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us stock market, top stock pick
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01/03/06 Stock Split Report
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Stock Split Report Subscribers:
MARKET ALERTS
Targets hit alerts: None issued
Buy alerts: GRP (bonus); SU; RJF; CDIS
Trailing stops: INFY
Stop alerts issued: VMSI
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:
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SUMMARY:
- Stocks get late Christmas gift, finish upside after a tennis match session.
- Stocks post strong reversal on FOMC-related news, similar to January 3, 2001.
- Fed is clearly setting up the end of this rate hiking campaign.
- Solid bounce off 50 day EMA is a start to 'January indicator' and the rebound after testing the November breakout.
Two reversals end stocks sharply stronger, saved by Fed rate hike commentary.
Futures were very strong early on the heels of solid economic data from Europe (stronger than expected GDP readings). The revved up pre-market engine after a lackluster close to 2005 indicated some new money was ready to be put to work and gave the appearance that the market was ready to get serious to start the new year.
Stocks started stronger with NASDAQ and SP500 posting 10 and 6 point gains each. That lasted less than one-half hour as once more early strength, just like last week, fell apart. NASDAQ lost 15 points from the Friday close while SP500 showed relative strength, losing just 3 points. Nonetheless, the action was familiar and once more indicated a market trying vainly to find reason to hold onto the November breakout move.
The early news was mixed with the stronger European economic growth juxtaposed with new tensions between Russia and its former minions regarding natural resource ownership (showing that old KGB habits in Putin die hard). The US economic news at 10ET was not warming to the market, with the ISM and construction readings coming in less than expected. Stocks started to slip with energy standing out as just about the only strong sector.
Shortly after that news hit stocks managed to find their session lows, though it was hardly clear that was going to be the case with the FOMC minutes to come. Stocks managed to bounce and consolidate laterally ahead of the release; hope does not give up easily in a new year. It was still not enough to overcome the morning reversal from positive to negative; hope may have been present, but it was not overcoming the selling.
Then the FOMC minutes were released, and though it was clear there is a division on the committee as to how much inflation and liquidity is in the pipeline, there were rather dramatic statements about the Fed wrapping up this rate hiking round, and that brought the buyers to the table. Last week they put the wallets up; Tuesday they took them out when the Fed statement was released.
Volume jumped as stocks turned around. NASDAQ rallied 45 points from the release before giving some back at the close. SP500 jumped 20 points before shaving a couple off that gain late. Energy was still strong, but it was joined by a general rally that closed the indices with 1.2% to 2.8% gains. Pretty impressive. SP500 was the key. It never gave up the 50 day EMA, and after testing that level early, it spearheaded the rebound.
Despite that, we still note that the market had reversed from yet another attempt at an early rally and was selling off before being rescued by the FOMC minutes. That made everyone feel really good. The key question is whether there is any staying power here. Statements of policy can move the market, but you often see backsliding afterwards. As we noted previously, the end of rate hikes often do no lead to immediate, lasting market gains. Those are anticipated and built into prices ahead of the news. It then takes time to consolidate and set up for the gains that typically occur after the Fed completes a rate hiking campaign. This, of course, presupposes the Fed did not tank the economy with its rate hikes. With a flat yield curve last week, that is still an open question at this juncture, particularly with oil prices almost $20/bbl ahead of where they were at this time last year.
Is there staying power here?
As noted, Fed actions or statements can move the market sharply. They did that Tuesday, reversing a sell off in progress that was itself a reversal of an early, year-starting upside move. Now the market was not in the death throes. The indices were still holding their November breakouts (more or less), and as noted last week, many strong, leadership quality stocks on the report were holding up quite well. Thus with SP500 at the 50 day EMA, some good news had it primed to bounce. Solid leadership and holding the 50 day MA are key positives.
Still, the market has most of the same issues confronting it in 2006 even after the Tuesday Fed news. High energy prices, flagging housing market, economic expansion already 3 years old, and what is promising to be a brutal, punishing political year with high stakes mid-term elections in November. Impeachment talks regarding the wiretaps is the latest in the war between the parties where it seems reasoned discussion has been replaced by the 'shout down' approach: if you disagree with the other side (and that is SOP these days), then shout as loud as you can as long as you can. Never mind that every modern president has used this power and that the debate should be whether we want the President to hold this authority solely or require authorization and monitoring. Instead the current environment requires the sides to shout from the far right and far left about 'inherent powers' or impeachment. That is unhealthy for all aspects of the country. Instead of tackling and resolving the serious issues confronting us, Congress and the executive branch have devolved into the semantics game as have the courts where we debate the meaning of words as opposed to right and wrong. You don't get much done for the country in the environment. Just ask the Romans.
