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trading system, money investment
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3/22/06 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Target hit alerts: None issued
Buy alerts: CHRW; ADTN; BGC; OPLK
Trailing stops: None issued
Stop alerts: None issued
SUMMARY:
- Market shows tenacity, overcomes adversity, Tuesday selling.
- Mortgage applications continue falling, hitting low for the year. Fed needs to declare victory before there is nothing left to feel victorious about.
- Expecting more consolidation action to better build the next run, but this market does not want to take any time off.
Market refuses to give in to Tuesday selling, rebounds from near support.
The market had more obstacles tossed in front of it on Tuesday with MSFT pushing back its Longhorn/Vista/name yet to be determined operating system to 2007 just one day after Steve the used car salesman Ballmer appeared on CNBC gushing about how wonderful MSFT is and how important it was for the company to get its new Win-LongVista-dows out this year. Golly Steve, what happened? Didn't read that last memo before heading to the TV studio? There was a lot of furor over the pushback as it was opined that box makers, chip makers and other hardware makers associated with PC's would suffer. NASDAQ futures were down 8 points prior to the open even as the SP and Dow futures were flat.
On top of that the rising rates fears have re-emerged after an almost giddy market bounce last week on renewed hopes the Fed was done in one. Bernanke splashed cold water on that idea with his 'never met a yield curve I didn't like' speech on Monday. There is a new sheriff in town and we sure hope he is not feeling his power and pulls a Greenspan, i.e. showing the financial markets he is a tough hombre by jacking rates higher just to do it. Greenspan's first shot as sheriff was in his foot, sending the market into Black Monday. The markets don't care how tough a Fed chairman is; they want one that understands economics and the markets and makes decisions based on that understanding. Right now the market is again dealing with unknowns as to the Fed chairman's aims. That is pushing interest rates back up, and that acts as a governor on the market.
Stocks struggled in the pre-market and opened soft with NASDAQ gapping lower, down 8 points in the early going. The recovery started fairly quickly, however, as the indices held above near support and started rebounding. That turned into a steady climb into the mid-afternoon. At that point some selling tried to take the market back down, but that effort only brought in some buyers. Indeed, after that dip we saw volume jump on many individual stocks as the indices turned back up and sprinted to new highs in the last hour.
It was a pretty good answer to the Tuesday selling that saw volume jump sharply on NASDAQ as that index tapped the January high and then reversed for a loss. It was not a complete answer, however. Volume was lower on both NASDAQ and NYSE. SOX went nowhere, continuing to languish in a lateral move at the bottom of its 55 point drop since the first of the month. NASDAQ recovered from its gap lower, but it did not threaten a breakout; volume was low and it is still gyrating within its trading range, rejected just Tuesday during another breakout attempt.
On the positive side the market once more overcame some bad news from MSFT and an unexpected drop in oil inventories (-1.3M versus +2.8M expected), not to mention the hard selling Tuesday. SP500 and SP600 held near support at the 10 day EMA and rebounded nicely. Breadth was solid at 2:1 on NYSE. Leaders were breaking higher once more on strong individual volume. All positives showing the market's tenacity, refusing to simply roll over and give back last week's gains.
We view this action as a continuation of the consolidation that started late last week when the indices started to stall out after the bounce higher. NASDAQ has some distribution, but the indices are holding their breakouts (if they have one) while NASDAQ continues working in its range. The up and down action is working to weed out the market as the indices for the most part are working to hold their gains. Moreover, there is solid breadth on the upside sessions, and that shows us it is not just short covering or a few buyers cherry-picking the market. NASDAQ continues to come up short with each breakout attempt, however, and SOX remains mired at the bottom of its recent sell off. Given NASDAQ's continued inability to breakout, the market has a real issue it is working through; thus the view this is a continuing consolidation.
THE ECONOMY
Housing market shows yet again (seems to do so on a daily basis) that the Fed has won and should wind up the rate hiking campaign.
Each day it seems there is more data from the housing market underscoring its decline. Greenspan laughed off talk of housing bubbles in front of Congress in early 2005, but by early summer the Fed minutes revealed the Fed was quite concerned about what it viewed as an overheated housing market. Next time Greenspan talked to Congress he talked of 'mini bubbles' in the housing market. Fed governors came out and flatly said housing was too speculative and needed to cool (sounds a lot like the Broaddus comment in 2000 that there needed to be more unemployment; yeah, lets slow the economy to get more foreclosures and people put out of their homes; all of course in the noble effort to head off inflation). From a joking matter to the target of rate hikes, all in a span of 6 months. How Fed-like.
