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us stock market, trade stock
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2/15/06 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Target hit alerts: None issued
Buy alerts: MINI; WFR; IMGC
Trailing stops: None issued
Stop alerts: OII
SUMMARY:
- Bernanke sparks a modest sell off but stocks rebound on further oil decline.
- Industrial production slips negative as New York PMI rebounds.
- Net foreign purchases less than expected on decline from UK
- Small caps and large caps still trying to lead NASDAQ back higher.
Stocks recover from Bernanke pullback but volume lags.
A soft start gave way to a modest rally ahead of Bernanke's prepared statement to Congress, but when the words were released the rally stalled and the indices sold off, giving back the move. Over lunch investors had a change of heart over Bernanke's words and rebounded, rallying back to the early morning high. The small cap SP600 led the gains once again (0.75%) but NASDAQ was not far behind (0.63%). NASDAQ did not clear the December high, however, and volume was lower and remained below average. That leaves NASDAQ looking better but still in a negative technical position. There simply are not a lot of buyers willing to move in and push it higher, something seen since basically the first mega cap tech earnings came out in January.
The Bernanke statement adopted the last FOMC statement meaning the Fed is still set to tighten at least at the March meeting and while it believes the accommodation has been removed, it will base further action on the data. That brings up the age old issue of what data it is looking at. You would hope the bond market or something such as ECRI because that shows future economic activity expectations (accurately at that), and thus what kind of growth there is ahead. What you don't want the Fed watching is employment related numbers because they tell the story from 6 or more months back.
In short, the Fed following the incoming data is not overtly comforting, but when you consider Bernanke's position, what more could he have done? His goal coming into today's session had to avoid anything that roiled the markets. As they were expecting what the Fed had already laid out, Bernanke just parroted those positions. He also has a highly respected ex-chairman out there talking about how strong the economy is and what needs to be done even before the chairman's seat got cold. He couldn't go in and say all of the prior assumptions were a lot of beans. He has not even had a chance to settle into the chair and he is already a bit constrained in what he can do. It will take a bit of time before he can assert himself fully. In the meantime that leaves the market in the same wait and see what happens mindset as a result of a Fed that says it is almost done but cannot make any real promises. That is keeping investors from really biting for now.
The bond market clearly believes there are at least two more 25BP rate hikes; by May it has the Fed funds rate at 5%. That is about as clear a signal as you can have, though this far out there can be significant swings in the contract as new data emerges. It is hard, however, to bet against the bond market, but for now it gives no more insight past a potential 50BP more in rates.
On the equity side stocks remain pensive, but we are also seeing the financial sector performing quite nicely with GS and others taking off even as Bernanke does his 'me too' with the prior Fed's position. These stocks are tied to interest rates, some more than others, but they are looking strong. That indicates that even though the Fed is continuing with its rate hiking, the financials are looking at no more than two, i.e. an end is truly in sight. We have a feeling that if the Fed is really tuned in to the data that matters it will stop after the March meeting. That goes against convention and likely the Fed will use the wrong data as usual, but with a new Fed chairman we can dream a bit, particularly with the financials performing well, we are taking some poetic license.
THE ECONOMY
Industrial production declines unexpectedly in January.
Warm weather resulted in much less utility usage and thus an unanticipated decline in output. Throw a 10.1% decline in a component, and you get unexpected declines. Electric utilities were down 9.1% while natural gas utility output was down 15% (+4.3% in December). With the largest drop in utility output on record you cannot get too worked up about the decline. Overall production has remained strong, and again, with this aberration it is really no indication of future activity.
New York PMI improves.
This region had shown quite the slippage in the prior quarter, but February the New York area posted a higher than expected mark at 20.31, topping January's 20.12 and the 18.30 expected. The regional reports have been weakening; not cratering, just weakening. This back to back 20+ reading shows some firming. The regional reports and the national ISM are an area of concern for us, and this two-month action is encouraging. As we have noted before, the economy is not crashing by any stretch; it is not, however, so strong as to be immune to significantly more Fed action.
Net foreign purchases fall.
