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trend trading stock, stock watch
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2/28/06 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Target hit alerts: None issued
Buy alerts: ALNY; BABY
Trailing stops: HOLX; VAR
Stop alerts: None issued
SUMMARY:
- Economic data causes market stumble, GOOG gives it an extra kick.
- GDP shows recovery late in Q4 as oil supplies became more plentiful. Inflation still hanging in there.
- Chicago PMI, consumer confidence, existing home sales all show some softness.
- Market has to regroup yet again after failing at January highs.
Market pauses over economic data, then Google helps knock it lower.
The economic data came faster on Tuesday with the first GDP revision, existing home sales, Chicago PMI and consumer confidence. GDP was stronger than expected, a good and bad result given the Fed still in the hunt. The 1.6% gain, however, was hardly something the Fed is going to cite as a reason for further raising interest rates. Existing home sales, the PMI, and confidence were all lower than expected, and while that takes some of the Fed heat off the market, that alone is hardly worth rallying about when there are worries the economy may not make it through many more Fed rate hikes.
The market was working through that data, having sold back to first support in the first hour and starting to rebound. Then GOOG announced at an analyst conference that its growth was going to slow from 100% year/year (the problems of becoming a large company). GOOG dove 50 points lower on the news and the indices immediately rolled lower as well. Volume jumped, breadth expanded to the downside. After failing to take out the January highs on NASDAQ and SP500 with this low volume ascent, the sellers were looking for an excuse. The GOOG story was it and the sellers came out swinging.
As noted Monday, the problem with low volume rallies is their susceptibility to upset when they approach resistance and then have to deal with a big negative story. Friday they handled it with the Saudi Arabia oil attack. Tuesday they could not handle it when one of the growth favorites spoke some truth about its future. As is often the case, the market overreacted.
It may have been an overreaction, but the nuts and bolts that make up market moves were pretty ugly. Volume jumped well above average on both NASDAQ and NYSE and breadth was better than 2:1 on the downside on both indices as well. NASDAQ and SP500 tried their hand at the January highs but as of Tuesday that attempt was a failure as sellers used the pause at resistance to move in. GOOG was an excuse and the sellers took advantage of it, driving stocks through near support. Thus far they managed to hold next support at the 18 day EMA, but they will have to rebuild after this distribution returned. The higher volume selling shows that big investors were selling more stock than they have bought lately, and if that continues the rally is in trouble. These damn low volume rallies always leave the market in risky positions.
Leadership stocks mostly held near support as well but there are more crackups. Semiconductors showed relative strength and were up modestly most of the session until late when everything suffered some selling pressure. SP500's loss looked worse because it was dropping from resistance. NASDAQ is still trading within its trading range and SOX held the 50 day EMA again, still consolidating. It looked decent, but again, it lagged the move higher; indeed, it did not make the move with the rest of the market last week.
In sum, not a good development for the market. Buyers not only did not come in and drive the indices through resistance, but sellers moved in and actively sold the market. One distribution session does not mean a breakdown, but before the low volume move higher last week stocks showed some distribution. This session needs to be met with buying right away if this breakout attempt is going to stay alive.
THE ECONOMY
GDP rises in line with expectations, core prices at Fed limit.
The second iteration of Q4 GDP rose to 1.6% as government spending improved as did general business activity. Business investment was revised higher to 5.4% from 2.8%, a better indication than originally demonstrated. That was the general trend of the report: modest improvements as more data came in.
Not only more data, but also more oil. Q4 was on the heels of the twin Gulf storms when all of that production was shut in. We imported a lot more oil, but immediately after the storms, it is becoming clearer that there was a major shortage of oil and that slowed business. The combination of higher oil and gasoline prices and just plain shortages of product slowed business.
Thus, a lot of activity that was slated for Q4 is taking place here in Q1. Thus the 4.5% to 5% and beyond expected GDP gain. In addition to that, there is the rebuild that continues in the south, highlighted this week in New Orleans given the Mardi Gras celebration. We noted in the fall that while the storms would slow the economy near term, there would be a storm related surge in 2006 as well. That is the other factor bolstering the gains: projects that were put off and the necessary rebuilding projects.
That is the unmentioned fear the Fed is dealing with. Sure it sees the fading housing market and softening in other numbers, but with the perception that the economy is surging Bernanke is hard-pressed to call off the hikes right now for fear of being branded an inflation slacker.
Housing is indeed a big issue for Bernanke.
