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1/18/06 Stock Split Report Update
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Stock Split Report Subscribers:
Full report issues Thursday.
MARKET ALERTS
Targets hit alerts: None issued
Buy alerts: None issued
Trailing stops: ATW; CETV
Stop alerts issued: 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 SSR alert service you can sign up at the following link:
http://www.investmenthouse.com/alertssr.htm
SUMMARY:
- Investors work through a potentially ugly session as chips, small caps lead recovery.
- Consumer prices remain in line and Fed remains sanguine regarding inflation.
- Signs of economic slowdown in 2006 but the market is not yet showing it.
- Big name earnings not helping, while smaller names post excellent results.
Plenty of gloom fails to keep market down.
A convergence of negatives Wednesday morning had futures on the run (NASDAQ futures were down over 30 points) and some on the financial stations buzzing about a market collapse. Japan was down 3% after the INTC and YHOO earnings and had to be closed 20 minutes early due to a flood of sell orders. Add to that continued pressures in the energy sector that pushed oil close to $67/bbl and you could feel the hype rising to a boil.
Not that there was nothing at issue. Oil is spiking higher again and earnings are indicating more and more that energy prices are hurting corporate bottom lines. INTC by its sheer size always causes ripples in techs because it makes chips for everything. YHOO has been a money printing machine for years, a stalwart of NASDAQ and the technology boom. Japan has been hyped so much on CNBC and Bloomberg of late you can't swing a dead cat in either studio without hitting an analyst pushing Japan and his or her fund directed at that country. Thus there was a lot of Pepto-Bismal swilled in the early morning hours and into the open.
Stocks, however, were recovering well before the opening bell. Futures steadily improved and stocks started right back up after the gap lower. Investors apparently felt the INTC and even YHOO earnings issues were company specific with INTC saying it had chip shortages (again) along with poaching from AMD and YHOO getting beaten about the head and shoulders by GOOG. YHOO's results were not bad at all, but investors wanted strong guidance and YHOO kept it conservative.
Even with this weak start NASDAQ and SP500 managed to hold near support and rebounded off session lows. That kept the January breakouts in tact. Moreover, SOX managed to close positive even with the INTC drag as it too tested near support and rebounded to close. SP600 (small caps) was strong as well, testing the 18 day EMA and rebounding to close positive. Very solid action as investors saw beyond the INTC and YHOO issues and looked at the market overall. Indeed, they used the selling to do some buying. That left SP500, SOX and SP600 in excellent position to continue the rally. That is saying a lot after all of the gloom and hyperbole leading into the session.
After hours you could say it was more of the same with EBAY and AAPL failing to satisfy investors. AAPL was making a comeback late (though still down from the close), but the news was elsewhere. Many stocks reported excellent earnings and posted good guidance. Many were shooting higher after hours, e.g. AMD, CTXS, LRCX, and they were leading a lot of other stocks higher. From the brink of disaster (or so it was being styled) to a recovery. Another day in the market.
THE ECONOMY
CPI lower on oil, core in line, within Fed's tolerance according to Bies, Beige Book.
The government says overall consumer prices fell in December, dropping 0.1% versus an expected 0.2% gain. Take out the lower energy costs and the core measure rose 0.2%, in line with expectations. That puts the year over year core price increase at 2.2%, within the Fed's tolerance range.
How do we know that? Because Fed governor Bies said Wednesday that consumer prices were within the Fed's target and that there was no noticeable pass through of energy and other cost increases from producers. Moreover, the Fed's Beige Book out Wednesday echoed this sentiment. The BB was overall upbeat on the economy and more dovish on inflation. Why? Because the Fed was targeting housing and it feels it has stuck a big enough pin in it to slow it down for the near future. It noted that residential housing had cooled; if it is ready to stop its hikes before major damage shows up in its targeted sector, that is pretty amazing. It did not do that in 2000; it was targeting stocks then and the Fed was not happy until the market was diving lower.
