|
|
start investing, option trading
* * * *
10/13/05 Investment House Daily
* * *
Investment House Daily Subscribers:
MARKET ALERTS:
Target hit alerts: XLE
Buy alerts: IVIL
Trailing stop alerts: None issued
Stop alerts: CDN; ESV
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:
- SOX rallies well while rest of market posts modest relief bounce.
- August trade gap widens and September will get wider as port closures crimp exports.
- Fed still to raise rates, but is it going past 4.5% or has it already baked in a recession?
- SOX needs some help on this bounce and NYSE indices are set to give it.
- Lots of economic data from September to take its shot at the rebound attempt.
SOX leads start of relief bounce as expected.
SOX did not waste much time after testing its 200 day SMA Wednesday. A good test and bounce off the 200 day got a boost from strong LRCX earnings. The table was set, LRCX brought out the food, and SOX jumped 2.1%.
NASDAQ joined in for a 10 point gain. The NYSE indices did not. DJ30 and SP500 closed just about flat and SP600 lost 0.4%. Not a lot of followers to the semiconductor lead.
Indeed, outside of chips the news was ho-hum. The trade gap widened as oil remained high, jobless claims fell slightly but are still closer to 400K than 300K after the twin storms, and oil fell but not enough to really make any difference to the consumer. That is an important point. Each day the oil ticker runs on the financial stations and they watch it minute by minute. Yet, at $63.08/bbl (-1.04 on the day) it is still forcing gasoline prices higher and pressuring price increases on all goods heavily utilizing petroleum in their materials or manufacturing process.
To really positively impact the consumer, oil needs to be at least near $50/bbl and more accurately in the mid-forties. Unless oil demand craters by virtue of the Fed once again pushing the US into recession, oil is not likely to reach that level anytime soon. Of course even if the US falls into recession, it is unlikely China and India will follow. Oil demand will fall, but with those two still using all they can get, price will not drop as much as you might believe. That would leave us in recession with still high energy prices. That smacks of stagflation once again as the US tries to dig out from recession with high prices stifling consumption along with an aging baby boom population.
It would take strong, Reagan-like stimulus to pull out of that, but the political climate in DC is poisoned against this type of action. Tax revenues have surged even as taxes were cut, another example of tax cuts generating more economic activity and thus more tax revenues than at higher tax levels. It is not a revenue problem with our budget, it is, as always, a spending problem. There are too many straws sucking from the federal coffers, this from a federal government that was described by the framers as being of 'limited powers.' It has unlimited taxation powers as seen in the IRS, and as the highway bill shows, there is nothing that cannot be considered a federal issue when it comes to spending our tax dollars. The point is there is a denial of what works to get the economy and thus tax revenues roaring. Tax revenues have surged but so has the deficit; once more Congress spends all that comes in just as in the 1980's. If we slip into recession we will have to go through the struggles of the 1970's to again finally realize that supply side stimulus makes the economy work.
Back to the market bounce, again the only players were in chips and tech. NYSE indices, in a show of incredible apathy, sat this one out. We expected SOX to lead, but you don't expect the other indices to just hang on for life. That gave the move all of the attributes of a relief bounce: lower volume, narrow breadth, unable to move through resistance. With these kind of numbers, if SOX does not get some help with its solid Thursday move, this relief move will have a short half life. The market suffered some heavy distribution the past two weeks as big money dumped shares across the market. The character is bearish and this bounce has not changed that. The inability of the NYSE indices to join the techs in bouncing shows the bearish sentiment built up on the dive lower was not dissipated by the bounce; in other words, the bounce was narrow with many investors still not satisfied the market has dropped enough to warrant buying. If they don't come in the market bounce won't last.
Market already showing recession to come?
This raises the question as to whether the recent drop is showing the market is already pricing in another recession after Fed rate hikes. You can blame energy, the storms, deficits, China, or whatever makes you comfortable, but isn't it amazing that if a recession does follow how the Fed was raising rates for more than a year ahead of it? Hardly amazing as we have oft noted the Fed has caused recession in 8 of the last 10 rate hiking campaigns and significant economic slowing has followed 13 of the last 15 tightening cycles (either a recession or a drop close to a recession).
