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investment help, financial investment
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5/24/06 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Target hit alerts: None issued
Buy alerts: VARI, SYKE, CELL
Trailing stops: NTRI
Stop alerts: GLG
SUMMARY:
- Stocks continue the work on a bottom, reverse the Tuesday action with NASDAQ showing huge trade
- Durable goods reverse March gains, fall hard as business investment drops.
- April new homes sales rise but only because March sales were lower.
- Wednesday action puts a positive spin on the bottom building, as it logs day one of a new rebound attempt.
Back and forth action the stuff of tops and bottoms.
Futures looked bad heading into the open, but after a very brief negative tape stocks bounced positive. Weak durables following the strong March report seemed to help spur the upside action: weaker economy could mean less Fed intervention, and as we have discussed of late, given the action bonds and commodities, the fear is more about the Fed once more screwing up versus inflation. Indeed the 10 year note slid to its lowest yield since peaking at 5.19% on the inflation hysteria that started three weeks back. Indeed, intraday it slipped below the 5% Fed Funds rate before rebounding into the close (5.04%). That is the first time that happened since April 2001; you recall that period, the one of our last recession. After a spike on an overreaction to the commodities blow off top, the 10 year has fallen, indicating the Fed has to be careful of what some FOMC members have talked about, i.e. overdoing it yet again.
The market rallied after the durables number but then peaked out when housing starts came in with a 4.9% gain versus -5+% expectations. The market faltered, managed a bounce on a strong rise in gasoline inventories (2.1M versus 1.6M) as refineries converted a lot of oil into gas (oil inventories fell 3M versus the -1.4M expected), but then the usual action took over. Stocks sold through the morning and through lunch. All indices turned negative. More of the same.
Then the selling stopped. SP500 undercut its 200 day SMA again, but then reversed to hold that level on the close. NASDAQ sold off but tapped the old August 2004/April 2005 up trendline and reversed to close positive. Volume jumped on both NYSE and NASDAQ. The laggards from Tuesday were leaders on Wednesday (that is, SOX, NASDAQ).
Once more the market sold but then reversed to hold the recent range of the past four sessions. The action has been quite volatile intraday with sell offs and rebounds or rebounds and sell offs, all in wide ranges. During this very recent lateral move volume has been up on the down sessions and up sessions as well. This is typical action as a market tries to bottom.
Tries is the operative word, but this action should not be written off because of the recent selling and talk of inflation. What happened when the market peaked in April? During Q1 we discussed the choppy action, volatile in its own right with a half step forward, a quarter step back. In addition, sentiment was getting too bearish with bulls rising toward 55% and bears falling. NASDAQ became quite volatile and showed several distribution sessions as it traded up and down. Now there has been a sell off with the indices very recently finding some footing, but in a very volatile range. Sentiment indicators have jumped to extremes, and that contrary indication combined with the volatility is how bottoms often set up.
While we 'like' the action we see in that respect, the market still has to show the buyers are coming back in after the shorts cover their positions. That typically occurs 4 to 7 days after the initial rebound attempt. Basically, the shorts start the action and then if the longer term buyers are going to move in they then take over from the shorts, showing their intent with strong point gains on surging volume and breadth. Right now the market is showing the signs of a bottom forming, something that has to occur ahead of the reversal and the follow through session 4 or so sessions later. The Wednesday action, however, is just the first day of a new rebound attempt. We see strong stocks starting moves higher; they can be the precursors to the overall market move. Starting next week we will need to see the rest of the market join in.
THE ECONOMY
April durable goods orders reverse March strength.
Durable goods orders fell 4.8% in April versus the 0.5% decline expected. Ex-transportation orders were down 1.1% where expectations pegged a 0.5% gain.
What was up in March was down in April, and the declines were in some key areas. Business investment, the key to the economic recovery and the key moving ahead given the high gasoline prices facing consumers, fell 1.7% after gaining 3.6% in March. Businesses have a lot of cash from this recovery, and they have to spend it to keep it going because the consumer is not going to have the stomach to spend continuously with $3/gallon gasoline. It was the business side that triggered the recovery when investment incentives were passed, and it will have to key the continuing economic expansion unless energy prices fall significantly. Of course, a big drop in energy prices likely means global and US demand is lower, and that means slower economies.
Other areas were down as well. Computers fell 10.4% from +12%. Airplanes fell 32.2% after a 67.7% March gain. Communications equipment dove 27.4%. Transportation is always the volatile element, but when it was removed orders were still negative, further underscoring the April weakness.
April new home sales rise but fall.
The headlines trumpet that new homes sales 'stay strong', positing a 4.9% gain versus the 5% decline anticipated. Yes they beat expectations, but they only rose because March suffered a significant write-down. Thus April's 1.198M pace topped March's 1.142M (revised from 1.213M). It was, however, down 5.7% year/year, a very telling statistic. As seen, each month can vary based on weather, but the year over year numbers tell more of the story.
