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01/12/06 Investment House Daily
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Investment House Daily Subscribers:
MARKET ALERTS:
Target hit alerts: BRCM (Took some interim gain)
Buy alerts: ALO; ESLR; WRES (bonus)
Trailing stop alerts: None issued
Stop alerts: None issued
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:
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SUMMARY:
- Market starts its pullback after showing some wear Tuesday and Wednesday.
- Trade deficit negative, but stronger exports narrow the gap.
- Time to be patient and let market make its test, see which stocks hold support for next move higher.
Stocks finally give up for a session, post lower volume decline.
The upside rally did not want to let go, fighting against the waning momentum on Wednesday. Thursday, however, the upside finally ran out of gas for the near term. Yes AAPL, SNDK and some other big movers the past week managed to post another gain, but they were the holdouts and indeed they closed well off their highs. After seven consecutive gains stocks finally gave back some ground, but in keeping with the rally, the action was almost perfectly to script.
Futures were weaker to begin with as the early earnings continued to 'underwhelm.' Foreign markets were flat, oil was up, and Iran was the topic on most floor traders' lips. When outside events are the dominant conversation topic you can bet orders are light. Sure enough the market started weak, but it did manage to hold modest losses once more and approached flat midday as stocks showed yet another comeback performance. They were on the verge of turning positive when the bids dried up after lunch. That led to a 17 point swing on NASDAQ and a 7 point SP500 drop, basically killing off the internal consolidation where the indices held steady for 4 hours.
The indices fell but held well above near support. Volume faded on the move; it was no weak volume session but it was down from the prior, and that is what you want to see. That tells you there is no major selling, i.e. no big money dumping stocks. Breadth was decidedly negative but was not out of hand (-1.7:1 NYSE, -1.5:1 NASDAQ) as most stocks faded back toward near support without a lot of breakdowns.
Basically it was a typical pullback after the market started to show some signs it was stretched on Tuesday and Wednesday. Nothing out of the norm, nothing to indicate the move is going to turn over and dive lower. Oil remains an issue; it rose to 64.49, slowly working toward post-Katrina levels without any storm stirring in the Gulf. That is an issue ahead in 2006, but it was not the issue Thursday. The pullback was a normal bout of profit taking after a strong accumulation run to start 2006. We will let it make the test and look for opportunities as strong stocks hold and start to rebound and as money works its way into other areas of the market.
THE ECONOMY
Trade gap falls 5.7% on stronger than expected exports.
The $64.2B deficit was better than the $66B expected (and $68.1B in October), helped by the strong sales in aircraft (+$694M) and even autos to overseas markets. Indeed, exports rose to a record $109B, accounting for the unexpected drop along with a 7.3% decline in crude imports that pushed imports down almost 1%.
Of course, the decline still ranks the month as the third biggest gap ever, and with oil prices rising again, we are not going to see the relief in the gap as in November. The trade gap exploded after the Gulf storms shut in most of Gulf of Mexico production and we had to import more barrels to keep the economy going. Lower prices helped offset those imports, but now prices are rising back close to Katrina levels. Production has improved, but it has not offset the rise. Overall, imports continue to grow at 13% year/year versus 9% growth in exports. With the return of oil prices, it is not likely we will see the trade gap disappear anytime soon.
Indeed, with oil prices rising we will continue to see more and more treasury buying from the UK where the lion's share of the buying is coming from. OPEC countries typically use the UK as its point of departure for its buys of treasuries and thus the large buys emanating from the UK. That keeps the worry alive that at some point those countries buying dollars from their producers selling to the US and then recycling them to the US via treasury purchases will decide to look elsewhere. That ignores reality at this stage where many countries rely on US consumption to keep their economies going. At some point, however, some of these 'emerging' nations will realize they can buy their own goods as their overall standard of living and wealth rises. That will cause a dramatic rumble in the world economy, especially in the US.
So what do you do? Those complaining say the US has to save more and buy less foreign goods. 'Saving' by putting money into accounts paying out 1.5% (the government's definition of saving) is not going to happen. About the only thing we could do is start a huge 'buy American' campaign and urge consumers to invest in US businesses. With an aging Baby Boom population, however, a major demographic is going to start dying off long before any difference could be made.
Moreover, given that a significant portion of the deficit is the direct result of necessary oil imports, and as seen in December, oil demand rebounded as prices fell, we are not going to cure the trade gap by simply buying American and investing in America. As long as we have to have oil to run our economy we are going to have a trade deficit. We can pass regulations limiting the number of barrels a family of four can consume and thus reduce the usage and theoretically the amount imported, but that is folly. We would wreck our economic output and our standard of living simultaneously. That is a non-starter with anyone you talk to other than the 'greenest' of the greens (even beyond tree-hugging).
What we have to do is focus our efforts on eliminating the major source of oil usage in the US: vehicles. At current rates of scientific advancement and economic efficiencies (i.e. how economic it is to adopt a new technology versus using the old), hydrogen cars are 15 years away. What we need to do is provide incentives to invest in and push for faster development of workable, cost-effective hydrogen powered vehicles.
