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us stock market, trade stock
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6/05/06 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Target hit alerts: CELL
Buy alerts: DXPE; ALTR; KFX
Trailing stops: MGI; HWAY
Stop alerts: ODFL
SUMMARY:
- Moderate pullback becomes sharp as new Bernanke comments viewed as hawkish.
- Market appears tired of fighting Fed just as Fed almost done. Signal of economic trouble?
- ISM services still strong as prices still rise.
- Unable to provide any follow through punch, indices heading back down toward another test of the recent lows
Bids dry up on Bernanke comments.
The market started softer as expected after last week's run higher took NASDAQ to its 200 day SMA and SP500 to its 50 day EMA. Iran muttering threats about oil as a weapon if the West did not 'behave' sent oil higher and gave an easy reason for investors to back off early.
The pullback was more or less under control with NASDAQ back to its 10 day EMA and SP500 to its 18 day EMA on lighter volume. Industrial metals, materials, and builders were weaker, but they were just the worst hit in a general decline as the buyers backed away.
Just after lunch the text of a Bernanke text at central banker gathering was released, and his purportedly hawkish comments about inflation at the upper end of the tolerable range was exactly what a weaker market did not want to hear. It gave more fodder to inflation hawks and gave buyers reason to pullback even further. Nearly all bids were pulled and the market skidded lower.
Volume was mixed but still quite low indicating it was more a lack of bids than a mugging by sellers. Nonetheless it wasn't a positive session merely because volume was lower on the selling. While we were looking for a moderate pullback to test last week's late move, Monday was not moderate as it took back all of the Thursday and Friday moves and most of the Wednesday move higher. Too much giveback to be considered just a test of those moves, and breadth was decidedly negative at -3:1.
This puts the market headed for another test of the recent lows made on the 5-24-06 reversal session as the attempted short double bottom took on a distinctly different look by the Monday close. If volume remains light it has a chance of holding and further working on putting in some kind of floor here where sentiment indicators remain at prior rebound levels. That is about all you can say for the Monday move.
THE ECONOMY
Regardless of your preferred Bernanke interpretation, Fed is basically done but market is laboring over that fact.
It is clear the transparent Fed is opaque, that Bernanke is suffering from a self-imposed testosterone crisis, and that despite all of this, the Fed is almost done. Mountains of ink and pixels have been burned discussing what the Fed will do in June. Monday the odds went from 44% to 77% of a June hike. Of course, that was just down from 77% before the Friday jobs report. The bond market is such a whipsaw market right now the trial lawyers are starting to pass around cards for potential whiplash victims. The 10 year, however, is locked in a range of 5.20% on the upside and 5% on the downside, the latter of which is also the current Fed Funds rate.
Monday Bernanke gave a speech and comments along with other central bankers, and he was 'tough' on inflation but also just as candid with respect to the weaker housing market, a weaker consumer thanks to energy prices, a moderating economy, and the lag effect of Fed policy actions (which he put at anywhere from 3 months to 18 months based upon the type of action). The market chose to focus on his comment that core inflation was recently higher and running at the upper end of most economists' (including his) acceptable range. He called that an 'unwelcome development.'
That was the statement that set the market off, but it could have easily focused on all of the dovish statements as well. The fact that the market chose to focus on the one hawkish aspect versus the 5 dovish ones just shows you where the market's head was on Monday.
Something more than Bernanke comments?
With the sentiment indicators the past three weeks at levels that sparked rebounds in this rally since back in 2005, you need to see the market respond and provide a strong upside move if the rally is going to continue. That is something it tried to do last week but could not quite muster. With the lower volume it is far from washed out on this move though it is struggling to hang on. As we noted the past two weeks, bottom making can be an ugly sausage grind that gets everyone tired of the blood and guts and then slips in the surprise floor and rebound.
Thus there are still upside possibilities after Monday, but we also have to consider the other side, the dark side so to speak, if stocks continue to sell and volume starts jumping as well. That would mean that the sentiment levels that signaled enough bloodletting had occurred in the prior sell offs in this rally are insufficient this time around. That would mean something else is ahead, and that means a lower market.