In addition, inventories rose as well, hitting 565K a new record. The current inventory is at 5.8 months given the sales pace. That is not that bad; it is way up from the housing market peak, but in the longer term picture it is a healthy level.
Some point to prices and their 2.8% rise to $238,500 as a sign the housing market has not cooled. Nonsense. Prices lag the market. Housing sales drop sharply before buyers grudgingly lower their prices.
What we have is positive news from housing. There is still no sudden plunge in the market, just a continued slowing and plateau forming. More builders continue to warn regarding the future, but that is normal in a slowdown. What Bernanke wants to avoid is a major housing decline as history says that leads to a general economic decline. Thus, even more reason to take a pause.
Mixed data, financial market reactions warrant a pause to get a lay of the land.
After a strong end to Q1, strength that was expected as a bounce back from storm-induced weakness in Q4 2005, Q2 is showing very mixed results. The Fed and most everyone else expects the economy to slow ahead. Why then, other than typical end of cycle panic that rate hikes are not working, would there be a desire to ratchet up the pressure on the economy?
The question is the answer: typical end of cycle panic, or more accurate, impatience. There are 16 rate hikes out there, and at least half of them have not made their presence felt on the economy yet. Given the view there is weakness ahead, given the very mixed economic results thus far in Q2 (remember, volatility is a sign of change), and given the financial market reaction of late (after the inflation hysteria passed when commodities spiked), a pause makes as much sense to us today as it did when we were calling for one to start the year.
THE MARKET
MARKET SENTIMENT
VIX: 17.36; -0.9. Matched the August 2004 high yet again when SP500 bottomed and started a nice climb into October 2004.
VXN: 21.91; -0.27
VXO: 16.56; +0.64
Put/Call Ratio (CBOE): 1.42; +0.28. Nice straight closes above 1.0, spiking higher Wednesday as the early upside move rolled over once more. It held on the close even as the market recovered in the afternoon session. Definitely at a point where there is enough downside speculation to help establish a bottom.
Bulls versus Bears:
Bulls: 46.3%. Bulls rebounded for the second week, rising from 44.3% and 43.9% before that. Bulls had been declining from the April peak at 53.2%. This rebound is surprising given the hard fall to end last week. After a month climbing from 42.3% back close to the 55% level considered bearish, the recent slide was good until this rebound. It rose from 42.3% on the low this cycle, a level below the prior lows in May and October 2005.
Bears: 25.3%. Bears were in sync with bulls, falling even as the market sold off to end last week. A significant drop from the 26.8% last week and the 28.6% the week before. This time around they peaked well below the 33% hit on the high the last time bears started growling. 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: +10.41 points (+0.48%) to close at 2169.17
Volume: 2.697B (+22.57%). Wow. Best volume of the year and indeed since the first trading day of 2005 when a big sell off began. Given the selling to this point, the sentiment indicators, the bottoming volatility of late, and the big reversal Wednesday, it looks like a big positive to us, the likely reversal day for this sell off.
Up Volume: 1.557B (+822M)
Down Volume: 1.119B (-309M)
A/D and Hi/Lo: Decliners led 1.13 to 1. Decliners still led because the rebound in the afternoon from negative.
Previous Session: Decliners led 1.26 to 1
New Highs: 47 (-9)
New Lows: 162 (+66)
The Chart: http://www.investmenthouse.com/cd/^ixic.html
Gapped higher and then threatened to roll over once more, indeed doing so intraday. Then NASDAQ tapped the August 2004/April 2005 up trendline on the low (2136) and reversed for a 34 point run to the close. Big volume, the largest in 17 months, accompanied the move. It sure looks as if the stars are aligning for a rebound. Whether this is a significant bottom or just a relief move remains to be seen, but given the sentiment, the sharp selling, the volatility at this 2150 level, and the shakeout and strong reversal, we are just about ready to jump the gun on waiting for a follow through session to show the buyers are in longer term.
SOX (+0.75%) showed some similar action but not to the same extreme. SOX sold below that touch of support at 460 and then rebounded for a positive close as it too sold off and then rebounded. Chips were the early leaders Wednesday, posting better than a 1% gain before a late fade pushed them back off their high (471).
SP500/NYSE
Stats: +2 points (+0.16%) to close at 1258.57
NYSE Volume: 2.031B (+6.45%). Volume was not as big as NASDAQ, not topping the recent volume of the past week. Still a good show of trade after a reach lower and then rebound to recover and hold the 200 day SMA.
A/D and Hi/Lo: Decliners led 1.41 to 1. Breadth lagged on the way back up as the rebound was in the afternoon and the NYSE indices barely closed positive.
