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us stock market, trade stock
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11/08/05 Stock Split Report
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Stock Split Report Subscribers:
MARKET ALERTS
Targets hit alerts: None issued
Buy alerts: VTIV
Trailing stops: BRL
Stop alerts issued: NTES
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 SSR alert service you can sign up at the following link:
http://www.investmenthouse.com/alertssr.htm
SUMMARY:
- Lots of teeth gnashing over TOL earnings, but market action remains excellent.
- TOL warning not the economic swan song it was made out to be.
- Patiently waiting to buy some leaders after this pullback to test the recent gains concludes.
TOL earnings forecast fails to take a toll on the market.
High end homebuilder Toll Brothers warned that 2006 was not looking as good as it was just last quarter, and that raised the hair on the back of many economists and brokerage houses about the economic future. If TOL was slowing then the housing market was slowing, and that meant many of the sectors contributing to the building boom would be slowing, and thus logically the consumer would be slowing as well.
That torrent of relative illogic dominated the headlines pre-market and indeed through the end of the session. Futures were lower from the start, and that carried over into the session. Dire predictions were made about the future of the economy and thus the market if the housing sector was rolling over. You would think the market was being led to slaughter from the rhetoric.
The news did have its impact as the housing sector, materials sector, and other building sectors sold off. Outside of that, however, the market action was excellent. The large cap indices fell less than 0.5% while the small and mid-caps struggled but still closed down less than 1% each. Volume was running heavier early on NASDAQ, but by the close both NASDAQ and NYSE trade was lower. Breadth was not bad at all considering the small and mid-cap lag (-1.6:1 NYSE, -1.5:1 NASD). The indices eased back on low volume, testing the strong move higher to this point (and the low volume drift higher the prior two sessions). This is just the action we wanted to see when this upside surge ran out of steam.
Leaders mirrored the overall action, easing back toward near support as well. We really like this action because it sets up strong stocks for new entry points. We like to go after winners that are giving us another entry point; they have shown that investors like them and why not just treat a new entry point like a new play altogether and let it run higher for you again? Well, nothing. Concentrating on winners is our favorite strategy. We look at a lot of stocks but as you know, we continue to look to the leaders as they give us new entry points on their runs.
This market pullback is giving us just what we like to see after a strong move higher: a nice orderly test on lower volume and moderate breadth. We also like how the market is responding to trumpeted bad news; it sold but as noted it was not a seller dominated dump lower. Once again the market shows its new strength even as bad news is heralded as the economy's downfall.
THE ECONOMY
TOL forecast and its potential ramifications overblown.
The lead story in the market Tuesday was the lowered forecast in the housing sector by TOL. As noted, that worked to tank the housing sector and those sectors tied to construction (e.g., FRK in the cement business), the sectors closely tied to TOL's business.
Given the dire predictions for the rest of the economy you would have expected the rest of the market to suffer as well. If the predictions that TOL was a harbinger for the rest of the economy then investors would avoid the Christmas rush and start selling today. Indeed you would expect a really ugly high volume sell off.
That didn't happen and there are very good reasons it did not. First, TOL is in the higher end of the housing market, building what are called luxury communities. It is not the ultra-luxury level where homes sell for several millions, but it is at the top of the non-custom builder market. As we have discussed for over a year, the top end is not showing the strength it did through 2003. There are no doubt still areas where the luxury market is strong, but outside California, Florida, New York, and some mountain resorts, the high end is definitely slowing. Real estate agents across the country have been telling us this for over a year. TOL is now feeling the impact as well.
The high end typically is the first part of the market to slow. It is the first to pick up when the economy recovers from a downturn as well. This is nothing new or outside common knowledge, and thus the near panic mentality in the homebuilding market Tuesday as analysts and investors concluded if the high end was starting to slow then the rest of the market would follow.
True, but that leads into our second reason as to why this does not spell eminent doom for the economy. In the economic cycle, housing is an early recovery sector. When the economy recovers from a downturn interest rates are low, and that fosters home buying. This time the housing sector not only started early, it never really slowed down. After 9-11 people sought safety at home and remodeled their homes and bought new ones. As rates continued to fall on the fear of deflation, the market only grew stronger driven by the 'cocooning' effect and lower rates. Rates remained historically low until this year, and that continued the boom. Indeed, they are still low now, but relative to the past few years they are getting to the point where some in the market are being priced out whereas just last year they would qualify for a home loan.
Thus a slowdown after years of boom is not that surprising, and indeed, it is normal in an expanding economy. Everyone knew it would come as rates rose. Indeed, not surprisingly, housing stocks peaked in mid-summer as long term rates started to make noise about breaking higher. TOL gapped down Tuesday, but much more damage had been done from its $58 peak in July down to $35 in late October. The housing market's run was extended well past its normal lifespan due to abnormally low interest rates. Now that interest rates are rising after a long, long run, the market is starting to cool. It isn't crashing, it is starting to cool. That does not mean the economy is ready to roll over just because the housing market slows. Again, the housing market slows in any expansion. It helped keep the economy from going into depression after 9-11, and it helped bring it out of recession as well. It will not help the economy to have housing slip to more average levels, but by itself it won't be the end of the expansion.
