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5/15/06 Technical Traders Report
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Technical Traders Report Subscribers:
MARKET ALERTS
Targets hit alerts: None issued
Buy alerts: CHRW
Trailing stops: None issued
Stop alerts: ENER
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:
- Commodities follow through to the downside but market finds some footing late
- Monday's work of the day: Inflation along with talk of 50 BP rate hikes
- Foreign purchases fall way back in March.
- New York PMI continues its fade. Precursor for Philly and Chicago?
- Now we see if the late bounce has anything behind it.
Metals, commodities continue sharp sell off, but other parts of market find some footing.
Sharp rise, sharp fall continues in the commodities. Copper surged 100% in short order, and that was just the tail end of its run. It is selling hard the past few days. Gold jumped through $700 last week, and then fell $26.80 Monday, its largest single session drop since 1993. You go up fast, you come back pretty darn fast as well, especially when the move turns ballistic, shooting straight up after already advancing 100% or more. That is blow off top material we talked about late last week and over the weekend.
Of course, the metals were getting most of the coverage Monday as a leading group took its licks. Oil dropped $2.63 to $69.41, but that hardly got a mention versus the metals. The rest of the market was not doing much better either, at least not early on. All sectors were selling once more, though none could really hold a candle to metals, energy and the other commodities. After all, the rest of the market got a head start on the commodities, and those stocks are now playing catch up to the downside.
The rest of the market was down early but then tightened up midday, attempting a rebound move as NASDAQ held its 200 day SMA, putting on airs that it was sold out. Then everything crumbled after lunch, falling to new session lows with NASDAQ popping its 200 day to the downside. Looked pretty grim, but that additional selling was enough for the shorts to figure they had milked this down leg as much as they could. Shorts started to cover and the market made an intraday double bottom, rallying into the close.
The move pushed SP500 and DJ30 positive. NASDAQ shaved 18 points off its low, giving the flat line a run late. Everything but the commodities came off their lows in that last 1.5 hours as breadth improved (-1.3:1 NYSE) on the rebound. Volume was mixed, higher on NYSE, lower on NASDAQ. Given that SP500 and DJ30 finished positive, you can argue it was a reversal session, but volume really didn't advance all that much over Thursday and Friday levels.
Hard to call it a key reversal, but it was a solid bounce after 5 downside sessions. Call it an oversold bounce or whatever you want, stocks got a bid on some covering. We have looked at this as one of those sharp, hard, but rather fast sell offs in a continuing uptrend. Thus we waited as patiently as we could for the pullback to run its course. Now we see if the bounce continues and can pick up any upside buyers to go with the shorts covering. If that is the case we are going to buy some more of these good stocks that went on sale the past week.
And the password is . . . inflation.
We woke up early Monday and from the moment we tuned in the financial stations (overseas, Bloomberg, CNBC, etc.) all you heard was inflation. Look, up in the sky; it's a bird, it's a plane, no it's inflation. The market fears inflation because it erodes profits and it erodes buying power. Thus as inflation worries hit almost a panic state, the market, no surprise, has sold hard.
There was more news to talk about on the inflation front in the continued wake of last week's FOMC 'stay the course yet' meeting. The Bank of Japan, after hinting last week it was going to raise rates soon, pulled a 360 and said 'rate hikes? What rate hikes?' (just seeing if any of you are reading closely). China on the other hand has pushed the Yuan higher against the dollar, nudging the exchange rate to 7.99 down from 8.00. We wrote about the inflationary impact of Yuan float last year, how overnight Chinese goods would jump in price. This was no wholesale jump in the exchange rate, but it jumpstarted the Yuan devaluation fear lurking under cover for the past 6 months.
Those two stories stoked the inflation fears that started to swell last week after the FOMC meeting. Suddenly Bernanke is a chump, a book smart but street-stupid PhD who wouldn't know inflation if he paid for it. That 'demand driven' commodities surge morphed into an inflation gauge in one night after the FOMC meeting. How could Bernanke have missed it they muse, forgetting they turned from inflation bulls to bears in less than the span of one week.
The result was more calls for a 50 BP rate hike and soon. Hell, that is Fed's line. It is also dangerous. We said earlier that the jump in long term interest rates was now doing the Fed's work for it. Well, the Fed now has many of the pundits doing its work for it as back in 2000. Back then they were convinced inflation was just around the corner and that gave the Fed additional credibility as it clamped down on what was rather illusive inflation. Okay, it was completely absent.