The market always starts selling with some ugly downdrafts. These were right up there with any you could want to compare it to. When so much volume accompanies so much selling you have to take notice. But there are many recession or bear market calls in the past from such selling episodes that never came to being. The market sells off hard, rebounds, sells again, completes its base, and then starts back higher. If it doesn't come back and complete its base but just keeps heading lower, you likely have the end of the uptrend.
Right now the market is trying to move into phase two, the rebound. There was not much strength in Thursday's rebound session but we have to see how it unfolds. Everyone is guessing right now about recessions or short term downtrends. The sentiment indicators are getting higher but are not their yet. The selling has been strong and many stocks have broken down. Many have not, however, and those leaders, while getting thinner in ranks, are going to be the keys to the recovery if one takes place.
THE ECONOMY
Trade gap pushed wider by continued strong energy prices, and it is going to get wider in September.
The August gap rose to $59B from $58B, not quite as much as the 59.5B expected; just a little $500M difference. Though it did not meet expectations it was still the third largest gap on record. Oil prices rose 7.4% and crude imports rose 4.4%. Gasoline was also imported more given the shutdown of 20% of the US refining capacity.
Exports climbed 1.7% to a record $108.2B as semiconductors, oil and gas equipment and airplanes were big winners. Unfortunately exports are likely to fall for September as the ports that were directly hit by Katrina and Rita were more export oriented. Thus with high oil prices, the need to import gasoline, and our export infrastructure shut down, the gap is going to widen.
Greenspan to use trade gap to bolster position: dovetails with 11-2004 comments.
This is only going to fuel Greenspan's arguments for maintaining a tight money policy. There is the fear that 'at some point' the trade gap gets so wide that foreign investors will view the US as a bad risk and stop investing here. Yes and at one point animals crawled out of the sea, sprouted wings and started to fly. It took a lot of time and no one is sure what was the pivot point. In any event, this is what prompted Greenspan's November 2004 statements about raising interest rates in order to attract foreign investment despite the large trade gap. That was the first salvo in what has become a typical Fed misinformation campaign as to why it has to continue raising interest rates. Again, we don't necessarily have a problem with getting rates up to 4% or maybe 4.25%, but if it goes further the Fed is going to flatten and then invert the curve, causing a significant economic slowdown. Contrary to Greenspan's statements in the spring and summer, an inverted curve is as close to a sure bet as you can get in most anything. Greenspan defends his position when he cites one instance in the past 20 years where an inverted curve did not result in a recession. Okay then. Let's bet the economy on one instance where simply a significant economic slowdown occurred as opposed to the recession that resulted in all the other instances. No offense, but I think I will pass on that one this time Mr. Greenspan.
Rate discussion overblown?
All of the market's angst this month started when it pulled an "Emperor has no clothes" realization: 'oh, the Fed is really getting pissy about these rate hikes, huh.' This is always the Fed's course of action. It is like hitting a puppy with a rolled up newspaper. The Fed taps and taps and taps but the puppy keeps on romping, playing, peeing all over the place. Then the Fed gets angry, hollers at the pup, and the pup cowers in fear (probably pees a bit more as well). If the pup then continues to romp and chew things up the Fed knocks the snot out of it with a barrage of stronger rate hikes. Then the puppy runs away.
Right now the market has just wet itself after the tough talking Fed rangers hit the road this month in something of a 'we told you we were tough' road show. We are wondering right now if the market is going to come back around and realize that the Fed is likely only going to raise rates at maximum to 4.5% under Greenspan and that the next Fed chief is likely not going to pull a Greenspan and start his career with more rate hikes and even some 50BP hikes that send the market into a dive just as Greenspan sent the market into Black Monday in 1987 (yes, he has been around that long). If the Fed believes the storm effects are short-lived, that will also mean it believes the inflation pressures as a result are relatively short lived. Thus if it continues to hike through January 31 (which is right on schedule, mind you), it may very well feel it has done what it needed to do: stay tough, stick to the guns, and hit the target for the Fed funds rate (despite their claiming there is no target).
But has the Fed already gone too far given the other obstacles?
Thus all of the fears about the Fed going to far, while not at all far-fetched based on the Fed's track record, may be somewhat overblown. The real question is whether enough damage has already been inflicted by the Fed's tighter money policy and $3/gallon gasoline to stall the economy. The market has certainly acted as if that could occur in the way it distributed the past two weeks and caved into the early 2005 base it cleared in the summer.
