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us stock market, trend trading stock
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5/09/06 Investment House Daily
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SUMMARY:
- Slow news day allows market to set up ahead of the Fed.
- Wholesale inventories shrink as sales jump.
- Waiting on more gasoline inventories and of course the Fed.
NASDAQ, SOX weather Dell warning, set up for the next move.
Stocks in general continued their test of last week's move higher with the real focus on how NASDAQ and technology responded to the Dell earnings warning. That news dominated the headlines, but it did not dominate the market. NASDAQ and SOX were pressured, but they did not crack. SOX tapped at its 50 day EMA and rebounded to hold the 18 day EMA. NASDAQ eased back to the up trendline, showing a doji on the candlestick chart, basically indicating an innocuous session. As usual DJ30 rallied and SP500 managed to recover late to close positive.
There was not a whole lot to drive the action. Foreign markets were lower, earnings were out but mainly impacting the reporting company, oil edged higher (70.69, +0.92), and wholesale inventories had the expected non-impact. Dell was a potential market mover, but as noted, its impact was muted as questions about Dell's woes being Dell specific were common (similar to MSFT and its earnings report). In the end the market did what it wanted to do, i.e. continue the test of last week's move.
That kept the action mixed once more, but constructive. DJ30 is out there on its own, setting its own pace and agenda, coming within 1% of an all-time high. SP500 and SP600 have broken higher as well, now taking a breather on lower volume. NASDAQ and SOX, the laggards, had what we consider good sessions, testing back to near support as expected, then holding with a modest bounce. Volume was up on NASDAQ and lower on NYSE, but both well below average. Breadth was flat (NYSE) to modestly lower (-1.4:1 NASD). Leadership was spotty with metals, retail, some energy heading higher. Basically a slow session along the lines anticipated.
The NYSE indices did not do much testing, instead moving laterally in a tight range. That, however, is a sign of strength. NASDAQ and SOX pulled back to near support. That leaves the indices in decent position to do a standard rise into the FOMC announcement. Last meeting it took most of the morning but finally stocks rallied into the result. They are set up to repeat the move Wednesday, and then it is up to the statement which will likely be less than hoped for but likely what is expected.
THE ECONOMY
Pretty slow session economically speaking, particularly ahead of the FOMC meeting. We could dazzle you (bore you?) with a recitation of the economic stance at this point, i.e. how the economic data continues to show growth even as the more recent data shows housing's continued softening and gasoline at $3/gallon again stifling some demand, but we have done that in detail of late.
Instead we have to wait and see what the Fed says with respect to the data that it openly admits is strong yet showing problems in key areas such as the two cited above. The Fed is showing a bit more enlightened thinking (at least publicly) in our view, and that holds out hope for a more flexible approach. That remains to be seen at the June meeting, however, because the Fed is likely not desirous of setting the market off and running with comments about pausing and the like. Maybe it will surprise us with a radically different statement now that Bernanke has a hike that is his own under his belt. Maybe, but we are not expecting that at this juncture given Bernanke's response to the response to his statements before Congress.
Wholesale inventories much smaller than expected.
Expectations were for a 0.5% gain but strong sales (0.7%) pushed inventories up just 0.2%. Great news, but just about as dated as fins on a Buick (March results). It pushed the inventory to sales ratio to 1.16 months, down from 1.17 months in February. Inventories are up 6.3% year/year versus sales at 9.9% year/year. The last of Q1 showed continued strong sales at the wholesale level and no inventory bloating at all. That means companies headed into the current quarter still needing to keep the manufacturing fires burning.
THE MARKET
MARKET SENTIMENT
VIX: 11.99; -0.01
VXN: 14.64; -0.13
VXO: 11.33; +0.31
Put/Call Ratio (CBOE): 0.87; -0.07
Bulls versus Bears:
Bulls: 43.9%. Falling further, down from 45.4%, 48% and 53.2% at the peak in April. Very nice decline continued even as the market trended higher (though NASDAQ did fall). The market chop was taking its toll. After a month climbing from 42.3% back close to the 55% level considered bearish, a much needed decline. It rose from 42.3% on the low this cycle, a level below the prior lows in May and October 2005.
