow through and then play what move it shows us.
SOX has imploded out of its 2.5 month range and has fallen back into the 7 month range that preceded the July breakout. The index fell just 0.4%, however, and was up in the afternoon. The index tapped the 200 day SMA (433) on the low and rebounded for a modest loss, showing a hammer doji on the candlestick chart. It is indicating it is ready for a relief move.
SP500/NYSE
Stats: -7.19 points (-0.61%) to close at 1177.68
NYSE Volume: 1.898B (+10.07%). More volume as the NYSE indices dove lower, particularly the SP400 SP600. Heavy volume breach by SP600 and that shows big money unloading them still after a week of ugly selling.
A/D and Hi/Lo: Decliners led 3.81 to 1. This is heavy once more. Intraday it was worse, moving over 4:1 to the downside. Would like to see another 4.5:1 or a 5:1 session as on 10-5-05. That might finally move the planets into line for a bounce.
Previous Session: Decliners led 1.63 to 1
New Highs: 19 (-13)
New Lows: 320 (+128). As with NASDAQ, starting to get there.
The Chart: http://www.investmenthouse.com/cd/^gspc.html
SP500 drove lower again, falling through 1184, a long term support level. It closed with another solid loss but it rebounded to hold above the August 2003/August 2004 trendline. Very strong volume as it ran through this level and rebounded to hold the trendline. That does not mean a whole lot; it tapped 1184 on the low last week and rebounded sharply. It does mean something given the further downdraft stretched the rubber band, and it is now holding a longer support level.
SP600 (-1.33%) imploded through the 200 day SMA (330), falling to some support at 325. When the selling is this strong you look at support levels as possible points an index could bounce from; they do not guarantee a bounce. As with the other indices, SP600 has been stretched to the downside and will try to rebound to test the 200 day on a relief move.
DJ30
DJ30 is looking a bit sold out at the 10,200 level, testing below that point intraday (10,186) but rebounding to again hold it as it did in early July. Volume shot higher as it did. Likely to try a relief move with the rest of the market from this point, but massive overhead at 10,350 and really a mot at 10,600.
Stats: -36.26 points (-0.35%) to close at 10216.91
Volume: 293M shares Wednesday versus 261M shares Tuesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
THURSDAY
We heard a good one the other day: FOMC does not stand for Federal Open Market Committee, but Federal Open Mouth Committee, a reference to the non-stop appearances by FOMC members in speeches, news interviews, etc. Wednesday we heard another earful, though lacking the colorful analogies of Fisher out of Dallas.
As for economic news, the trade balance, jobless claims, and oil inventories (a day delay) are on tap. Earnings are also ramping up, but there is not going to be a lot of upside in earnings to start with simply because the mood of the market is that earnings are old news and the Fed, energy prices, tax policy and the like are what is going to control what happens down the road.
It has been 3 years since the market bottomed and the 2000 bear market ended. That is average for bull market runs. There are many negatives facing the market, and they have only grown in number since the first of the year since we focused on the Fed and energy. It seems what brought the market to its knees this month is a realization that one of those factors, the Fed, just might not be the market's friend. That renewed distrust along with all of the other issues sent stocks tumbling.
Now they are showing indications they are going to be in for a relief move. Trick as always because after this kind of drop that broke into the prior bases, to be technically sound another run lower will typically occur after the relief bounce. Thus we can play the upside move as long as we recognize that we are playing a bounce that will like peak out and make another test.
We are looking to play some leaders that have held the 50 day EMA or better on this recent blow down. Looking at how the indices have dynamited their 200 day SMA for the most part, a stock that held its 50 day EMA or better yet its 18 day EMA on the selling is pretty damn strong. Those can provide an immediate lift on a relief bounce and they have the bonus of being a proven survivor. Thus they have better life expectancy when the rebound runs out of gas.
After the bounce we are also looking for those stocks that have rebounded back to test the support they broke on the way down, looking for lower volume moves. When they tap at or 'kiss' that level and turn back down we are looking to play them on the move lower. We like to buy puts but we also sell calls on those at times. We sell the premium and buy the call back after the stock drops from the resistance level and then starts to bottom.
In this kind of blow off that is what we have to do. Sure we have stocks that we are holding onto that are still holding some form of support and have the credentials to bounce right back up. As for the rest of our portfolio, however, we are going to catch the move higher and then the next move lower. After that we see what the market shows us as to whether it is going to bottom with a rebound and follow through or if the Fed has 'won' and beat the market down into another bear market with its policy of tight money in the face of high energy costs and an already slowing economy heading into the summer storms.
Support and Resistance
NASDAQ: Closed at 2037.47
Resistance:
2050 is price support from spring and summer 2005 consolidations
The 200 day SMA at 2075
2100 was key resistance and support in the past
The 18 day EMA at 2106
The 50 day EMA at 2125
2151, the early December closing high and highs from January 2004
The 50 day SMA at 2140
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:
2018 is the early April high.
The August 2004/April 2005 up trendline at 2012
S&P 500: Closed at 1177.68
Resistance:
1183 - 1184 from November 2004 highs and July 2005 intraday low and a high way back in July 1998
The 200 day SMA at 1199.58
1200 was solid price support
The 18 day EMA at 1205
1210 held in late September on the close.
December 2004 high at 1219 and June high at 1220
The 50 day EMA at 1215
The 50 day SMA at 1220
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:
1176 is the August 2003/August 2004 up trendline.
1165 - 1155 from late 2001/early 2002 double top
Dow: Closed at 10,216.91
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 10,329
The 50 day EMA at 10,467
The 200 day SMA at 10,520
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 still trying to hold
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 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): -$59.5B expected and -$57.9 prior
Initial Jobless Claims, 10/08 (08:30): 360K expected and 390K prior
Crude Inventories, 10/7 (10:30): -246K prior
October 14
Retail Sales, September (08:30): 0.2% expected and -2.1% prior
Retail Sales ex-auto, September (08:30): 0.8% 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): -0.4% 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): 0.2% expected and -0.5% prior
Treasury Budget, September (14:00): $37.0B expected and $24.6B prior
End part 1 of 3
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world stock market
us stock market
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