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financial investment, Breakout test
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2/09/06 Investment House Daily
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SUMMARY:
- Stocks make a broad surge out of the gates but reverse and close negative on stronger trade.
- Greenspan crowding Bernanke right off the bat.
- Market back on the edge of the knife after Wednesday rebound is turned over.
Stocks early vigor turns to vinegar.
Stocks were fired up at the open. Jobless claims were again lower than expected, continuing the trend of apparently better jobs growth. That knocked futures back a bit, but they recovered and stocks posted a modest gain on the open. Then the chips took the lead and all stocks advanced though the small caps lagged once more. Breadth was decent on NYSE, moving toward 2:1. Volume was up on NASDAQ, and the leaders were starting to stir again. NASDAQ moved through its near resistance with pretty amazing ease while SP500 was cruising toward 1275. Stocks peaked, made a shallow test, and then rebounded to new session highs.
From there things turned ugly. There was no 'aha' catalyst, just a combination of events on top of Wednesday's narrow relief bounce. With the applause from his exit having barely died down, Greenspan was giving a speech to Goldman Sachs. In it he said there would be a lot more rate hikes. The market peaked at that point. Then the 30 year treasury auction was held, and while there was solid demand it was not the strong surge expected. As you know, strong might as well be weak in the world of expectations. The market noticeably dropped when the news hit. Bids dried up, selling intensified, and stocks sold into the close.
Breadth slumped in the afternoon as stocks that had been cracking resistance lost their nerve and rolled over. NASDAQ and SP500 quickly fell back through the near resistance broken in the morning session and on the close gave up the 50 day EMA once more. SP600 lagged on the move higher, and by the close it gave up its recapture of the 18 day EMA. SOX was strong but it too closed lower, though it easily held its uptrend. Financials held their support as well. Chips, financials, and medical appliances are some of the best looking in the market, but the question is whether they are just hanging on ahead of a fall or are going to hold the line and drag the rest of the market back.
Technically the action was bad. Wednesday's rally was narrow and as noted last night was likely just a relief move for the beaten up large caps. Thursday looked good but snatched defeat from the jaws of victory in a big, parabolic reversal. It was truly amazing to hear at 3:10ET two reporters/anchors on one of the financial stations saying the market was 'on fire' and 'out of hot water' with the best 2-day rally since October. The market was collapsing around them even as they were almost high-fiving on the exchange floor.
In any event, a narrow rebound of the battered large caps followed by a broad intraday reversal shows the sellers once again taking advantage of a move higher and selling into it, continuing the problems that started last week. The indices have made lower highs and lower lows, and are ready to make another lower high from the look of the Thursday action. As noted, there are a few strong sectors remaining, but the small caps are starting to waiver, and if they fail the market will be hard-pressed to hang on.
Why the change? We have talked about it a lot of late. There are a lot of economic issues as discussed Tuesday and Wednesday, but the straw that is breaking things is the notion the Fed is going to have to hike a lot more. The employment data is fueling the notion that the Fed is going to raise more than just once, and given the Fed's track record over its 100 year existence, the worry is justified. The rally this year really took off n the FOMC minutes that suggested the Fed was just about done. Before that news it was starting to wallow. With that fuel now removed, the market is again struggling under the weight of high energy prices, weaker than desire earnings guidance, an inverted yield curve, and a Fed that too many times has gone several rate hikes too far.
THE ECONOMY
Greenspan eager to reap the gains from years of public service.
Ever wonder what it is like to have two Fed chairmen? Now we know. The door barely closed behind him when former chairman Greenspan was out on the lecture circuit. There is a furor about lobbyists and former congressmen turned lobbyists in D.C. right now. Let's throw a little of that fury at former Fed chairmen as well.
Thursday Greenspan was speaking to Goldman Sachs and he was throwing bombs. He bluntly said that the Fed was going to raise a lot more times during this round. So much for letting the new guy get acclimated to the job. So much for carefully crafted statements about the future. Sure Greenspan cannot set policy, but at a critical time when Bernanke has to show he can do the job we have the 'Maestro' out there telling everyone how it should be done. You have to jut say 'what the hell is going on up there in D.C.?'
It is hardly surprising when you think about it. In his latter years Greenspan nosed in on every policy area imaginable, after first feigning disinterest in his best imitation of Brutus' 'I am not here to bury Caesar' manner. Given his penchant for stepping outside his mandate, it is not surprising he is eager to continue without any pretext of restraint.
