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us stock market, trade stock
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12/10/05 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Target hit alerts: BBBB
Buy alerts: MCRS
Trailing stops: LRCX
Stop alerts: None issued
SUMMARY:
- Modest low volume gain Friday, but chips shake off INTC update and look ready to lead.
- Early Michigan sentiment read continues to improve.
- Fed ahead and a language change is expected.
- Investors hopeful as oil tries to set up right shoulder to bearish base.
- First loss in 8 weeks setting NASDAQ up for a bounce heading into FOMC meeting.
Oil and stocks pass each other on the way to a modest market rebound.
Once more stocks had a difficult time figuring out what they wanted to do. The entire week stocks were all over the map intraday though the direction for the week was slightly lower. Each session stocks tried an early rally only to give it away by the close. Friday stocks were showing more upside stamina, but by midmorning they were again in negative territory, turning an early bounce into losses. It was more of the same story.
More of the same but with an ongoing change. Thursday stocks gave up early gains yet again, but in the last hour NASDAQ bounced off of its 18 day EMA near support and took back a sizable chunk of its loss, and it did so with a solid volume jump. It did not close positive, but it also did not just thud to the bottom of the range and close. Despite the negative close breadth was positive. Signs of life. Friday NASDAQ and SP500 again tested toward their 18 day EMA, and again they rebounded. This time they found their way back to positive and they managed to hang onto the gains to the close.
Volume was lower so it wasn't any renewed buying surge, but it was a further progression in the change back to more bullish action after the market went flat following the strong bounce higher two Thursdays back that showed a lot of promise but lacked stamina. Significantly, the semiconductors, plagued by Intel's weak-kneed mid-quarter update early on, staged a reversal as well that even saw INTC turn back to positive. SOX tested the 18 day EMA as well Thursday and early Friday, but it posted an impressive recovery Friday, leading the market once again. It was a key leader on the recent move, breaking out to start the month. Friday's action looks as if SOX is ready to lead higher again. Very bullish to overcome disappointing news from a much followed big name. It did not hurt that analysts concluded that much of INTC's trouble resulted from low chip inventories everywhere, something bullish for the sector overall.
While the proximity to year end and memories of the rally to flop in early 2005 worked up some anxiety last week as to whether the rally could continue, the bigger picture as we discussed in the nightly reports is one of a market continuing a consolidation of a strong move in November. The main thing that threw everyone off was that strong rebound two Thursdays back that signaled the resumption of the rally. Only problem was, the market did not follow its own lead and spent the next week further consolidating, this time falling through the 10 day EMA and going to the 18 day EMA as it did in December 2004. That is really a typical level to test after a strong run higher. With no distribution sessions (no high volume on the selling), no high negative breadth, and very few breakdowns in strong stocks, the pullback was a pretty run of the mill consolidation of a good run. Again, the proximity to year end and the head fake from the strong move on December 1 added intrigue that was not really intrigue at all.
Now the market has made its pullback, but there is another obstacle ahead, and that is the FOMC meeting on Tuesday where the Fed will raise rates and likely change the language in its statement. That could influence the market if there is a surprise, but the market looks ready, as is often the case, to move higher into the announcement. Many say the market will be on hold ahead of an FOMC meeting. In reality, stocks tend to rise into the announcement. From there it depends upon whether the market is surprised. Thus the market is set to rebound, and it has set itself up to take the rather typical path it takes. The market tends to move in mysterious ways, but if you look closely, those mysterious ways tend to repeat themselves time and again.
THE ECONOMY
Sentiment continues to improve, righting the trend.
The preliminary December Michigan sentiment report posted a better than expected 88.7 reading, topping the 85.0 expected and 81.6 from November. Nice gain and a bonus in beating expectations.
The report hit 74.2 in October, a 13 year low, but it was a result of the Gulf storms and fears energy prices would 'super spike' in the aftermath. Didn't happen, gasoline prices fell, jobs growth remained solid, and thus sentiment, like hope, floated. The levels on the decline were never threatening those that indicate the consumer is going to stop consuming. Moreover, the dip lower that was trying to change the trend has been effectively erased with a two-month gain of 20% in the indicator versus the 4-month 23% loss from July to October. Thus the absolute levels never reached critical points and the trend did not break. Sentiment is a rubber band. It can stretch lower, but as long as it does not break, it snaps back without shutting down consumption to a point where we enter a recession or other significant economic slowdown.
The Fed is dead ahead.
