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us stock market, trend trading stock
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4/19/06 Technical Traders Report
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Technical Traders Report Subscribers:
MARKET ALERTS
Targets hit alerts: After the two good surges, took some interim gain off the table. CYMI; GG.
Buy alerts: SLAB; ENER
Trailing stops: None issued
Stop alerts: None issued
The market alert service is a premium level service where we issue intraday alerts relating to the general market conditions, when stocks hit action points (buy, stop, target, etc.), and when we see other information impacting the market or our stocks. To subscribe to the SSR alert service you can sign up at the following link:
http://www.investmenthouse.com/alertttr.htm
SUMMARY:
- Stocks shake off rising CPI, oil, post modest gains on solid trade.
- Core CPI stronger, keeping it at top of Fed's range
- Yellen gives some areas to watch for rate hike forecasting
- Market rallying in anticipation of rate cuts? That makes your head hurt.
- Earnings coming in ahead of expectations but after hours results received mixed treatment
Second day of gains led by technology, small caps.
Gains were more modest Wednesday following the Wednesday blast higher as stocks had to find some additional buyers to overcome the resurgence of the same old issues, i.e. oil and inflation. Futures were rocking in the pre-market as stocks set up to rally once more on the heels of the Tuesday gains. Then the CPI hit with the core coming in with a 0.3% gain, topping expectations (0.2%). That splashed cold water on the mood and the open was much more subdued.
Stocks opened higher but gave back the gains in the first hour. When the energy inventory data came in below expectations, stocks jolted lower. The did not give in, however. Buyers used that dip to start buying, and stocks started a recovery that held up through the close. An early afternoon dip threatened the recovery, but stocks rallied back in the afternoon session, helped along by more statements from San Francisco Fed president Yellen.
Once again, despite higher energy prices (oil hit $73/bbl intraday) and rebounding bond yields (FFF contract again pricing in a 45% chance of a 5.25% FF rate by June), stocks posted a gain. That shows some good staying power in the resumed move higher, but man, this market sure likes to play brinkmanship. It threatened to breakdown once more, yet managed to pull out another recovery.
Volume was solid and was running higher, but it died off late. Still a good above average volume session, showing continued buying. It also shows expiration position shuffling slopping over from Tuesday as the rebound has caused shorts to reposition for the next expiration period. Breadth remained solid but was much weaker despite the small cap leadership.
The thing that continues to impress and is almost worrisome, is the massive liquidity that is pushing hard commodities higher and higher. They are the techs of this part of the market rally, garnering almost all of the excess investment cash. Every day you hear how commodities are 'on fire' and an economic 'boom'. Things are going great guns, but the gains are just about as reckless as they were in 1999 and 2000. Of course, you can never tell when the tap is going to turn off; it could run for several years. We could predict the sky is going to fall and eventually be correct, but might miss three years of upside in the process as did many bears in the late 1990's. They finally got to say "I told you so," but they missed about 150% upside on NASDAQ before it started to sell.
NASDAQ and SP600 closed at new highs for the year and since the 2002 low. SP600 hit a new all-time high. SOX rallied up to the 'hump' in its attempted double bottom. SP500 could not push past its recent highs. After this move we are likely to see a test given the move to resistance (NASDAQ did not totally demolish its prior high). There is still upside momentum and we would love to see a continued move and then a test of the recovered support levels; that is a position of strength to test from versus failing to take out the prior highs. Stocks, however, were already slowing on this second session, so SP500 may not move through the old highs on this move. Good strength to this point, however, and thus we would look for a higher low from SP500 to set up the breakout.
Given the action we took some interim gain off the table on some positions, particularly now that stocks have recovered what they lost just ahead of earnings. That gave stocks a running start to rally when the earnings came in well. After hours the earnings were mixed, and we know that investors get earnings saturation once they get the gist of the season. Results are coming in ahead of expectations, and after this good move, investors are going to start looking down the road once more to other issues, and we know what those are.
In sum, another good session with modest to nice gains. SOX is reasserting some leadership, and after hours some sorry numbers by INTC were rewarded under the 'cannot get worse' category of buying. A good recovery and solid move higher that is going to give a test shortly before resuming the move. Issues remain, but once more the market has shoved them to the rear and price in growth despite energy and other costs.
