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investment help, day trading
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3/15/06 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Target hit alerts: None issued
Buy alerts: LRCX; CELG
Trailing stops: None issued
Stop alerts: CEPH
SUMMARY:
- SP500 continues breakout, NASDAQ moves to top of range on stronger volume.
- Yield curve turns positive as net foreign purchases for January surge. Is there a relationship here?
- Fed Beige Book sees 'moderate' growth for 2006 and 'modestly' higher retail prices. Some say Fed ready to stop hiking soon.
- Letting positions ride during this phase of rally as we look to whether NASDAQ and SOX can join the breakouts.
Stocks start soft, get boost from Beige Book, close strong.
The market started weaker and milled about for almost three hours before it found legs and continued the rally. Oil inventories jumped more than expected once more, but that failed to excite investors. Stocks found support just ahead of lunch and then got a boost from the Fed Beige Book that seemed relatively benign in its discussion of inflation. The market keyed off of that the rest of the day, rallying into the close.
That pushed DJ30 and SP500 to new post-bottom highs and took SP600 to a new closing high. NASDAQ traded up toward the top of its range, and SOX, well, tried but just couldn't do much. Volume finally moved back above average on NASDAQ and rose on NYSE, but surprisingly was still below average on NYSE.
Despite rising the past two sessions, volume is still a weak link in our view. Sure rising volume shows buyers in control and more buyers than sellers, but trade levels overall remain rather weak with only two sessions above average on NYSE this month. Given that this was the midpoint of an expiration week, you would expect volume to be up. This rise in trade was pretty modest when you look at it in context.
What it tells us is that while the buyers are in control right now, there is not a clear majority of all investors participating in this move. As noted, trade was up but suspiciously light for midweek of an expiration week. The volume bump was likely due to expiration, and that would leave volume still rather mediocre. Indeed, on NYSE it WAS mediocre even with the expiration week increase.
That leaves the market vulnerable if those not participating on the upside decide to join in but do so on the downside. The market has definitely improved, skating out of trouble once more, but the rebound has not brought in the buying typically seen on key moves. With NASDAQ and SOX still lagging from a technical sense, the market could still face problems as they move into the overhead supply levels, particularly at the top of NASDAQ's range. If the market is pricing in the end of rate hikes, then we could see them breakout as well, and likely on more volume. We definitely have no problem with this upside move and continued to participate, but we are less than convinced all of the indices will make the same breakout move without more participation.
THE ECONOMY
Yield curve reverts to a positive bias.
Not quite a month back the bond yield curve stood at a 20 BP inversion, i.e. the 2 year note yield 20BP higher than the 10 year bond yield. Not a massive inversion, but it was accelerating. That last jump to the 20BP inversion turned out to be partially fueled by the February refunding that saw a surge of interest with the reintroduction of the 30 year bond. The curve came back some but was still inverted. It remained inverted until the past two weeks when the 10 year bond started to fall and yields jumped; that was part of the scare thrown into the market as higher rates were read, incorrectly, as inflation. The curve flattened late last week and then righted itself this week with an 8 basis point positive slope on Wednesday. Still flat, but not inverted.
At first blush you wipe the brow followed by a 'whew, that was close.' You see Wednesdays net foreign purchases data (the 'TIC' data) where purchases hit $66B in January ($53.9B prior) and you feel pretty good. Foreign investors are still buying US treasuries and there is more than enough foreign interest to fund our trade gap that at some unknown level at some unknown time it the future might quite possibly lead to a potential reduction in some foreign funds coming to the US (was that mitigated enough for you?).
Then you review what happened over the past couple of weeks as the curve swung for a 20 BP inversion to an 8 BP positive slope. The big item that comes to mind is the port management fiasco that, when all is said, did little more than make the US look like a bit of a hypocrite to our detractors with respect to free trade and open markets. Whether you agree that the sale should have been okayed or not, that was the result.
Could it be that the ports deal is having the impact some claimed it would, i.e. lessening the appetite for US treasuries due to a bit of uncertainty in the rule of law in the US? After all, the process Congress set up was followed and then Congress howled at the result and stood ready to pass legislation blocking the transaction. This was on the heels of the earlier attempts by the Chinese state oil company to buy Chevron and threats from Congress to pass legislation blocking the sale. Whether you agree or not with what was done or attempted by all parties involved, it has the look that the US talks about free trade with a forked tongue, i.e. it is great until it actually works as totally free trade.