That would focus a lot of investment dollars in the US (helping the savings rate if it is measured accurately, i.e. by investments in the economy) and it would also help achieve the twin goals of maintaining our standard of living and reducing our need for oil. It would also make us once more a technology leader that the rest of the world could look to in order to help with their own fossil fuel dependencies. Imagine reducing our need for oil imports by 50%. Prices would sink and those industries that still required the use of petroleum would be more prosperous because energy prices were lower. We could even give incentives to shift the majority of the heating and cooling in the US to geothermal, a system many times more efficient than conventional 'air to air' means.
Encouraging certain actions is nothing new. It takes more than wearing 'WIN' buttons as proposed by Greenspan in 1974 to somehow beat inflation ('Whip inflation now'). It takes more than 'buy American' campaigns or the current 'Gee guys, let's conserve' comments from the administration. It takes more than efficiency standards that, as we found out last week, are meaningless as most vehicles come nowhere near meeting the projected averages the automakers say they have. We need bold steps, as bold as the space program in the 1960's. Let's give industry and individuals real incentives to make this happen, and the best way is M-O-N-E-Y. Tax incentives, investment incentives, individual homeowner incentives in the form of tax credits. That is how you get industry and individuals to act in a free enterprise society.
THE MARKET
MARKET SENTIMENT
VIX: 11.2; +0.26
VXN: 16.24; +1.01
VXO: 11.2; +0.54
Put/Call Ratio (CBOE): 0.74; +0.11. Starting to rise again but well off levels that would indicate any selling is near an end. Gee, it just started after a strong rally.
Bulls versus Bears:
Bulls: 55.7%. A sharp drop from the 60.4% the prior week, reversing a steady climb through 55%. Well, not reversing it, but putting a big dent in it. Still above the 55% level considered the threshold into excess. It won't stay there, however, given the strong surge this week. Hit 44.8% on the low on this leg, just above the 43.5% low in May.
Bears: 23.7%, up from 20.88%. That was basically the low point on this move and bulls got a bit more skittish last week as the major indices sold to the 50 day EMA. Good surge, taking it out of the danger zone, but likely to fade after this week's rally. 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: -14.67 points (-0.63%) to close at 2316.69
Volume: 2.061B (-15.04%). Volume was not light, coming in well above average and equal to Monday and Tuesday levels. It was, however, lower than Wednesday and that is a positive. Relatively it is high but we noted a drop in trade as the market sold mid-afternoon. That does not suggest buyers jumping in on the downside but some profit taking after a strong upside run that demonstrated consistent, strong volume accumulation.
Up Volume: 828M (-740M)
Down Volume: 1.211B (+390M). Trade was close both upside and downside, another indication there was no heavy selling as NASDAQ posted its first loss in 8 sessions.
A/D and Hi/Lo: Decliners led 1.56 to 1. Quite modest breadth though stronger than the upside breadth on the recent upside sessions.
Previous Session: Advancers led 1.05 to 1
New Highs: 182 (-34)
New Lows: 18 (-6)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
NASDAQ was showing signs of weakening Tuesday and Wednesday, and those finally were strong enough to send NASDAQ modestly lower on lower volume. The move has pushed NASDAQ well above near support at 2300 and then at 2292, and we expect some further testing to close out the week and even early next week before NASDAQ can consider moving back up. NASDAQ has been a leader with many market leading stocks at the fore. Now we let them make their test of near support and set up for the next move in this rally.
SOX (-1.33%) led the move back up and led on the downside Thursday. No surprise as its beta, a measure of volatility, is much higher than the other indices. Similar to NASDAQ, it has made a solid move but stalled out at intermediate resistance that ranged from 532 to 536. Next resistance, and key resistance, is 561. Looks as if it needs a further test before it rebounds, but we don't expect it to fall to the 10 day EMA (515.54) on this pullback.
SP500/NYSE
Stats: -8.12 points (-0.63%) to close at 1286.06
NYSE Volume: 1.701B (-2.35%). Volume fell on NYSE as well, but it too was still strong. We like, however, that it was lower than all but one session of 2006. That indicates that there truly was less action on the downside, i.e. the sellers were not taking over.
A/D and Hi/Lo: Decliners led 1.72 to 1. Stronger than Wednesday's upside breadth, but also weaker than most of the solid advances shown by the NYSE indices.
Previous Session: Advancers led 1.28 to 1
New Highs: 214 (-84)
New Lows: 29 (-10)
The Chart: http://www.investmenthouse.com/cd/^gspc.html
Gapped a bit lower and then sold off with NASDAQ in the afternoon after trying to consolidate laterally all morning and through lunch. SP500 has lagged a bit on this move after showing the relative strength that kept the market together in December as the rest of the market weakened. A nice, easy pullback to the 10 day EMA (1280) or support at 1275 sets it up well to continue the move, and is not a very far drop from the Thursday close.