This is supposed to be a critical meeting for the Fed, not with respect to a rate hike, but with respect to a language change. The market anticipates the Fed is going to drop 'measured' from its statement that insured a 25 BP hike each meeting. The Greenspan Fed likes to telegraph its moves (to a certain extent; Bernanke is supposed to do so even more), and before it makes a move it likes to prepare us. That started with the last FOMC minutes where several members discussed the need for a language change ahead. Now there has not been much other talk of that since, and that is concerning because the Greenspan Fed likes to let everyone, even the street sweeper (who, by the way, likely owns stocks based on the most recent Treasury Department data), know what it is going to do ahead of time. Outside of the FOMC minutes, there has not been much discussion of the language change.
There are other factors that could help, however. Despite the strong economic data that will likely keep the Fed raising rates for the remainder of Greenspan's tenures (mercifully a short times span), some of that very economic data suggests the Fed's job is about done. Productivity surged in Q3 to 4.3%, and in Phillips Curve terms (we want to keep it in language the current Fed understands) that means the GDP growth can be at least 5% per quarter without having any Phillips Curve inflation stress. Further, the core PCE (personal consumption expenditure), a Greenspan favorite, is heading lower fast after a spike in Q4 2004 and Q1 2005. Plenty of reason for the Fed to give itself some flexibility down the road.
Now here is the rub. The Fed may leave 'measured' in the statement but say that is likely to change in the near future if conditions continue on their current trend. That would be more with Greenspan's baby steps, tell them plainly approach and allow for the excise at the January 31 meeting. The Fed could say it was raising another 25BP but that it could remove the 'measured' language as the economic indications had improved to the point automatic hikes were no longer required. The problem with that is that the market is expecting the language change this time and not in January. That would be kind of a nasty trick or treat on the market, and it is the wrong season for that. Tough call, but we have a suspicion Greenspan may indeed leave 'measured' in but say it is just about ready to take it out. That is like kissing your sister and the market doesn't play that game.
Crude oil showing signs of setting up a breakdown toward year end. Sounds familiar.
Here we are approaching the end of another year and the promise of an oil price decline is once again anticipated. Unlike 2004, however, it is not widely anticipated. It is watched like the temperature each day on the financial stations, but most pundits and most consumers are resigned (or are getting to that point) that prices are high, are going to stay high, and will likely get higher.
While common sense says that demand and supply levels have created a stable floor for oil and indeed set the stage for ever increasing prices, the same scenario was set in the 1970's. I learned in school that oil supplies had peaked (Hubbard's Peak) and that we were going to be out in 25 years. Of course no one expected that technology might help us find a lot more oil where we thought it wasn't or allow us to drill in places where we knew there was oil but could not get to. Now with China, India and other industrializing nations wanting more, we are back at the Peak again and ready to run dry in the not too distant future. Once more we are not allowing for advances that will render more product. Moreover, we are also not taking into account we are within 15 years of mass produced, cost effective hydrogen vehicles, and vehicles are the largest burners of petroleum.
As for the oil market itself, the pattern for crude oil is forming up a 6 month head and shoulders base. It is currently rising to the June and July peak levels that formed the left shoulder here at $60/bbl. Note how oil made it back to that level this week and then Friday was knocked back to 59.39 Friday. There is indeed some resistance near 60. That, however, does not guarantee a rollover and drop to the low forties. As we have seen time and again, a market or stock or commodity can carve out this base and have most of it done and then blow up the pattern. That happened in late 2004 when oil was on the ropes and looked ready to swan dive. The stock market was all fired up about it and the prospect the Fed was almost done. It became clear that neither was going to happen, so instead of oil dropping, stocks dropped. The moral: it looks as if it is forming up for a drop, but the fat lady isn't singing yet. Further, energy stocks are not forming the same pattern but instead are forming much more bullish cup with handle and ascending triangle patterns. Oil is, as it always has been, slippery.
THE MARKET
MARKET SENTIMENT
There are two undercurrents of sentiment in the market right now. On the one hand, investment advisors are too bullish as the bulls versus bears survey showed even more bulls. Bears climbed as well, but the bulls are much more bullish than the bears are bearish. This first theme is a longer term one impacting this rally and on into 2006: too many bulls means most of the money has been put to work and there is not enough left to keep driving prices higher. That would mean a correction/consolidation is required to get some of the money out of the market to the point where a new rally could start and sustain itself.
Second, there is a near term worry harbored by many floor traders and market makers we are talking to that the current rally is going to go the way of the 2004 year end rally, i.e. nose dive as 2006 begins. This second theme is short term and applies to the current rally. While overall there is too much bullishness, near term the rise in concern about the sustainability of this rally is a positive for the rally to continue. Each time doubt has crept in the rally has resumed. As long as the price/volume action and leadership remain solid then the rally has some legs to year end as it uses these interim pullbacks to turn right back up.
