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money investment, investment help
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5/17/06 Investment House Daily
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SUMMARY:
- CPI sends market lower on stronger core.
- Technical action is very weak, but that weakness is turning into a near term strength (the hurts so good syndrome).
- Core CPI skewed gratis government calculations.
- Semiconductors ready to try a bounce into expiration, but thus far no takers.
Core consumer price climb greases skids for further market decline.
The CPI didn't show the pussycat tame core of the PPI, and with the newly converted inflation hawks already frothing at the mouth, the strain of a 2.4% year/year core rise was more than the market could bear. Inflation is apparently the new word of the month with some very recent 'demand driven price increase' prophets, now reformed, jumping on the bandwagon. That bandwagon, as noted in our reports, has been rolling along for a couple of years now. As we noted in our discussions of the early incentives used to start the recovery, the initial stages were built on the demand side of the equation when demand was already strong. That laid the tracks for the inflation we are now seeing. That is nothing new, but if you just tuned in over the past week or so you would think it was the biggest secret since Dallas' 'who shot JR?' season.
Metals tried to use the inflation numbers (core was 0.3% versus the 0.2% expected and 0.1% in March) to run higher, bouncing early. They failed fairly miserably, looking much like an exhausted fighter marshalling his strength to start the next round only to feel the hands turn to lead and the legs to rubber after a couple of jabs that miss the mark. When that leadership attempt failed it was pretty much over other than trying to find a bottom, something most stocks failed to do on Wednesday.
Oil inventories tried to help with gasoline inventories rising nicely though less than expected. Oil continued to fade (closing at 68.69, -0.84) but stocks found no solace. The action was technically ugly once more. SP500 and SP600 knifed lower below their 50 day EMA. DJ30 joined them, making it a threesome below that key support. That drove NYSE breadth to -5:1 on the lows, and that is getting pretty 'extremish.' NASDAQ was not immune. It undercut its 200 day SMA as the institutions turned their back on technology (and just about everything else) once more.
Volume spiked as the NYSE indices and NASDAQ sold once more. Much stronger trade shows big money selling, but take a number; the selling has been strong all the way down. It is also expiration week and that is pushing some to make changes in their positions they otherwise would leave alone. Thus the ballooning volume is being pumped up by expiration. Don't get me wrong, volume would be strong either way. It is just being helped out, and the volatility is being pushed up, because of expiration.
In addition to the high volume selling and very weak NYSE breadth, the intraday action was a picture of anemia. Stocks gapped lower, an early rebound attempt failed horribly, an intraday double bottom formed only to roll over, and a last hour bounce attempt lost its nerve as well. Each upside attempt lost its bid or was overrun with sell orders. The indices closed near session lows, keeping the downside momentum alive into the morning.
When pain starts to become enjoyable.
No we are not talking S&M or self-flagellation. At some point the action gets so negative it has gone as far as it can go. Technically a very weak session to go along with the prior weak sessions: diving to new lows on the selling, higher volume (distribution) yet again, blowing out potential support levels, no real recovery attempt.
Things got so bad Wednesday they started to get good. That NYSE breadth was -5:1 on the low, closing at -4.5:1. That is at levels the rebounds since 2002 showed when a bottom was in. The put/call ratio spiked again, making four consecutive sessions above 1.0. Volatility is jumping, hitting levels seen at the October 2005 bottom. Most pundits expect a further fall from here, continuing the current downdraft.
All of those are contrary indicators, suggesting the selling has just about ripened into a bounce. There is more, however. SOX has been melting, but it looks to have found support at 475. AMAT disappointed, but many of the leading chip stocks held up well Wednesday and look ready to bounce: LRCX, WFR, FSL, FLSH, SNDK, TQNT, etc. NASDAQ's fall Wednesday still had a rock-like appearance, but breadth was nowhere near as bad as NYSE. NASDAQ has been selling already and NYSE is trying to catch up. Indeed, NYSE volume has been moving into NASDAQ's neighborhood.
There is expiration on Friday as well, and as noted, some of this volume and selling has to do with that event. Indeed, we are likely to see a rebound into expiration based given the selling to this point.
