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money investment, day trading
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10/24/05 Investment House Daily
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SUMMARY:
- Stocks rally broadly early, then on Fed appointment but volume lags as market probes resistance.
- Bernanke nomination an attempt to satisfy all as Bush administration ducks taking bold action.
- Nomination of new Fed chief starts speculation anew about what inning Fed is in.
- TXN earnings miss sends it and other chips lower after hours, and market will be tested early after Monday low volume move.
Broad rally without volume.
Stocks continued their follow through action from last week, starting the session stronger, recovering from a morning dip, holding the gains through the afternoon, and then ripping higher into the close. Oil prices were lower again and below $60/bbl, and that gave stocks another boost as oil again flirted with a breakdown. It held $60/bbl again on the close, however, once again just teasing investors with breaking the trend.
The big news hit midmorning when it was rumored that the new Fed chief would be announced Monday. Once rumor became fact, however, the market dropped because no confirmation of who it actually was going to be. That came a half hour later and then the market started back up to new session highs, NASDAQ clearing the important 2100 level. Looked good though volume was running light. Then the market spent the afternoon mulling over the nomination after Bush introduced him and Bernanke bestowed some wisdom upon us.
After 3 hours in a tight lateral range stocks broke higher in the last half hour, racing to new session highs as shorts covered positions. What happened? NASDAQ broke resistance at 2100 and the 50 day EMA, and when stocks were not heading back down in the last hour shorts were forced to cover some of those positions. While NASDAQ was moving through resistance, SP500 was bumping its own, just starting to push through the 200 day SMA. All good price moves, but all hardly out of the woods.
The reason: volume. Though it was a good follow through to last week's follow through with respect to price, volume limped home, barely making average on NYSE and failing to do so on NASDAQ. It was also well off the levels late last week that saw volume spike Wednesday as stocks moved toward October expiration. That volume is the key to any move, and we really wanted to see it kick back in as stocks resumed the move after the follow through session in this neo rally.
The other technical indications were good though they don't trump overall trade. Leaders were moving well. Some had nice volume to go along with them, others rallied as well but on tepid trade. Some of our potential buys had no trade and we had to pass on those but we did move on those showing good trade that gave us a good entry. Breadth was strong for the second time in the past week as small caps led the charge higher (2.2%). Upside breadth has lagged the past month, but started to improve subsequent to last weeks follow through session. Good to see, but volume remains the key if the market is going to continue this new rally and add to Monday's nice price gain.
Monday earnings had a new expiration to work with along with a boost from a Fed chair nomination the market has some confidence in. Tuesday it is back to the grind with TXN's disappointing earnings after hours, existing home sales, and October consumer confidence. Once more the market ahs to earn its stripes in the rally attempt. Monday was a strong price move, but it lacked a lot of volume to give it punch. The rally can continue without trade as long as there is an oversold condition. That, however, will play out rather quickly if no real buying conviction emerges.
THE ECONOMY
Bernanke has the credentials and the reputation to placate Congress and the markets.
Many were hoping for a truly definitive move with respect to the new Fed chairman, one that believes in supply side economics and the value of low taxes and an economic environment that favors risk taking. We are a country born of risk taking; that is what sets us apart from others and keeps us coming up with the best ideas. With all of the political issues confronting him, however, President Bush decided to avoid risk in choosing the new Fed chairman and picked a well-qualified, non-controversial replacement.
Bernanke is similar to Greenspan but he is also quite dissimilar. He is understated as is Greenspan. He is more educated than Greenspan and at a very early age (26 to 30) penned some seminal writings on economics that are required reading in many top economic schools.
Bernanke believes in inflation targets while Greenspan prefers to view each episode as separate and potentially different (at least that is the way he approaches them early on before reverting to his old habits). We don't like targets with respect to inflation. Europe has them and it tends to keep Europe in a box economically: every time it starts to break higher the central bankers raise rates and chop block the move. Japan had targets and that kept Japan in a 12 year depression because it was too inflexible to let the economy get a head of steam.