Is it any coincidence that after the second such event that the long end suddenly jumped in yield and eliminated the inversion? Could it be that foreign investors cooled their purchases of US treasuries after this latest 'yes we believe in free trade but not with you' drama? You could point to the TIC data, but that is old news from January. Something swung the yield curve dramatically, and the indeed some of the bond traders we talked to today believe that is exactly what is going on. Japan, South Korea, China and others have broached the subject of diversifying out of US treasuries over the past year; with these latest events, what better catalyst is there to go ahead and start the process?
As for now the 10 year keeps finding resistance at 4.80%. The fear on the floor is that it will break through that in the near future and head toward 5% and really jar the equities market, helped along by declining foreign purchases. On the bright side, however, if long yields continue to rise, the market is finally doing the Fed's work for it and that would hasten the Fed to table further rate hikes. Kind of a sweet and sour mix there; the Fed stopping rate hikes but rates continuing to climb due to foreign investment backing out of the US.
Fed Beige Book very matter of fact regarding inflation.
The Fed's last survey of the economy expects 'moderate' growth in 2006 after a fast start in Q1. It sees real estate slowing from 'high levels' and 'sluggish' auto sales, but demand for factory goods is 'widespread' and commercial real estate remains strong. With those offsetting forces, the Fed concludes there is continued cost pressure, but only 'modestly' with respect to retail.
While Bernanke is aware of prior housing market stumbles leading to economic slowdowns, he is also apparently hung up on the strength of commercial real estate both in current structures and construction of new commercial structures. Bernanke sees that strength as some sort of problem and apparently wants to target it along with the housing market.
This is very Fed-like. It targeted housing because it was too strong even though it was the one sector of the economy that helped drag it through the recession. It focuses on employment and wages as being some sort of inflation indicator though they both lag overall economic performance. Commercial construction is no different. It is often automatically assumed that if CEO's are making the decisions they must be right. Construction decisions, however, are not made and put into place in a week. Projects require approval, design, and then construction. Big projects can take years from conception to ground breaking.
Even with all of this planning, however, corporations often continue to build right into economic slowdown or recession. It happened in the early 1980's; office space in Denver and Houston was auctioned for 25 cents a square foot. Buildings stood vacant for years. The point: relying on the commercial market as some indication that the economy is going to continue higher and faster is foolish. As we noted on Monday and Tuesday, look ahead and put the data into context, realizing the data lags.
The Beige Book along with other recent comments from the Fed was enough to make some predict the Fed was done at 4.75% (just one more hike) or 5% (one in March, one in May). The Fed needs to stick to just one to be safe. The market may be attempting to price that in right now with this move but it is not a dramatic advance.
THE MARKET
MARKET SENTIMENT
VIX: 11.35; +0.61
VXN: 15.44; -0.28
VXO: 11.09; -0.1
Put/Call Ratio (CBOE): 0.72; -0.05
Bulls versus Bears:
Bulls and bears rose again last week and for the second straight week have surpassed the levels in May and October 2005 that signaled bottoms in the market ahead of rebounds. That remains a positive for the market, but even high levels while the market was at the breakout point recently was not enough to push the market higher. The closer bulls and bears come to each other the better potential for a bottom. Thus far it is not making the difference. We have to keep this in its place: it is a secondary indicator. It tells us to watch for signs of a turn. It does not declare a turn on its own.
Bulls: 42.7%. Edging higher from 42.6% the prior week. Bullishness had been diving hard, 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 undercut the prior two lows that helped kick off their own rallies.
Bears: 31.3%. Another solid push higher from 30.8%. Bear growth continues to slow, down from prior weekly climbs from 25.5% to 27.7% to 29.5%. Already has surpassed its readings from the two prior market bottoms in May and October 2005 (30% and 29.2%, respectively).
NASDAQ
Stats: +15.94 points (+0.69%) to close at 2311.84
Volume: 2.143B (+8.5%). Volume finally moved back above average on this most recent leg higher. There was plenty of above average volume on the early March selling and NASDAQ needed to show this stronger trade as it continued the rebound. Overall it was still pretty light trade for the Wednesday of expiration week. A good start to the type of volume NASDAQ will need, however, to make the move out of its 2006 trading range. You have to ask, however, just how strong volume would have been if expiration was not pushing it higher.
