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money investment, investment help
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3/07/06 Investment House Daily
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SUMMARY:
- Semiconductors lead the move lower.
- Interest rates still the topic of the day but initial market reaction is likely an overreaction.
- Once again market has to sift through the rubble and find reason to rebound.
- Leaders are under pressure with the market, but many still holding support on this pullback.
TXN adds to interest rate worries.
Monday interest rates set the market on edge, and they were no less a story Tuesday. Unfortunately for the market, TXN failed to match investor expectations and another Fed speaker was out, this time striking a more hawkish tone. In the post-Greenspan void before Bernanke's first meeting it appears that the Fed underlings are out to prove their manhood, each trying to out-scoop the previous speaker. Tuesday Poole, a non-voting member, said the economy was surging and the Fed would keep raising rates as needed; basically the old 1999-2000 argument against prosperity. It is no wonder investors were beating the retreat with that salvo, even as the economic data suggests the economy is not surging further and faster. THAT is indeed the 1999-2000 mantra, and Tuesday it raised the specter of that 50 BP rate hike that Greenspan dropped on the market in May 2000 as a parting gift for the economic expansion that was soon to end.
TXN disappointed, but its report was solid. Thus TXN was used as the scapegoat, the reason to sell for a market that, after looking pretty positive Friday even after giving up a breakout attempt, has once more embraced the potential horrors of the Fed going too far, protectionist talk out of D.C., high energy costs, and some yet to be accurately identified issue with interest rates (outside a fear the Fed will overdo it).
Once more the uncertainty with these issues has pushed the market back from a breakout attempt. Tuesday it built on that fall from resistance as NASDAQ, SP500 and SOX undercut the 50 day EMA. NASDAQ and SP500 managed to recover that level, more or less, but SOX broke lower, fell through the 50 day, and never got up. The late rebound helped, and volume was modest on both NASDAQ and SP500, indicating it was not an all out fire sale. Breadth was extremely weak, however, at -3:1 intraday on NYSE before recovering to -2.6:1 by the close.
Basically it was the growth indices that were the weakest. SOX was slaughtered, NASDAQ closed just below the 50 day EMA, and SP600 was sold to the 50 day EMA. That is a classic sign of worries about economic growth prospects. After a choppy 4 weeks from mid-January to mid-February where the growth stocks struggled, the market recovered through the start of March. Now they are struggling once more after failing a breakout attempt.
The large caps look fairly decent though the price/volume action has deteriorated. SP600 is making the test of the trendline that we anticipated after failing to breakout above the upper channel line. This actually puts SP600 in a good position to resume its uptrend. NASDAQ is problematical, trying to hold the 50 day EMA on some decent volume contraction on the downside move. SOX is the breakaway cannon. The big names in chips have faded or struggling. Several chip leaders are merely testing support, looking to resume their uptrend. As a whole, however, chips are selling and NASDAQ and the SP600 will have to hold the line for the growth indices to keep the current trading range in tact.
THE ECONOMY
Interest rates still the hot button.
Talk to any floor trader about interest rates and the current mantra is woe be to us all because interest rates are getting much too high. We listened to several this morning talking about how inflation is jumping. When we asked what proof they had, they said 'well, just look at the 10 year bond rate.' That was very interesting indeed, and it underscores something we have discussed before: a vast right wind (or was it left wing?) conspiracy to confuse us all as to what inflation is.
Rising interest rates do not equal inflation. Higher prices don't necessarily imply inflation. Inflation is caused by too much money or liquidity given the amount of supply. If liquidity is growing faster than supply, prices can rise. Interest rates can rise if there is inflation. Interest rates can rise if there is no inflation. A healthy, inflation-free economy often sees modest rises in interest rates over time. The real issue is not whether rates are rising, but whether inflation is the culprit.
The first thing you have to recognize is that rates are still below 2004 levels. They are still historically very low. What really rattled investors, traders, etc. is the rapid advance of the 10 year note the past week. It went from a 20 basis point inversion to just a few points in four days. The knee-jerk reaction, and in the market there is always a knee-jerk reaction, was that inflation was running higher. After all, what else could it be? There is certainly nothing else in the universe of infinite variables that could have caused rates to suddenly surge. Yes, it has to be inflation. I suppose plagues of locusts, flies and toads are next. Might as well throw in the sky is falling as well.
Could it possibly something much more rationally explained? It is not as sexy as panicking, but it is worth looking at. Recall how the 10 year bond rallied hard in the last half of February as the US auctioned treasuries, refunding our debt. The reintroduction of the 30 year bond only added to the interest in US treasuries. That led to a strong bond rally that took long rates lower and helped invert the already inverted yield curve from 3 to 4 BP to 20 BP. Thus prices were pushed higher in some excitement, susceptible to a correction when the right catalyst came along.
That catalyst turned out to be the one-two punch of the ECB raising rates and talk that Japan is going to end its zero interest rate policy on Thursday. That spooked bond traders all over the planet, and there was some selling on fears that rising European and Japanese rates would diminish the appeal of US bonds. Some selling started among some fearing that prospect, booking some gains. As with all market moves, emotion gained the upper hand and there was a rush to sell.