Now not all areas are sold out. NASDAQ avoided the Christmas rush (winter holiday?) and started early. It and the chips look pretty decent for a bounce. Energy, at least parts of it, sold early as well and could find some upside. The main question after when a bounce starts, however, is its character. Given the massive distribution, we cannot expect much; thus we won't be disappointed. What we think may happen is that this sharp correction may end as quickly as it started. In the real world, however, we approach it as a temporary thing and thus are looking for some trades on the bounce to give us some coin. If it blasts higher from there on volume, sweet. If it doesn't, then the downside will be set up well and we will use the bounce to close some upside plays and then prepare for some downside plays.
THE ECONOMY
"Shocking" CPI may lead the Fed to 'shock' the market.
The core rose to 0.3% over the 0.2% expected, and that pushed the year over year core to 2.4%. Horror of horrors. Of course, it hit 2.4% in January, and it did so as well last summer. It backed off both times before, but there is an idea out there, the 'just has to' argument, that with higher energy prices inflation 'just has to' rise. No it doesn't. Higher energy prices can send consumers into hibernation where they don't buy anything. Then the economy slows and inflation may or may not emerge.
Of course, this Fed does not want to be the one that lets inflation out of the bottle (as if it is always lurking, just waiting to get out). Thus the rather low and somewhat ridiculous 2% speed limit for inflation growth. Problem is, everyone is so freaked out about inflation the past two weeks that, as we noted, the roles are reversed. Typically it is the Fed warning about inflation to come and the market saying 'sure buddy, whatever.' This everyone is talking about inflation, basically forcing the Fed to act. Even if the Fed doesn't necessarily want to act, if everyone is in a snit and the Fed doesn't do anything, things could get out of hand. The result is the Fed overreacts yet again, not necessarily, however, because it was convinced inflation was coming.
We are hearing some ugly, Greenspan-esque comments behind the scenes regarding rate hikes. One voting FOMC member has suggested on the QT that the Fed might just have to 'surprise' or 'shock' the market to bring things into line. We hear that more than one FOMC official feels this way. That is a page from the Greenspan book. Of course, with this new 'transparent' Fed, who knows what a shock or surprise would be. At this point you would almost have to say a pause in June would be the shock given all of the calls for a 50 BP hike from the converted 'demand driven price rise' crowd.
We said it several times the past few months: the Fed is in a very tight spot here as it tries to keep the economy going with surging energy prices. It is keeping the money supply rising (stimulus) while raising rates even as energy prices rise.
What does the CPI really mean?
That brings us back to the CPI report and its growth in the core. At first blush you would assume that with the rising energy prices the higher core (less food and energy) indicates some 'pass through' of energy costs into other areas of the economy. That is what everyone fears and concludes is inevitable, though the two most recent periods of spiking energy costs did not lead to such a result.
A closer look, however, reveals the Governor Bies view of inflation discussed a few weeks back. It is, as discussed at the time, basically fantasyland, based on a theory that higher interest rates mean fewer houses sold and thus higher rents. It does not reflect reality; this is just a government 'adjustment' to the numbers based on the assumption that higher interest rates mean more people renting and thus rents rise. The main part of the rise in core CPI was not based on actual price rises or the pass through of energy costs, but an artificial, assumed increase in rent prices because interest rates have hit above 5%.
When you look a the numbers, it was the assumed rise in rents that pushed the core to 0.3%, matching the March level. There was some increase in airplane travel costs, but services did not show a rise. Thus you have to put this reading in perspective with all of the others and realize that a 2.3% rise year over year is not that big of a rise, and indeed, it has not held at that level even as energy prices rise.
Further, the most accurate measure of inflation (no, the hype we have heard lately about commodity prices, etc. is not the most accurate measure) still shows upward pricing pressure has eased in this cycle. Unfortunately, as discussed above, the Fed is in a tight spot not only with its tightrope walk between rate hikes, money supply and energy prices, but now the media hype about inflation being too strong. That makes a difficult situation nearly impossible, but then again, much of it was fostered by Bernanke's talk of a pause and then his somewhat of a retraction the following weekend. Of course, the Fed's travails typically become investor travails, and THAT is why the market is really exorcised over this as opposed to reacting to what was really a rather tame inflation reading.
THE MARKET
MARKET SENTIMENT
VIX: 16.26; +2.91. VIX has moved to the October 2005 highs where the SP500 found bottom in the September and October sell off. It can still go higher, and indeed in serious declines (i.e. severe corrections to bear markets) it will hit 50 or better at the turn. In a continuing rally, however, it will spike to these levels and spark a rebound in the rally.