As we noted Wednesday, the market will answer that one for us after it gives us a somewhat sustained relief bounce and another test lower. If it cannot get up off the mat after that next drop then we need to forget about Greenspan bowing out of office with an economy that is healthy. The market would be forecasting the economic weakness to come as a result of the confluence of events that have boxed it around this year. It never seems to fail: when the Fed thinks things are too good and thus starts raising rates the crap starts flying and an economy that could have been strong enough to handle it is not. Never fails.
THE MARKET
MARKET SENTIMENT
VIX: 16.47; +0.25. VIX continued to rise, hitting 17.19 on the intraday high before the afternoon rebound in stocks took it lower. Close to the 18ish level that has set the market higher in recent bounces, but we also note that it took more than one such spike, needing three over a 4 week period in April and May before the market bottomed. Thus, this looks like the first spike in the series as the market falls, bounces, falls again, then tries to finish up and continue to move higher.
VXN: 17.19; -0.57
VXO: 16.06; +0.58
Put/Call Ratio (CBOE): 1.31; -0.01. The overall put/call ratio Wednesday hit 1.09. That combines all of the options markets and not just the CBOE. It hit 1.0 last week on one session. When the entire option market starts showing this level of activity it is a better sign. As for the CBOE, it closed above 1.0 for the fifth time in six sessions.
Bulls versus Bears:
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: +9.75 points (+0.48%) to close at 2047.22
Volume: 1.83B (-11.72%). Volume dropped off though it did remain above average as NASDAQ tested lower early and then rebounded for a decent rise. When compared to the 100+ point haircut to this point it looks a bit puny. The volume does as well.
Up Volume: 1.118B (+713M)
Down Volume: 688M (-959M)
A/D and Hi/Lo: Advancers led 1.01 to 1. No sterling moves across the tech index. NASDAQ 100 rose 0.83% as the large cap techs rebounded. This is often an indication of a relief bounce as the large caps get some of the first money that comes back to the market as shorts are covered and value hunters move in.
Previous Session: Decliners led 3.12 to 1
New Highs: 29 (+4)
New Lows: 236 (+4)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
NASDAQ continued the downside blow down early but then turned and rebounded with a nice afternoon rally. Volume was lower from the get go, indicating the early selling was not that strong. Unfortunately it did not ramp up as NASDAQ recovered. In the last hour NASDAQ bumped into 2050-51 resistance (the bottom of the May/June trading range). That is the first level of resistance, and NASDAQ could not push through it. If it can get some support from the NYSE indices and further help SOX, NASDAQ can rally up to the 200 day SMA (2075) as a point where it will give us a better view of what strength there is in the index.
SOX was the man Thursday, putting in a strong 2.1% move that it forecast Wednesday with the tap of the 200 day SMA (433.37) and candlestick doji. Looking for a move to the 50 day EMA (461) if this is a strong move. The 10 day EMA (452.67) may try to get in the way, and the 18 day EMA (457.87) is also going to put some pressure on it. Good start to the move.
SP500/NYSE
Stats: -0.84 points (-0.07%) to close at 1176.84
NYSE Volume: 1.718B (-9.52%). Volume was lower but still way above average as SP500 reached way down on the low and rallied back to hold the up trendline. The strong volume is not bad action at all coupled with that price action and suggests SP500 is going to try a rebound as well.
A/D and Hi/Lo: Decliners led 1.86 to 1. The small caps were a hindrance.
Previous Session: Decliners led 3.81 to 1
New Highs: 17 (-2)
New Lows: 380 (+60)
The Chart: http://www.investmenthouse.com/cd/^gspc.html
SP500 undercut the August 2003/August 2004 up trendline (1176), diving to 1168 on the low. It then rallied in the afternoon with the rest of the market and recaptured the trendline on the close. Volume was lower but still very strong. This blow down and rebound, showing a nice hammer doji on the candlestick pattern is a big shakeout move. It looks ready to give some assistance to SOX and its bounce after this last shakeout in this part of the selling. Not saying this is a bottom but it is a key support point and it is showing the right kind of action after two down weeks to provide a rebound move.