Problem is, the markets cannot handle two Fed chairmen. Bernanke, just as Volker and Greenspan, needs time to grow into the job and gain credibility. When the last guy sits in the bleachers calling balls and strikes it is hard if not impossible for the rookie to come into his own. Volker had the wisdom and class to let Greenspan establish himself with his first market crash, the 1987 Black Monday meltdown. Greenspan should give Bernanke the same courtesy. After all, it looks as if the Greenspan Fed has started us on the road to another 2000 like episode. Seems he would want to clam up and let Bernanke make the calls to raise rates some more and seal the deal, thus taking some of the heat off Greenspan for causing yet another economic slowdown. From the looks of it, things could be quite bumpy as Greenspan hits the lecture circuit full force.
THE MARKET
MARKET SENTIMENT
VIX: 13.12; +0.29
VXN: 17.14; +0.08
VXO: 12.36; -0.05
Put/Call Ratio (CBOE): 0.76; -0.03
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: -11.11 points (-0.49%) to close at 2255.87
Volume: 2.377B (+5.67%). Volume was strong early as NASDAQ rallied past near resistance, but it remained strong as it turned over and gave back the gain. That shows sellers coming in and unloading into the gain.
Up Volume: 1.217B (-310M)
Down Volume: 1.132B (+520M)
A/D and Hi/Lo: Decliners led 1.2 to 1. NASDAQ breadth never really surged, topping out near 1.7:1 even at the session highs. Once again there was not a lot of broad movement in the techs. We note that NASDAQ 100 was the first to turn negative on the session and was down twice as much as NASDAQ. Seems the large cap techs have resumed showing their colors.
Previous Session: Advancers led 1.37 to 1
New Highs: 159 (+39)
New Lows: 30 (-2)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixic.html
NASDAQ rallied past the December highs (2278; hit 2284 on Thursday high) but then lost its way. In a big 30 point swing it gave up the strong move and closed back below the 50 day EMA (2257). Volume was strong all session; would have at least preferred a drop off late. Threatening to make another lower high, this time at the December highs. That has the look of a head and shoulders trying to form, though those are notoriously misleading. It is enough to see the lower highs, some distribution, and a volume rollover to know there is some trouble. The large caps were down twice the overall index, and with their weighting they are a serious drag. That disappointing guidance that started the earnings season is keeping them under pressure.
SOX (-0.30%) gave back its early gains as well, but it started in much better shape, i.e. in its uptrend above the 10 and 18 day EMA. That keeps it overall in solid position with many chips enjoying solid sessions. They were great sessions before the reversal, but when you are in a solid uptrend, a modest pullback is not big thing. The big issue is whether SOX is going to try to hold the fort alone or whether the small caps straighten back up and the large caps quit taking on water. Solid for now but when the overall market weakens you still have to tread cautiously.
SP500/NYSE
Stats: -1.87 points (-0.15%) to close at 1263.78
NYSE Volume: 1.774B (-0.9%). Volume backed off slightly but was still above average as SP500 reversed a solid advance. No spiking trade is good, but volume was right in line with the prior three sessions, one being a hard drop below the 50 day EMA. Hard to take much solace from the slightly lower volume on the reversal.
A/D and Hi/Lo: Advancers led 1.07 to 1. After reaching close to 2:1 intraday a complete pancake on the reversal.
Previous Session: Advancers led 1.38 to 1
New Highs: 132 (+61)
New Lows: 16 (-18)
The Chart: http://www.investmenthouse.com/cd/^gspc.html
SP500 rallied through the short term moving average and up to the December high near 1275. Looked solid on good trade, but then an 11 point reversal closed it below the 50 day EMA (1264) once again. Distribution on Tuesday, a narrow rebound Wednesday, an intraday tap of resistance and then a reversal on Thursday. Not the best picture at this point and unlike some commentary, it is not out of hot water. Indeed, it is still in the stew.
SP600 (-0.62%) struggled again as well, falling back through the 18 day EMA (371.74) and landing on the three mid-January highs where there is some support. It is struggling some though as with SOX it started in a better position than the large cap indices. It remains in its uptrend from the October low, the lower trendline of which is down at 362.50, right below the 50 day EMA (364.22). If it breaks this December high (369ish) it is likely heading to that level.