What do lower stock prices indicate when the sentiment indicators have hit prior highs and the economy still looks so full of vim and vigor (to some) and even threatening to breakout with serious inflation (to some who should know better)? It means the economy is heading toward more vinegar than vigor. When the Fed is in the twilight of a rate hiking campaign (or at least should be) it starts to see all kinds of shapes in the shadows. As we have discussed, this time the pundits have helped it along, crying 'inflation' and hoping the Fed would respond. When Bernanke showed some calm rationality in the face of this he was filleted. Under Greenspan it was the chairman's own hubris that often led him to overshoot; after all, he started his career that way with some thundering 50 BP hikes that ushered in the 1987 crash, and he kept it up throughout his career. This time around it is the chairman's perceived lax inflation fighting mindset coming into the job as well as a financial market furor (with respect to just small parts of the markets, however) that is pushing the Fed into the same old actions of the past.
The economic reports are showing slowing. ECRI shows slowing. The Fed's own model shows slowing. There are hints of inflation, but history is so clear that inflation cycles lag the primary economic cycle. Moreover, ECRI's FIG continues to show inflation as peaked in this cycle. Indeed, 10 year bond yields, before Bernanke's 'tough love' talk Monday, were at 5% (they closed at 5.02%), right at the Fed Funds rate. Bond yields are extremely volatile right now, but they are starting to trend toward the 5% end of the range.
Bonds and central banks.
As bond yields trend toward the FFR they are telling us the bond market, despite the inflation hawks (the vocal minority), is starting to believe once again the Fed is likely to overshoot. Bonds got all hyper in the commodities run up as well, but as with all markets, they too overshoot in the short run. Once more they are back down at the FFR level even as the inflation talk spiked up again Monday.
On top of that, central banks from around the globe have been draining off the liquidity that was sparking the blow off surges in commodities. With the money starting to dry up we have seen the price gains do the same, and it is trying to infect the rest of the market as the indices struggle to hold onto their recent lows.
Thus the bond market is softening up and commodities and friends (e.g. construction, materials, industrial metals, etc.) are doing likewise even as the Fed talks tougher about inflation. If the indices break below the current lows in this pullback and recent rebound attempt on strong trade, that is telling us there is something worse in the offing given the same sentiment levels that launched rebounds in prior pullbacks in this rally are not able to spark a sustainable advance. That something worse is likely the Fed overshooting and slowing the economy to below trend growth or worse.
Thus far the economy shook off an inverted curve last year, but the post-Katrina and Rita boost in GDP is running its course and now the economy has to find another engine. We are concerned that the bond market is falling back into the level that starts flirting with a Fed overshoot. With just one more 25BP hike likely (if even that, despite the Monday speech), that is not really comforting. It would mean the Fed has already gone too far and does not know it. It has not happened yet and there are still many positives out there. Of course that is usually the case when the Fed overdoes it. We can only hope that the Fed does not feel it has to raise rates just to placate the bond market vigilantes as they are called now.
THE MARKET
MARKET SENTIMENT
VIX: 16.65; +2.33
VXN: 20.9; +2.52
VXO: 16.35; +3.19
Put/Call Ratio (CBOE): Unavailable at time of writing.
Bulls versus Bears:
Bulls: 42.6%. Backing off as expected given the market struggles, down from 43.8% the week before and well off the 46.3% hit three weeks back. Still heading lower after the April peak at 53.2% and almost matching the 42.3% hit on the last low. We don't expect it to improve much after this week given the volatile action that saw some improvement but no clear return to buying. The current level is also just above the levels hit in May and October 2005 that saw new upside runs.
Bears: 29.8%. Solid climb in bears as the selling and increasing volatility worked against positive market attitudes. That is up sharply from the 27.6% as week that was also a solid jump from 25.3% the week before. Bears have now topped the 28.6% hit on the interim high on this selling. The 33% high hit in March topped the prior two highs (30% in May 2005, 29.2% in October 2005) that gave way to strong rallies. Bears are again at a level that could help drive this current rally attempt further. The 20% level and below is considered bearish. It started this move just above 20%, the threshold level.