As for industry, the Fed noted manufacturing gains were 'widely reported' among the twelve Fed regions. At the same time the Fed noted tighter labor markets but only 'moderate' wage gains. While we don't believe in 'wage-led' inflation, the Greenspan Fed has used that in the past as an excuse to hike rakes. Once again, however, we see the Fed willing to overlook in 2006 what it viewed in 1999 and 2000 as inflationary. This is even more evidence the Fed is just about done.
Yield curve says Fed should quit.
It is a good thing the Fed is telegraphing it is almost through. We have discussed over the past couple of weeks outside influences on the bond yield curve that are contributing to the flattening and indeed inversion (it did it again slightly on Wednesday) of the treasury market. While Chinese buying and petro-dollar recycling are very real influences, the level of influence is unknown and indeed Greenspan acknowledges he does not know how much of the flattening is due to this treasury buying. Everyone seems to agree, however, that it is not the major cause.
Looking at the yield curve's action says it is indeed not the major cause. The long end is not tanking and thus causing the inversion, but it is the short end's rise that is flattening the curve. That is a classic indicator that the Fed is going too far with its rate hiking. If the long end was falling faster than the Fed was hiking rates, that would bode ill as well, but it would be from some other occurrence than the Fed, and the consequences would likely be dire.
Thus there is still hope. The Fed has not caused a major financial crisis that usually marks the end of its hiking campaigns. In other words, the Fed typically does not stop hiking until its sees the whites of the impending disaster's eyes. Even that might be too fast for the Fed to stop hiking. If the Fed would wind things up now or at the end of this month that would still give the economy a chance even with $67/bbl oil.
ECRI suggests inflation is peaking but so has growth.
The Fed is content with inflation right now. Some agree, some disagree. The Economic Cycle Research Institute (ECRI) has a great track record with economic cycles, and its Future Inflation Indicator (FIG) is starting to indicate the current inflation cycle is peaking. The past two months have been lower after hitting a high off of the FIG's 2004 bottom. If FIG comes in lower again next month then the inflation cycle is likely over. It could still show some spikes, but if the trend is broken inflation will start to wane as 2006 progresses. Breakout out the band.
But don't get too excited. There is a reason the inflation trend may have peaked. ECRI's growth indicators were solid green for 2005 despite many economic forecasters, some from Merrill Lynch we will not mention directly, saying indeed the economy would peak and fall. ECRI was right. Now ECRI's growth indicators are weakening. If they continue to weaken as the FIG is weakening, then they are forecasting below trend growth for 2006. Trend has been 3% to 4%. That means below 3% growth.
A surprising slowdown?
Back in mid-2005 we wrote we were worried about the 2006 economy. The recent rally in stocks that saw NASDAQ breakout from a 2 year triangle, however, suggests otherwise. ECRI says weakening, the market (if it can hold this breakout and get through this INTC/YHOO selling, a true sign of strength) is suggesting strength. We will always defer to the market; it is the leading and the accurate indicator.
There are issues to make you worry, however. First, ECRI has a great track record. It is not suggesting recession, just below trend growth. The market, however, would not expand if that was going to be the case. What factors could cause the problem? Energy has always been there. It has been high for 2 years, and is only getting higher. Predictions of a collapse have only been predictions. Each time oil looks ready to collapse it recovers and drives higher. Right now oil is near Katrina levels with a warm winter and before driving season. Sure Nigeria and Iran are keeping it higher, but there is always something that is keeping it higher. Throw onto that a surge in driving and some more Gulf hurricanes and you have spiking oil and gasoline at $4/gallon.
We are already seeing companies unable to pass on costs, and that is impacting earnings. While we would like to point to INTC and YHOO as examples, they don't precisely fit the mold. INTC more than YHOO perhaps. In any event, this higher energy climb and inability to pass through costs is putting some pressure on profits. If it continues higher and higher you get consumers less willing to spend because of higher gasoline and heating/cooling costs and thus even more inability of companies to pass along price increases (consumers just won't buy). That is one of the 'bad case' scenarios for the economy. We don't even want to think about the worst case scenario.