THE ECONOMY
CPI rises at the core and stocks manage to look past that to a certain extent.
The March core CPI posted its highest gain in 12 months at 0.3%, topping estimates of 0.2% and February's 0.1%. That put the year/year gain at 2.1%, outside the Fed's unspoken but widely assumed limit of 2.0%. Of course, that is where it has been the entire quarter and it is where it was based on Q4 GDP.
Energy prices rose in March, up 1.3% after a 1.2% decline in February. Gasoline rose 3.6%, a trend that will continue into April. It was not all energy, however, as the core rose more than expected and there is some pass through with respect to energy. Prices are just getting too high to avoid it. At this level, however, prices have not yet reduced demand. We expect it won't take much more of a rise in gasoline before consumers start cutting back, particularly with some rise in core prices. There is now talk of $4/gallon gasoline this summer, and when consumers see their bills and start to ponder what another $1+ per gallon will do, they psychological impact can be significant on spending.
What were the price gains in the core? Hotel prices, apparel, and air fares were the price gain leaders. We can live with that to a certain extent, but we also have to remember that two of those categories pertain directly to the vacation season ahead, and many businesses make their year on the summertime getaway business. Thus while many on the financial stations are basically ignoring the rise in prices of energy and other goods and services, to do so is at your own risk. Right now the market is not forecasting a slowdown and that is our key indicator. We are watching, however, because if prices continue their recent spike we are likely to see some demand destruction over the summer, already a slow period for stocks.
Yellen gives pointers on what to watch re the Fed.
Yellen is quickly becoming the favorite of the financial stations, granting an audience to CNBC to further illuminate her Tuesday statements. She is concerned regarding overshooting, and said to watch the housing market and consumer spending as signs the Fed is going too far. Mortgage applications slipped 1.7% last week, the second decline in a row and on the heels of a 7.9% slowdown in March. As for inflation, she says watch wages and compensation. Okay. We know the Fed is targeting housing, and it is definitely falling. Consumer spending is holding strong but is likely to start a fade as gasoline prices reach $3/gallon. Wages? That is a red herring. The modest gains in wages seen in this recovery are not nearly ready to spark inflation. Of course, wages are not the cause of inflation; it is the overall level of liquidity in the system. It is very hard to argue that liquidity is pushing wages higher and higher such that consumer demand is going to lead an inflation spiral.
In any event, the market seemed again placated by Yellen's comments as she did nothing to change her prior statement though she did emphasize the 'data driven' nature of the Fed's analysis when queried on whether the Fed was finished at 5% as opposed to 5.25%.
Some explaining market rise as anticipating rate cuts.
Clear thinking is often hard to come by, no matter whether you are talking markets, politics, sports, etc. We view part of our job as rebutting some of the nonsense presented on the financial stations and in other sources. We have heard this theory cropping up of late, and you would think it has some credibility as it is allegedly based on history. Problem is, even with facts you have to be able to apply them correctly or you get insane results.
This is one of the stranger arguments proffered to explain the market rebound. Stocks have moved higher, albeit in a jerky fashion, in anticipation of a cessation to the Fed rate hikes and the benefits that will imbue to earnings. After all, stock prices rise in anticipation of earnings gains; anything that furthers that will positively impact stock prices. Thus in anticipation of good earnings guidance and the Fed closing this round of hikes has helped spur the current move.
Not so say some, or at least they claim that is not the whole story. The argument we are hearing is that historically the Fed cuts rates 8 to 9 months after rate hiking stops and thus stocks are pricing in that rate cutting and its beneficial effects on earnings. If not utterly ridiculous it would be sound.
Why would the Fed have to raise rates? Why did it do so (belatedly) in 2001? The market and then the economy when into the crapper. The Fed does cut rates until there is a clearly defined, real economic problem. What do stocks do ahead of an economic slowdown? They sell off. They are one of the main indicators of an economic problem ahead. How then, will stocks rally in anticipation of Fed rate cuts that are made as a result of an economic slowdown? Do investors say let's buy stocks now before they go down so we can be there at the bottom when the Fed cuts rates? No. They anticipate and sell off ahead of time. Sure they will rally, but they rally in anticipation of the subsequent upturn. They don't look from the current peak in economic activity to the next peak and price that in at the top. The idea is utter rubbish, but that is what you get on the financial stations. Of course, the gentleman was unchallenged by the tough, savvy interviewer, leaving the viewer to ponder the wisdom of 'facts' crammed into a faulty premise.