Of course, the Fed can always overdo things.
As discussed before, the Fed has the housing market in its sights. It does not admit it, but after a laughing dismissal of a reference to a housing bubble in front of Congress, its comments and statements have increasingly demonstrated the Fed is viewing the housing market as an 'excess' just as it viewed the stock market as an 'excess' in the late 1990's. Its goal is to bring about a 'soft landing'. You know what that is: that is where the Fed hikes until the target buckles and collapses.
That is what we are fearing, anyway. The Fed's history is one of 'excess' in its won right, i.e. excess in rate hikes. Former Fed governor McTeer assures us that Greenspan has learned his lesson about going 'one hike too far,' but he has yet to demonstrate the lesson is learned, and with the Fed's track record it is easy to get worked up. That is what we fear more than TOL's forecast. That forecast is part of a normal economic cycle. The Fed is not. Well, it pokes its nose into any cycle once things get going well, so maybe it is part of the cycle.
In any event, while the TOL forecast is not that out of line with history, that does not mean the economy is going to skate through 2006. The Fed is still on the table, and the market is betting better than even money that Bernanke is going to raise rates another 25BP in the first meeting after Greenspan leaves. That means a Fed funds rate of 4.75%, and where the yield curve is at that point remains to be seen. Ten year rates were down Tuesday, falling near 4.5%, a sharp decline from 4.67% last week. Only time will tell, but the Fed is still playing with fire as the 2 year note is now at 4.41.
The Fed is betting on the curve holding through the January 31 rate hike. In and of itself, it might just do that. As we have often discussed, however, the Fed does not conduct its business in a vacuum. Unanticipated outside influences always come to bear, and that makes a prolonged rate hiking campaign a gamble. The Fed has many hikes in the pipeline that have not yet impacted the economy. If there is another upset to an already maturing expansion, then we may be in for another recession in 2006. The economy has enough to face with high energy prices and a maturing expansion; it could likely weather an outside hit similar to the Gulf storms, but if Fed rate hikes keep peppering away, its immunity to the flu, from any source, is lowered.
If the Fed is focusing on the housing market as we believe, it should like what it hears from TOL and then perform an inventory of where the housing market is. The signs show it is peaking and is in the process of putting in an orderly top. The Fed should declare victory very soon and throw a party for Greenspan. Hell, I will buy the beer. If it continues to hike past January 31 just to prove how tough Bernanke is, a problem is coming. Posturing is one thing; thoughtful, meaningful action or non-action, however, is what really counts to the markets.
THE MARKET
MARKET SENTIMENT
VIX: 13.08; -0.09
VXN: 15.56; +0.38
VXO: 12.45; -0.06
Put/Call Ratio (CBOE): 0.73; -0.15. Note that put activity decline on a downside session. Not many sellers in the market and now many betting this pullback will take it down even with the gloom about the TOL forecast.
Bulls versus Bears:
Bulls: 46.4%. After a month-long decline to 44.8%, bulls started back up on the heels of the bottom and the gains put in since. Never got as deep as the May low at 43.5%, but good enough to get this move started. Bottomed in May at 43.5%.
Bears: 26.8%. Sharp drop in bears as well, down from 29.2%. Hit a high for the year at 30% in early May.
NASDAQ
Nasdaq
Stats: -6.17 points (-0.28%) to close at 2172.07
Volume: 1.64B (-8.15%). Volume was running higher through lunch, but in the afternoon trade backed off and NASDAQ finished with lower volume to compliment the nice, easy pullback for the session. After the weaker volume move higher the prior two sessions, this action on a down day was good to see.
Up Volume: 787M (-119M)
Down Volume: 835M (+51M)
A/D and Hi/Lo: Decliners led 1.47 to 1. Very modest downside breadth on a modest downside session.
Previous Session: Advancers led 1.28 to 1
New Highs: 81 (-46)
New Lows: 58 (+13)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
NASDAQ opened soft, gapping slightly lower. It never threatened near support, rebounding from 2166 on the early drop. It tried to move back through 1278 resistance from the January 2004 high once more, but after moving to 2181 it faded into the close, leaving 2178 still standing. Without much volume the inability to take out that resistance was not surprising. It was a very nice, orderly pullback on below average volume, showing a doji. Likely has more downside to come before it is ready to resume, but this is the action you want to see on a pullback.
SOX (-0.22%) held steady over the 50 day EMA (451), tapping the 50 day SMA (457) on the high before fading back to close flat for the session. This continues its lateral move over this support level after gapping higher last Thursday along with NASDAQ. The lower intraday tests have partially filled that gap, but only half of it. Might see it actually make a dip lower intraday down toward the 18 day EMA (444.82) before this lateral move is over. Like how it is holding its gains, however, being stingy along with the rest of the market.