We talked about this last week, but it is worth discussing a bit more. Bernanke stated to Congress his concern about the housing market and the impact on the economy if it goes into sharper decline. The last three times we experienced a peak in the housing market, the economy suffered a decline of roughly 50% in output.
Existing home sales are following new home sales lower, showing a 2.8% drop last month and the fifth month in a row sales are lower. The inventory is higher as well, up to 5.3 months from 4.5 months. Levels are definitely lower and getting lower. You hear, however, the same things you heard in 2000, i.e. despite lower levels the market is still historically strong. So was the economy in 2000; that does not mean it wasn't weakening. Any market that was setting records is still going to look good compared to history as it stalls out. Wake up and smell the coffee.
In any event, Bernanke is a housing market watcher and he knows the impact of a peaking and then declining market on the economy. If he holds true to this we should see another hike and then maybe one in May.
The issue on the other side of the ledger it the PCE. It rose to 3.3% overall (3.0% on the first GDP report). The core fell to 2.1% from 2.2%, a bit of improvement. The Fed likes to see this at 2.0% or lower. With it above 2% Bernanke will remain under some pressure to keep raising rates. March is a done deal. May is likely a done deal. After that he has to stop, but even then it might be too many hikes for an economy that is solid but slowing.
Chicago PMI, confidence lower.
By historical standards the economy does remain pretty strong and we are afraid the Q1 GDP forecasts are clouding a lot of judgment. It is a borrow from Q4 and the two should be averaged out for the reasons noted above. We continue to see, however, slowing in the expansion. Chicago PMI was 54.9 versus the 58.5 expected and 58.5 prior. Consumer confidence fell to 101.7 from 106.8 (104.0 expected). Durable goods orders were hammered, housing is weaker, business investment is backing off some. The economy remains solid, but it is slowing due to the age of the expansion, the weight of many rate hikes, and high energy costs to name a few issues.
The big failure in 2000 was noticing that a slowing economy could turn into a declining economy if it was choked hard enough. The stock market is still holding up for now, but we need to see how this new selling after the low volume rise plays out. All of the data in 2000 was strong compared to historical norms, and even though it was weakening, apologists said it was 'still strong' just as they are saying today. Of course it was. It was also on the course to being a lot weaker. Everyone with decision making authority bought into that line and the economists and reporters bought it as well. We had the strongest declining economy in the world, one with an inverted yield curve by the way, and soon we had a recession.
Hopefully Bernanke realizes this slowing, sees housing for the issue it is, gets off this 'inverted yield curves are cool' kick, and stops the hikes before things get out of control. That may just be a fool's hope, so we need to watch this current resurgence of distribution closely to see what the market does and what it forecasts for down the road.
THE MARKET
MARKET SENTIMENT
VIX: 12.34; +0.75
VXN: 15.99; +1.02
VXO: 11.84; +1.36
Put/Call Ratio (CBOE): 0.91; +0.19. Good jump in put activity on the session but still not cracking the 1.0 level on the close. A couple of 1.0+ closes during the early February selling. Needs a few more to show the anxiety reaching a level to bounce things. The market is not in a downtrend and yet put activity is fairly high. There are many betting on downside but there are also put sellers getting squeezed as the market sold, and they were forced to cover. Either way the theory works: put buyers getting geared up and playing the downside hard and put sellers panicking and covering their positions (no one wants to be caught naked when the tide goes out). Both are examples of fear building, but it is not at a level that can indicate an extreme.
Bulls versus Bears:
Bulls: 45.3%. A strong drop from 48.9% the week before. A fairly precipitous decline the past few weeks from 60.4% hit in January on the high for this cycle. 35% is considered an extreme level that can indicate a reversal, but readings of 44.8% on the low on the last leg and 43.5% in May triggered solid market rebounds. Getting close, and with NASDAQ at support and trying to make a higher low, the timing is good.
Bears: 29.5%. Strong climb from 27.7% and 25.3% before that. The market never turned overly positive as measured by this indicator as it never reached below 20% on this move. It is at a level that can help the market turn. 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: -25.79 points (-1.12%) to close at 2281.39
Volume: 2.207B (+24.46%). The first above average volume in three weeks and it comes on a down session. After very modest accumulation last week NASDAQ sellers were out in force as volume was up early and then spiked on the GOOG news. Never like to see a low volume rise to resistance met with a significant volume increase.