The point: this news managed to reverse a sell off Tuesday, a sell off that looked to be ready to take the market significantly lower a la January 2005 after another brief, failed early rally attempt. After this news plays out, the playing field is still the same. After all, the market was anticipating the Fed was almost done. Unlike 2005, it received some confirmation of this, and that helped boost the market. Like late 2004, however, the market built in that cessation ahead of the news (though to a lesser degree than it did in 2004 with that impressive August to December rally). Other than that, however, there is energy, the flat yield curve, etc. as noted above.
That takes us back to January 3, 2001 when the Fed cut rates after sending the market and economy lower. The market exploded higher . . . for about 2.5 weeks. Then the market resumed its selling because one rate cut does not turn around an economy. Indeed, as it turned out, a whole series of cuts could not reverse the selling; it took some tax incentives to get businesses to invest, and another 20 months, to finally get the market and economy back on track. As is the case, now, thought the Fed finally go the idea and cut rates, the same issues were out there, and one rate hike did not change that.
If the Fed quits hiking soon that is certainly good news for the market as it no longer has to fight the Fed. That does not mean all of the issues are gone, however. What the market will have to do is show us some follow through to this move. Even though the November breakout remained basically in tact ahead of the Tuesday move, with the other issues out there you want to see a strong follow through in the next week to show the buyers have come back again. That gives you a bit more confidence this was not a one-day wonder. The market has somewhat consolidated the late 2005 rally, using most of December to do it, and so it could move higher from here. Want to see the strong buying resume, however, because of the high level of bullishness and other factors aside from the Fed still facing the market.
THE ECONOMY
Fed gives the market a New Year's present by most accounts.
The Fed minutes were longer than usual. That is often the case when change is at hand because the change has to be justified. Just look at any Supreme Court case where a change to existing law is being made: pages and pages and pages of backup argument to support the change. This statement was not verbose to that extent, but great pains were taken to voice all sides on all issues confronting the rate hiking campaign.
It was pretty bullish stuff from the Fed though both the doves and hawks were painting the tape with their beliefs. The doves got the most attention, however, with the statement "although future action would depend on the incoming data, this characterization of the outlook . . . policy was seen by most members as indicating that, given the information now in hand, the number of additional firming steps required probably would not be large." The committed noted the "indirect effects of elevated energy prices on core inflation had been muted." "Some members" viewed the current Fed funds rate as 'within a broad range of values that might turn out to be consistent output remaining close to potential", i.e. that rates were at neutral. That was only 'some' of the committee, however. The minutes noted more hikes were required and depended upon the incoming data, but you can tell the growing consensus on the committee is that the rate hikes are just about over and that the Fed is indeed in the final innings if not inning of the hiking.
There were other interesting points of note as the Fed really opened up the 'transparency' ahead of Bernanke taking over. We know that 'measured' was kept in the statement in order to assure the financial markets that the Fed's additional hikes would be kept at 25BP and not accelerated to 50BP. The minutes explicitly noted some speculation in the financial markets that the Fed was going to pick up the pace based on what it had said previously and how the FOMC members had come out with guns blazing after the Fisher 'late inning' comments several months back. In addition, the Fed discussed the spreads on the cash bond versus the index bond, indicating that the Fed was in fact looking at the bond market to glean some of its information for where to take rates. Nice to throw that in after 13 rate hikes; better late than never, however.
Finally, the bond market had something to say about the minutes as well. An end to Fed hiking means an end to the erosion of bond values and thus bonds rallied. That did not further flatten or invert the curve, however, as all bonds rallied. The spread between the 2 year and 10 year closed at 4.37% on the 10 year versus 4.33% on the 2 year. No major shift, but the curve clearly steepened in response to the Fed comments as to its direction. Of course the dollar was slaughtered and gold shot higher, but that is typical when the Fed talks of easing off on monetary policy. As of the close, the odds of a hike at the first Bernanke Fed was down to 50 - 50.
THE MARKET
MARKET SENTIMENT
Overall sentiment remains too high. As noted last Friday, bullish sentiment topped 60% with bearish sentiment just below 21%. Too high on one end and too low on the other. Thus despite the solid reversal Tuesday, we have to keep watching the action carefully given the bullish sentiment.