Today that is not the case, but it is dangerous when everyone starts chanting 'off with his head.' In the heat of the moment, namely a commodities blow off top, they are panicking and calling for more Fed aggression. What if commodities keep on falling after this huge 100% spike on top of 100+% gains already? It would be a classic case of panic by the masses at the top. If you look at history that happens more often than not.
Moreover, let's not forget oil and gasoline. Oil and gasoline both did us a favor Monday by falling back after surging higher once more last week. Oil and gasoline fortunately are not breaking through $75/bbl and $3/gallon and staying there; demand keeps fading when it does. Nonetheless, if there is a storm or supply upset in Nigeria or elsewhere, prices will pop. High prices have a more destructive than inflationary affect on the economy.
So what is the truth? Inflation or panic? Copper may have jumped 88% in a couple of weeks, but copper demand didn't. That is not a sign of inflation; that is a sign of rampant speculation. The main problem we have right now is that the Fed and the television pundits are biting off on the Phillips Curve once more, fearing prosperity instead of what really causes inflation, i.e. excess liquidity. There are huge amounts of money circling the globe thanks to rising oil prices and recovering world economies . . . and, of course, central banks willing to flood the world with currency. Look at Japan; it threatens to pull the trigger on rate hikes, but when it comes to the lick log, it continues to back down. That keeps Japan flush with money. China makes modest moves with its currency, but it needs a lot of money from the US surplus to pay for its industrial revolution. Seems all world central banks are letting their countries enjoy some of the recovery after years of lagging.
That is keeping liquidity levels too high over the world, and that is the real inflation threat. We won't stop inflation by slicing the US economy's hamstrings and lowering growth. All we get then is stagflation because we have to face it, with the demand side tax incentives first passed and the reluctance of businesses to get back into the game after the sharp 2000 to 2001 collapse, the demand side has been ahead of the supply side all along. That along with the high money supply has sparked inflation. You don't cure it by killing off investment, you cure it by balancing out supply and demand by giving incentives to increase supply while tempering demand. A 50 BP hike after 16 25BP hikes is not going to solve the problem. Extending the tax cuts is a good step. Draining a bit of liquidity is another step yet to be taken.
THE ECONOMY
If you look way back in March you see net foreign purchases fell.
The data is so dated it is hard to use alone, but if enough months stack up it starts to build a trend. Thus far the March data is just one weaker data point in a string of strong foreign purchases. Foreign capital inflows rose $69.8B, well off the $85B to $88B expected and the $90.5B in February. Treasury purchases fell to a meager $3B from $29.9B.
Hard to be upbeat about that. We need the foreign purchases to prop up our trade deficit where we buy more than we export. Basically we need those with trade surpluses to the US to loan us the money, and they do that by buying our treasuries, etc. They will do that as long as they need us to buy their products. When one day their populations become wealthy enough to consume the higher dollar goods going to the US then they will sell them at home and have less desire for US Treasuries. That is the day that is feared. But, if they start selling more at home won't that mean they will be selling less here and thus a lower trade deficit? Man, maybe Greenspan was right; these things tend to take care of themselves if you leave them alone. Of course, Greenspan couldn't follow his own advice as sage as it may be. He meddled, we paid the price. Now THAT is a legacy.
New York Empire State manufacturing index is on the skids.
Lost in all of the inflation panic is a continued lull in the regional manufacturing reports. For the third straight month the New York region slowed. The Philly Fed is out Thursday, and it has 9 straight months of lower activity. On the other hand, Chicago is holding at a high level, but it has traded in a narrow range for 7 months.
These regional reports tend to lead the national average by a couple of months. Chicago has not moved lower so the national ISM likely will still hold up pretty well this month, that is, unless Chicago breaks lower after the tight range.
These reports are evidence that needs to be remembered along with those calls for a 50 BP rate hike. It was not but a couple of weeks ago that some fairly sane pundits were still behind a pause during the summer. During this past two week spike in commodities, they lost their sanity and started believing the spike was due to runaway inflation concerns in the commodities market versus runaway speculation. Meanwhile high oil and gasoline prices, slowing housing prices, and a stagnating manufacturing sector at least suggest some caution ahead. Maybe the Fed should throttle back some on money supply just a tad and take a pause for a couple of months. If I had appeared on Bloomberg or CNBC today I would have been run off the set with that approach. Everyone has jettisoned all of the facts leading up to this last commodities spike and is now fixated on commodities. Hey, we all know what happens when you fixate on one point of view. Have we forgotten 2000 so quickly? Yep.