It is also Fed-like that these comments started to swirl in public at a time that it was pretty clear the housing market had peaked. We were writing at the time that the market had peaked based upon the data flowing in. Sure it was still strong, but the economy was still strong in early 2000; it was peaking, however. It is the Fed's job, as Bernanke just said, to look down the road and anticipate trouble. Problem is, the Fed has been very one-sided in the trouble it anticipates. It always wants to get ahead of inflation but never seems to worry about looking for signs of economic slowing as a result of its tighter money, higher interest rates policies. At the same time it was becoming clear the housing market was slowing, the Fed was saying it had to be stopped. Now either the Fed doesn't look ahead and make obvious conclusions from the data trends or it sees the slowdown and then starts talking about how it needs to slow, thus making its policy decisions appear effective. That is similar to Hoover in the FBI putting someone at the top of the '10 most wanted' list after they had zeroed in on his location and could make the arrest quickly.
We are almost a year further down the road from early last summer and the housing market has only slowed more. We have chronicled all the way down, and particularly of late as we receive a flood of information from around the country of housing markets that went from pretty decent sellers' markets to buyers' markets with low ball offers becoming the norm. Yet last week San Francisco Fed president Yellen was opining about no real slowing in the housing market or the economy. Pick up a newspaper please.
More data of the slowing: last week mortgage applications hit their lowest level of the year. Applications overall (new purchase and refinancing) fell 2.9% to 393.6. A year ago that stood at 446.4. The 30 year fixed mortgage fell to 6.31% from 6.42%, but applications still fell. Overall the 30 year is higher than the 2005 low at 5.47%, but still lower than the 2005 high at 6.33%. Low overall without a doubt, but rates are rising and rising rates always slow housing, particularly when we are now addicted to low cost money through 0% auto financing, etc.
This jibes with the other data we are receiving, i.e. the glut of new homes in some of the formerly hotter areas. The herd mentality is taking hold as the market softens. Those not wanting to miss the gravy train and cash in on the big gains in their zip codes are rushing their homes to market to extract their gains. Thus in cities such as Phoenix, AZ as we reported in the last week, there are neighborhoods with 30 basically identical homes on the market where there were just 3 or 4 last month. The flood of new, nearly identical units for sale puts quite a damper on prices. With fewer mortgage applications, you know the majority of those homes are going unsold.
This likely won't show up too much in the data released Thursday. That is still February data, and the intelligence we are getting says this is hitting mostly this month. There are still sales ongoing, but it is taking longer to sell homes and mostly gone are the days in the hot markets where you got 100% or more of your asking price.
As we said before, the Fed needs to declare victory and let the economy heal. As we have said before, there is nothing wrong with the economy that a cessation of the rate hikes right now won't cure. It is pretty evident to most anyone looking at the economic reports and data that activity is slowing. It is incumbent upon the Fed to recognize this and at least take a pause for six months or so and see how the remaining rate hikes still falling to earth impact activity. The Fed historically goes too far, and when you have a new captain at the helm the odds even increase that it rams full speed ahead into an iceberg. Bernanke is going to raise next week and again likely in May. The economy can handle next week; it ahs built that in and the market, the best leading indicator, is holding up. The May hike makes things more problematical. One in June as well? Start breaking out the parachutes.
THE MARKET
MARKET SENTIMENT
VIX: 11.21; -0.41
VXN: 16.1; +0.06
VXO: 10.31; -0.49
Put/Call Ratio (CBOE): 0.98; +0.02. Hanging around the 1.0 level even as the market rebounded. That shows continued anxiety but nothing extreme as not making any closes above 1.0.
Bulls versus Bears:
While individual investor sentiment is getting bullish, investment advisor sentiment continues to turn more bearish. That is a continued positive. They continue to move further past those levels that marked bottoms and presaged market rallies in May and October 2005.
Bulls: 42.3%. Bulls continue to fall after holding steady the prior two weeks. From 60.4% at the start of 2006, the fall was hard in February, and is now leveling off (48.9% to 45.3% to 42.6%). It has undercut the two prior lows that helped spark rallies in May and October.