VIX: 11.14; -0.93
VXN: 14.69; +0.43
VXO: 10.84; -0.93
Put/Call Ratio (CBOE): 0.75; -0.05
Bulls versus Bears:
Bulls: 60.4%, up from 58.8%. No drop off in the climb higher and there are way too many bulls at this point for the market's good. Four straight weeks bullishness has exceeded the 55% benchmark considered bearish. 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. The market is struggling to move higher, more leaders are balking, and the small caps are on a bumpy road. The rally needs to resume this week. Hit 44.8% on the low on this leg, just above the 43.5% low in May.
Bears: 20.88%, down from 21.6%. Continues to slide lower as bulls rise. Bad combination. Still above 20% that is considered a bearish reading, but close enough for horse shoes. 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: +38.42 points (+1.74%) to close at 2243.74
Volume: 2.088B (+58.5%). The big percentage gain is not the key; volume all last week was very low. No, the key was that volume was well above average and in the top the of the past few months. It also picked up steam as the market reversed and rallied higher. That shows buyers jumping onto the Fed train, an indication of accumulation. That is good, but we will have to see it continue Friday or by Wednesday next week to show the big money is back in once more and was just not in chasing the bus on Tuesday.
Up Volume: 1.563B (+1.212B)
Down Volume: 497M (-431M)
A/D and Hi/Lo: Advancers led 1.58 to 1. Quite mediocre given the size of the gain. It was a reversal session and downside breadth was not that bad after the morning downside reversal, so we are not going to get too uptight about this. It was still low, however.
Previous Session: Decliners led 1.32 to 1
New Highs: 120 (+45). This time we need to see this improve as NASDAQ approaches a new high. It has been a weak link all along for the moves since July 2005.
New Lows: 50 (-27)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
NASDAQ dove below the 50 day EMA (2211) on the low (2190) and then rebounded with the rest of the market. NASDAQ was definitely lagging, however, despite the fact its gain topped all but SOX. Breadth was poor; many NASDAQ stocks did not participate. That tells us there was some 'just in case' buying ongoing as big money loaded up on shares in the aftermath of the FOMC minutes. Remember, the index was in a dive before that news and its rebound. Nice reversal indeed, but how it responds to the recent highs and whether the strong upside volume continues and breadth and new highs improve will tell us if this move can survive.
SOX (2.84%) bolted off the 50 day EMA (479) to lead the market. It undercut that level intraday, but it held above the Friday intraday low and support at 475 in doing so; thus it was not a nasty decline as with NASDAQ. It held its breakout and looks solid on day one of the recovery as it heads for the prior high at 505.59 (closing) following the breakout. It has filled the early December gap, and that gives it good footing to take on that prior high.
SP500/NYSE
Stats: +20.51 points (+1.64%) to close at 1268.8
NYSE Volume: 1.909B (+72.71%). As with NASDAQ, the percentage, while impressive, does not mean much given the low volume sandwiched between the holidays. The key remains the overall strength of the volume, rivaling most of the best sessions since September. Strong upside buying as SP500 held key support and shot higher.
A/D and Hi/Lo: Advancers led 3 to 1. This is more like it. The NYSE indices, large cap and small, were running higher with excellent breadth showing widespread buying.
Previous Session: Decliners led 1.42 to 1
New Highs: 216 (+150). A long way to go as well even as the indices once more approach 52 week highs.
New Lows: 62 (-42)
The Chart: http://www.investmenthouse.com/cd/^gspc.html
SP500 never gave up its breakout, holding above the August high (1245 closing) and the 50 day EMA (1246.88) and then blasting off. Showed the best relative strength during the lateral move in December, and though it did not lead the gains Tuesday it is really the leader in this move because that strength helped keep the market together.
SP600 (1.53%) was solid as well, undercutting the 50 day EMA and SMA (351.42, 350.17) and rebounding for solid gains. Still has not broken up the head and shoulders with shoulder peaks at 357 - 358 (closed at 356.02) and a head at 362.80 (intraday). The large caps are strong, but the small caps are going to have to prove their strength with a move over that level. Tuesday they were bolstered by the large number of smaller energy companies on the index.
DJ30
Similar to the other indices, DJ30 slightly undercut the 50 day EMA (10,728) and then rebounded on rising, above average volume. In doing so DJ30 held above the middle or 'hump' of its 10 month double bottom with handle base at 10,700. Good shakeout and it helps clear the way for a run at a breakout above the handle highs (hit in late November) at 10,960. Key level for this index.
Stats: +129.91 points (+1.21%) to close at 10847.41
Volume: 302M shares Tuesday versus 191M shares Friday.
The chart: http://www.investmenthouse.com/cd/^dji.html
WEDNESDAY
Hard to top the FOMC news, particularly with auto sales and factory orders as the main economic data out on the second session of the year and the second session of another shortened week. It was quite a start to the year.