VXN: 19.56; +2.23. VXN has also moved up to the October highs (topping them on a closing basis) where it peaked following the August to October sell off. This decline has been sharper and the rise in the VXN correspondingly stronger as well. This goes hand in hand with our belief that this is one of those sharp, painful, but quick blow offs during an otherwise continuing rally.
VXO: 14.98; +2.64
Put/Call Ratio (CBOE): 1.52; +0.51. Fourth session closing over 1.0. Now some are saying that there is a lot of protective put buying ongoing, and thus this means little to the market direction. That misses the point. Whether the buying is for downside profit (buying puts in anticipation of further declines), protection (buying protective puts to offset losses on long positions as often done by institutions), or repurchasing puts sold in anticipation of stocks rising further, they all think stocks are going lower. It is when most of the option buyers adopt the downside mentality that this indicator gets its predictive power. After four days it is piling up the sessions to indicate high anxiety.
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: -33.33 points (-1.5%) to close at 2195.8
Volume: 2.424B (+15.34%). Big surge in volume as NASDAQ again dove lower below the 200 day SMA. Nothing to show the selling is stalling out, but we note that NYSE volume is growing as a percentage of NASDAQ trade. After the big rally in the NYSE stocks they are in the process of getting even with NASDAQ.
Up Volume: 445M (-291M)
Down Volume: 1.965B (+633M)
A/D and Hi/Lo: Decliners led 2.72 to 1. Bad but not as horrendous as on NYSE. If we saw a -1.5:1 or so that would have been very telling.
Previous Session: Advancers led 1.03 to 1
New Highs: 62 (-17)
New Lows: 140 (+34)
The Chart: http://www.investmenthouse.com/cd/^ixic.html
Dove below the 200 day SMA (2229) on renewed volume after two low volume sessions at that level. That shows there was more to take out of the techs, but we also note that quite a few 'names' were positive on the session and others are at next support. This resumption in the selling leaves a bottom point still in question. NASDAQ is close to giving up its breakout from its 2 year triangle base (2185ish). That level, however, should provide some support in its neighborhood if NASDAQ is going to hold onto the move.
SOX (-1.15%) was no daisy, but it is finding support at 475 from some pretty solid price points throughout 2005. As noted, many leading chips have stopped the bleeding and look ready to bounce. And the chips shall lead? Well, maybe in a relief move. After that bounce a new assessment will be made. Given the volume on the selling, it would have to be quite impressive to turn back the tide for good.
SP500/NYSE
Stats: -21.76 points (-1.68%) to close at 1270.32
NYSE Volume: 2.085B (+23.49%). Volume shot higher as the NYSE indices resumed their plunge through the 50 day EMA with DJ30 moving into that group as well.
A/D and Hi/Lo: Decliners led 4.56 to 1. Better than -5:1 on the worst levels, and that is extreme enough, along with other spiking indicators, to start a rebound in a pullback during a continuing rally.
Previous Session: Advancers led 1.09 to 1
New Highs: 29 (-14)
New Lows: 220 (+97)
The Chart: http://investmenthouse.com/cd/^gspc.html
SP500 plowed lower, finding 'support' on the low at 1267, a level that marks price points during November and December 2005, as well as January through March this year. It also goes way back in time to 2001. Might hold, but the 200 day SMA (1257) is just a quick run from the close, and another such move would go a long way in putting in a bottom on this move.
SP600 (-1.51%) moved lower as well, falling to the January and March highs (382-379) where it is trying to find some footing. These peaks are a good place to try and stem the bleeding, otherwise it is another 10 points to try the next potential support level (370).
DJ30
The Dow joined the others below the 50 day EMA (11,281) with a 200+ point dive that also took it through the up trendline (11,270). Volume rose as well, indicating as with the other indices some further institutional selling. It has broke near support and the next llevel is near the February highs at 11,137.
Stats: -214.28 points (-1.88%) to close at 11205.61
Volume: 399M shares Wednesday versus 307M shares Tuesday. Higher volume selling resumed as DJ30 broke below the 50 day EMA.