In reality stocks rise in anticipation of the end of rate hikes and then struggle after the rate hikes end because it is already priced in. Then everything rests with whether the Fed went too far and causes a significant slowdown or recession, or if it gets it right and the economy resumes its uptrend. It kind of did that in 1994, and that is what everyone hopes for. Oh, by the way, I am going to the track and put down a wad on the long shot after finished with work tonight. In the vast majority of rate hike campaigns the Fed goes too far and the economy stalls either into a slowdown or a recession. The latter means that the Fed will end up cutting rates, but the market has sold off ahead of the economic slowdown because earnings are slowing. If earnings slow, there is nothing to keep stock prices moving higher. They have to readjust to levels commensurate with the new earnings growth rates, and that means the market sells. Just before the economy bottoms, stock prices will bottom and start to rebound. That may or may not coincide with Fed rate cuts. As seen in 2001, Fed rate cuts did nothing to reenergize the market. It was not until investment incentives were passed that money was again freed up for investment and restarted the economy. The market bottomed in October 2002, about 8 months ahead of the economic recovery though we wrote of signs it had turned the corner starting late 2002. Indeed, we viewed the October bottom as The bottom, and wrote of it at that time. That is what you have to look at: sane, clear analysis of the events as opposed to rather incredible leaps of logic.
THE MARKET
MARKET SENTIMENT
Sentiment is always harder to quantify than the nuts and bolts of the market (price/volume action, leadership), but it does have its role in market forecasting. Basically you look for extremes either in upside enthusiasm or negative views on the market. For example, during the late 1990's stocks were the topic at the water cooler, happy hour, and basically any get together. I still remember cringing at parties in 1999 and early 2000 where after a retelling of investment triumphs and musings on a current dip, someone would shout 'buy more AOL!' Relatives would say 'we had better get into this market.' Everyone would have a stock tip for me to write about.
It was clear a top was coming just from the sentiment angle, but until the price/volume action, leadership breakdown, and jumping volatility in early 2000, stocks ran higher and higher despite the exploding enthusiasm. That sentiment led many to back off from the market, but with enthusiasm basically running rampant from 1977 on, you missed out on three years of serious upside waiting for the end.
Thus right now, even though we are seeing a lot of bullishness, we are still watching the primary indicators closely. This early 2006 has been up and down, but it has continued to trend higher, and no major leadership implosion is occurring. It has not been great action, however, and that keeps us on edge, particularly as we get more and more phone calls from investors from 2000 asking for stock tips. They will claim that the rise has nothing to do with the call, that the call could have taken place a year ago, but the fact is, the calls come in now that the market has rallied for over 3 years.
This is something to keep in mind as we continue to watch the market action, putting the price/volume action and leadership in context of a market that has excess enthusiasm. That keeps you at the right level of skepticism even as more and more pundits throw in the towel and say 'time to party.' We participate as long as the market nuts and bolts say to do so, using the sentiment as a heads up that there could be trouble ahead. As noted, that trouble could be three years down the road, however.
VIX: 11.32; -0.08
VXN: 15.21; -1.13
VXO: 10.66; -0.38
Put/Call Ratio (CBOE): 0.69; 0
Bulls versus Bears:
Bulls: 53.2%. Another sharp rise, up from 49.5% and 46.7% the week before that. Rapidly approaching that 55% level considered bearish. On the low this cycle it hit 42.3%, a level below the prior lows in May and October 2005. The market moved higher after that but it did not show us a strong surge.
Bears: 24.5% from 27.8%. Well off its high at 33% for this cycle, a level that topped the prior two highs that gave way to strong rallies. Above the 20% level below which is considered bearish, but heading lower fast. It is coming full circle, having started this move just above 20%, the threshold level. Bears surpassed the readings from the two prior market bottoms in May and October 2005 (30% and 29.2%, respectively).
NASDAQ
Stats: +14.74 points (+0.63%) to close at 2370.88
Volume: 2.245B (-0.37%). Lower trade but still solid and above average as NASDAQ pushed to a new post-2002 closing high. Continued accumulation but also some pre-expiration shuffling prompted by the strong rebound and shorts needing to reallocate positions. Good to see continued strong volume on the upside move.
