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5/10/06 Technical Traders Report
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Technical Traders Report Subscribers:
MARKET ALERTS
Targets hit alerts: None issued
Buy alerts: HAL
Trailing stops: CYMI
Stop alerts: INFA; MFLX
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:
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SUMMARY:
- Meaning of 'yet' leaves market undecided, closing weak as it tries to figure the Fed.
- Fed raises rates for sixteenth time, quiet on a pause.
- Commodities prices rocket, dollar tanks, but how much is inflation and how much is speculation and a purposeful devaluation?
- Market leaning two ways in wake of Fed decision.
Volatile post-FOMC market action as Bernanke is saying one thing, likely meaning another.
The market did not rally into the FOMC decision. It was basically flat until a move lower that started right as lunch ended on the East coast. The market appeared to anticipate the Fed was not going to give any 'pause' insight and thus there was none of the usual short covering 'just in case' the Fed surprised everyone. Basically the market was taking back some of the anticipation rally (at least on the NYSE) that the Fed was going to pause.
It was not a clear cut decision as the market gyrated up and down after the result, trying to figure out the significance of the 'yet' added in the phrase "further policy firming may yet be needed." It looks and sounds the same, yet it is different. To us it means that the Fed really thinks it is near the end, yet it may have to do a bit more. For example, I have worked all day to finish, yet I may have more to do. That is our take, but who the heck knows? So much for clarity. 'Yet' seems pretty well defined, but it is all how you use it, and the Fed was vague enough to leave everyone guessing.
The overall response was hardly rah-rah. Volatility is the norm after a Fed decision, but the volatility was in a negative range; in other words, the overall bias was negative as the market sifted through the statement and tried to get a fix on the Fed's future actions. The NYSE indices still look peachy with nice easy pullbacks by SP500 and SP600 with DJ30 even posting another modest gain. A big part of the growth stocks, however, did not fare as well. NASDAQ sold to its 50 day EMA, managing a late bounce to hold that level. SOX plowed under its 50 day EMA. Both likely overreacting to the lack of 'pause' language in the statement. Of course, they were already weaker heading into the decision so we cannot blame it all on the Fed. They need to show us it was an overreaction fairly quick.
Volume was up on the session, not a great indication as NASDAQ sold to the 50 day EMA and chip stocks struggled. It was still below average, but it was the strongest trade in four sessions. NYSE trade was up as well, but those indices rebounded off their tests of near support, remaining strong as buyers moved in after the test lower. The tech stocks are generally considered growth stocks, and NASDAQ is lower. The irony of that, however, is that the stocks that control NASDAQ's direction, the mega-cap tech leaders from the late 1990's, are no longer growth stocks as shown by MSFT, DELL, and now CSCO. NASDAQ 100 was down 0.96% while NASDAQ declined 0.75%, weighed down by those large cap techs. There are many NASDAQ stocks in excellent shape, but as long as the large cap non-growth stocks control its direction, NASDAQ is likely to never approach its old highs. The up and comers will have to growth and add shares and supplant those old leaders to make the shift. That is not going to happen anytime soon.
That leaves the market heading into Thursday and anticipated strong April retail sales results with a Fed that may 'yet' have to raise rates if the data warrants. That is really the same old story as before, and that leaves us looking at the techs to see if they can pull out of a potential dive engineered by the old large-cap leaders.
THE ECONOMY
Fed still raising but wants to pause. Knights that say 'yet'?
The Fed raised interest rates for the sixteenth consecutive meeting, all 25 basis point moves. That brought the Fed Funds rate from 1% to 5%. That was as expected. Also as expected, there were no major changes to the statement. It was basically the same statement yet it inserted one word, 'yet', as in "further policy firming may yet be needed."
Maybe the Fed would have been better to just leave it as it was. As it was the market wondered what 'yet' meant, and when there is doubt that brings the sellers out. They controlled the action to the close, sending NASDAQ to its 50 day EMA.
As noted above, what the Fed was likely trying to do was say it was close but still data dependent. After Bernanke's perception that the market overreacted to his 'pause' speech he wanted to make it clear he was not a casual 'pauser.' He may want to pause and indeed the Fed is likely to pause in June, but he cannot let that out.
To pause or not to pause.
The Fed has a dilemma. Bernanke knows housing declines have led to economic slowdowns or recessions 8 of the last 10 pullbacks. He has talked and written about this. He also knows that high energy prices have more of a destructive force than an inflationary force on the economy. He has discussed this as well. At the same time commodities such as gold and silver (and tin, and copper, etc.) are screaming higher, even accelerating their runs in the past month (somewhat coincident with the 'pause' speech). Also, the dollar has been hammered. The latter two items are inflationary indications while the former are the opposite.
