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us stock market, trade stock
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2/13/06 Investment House Daily
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SUMMARY:
- Friday's rebound is Monday's decline as techs, chips, small caps lead the downside.
- Slow economic day ahead of a busy week.
- Market not buying talk of strong economy, searching for some help from Fed but not expecting it.
Stocks resume the dips as leadership erodes a bit more.
Friday leaders and the stock market in general rebounded from an early dip, showing some promise as SOX rebounded from the 18 day EMA and SP600 jumped from an intraday 50 day EMA test. That only seemed to open the path to the downside, however, as investors searching for a reason to buy more stock found only reasons to sell some shares. GOOG was panned in Baron's and gapped lower on stronger volume. Bernanke's congressional speech was on the tongues of many floor traders and apparently investors as well, and they were not feeling good about what was ahead.
That was enough to start stocks lower, and that kept stocks under pressure all session. A last hour rebound kept SP500 in decent shape, but the recent leaders were once more under pressure. SOX undercut the 18 day EMA for the first time since late 2005 and SP600 sold to the 50 day EMA. NASDAQ fell through the bottom of its recent lows as NASDAQ 100 continued to languish well below the 50 day EMA. Many leaders are holding their ground, but more and more are cracking and falling through near support.
Volume was lower overall, indeed, much lower, coming in well below average. Despite the continued erosion in the leaders this lower volume indicates that selling pressure may be letting up. In the market overall it at least indicates that shares are not being dumped wholesale. After the distribution from mid-January and early February, the market needs this lower volume to recover and rebuild. It is often a sign that an oversold condition is getting overdone, particularly in this market where investors simply don't know what is coming and are sitting on their hands. With the general downside bias in the market the indecision just let stocks melt lower.
Basically the market is in limbo ahead of Bernanke's speech. The fear of the Fed that was controlling stocks in December has re-emerged with 25 basis point hikes priced into bonds for both the March and May FOMC meetings. With the renewed fear of a strong economy, somewhat erroneously misplaced in our view, those 50 BP in hikes are considered the minimum at this point. Of course the strong concern about a strong economy is really a worry about a weak economy after the Fed overshoots. That is our concern at this juncture: the Fed once again attributing too much strength to the economy and overreacting, sending an otherwise solid economy into a growth plane below trend. Right now the market appears to be agreeing with that premise.
THE ECONOMY
The slow economic day Monday belies a very busy week that gets underway with retail sales Tuesday. Important reading after December disappointed, and it will confirm or not what many retailers reported earlier with respect to gift cards. As we noted in December, the retail season has lengthened with gift cards and it tends to mask how strong December was as the cards are not recorded as sales until redeemed.
Bond yield curve continues to invert.
The yield curve is not at a deep 50 to 75 basis point inversion yet; that steeper inversion is considered the point where it predicts a recession. That gives some analysts and economists the courage to say that this inversion (10 BP as of the Monday close at 4.67% versus 4.57%) does not mean much.
Maybe not just yet, but what we have seen is a flat curve go to a modest inversion of a point or two, then 3 to 5 points and then a jump to 10 basis points. Just as with rate hikes and judging their impact on the economy (they are cumulative) or a currency once it starts to decline after an 'adjustment', a modest inversion can turn large in a hurry once the move starts. The most recent jump came after the last rate hike, and with the Fed on tap for two more according to the Fed Funds futures, we are going to see more of an inversion unless something changes and starts the long end moving higher.
There continues to be talk of what could do that, namely foreign investors shunning US treasuries, but if that does happen that is not necessarily a good thing because then we have dollar issues as well and inflation prospects. We are in a difficult position with not many solutions that actually solve the problem. When push comes to shove, however, we always feel that growth is better than a lot of ifs and maybes and economic fine tuning attempts.
THE MARKET
MARKET SENTIMENT
VIX: 13.35; +0.48
VXN: 17.39; +0.51
VXO: 13.1; +0.89
Put/Call Ratio (CBOE): 1.01; +0.33. Second close above 1.0 in the past week. The more closes above 1.0 the more indication that the move is getting overdone.
Bulls versus Bears:
Bulls: 51.6%. Bulls did not rally to end January despite the market bounce off the 50 day EMA, but last week's drop and choppy trade did push bulls lower from 52.6%. That continues the drop from 60.4% hit in January on the high for this cycle. It is a positive to see bullishness fade during the rebound to end January; finally some of the bullish sentiment has cracked. It still, however, has a way to go to reach a level that will produce enough negative sentiment to spark a rally if this one should fail. It hit 44.8% on the low on the last leg, just above the 43.5% low in May.