Up Volume: 617M (-584M)
Down Volume: 1.549B (+1.032B)
A/D and Hi/Lo: Decliners led 2.06 to 1. Upside breadth improved early in the year and then fell back to mediocrity. Tuesday the downside flexed some muscle. We don't put too much emphasis on one session, but when it is combined with a failure at resistance and a higher volume drop it starts to paint a picture.
Previous Session: Advancers led 1.42 to 1
New Highs: 131 (-105)
New Lows: 41 (+19)
The Chart: http://www.investmenthouse.com/cd/^ixic.html
Gapped lower, nothing nefarious in itself as a soft open can be the opening big buyers want to resume accumulating shares. It held 2278 support (the 18 day EMA and December high at 2278) on the close. That is near support and kept NASDAQ easily within its recent range. NASDAQ is not near a breakdown as of the Tuesday close, still holding the higher low it made at the 50 day EMA (2265) last week. Technically it is in decent shape if you ignore the distribution. In other words, if it can hold the line here and resume the upside it would be in great shape. The distribution is a negative that speaks the loudest, but again, it was one session. While not good news at all, if NASDAQ can hold the line at the 50 day EMA or better it would be in good shape. That would require another change in character after the Tuesday higher volume selling. Not impossible but not easy.
SOX (-0.80) held up relative well, and was indeed positive much of the session before melting back late. It rallied to the 18 day EMA (531) on the high but then folded. It held the line above the 50 day EMA (520.34), having already sold off ahead of the rest of the market. That gave it that appearance of relative strength. There are still, however, many leadership semis holding up well. SOX managed to fend off some downgrades this week and hold the 50 day EMA. It need to show some leadership once more.
SP500/NYSE
Stats: -13.46 points (-1.04%) to close at 1280.66
NYSE Volume: 1.766B (+22.63%). Volume spiked on NYSE as well as the indices turned lower. The last strong volume session was two weeks back when the NYSE indices posted a solid upside gain. This was stronger selling volume after last week, but it was not stronger than that upside accumulation. Of course, the NYSE indices will have to show more upside strength again to indicate the buyers are back in. A higher volume selling session after testing resistance is hard to overcome, however.
A/D and Hi/Lo: Decliners led 2.16 to 1. As with NASDAQ the downside breadth expanded, indicating widespread selling in both large and small caps. Indeed the small caps out sold the large caps on a relative basis. Breadth was decent on the upside move; it slacked off as the indices moved laterally the past two weeks, however, and it was clear the sellers were back in action Tuesday.
Previous Session: Advancers led 1.39 to 1
New Highs: 102 (-179)
New Lows: 35 (+11)
The Chart: http://investmenthouse.com/cd/^gspc.html
Started soft and got softer all morning as the large caps were hit along with the techs. SP500 struggled to hold the 18 day EMA (1280.91) all session, making three tests of that level and managing to just hold that level on the close. Hard drop an unable to get up all session. Does not have much room on the downside from here in order to hold the pattern and keep alive the breakout attempt over the January high (1295).
SP600 (-1.2%) fell back immediately after a break to a new all-time high Monday. Volume was low on that move, and that left it open to attack. Tuesday it was attacked and gave back a chunk, tapping at the 18 day EMA (375.39) on the low and rebounding just slightly. That move took it just over its upper channel line, but without the volume it could not hold the move. SP600 remains easily in its uptrend, but it was hammered back Tuesday.
DJ30
The Dow did not escape the selling either, fading back close to the 18 day EMA (10,999.75). That more or less holds the breakout though volume was back above average on the selling. Not as strong as the upside two weeks back, but a solid shot of distribution no less. Good place for it to hold, but it is rare for just one sharp down session to clean out all of the sellers.
Stats: -104.14 points (-0.94%) to close at 10993.41
Volume: 325M shares Tuesday versus 268M shares Monday. Good price/volume action up until Tuesday. As noted above, one distribution session does not make a breakdown, and DJ30 has 'acted' better than the other indices of late. The entire market, however, has to overcome this return to distribution and must do it pretty quick to keep the ball rolling.
The chart: http://www.investmenthouse.com/cd/^dji.html
WEDNESDAY
What is done is done, i.e. there was higher volume selling Tuesday when worries about the Fed and oil prices were crystallized in Google's comments about its growth. Now GOOG is rather removed from Fed action and energy prices in its business operations, but investors were ready to extrapolate an anticipated GOOG slowdown to the rest of the market. GOOG said only that its own growth and size were obstacles for its future growth, i.e. the troubles of the rich, but again, investors readily convinced themselves it might mean something for the rest of the market. As always, the market shoots first and asks what happened sometime later.