Up Volume: 1.472B (-471M)
Down Volume: 744M (+449M)
A/D and Hi/Lo: Advancers led 1.91 to 1. Another decent day of breadth as NASDAQ led the large cap indices higher.
Previous Session: Advancers led 2.55 to 1
New Highs: 309 (+101). Good rise but still lagging the 400+ level that it has been unable to show in any of its moves. The moves are solid but not blowout, and thus the choppy advance in the index. Nonetheless, it is advancing.
New Lows: 39 (-8)
The Chart: http://www.investmenthouse.com/cd/^ixic.html
NASDAQ pushed to a new post-2002 closing high, continuing the breakout run from its 2 year ascending triangle that formed in 2004 and 2005 to consolidated the strong move off the October 2002 low. After that torrid run in 2003 it needed a good, long consolidation, and it got it. Now it is showing strong volume on each of its upside breakouts. Overall the move is choppy and erratic, and indeed downright frustrating at times, but it is continuing higher. You don't hear or see this analysis on the financial stations or in other market reports, but this is one of the key underlying strengths in the market you see when you step back from the day to day movements. NASDAQ continued its rebound from its trendline and 50 day EMA, and it did so on above average volume. We said we would prefer to see NASDAQ test from above the breakout, and that is what it looks as if it will do when that comes back to test this move.
SOX (+1.75%) posted its second consecutive strong move after making a slightly higher low off support at 500. It closed just off the high in the 'hump' (527.75) of its attempted double bottom base. Chips certainly look much improved as good results come in. INTC has been a drag but it was up after hours as its crappy earnings report was not crappier than feared. SOX has been here before after that strong early April move. Now we see if there are any guts in the move. It could very well, however, move laterally here for several sessions to form a handle that sets up the next move higher. As NASDAQ and SP500 are at their prior highs and will need a rest, SOX may give us that move as those indices take a breather at some point over the next few sessions.
SP500/NYSE
Stats: +2.28 points (+0.17%) to close at 1309.93
NYSE Volume: 1.749B (-5.07%). Volume backed off slightly on NYSE as well as SP500 tried its early April highs and SP600 broke to a new high. You can quibble and say volume was lower, but trade was still better than anytime in the past month excluding Tuesday, and better than trade in 3 months if you toss out one day in mid-March. That tells you there was still some accumulation, but we also have to put it in context and recognize some midweek repositioning ahead of expiration this week.
A/D and Hi/Lo: Advancers led 1.6 to 1. Even with the small caps leading to a new high, breadth was mediocre. No complaints given the strong showing on the Tuesday move.
Previous Session: Advancers led 3.63 to 1
New Highs: 354 (+80). Not bad. Could be better.
New Lows: 128 (-13)
The Chart: http://investmenthouse.com/cd/^gspc.html
SP500 posted a gain but a most modest one as it approached the early April highs (1313-1314). This is not unexpected given SP500 was in trouble prior to the Tuesday gallop higher, trading below its 50 day EMA (1290), having broken its October/March trendline (1302). It is now back above that trendline and posted another gain on volume, but we are likely to see SP500 take some kind of breather after that move that pulled it from the jaws of trouble. We note that intraday SP500 faded back to near the trendline and then rebounded into the close. That shows some continued purchasing in this second day of the rebound move.
SP600 (+1.04%) posted its second consecutive strong gain, breaking to yet another new all-time high and clearing the early April highs (398.33). As noted Tuesday, it appears to be shifting its uptrend higher. It will come back to test the move, and it should hold the upper channel more or less when it does so (394).
DJ30
DJ30 could not muster any more upside, rallying to 11,300 on the high but basically going nowhere as it tests the March highs (11,335). Taking a rest similar to SP500 at those highs after a nice move off of its up trendline and 50 day EMA (11,102). Volume was lower but still above average, something it has not shown in a long time. Good recovery. May need a couple of days rest before trying higher once more.
Stats: +10 points (+0.09%) to close at 11278.77
Volume: 292M shares Wednesday versus 309M shares Tuesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
THURSDAY
Earnings as far as the eye can see. Thus far results with 20% of the SP500 reporting are running at a 13.3% growth rate. 64% are beating, 14% have missed. Not bad, and that has helped spur the rebound from the selling that occurred immediately ahead of earnings season. So basically, the market is even with early April, right? Well, not really. NASDAQ and SP600 showed great strength coming off the April test, showing once again that buyers remain strong in those sectors. A little confirmation of strength never hurt anyone.