Yields popped up on the rush, surpassing prior highs and clearing some resistance at 4.75%ish. You can argue as a result that bonds will try to rise to the next resistance at 4.8% to 4.85%. You can also argue that bonds overshot the mark a bit in the almost panic selling and are ready to settle back some to the previous highs. Indeed, that is what they did Tuesday as the 10 year faded back to 4.74% from tapping at 4.80% and closing at 4.75% on Monday.
That is not a huge jump, just a faster run higher in response to the sharp dip on the February bond refunding. Recall that we wrote last week arguing that any inverted to flat yield curve is not good because history and finance tell us that it is hard to make money in that environment and thus capital gets locked up and growth stalls. The yield curve is not positive yet (back to flat for now), but this is an improvement, starting the road back toward a healthier curve. If this was not the case, why would the financial stocks rally on Tuesday? That is plus number one.
Plus number two is that the curve is helping do the Fed's job. The curve is finally starting to reflect the 14 rate hikes to this point, bouncing back to levels last hit in 2004. The more the long end rises on its own, the less action the Fed needs to take. Of course, we don't want to see long rates running to 6%, but as they move higher the Fed has less pressure to force them higher. In short, the Fed can let rates seek the market range as opposed to the Fed range. For now the Fed has said it does not need to take rates past neutral. If it holds to that position, this natural rise in rates is a positive, not something to be feared.
THE MARKET
MARKET SENTIMENT
VIX: 12.66; -0.08
VXN: 17.7; +0.18
VXO: 12.4; +0.23
Put/Call Ratio (CBOE): 1.02; +0.1. Cracked back above 1.0 on the close for the first time in three weeks. Starting to show some high anxiety as with the bulls/bears sentiment though it will likely take more such closes to wring all of the sellers out.
Bulls versus Bears:
Bulls and bears are at prior rebound levels even as the market toys with new highs. That remains something of a positive for a breakout, though the Monday action was anything but. Remember, this is always a secondary indicator and not a sure bet. It tells us that conditions are ripening for a turn.
Bulls: 42.6%. Bullishness is really on a dive, dropping from 45.3% and 48.9% the week before. Quite a drop from 60.4% hit at the start of the year. It has now undercut the prior two lows that helped kick off their own rallies.
Bears: 30.8%. Bears did not grow as fast as in prior weeks (25.5% to 27.7% to 29.5%) or as fast as bulls fell, but as with NASDAQ, the reading has topped the prior two highs at 29.2% and 30% in May that presaged bottoms.
NASDAQ
Stats: -17.65 points (-0.77%) to close at 2268.38
Volume: 1.966B (-10.26%). Volume dropped below average as NASDAQ fell through the 50 day EMA and managed a modest rebound. Volume has trailed off during this selling round, and that still indicates that, despite the point losses, there is not heavy duty dumping of tech shares.
Up Volume: 471M (-280M)
Down Volume: 1.465B (+41M)
A/D and Hi/Lo: Decliners led 2.36 to 1. NASDAQ 100 held up better than NASDAQ, and the breadth also indicates the large caps held up better. Small caps across the board were getting rung up on Tuesday.
Previous Session: Decliners led 1.72 to 1
New Highs: 85 (-35)
New Lows: 58 (+17)
The Chart: http://www.investmenthouse.com/cd/^ixic.html
With the semiconductors in the lead, NASDAQ gapped lower and sold through the 50 day EMA (2270). It hit 2260 on the low, holding just above the trendline formed at the October lows. It rebounded but could not retake the 50 day EMA by the close. The move kept it in its 8 week trading range between 2330 and 2250. Volume was lower, and as noted, that indicates no major selling, just the continued malaise that has taken the bid away from tech for now. Almost surprisingly, NASDAQ can still hold here or at the October up trendline (2255) and still make a higher low and once more try to take out the highs.
SOX (-2.86%) was in freefall from the open as TXN's troubles spread across semiconductors. TXN impacted telecom stocks in addition to many telecom related chips. SOX sold lower and made no attempt at a rebound, slicing through its 50 day EMA (522.77) by a good 9 points. It plowed under its October/December up trendline in the process. SMH, the semiconductor ETF, continued its struggles, undercutting the lows in its 7 week lateral move. At least SMH is right at its 200 day SMA, a level that should provide it some support.
SP500/NYSE
Stats: -2.38 points (-0.19%) to close at 1275.88
NYSE Volume: 1.662B (+0.55%). Volume edged higher as SP500 undercut its 50 day EMA but then recovered and SP600 plunked down to the 50 day EMA in one big drop from the 18 day EMA. Volume remained basically at average levels, but the slight bump in trade was not a bad thing: SP500 rebounded to hold the 50 day EMA, and you don't mind seeing volume rise as an index undercuts and recovers as that shows buyers stepping up to the plate.
A/D and Hi/Lo: Decliners led 2.69 to 1. Recovered from -3.1:1 intraday. Still weak either way you slice it as the small caps and mid-caps once again struggled.