That leaves the indices, after a one-day selling event, already at 'must hold' levels. If they don't hold it does not mean they are going to melt down to the core of the earth, but it does mean a longer road to recovering and making another challenge of the highs. A quick hold and rebound, i.e. fighting fire with fire, makes Tuesday look like a one-day event.
We are not necessarily banking on that prospect. There was some distribution before the lower volume rise the past two weeks, and as is often the case, that light volume rise got rattled when the wrong news hit. The market has been surprisingly resilient in the face of oil that rebounded again from its deathbed and a Fed that the market perceives as more hawkish. Of course the market is just playing the odds as the Fed often goes too far and oil rebounds.
Now we may get a relief bounce almost immediately. We have looked back at some market trends over the past couple of years, and about 80% of the time when the market starts a new month it is up the first three sessions, i.e. it is up net for those three days (not necessarily up each session). Thus after the Tuesday dump we could see some new money put to work to start a new month, particularly after a downside session as some perceived bargains appear. If we get such a move we will watch volume very closely. If there is more low volume upside, once the new money for the month is put to work we are likely to see a return to the downside. If we get that move we will use it to close out positions that are struggling or otherwise look played out (on the 'bubble').
There is more economic data before the open (personal income and spending) and then the ISM and crude oil inventories after the session is underway. If we get the 20% end of the stick, i.e. more selling, we will have to protect positions. The market may sell more and then rebound, but with the high volume turn back from resistance after that low volume rise, the red flags are up and that requires more defense.
We can look at selling some calls on strong stocks in solid uptrends, then buying them back after the pullback to support. We can also look at a pullback to support as an opportunity if the stock holds. There will be stocks that perform even in an overall market pullback. Indeed, there are many of our positions that paid no attention to the overall market selling on Tuesday. It is definitely a time to be patient with new buys, take care of current positions, and be ready for opportunity when stocks get ripe again.
Support and Resistance
NASDAQ: Closed at 2281.39
Resistance:
2288 from December 2000 low.
The late January high at 2314.36
2322 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:
2278 is December 2005 intraday high.
The 10 day EMA at 2282
The 18 day EMA at 2278.86
2273 is December 2005 closing high.
The 50 day EMA at 2265
The October 2005 up trendline at 2249
S&P 500: Closed at 1280.66
Resistance:
The 10 day EMA at 1284
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 18 day EMA at 1281
The December highs at 1275 (intraday) and 1273 (closing)
The 50 day EMA at 1271
1264 from the December 2000 lows
The bottom of the November/December 2005 range at 1248
Dow: Closed at 10,993.41
Resistance:
The 18 day EMA at 11,000
The 10 day EMA at 11,039
11044 is the January high.
11,176 - 11,186 from April 2000
11,350 from the May 2001 peak.
11,401 from the September 2000 peak.
11,425 from April 2000 peak
Support:
10,985 is the March 2005 intraday high
10,965 from Q4 2000 and November/December 2005
The 50 day EMA at 10,902
10,868 is the December 2004 high
10,754 is the February high
10,720 is the high in the recent lateral move
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
February 27
New home sales, January (10:00): 1.233M actual versus 1.270M expected and 1.298M prior (revised from 1.269M)
February 28
GDP second preliminary, Q4 (8:30): 1.6% actual versus 1.6% expected, 1.1% first iteration
GDP chain deflator, Q4 (8:30): 3.3% actual versus 3.0% expected, 3.0% prior.
Chicago PMI, February (10:00): 54.9 actual versus 58.2 expected, 58.5 prior.
Consumer confidence, February (10:00): 101.7 prior versus 104.0 expected, 106.8 prior.
Existing home sales, January (10:00): 6.56M actual versus 6.60M expected, 6.75M prior (revised from 106.3).
March 1
Personal income, January (8:30): 0.6% expected, 0.4% prior
Personal spending, January (8:30): 1.1% expected, 0.9% prior
Construction spending, January (10:00): 1.2% expected, 1.0% prior
ISM, February (10:00): 55.5 expected, 54.8 prior
Crude oil inventories (10:30): +1.121M
March 2
Initial jobless claims (8:30): 285K expected, 278K prior
March 3
Michigan sentiment, final, February (9:50): 87.5 expected, 87.4 prior
ISM services, February (10:00): 58.0 expected, 56.8 prior.
End part 1 of 3
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