The data is a month old but December inflows were lower at $56.6B, falling short of the $65.7B trade deficit for the same month. That was well off the $82.3B expected, and that estimate was down from $91.6B in November. For 2005 inflows were $910.7B versus the $725B trade deficit. That shows plenty of interest in 'funding' the trade deficit.
That is really a misnomer; they are not actually going out and saying 'we better buy some US instruments to cover the gap.' It is a combination of several factors including the desire to aid their own economies by keeping the US market open to their own production. Further, despite all of the gloomy talk (a lot of it politically motivated) about the sorry state of the US, foreign investors still actually want to own part of the most stable and historically consistently fastest growing economy.
A drop in UK purchased led the drop, falling from $34B in November to $11B in December. Lots of hedge funds work through the UK as well as petro-dollars. Will need to see if this continues, but the hedge fund s are volatile month to month.
THE MARKET
MARKET SENTIMENT
Not showing much at this juncture. The put/call ratio topped 1.0 on two occasions this month, not enough to ignite any turn from the weakness. Bulls and bears are not near extreme levels that would facilitate a turn either.
VIX: 12.31; +0.06
VXN: 16.05; -0.86
VXO: 11.82; -0.29
Put/Call Ratio (CBOE): 0.71; -0.15
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: +14.26 points (+0.63%) to close at 2276.43
Volume: 1.839B (-2.03%). NASDAQ volume fell slightly as the techs furthered their rebound attempt. The upside trade is nowhere near the downside strength, and that will plague the upside move if buyers do not step in. Price/volume action has deteriorated on NASDAQ since the start of the earnings season. It has not gone into the gutter, but the solid action seen up through the first week in January has eroded.
Up Volume: 1.284B (-34M)
Down Volume: 533M (+6M)
A/D and Hi/Lo: Advancers led 1.64 to 1. Not a lot of excitement as the breadth failed to continue its stronger showing from Tuesday. Just an internally weak day.
Previous Session: Advancers led 1.91 to 1
New Highs: 132 (+43)
New Lows: 27 (+7)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixic.html
A slightly lower start at the 50 day EMA (2257) and then an up, down, then up session, all within the range between the 50 day EMA and the December intraday high (2278). Lower, below average volume and still below resistance in its series of lower highs and lower lows; it simply is not showing the kind of buy side interest to make a strong move. That makes this look a lot like another lower high in the making in this cycle since peaking in early January.
SOX (+0.33%) continued to rebound as well after that deeper intraday tap Tuesday, but it too was on low volume and did not have a lot of power. It rallied past the 10 day EMA (538.28) on the high but then faded to close just below that last near term resistance point. Technically SOX is not in bad shape, holding near the mid-January highs but below those twin tops in late January and last week. Still trending higher but it has lost its momentum for now along with NASDAQ as both of these growth indices search for a reason to price in stronger earnings.
SP500/NYSE
Stats: +4.47 points (+0.35%) to close at 1280
NYSE Volume: 1.729B (-4.69%). Volume backed off as the NYSE indices made a further advance. Trade remained above average, so it was not a dog of a session, particularly with the strong volume advance on Tuesday. NASDAQ has lost some momentum, but NYSE is still finding some strengths.
A/D and Hi/Lo: Advancers led 1.75 to 1. Decent in the aftermath of the solid Tuesday breadth as the small caps' return continues to help advance the market.
Previous Session: Advancers led 2.06 to 1
New Highs: 152 (+36)
New Lows: 19 (-12)
The Chart: http://www.investmenthouse.com/cd/^gspc.html
The large caps cleared the December intraday high at 1275, rallying again but on lower volume. Trade remained above average, and thus the action was nothing to frown upon. SP500 is in a short downtrend similar to NASDAQ, having made a couple of lower highs and lower lows. That makes this a key rebound attempt, and it has started on good volume, solid breadth, and has taken out the first resistance level. More important than the December high, however, is the late January peak (1288) that marks the first lower high. Taking out that on strong trade breaks up this short trend lower.
