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world stock market, us stock market
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2/08/06 Investment House Daily
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SUMMARY:
- Cisco generates some large cap excitement as the big caps rebound.
- Way too much talk about a surging economy because of the jobs report.
- After the large cap relief rally it is up to the leaders to take up the torch again.
Cisco is back baby. Well, not really.
The large caps had a party Wednesday when Cisco beat the street and had good things to say about the current quarter. It was rewarded with a 7% gain and prompted upgrades among other large caps, e.g. DELL and AMAT. The large cap dominated NASDAQ and SP500 rebounded on the action, both managing to retake the 50 day EMA on the close. SOX was up again, leading the way once more, but the small caps and mid caps were holding back.
So, was this a renewal of the rally? Did Cisco turn the market? No. Volume was up on both NASDAQ and NYSE, typically a positive indication as the market met the Tuesday selling volume with good volume bounce. That is not dispositive, however. Breadth was weak (less than 1.4:1) on the rebound as the small and mid-caps, leaders in the market, lagged, sitting out the rebound. Many market leaders did the same; they were not necessarily lower, they just did not participate in the gains. NASDAQ 100 outpaced overall NASDAQ 1.13% to 0.98%.
All of this adds up to a relief bounce in the large caps. They were hammered heading into the session, making a lower high in late January and a lower low this week. They were being sold hard. Sell programs were hitting the large caps as noted over the past week. The Cisco news was a reason to cover the shorts on the large caps, and that drove their prices back up. They dominate SP500 and NASDAQ, so the indices rebounded as well. The low breadth shows it was just them, however. The higher volume is not unusual for such a move: the large caps are owned by thousands of institutions and shorted by many hedge funds. When they cover the volume jumps.
In short, the trampled large caps, many of which (particularly large cap techs such as DELL) are in downtrends, rebounded from the selling in a classic relief bounce. Maybe this bounce will lead to the leaders resuming their moves higher. After all, each rally or recovery starts with some short covering. The issue is whether the leaders pick up the torch and resume their own moves. As noted, they mostly sat out the Wednesday rally. We play leaders, and a lot of them were just watching. We could chase the large caps back up, but they have demonstrated distribution, not accumulation, and are likely to struggle again, making them not the best investment vehicles right now. We will see if the leaders pick up the move once more; they are definitely still set up well to do so. The Wednesday move, however, was not any confirmation that the rally is back on.
THE ECONOMY
Still too much talk about a surging economy on the heels of the jobs report.
Don't want to beat a dead horse, but Wednesday we continued to hear the same talk from more economists and pundits about a surging US economy in 2006 requiring the Fed to continue hiking interest rates to stave off inflation. The culprit was once again last Friday's jobs report where 4.7% unemployment and rising wages (rising, by the way, from the gutter) have the Phillips Curve worshippers, i.e. those economists locked in the Stone Age of economics, playing the modern version of Chicken Little with respect to inflation.
Wednesday the parade of 'keep on hiking' analysts was non-stop, citing the strong economy in 2006. Wow. D j vu all over again. A lagging economic indicator finally shows strength and the economy is 'red hot.' This in spite of oil easily holding in the sixties for months and months, an inverted yield curve (but, of course, it is different this time), disappointing earnings guidance across the board, a sinking housing market (evidenced by the numbers - - mortgage applications sagged again by 1.2% - - and the slumping builders stock prices), a drop in GDP, and weakening regional and national manufacturing and service numbers. On top of that, the leading indicators that are accurate are starting to suggest the peak has been hit already. Oh yeah, baby, the economy is surging. If you drive looking in the rearview mirror it looks great. You even miss the horror of seeing the car drive off the side of the cliff.
We are not saying the economy is about to do this, but if we continue down this road thinking that everything is rosy and the Fed has to keep hiking, we are following the same road as in 2000 when the 'white hot' economy and worries over a tight employment market kept the Fed hiking right through the signs of slowing. Now the Fed has its own indicators and far from us to doubt the collection of diplomas on the FOMC. Unfortunately, either they don't watch the right indicators or they don't trust what they are saying, because over 90% of the time the Fed gets it wrong and pushes us into a significant economic slowdown or into recession.