Earnings helped provide the catalyst for the Tuesday move, but as noted above, we cannot count on that to drive stocks higher and higher. We may get some more upside impetus from good results for the next few sessions, but that saturation point is hit once half or so report and the outcomes are more or less priced in. That means general market surges as seen Tuesday will be less likely with individual moves dominating as the indices test the break higher and try to continue the move. With oil at $72/bbl investors will have something else to consider when the blush wears off of good earnings. Remember, after guidance is out, investors will look at other factors that could impact earnings down the road outside of what the companies are forecasting in their earnings. High energy prices are a definite potential impact.
There was still life in earnings results after hours with AAPL and INTC moving higher. EBAY and QCOM were lower but we did not see a lot of implosions. Thursday weekly jobless claims come out along with the Philly Fed and Leading Economic Indicators. Not a lot of firepower there to move the market though we will be interested in Philly given the weaker New York reading Monday.
Right now the market has made the recovery once more, deciding to fish versus cut bait after selling back to support. More of the same and likely that will continue. After the move higher SP500 and DJ30 were already slowing at the prior April highs. After NASDAQ and SP600 broke to new highs they will test the move in the coming sessions. We are not expecting much change in the action, i.e. we can expect the same jerky moves going forward as opposed to clear sailing. That is why we took some interim gains on the continued move higher Wednesday. Maybe the market will surprise us and shoot higher. Realistically we will look for more upside given the strong upside volume but expect a test coming after the move, particularly with expiration Friday ahead. That, however, can give us opportunity as well as leading stocks test their recent moves.
Support and Resistance
NASDAQ: Closed at 2370.88
Resistance:
2477 is the January 1999 peak
2493 is the February 1999 peak
2523 from the December 2000 low
3015 is the December 2000 peak and the October 2000 low
Support:
The January high at 2333
2328 from the May 2001 peak
The recent high at 2325
The 18 day EMA at 2331
2314 is the October/March up trendline.
The 50 day EMA at 2308
2288 from December 2000 low.
2278 is December 2005 intraday high.
2273 is December 2005 closing high.
A minor peak at 2249
2240 is closing low in recent range.
S&P 500: Closed at 1309.93
Resistance:
1311 is the March intraday resistance on this move.
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:
The October/March up trendline and the January high at 1302
The 18 day EMA at 1297.72
1297.57 is the recent February high.
The 50 day EMA at 1290
The late January peak at 1285
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 11,278.77
Resistance:
The recent March highs at 11,329 to 11,335
11,350 from the May 2001 peak.
11,401 from the September 2000 peak.
11,425 from April 2000 peak
Support:
The 18 day EMA at 11,174
11,159 is the February high.
11,137 is the last peak from the February top.
11,125 is the October/January/February up trendline.
The 50 day EMA at 11,102
11,044 is the January high.
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.
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
April 17
New York Empire State PMI, April (8:30): 15.8 actual versus 24.0 expected, 29.0 prior (revised from 31.2)
Net foreign purchases, February (9:00): $86.9B actual versus $69.1B prior (revised from $66.0B)
April 18
Housing starts, March (8:30): 1.96M actual versus 2.025M expected 2.126M prior.
Building permits, March (8:30): 2.059M actual versus 2.1M expected, 2.179M prior
PPI, March (8:30): 0.5% actual versus 0.4% expected, -1.4% prior.
Core PPI, March (8:30): 0.1% actual versus 0.2% expected, 0.3% prior.
FOMC minutes, March (2:00): FOMC split on continuing versus holding pat, but all agree near done.
April 19
CPI, March (8:30): 0.4% actual, 0.4% expected, -1.4% prior
Core CPI (8:30: 0.3% actual versus 0.2% expected, 0.1% prior
Crude inventories: -800K actual versus +2M expected and 3.23 million prior
April 20
Initial jobless claims (8:30): 308K expected, 313K prior
Leading Economic Indicators, March (10:00): 0.0% expected, -0.2% prior.
Philadelphia Fed, April (12:00): 14.3 expected, 12.3 prior.
End part 1 of 3
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