That brings up the 'January indicator.' It goes something like this: as goes January, so goes the year. As goes the first three days, so goes January. Thus by the transitive property of the markets (of dubious repute), if the first three days of the year post a gain, so should the market for the year. How big a gain? It doesn't say. What an indicator.
Much more important to us is whether the Tuesday move will hold the line and then show a follow through sometime between Friday and next Wednesday, i.e. another strong upside session with volume and breadth that shows the buyers are back in with strength, ready to drive stocks higher. With bullish sentiment extreme, a flat yield curve, high energy prices, a 3 year old expansion, an election year, and a slowly fading housing sector, this market needs to show us it can sustain a further move.
On the other hand, in the bigger picture, the market has been consolidating for two years following the big gains through the end of 2003 following the October 2002 bottom. Technically, it has built a good base off of that bottom and initial run higher. As we have discussed before, NASDAQ has built a nice, two year ascending triangle, and it broke out in November 2005. The breakout, however, was hardly spectacular, and thus this test has been iffy. The overall pattern is not, but it needs to set back up and show us a much stronger break higher. Perhaps Tuesday was the start of that move; as noted above, we will need to see a strong follow through session to show the near term move is part of a solid breakout from that longer term pattern.
SP500 has also formed a base post 2003, breaking higher in late 2004 and forming another base in 2005, an ascending pattern with a November breakout. Its move had more substance and more staying power on the test. It has provided strength to the market of late. SP600 has that shorter term head and shoulders, but over the past 6 months it has formed its third base since the 2003 breakout from the April 2002 to summer 2003 base. The latter base is a reverse head and shoulders pattern. SP600 has to overcome the near term toppy pattern, but as with the other indices, the bigger picture is positive.
Thus despite the issues confronting the market, its longer term technical picture is strong. That means we could suffer some near term struggles based upon some extreme sentiment and other issues, but then once more break higher. As we have noted, there is some strong leadership that has held up and was moving again Tuesday. That is providing the backbone and is keeping the longer term technical picture strong despite the near term clouds. Those near term clouds look as if they could influence much of 2006, however, so what we have to do is continue to watch the leadership and take advantage of those setting up and rallying from positions of strength.
Support and Resistance
NASDAQ: Closed at 2243.74
Resistance:
2251 is the January 2001 low
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:
The 18 day EMA at 2235
The 10 day EMA at 2232
2220 (2218 intraday) is the August high
The 50 day EMA at 2211
2192 from the January intraday high and the mid-July high.
2187 is the September high.
2178 is the January closing high
S&P 500: Closed at 1268.80
Resistance:
The recent highs at 1275
1267 to 1273 is the May and May 2001 peaks (1315 intraday)
1324 to 1329 from the October 2000 lows.
Support:
1264 from the December 2000 lows
The 10 day EMA at 1260.46
The 18 day EMA at 1259.72
1250 may prove to be some psychological support, but it did not hold Friday.
The August high at 1246
The 50 day EMA at 1246.88
The September high at 1243
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 10,847.41
Resistance:
10,868 is the December 2004 high
10,952 - 10,965 from Q4 2000 and late November 2005
10,985 is the March high
11,176 - 11,186 from April 2000
Support:
The 10 day EMA at 10,811
The 18 day EMA at 10,811
10,754 is the February high
The 50 day EMA at 10,728
10,720 is the high in the recent lateral move
The June highs at 10,646 to 10,656
Price consolidation at 10,600
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
January 03
Construction Spending, November (10:00): 0.2% actual versus 0.7% expected and 0.8% prior (revised from 0.7%)
ISM Index, December (10:00): 54.2 actual versus 57.5 expected and 58.1 prior
FOMC Minutes, December 13 (14:00)
January 04
Auto Sales, December: 5.7M expected and 5.5M prior
Truck Sales, December: 7.6M expected and 7.0M prior
Factory Orders, November (10:00): 2.4% expected and 2.2% prior
January 05
Initial Jobless Claims, 12/31 (08:30): 320K expected and 322K prior
ISM Services, December (10:00): 59.0 expected and 58.5 prior
Crude Inventories, 12/30 (10:30)
January 06
Non-farm Payrolls, December (08:30): 200K expected and 215K prior
Unemployment Rate, December (08:30): 5.0% expected and 5.0% prior
Hourly Earnings, December (08:30): 0.2% expected and 0.2% prior
Average Workweek, December (08:30): 33.7 expected and 33.7 prior
End part 1 of 3
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