That is exactly what happened in 2000 and we are afraid it is happening again. In 2000 there were the same signals of slowing, including an inverted yield curve that was dismissed then (the Fed hiked right into it and beyond) as it is dismissed now. Glowing reports about a red hot economy. Indeed, this is the new topic as we have noted above. Just as with any market or dynamic system, when a belief becomes mainstream that usually marks the end of the event. Think of the raging bull on the cover of Time in 2000. Think of the raging bear on the covers of Time, Newsweek, US News & World Report, etc. in October 2002. Those marked the end of each. In short, the mainstream has finally, grudgingly bought into the economic recovery. Danger.
THE MARKET
MARKET SENTIMENT
VIX: 12.83; -0.76
VXN: 17.06; -0.6
VXO: 12.41; -0.65
Put/Call Ratio (CBOE): 0.79; -0.16
Bulls versus Bears:
Bulls: 52.6%. Surprisingly bulls continued to fall despite the gains two weeks back, falling from 53.7%. This is the second week below the 55% threshold after a fall from 57.3% from three weeks back and 60.4% at the peak on his cycle. Hit 44.8% on the low on the last leg, just above the 43.5% low in May.
Bears: 25.8%. Bears rose a bit higher, climbing from 25.3% last week and 22.9% the week before. Bears never fell below 20% on this move, helping underpin the advance (low was 20.88%). 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: +22.02 points (+0.98%) to close at 2266.98
Volume: 2.249B (+1.32%). NASDAQ volume increased from already high levels hit Tuesday on that distribution day. NASDAQ met selling volume with upside volume, typically a good indication. It could turn into something better, but for now it has the attributes of a short covering rally.
Up Volume: 1.527B (+563M). Upside volume was stronger, but covering will do that.
Down Volume: 612M (-619M)
A/D and Hi/Lo: Advancers led 1.37 to 1. Very anemic breadth for a 1% gain in NASDAQ. It was a large cap move.
Previous Session: Decliners led 2.14 to 1
New Highs: 120 (+20)
New Lows: 32 (-5)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixic.html
NASDAQ gapped higher and above the 50 day EMA (2257) on the CSCO earnings and large cap tech upgrades but tried to give it all back in the morning. It managed to hold above the Tuesday close and rebound on into the close. A slump in the afternoon did not have any muscle, and the index shook it off to hold the gains into the close. The move takes NASDAQ just below the highs in the December range (2273 closing, 2278 intraday) and still below the 10 and 18 day EMA (2273, 2276) that are sitting right on top of that December high. NASDAQ made a lower high and a lower low on this last leg, not great technical action. Don't like the volatility as it pushed for a new high in January, and this move has the characteristics of a relief bounce. It will need to prove it is more.
SOX (+1.43%) again proved its leadership stripes with its gap higher as AMAT and some other large chips posted gains. It held the 18 day EMA (532.60) on the low of this pullback and it is edging toward the next leg higher. If it and the smaller caps resume, then NASDAQ has someone to follow. Of course, NASDAQ was not following earlier this week even as the leaders advanced.
SP500/NYSE
Stats: +10.87 points (+0.87%) to close at 1265.65
NYSE Volume: 1.79B (+0.64%). NYSE volume advanced as well as SP500 bounced and the small and mid-caps drifted higher. Hard to call this an accumulation session given the action leading into it as well as the internals on the move.
A/D and Hi/Lo: Advancers led 1.38 to 1. As with NASDAQ, very tepid breadth indicating a large cap recovery move after they got roughed up the prior week and no answer to the -2:1 breadth on the Tuesday selling.
Previous Session: Decliners led 2.07 to 1
New Highs: 71 (-19)
New Lows: 34 (+1)
The Chart: http://www.investmenthouse.com/cd/^gspc.html
SP500 jumped back over the 50 day EMA (1264) on the close, moving on a modest jump in already strong volume from the Tuesday selling. Lower high, lower low on this leg and trying to pick the pieces back up. As discussed above, we are not convinced this is a credible recovery; the technical pattern is weaker, breadth was poor, and it is still in the middle of a band of resistance up to 1275 before it can even consider taking on the two January tops. As with NASDAQ, we also don't like the volatility.
SP600 (+0.42%) tapped the mid-January highs on the low (369) and recovered to post a modest gain that recaptured the 18 day EMA (371.91) on the close. That leaves it below the 10 day EMA (373.92) but still looking solid in its pattern. Not much participation from the small and mid-caps Wednesday, definitely laggards in what was a large cap relief bounce. Still in good position to lead higher once again along with SOX, and that is something the market needs to keep this rebound attempt moving.