We don't have a problem with Fed funds rate targets, i.e. where the Fed says this is where we think neutral is and are going to get their over the next 'x' months. Bernanke was the author of the Fed's transparency movement and this would be something he may favor. He has not said so, but this is the kind of 'targeting' that lets the market and businesses make rational decisions about future investments as opposed to guessing how long or how far the Fed will go.
Bernanke's targeting will likely be along the lines of Australia's central bank, i.e. looking out two or more years. That gives the bank a lot of flexibility in how it acts today for events that may or may not occur down the road. It has worked well for Australia (along with its supply side changes in its economy), and that country is enjoying an economic resurgence as capital is put to work after hiding in shelters for decades.
Thus Bernanke is likely to be a decent chairman, but he won't likely be the champion of free markets and economic incentives that we wanted. Granted, the Fed does not have fiscal policy powers, but if a Fed chairman believes in the power of free markets and supply as opposed to demand dominance, then we have a better chance of matching fiscal and monetary policy. Bernanke has some background that suggests this. Indeed, Art Laffer, the father of supply side economics, says that Bernanke is a supply-sider and is pleased with the choice. That is a pretty strong endorsement.
Speculation regarding how many more rate hikes starts anew.
Bernanke's name was hardly finished reverberating when speculation began about whether the Fed would keep hiking or get ready to pause, stop, give up, etc. Some of Bernanke's comments indicated he feels the job is just about done. Once example tossed out was his comment on energy prices and how soaring energy prices place a high burden on the consumer. Maybe, but that is pretty thin.
But in reality, how far is the Fed going? The Greenspan crew has been hitting the microphones hard lately to indicate they were displeased with inflation and that there may be more and more intensive rate hikes ahead. Of course this is in sharp contrast to earlier statements as to how the Fed had learned its lessons and would not back end load its rate hikes.
Before this last round of Fed-speak we surmised Greenspan had moved up the January 31 FOMC meeting so he could be the acting chairman and issue the last rate hike in the series. That would put the Fed funds rate at 4.5%, assuming a continued 'measured pace.' Ferguson may have alluded to 50 BP hikes, but we really do believe Greenspan knows he cannot toss in 50 BP hikes at the end. We have heard in private conversation he has said the 50 BP hike in May 2000 was his biggest mistake in that round. Greenspan inherited what he perceived to be a problem when he took office in 1987. He hiked rates and fired off a 50 BP hike just before Black Monday. He does not want to leave his successor feeling the need to jack up rates quickly to start his career as Greenspan knows a new Fed chairman has enough trouble with credibility without having to take any immediate actions that are open to second guessing.
The bond market was not so sure about any of this. Stocks rallied but bonds sold 4/32 and rates rose to 4.44%, right back up close to that 4.5% level that sent the 10 year running last week. Basically bond traders did not see Bernanke as much of an inflation hawk as Greenspan. Bonds know best, and more than anything that fueled the speculation that the rate hikes would end somewhere from 4% to 4.5%.
THE MARKET
MARKET SENTIMENT
VIX: 14.74; -1.39. Never made it to 18 on this jaunt and now it looks as if the pressure has been let out of the build to higher levels. Decent jump above 17, but not a major spike to makes this the mother of all bottoms.
VXN: 15.23; -0.59
VXO: 13.74; -2.13
Put/Call Ratio (CBOE): 0.71; -0.31. Largest decline in two weeks after spiking above 1.0 for 8 sessions out of 10.
Bulls versus Bears:
Last week bulls and bears showed the jumps we were looking for though bears did not quite hit the 30% level seen in early May just after the market bottomed. There is still the next leg lower, however, to run that up and even past that level. Getting where they need to be to form a bottom here.
Bulls: 45.3%. Dropped slightly from 45.8%. After to consecutive 3.7 point drops bullish sentiment is leveling off. Wanted it to put in another strong drop to take it down to the May level. If the volatility continues this week it may get there. Bottomed in May at 43.5%.
Bears: 29.5%. At least the bears moved higher though just a 0.3% rise. Getting close to that 30% hit during the April/May bottom. Hit a high for the year at 30% in early May.