Bears: 25.3%. Bears did not rally as bulls faded, instead dropping modestly from 25.8%. We expect that to change after this week, but really wanted to see bears start to ratchet higher now that bulls are cracking. Bears have held above 20% on this last 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: -22.07 points (-0.98%) to close at 2239.81
Volume: 1.706B (-17.99%). Big drop in volume, falling below average for the second time this month and the lowest since mid-January. This shows the selling pressure was simply not there despite the point loss; buyers just were not buying ahead of all the economic news and the first Bernanke speech that kicks off a new era (despite Greenspan trying to keep the limelight).
Up Volume: 439M (-703M)
Down Volume: 1.237B (+415M)
A/D and Hi/Lo: Decliners led 1.93 to 1. Downside has taken over breadth on NASDAQ the past month after starting January finally showing some solid upside breadth. Distribution and churn in February and deteriorating breadth matches the deteriorating price pattern.
Previous Session: Decliners led 1.19 to 1
New Highs: 73 (+7)
New Lows: 31 (-4)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixic.html
NASDAQ undercut the recent lows intraday but the last hour rebound closed it within that range. Still, it was a lower close since the January rally started the month, making yet another lower high and lower low. The silver lining was the lower volume; after the distribution about all that shows is the selling pressure abated ahead of the Bernanke speech as investors are not sure what to make of the new Fed chairman. The technical pattern continues to weaken, however, as NASDAQ probes lower toward the October up trendline at 2227. Not falling hard here and that leaves open the possibility of an upside rebound; again, however, the pattern has deteriorated, and NASDAQ will need some assurance the Fed is almost done. If not we don't see the market building a lot of faith into the Fed's ability to hit the economy on the button.
SOX (-1.40%) was unable to rebound enough in the last hour to recapture the 18 day EMA (534.55) it undercut for the first time since late December. It was not a major breakdown, and the chips continue their uptrend. They also have a double top trying to start from the late January and February peaks. SOX rallied well up to that level last week and then reversed intraday with the market. It has been weak since. This break was not on strong volume so you don't want to read too much into a one-day breach (thus far) of a moving average. Shows some more erosion in some of the leaders as the rest of the market continues to struggle as well. One of the last leadership sectors of the market, and it needs to hold up, but likely not to get much ahead of Bernanke.
SP500/NYSE
Stats: -4.13 points (-0.33%) to close at 1262.86
NYSE Volume: 1.367B (-19.8%). Lowest volume since the Christmas week shows just not a lot of selling pressure on NYSE stocks despite the losses. Given SP500's recovery and SP600's test of the 50 day EMA and hold, not bad.
A/D and Hi/Lo: Decliners led 1.7 to 1. Decliners were up again as the small caps continued their struggle. Improved from -2.1:1 intraday, but it was not the small caps helping drive things back up as they closed near session lows.
Previous Session: Advancers led 1.06 to 1
New Highs: 67 (-17)
New Lows: 43 (+8)
The Chart: http://www.investmenthouse.com/cd/^gspc.html
SP500 was down on the session and undercut the 50 day EMA (1264) once again, but the action was not bad at all. It easily held the recent range of the past two weeks, continuing the lateral move and trying to hold the line for a rebound. Of course, the action keeps it in the right shoulder formation of a two-headed reverse head and shoulders pattern, but any day it can hold up in a weak and indecisive market is, sadly, a decent day. It was definitely sitting in neutral ahead of Bernanke.
SP600 (-1.00%) continued its struggles, selling down to tap the 50 day EMA (364.54) on the low. This time it could not make the rebound as it did Friday. Low volume was good to see. SP600 has made the 50 day EMA test, and now it needs to show some strength. Problem is, not a lot of catalysts to set it higher now that it has tested. The small caps have been leaders to this point; this is where they will have to reassert it once more. Likely not to happen before Bernanke. If it fails on volume, bad sign for market.
DJ30
DJ30 spun its wheels at the November, December and late January highs (10,950ish), obviously a point of resistance as DJ30 tries to fight the formation of a right shoulder. Tapped the 18 day EMA (10,853) on the low and recovered for a modest loss on very low, below average volume. It too is biding its time here, looking for a catalyst. As it does, it is setting up a bearish pattern as are most of the indices.