Question is, just how much is each is really reflecting inflation and if so, which is more significant? Commodities are screaming, but this doesn't have the look and feel of prior inflationary rises. They typically build and build and build. This has a speculative feel to it. Sure there is demand worldwide and that is pushing prices. But demand has not ramped up in the last month or even six months that would justify this huge spike in prices. While there is some inflationary indication in any big rise in commodity prices (particularly gold), this massive and recent surge smacks of speculation. That could lead to inflation as well, particularly if there is so much liquidity the mere dollars chasing the commodities is pushing them higher.
As for the dollar, a decline is a signal of less faith it will hold value, i.e. a signal of inflation. Rate hikes help because it makes the currency more valuable, attracting overseas funds. Using interest rate hikes to prop up a currency is historically a terrible idea, however. What to do about a declining dollar then? Get the Treasury actually behind it. The Bush treasury mouths the words. We heard it today again from Secretary Snow: a strong dollar is in the US' best interests. Yet it looked as if he was out of sync, as if we were watching a Milli Vanilli repeat performance. They say the words but no one believes them. Thus the dollar declines.
That is not due to inflation. That is due to another republican administration thinking it can devalue its way to manufacturing prosperity. News flash: US manufacturing is in a 50 year decline. Every day you hear we are a service and information economy. Items that can be made elsewhere for one-third of the cost or less as here in the US should probably be made elsewhere. We should be spending our money not on preserving jobs where waistbands are sewn onto briefs or boxers, but on the next technological waves that will create the jobs that RAISE our standard of living. Making tidy-whities isn't going to do it. Encouraging entrepreneurship such as Google does. In fact, GOOG has created so much wealth in California through its jobs that it is measurably impacting California's tax revenue base. Incredible. We should be trying to encourage duplication of that creativity, not trying to to preserve nineteenth century industry.
Tough dilemma.
Bernanke may be the plain speaking Fed chairman, but thus far he has not been totally clear. Statements, retractions, 'yet.' You can understand the words (unlike Greenspan), but the way they are put together leaves you wondering sometimes. Much clearer is former Dallas Fed president McTeer. Wednesday he was again speaking clearly and he was still concerned the Fed was going to go too far despite the talk of a pause and the Fed's acknowledgement that it often goes too far. He summed it up saying that despite the talk of a pause the Fed would probably fumble the ball. He was pretty matter of fact, pretty glum about it. Man. Hard to be happy after that.
Particularly with all of these undercurrents suggesting inflation but then not. I think that is where McTeer was coming from. There are arguments on both sides of the ledger, and it would take such a perfect policy to pull off a good ending that McTeer, with his experience on the Fed, puts the odds low at succeeding. Tons of liquidity, surging commodities, falling housing, stifling energy costs. At some point you just have to get on your horse and ride it. The Fed has been riding the current horse for 16 meetings. It may want to give it a rest for a couple of months, but unless energy hammers the economy it will be back at it, and that is what McTeer fears.
Heck, that is what we all fear because we all know the scenario too well. Sure commodities are soaring, but once there is a spook in the market, the money slows as speculators pull back. Then the central banks feel they have to put a lid on the amount of money in the world. Japan and Europe are hiking rates as we think about cutting them. There is some disarray as to policy on a worldwide basis. Money supply is growing, but the central banks can stop that as easily as they keep it building, and if more banks think growth is too fast they start doing that. If that happens we will see a tech-like drop in the commodities whether or not the move is 'demand driven' as so many like to parrot every day.
THE MARKET
MARKET SENTIMENT
VIX: 11.78; -0.21
VXN: 14.85; +0.21
VXO: 11.4; +0.07
Put/Call Ratio (CBOE): 0.83; -0.04
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: -17.51 points (-0.75%) to close at 2320.74
Volume: 2.057B (+4.7%). Volume hit its highest level in 5 sessions, but remained just below average as NASDAQ tested below its 50 day EMA but rebounded to hold on the close. Rising trade is not that bad in that situation; it suggests some buyers came back in. It is not, however, a clear case of buying on the dip given the quite modest rebound. Have to chalk it up as a distribution session with the large cap, non-growth techs suffering again.
Up Volume: 638M (-40M)
Down Volume: 1.385B (+116M)
A/D and Hi/Lo: Decliners led 1.58 to 1. Not horrible breadth. The NASDAQ 100 (-0.96%) outpaced the rest of NASDAQ lower.
Previous Session: Decliners led 1.37 to 1
New Highs: 188 (+8)
New Lows: 70 (+27)
The Chart: http://www.investmenthouse.com/cd/^ixic.html
Gapped lower again and fell through the 50 day EMA (2318) on the low, managing a rebound to hang onto that level. Higher trade, middle of the road breadth; distribution but nothing outrageous suggested by the internals. NASDAQ is at a point where it needs to get with it once more, particularly after making a lower high last week. It does not want to go back to 2300 again because this time it will find it hard to hold the line after this lower high.