VIX: 11.69; -0.52
VXN: 15.14; -0.3
VXO: 11.49; -0.53
Put/Call Ratio (CBOE): 0.82; -0.18. Moved over 1.0 on the close Thursday, suggesting the near term worry is getting close to the point the rally can bounce again.
Bulls versus Bears:
Bulls: 56.2%. Up slightly from the 55.8% last week. That makes two consecutive weeks that bullishness has exceeded the 55% benchmark considered bearish. As noted, the theory behind this reading is that when too many investors are bullish, then most of the money is in the market and it has a hard time sustaining itself. We continue to watch the nuts and bolts (price/volume action, leadership) closely for signs of weakening. Some leading stocks have dropped but thus far it has been limited. Hit 44.8% on the low on this leg, just above the 43.5% low in May.
Bears: 21.9%. Last week's 21.1% was the low water mark on this run thus far, and the bounce this week is a sign of that near term concern for this rally we discussed above. It is holding just over the 20% level considered bearish. It hit 29.2% on the high this cycle, just below the 30% level hit in May when the market bottomed at that time as well.
NASDAQ
Stats: +10.27 points (+0.46%) to close at 2256.73
Volume: 1.713B (-13.85%). Substantial volume drop from Thursday as trade fell back below average as NASDAQ posted a second bounce off the 18 day EMA. Thursday's high volume was not a bad thing given the intraday tap of the 18 day and solid rebound. Price/volume action remains superb on this move, and that continues the strong technical underpinnings to this rally.
Up Volume: 1.23B (+443M)
Down Volume: 450M (-729M)
A/D and Hi/Lo: Advancers led 1.51 to 1. Modest upside breadth, quite decent overall. The interesting feature with breadth last week was the positive breadth Thursday when NASDAQ closed lower. Breadth was very strong tow Thursdays back and since, during selling or buying, it has been modest. That is another positive.
Previous Session: Advancers led 1.05 to 1
New Highs: 123 (+17)
New Lows: 25 (-13)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
NASDAQ once again reached down toward the 18 day EMA (2236) intraday and then rebounded. Unlike Thursday NASDAQ managed to post a gain with this rebound. Volume was up Thursday as buyers moved in on the test; Friday it was lower ahead of the weekend. Not a bad end to a week that saw NASDAQ unable to continue the strong session on December 1 that looked ready to kick the rally higher again. Price/volume action has remained solid, leadership is still solid, and thus the pullback is rather typical. With SOX looking better Friday we are looking at a continuation of the rally this week.
SOX (1.8%) was somewhat impressive Friday given INTC's disappointing update. SOX tested the 18 day EMA (484.92) Thursday, and Friday it waived at that level before turning up and leading the market with its gain. SOX led on the recent leg higher and this action suggests it is ready to lead higher again.
SP500/NYSE
Stats: +3.53 points (+0.28%) to close at 1259.37
NYSE Volume: 1.401B (-15.56%). After some rising, average trade Thursday on the bounce off the intraday 18 day EMA test, Friday volume fell to the lowest since Thanksgiving. As with NASDAQ, price/volume action was solid leading up to this pullback and has remained solid in the pullback.
A/D and Hi/Lo: Advancers led 1.53 to 1. Modest upside breadth Friday, but not bad given the lackluster gains in the NYSE indices. As with NASDAQ, breadth was positive Thursday even with the indices lower, a good indication of underlying strength.
Previous Session: Advancers led 1.27 to 1
New Highs: 105 (-33)
New Lows: 62 (-17)
The Chart: http://www.investmenthouse.com/cd/^gspc.html
Tested slightly lower Friday, but held easily above the 18 day EMA (1252) before turning higher to post a modest gain. Thursday SP500 tapped the 18 day intraday and rebounded. Still a bit sluggish Friday, but the pullback has been showing good overall price/volume action and it is ready to move higher with SOX and NASDAQ.
SP600 (+0.32%) had two positive finishes to the week versus just one for the large cap indices. Very modest pullback for the index, holding above the 18 day EMA (354.80) on the intraday lows and the 10 December 2005 (357.35) on the closes. Very solid, and along with NASDAQ and SOX it is ready to break higher this week and notch itself a new all-time high.
DJ30
DJ30 posted a modest, low volume gain on sluggish trade similar to SP500. Unlike the other indices it was unable to hold the 18 day EMA (10,784) Thursday, and it could not retake that level Friday. Many are looking at DJ30 as the indicator for the rest of the market and are thus drawing conclusions the rally is in trouble. As noted Thursday, we don't view DJ30 as leading anything but itself.
Stats: +23.46 points (+0.22%) to close at 10778.58
Volume: 239M shares Friday versus 253M shares Thursday.