Bears: 28.6%. The NASDAQ decline and overall market chop and volatility had its effect on bears as well, rising from 25.8%. Not as dramatic a move as the Bulls as they are still well off their high at 33% on the last cycle. Up from 24.5% on the low this time around. The 33% high hit last cycle topped the prior two highs (30% in May 2005, 29.2% in October 2005) that gave way to strong rallies. The 20% level and below is considered bearish. It started this move just above 20%, the threshold level.
NASDAQ
Stats: -6.74 points (-0.29%) to close at 2338.25
Volume: 1.965B (+9.48%). Volume was higher but still well below average as NASDAQ tested near support. Dell earnings helped jump volume some as the large cap techs traded nervously. Overall we like the trade as NASDAQ tests the trendline.
Up Volume: 678M (-181M)
Down Volume: 1.269B (+380M)
A/D and Hi/Lo: Decliners led 1.37 to 1. Pretty modest breadth as NASDAQ struggled under the burden of Dell's earnings.
Previous Session: Decliners led 1.1 to 1
New Highs: 180 (-56)
New Lows: 43 (+1)
The Chart: http://www.investmenthouse.com/cd/^ixic.html
Gapped lower, not unexpected given Dell, but held the October/March trendline (2334) on the close after tapping at the 18 day EMA (2330) on the low. The modest kick up in volume was not much of a concern; it was still well below average, and rising volume at support can be a good thing. NASDAQ has not fully filled the Friday gap higher, but it has come back to good support and is trying to make a higher low and continue with more volume last week's bounce.
SOX (-1.02%) sold down close to the 50 day EMA (515.41) on the low and then recouped some ground to hold the 18 day EMA (518.48). That is the move we anticipated, and the hold at the 18 day EMA is what we want to see for the next attempt higher. Yes it is lagging, but this was good action, helping to weed out some sellers and set the stage for the next move higher. It has made the test, now it has to show us the move.
SP500/NYSE
Stats: +0.48 points (+0.04%) to close at 1325.14
NYSE Volume: 1.519B (-2.27%). Lower, below average volume once more as SP500 and SP600 moved laterally in a very tight range. Very good action.
A/D and Hi/Lo: Decliners led 1.04 to 1. Flat, just like the indices.
Previous Session: Advancers led 1.03 to 1
New Highs: 270 (-22)
New Lows: 72 (+3)
The Chart: http://investmenthouse.com/cd/^gspc.html
A second lateral move in a very tight range, refusing to give back any gains from last Friday's breakout move. Volume backed off once more, the second session of below average trade, just what you want to see when an index takes a pause because it shows no one really wanting to let go of their shares. May take another session to set up the next move, but this action is in keeping with the index' strength.
SP600 (-0.04%) showed a similar lateral move in a tight range, holding onto its Friday break to a new all-time high. Nice break higher, nice lateral test, holding its gain. As with SP500, it may take another session to fully set up, but there is no selling of small cap shares as the market takes a pause.
DJ30
The breakout momentum continued Tuesday with DJ30 again posting the best percentage gain, moving further into post-2002 high territory and trading just 1% off its all-time high (11,750). It continues to find the marginal buyer as industrial stocks garner what you could almost call speculative dollars. Very low volume on the move; running out of a bit of steam but hardly ready to violate its trend. Again, though it is getting a bit extended here it is likely to try one serious shot at its all-time high.
Stats: +55.23 points (+0.48%) to close at 11639.77
Volume: 202M shares Tuesday versus 309M shares Monday. First below average session in two weeks, some more indication that DJ30 may be just a bit overextended here, and after a further run toward the high it could find the homecoming
The chart: http://www.investmenthouse.com/cd/^dji.html
WEDNESDAY
The Fed will dominate the agenda Wednesday, but there is also the oil inventory report and the Treasury budget. Gasoline inventories are expected to rise. Gee, give them one up week after 9 down weeks and they start to think another trend is forming. We will see; that kind of expectation can be dangerous.
