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world stock market, us stock market
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6/08/06 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Target hit alerts: KFX; XTO; CMC; AMT
Buy alerts: LH
Trailing stops: OII
Stop alerts: VSH; SYKE; PKE
SUMMARY:
- World central bank hikes send stocks spiraling lower, fear soaring higher, & stocks back up from the depths.
- Despite the recovery, market is still flashing problem signs.
- Another huge volume recovery tries again to se the stage for a rebound.
Some good old fashion panic helps stocks rally out of a sharp sell off.
Wednesday we said that markets tend to find some footing when things look their worst, and Thursday morning the financial news was choking the markets further. Yes the head devil in Iraq was sent back to hell, but when the world markets are worried about the economic future, that is not going to turn the tide. What really hurt and sent foreign and then US markets lower were the central bank rate hikes peppered across the globe. The ECB raised rates by 25 BP as did 7 other central banks ranging from Turkey to Thailand to South Africa. Seems the Fed's tough talk guy talk was the news spot heard around the world with respect to interest rates, and that has financial markets scared.
It had investors scared too, at least the market's response to it. The US bond yield curve slightly inverted early on, managing to close flat at 5%. Emerging markets are diving, down 20% from the early May highs. Retail investors moved billions out of the market the past week and more was heading out today. You could feel the panic in the air; we heard it from our brokers, floor traders, and many individual investors.
The fear only worsened as NASDAQ and SP500 undercut their up trendlines, volume shot higher, volatility surged, and negative breadth ballooned. Midmorning it looked as if the intraday downtrend was in place as NASDAQ broke its uptrend, tested and failed to recover. As the selling worsened, we sensed at least a near term catharsis and took some nice down side gains off the table. Then we purposefully sat back and watched the market scratch its way back. It was no big reversal and run, just a dogged rebound into the close that took DJ30 and SP500 positive with near misses on the other major indices. We took a few upside positions on stocks that weathered the selling well, and also closed some positions that could not recover by the close as we waited to see just how strong this rebound is over the next several days.
The large reversal on huge volume is a good sign of a flush out of the system, but we have seen this action before. We would have preferred to see NASDAQ close positive; it was on the brink but then waffled in the last 20 minutes as some had reservations about the recovery. It was not a complete reversal, and even if it was as always we have to see if the buyers emerge next week to take it even higher, something that the market failed to deliver off of the reversal session two weeks back. It is good it is hanging in its range at the bottom of the sell off, but as with the last reversal, it has to show us some staying power. That would come from some leadership, and as of yet that has not showed up yet.
THE ECONOMY
Yield curve flirts with another inversion, and this isn't any conundrum.
The bond yield curve has flattened this week and Thursday the 10 year dipped below 5% and the 2 year early. It managed to recover to flat at the close, something of a distinction without a difference. Greenspan referred to the flat curve as a 'conundrum,' and both he and Bernanke said it was the result of foreign buying of US treasuries. There was certainly that going on, but it was not all just foreign buying.
This current slide started around the Fed's new tough talk on inflation. The 10 year jumped up to 5.19% when commodities jumped and the Chicken Littles ran around crying inflation. Then the Fed decided it needed to pull Bernanke's foot out of his mouth and started the current 'I hate inflation' ad campaign. The stock market and the 10 year yield started to fall as the rhetoric heated up. There was no surge in buying US treasuries that started the decline, just the age old market forces with investors fleeing ahead of overly aggressive Fed action that 9 out of 10 market pundits (the smart ones) say leads to economic trouble and of course stock market trouble prior to that. The bond market tends to foretell economic slowdowns as it did in 2000 when the Fed hiked into an inverted curve. If the inversion worsens that is a really bad sign for the economy ahead.
Commodities are another area that is indicating economic trouble trying to materialize. That blow off top we wrote about in late April and early May continues. Gold fell $18.80 to 614, a 15% haircut from the high at 725. Copper has tanked from $4. The stocks related to these commodities have been largely gutted. It is not a complete meltdown of commodities, but it shows that the inflation hysteria related to them was absolutely wrong and is being used by the Fed as one reason for its tough stance on inflation. We will have to see if gold and friends continue their decline; we don't think it is done by a long stretch here.
Emerging markets are another sign of some trouble. Everyone and I mean everyone was touting emerging markets as the opportunity for investors. No doubt they are hot and enjoyed strong runs. We have money overseas as well, but not in individual stocks. Suddenly those markets are down 25% on the whole. The central banks are draining liquidity from the world and that always have a deleterious impact on smaller financial markets. It does not take much reduction in money supply and money flow to cause these markets to start rattling.
