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money investment, investment help
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01/17/06 Investment House Daily
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MARKET ALERTS:
Target hit alerts: None issued
Buy alerts: BNT
Trailing stop alerts: None issued
Stop alerts: None issued
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SUMMARY:
- Nice intraday action sets up rally continuation but after hours earnings may wash out support.
- Capacity utilization strongest since late 2000 as Fed looks to wind down rate hikes.
- Big earnings misses awakening some sellers: YHOO and INTC lone rangers or indicative of overall earnings problems.
Weak session but a nice set up until triumvirate of weak earnings.
Stocks started weak, gapping lower in a continuation of last week's late pullback. There was plenty to worry about with Nigeria rebel attacks on Shell facilities driving oil above $66 ($66.94, +2.36), challenging post-Katrina levels even with a warm winter over much of the US and no storms in the Gulf. We said it before, this is a scenario that could drive gasoline prices to $4/gallon this summer as high prices and the first big Gulf storm combine to scare the market. There are predictions oil will fall given there is no apparent continuing catalyst for this recent climb, but failed predictions of an oil price collapse litter the market commentary the past year and one-half.
Oil was in the background all session, and in addition there were many downgrades early on across many sectors. AMD, AMAT, SNDK, NEM, QCOM, TOL were some of the names downgraded. WFR and FITB both from the financial sector missed earnings. Foreign markets were down as well, unable to find their way with the US markets closed Monday. Oil, earnings, downgrades, foreign losses. Plenty to worry about.
SP500, NASDAQ and SOX tested toward the 10 day EMA on that open but held and rebounded. Midday they undercut that near support level but then rebounded in the afternoon with a slow, steady gain, making higher and higher lows. By the close both NASDAQ and SP500 had successfully tested the 10 day EMA and held. They posted losses, but the intraday action was good along with the action of many of the market leaders.
Volume edged higher, but that was off very light volume Friday, the lightest volume of the year. Given the test of support and rebound by SP500 the rising trade was not necessarily distribution. Relative to the prior volume it was no indication sellers were taking over the market. Breadth was flirted with -2.5:1 on NYSE, but it recovered on the close to -1.8:1. As with the market, breadth bounced back as well in the afternoon.
While the market continued its pullback, money rotated into energy early on given the Nigeria uprisings and oil surpassing $66/bbl. That buying was spotty and not on a lot of volume, but it held things together and allowed stocks to recover some by the close. Earnings from INTC and YHOO after hours, however, took the wind out of the rebound. Both were down sharply as both missed. Despite the pullback of late, it was not enough to support stocks after hours. QQQQ was down, indicating much of the large cap techs were under pressure as well as leaders such as BRCM, MRVL, SNDK. IBM reported earnings and managed to rebound to post after hours gains, but the other two threaten to torpedo a nice pullback. We will have to see the extent of the damage, but with oil over $66/bbl and big name earnings stinking, energy may be all that is left standing near term.
THE ECONOMY
Capacity hits 80.7%, highest since late 2000.
Capacity topped 80.5% expected and 80.3% in November, and that data roused comments about 'bottlenecks' and the need for the Fed to continue tightening. The theory is that when capacity utilization tops 80% you can see inflation because products cannot be manufactured enough to meet demand.
It was the highest reading since November 2000. Now back in 1998 to early 2000 the Fed talked a lot about bottlenecks when capacity was in the 81.50 to 82.50 range. That was down from an 82 to 94 range that extended from late 1995 into early 1998. The Fed was worried about bottlenecks and was hiking rates. Of course there was no sign of inflation in the system from bottlenecks or any other area. Indeed, supply was meeting demand beautifully and the economy was humming along with basically no inflation. Yet the Fed used the 'textbook' rule of thumb that 80%+ capacity can lead to inflationary pressures. That is very much the Phillips Curve mentality that equates prosperity with inevitable inflation.
As a true reading of economic history tells you, however, it is not prosperity and humming factories that produce inflation. It is not wages, it is not demand. It is excess liquidity, i.e. too much money in the system. If supply is unfettered and left to meet demand, there is balance. If supply is regulated to where it cannot meet demand and there is too much money in the system, then you get inflation.
Thus it is somewhat ironic and indeed almost hopeful to see the Fed considering ceasing rate hikes even with capacity trending above the 80 level. Whereas the Fed was using this level as a reason to raise rates in 1999 and 2000, it is now ready to end its hikes even as capacity is at a potentially inflationary level by the book. This is similar to our discussion of employment and wages where the Fed is not fearing lower and lower weekly jobless claims as it did in 1999 (or at least claimed it did).
An optimist would say this is the Fed reverting toward a more free market basis as Greenspan winds down and Bernanke prepares to take over, a Fed that is looking at real indications of inflation in the bond market and in actual inflation indicators as opposed to seeing the boogeyman lurking in every economic report and perverting those reports into some kind of inflation indicator. Of course, the Fed is as political as any entity. It is more than likely just picking and choosing its 'indicators' based on what it wants to accomplish. That is nothing new for Washington. We see it in Congress, federal courts, and the executive branch. Why should quasi-governmental agencies be any different?