NASDAQ
Stats: +33.62 points (+1.61%) to close at 2115.83
Volume: 1.601B (-12.36%). Volume dropped below average after three strong, above average volume sessions last week. Given the move through resistance you want better trade to hold the move.
Up Volume: 1.304B (+205M)
Down Volume: 288M (-400M)
A/D and Hi/Lo: Advancers led 2.56 to 1. Solid breadth as the small cap indices led the market higher. Definite improvement in breadth even over the follow through session last Wednesday.
Previous Session: Advancers led 1.55 to 1
New Highs: 83 (+23)
New Lows: 59 (-24)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
NASDAQ rallied through 2100 resistance just before the Bernanke press conference, then spent three hours determining if it did the right thing, moving in a tight lateral range above that key level. In the last half hour it got some legs and rallied on through the 50 day EMA (2111). Good action but it suffered from chronic low volume on the move through both of those levels. That leaves NASDAQ with a good price move but wondering what to do next without a lot of buying volume to keep the move alive and pop a higher high after two lower lows since the August peak. In other words, it is still trending lower after the good move, and without volume it will be hard pressed to crack the lower lows or down trendline. There is good leadership in technology and it is spread between the large and small caps; that gives it some strength. That will still not trump good upside volume as NASDAQ continues higher and tries the 2150 level.
SOX (1.1%) rallied as well but it was a laggard all session, turning in by far the lightest move of the major averages. It continues its lateral move along the 200 day SMA (434.27), putting some distance on that level, but after hours TXN reported disappointing EPS though it did beat on revenues and guidance was not bad. It was down after hours and we will have to see how much drag it puts on the rest of semiconductors and tech in general. This is where that low volume can hurt a move.
SP500/NYSE
Stats: +19.79 points (+1.68%) to close at 1199.38
NYSE Volume: 1.646B (-11.41%). Big drop in volume back to just above average following last week's strong volume spike starting with Wednesday. Wanted to see more strength on this continuation of the rally following the test of the follow through, particularly on a move to this key resistance.
A/D and Hi/Lo: Advancers led 3.19 to 1. Strong breadth as the small caps surged to the lead. This is much needed, but it does not trump the volume that has to improve for the move to live.
Previous Session: Advancers led 1.94 to 1
New Highs: 65 (+31)
New Lows: 86 (-28)
The Chart: http://www.investmenthouse.com/cd/^gspc.html
SP500 rallied slightly through the 200 day SMA (1199) on the close, using that last half hour spurt higher to push on through. It surged off of the August 2003/August 2004 up trendline (1181) as it continues to hold above that longer term trendline for this current post 2002 rally. It too lacked any serious volume, with trade dropping to just above average. That takes the luster off the move as on NASDAQ, and as it is just over the 200 day SMA and below 1200 it still has a struggle. Strong price move and can still reach toward the 50 day EMA (1207) and 50 day SMA (1212). SP500 has much farther to go than NASDAQ to break the string of lower highs (1230). It has to take care of near resistance first.
Super SP600 move (2.2%) as the small caps jumped off the 200 day SMA (330) and raced toward key resistance at the 50 day EMA (340) and price resistance at that same level. It definitely had the rebound set up with the two intraday lows, the second occurring last Wednesday as the index tested lower and then rebounded. Strong price move but as with the NYSE overall, it still needs to gather in some volume to break through 340 and then 342.50 (the 50 day SMA).
DJ30
Low volume but strong price move as DJ30 rebounded off the 10,200 support level and edged out NASDAQ with its percentage gain. Still below the 50 day EMA (10,432) that stalled the last move and still in a downtrend since August, but a higher low to post a decent start to a recovery. Of course volume was lower as with the entire market. Same story; just letting it bounce and follow the other indices that are leading.
Stats: +169.78 points (+1.66%) to close at 10385
Volume: 263M shares Monday versus 357M shares Friday (driven by the CAT huge selling volume).