If the market was looking for help from SOX (-2.49%) it did not get it. SOX fell through the 50 day EMA (515.08) in the early afternoon fade and could not recover much ground at all. What had set up as a very nice pattern, overcoming MSFT and DELL shortcomings, could not hold the line when Cisco disappointed with its guidance. Needs to make a quick recovery and show that the Wednesday action was an overreaction to the Fed's lack of pause in the statement.
SP500/NYSE
Stats: -2.29 points (-0.17%) to close at 1322.85
NYSE Volume: 1.612B (+6.14%). Volume rallied back up to average on NYSE, but the action of SP500, SP600 don't suggest selling. As soon as they hit near support they rebounded to recoup most of the losses. Very good shakeout action, a high contrast to the tech action.
A/D and Hi/Lo: Decliners led 1.23 to 1. Quite modest.
Previous Session: Decliners led 1.04 to 1
New Highs: 220 (-50)
New Lows: 103 (+31)
The Chart: http://investmenthouse.com/cd/^gspc.html
SP500 continued its slight fade off of the new post-2002 high, tapping the 10 day EMA (1317) on the low and holding above the November/March trendline (1315) as well. Simply excellent action is about all you can say. Quite a test is another. Looking good is yet (oops, we said the word) another. It may still come back to test again, but it is in very positive shape.
SP600 (-0.38%) showed the same action, tapping at the 10 day EMA (400.63) on the low and also holding the old upper channel line (400) of its uptrend. A test lower, a rebound. Still holding most of the gains with a good shakeout. Hard to find fault with this move.
DJ30
DJ30 posted another gain though it is showing its age on this move with a doji on the candlestick chart as it comes within 80 or so points (on the high at 11670) of its all-time high. This may be all it gets on this move; it has squeezed out a gain for 6 out of 7 sessions and as with SP500 and SP600 it likely needs a bit of a shakeout. No complaints.
Stats: +2.88 points (+0.02%) to close at 11642.65
Volume: 284M shares Wednesday versus 202M shares Tuesday. Volume jumped back up to near average as DJ30 ran in place. After a strong move up that suggests a bit of churn as the sellers catch up with the buyers. That is often followed by a pullback, but in this instance it is not suggesting anything massive.
The chart: http://www.investmenthouse.com/cd/^dji.html
THURSDAY
In the Fed aftermath retail sales take the spotlight given the Fed's data driven mode. The sales are from April and with Easter and the results already seen from same store sales, they are likely to be strong. Helping pump them up will be gasoline sales; they jumped in the last part of the month and retail sales include gasoline. Kind of a sick twist in the report: retail sales surge but gasoline aids in the jump and it also takes away from other discretionary areas. Gasoline price spikes are like the lilies of the field; they reap yet toil not.
Investors face retail sales and Thursday with a market trying to head in two directions. The NYSE looks golden. NASDAQ was set up well to rebound but now is hanging on at the 50 day EMA. SOX was in excellent shape but started a jailbreak in one day. It remains to be seen whether the Fed decision sans pause language has a lasting negative impact. It typically takes a day or two for investors to get comfortable with a statement change even if it is one three-letter word that rhymes with let.
Thus far the NYSE indices have gone about their new highs even as NASDAQ and SOX reluctantly followed. Now that there could be outright rebellion we will see where the strength lies: in upside NYSE stocks or downside technology. The jury on that is out, but it is clear that NYSE remains strong while tech remains a big question mark. We will be looking for plays off of this pullback in the NYSE stocks (and we won't forget NASDAQ stocks that are, in general, simply out market-capped by the big techs that are dragging the index lower). With pullbacks this nice, you have to be looking for opportunity.
Support and Resistance
NASDAQ: Closed at 2320.74
Resistance:
The late January highs at 2325
2328 from the May 2001 peak
The 18 day EMA at 2329
The January high at 2333
2339 is the October/March up trendline.
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:
The 50 day EMA at 2318
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 1322.85
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.
The October/March up trendline at 1315.50
1315 is the May and May 2001 peaks
The 18 day EMA at 1312
1311 is the March intraday resistance on this move.
The January high at 1303
The 50 day EMA at 1301
1297.57 is the recent February high.
The late January peak at 1285
Dow: Closed at 11,642.65
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 11,503
11,452 from December 1999 peak
11,425 from April 2000 peak
The 18 day EMA at 11,423
11,417 from the recent April highs.
11,401 from the September 2000 peak and April 2001 highs
11,350 from the May 2001 peak
The March 2005 highs at 11,329 to 11,335
The 50 day EMA at 11,258
11,232 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: +300K. Gasoline +2.4M
Treasury budget, April (2:00): $116.5B expected, $57.71 prior
FOMC statement (2:15): Hike to 5%. No mention of pause, but rate firming may 'yet' be necessary.
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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