THE MARKET
MARKET SENTIMENT
VIX: 11.91; +0.68
VXN: 16.74; +0.82
VXO: 12.06; +0.99
Put/Call Ratio (CBOE): 0.78; 0
Bulls versus Bears:
Bulls: 56.8%. After a week that finally saw bulls fade from 60.4% (55.7% last week), bullish advisors turned back up. Not surprising given the strong market move. Still over the 55% level considered extreme. This, as with VIX, is an indication and not a fact of market direction. Too strong, but the strength in price/volume action and leaders is outweighing this sentiment indication. Hit 44.8% on the low on this leg, just above the 43.5% low in May.
Bears: 22.1%. Down from 23.7% the prior week where bears spiked up to from 20.88%. Still in decent shape, acting as something of a counterbalance to the excess number of bulls. 20% is the threshold where a lack of bears is considered extreme and bad for the upside. 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: -14.35 points (-0.62%) to close at 2302.69
Volume: 1.798B (+0.7%). Volume was up on the loss but it followed the lowest volume of the year and was well off the pace this year. Thus the higher volume was not any shift to sellers dominating the market. That was the case Tuesday. Wednesday might be something different if the YHOO and INTC selling spreads out to the general market, something it was indeed doing after hours.
Up Volume: 552M (-378M)
Down Volume: 1.208B (+397M)
A/D and Hi/Lo: Decliners led 1.65 to 1. Pretty modest, coming back from -2:1 intraday.
Previous Session: Advancers led 1.25 to 1
New Highs: 133 (+5)
New Lows: 34 (+11)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
NASDAQ gapped lower but held the 10 day EMA (2298) early, its first indication that it was not going to spiral into further selling but instead continue the work on the nice pullback to test the strong January run. It undercut the 10 day to end lunch, but that sparked a recovery and sent NASDAQ higher into the close. It still closed well below flat but it held the 10 day and showed a nice doji with tail on the 10 day EMA. Low volume, narrow selling breadth, good price action. Looked very good heading into the Wednesday session until INTC and YHOO simply missed their earnings. Now another gap lower is ahead, and the 18 day EMA (2282) is the next support and then 2273 from the December closing high.
SOX (-1.56%) was under pressure and led the selling all session. AMD, AMAT and other semiconductors were downgraded, putting immediate pressure on the index. With INTC earnings after the close the trade was even more skittish. SOX undercut the 10 day EMA (517.71), but by the close rebounded to hold that level. It too looked pretty solid, but after hours some major components are getting rocked, and SOX is going to open significantly lower Tuesday. The 18 day EMA (509.90) is likely to get a serious test.
SP500/NYSE
Stats: -4.68 points (-0.36%) to close at 1282.93
NYSE Volume: 1.644B (+4.06%). Volume was up as on NASDAQ, but two things mitigated the rising trade on losses by NYSE indices. First, the volume was up from lower Friday levels and as with NASDAQ, it did not reach the stronger levels seen in the January rally. Second, SP500 reached below the 10 day EMA intraday but then rebounded to hold that level on the close, indicating a good test and shakeout followed by some buying. Good through the Tuesday close but now we see how well it can hold up Wednesday in the wake of the disappointing earnings from three large cap horses.
A/D and Hi/Lo: Decliners led 1.79 to 1. Recovered handily from -2.5:1 midday.
Previous Session: Advancers led 1.24 to 1
New Highs: 154 (+29)
New Lows: 32 (+11)
The Chart: http://www.investmenthouse.com/cd/^gspc.html
SP500 lost on the session but it also recovered after undercutting the 10 day EMA (1281) and reaching toward next support at 1275 and the 18 day EMA (1276). It managed a close on the 10 day on some rising volume (indicating some buying to drive the index back up), and that made it an overall decent session of further shaking out in this pullback to test the strong January move. As with NASDAQ, however, Wednesday will try to change the character as large caps such as INTC and YHOO are knocked around. The collateral damage was fairly widespread after hours, and it is apparent that SP500 is going to test next support Wednesday in a key session for the rally. That 1275 support is from the December high, and a hold there would be best if somewhat of a pipedream given the after hours impact wrought by YHOO and INTC. A significant break below that level puts it back into the December range and at a minimum pushes another run higher well down the road.
SP600 (-0.55%) tested lower as well, its third loss in four sessions in a nice test of the early January breakout move. It slightly undercut the 10 day EMA (363.69) on the low and rebounded to easily hold that near support level. Looks solid (as did the other indices on the close), and SP600 might find itself a bit better off because it does not have those mega-cap stocks that are experiencing difficulty in growing earnings. In addition, SP600 and SP400 house many of the smaller energy stocks, and they could help bolster these indices even as the large cap indices struggle Wednesday.