Up Volume: 1.679B (+213M)
Down Volume: 446M (-34M)
A/D and Hi/Lo: Advancers led 1.58 to 1. Breadth was even less than Monday, and that breadth was less than impressive. The large cap techs led the way higher as NASDAQ 100 outpaced overall NASDAQ. Breadth on NASDAQ has lagged on the upside since late 2005.
Previous Session: Advancers led 1.78 to 1
New Highs: 184 (+38)
New Lows: 38 (-6)
The Chart: http://www.investmenthouse.com/cd/^ixic.html
NASDAQ gapped higher, tested, and then put together another upside session, the fourth in a row after a week of selling. NASDAQ finally found its legs at the bottom of its 2006 range (2250 to 2240) with the Tuesday break above the 50 day EMA (2272) after trying to stall out once more at that level. NASDAQ is making larger percentage gains than SP500, but it also had a weaker pattern and has more ground to make up. It is just now approaching its late January high (2314) where it failed in early February. It will have run a much further distance to just get to its breakout point, and it will be winded when it gets there. It will also need more volume as it makes the move to overcome that overhead supply. When it gets to the highs it will likely need to pause, step sideways, and then try the move. We are not convinced it will be able to make it, but if volume continues to climb it improves its chances. If it breakouts out and holds the test it will be confirmation of the overall market move and indicate the Fed is indeed just about done.
SOX (+0.30%) lagged all session after posting a market leading gain Tuesday. It tried to move through the 10 day EMA (514.30) but failed by the close, showing a doji after just one upside session that followed the seven session drubbing. NASDAQ will need some help from semiconductors to make the breakout from its range. SOX sure wasn't showing the kind of strength needed on Wednesday.
SP500/NYSE
Stats: +5.54 points (+0.43%) to close at 1303.02
NYSE Volume: 1.63B (+4.57%). Volume rose once more as the NYSE indices rallied, but it was once more a rather pathetic below average session. More buyers than sellers, but at best a plurality. As discussed above this kind of low volume move can get whacked when all of the players take part. Sellers are not getting in the way of this right now, but it would not take too much to make things more uncomfortable for the upside.
A/D and Hi/Lo: Advancers led 1.84 to 1. Solid and not bad after the blowout upside breadth on Tuesday. It can't stay that high each session.
Previous Session: Advancers led 2.8 to 1
New Highs: 258 (+74). SP600 flirted with a new high as well but new highs were not soaring as both the large cap and small cap indices moved to those highs. As with volume, this internal indicator is lagging.
New Lows: 28 (-15)
The Chart: http://investmenthouse.com/cd/^gspc.html
SP500 posted its fourth consecutive gain, moving to consecutive new post-2002 highs. As noted, volume lagged, coming in below average once more. SP500 capitalized on its nicely formed pattern and there is some accumulation as SP500 moves higher. Cannot argue with the move as SP500 took out 1297 and 1300, the latter being on the mind of floor traders as a major accomplishment Wednesday. Like the price move, but concerned that the lagging volume will come back to bite it.
SP600 (+0.78%) continued its rally back up in its trend higher, bouncing nicely off the up trendline and now already approaching the upper channel once more (385). It has just about matched its early March intraday high (383.72), and to keep the trend healthy, it should take that out and run on up to 385. Very methodical in this solid trend higher.
DJ30
Another new post-2002 high for DJ30 as well as some index names announced better expectations. Volume was higher but still below average for the blue chips. Not all that from the all-time highs near 11,750, but the next real consideration is 11,350.
Stats: +58.43 points (+0.52%) to close at 11209.77
Volume: 274M shares Wednesday versus 251M shares Tuesday. Volume picked up for the first time in over a week, giving the move a bit more strength. Trade was still below average, however.
The chart: http://www.investmenthouse.com/cd/^dji.html
THURSDAY
Housing starts and CPI are out before the open and Philly Fed is released at noon. Housing and the CPI have a more direct bearing on the Fed, even if somewhat misplaced with respect to housing. Of course, if Bernanke is worried about the impact of a declining housing market then a continued slowdown in housing starts plays into setting up the Fed for fewer rate hikes.