SP600 (+0.75%) led the market for the second session, putting some emphasis on its Tuesday break above the December highs. It also cleared the short term moving averages. Some resistance at 376.50 before it moves on to the last all-time high at 380.83. The small caps have come to life off of the 50 day EMA (365.14) test, returning to market leadership. As with the financials, that is more of an economic positive as small caps are mostly growth stories.
DJ30
Continued higher, this time surpassing the January high at 11,048. Volume backed off to average, but another solid move. It will get some help from HPQ as it reported better than expected earnings after the close. That may help the techs; their weakness has fostered the Dow's strength.
Stats: +30.58 points (+0.28%) to close at 11058.97
Volume: 298M shares Wednesday versus 307M shares Tuesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
THURSDAY
Bernanke is in the book and there is no change in stated Fed policy. That leaves the market looking at one and likely two more hikes and then a month to month water torture from there unless the Bernanke Fed looks somewhere other than employment data and wage growth that Greenspan used and ultimately crashed the market and economy in his last big market impacting move in 1999 and 2000.
That scenario is not one that appears beneficial to the market, but we do see some strength in the financials and the small caps have returned to leadership once more as well. As noted above, that is a market indication that the Fed won't overdo it on interest rates and that the economy will continue to grow.
Overall, however, the market remains split with SP600 and DJ30 the only indices that have broken up the recent weakness. SP500 is improving with the solid accumulation session Tuesday, but NASDAQ still has yet to show any real strength since starting its slide into the current short downtrend in January. We don't want to pronounce it dead, and if the other indices continue to improve, some money will likely start to work its way into NASDAQ once more. Oil prices are falling and gasoline is tanking as well. That only helps the equity environment.
For now it is a very stock specific market. You see stocks in the same sector going in different directions in some cases, and that underscores some disarray in the market and a continued fight between buyers and sellers. There is some improvement underway as noted, and as long as we see strong stocks making strong moves we will participate unless the overall action begins to falter once more. The market makes the ultimate determination of direction, and we see enough strong stocks and sectors to help it through this rough patch. It is not a lock, but we will play the strong stocks as the provide the opportunity to do so.
Support and Resistance
NASDAQ: Closed at 2276.43
Resistance:
2278 is December 2005 intraday high.
2288 from December 2000 low.
2300 is the October/December up trendline.
2328 from the May 2001 peak
The January high at 2333
3015 is the December 2000 peak and the October 2000 low
Support:
2273 is December 2005 closing high.
The 18 day EMA at 2265
The 10 day EMA at 2269
The 50 day EMA at 2257
The October 2005 up trendline at 2233
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 1280.00
Resistance:
The late January peak at 1285.
The January high at 1295
1315 is the May and May 2001 peaks
1324 to 1329 from the October 2000 lows.
Support:
The December highs at 1275 (intraday) and 1273 (closing)
The 18 day EMA at 1270
The 10 day EMA at 1270
The 50 day EMA at 1265
1264 from the December 2000 lows
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 11,058.97
Resistance:
11,176 - 11,186 from April 2000
11,248 from the May 2001 peak.
11,238 from the September 2000 peak.
Support:
11044 is the January high.
10,985 is the March 2005 intraday high
10,965 from Q4 2000 and November/December 2005
10,868 is the December 2004 high
The 10 day EMA at 10,921
The 18 day EMA at 10,891
The 50 day EMA at 10,834
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): 2.3% actual versus 0.9% expected, 0.4% prior (revised from 0.7%).
Retail sales, ex-autos (8:30): 2.2% actual versus 0.8% expected, 0.2% prior.
Business inventories, December (10:00): 0.7% actual versus 0.5% expected, 0.6% prior (revised from 0.5%). Business inventories rose for the seventh straight month. Some indication of lower consumption, but the strength in sales continues as well.
February 15
New York Empire Index, February (8:30): 20.3 actual versus 18.0 expected, 20.1 prior.
Capacity utilization, January (9:15): 80.7% actual, 80.8% expected, 81.2% prior (revised from 80.7%).
Industrial production, January (9:15): -0.2% actual versus 0.2% expected, 0.9% prior (revised from 0.6%).
Crude oil inventories (10:30): +4.85M bbl versus -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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