DJ30
DJ30 fell through the 18 day EMA and 10,984 (March 2005 high) on rising, average trade. It has given up the break higher from last week, and with INTC selling and IBM at best holding steady, it will be under pressure again tomorrow as HPQ joins in on the downside. DJ30 came late on the breakout to support the rest of the market, and it was not a grand breakout move. Some support at 10,800 from prices and the 50 day EMA (10,798).
Stats: -63.55 points (-0.58%) to close at 10896.32
Volume: 251M shares Tuesday versus 209M shares Friday. Volume moved up to average on the selling, and that is lower than the prior January volume, but not by much. It indicates some distribution in the blue chips.
The chart: http://www.investmenthouse.com/cd/^dji.html
WEDNESDAY
The CPI is out before the open and it remains to be seen if it can, if indicating little inflation as per the core PPI, hold back the tide of selling INTC and YHOO helped generate after hours. That late trade saw a lot of semiconductors and techs heading lower in the downdraft of those two big cap names. When you stack CPI up against actual earnings, however, the CPI will lose out because the market is the leading indicator with respect to the economy, not the other way around.
The second issue is whether INTC and YHOO are indicative of their sectors or are victims of poaching by rivals. INTC admitted for the first time that AMD was eating into INTC's business, and if DELL starts using more AMD chips that is only going to hurt INTC more. So is INTC's loss AMD's gain? We will see later this month. Moreover, INTC also said supply issues again constrained its ability to meet its sales. Once again, if INTC is unable to get enough of the components it needs, does that mean that the suppliers are doing quite well with respect to the orders they have on their plate? Could very well be.
Then there is YHOO and its rival GOOG. YHOO missed by one to two cents depending upon your favorite analyst (if there is such a thing), and revenues were a hair light. There were issues with respect to its click advertising returns, and that is part of its competition with GOOG. As with INTC, is YHOO's loss simply GOOG's gains?
The market was not viewing the earnings in this 'Lone Ranger' mindset as we saw semiconductors generally following INTC lower. The internet stocks were a big stronger in general, letting YHOO take the plunge for them. Whether that holds up remains to be seen tomorrow.
In any event, the market is going to face a real challenge Wednesday with NASDAQ no doubt gapping lower for the second consecutive session. It can still fall further, hold the 18 day EMA, and keep the breakout alive. What the market needs is results from other stocks that show the INTC and YHOO results to be oriented to those particular stocks as opposed to the entire market. Unfortunately that will take a series of releases over the next week to ten days. Until then the market is on its own, fighting the mega-cap earnings misses and oil that is ridiculously high, at least based on the conditions driving it higher near term.
Saturday we worried over a potential earnings minefield and it looks as if two mines have been stepped on and will try to take techs and large caps below near support. We will be watching to see if money rotates to new areas even as techs suffer. It tried to do it Tuesday, but there was not a lot of buying as investors waited on some big earnings. Now that they are fact we will see if money leaves the market or is moved into areas such as energy what with $66/bbl oil.
Support and Resistance
NASDAQ: Closed at 2302.69
Resistance:
2328 from the May 2001 peak
3015 is the December 2000 peak and the October 2000 low
Support:
The 10 day EMA at 2298
2288 from December 2000 low.
The 18 day EMA at 2282
2278 is December 2005 intraday high.
2251 is the January 2001 low
The 50 day EMA at 2240
2220 (2218 intraday) is the August high
S&P 500: Closed at 1282.93
Resistance:
1315 is the May and May 2001 peaks
1324 to 1329 from the October 2000 lows.
Support:
The 10 day EMA at 1281.84
The 18 day EMA at 1276.12
The recent highs at 1275
1264 from the December 2000 lows
The 50 day EMA at 1258.45
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 10,896.32
Resistance:
The 10 day EMA at 10,933.76
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 18 day EMA at 10,904.62 is wavering.
10,868 is the December 2004 high
The 50 day EMA at 10,798
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 17
New York Empire State Index, January (8:30): 20.1 actual versus 21.0 expected and 26.3 prior (revised from 28.7).
Capacity utilization, December (9:15): 80.7% actual versus 80.5% expected and 80.3% prior (revised from 80.2%).
Industrial production, December (9:15): 0.6% actual versus 0.5% expected and 0.8% prior (revised from 0.7%).
January 18
CPI, December (8:30): 0.2% expected and 0.2% prior.
Core CPI, December (8:30): 0.2% expected and 0.6% prior.
Net foreign purchases, November (9:00): $106B prior.
Crude inventories (9:30): -2.887 prior
Federal Reserve Beige Book (2:00)
January 19
Housing starts, December (8:30): 2.035M expected and 2.123M prior
Building permits, December (8:30): 2.1M expected and 2.163M prior
Initial Jobless claims (8:30): 320K expected and 309K prior
Philly Fed, January (12:00): 13.0 expected and 12.6 prior
January 20
Michigan sentiment, prelim., January (9:50): 92.5 expected and 91.5 prior
End part 1 of 3
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