THE MARKET
MARKET SENTIMENT
VIX: 13.57; -0.62
VXN: 18.04; +0.94
VXO: 12.87; -0.65
Put/Call Ratio (CBOE): 1.23; -0.04. Fell on the close given the afternoon rebound, but the put activity was still high, the second close above 1.0.
Bulls versus Bears:
Bulls: 44.3%. A rebound in bulls from 43.9% after a slide from 53.2% at the April peak. We can anticipate a decline next week given the dive lower in stocks Thursday and Friday. Overall still in a nice decline. After a month climbing from 42.3% back close to the 55% level considered bearish, the recent slide is 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: 26.8%. Bears declined as bulls 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: -5.27 points (-0.23%) to close at 2238.52
Volume: 2.061B (-11.98%). Volume fell back below average Monday after two above average volume distribution sessions to end last week. Lower trade is not bad given NASDAQ was still selling and did not recover positive territory; it basically shows the selling slowed. Now it needs some upside volume and some breadth as well to show the upside buyers are moving in addition to the shorts covering.
Up Volume: 698M (+271M)
Down Volume: 1.346B (-552M)
A/D and Hi/Lo: Decliners led 1.82 to 1. Still pretty sharp downside breadth though much better than the ugly negative breadth to end last week. As with the volume, this shows a bit less intensive selling.
Previous Session: Decliners led 3.1 to 1
New Highs: 64 (-8)
New Lows: 148 (+19)
The Chart: http://www.investmenthouse.com/cd/^ixic.html
NASDAQ sold further, undercutting the 200 day SMA (2229) but then rebounding 18 points in the late afternoon rally to retake that level. After dumping stocks for several sessions, the hold at the 200 day shows the institutions are not completely abandoning technology. NASDAQ 100 fell only 0.06%, indicating that the large cap techs that undermined the index last week (and basically ever since MSFT reported its earnings) are firming up and trying to put in a bottom for at least a relief bounce. Given the distribution to this point, you have to look at any rebound as a relief move unless we see some strong trade and good breadth. After 5 days of getting kicked around it is due for a rebound, and Monday it showed good action that suggests it is ready to give it a try.
S0X (-0.95%) kept on selling, unable to hold its 200 day SMA (491.80) though it did rebound along with the techs and other stocks in the afternoon session. It managed to hold the December range from 475 to 500; high praise indeed given its dump lower. In short, it is no picture of health but it is also ripe for a relief move after this selling.
SP500/NYSE
Stats: +3.26 points (+0.25%) to close at 1294.5
NYSE Volume: 1.87B (+1.16%). Volume rallied further, topping the Thursday and Friday selling trade as the NYSE indices reached lower and then bounced. SP600 could not turn positive, but SP500 managed a positive close. That suggests a reversal attempt here; these sell offs can be sharp and unsettling, and that keeps many from considering it is just a short pullback. It has some attributes of the quick blow off and rebound, and we are going to watch for a strong rebound.
A/D and Hi/Lo: Decliners led 1.35 to 1. Very modest and well in order after that nasty downside breadth session Friday.
Previous Session: Decliners led 3.9 to 1
New Highs: 31 (-4)
New Lows: 186 (-13)
The Chart: http://investmenthouse.com/cd/^gspc.html
As noted, SP500 continued lower after breaching its 50 day EMA (1301) Friday, but it tested and held above the April lows (1285 closing, 1281 intraday) and rebounded to close positive in rising, above average volume. As noted, that is suggestive of a reversal. Not a clear, bell-ringing, come and get it, but enough to watch for stocks bouncing up off of their support for those that held it.
SP600 (-0.45%) struggled all session, but after tapping intraday at support 380ish, the small cap index rebounded as well, though unlike SP500 it was unable to close positive. SP600 sports many small energy and metals stocks, and thus its labors. Key test coming when it rebounds to try the 50 day EMA (390.28) and the up trendline at 391.
DJ30
The blue chips held above the 50 day EMA (11,278) and the March highs (11,317), rebounding with SP500 in the last hour to close positive. It barely moved back through its 18 day EMA (11,426) as it shakes off the quick dump lower Thursday and Friday. As noted last Wednesday, it was ready for a bit of froth blow off after that doji on the candlestick chart. It simply got caught up in the market-wide selling, but its volume was low. This should just about be it for the pullback on DJ30.