The small cap SP600 struggled again below its 200 day SMA (330), selling off as did SP500 and then rebounding to close basically flat. It too is showing a hammer doji on the candlestick chart and that often precedes a rebound move, particularly after two weeks of tail kicking. It has immediate resistance at the 200 day SMA, but if this has any strength it can make it to the 10 day EMA at 335ish.
DJ30
DJ30 showed its own hammer doji on the candlestick chart after it too dove lower to 10,156 but then held on similar to early July when it dove to 10,175 intraday and rebounded. Ready to try a move with the market, but it is not ready to put on the leadership cape.
Stats: -0.32 points (0%) to close at 10216.59
Volume: 270M shares Thursday versus 293M shares Wednesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
FRIDAY
Friday is chock full of economic data. After the Fed-speak and the relatively quiet week, we are going to get the full treatment. Retail sales, CPI, production and capacity, Michigan sentiment, business inventories, and the Treasury budget. Makes your head hurt just to grasp the amount of data heading our way.
Will it amount to a hill of beans for the market? Yes. Retail sales, the CPI and production and capacity are for September when the storms were impacting the economy. Michigan sentiment helped get the market roiled in the first place as the selling started when it came in with an impressive drop. All of these could be at it again.
Question is, what way will the market take it? The market fears the Fed and thus good news is bad news because the Fed will growl and push harder on the market's throat with its boot. Bad news is bad because it shows the economy is weak and the Fed still will view things as risky given the aftermath of the storms, federal spending, the trade gap, the flight ratio of an un-laden swallow, etc.
The market is set up for a rebound. SOX started it off Thursday. SP500 and SP600 are set to step forth as well based on their patterns shown Thursday. Economic news could wreck it; the market is very weak after all and has not responded well to any kind of news. After this hard round of selling, however, it is likely to be driven by technical indications for the near term until it gets some height on the move and starts to look around and wonder if it is going to fall. When the market takes a look around that is usually when it has trouble.
We still see some really good patterns out there and as noted above, this action is part of the process where the market decides if it is going into a bear market or is just going through a gut wrenching purge before basing out and continuing on. There is uncertainty of course as to what is going to happen with the Fed and the economy, but the market is working through that at this point and will show us the signs if it can hold another test and rebound, etc. The leaders holding up are a good sign; if none were there the market would be heading down now and not going to try to recover. The key is the next drop; if the leaders are wiped out, really wiped out, there is no one to bring the market back. That is trouble.
For now we are still looking for a continued bounce and will not back off from some excellent leaders that have simply taken a low volume test during all of this selling. Those are solid choices. The downside right at this point is a bit more risky than the upside given the blowdown and the rebound on SOX and the patterns on SP500 and SP600. The XLE put play was a fine one, but we knew it was going to have to be quick given the market selling to that point. The market looks ready for a further bounce and we are willing to move into some strong stocks as it does.
Support and Resistance
NASDAQ: Closed at 2047.22
Resistance:
2050 is price resistance 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 2100
The 50 day EMA at 2122
2151, the early December closing high and highs from January 2004
The 50 day SMA at 2137
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 2015
S&P 500: Closed at 1176.84
Resistance:
1183 - 1184 from November 2004 highs and July 2005 intraday low and a high way back in July 1998
The 10 day EMA at 10 93
The 200 day SMA at 1199.40
1200 was solid price support
1210 held in late September on the close.
December 2004 high at 1219 and June high at 1220
The 50 day EMA at 1213
The 50 day SMA at 1218
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 10,216.59
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 10,309
The 50 day EMA at 10,458
The 200 day SMA at 10,517
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): 1.1% actual versus NA expected and -0.1% prior
Import Prices ex-oil, September (08:30): 1.2% actual versus NA expected and 0.0% prior
Trade Balance, August (08:30): -$59.0 actual versus -$59.5B expected and -$58.0 prior (revised from -$57.9)
Initial Jobless Claims, 10/08 (08:30): 389K actual versus 360K expected and 391K prior (revised from 390K)
Crude Inventories, 10/7 (10:30): 1017K actual versus 1.1M expected and -246K prior
October 14
Retail Sales, September (08:30): 0.5% 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
|
start investing
option trading
|