Bears: 33%. Another nice bump higher from 31.3%. 30.8% from 29.5% from 27.7% from 25.5%. It started this move just above 20%, the threshold level. Above 20% is considered better while below 20% is considered bearish for the market. Bears have surpassed the readings from the two prior market bottoms in May and October 2005 (30% and 29.2%, respectively).
NASDAQ
Stats: +9.12 points (+0.4%) to close at 2303.35
Volume: 2.185B (-9.88%). Volume backs off as NASDAQ gapped lower and rebounded, but it did hold above average, indicating there was some buying as the index rebounded. Still does not wash away the Tuesday distribution or the distribution last Thursday. NASDAQ needs to put together some stronger upside sessions as it continues this movement within its trading range.
Up Volume: 1.26B (+449M)
Down Volume: 880M (-672M)
A/D and Hi/Lo: Advancers led 1.82 to 1. Decent breadth but note that it could not top the downside breadth from a much stronger negative session on Tuesday.
Previous Session: Decliners led 2.05 to 1
New Highs: 115 (-35)
New Lows: 52 (+8)
The Chart: http://www.investmenthouse.com/cd/^ixic.html
NASDAQ gapped lower on the MSFT news and worries that spread throughout techs about what that means for the upcoming holiday PC sales season. At first you would have thought it meant the end of the PC cycle altogether the way some reacted. Microsoft is not the only operating system fish in the sea, however, just as INTC is not the only chip maker. Intel has gone onto skid row but the market has not imploded. This news gives AAPL and Linux a bit of an opening, but the overall market response Wednesday was more of a 'so what' after the initial reaction. In any event, NASDAQ gapped lower but above its 50 day EMA (2278) and its up trendline (2280) and then rebounded to retake 2300 and close positive. Nothing strong or earth changing. Lower volume than the selling indicates just another bounce inside its trading range. Good to see, however, that it did occur and keeps alive NASDAQ's chances to continue consolidating for another run at the January high (2333).
SOX (+0.07%) posted a gain but remained in its four day lateral move at the bottom of its March sell off. It is still roughly holding the December highs around 500, but it has been completely unable to participate in any of the gains. It is due a bounce, and when it does the rest of the market will benefit. It has dug itself a big hole, however, and any bounce will find a lot of resistance. Indeed, it has yet to make it through the 10 day EMA (503.50; closed at 497.59) since it started this selling. The pattern is weak and it has a lot to do if it is going to attempt a recovery. Not indicating it wants to do that right now, at least it doesn't look like anything strong.
SP500/NYSE
Stats: +7.81 points (+0.6%) to close at 1305.04
NYSE Volume: 1.485B (-5.56%). Volume remained below average and was lower than the Tuesday volume. Thus no accumulation on the rebound but the Tuesday selling, while on higher volume, was not that terrible a distribution session. More low volume; nothing unusual there. That remains the overall weakness of this move and leaves it open to attack if it cannot show strength on the next move higher after this test.
A/D and Hi/Lo: Advancers led 2.17 to 1. Solid upside breadth as the NYSE indices rebounded.
Previous Session: Decliners led 2.61 to 1
New Highs: 104 (-32)
New Lows: 39 (-8)
The Chart: http://investmenthouse.com/cd/^gspc.html
Held near support at the 10 day EMA (1298) and then rebounded, holding most of the gain into the close. Good intraday action, good breadth, held near support and the breakout. The only thing lacking was again the volume. We want to see SP500 make it through this consolidation and then show us some volume, luring in more big money as it continues to hold off the selling and post gains. Negative sentiment is high enough (bulls and bears) to have a lot of money outside the market, and continued gains would work to drag that money in, keeping the move higher alive.
The small cap SP600 (+1.18%) was inspirational with its rebound off the 10 day EMA (381.93) and run to the close. That pushed it to a new all-time closing high . . . again. It also pushed SP600 right back up to the top of its channel (387). It is trying to make a higher low at the 10 day EMA and break through the top of the channel just as it did in mid-January. Those moves tend not to last; the index gets top heavy or ahead of itself. It then fades back. During that break higher, however, we can get some great move from our stocks as we did in late January.