The chart: http://www.investmenthouse.com/cd/^dji.html
THURSDAY
Some important economic readings are out, particularly the Philly Fed, but they won't undo the damage of the CPI. Inflation is the main concern now regardless of the data. Falling housing starts, weak New York Region (for several months), WMT citing slower demand due to gasoline, etc. all take a back seat to the inflation worries. What the market is really worried about is what the Fed will do. Hell, the Fed acknowledges that it typically goes too far with its rate hikes. What we are seeing now is the Fed boxed in once more, basically forced to hike rates regardless of what it wants to do. We are not saying it shouldn't hike rates, but the 'flexibility' Bernanke says he wants for the Fed is basically gone.
Technically there is generally little to indicate any of the selling is over. As outlined above, however, the contrary sentiment readings are hitting levels suggesting a bottom of some sort is near, but you don't want to make book on them as their timing can leave you hanging. There are some technical indications, however, the most notable (and just about the only one) is the action of some big techs and some semiconductors. They started selling early and the selling ramped up as MSFT and friends disappointed investors with their earnings and outlooks.
Now we see QCOM gapping lower but bouncing up off its 200 day SMA, JDSU slowing down the selling at the 200 day, and CTXS is holding support well above its 50 day. BRCM is bouncing off its 200 day on volume. WFR is showing a nice doji at the 50 day EMA. CYMI is making that test as well as is FSL and LRCX. FLSH has a great pattern and SNDK and SMTI look solid. They are in position to bounce and lead a relief move after an overall shellacking in the market.
After that it remains to be seen. Indeed, it still remains to be seen if a bounce of any sort can take hold. We expect a relief bounce near term but as noted, it has to be something really strong to reverse this heavy duty distribution selling to this point. We are going to look at some of these solid stocks that have held their ground as well as others set to rebound in a relief move. Some will be trades on the upside as we see how strong the bounce is while others from solid positions we will look at as longer term positions if they can show us solid buying on the bounce off support. Despite the selling we still believe this is one of those sharp, nasty corrections in a continued upside move. If we are wrong and the rebound is on low volume and stalls out, we will use that to close more positions and then look at the downside as the selling resumes.
Support and Resistance
NASDAQ: Closed at 2195.80
Resistance:
2205 is the December 2005 closing low.
2218 is the August 2005 peak before the sell off through October 2005.
The 200 day SMA at 2229
2240 is closing low in February range.
2273 is December 2005 closing high.
2278 is December 2005 intraday high.
The 10 day EMA at 2282
2288 from December 2000 low.
The 18 day EMA at 2299
2300 from the April intraday lows.
The 50 day EMA at 2307
Support:
2185 to 2182 is the September 2005 peak and interim high from November 2005.
2162 to 2155 from December 2005 and September 2006
2100 from the early and mid-2005 peaks.
S&P 500: Closed at 1270.32
Resistance:
1280 from the April lows
The late January peak at 1285
1297.57 is the recent February high.
The 50 day EMA at 1300
The January high at 1303
The October/April trendline at 1305
The 18 day EMA at 1306
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:
1272 to 1268 is the November and December 2005 closing highs and March 2006 closing low
1250 to 1248 from the November and December 2005 lows.
1245 from the August 2005 high and 1241 from the September 2005 high
1225 from the March 2005 high
Dow: Closed at 11,205.61
Resistance:
11,265 is the October/January/February up trendline.
The 50 day EMA at 11,284
The March 2005 highs at 11,329 to 11,335
11,350 from the May 2001 peak
11,401 from the September 2000 peak and April 2001 highs
11,417 from the recent April highs.
The 18 day EMA at 11,426
11,425 from April 2000 peak
11,452 from December 1999 peak
The 10 day EMA at 11,462
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:
11,159 is the February high.
11,137 is the last peak from the February top.
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.
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): 0.9% actual, 0.8% expected, 0.5% prior.
Core PPI, April (8:30): 0.1% actual, 0.2% expected, 0.1% prior
Housing starts, April (8:30): -7.4% (1.849M actual) versus 1.95M expected, 1.96M prior
Building permits, April (8:30): 1.984M actual versus 2.040M expected, 2.094M prior
Industrial production, April (9:15): 0.8% actual versus 0.5% expected, 0.6% prior
Capacity utilization, April (9:15): 81.9% actual versus 81.5% expected, 81.4% prior
May 17
CPI, April (8:30): 0.6% actual versus 0.5% expected, 0.4% prior
Core CPI, April (8:30): 0.3% actual versus 0.2% expected, 0.3% prior
Crude inventories: Gasoline +1.3M; crude -100K
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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