SP600 (-0.61%) was middle of the road Thursday, easing back with most of the other indices and posting mid-range losses. Solid break to a new all-time high on the rally as the small caps regained leadership status and now a nice and thus far orderly test in progress. A move back to the 10 day EMA (362.79) or the 18 day EMA (360.21) sets it up for the next move in this breakout.
DJ30
DJ30 gave up 11K and 10,894, but it was on lower, below average volume and the index still closed well above the 10 day EMA (10,938). As with the other indices, a very orderly pullback that is easily holding above near support thus far.
Stats: -81.08 points (-0.73%) to close at 10962.36
Volume: 244M shares Thursday versus 266M shares Wednesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
FRIDAY
Economic data takes the fore with earnings Friday as retail sales and PPI hit the tape. Those are some key indicator for the Fed, though both of them are indirect and not Greenspan favorites. Indeed, this Fed has almost dropped its Phillips Curve bent and admitted that we can have strong retail sales, low unemployment (basically, prosperity) without inflation. Man, if that lesson can hold over into the Bernanke Fed (and, of course if it is more than lip service from the almost defunct Greenspan Fed), our economy might fare better than thought.
In any event those reports will add spice to the action. The will likely not change the market direction near term, however. Nothing short of stupendous earnings and guidance from key players could turn the needed pullback that has just started. In short, the market is due for this pullback, and just as it ignored rising energy prices on the way up, it is likely to ignore any positive data right now and go about the business of testing and setting up the next move. Big, important news trumps most all action, but without it, the market usually does what it is technically set up to do. After a 5% gain in NASDAQ in a week, it is ready to make a test.
Thus we are going to continue being patient and let stocks make the test and set up for the next move. We will be watching the likes of SNDK, MRVL, MSTR, AAPL, BRCM, NVDA, and the many strong stocks in many sector as to how they perform on the pullback. We will look for those holding support on lower overall trade and then rebounding on a good shot of volume. The first test of a breakout move is a great place to enter, one of our favorites. It shows the buyers are moving back in once more and there is still plenty of upside. Indeed, many stocks start their strongest and longest moves after that first test.
We will let strong positions test and hold support. This will weed out some of the weaker stocks and allow us to focus in on those that hold up and are ready to lead the way back up. When they start we will start acquiring them. This often happens before the whole market moves, hence the name leaders.
Support and Resistance
NASDAQ: Closed at 2316.69
Resistance:
2328 from the May 2001 peak
3015 is the December 2000 peak and the October 2000 low
Support:
The 10 day EMA at 2292
2288 from December 2000 low.
2278 is December 2005 intraday high.
The 18 day EMA at 2275
2251 is the January 2001 low
The 50 day EMA at 2234
2220 (2218 intraday) is the August high
S&P 500: Closed at 1286.06
Resistance:
1315 is the May and May 2001 peaks
1324 to 1329 from the October 2000 lows.
Support:
The 10 day EMA at 1280
The recent highs at 1275
The 18 day EMA at 1274
1264 from the December 2000 lows
The 50 day EMA at 1256
The August 2005 high at 1246
The September 2005 high at 1243
March 2005 closing high at 1225 and intraday high at 1229.11
Dow: Closed at 11,951.23
Resistance:
10,965 from Q4 2000 and late November 2005
10,985 is the March intraday high
11,176 - 11,186 from April 2000
11,248 from the May 2001 peak.
11,238 from the September 2000 peak.
Support:
The 10 day EMA at 10,938
The 18 day EMA at 10,899
10,868 is the December 2004 high
The 50 day EMA at 10,787
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
Price consolidation at 10,600
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
January 09
Consumer Credit, November (3:00): -$600M actual versus $5.0B expected and -$8.4B prior (revised from -7.2B)
January 10
Wholesale Inventories, November (10:00): 0.4% actual versus 0.5% expected and 0.2% prior
January 11
Crude Inventories, 01/06 (10:30): -2.9M actual versus -900K expected and -1.013M prior
January 12
Export Prices ex-ag., December (08:30): 0.1% actual versus -0.9% prior
Import Prices ex-oil, December (08:30): 0.0% actual versus -0.2% prior
Trade Balance, November (08:30): -$64.2B actual versus -$66B expected and -$68.1 prior
Initial Jobless Claims, 01/07 (08:30): 309K actual versus 320K expected versus 291K prior
Treasury Budget, December (2:00): $11.0B actual versus $4.2B expected versus -$2.9B prior
January 13
Retail Sales, December (08:30): 1.0% expected and 0.3% prior
Retail Sales ex-auto, December (08:30): 0.4% expected and -0.3% prior
Business Inventories, November (08:30): 0.4% expected and 0.3% prior
PPI, December (08:30): 0.4% expected and -0.7% prior
Core PPI, December (08:30): 0.2% expected and 0.1% prior
End part 1 of 3
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