Previous Session: Decliners led 2.23 to 1
New Highs: 38 (-86)
New Lows: 54 (+14)
The Chart: http://investmenthouse.com/cd/^gspc.html
Much more orderly trade in the large caps Tuesday with an undercut of the 50 day EMA (1273.87) and a rebound to hold that level. That keeps SP500 just over the December highs that mark the start of this breakout move. SP500 still suffers from a couple of distribution sessions but it is trying to shake them off and put together a higher low here at the 50 day EMA. It needs to do that; the rather low volume on this last test of the January high (1295) has some attributes of a double top trying to form.
SP600 (-1.23%) thumped hard down to the 50 day EMA (370.39) and the up trendline on the low. After struggling at the upper channel line for four sessions it gave way and fell to its trendline. Similar move to that in mid-December and in early January. This is where the rubber meets the road for the small caps. If they hold they could help provide some leadership to the upside in a market recovery effort.
We need to mention the mid-cap SP400 as well. It fell 1.17%, in line with the small caps, but it undercut its 50 day EMA for the first time since it broke out of its last base in November. One close does not make a breakdown, but the market cannot afford to lose it below the 50 day along with SOX.
DJ30
DJ30 showed some relative strength, tapping the 50 day EMA (10,920) for the second straight session and then rebounding to post a modest gain. Volume was lower and below average; no distribution and no accumulation, just biding its time as the market sells. Thus far it remains in decent shap after breaking to a new post 2002 high.
Stats: +22.1 points (+0.2%) to close at 10980.69
Volume: 284M shares Tuesday versus 292M shares Monday. Showed relative strength but no solid volume rebound as DJ30 recovered off the 50 day EMA.
The chart: http://www.investmenthouse.com/cd/^dji.html
WEDNESDAY
The market is still building up to the Friday jobs report, the last report outside the CPI and the PCE that holds the market interest. With the Fed throwing out mixed signals about where it is in the rate hiking game, the interest rate sensitive reports are the focus (even if jobs are not that economically sensitive in reality). That leaves the market on its won pretty much until Friday though crude oil inventories are out Wednesday and the trade balance late Thursday.
Tuesday the market showed that despite some rising pessimism, the buyers and sellers are still fighting it out. Thus far neither has the strength to push the indices out of their ranges though SOX took a dive on Tuesday. Wednesday the market will have to show it can hold the range once more. Indeed, to keep things on even a modest upside trajectory NASDAQ and SP500 need to start making some higher lows and SP600 is going to have to hold the up trendline.
While most stocks sold Tuesday, not all sold off or fell through support. The action remains choppy and difficult in this rather narrow range and some strong stocks are threatening a breakdown while others have cracked support. At the same time there are many leaders that have simply pulled back to near support in this selling. Those are garnering a lot of our focus; if the market holds this support and makes a higher low, these are going to be moving up once more after this rest period for them. The market continues to struggle, but leaders are overall continuing their uptrends. We are going to move cautiously, but we are also going to step into those that show us good moves off a pullback that held support or set up a breakout.
Support and Resistance
NASDAQ: Closed at 2268.38
Resistance:
The 50 day EMA at 2270
2273 is December 2005 closing high.
2278 is December 2005 intraday high.
The 18 day EMA at 2285
The 10 day EMA at 2288
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 2255
A minor peak at 2249
2218 from August 2005 peak
S&P 500: Closed at 1275.88
Resistance:
The 18 day EMA at 1282
The 10 day EMA at 1283
The late January peak at 1285
The January high at 1295
1297.57 is the recent February high.
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 50 day EMA at 1273.87
1264 from the December 2000 lows
The bottom of the November/December 2005 range at 1248
Dow: Closed at 10.980.69
Resistance:
10,985 is the March 2005 intraday high
The 18 day EMA at 11,001
The 10 day EMA at 11,014
11044 is the January high.
11,159 is the February 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:
10,965 from Q4 2000 and November/December 2005
The 50 day EMA at 10,920
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.
March 06
Factory orders, January (10:00): -4.5% actual versus -5.5% expected, 1.6% prior (revised from 1.1%).
March 07
Productivity, revised Q4 (8:30): -0.5% actual versus -0.1% expected, -0.6% prior
Consumer credit, January (2:00): $3.9B actual versus $5.0B expected, $3.4B prior
March 08
Crude oil inventories (9:30): +1.638M prior
March 09
Initial jobless claims (8:30): 295K expected, 294K prior.
Trade balance, January (8:30): -$66.5K expected, -$65.7K prior.
March 10
Non-Farm payrolls, February (8:30): 210K expected, 193K prior
Unemployment rate (8:30): 4.7% expected, 4.7% prior.
Average workweek (8:30): 33.8 expected, 33.8 prior.
Hourly earnings (8:30): 0.3% expected, 0.4% prior
Wholesale inventories (10:00): 0.5% expected, 1.0% prior
Treasury budget, February (2:00): -$118.0B expected, -$113.5B prior.
End part 1 of 3
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