The chart: http://www.investmenthouse.com/cd/^dji.html
TUESDAY
Consumer confidence gives us another read at 10ET, but before that a ton of earnings will hit along with TXN that reported after the Monday close. Some said to buy it right before the close, and that may prove to be a winning move down the road, but after hours it was trading off just over a dollar. Revenues beat estimates and guidance was above the midpoint, but earnings per share missed due to some options expensing and an unexpected tax issue. Now investors may overlook those after the knee jerk reaction after hours and end up rallying the stock. That wasn't the case Monday night.
That shapes Tuesday up as one of those 'interesting' sessions where stocks are working on a bottom and indeed trying to rally out from it after last Wednesdays follow through while besieged by a new round of news that has the ability to derail the nascent rally attempt. Monday enjoyed good leadership and strong breadth, lacking only in volume. It followed an expiration week and thus lower trade the following Monday is not out of the norm. We need to see it pick up as SP500 tried to move through resistance and follow NASDAQ's lead.
We like the leadership Monday. A lot of stocks advanced as the breadth readings show, but there were also many stocks moving on strong volume. Thus while the overall market was not bought hard, there was concentrated buying in strong stocks, and that is not short covering volume: leaders are not being sold, they are being acquired and thus don't have that overhead supply and high short interest that causes these big rebounds that then fizzle. When the leaders are rising on volume that means there is some big money in the market buying.
Again, that can spread out from the Monday buying following expiration. Energy was showing life again Monday after positions were unwound to end expiration. Medical appliance and equipment was strong again. Tech was strong as well with some good leadership. How semiconductors perform Tuesday will tell more of the tale after the TXN earnings are chewed on. If the market is serious about rallying, it will tend to push aside the fact that TXN missed EPS because of a one-time tax event and focus on the revenues and the guidance that was a bit higher. A strengthening market will find the good points and build on them. A weakening market will go out of its way to find some reason to sell.
We saw enough strength in leadership (a lot of our stocks were running) to keep us looking for stocks coming off of tests or making the break higher. Big session with SP500 trying to handle resistance, and after that run to the close we can expect some early softness on the TXN news. A modestly soft opening will give the buyers an opportunity, and if they take it the shorts will be forced to cover some more.
Support and Resistance
NASDAQ: Closed at 2115.83
Resistance:
The 50 day SMA at 2124
2154 from January 2004 high
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:
The 50 day EMA at 2111
2100 was key resistance and support in the past
The 200 day SMA at 2073
2050-51 is price resistance from spring and summer 2005 consolidations
2018 is the early April high.
The August 2004/April 2005 up trendline at 2019
S&P 500: Closed at 1199.38
Resistance:
The 200 day SMA at 1199 is cracking
1200 was solid price support at one time
The 50 day EMA at 1207
1210 held in late September on the close.
The 50 day SMA at 1212
December 2004 high at 1219 and June high 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:
1183 - 1184 from November 2004 highs and July 2005 intraday low and a high way back in July 1998
1180 is the August 2003/August 2004 up trendline.
1165 - 1155 from late 2001/early 2002 double top
Dow: Closed at 10,385.00
Resistance:
The May high at 10,406 and 10,400, the bottom of the November/December range
The 50 day EMA at 10,423
The 200 day SMA at 10,504
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:
10,350 turned out to be support in the recent August and September pullbacks
10,250 held in the June and July lows
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 25
Existing Home Sales, September (10:00): 7.20M expected and 7.29M prior
Consumer Confidence, October (10:00): 88.0 expected and 86.6 prior
October 26
Crude Inventories, 10/21 (10:30)
October 27
Durable Goods Orders, September (08:30): -1.2% expected and 3.4% prior
Initial Jobless Claims, 10/22 (08:30): 340K expected and 355K prior
Help-Wanted Index, September (10:00): 36 expected and 35 prior
New Home Sales, September (10:00): 1250K expected and 1237K prior
October 28
GDP-Adv., Q3 (08:30): 3.6% expected and 3.3% prior
Chain Deflator-Adv., Q3 (08:30): 2.8% expected and 2.6% prior
Employment Cost Index, Q3 (08:30): 0.8% expected and 0.7% prior
Michigan Sentiment-Rev., October (09:45): 76.0 expected and 75.4 prior
End part 1 of 3
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