Thus it is not too hard to see why ECRI can be predicting an inflation peak and also weakening growth: higher costs mean less consumption and thus less inflation pressure and growth. That is why we always worried more about growth than prices. You prefer to have growth and then have to worry about prices as opposed to stable prices but in achieving them causing a major economic slowdown. Yes the Fed is ending, but as we noted before, the end is usually met with a flat market. The market rallied in anticipation and then needs to consolidate while the economy picks up steam again after the Fed stops. That can be a short time or a long time (e.g., a significant economic slowdown or recession) depending upon how much damage has been done. The Fed is trying to bow out before things fall apart. If Congress makes the tax cuts permanent and would pass some meaningful budget cuts that would buck up the economy in 2006. Both of those seem unlikely, however, and that will be an added pressure on stocks as we move into the summer.
THE MARKET
MARKET SENTIMENT
VIX: 12.25; +0.34
VXN: 17.11; +0.37
VXO: 12.32; +0.26
Put/Call Ratio (CBOE): 0.95; +0.17. Lots of activity as puts that were sold during the rally had to be repurchased while others bought in on the downside, anticipating the apocalypse. They both helped push put activity back up near the top of the range, indicating anxiety was starting to spike higher near term. Good to see as a contrary indicator, but not at a level that would necessarily indicate a rebound is at hand.
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: -23.05 points (-1%) to close at 2279.64
Volume: 2.354B (+30.9%). Volume shot higher as NASDAQ gapped lower and then fought back to recover part of the lost ground. 282M share attributable to INTC (average trade is 53M) and 118M shares attributable to YHOO (average is 19M). Without them volume topped Tuesdays low volume by 200M shares. Those two stocks were sold hard along with some of the other old line mega cap techs, and that accounted for a lot of the volume. Stocks such as MRVL and BRCM actually rallied on stronger trade.
Up Volume: 851M (+299M)
Down Volume: 1.479B (+271M)
A/D and Hi/Lo: Decliners led 1.17 to 1. Was -2:1 at one point but then rebounded to a very modest negative breadth. It was a large cap phenomena on Wednesday with the old line tech names taking the beating.
Previous Session: Decliners led 1.65 to 1
New Highs: 116 (-17)
New Lows: 36 (+2)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
NASDAQ gapped lower below the December breakout point at 2273 (closing) and 2278 (intraday) but then embarked on an immediate recovery. It moved back through the 18 day EMA (2281) and then tested the December highs, holding them and rebounding to the 18 day on the close. That kept the January breakout in tact but NASDAQ is also facing two gaps lower and it is having to deal with the mega cap techs that are disappointing investors while the smaller issues are posting the growth. That is no mystery. The large caps are too big to post big growth; that is done by the smaller issues. For NASDAQ, however, the direction of the mega caps is its direction. All in all its pattern is the worst of the four leading indices (and DJ30 is not one of them), but its rally is also still alive.
Remarkably SOX managed to finish positive (+0.09%) after it too gapped lower but held the December highs (and thus the breakout) as well as the 18 day EMA (510.85; closed at 518.89). That makes the pullback look like a nice pullback that is setting up the rebound. With AMD, KLAC, LRCX, BRCM, MRVL and other chips moving higher after hours it certainly looks as if it wants to lead higher.
SP500/NYSE
Stats: -5 points (-0.39%) to close at 1277.93
NYSE Volume: 1.691B (+2.84%). Volume edged higher as the large caps sold but then recouped half the losses. Not bad as once again the large caps rebound off the session lows, waiting for NASDAQ to get it back together.
A/D and Hi/Lo: Decliners led 1.33 to 1. Well over -2:1 on the lows but then recovering with the help of the SP600 rebound to post a very modest downside showing.