DJ30
DJ30 was one of the leaders Wednesday, retaking the 50 day SMA and EMA (10,848 and 10,806) as it trudged back up into the heart of the November/December consolidation range. Volume was above average but lower than the Tuesday selling as the blue chips showed a similar rebound to the other indices. DJ30 made a lower low in January and a lower high to start February. Technically weak, but not giving up the fight just yet.
Stats: +108.86 points (+1.01%) to close at 10858.62
Volume: 330M shares Wednesday versus 351M shares Tuesday. Rebounded but on lower trade.
The chart: http://www.investmenthouse.com/cd/^dji.html
THURSDAY
Looking for the leaders to resume leading after taking a day off.
Finally a bit more economic data, but not much with initial jobless claims and wholesale inventories. Of course with all the furor over jobs, another sub-300K report will only stoke the inflation fears and Fed hiking talk even more.
The key for the market is whether the leaders that sat out the Wednesday action take the lead once more and can drag the large caps up with them after that short covering relief bounce helped take back some of the carnage. SOX was up again Wednesday, but a lot of the market leaders basically sat the session out. After this rest they need to take up the torch once more. As noted above, they are set up to do it.
Volatility returns.
Thus far we have seen no major breakdowns in leaders, so we don't want to get too alarmist about the market's future. What we don't like is the large cap breakdown and the quality of this rebound. As noted, that can change to a positive in short order if the leaders take off once more.
What we also don't like is the volatility entering the market the past four weeks after the early January rally on the FOMC minutes release. Lower highs and lower lows and some distribution in the large cap indices show some internal deterioration. Volatility, not as measured by the VIX, but the kind that shows up in the day to day jumps up and down has entered the action. Volatility is one of the market signposts that indicates change.
Lower highs, lower lows, some distribution, large cap breakdowns, weakening breadth, increasing volatility. Those are the market indications and they indicate at the minimum some discomfort with what is transpiring with the economy. With respect to the economy, an inverted curve, high energy prices, sagging housing market, lower regional manufacturing and service reports, a weak GDP reading, etc. indicate some economic distress. As with stocks, there is no breakdown, but there is volatility creeping into the numbers and across the economy as well (i.e., among the different reports). Volatility, sometimes what we call the change of weather, is something to keep an eye on.
Again we want to say the market has not rolled over and the leaders have definitely not broken down. The market can suffer through one of these bouts of volatility and technical weakening and recover nicely, going about its rally. We are definitely watching the leaders to see if they resume their moves higher and on robust trade. That will be a near term positive and worth participating in even as we watch to see how this volatility pans out. Leaders, what we play, can continue to post gains even as the rest of the market crumbles. Thus we can stick to them for our upside plays and still weather the ongoing struggles of the laggards.
Support and Resistance
NASDAQ: Closed at 2266.98
Resistance:
2273 is December 2005 closing high.
The 10 day EMA at 2273
The 18 day EMA at 2276
2278 is December 2005 intraday high.
2282 is the October/December up trendline.
2288 from December 2000 low.
2328 from the May 2001 peak
The January high at 2333
3015 is the December 2000 peak and the October 2000 low
Support:
The 50 day EMA at 2257
The October 2005 up trendline at 2234
2220 (2218 intraday) is the August high
2216 is the August 2005 high
2178 to 2182 from the December 2004 high and the September 2005 high; these roughly mark the breakout from the 2 year base.
S&P 500: Closed at 1265.65
Resistance:
The 10 day EMA at 1269
The 18 day EMA at 1271
The December highs at 1275 (intraday) and 1273 (closing)
The October to December up trendline at 1286
The January high at 1295
1315 is the May and May 2001 peaks
1324 to 1329 from the October 2000 lows.
Support:
1264 from the December 2000 lows
The 50 day EMA at 1264.50
The bottom of the November/December 2005 range at 1248
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 10,858.62
Resistance:
10,868 is the December 2004 high
10,965 from Q4 2000 and November/December 2005
10,985 is the March intraday high
11044 is the January 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 10,835
The 10 day EMA at 10,828
The 50 day EMA at 10,806
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.
February 7
Consumer Credit, December (2:00): $3.3B actual versus $5.0B expected
February 8
Crude oil inventories (10:30): -318K versus 1+M expected
February 9
Initial jobless claims (8:30): 285K expected and 273K prior
Wholesale inventories, December (10:00): 0.5% expected and 0.4% prior.
February 10
Trade balance, December (8:30): -$64.8B expected and -$64.2B prior
Treasury budget, January (2:00): $8.0B expected and $8.6B prior
End part 1 of 3
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