Previous Session: Decliners led 1.2 to 1
New Highs: 19 (-11)
New Lows: 217 (+94)
The Chart: http://investmenthouse.com/cd/^gspc.html
Extreme volatility continued once more, and it showed up on VIX as well. SP500 rallied then sold off, undercutting the 200 day SMA (1258) after a strong open recaptured that key level. It hit 1245 on the low but then rebounded for 18 points low to close. Despite the wide intraday ranges, the action on the close the past four sessions has started to work laterally, trying to hold this support and rebound. In that way it is much the same as NASDAQ.
SP600 (+0.08%) reached way down to the 200 day SMA (363.81) on the intraday low and then rebounded 9 points to close with a slight gain. Nice hammer doji with tail; coming off a test of the 200 day SMA after such a sell off suggests a rebound, just as with NASDAQ and SP500.
DJ30
DJ30 showed more volatile intraday action but within the same range of the prior three sessions. Volume jumped as it tapped at the 'neckline' (11,040 to 11, 075) of the head and shoulders trying to form over the past 10 weeks. As with the other indices, DJ30 is setting up a bounce. The question for the Dow is whether it clears the March high in the left shoulder (11,335 to 11,340) and continues on up, thus breaking up that potential bearish pattern. It looks ready to bounce along with the other indices, and then we see the strength it has.
Stats: +18.97 points (+0.17%) to close at 11117.32
Volume: 403M shares Wednesday versus 315M shares Tuesday. Strong volume on the test and rebound, a good bookend to the strong Friday expiration trade that saw DJ30 post a gain as well.
The chart: http://www.investmenthouse.com/cd/^dji.html
THURSDAY
The next iteration of Q1 GDP and the deflator is out before the open along with jobless claims. Then existing home sales at 10ET. Inflation is still the scare point in the market, and the market will have to get over Thursday and then Friday (PCE) where there are inflation indicators known to be the Fed's, at least under Greenspan, key indicators. Bernanke wants to pause, and despite the rhetoric some (who know better) are throwing around about his losing touch with reality, etc., it is time to break with history and exercise good judgment based on what historical facts and past actions teach us.
Thus if inflation is tame, Bernanke will have the cover he needs to get his pause and the market will respond favorably. We say it again: the market is not bound up by inflation as many argue; it just overreacted to the hysteria as commodities spiked. After reality set in and commodities started to fall following their blow off run, where have interest rates gone? Back down to 5%, below the Fed Funds rate intraday, suggesting the Fed is getting too far ahead of the curve.
We have seen plenty of volatility the past few sessions as stocks bounce up and down. Good stocks move up, then fade quickly, but many of those are still holding near support on these moves while much of the market has been gutted. If the Wednesday rebound turns into the bounce we think it will, then these are the leaders on the move. We are going to continue looking to the stocks that made the tests and held or are otherwise in position to deliver on a rebound as our plays for the next week.
Support and Resistance
NASDAQ: Closed at 2169.17
Resistance:
2185 to 2182 is the September 2005 peak and interim high from November 2005.
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
The 18 day EMA at 2239
2240 is closing low in February range.
2273 is December 2005 closing high.
2278 is December 2005 intraday high.
The 50 day EMA at 2279
2288 from December 2000 low.
2300 from the April intraday lows.
Support:
2162 to 2155 from December 2005 and September 2006
2138 is the August 2004/April 2005 up trendline.
2100 from the early and mid-2005 peaks.
S&P 500: Closed at 1258.57
Resistance:
1272 to 1268 is the November and December 2005 closing highs and March 2006 closing low
The 10 day EMA at 1275
1280 from the April lows
The late January peak at 1285
The 50 day EMA at 1292
1297.57 is the recent February high.
The January high at 1303
1311 is the March intraday resistance on this move.
The October/April trendline at 1312
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 200 day EMA at 1258
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 11,117.32
Resistance:
11,159 is the February high.
The 10 day EMA at 11,228
The 50 day EMA at 11,252
The 18 day EMA at 11,282
11,295 is the October/January/February up trendline.
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.
11,425 from April 2000 peak
11,452 from December 1999 peak
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:
11,097 to 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 24
Durable goods orders, April (8:30): -4.8% actual versus -0.5% expected, 6.6% prior (revised from 6.4%).
New home sales, April, (10:00): 1.198M actual versus 1.135M expected, 1.142M prior (revised from 1.213M)
Crude oil inventories (10:30): -3M versus -1.4M expected. Gasoline +2.1M versus +1.6M expected
May 25
GDP, Q1 (8:30): Next iteration. 5.8% expected versus 4.8% prior reading
Deflator, Q1 (8:30): 3.3% expected, 3.3% prior
Initial jobless claims (8:30): 318K expected, 367K prior
Existing home sales, April (10:00): 6.75M expected, 6.92M prior
May 26
Personal Income, April (8:30): 0.7% expected, 0.5% prior
Personal spending, April (8:30): 0.6% expected, 0.6% prior
Michigan Sentiment, final, May (9:45): 79.0 expected, 79.0 prior
End part 1 of 3
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investment help
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