The recent decline in energy prices may embolden the Fed, but you have to think that with Bernanke's statements about the demand damaging affects of he will be talking to other FOMC members about consumption hiccups due to high prices not to mention a declining housing market, another of Bernanke's notable contributions to the rate hike debate this year.
Even with that, however, the Fed is highly likely to raise rates to 5% Wednesday and not give us a lot in terms of the statement as to what it will do next. Bernanke is most likely willing to let what he has said and then retracted (well, sort of) stand as the 'clear' indication of Fed direction. In other words, the statement is likely not to change a whole heck of a lot. Or, if it does, it will be a big change. Bernanke is still making the case he is not a dove on inflation (he said so himself). He has broached interesting topics, but he has also backed off when he felt he was being misunderstood (of course Greenspan was always misunderstood; indeed, he cultivated the Fed fog). Thus we are not anticipating a radical change at this meeting. When a pause comes, it will be announced in the statement of a regular meeting; that will be the warning.
As noted above, the pullback has been decent, setting the indices (particularly NASDAQ and SOX) up for a traditional rise into the FOMC result. NASDAQ may get a bit of a boost from CSCO as it beat expectations after hours and was up about $1. Of course at this juncture CSCO likely won't raise NASDAQ to a breakout, but it won't hurt getting it off of this test of support.
We are going to continue looking for leaders rebounding ahead of the rest of the market, but we are also going to want to see some good moves to opt in ahead of the FOMC meeting. We like the pullback and the set up for a rebound and thus will move in on strong moves, but there is also volatility after the FOMC result that may give rise to opportunity as well. That also has the benefit of the Fed putting its cards on the table.
In any event, a strong move from a strong stock is not something we will turn away from. There were some good moves Tuesday, but there were a lot more so-so moves that just didn't quite have 'it.' They hit the buy point on low volume (and it stayed low) or they tapped it on high volume but could not get going. No point in rushing too many of those, particularly with the FOMC meeting ahead. Better to let them show us tomorrow if they really mean business and worthy of our money.
Support and Resistance
NASDAQ: Closed at 2338.25
Resistance:
The February closing high at 2361
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:
2338 is the October/March up trendline.
The January high at 2333
The 18 day EMA at 2330
2328 from the May 2001 peak
The late January highs at 2325
The 50 day EMA at 2317
2300 from the April intraday lows.
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 1324.22
Resistance:
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:
1317, the recent intraday highs from April.
1315 is the May and May 2001 peaks
The October/March up trendline at 1315
The 18 day EMA at 1311
1311 is the March intraday resistance on this move.
The January high at 1303
The 50 day EMA at 1300
1297.57 is the recent February high.
The late January peak at 1285
Dow: Closed at 11,620.80
Resistance:
11,638 from January 2000
11,723 is the January 2000 closing high
11,750 is the January 2000 intraday and all-time high.
Support:
11561 is the DJ30 closing high
The 10 day EMA at 11,469
11,452 from December 1999 peak
11,425 from April 2000 peak
11,417 from the recent April highs.
11,401 from the September 2000 peak and April 2001 highs
The 18 day EMA at 11,396
11,350 from the May 2001 peak
The March 2005 highs at 11,329 to 11,335
The 50 day EMA at 11,242
11,220 is the October/January/February up trendline.
11,159 is the February high.
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
May 9
Wholesale inventories, March (10:00): 02.% actual versus 0.5% expected, 0.9% prior (revised from 0.8%)
May 10
Crude oil inventories
Treasury budget, April (2:00): $116.5B expected, $57.71 prior
FOMC statement (2:15): Hike to 5% expected. No mention of pause expected.
May 11
Business inventories, March (8:30): 0.5% expected, 0.0% prior.
Initial jobless claims (8:30): 315K expected, 322K prior
Retail sales, April (8:30): 0.8% expected and 0.6% prior
Retail sales ex-autos, April (8:30): 0.9% expected, 0.4% prior
May 12
Export prices, April (8:30): 0.2% prior.
Import prices, April (8:30): -0.3% prior
Trade balance, March (8:30): -$67.0B expected, -$65.71 prior
Michigan sentiment, prelim (9:50): 86.0 expected, 87.4 prior
End part 1 of 3
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