The market has rallied ahead of the number on that rising but less than auspicious volume as noted above. CPI is expected to come in rather tame once more at 0.2% on the core. The market needs that or lower to continue the move, particularly with the mediocre volume on the gains to this point. If it gets its number we will likely see NASDAQ climb and test the top of its range. That is where the move gets much more interesting. Of course we will also keep an eye on the semiconductors and see if they can put together another move; thus far the rebound for chips has been Tuesday.
Despite the moves higher Wednesday we did not see a lot of good buys. As noted, we were more content to let our positions run higher as we simply found few stocks in good buy position that were making strong volume moves. Not that we were not looking for them, they just were fewer and farther in between than on Tuesday.
We are really looking to see how the NASDAQ and SOX moves pan out on the upside. If they do make the breakout, joining SP500 and DJ30 with new post-2002 highs (at least for NASDAQ), there will still be plenty of buys; that would mark a major change for the market and still plenty of upside. If it does, that would also mean the market is pricing in the minimum number of rate hikes from the Fed.
We will continue to look for opportunity as the market moves higher and NASDAQ tries to reach its prior highs and attempts a breakout. If we see the right kinds of moves we will continue to participate as we watch how NASDAQ handles the top of its range and whether more buyers come into the market and bolster the volume.
Support and Resistance
NASDAQ: Closed at 2311.84
Resistance:
The recent high at 2325
2328 from the May 2001 peak
The January high at 2333
3015 is the December 2000 peak and the October 2000 low
Support:
2288 from December 2000 low.
The 10 day EMA at 2284
The 18 day EMA at 2282
2278 is December 2005 intraday high.
2273 is December 2005 closing high.
The 50 day EMA at 2272
A minor peak at 2249 is still holding.
2240 is closing low in recent range.
2218 from August 2005 peak
S&P 500: Closed at 1303.02
Resistance:
1315 is the May and May 2001 peaks
1324 to 1329 from the October 2000 lows.
Support:
1297.57 is the recent February high.
The January high at 1295
The late January peak at 1285
The 10 day EMA at 1288
The 18 day EMA at 1285
The 50 day EMA at 1276
The December highs at 1275 (intraday) and 1273 (closing)
1264 from the December 2000 lows
1254 is the February low
1248 to 1250 is the bottom of the November/December 2005 range
Dow: Closed at 11,209.77
Resistance:
11,350 from the May 2001 peak.
11,401 from the September 2000 peak.
11,425 from April 2000 peak
Support:
11,176 - 11,186 from April 2000
11,159 is the February high.
11044 is the January high.
The 10 day EMA at 11,080
The 18 day EMA at 11,047
10,985 is the March 2005 intraday high
10,965 from Q4 2000 and November/December 2005
The 50 day EMA at 10,956
10,931 is the November 2005 high
10,890 is the December 2005 closing high.
10,868 is the December 2004 high
10,705 from the July/August 2005 peaks to 10,682 that is the September 2005 high
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
March 14
Retail sales, February (8:30): -1.3% actual versus -0.9% expected, 2.9% prior (revised from 2.3%)
Retail sakes, ex-autos (8:30): -0.4% actual versus -0.5% expected, 2.6% prior (revised from 2.2%).
Current account, Q4 (8:30): -$224.9B actual versus -$218B expected, -$185B prior
Business inventories, January (10:00): 0.4% actual versus 0.3% expected, 0.8% prior.
March 15
New York PMI, March (8:30): 31.2 actual versus 19.0 expected, 21.0 prior
Net foreign purchases, January (9:00): $66.0B actual versus $56.61B prior
Crude oil inventories (10:30): +4.8M actual versus 2.25M expected, 6.76M prior.
Fed Beige Book (2:00)
March 16
Building permits, February (8:30): 2.13M expected, 2.216M prior
Housing starts, February (8:30): 2.03M expected, 2.276M prior
CPI, February (8:30): 0.1% expected, 0.7% prior
Core CPI (8:30): 0.2% expected, 0.2% prior.
Initial jobless claims (8:30): 298K expected, 303K prior
Philly Fed, March (12:00): 13.0 expected, 15.4 prior
March 17
Industrial production, February (9:15): 0.8% expected, -0.2% prior
Capacity utilization, February (9:15): 81.4% expected, 80.9% prior
Michigan sentiment, preliminary March: 88.0 expected, 86.7 prior.
End part 1 of 3
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