NASDAQ
Stats: -49.78 points (-2.24%) to close at 2169.62
Volume: 1.821B (-6.45%). Volume remained below average, indeed, well below average and lower than Friday's low trade. That was just about the only silver lining, and the large point losses tarnished it.
Up Volume: 227M (-502M)
Down Volume: 1.587B (+401M)
A/D and Hi/Lo: Decliners led 3.6 to 1. Now that is a tail kicking. Everything on NASDAQ was basically unwanted. But that is the way it was all across the market.
Previous Session: Advancers led 1.09 to 1
New Highs: 93 (-38)
New Lows: 69 (+27)
The Chart: http://www.investmenthouse.com/cd/^ixic.html
NASDAQ did not even make an attempt at the 200 day SMA (2230), turning back at the 18 day EMA (2215) and selling since midmorning right into the close. In one session it gave up all but 4 points of the Wednesday through Thursday upside effort. Volume was lower as noted; that keeps alive the chance this bottom making process will continue as no sellers were piling in for the slaughter. At this juncture we have to see how it plays out given the sellers' reluctance to jump in and of course the buyers' unwillingness to try and guess what the Fed is going to do. To keep the rebound attempt alive it needs to hold on the close somewhere near the August 2004/April 2005 up trendline at 2147ish.
SOX (-3%) rolled over at the 18 day EMA (477) and dove lower Monday. Over the weekend we commented that the 18 day EMA acted as resistance in downtrends, and it certainly did that Monday. Very similar to what it did two weeks back when it bounced one session and then rolled over hard and sold further. The chips try to step up, but many are lagging, and Monday some of those holdouts trying to lead higher were hit as well.
SP500/NYSE
Stats: -22.93 points (-1.78%) to close at 1265.29
NYSE Volume: 1.625B (+3.37%). Volume edged higher on the selling, but it was still below average. It suggests more selling pressure, but with NASDAQ trade lower this slight bump doesn't show rampant selling. Wasn't good coupled with the dump lower, but not a sell off.
A/D and Hi/Lo: Decliners led 3.63 to 1. The small caps and mid-caps were hammered, and as they make up most of the NYSE the breadth was harshly negative.
Previous Session: Advancers led 1.98 to 1
New Highs: 55 (-35)
New Lows: 88 (+33)
The Chart: http://investmenthouse.com/cd/^gspc.html
SP500 is on the way to the 200 day SMA (1259.79) once more, giving back most of last week's gain as did NASDAQ. It failed at the 50 day EMA (1288) and is now once more heading back to important support to again try and find footing and mount a stronger recovery. Strong volume last Wednesday off this level, so there is some buying support there. Just have to watch and see if it can again find that bid and show the kind of rebound strength to the upside once more.
SP600 (-2.79%) was hammered lower as well, fading from the Friday intraday tap at the 50 day EMA (384.82) and giving up most of its three-day gain as well. Some support at 370 where it held when it made a higher low last week. Looks as if it will breach that on this trip and make another test toward the 200 day SMA (364.95) where it tapped intraday on May 24, the reversal session for the market.
DJ30
Diving lower at the 50 day EMA (11,235.66), unable to clear this resistance that also marks the March high (11,335) and the left shoulder of the head and shoulders. Volume was lower on the dump back down, and DJ30 did hold the May intraday lows (11,030; though it made a new closing low on this leg lower), giving it a chance to hold and rebound before breaching the neckline of its 12 week pattern. This is where the rubber meets the road.
Stats: -199.15 points (-1.77%) to close at 11048.72
Volume: 255M shares Monday versus 268M shares Friday.