SP500/NYSE
Stats: -4.22 points (-0.35%) to close at 1218.59
NYSE Volume: 1.407B (-4.19%). Volume was lower all session on NYSE, as these indices eased back in their lateral test of the strong move higher. As with NASDAQ, very good price/volume action as the indices consolidate their gains.
A/D and Hi/Lo: Decliners led 1.59 to 1. Modest downside breadth, particularly when you consider the weakness in the small and mid-caps.
Previous Session: Advancers led 1.28 to 1
New Highs: 67 (-28)
New Lows: 104 (+14)
The Chart: http://www.investmenthouse.com/cd/^gspc.html
SP500 opened flat and then faded rapidly to the session low at 1216. It was unable to hold onto some support at 1220, but it never threatened the next level lower near 1210 (the 50 day SMA) either. It held within the range of the past four sessions (the low of the range at 1214.45) as it eased back on very low, below average volume. As with NASDAQ, very good price/volume action as SP500, unlike NASDAQ, has started a good handle or lateral consolidation of the strong move higher. Its handle is three sessions old, giving it a very nice launch point for the next move higher.
SP600 (-0.70%) and SP400 (-0.73%) led the downside action, but the moves were still contained within the recent lateral range and were also on that very low NYSE volume. Indeed, SP600 is moving laterally over the 50 day SMA (341.85) on lower and lower volume. That is excellent action, shaking out the sellers while showing no deterioration in the strong action that brought it higher off of the October double bottom. May take another session to totally form up, but it is doing so nicely.
DJ30
The industrials could not continue their leadership from Monday, posting a slightly larger loss than NASDAQ and SP500. Low volume on the pullback, however, just as you want to see. On this test it needs to hold the 200 day SMA (10,499) on the close to set up the run at 10,600 and then 10,719, the August high.
Stats: -46.51 points (-0.44%) to close at 10539.72
Volume: 201M shares Tuesday versus 241M shares Monday.
The chart: http://www.investmenthouse.com/cd/^dji.html
WEDNESDAY
We continue to like the action the market is showing. A strong price and volume move higher to end October and begin November. A light volume pullback. Refusing to give up much of the gain. Shaking off potentially damaging data. Hard not to like that.
We also like the action of leaders that continue, as does the market, to show solid price and volume action. We are looking to use this pullback to set up new buy points for leading stocks on the report and others that we wanted to get in but have been waiting for the right time.
It is likely to take another session or so to set up. We need to be patient, let it finish the pullback, and then step in. NASDAQ has been rising and Tuesday was its first pullback session. That is why it might take another session or so to get fully set up. The market has weathered earnings with mixed outlooks, more Fed-speak, rancor in DC that is likely to stall beneficial legislation, and it is still showing very good action along with the leaders. We are going to continue to take advantage of that as the market continues its strength.
Support and Resistance
NASDAQ: Closed at 2172.07
Resistance:
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:
2154 from January 2004 high
2144 is the October gap up point.
2141 is the 10 day EMA
2121 is the August downtrend.
The 50 day EMA at 2119
2100 was key resistance and support in the past
The 200 day SMA at 2076
2050-51 from spring and summer 2005 consolidations
2025 is the early October low
2018 is the early April high.
The August 2004/April 2005 up trendline at 2025 that forms the bottom of the big triangle pattern
S&P 500: Closed at 1218.59
Resistance:
December 2004 high at 1219 and June high at 1220 is not totally broken
March 2005 closing high at 1225 and intraday high at 1229.11
The September high at 1243 and the August high at 1246
Support:
1210 held in late September on the close.
The 50 day SMA at 1210
The 50 day EMA at 1207
1200 was solid price support at one time
The 200 day SMA at 1200
1190 from prior prices
1183 - 1184 from November 2004 highs and July 2005 intraday low and a high way back in July 1998
1187 is the August 2003/August 2004 up trendline
The October intraday low at 1168 is a key point to watch
1165 - 1155 from late 2001/early 2002 double top
1140 from the April low
Dow: Closed at 10,539.72
Resistance:
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:
The 200 day SMA at 10,499
The 50 day EMA at 10,433
The May high at 10,406 and 10,400, the bottom of the November/December range
The 18 day EMA at 10,432
10,350 was support in the recent August and September pullbacks
10,250 held in the June and July lows but is blowing out 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.
November 07
Consumer Credit, September (15:00): -0.1B actual versus $5.8B expected and $7.9B prior (revised from $4.9B)
November 09
Wholesale Inventories, September (10:00): 0.3% expected and 0.5% prior
Crude Inventories, 11/4 (10:30)
November 10
Export Prices ex-ag., Oct (08:30): 1.1% prior
Import Prices ex-oil, Oct (08:30): 1.2% prior
Trade Balance, September (08:30): -$61.8B expected and -$59.0 prior
Initial Jobless Claims, 11/05 (08:30): 320K expected and 323K prior
Michigan Sentiment-Prelim., November (09:45): 76.0 expected and 74.2 prior
Treasury Budget, Oct (2:00): -$50.0B expected and -$57.3B prior
End part 1 of 3
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