Previous Session: Decliners led 1.79 to 1
New Highs: 98 (-56)
New Lows: 34 (+2)
The Chart: http://www.investmenthouse.com/cd/^gspc.html
Solid action from SP500, selling through the 18 day EMA (1276) and support at 1275, but holding the December closing high at 1273 on the session low. It then rebounded to hold near support and the early January breakout. That keeps SP500 in excellent shape to continue higher. Wednesday it was helped by healthcare/medical stocks and financial stocks. Looks ready to spread out more and continue the breakout run.
SP600 (+0.05%) showed some excellent action, tapping at the 18 day EMA (361.65) on the low and rebounding to close with a gain right over the 10 day EMA (363.89). The low tapped the December high and rebounded, holding the breakout. Very solid, showing an orderly pullback and a good flush out with the Wednesday reach lower. Then the recovery shows the buyers stepped back in. Nice doji with tail on the candlestick chart indicates a pullback is over.
DJ30
Dow 11,000 is gone, along with the March 2005 high (10,984). INTC is part of the Dow, so the selling and large volume spike was expected. It managed to hold the 50 day SMA (10,818) on the low and recoup some losses. It is back in the handle to its 10 month double bottom with handle base, and will attempt to rebound. Much of what it does will depend upon what the rest of the market does. Follower, not a leader.
Stats: -41.46 points (-0.38%) to close at 10854.86
Volume: 361M shares Wednesday versus 251M shares Tuesday. At least it held the 50 day MA on some strong volume.
The chart: http://www.investmenthouse.com/cd/^dji.html
THURSDAY
Housing starts and permits, jobless claims, and the Philly Fed PMI report are the highlighted economic reports. Oil inventories were delayed to Thursday due to the holiday. Those likely will play second fiddle to the earnings reports, however, though oil inventories will have some impact given oil is so darn high.
While AAPL and EBAY get the headlines, as noted above, the smaller issues are posting the growth and gains. Guidance from these has been solid and thus the market is holding its breakout and stocks are moving higher after hours. The market took a shot Wednesday and looks to have survived. If it can recover Thursday in spite of AAPL and EBAY, instead looking to LRCX, CTXS, AMD, etc., it will be continuing the breakout move after a test that turned into a shakeout.
That still leaves unanswered the issue of whether the market and the breakouts by NASDAQ and SP500 from long term patterns are foretelling larger gains ahead or if oil and the indications of economic slowing are going to result in a precipitous drop after the breakout tries another run. We can speculate, but the market is the final arbiter and despite the jolts over the past couple of days it looks ready to try and extend the breakout move near term. You have to like the way it spit in the eye of panic and recovered, acting as if it was an ordinary day at the office.
Support and Resistance
NASDAQ: Closed at 2279.64
Resistance:
2288 from December 2000 low.
The 18 day EMA at 2282
The 10 day EMA at 2295
2328 from the May 2001 peak
3015 is the December 2000 peak and the October 2000 low
Support:
2278 is December 2005 intraday high.
2273 is December 2005 closing high.
2251 is the January 2001 low
The 50 day EMA at 2242
2220 (2218 intraday) is the August high
S&P 500: Closed at 1277.93
Resistance:
The 10 day EMA at 1281.12
1315 is the May and May 2001 peaks
1324 to 1329 from the October 2000 lows.
Support:
The 18 day EMA at 1276
The recent highs at 1275 (intraday) and 1273 (closing)
1264 from the December 2000 lows
The 50 day EMA at 1259
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 10,854.86
Resistance:
10,868 is the December 2004 high
The 18 day EMA at 10,899
The 10 day EMA at 10,919
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 50 day EMA at 10,800
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): -0.1% actual versus 0.2% expected and 0.2% prior.
Core CPI, December (8:30): 0.2% actual versus 0.2% expected and 0.6% prior.
Net foreign purchases, November (9:00): $89.1B actual versus $104B prior (revised from $106.8B).
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): 315K expected and 309K prior
Crude inventories (9:30): -2.887 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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