The chart: http://www.investmenthouse.com/cd/^dji.html
TUESDAY
No scheduled economic reports for Tuesday, but with the FOMC meeting late in the month we may hear some more from the Fed about rate hikes, continuing the game even more. As noted over the weekend, the market is on a yoyo with respect to this 'data dependent' Fed; it tries to micro-analyze each data point and reacts as if that data point is Fed determinative. It shows the idiocy of the Fed policy of looking at past data as the key to what to do now, but to his credit Bernanke did try to dispel that notion Monday, saying that the Fed used the data to determine how it impacted its forecast of the economy but not what action it would take at that meeting. He used the analogy of a quarterback leading his receiver. He better watch out; tomorrow the headlines will scream about Bernanke using football strategies to determine Fed policy. By the end of the week the pundits will be analyzing his Fed policy in terms of football (run and shoot offense, 4/3 defense, fourth down gambler, drop back and punt - I think we already used that one).
The Fed-speak, if any, likely won't help clarify the market action. After Monday, even with the light volume, the indices look ready to head lower and test the recent lows or test support as the case may be. Once more the market will have to prove if it has anything left in the tank on this move and can hold above the lows on this rally attempt and then try again to deliver a strong upside move. SP500's strong move from last Wednesday is still not abrogated, and that move was on very strong trade. If it does hold up it will have to counterbalance the semiconductors that look less than great right now.
In the bigger picture the neat little double bottom formed has been turned back and now the indices have to find support once more near the prior lows and set up again. The lower volume helps. On the other hand they are back near the bottom of a sell off, having failed a bounce attempt. No distribution creeping back in yet, and again that holds out a bit of promise as the market still attempts to put in a bottom. The nice thing is, not much more downside is needed to tell us whether it is going to hold or not.
We will continue to watch the volume and the action of stocks that helped lead the last move higher. The market has to have leaders to move higher, and as noted the past week, they are there but their ranks are getting thinned by this up and down action. Seems this correction is putting all of the market to the test.
Support and Resistance
NASDAQ: Closed at 2169.62
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 18 day EMA at 2215
The 200 day SMA at 2230
2240 is closing low in February range.
The 50 day EMA at 2258
2273 is December 2005 closing high.
2278 is December 2005 intraday high.
2288 from December 2000 low.
2300 from the April intraday lows.
Support:
2162 to 2155 from December 2005 and September 2006
2147 is the August 2004/April 2005 up trendline.
2100 from the early and mid-2005 peaks.
S&P 500: Closed at 1265.29
Resistance:
1272 to 1268 is the November and December 2005 closing highs and March 2006 closing low
1280 from the April lows
The 18 day EMA at 1280
The late January peak at 1285
The 50 day EMA at 1288
1297.57 is the recent February high.
The January high at 1303
1311 is the March intraday resistance on this move.
1315 is the May and May 2001 peaks
1317, the recent intraday highs from April.
The October/April trendline at 1319
1324 to 1329 from the October 2000 lows.
Support:
The 200 day EMA at 1259.79
1250 to 1248 from the November and December 2005 lows.
1245 from the August 2005 high and 1241 from the September 2005 high
1237 is an old trendline from the August 2003/August 2004/October 2005 lows.
1225 from the March 2005 high
Dow: Closed at 11,048.72
Resistance:
11,097 to 11,137 is the last peak from the February top.
11,159 is the February high.
The 50 day EMA at 11,236
11,283 is the 'hump' in the attempted double bottom.
The March 2005 highs at 11,329 to 11,335
11,350 from the May 2001 peak
11,355 is the October/January/February up trendline.
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
Support:
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.
10,867 is the 200 day SMA
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
June 5
ISM Services, May (10:00): 60.1 actual, 60.0 expected, 63.0 prior
June 7
Crude oil inventories (10:30): +1.6M prior
Consumer Credit, April (3:00): $3.5B expected, $2.5B prior
June 8
Initial jobless claims (8:30): 330K expected, 336K prior
Wholesale inventories, April (10:00): 0.5% expected, 0.2% prior
June 9
Export prices, May (8:30): 0.7% prior
Import prices, May (8:30): 0.0% prior
Trade balance, April (8:30): -$65.0B expected, -$62.01B prior
End part 1 of 3
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