Stats: +47.78 points (+0.42%) to close at 11428.77
Volume: 300M shares Monday versus 321M shares Friday. Volume was lower , but it was not all that strong on the Thursday and Friday selling; it was definitely lower than the upside volume on the move higher. Thus the selling on DJ30 was not that strong and this is another reason the Dow looks ready to rebound pretty soon if not Tuesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
TUESDAY
After the techs led the downside with a week's worth of selling, the NYSE indices tanked to end last week, playing catch-up. They came close, and Monday afternoon, after another downside flush out, stocks started to rebound. Not all. The commodities stocks were still close to the lows at the close, but then again, they didn't start selling until really Friday; they likely still have some froth to wring out.
Overall the close to the session was better, but it was no clear indication the sharp, nerve-jangling pullback is over. There was good action on the Dow as it held its breakout, and SP500 did close positive. Also, many stocks held onto their 50 day EMA or better. Anxiety remained high as measured by the put/call ratio and the chatter on the financial stations regarding corrections, inflation, bigger Fed rate hikes. It drives you crazy, but it is all part of the cycle so you have to love hearing it at the same time.
All in all it was no sharp reversal, and thus and rebound attempt still has to prove itself. That will come if we see these leaders move higher on volume with the indices doing the same and showing a solid jump in breadth. In short, we need to see the indices rebound on good volume and breadth, and the stocks pulling back to support need to rebound on volume as well.
As noted above, we were pretty patient on the pullback, letting a lot of stocks test support. We thought things were getting to a blow off on commodities, and those corrections are sharp but fast. Now we are looking at picking up more positions as they rebound if they show good volume on the rebound (along with good overall market action). With all of the talk about the 'big one' in terms of a sell off, inflation and a weak Fed, etc., it is hard to step back in. If we see, however, stocks that have pulled back, held a level of support, and then start back up on solid trade, we have to override our gut feelings and go with leaders advancing on volume. Those will have made a test, shaken out the chafe, and are ready to move again.
Support and Resistance
NASDAQ: Closed at 2238.52
Resistance:
2240 is closing low in February range.
2273 is December 2005 closing high.
2278 is December 2005 intraday high.
2288 from December 2000 low.
The 10 day EMA at 2293
2300 from the April intraday lows.
The 18 day EMA at 2307
The 50 day EMA at 2310
The late January highs at 2325
2328 from the May 2001 peak
The January high at 2333
The February closing high at 2361
Support:
The 200 day SMA at 2229
2218 is the August 2005 peak before the sell off through October 2005.
2205 is the December 2005 closing low.
2182 is the September 2005 peak and interim high from November 2005.
S&P 500: Closed at 1294.50
Resistance:
1297.57 is the recent February high.
The 50 day EMA at 1301.74
The January high at 1303
The October/April trendline at 1303
The 18 day EMA at 1308
1311 is the March intraday resistance on this move.
1315 is the May and May 2001 peaks
1317, the recent intraday highs from April.
1324 to 1329 from the October 2000 lows.
Support:
The late January peak at 1285
1280 from the April lows
1272 is the December 2005 closing high and March 2006 closing low
1250 to 1248 from the November and December 2005 lows.
Dow: Closed at 11,428.77
Resistance:
The 18 day EMA at 11,426
11,452 from December 1999 peak
The 10 day EMA at 11,471
11561 is the DJ30 closing high
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:
11,425 from April 2000 peak
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 11,278
11,255 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 15
NY Empire State Index, May (8:30): 12.4 actual, 15.0 expected, 15.8 prior
Net foreign purchases, March (9:00): $69.8B actual, $80.5B prior (revised from $86.91B)
May 16
PPI, April (8:30): 0.8% expected, 0.5% prior.
Core PPI, April (8:30): 0.2% expected, 0.1% prior
Housing starts, April (8:30): 1.95M expected, 1.96M prior
Building permits, April (8:30): 2.040M expected, 2.094M prior
Industrial production, April (9:15): 0.5% expected, 0.6% prior
Capacity utilization, April (9:15): 81.5% expected, 81.3% prior
May 17
CPI, April (8:30): 0.5% expected, 0.4% prior
Core CPI, April (8:30): 0.2% expected, 0.3% prior
Crude inventories: +272K prior; gasoline +2.1M prior
May 18
Initial jobless claims (8:30): 318K expected, 324K prior
Leading economic indicators, April (10:00): 0.1% expected, -0.1% prior
Philly Fed, May (12:00): 12.5 expected, 13.2 prior
End part 1 of 3
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