Stats: -26.73 points (-0.24%) to close at 10892.32
Volume: 244M shares Monday versus 303M shares Friday. Volume has declined since the selling last Tuesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
TUESDAY
A day closer to the first Bernanke speech (Wednesday) with retail sales and inventories getting the economic data started. It is likely not going to do much, however, as the market is really honed in on what Bernanke says. The market is anticipating a more hawkish Bernanke versus the more dovish Bernanke as his talks of the last six months indicated. The reason is that Bernanke has to show he is tough lest the financial markets lose faith in him early. With all of the talk about a strong economy given the stronger employment data and the Fed's history, that has some truth (frightening as it may be) to it.
Of course, Greenspan was tough on inflation when he first came to the chairmanship, and he sent us into Black Monday. He eventually had the respect of the markets, but in trying to gain its respect early, he lost a lot of credibility. We would hope that Bernanke is more thoughtful given his background, but only time will tell.
Despite everyone's opinion on the matter, the market has peaked for now and has deteriorated technically with some scattered distribution. It is not done in; there are still many leaders in good shape though the ranks are thinning some as the uncertainty re the Fed and the economic future continues.
Yes, uncertainty regarding the economic future. Despite the economists and brokerage houses calling for stronger economic results ahead, the market is not buying into it. In a way, with the Fed in the hiking mode, the calls for stronger growth are actually helping the opposite come true. The more the economists and Fed are convinced the economy is going to be strong, the more likely the Fed will go too far. That is what happened in 2000, and the market is obviously not buying into the economic strength story right now. Either it is just going to be weaker on its own or the Fed is going to go too far or some combination of both, but the market is showing lower lows and lower highs in the techs where you would expect the growth to be if the economy was so strong.
It still is well within the range where it could turn things around what with SP500 holding in its range, SOX still in its uptrend, and SP600 testing the 50 day EMA on this lower volume. For now the market is holding tenuously as it awaits Bernanke's comments. The lower volume shows no real selling pressure, just nervousness to see what the lay of the land is with Bernanke, and then it takes its direction.
Technically the market has deteriorated, and we doubt that Bernanke will give anything of substance that would change the market's current belief that he has to show he is 'strong like bull' with respect to inflation. Though we have only seen two in 25 years, Fed chairmen typically don't tip their hand to Congress at these semiannual updates. Thus there is not much to change the mindset other than having the thing done with.
Thus we are likely to see another low volume session of waiting, but the market has become a bit oversold and could start a creep higher ahead of Bernanke on Wednesday morning. Again, we don't see Bernanke doing much to change the current perception he has to prove himself tough on inflation, so the market may be disappointed once the speculation becomes fact. With the current technical deterioration, that does not make things look good after his talk.
Support and Resistance
NASDAQ: Closed at 2239.81
Resistance:
The 50 day EMA at 2263
The 10 day EMA at 2263
The 18 day EMA at 2269
2273 is December 2005 closing high.
2278 is December 2005 intraday high.
2290 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 2227
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 1262.86
Resistance:
1264 from the December 2000 lows
The 50 day EMA at 1264.42
The 10 day EMA at 1267
The 18 day EMA at 1269
The December highs at 1275 (intraday) and 1273 (closing)
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 1226
Dow: Closed at 10,892.32
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 10 day EMA at 10,860
The 18 day EMA at 10,853
The 50 day EMA at 10,817
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 14
Retail sales, January (8:30): 0.9% expected, 0.7% prior.
Retail sales, ex-autos (8:30): 0.8% expected, 0.2% prior.
Business inventories, December (10:00): 0.5% expected, 0.5% prior.
February 15
New York Empire Index, February (8:30): 18.0 expected, 20.1 prior.
Capacity utilization, January (9:15): 80.8% expected, 80.7% prior.
Industrial production, January (9:15): 0.2% expected, 0.6% prior.
Crude oil inventories (10:30): -318K prior
February 16
Building permits, January (8:30): 2.068M expected, 2.075M prior
Housing starts, January (8:30): 2.023M expected, 1.933M prior
Philly Fed, February (12:00): 9.2 expected, 3.3 prior
February 17
PPI, January (8:30): 0.2% expected, 0.9% prior
Core PPI, January (8:30): 0.2% expected, 0.1% prior.
Michigan sentiment, prelim, February: 91.0 expected, 91.2 prior.
End part 1 of 3
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