DJ30
DJ30 was a 'leader' Thursday, posting a 0.23% gain on lower volume. It was up triple digits and the twidgits on the financial stations were crowing about the strong rally in the market even as it fell down around them. They focus on the Dow and base their commentary on its moves. That is similar to using the employment report as your leading economic indicator. Interestingly, DJ30 easily held above its 50 day EMA (10,809), something NASDAQ and SP500 could not manage. That doesn't mean a whole lot because the Dow simply represents so little of the market.
Stats: +24.73 points (+0.23%) to close at 10883.35
Volume: 314M shares Thursday versus 330M shares Wednesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
FRIDAY
The trade balance and treasury budget are on the docket, and they could add something to the action though likely not much on the positive side. The trade deficit and budget are only reminders that things can go wrong, and when investors are concerned about the Fed over-tightening, high oil prices, inflation, inverted yield curves, Iran with nukes, etc., that is not the kind of reminder the market needs.
The Thursday reversal is not out of line with the distribution on Tuesday and the narrow relief bounce Wednesday. It is all part of a weakening in the market that the large caps started when the first mega cap tech earnings disappointed. The market recovered on some stronger guidance, but it could not top the early January high that led into earnings season. In short, what the companies were peddling was not good enough for investors to bid stocks up past the expectations level hit in the early January run. Now that the Fed is on the table indefinitely once more (even if it is just a couple more hikes, with the uncertainty rising again it may as well be indefinitely) the market is having a hard time dealing the other issues on the table.
Comparisons to 2000 can be made and we have done that. It is not a direct correlation of course. Volatility is on the rise but it is not at the levels seen in early 2000 when NASDAQ would rally 150 points in a session and then sell off 170 points the next just to rebound 100 the following day. The prices are much more compressed now, but there is more volatility. A 40 point move today is huge and while the moves are not jerking back and forth we have had some back and forth action NASDAQ is down 20, up 20, down 50 (mid-January) and again this month. There is more volatility and that is always a sign of some change from the prevailing trend.
NASDAQ and SP500 still have a chance to pull up from entering a dive. Their patterns are at a point where they have negative features but could also form double bottoms here; indeed, the latter often form out of more volatile markets when there is a lot of doubt and a lot of negative issues are swirling. There is still leadership that is holding up as noted, e.g., semiconductors, financials, and some of the healthcare sectors. Beyond those sectors there are many stocks holding support as well. In other words, despite the weakening and the troubles of the large caps, there is no overall meltdown. It is threatening and some sectors are in deep trouble, but that could still be a rotation.
How the market handles this second test from the January highs and how the leadership holds the line will tell the tale. We are somewhat pessimistic given the talk of the employment condition requiring several more rate hikes. That is dangerous because history shows it is wrong; we have kicked off more than one recession with the notion that strong employment had to be slowed in order to prevent inflation. We are very concerned the Fed is going to repeat history once more after it showed signs of enlightenment. Foolish hope on our part because early on in the campaign we said the Fed would ultimately fall into its usual tunnel vision with respect to inflation and rate hikes. It is certainly playing by the script once more.
That leaves us cliff hanging on Friday and likely not to get much of a read as to the market's next move. Monday will likely tell a lot more of the story as the big investors have to make their moves for the week. Right now we are not overly positive, but we still see a lot of strong stocks that are in great position to move higher. If the market were stronger it would be a slam dunk that they would rally well off these tests, but right now the market is still trying to work through the current round of negative sentiment and distributive action. We are going to continue looking at solid upside plays but we are also looking at the potential downside as well.
Support and Resistance
NASDAQ: Closed at 2255.87
Resistance:
The 50 day EMA at 2257
2273 is December 2005 closing high.
The 10 day EMA at 2270
The 18 day EMA at 2274
2278 is December 2005 intraday high.
2284 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 October 2005 up trendline at 2224
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 1263.78
Resistance:
The 50 day EMA at 1264
1264 from the December 2000 lows
The 10 day EMA at 1268
The 18 day EMA at 1270
The December highs at 1275 (intraday) and 1273 (closing)
The October to December up trendline at 1288
The January high at 1295
1315 is the May and May 2001 peaks
1324 to 1329 from the October 2000 lows.
Support:
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
The 200 day SMA at 1225
Dow: Closed at 10,883.35
Resistance:
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:
10,868 is the December 2004 high
The 18 day EMA at 10,840
The 10 day EMA at 10,838
The 50 day EMA at 10,809
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): 277K actual versus 285K expected and 273K prior
Wholesale inventories, December (10:00): 1.0% actual versus 0.5% expected and 0.5% 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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financial investment
Breakout test
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