DJ30
DJ30 mirrored SP600's action, bouncing up off the 10 day EMA (11,204) test and moving to a new post-2002 high. Volume rose and was above average for the second consecutive session, this time on the upside. MSFT contributed a lot of downside volume, but the overall action was bullish; hard to argue otherwise.
Stats: +81.96 points (+0.73%) to close at 11317.43
Volume: 342M shares Wednesday versus 332M shares Tuesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
THURSDAY
Some more employment data with initial jobless claims, one of the hot buttons in Fed talk the past couple of months. Of course, it is a hot button fro the wrong reasons; employment is a lagging indicator. We get more housing data with the February existing and new home sales; we could see some of the weakness surprise expectations of continued solid results, but March really showed the weakness from what we are hearing. Durable goods orders at 10ET could be interesting as well; a 9.9% drop in January is expected to turn back to positive in February. The drop was due to transportation, and that cannot stay depressed at those levels, but the anticipated rebound may be a bit too lofty. A second negative month of durable goods would require some Fed notice; likely wouldn't get it, but it should be noted by the Fed.
The Wednesday action was somewhat of a relief after the Tuesday distribution. It was also good to see leaders breaking higher from tests or out of solid patterns. Despite the gain on the heels of the Tuesday selling, however, the rebound was not as strong, and that suggests the indices still have some more consolidation to get through to try another break higher, at least one that has some real strength behind it. The indices could always just drift higher again, but that only makes the market more vulnerable, the risk/reward more skewed toward risk. This rally continues to lack upside volume, and thus a lateral move that holds the gains would help set up a better move.
At the same time we have to remind ourselves that this move higher was on low volume and the downside trade has been stronger. The market is showing continued resiliency despite the low volume, but there have been flashes of strong downside volume when more participate. A low volume upside move is no match for a lot of sellers. To date, however, there have been few sessions where the sellers have jumped in. Indeed, the NYSE indices have made breakouts in spite of the periodic distribution. NASDAQ and SOX remain weak links; a NASDAQ break over the January highs would be a major move for the market's overall upside.
For now we are looking for some more back and forth trade as the NYSE indices try to consolidate the move higher. We have underestimated the market's ability to shake off the issues confronting it and moving higher, but as usual we let the market do the talking. If it keeps showing strong stocks in solid patterns making the breaks higher we defer to the market. Thus we will continue to look for strong moves from solid patterns.
Support and Resistance
NASDAQ: Closed at 2303.35
Resistance:
The recent high at 2325
2328 from the May 2001 peak
The January high at 2333
2477 is the January 1999 peak
2523 from the December 2000 low
3015 is the December 2000 peak and the October 2000 low
Support:
The 10 day EMA at 2296
The 18 day EMA at 2291
2288 from December 2000 low.
2278 is December 2005 intraday high.
The 50 day EMA at 2277
2273 is December 2005 closing high.
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 1305.04
Resistance:
1315 is the May and May 2001 peaks
1324 to 1329 from the October 2000 lows.
1358 to 1362 mark a series of peaks from April 1999 to August 1999 high and the February 2002 low at 1360.
1371 to 1373 is the December 2000 peak and the January 2001 peak
Support:
1297.57 is the recent February high.
The 10 day EMA at 1298
The January high at 1295
The 18 day EMA at 1293
The late January peak at 1285
The 50 day EMA at 1281
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 11,317.43
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
The 10 day EMA at 11,204
11,159 is the February high.
The 18 day EMA at 11,144
11,044 is the January high.
The 50 day EMA at 11,013
10,985 is the March 2005 intraday high
10,965 from Q4 2000 and November/December 2005
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 20
Leading Economic Indicators, February (10:00): -0.2% actual versus -0.3% expected, 0.5% prior (revised from 1.1%).
March 21
PPI, February (8:30): -1.4% actual versus -0.2% expected, 0.3% prior.
Core PPI (8:30): 0.3% actual versus 0.1% expected, 0.4% prior
March 22
Crude oil inventories (10:30): -1.3M actual versus +2.8M expected and +4.836M prior
March 23
Initial jobless claims (8:30): 305K expected, 309K prior
Durable goods orders, February (8:30): 1.3% expected, -9.9% prior
Existing home sales, February (10:00): 6.5M expected, 6.56M prior
New home sales, February (10:00): 1.21M expected, 1.233M prior
End part 1 of 3
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trading system
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