The chart: http://www.investmenthouse.com/cd/^dji.html
MONDAY
Lots of economic data this week starting with retail sales early Tuesday and the FOMC decision and statement that afternoon. That will dominate the action early in the week, but we anticipate the market will rise into the FOMC meeting. As discussed above, the pullback has set up the next move higher, and NASDAQ, SOX and SP500 look very good for a bounce higher heading into this week. The Fed might upset the apple cart by not changing its statement, but the set up is there for a move higher.
The rally is definitely getting long in tooth. The action, while overall very good, is not without blemish. Last week saw some strong, fundamentally and technically sound stocks dive lower (e.g. CMTL, EAT). Overall leadership remains solid, but there are some cracks forming, and in conjunction with the extreme bullishness it is a sign the rally is getting worn and will need a deeper test after another run or two. Incidentally (or not), that would roughly coincide with the first part of 2006, and we have expressed our doubts about how the market will fare in the coming year.
That has something to do with remembrances of what happened to start 2005, but it is also grounded in the continuing rise in energy costs as well as the Fed and what it does with interest rates and excess liquidity. Further, history shows that indeed the market rallies ahead of the Fed ceasing a rate hiking campaign, but once the Fed does stop the market typically struggles. The reason is that the market rallied in anticipation of the cessation, and, most importantly, the market has to deal with the economy struggling because 8 out of 10 times the Fed goes too far and stalls out economic growth. Thus far the economy is still very strong, but it is typically strong even as the Fed goes too far.
Nearer term we are looking for stocks to rebound from the pullback, with NASDAQ, SOX and SP600 leading the final move into the end of the year. This pullback is providing some opportunity as strong stocks pullback and set up with the market for the next move higher.
Support and Resistance
NASDAQ: Closed at 2256.73
Resistance:
2264 from the June 2001 peak
2273 is the January 2001 closing low
2288 from December 2000 low.
2328 from the May 2001 peak
3015 is the December 2000 peak and the October 2000 low
Support:
2251 is the January 2001 low
The 10 day EMA at 2250
The 18 day EMA at 2236
2220 is the August high
2205 was intraday resistance last week
2192 from the January intraday high and the mid-July high.
2187 is the September high.
The 50 day EMA at 2189
2178 is the January closing high
S&P 500: Closed at 1259.37
Resistance:
1264 from the December 2000 lows.
1267 to 1273 is the May and May 2001 peaks (1315 intraday)
1324 to 1329 from the October 2000 lows.
Support:
The 10 day EMA at 1258
1250 may prove to be some psychological support.
The 18 day EMA at 1252
The August high at 1246
The September high at 1243
The 50 day EMA at 1234
March 2005 closing high at 1225 and intraday high at 1229.11
December 2004 high at 1219 and June high at 1220
1210 held in late September on the close.
Dow: Closed at 10,778.58
Resistance:
The 18 day EMA at 10,785
The 10 day EMA at 10,815
10,868 is the December 2004 high
10,952 - 10,965 from Q4 2000
10,985 is the March high
11,176 - 11,186 from April 2000
Support:
10,754 is the February high
10,720 is the high in the recent lateral move
The June highs at 10,646 to 10,656
The 50 day EMA at 10,650
Price consolidation at 10,600
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
December 12
Treasury Budget, November (2:00): -$61.0B expected and -$57.9B prior
December 13
Retail Sales, November (08:30): 0.4% expected and -0.1% prior
Retail Sales ex-auto, November (08:30): 0.1% expected and 0.9% prior
Business Inventories, October (10:00): 0.5% expected and 0.5% prior
FOMC policy announce (2:15): 25BP rate hike and removing 'measured' expected.
December 14
Export Prices ex-ag., November (08:30): 0.6% prior
Import Prices ex-oil, November (08:30): 0.8% prior
Trade Balance, October (08:30): -$63.0B expected and -$66.1B prior
Crude Inventories, 12/9 (10:30): 2.720M prior
December 15
NY Empire State Index, December (08:30): 18.4 expected and 22.8 prior
CPI, November (08:30): -0.4% expected and 0.2% prior
Core CPI, November (08:30): 0.2% expected and 0.2% prior
Initial Jobless Claims, 12/10 (08:30): 327K prior
Net Foreign Purchase, 0 (09:00): 0 expected and 101.9B prior
Industrial Production, November (09:15): 0.5% expected and 0.9% prior
Capacity Utilization, November (09:15): 79.8% expected and 79.5% prior
Philadelphia Fed, December (12:00): 14.0 expected and 11.5 prior
December 16
Current Account, Q3 (08:30): -$203.6B expected and -$195.7B prior
End part 2 of 3
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