Problem is, the central banks always fight the last war.
Nothing wrong with sopping up some excess liquidity. That was part of the problem with the blow off tops in commodities and emerging markets. The problem comes in just as we have seen it: steady, reasoned, and restrained steps to draw down liquidity morph into almost panic-like actions and rhetoric when the lagging indicators trend a bit hotter. They are typically in their death throes by the time they show some heating, and this is the case this time as well as the leading economic indicators are already showing slowing both in the business cycle and in the inflation cycle as well.
Thus when commodities prices spike the concern jumps to panic and we get an overreaction. Never mind gasoline is still too high, that at least 6 hikes are still to impact the economy, housing is slowing, etc. The supposedly calm and reasoned Fed gets caught up in the emotion and goes too far just as it is threatening to do now. It was basically done and then made the mistake of saying so. That allowed the markets to panic when the inflation data heated up slightly as it always does at the end of the cycle. We wrote about this, not early this year, but early in 2005, and sadly, it is happening all over again, pretty much as scripted.
Thus, even though the market rebounded impressively Thursday, showing a spike in sentiment and panic prior to the move, the same problems are still there. Perhaps the Fed will be smart enough not to hike into a flat to inverted yield curve this time. Perhaps the reasoned comments from late 2005 will prevail. The odds are against it as the Fed always fights the inflation war after the outcome is already determined. If nothing else, maybe, just maybe someone on the Fed will say 'hey, maybe we shouldn't hike into an inverted yield curve this time.' As the Oak Ridge Boys sang, dream on.
THE MARKET
MARKET SENTIMENT
The sentiment indicators spiked again as the market sold, high enough to set the foundation for a new rise. Volatility has risen with the initial selling, typically a sign that fear or anxiety is getting high enough for a reversal. It can signal a market top as it did in early 2000. That makes the market technical indicators very important on any additional attempt at rebounding.
VIX: 18.35; +0.55. Spiked to 22.59 on the high, matching March 2004 levels. The highest level hit on this selling.
VXN: 24.61; +1.07
VXO: 17.44; +0.39
Put/Call Ratio (CBOE): 1.36; +0.24. And another close over 1.0, the fourteenth in sixteen sessions.
Bulls versus Bears:
Bulls: 40.2%, continuing the slide from 53.2% at the April peak. This is down from 42.6% the prior week, 43.8% the week before, and 46.3% hit before that. It has surpassed the 42.3% hit on the last low. The current level puts it below the May and October 2005 readings that saw new upside runs.
Bears: 31.5%. Still climbing, up from 29.8% the prior week (27.6%, 25.3% before). Still just below the March high at 33% but above the 2005 highs that spawned new rallies (30% in May 2005, 29.2% in October 2005). The 20% level and below is considered bearish. It started this move just above 20%, the threshold level.
NASDAQ
Stats: -6.48 points (-0.3%) to close at 2145.32
Volume: 3.038B (+52.7%). Now that is a volume surge, hitting levels not seen in several years. It was heavy as stocks sold and heavy as stocks recovered. This is part of what reversals are made of, i.e. where the buyers/short coverers come in and shove trade sharply higher in a frenzy to buy.
Up Volume: 750M (+175M)
Down Volume: -2.146K (-1.375B)
A/D and Hi/Lo: Decliners led 1.53 to 1. This modest decline looks simply peachy compared to the -4+:1 readings in the morning, readings that approached -5:1 at their worst levels. That is extreme.
Previous Session: Decliners led 1.22 to 1
New Highs: 55 (-17)
New Lows: 194 (+97). Surprisingly modest. Would have preferred a spike to 400 or so.
The Chart: http://www.investmenthouse.com/cd/^ixic.html
Wednesday NASDAQ finished at the low after a positive open, Thursday it finished near the high after a selling frenzy. NASDAQ gapped below its up trendline from August 2004 and hit support at 2100 on the intraday low. Then it rushed back up on huge trade to close right at the trendline (now at 2146). Impressive 45 point reversal after a 52 point shellacking, but the inability to close positive when it had the chance to do so late in the session (it wandered lower the last 20 minutes) exposes a bit of weakness as the buyers and coverers doubted the rebound when it made it back to the trendline. It is more of a classic double bottom attempt than the first one, with the undercut of the prior low and the rebound on furious trade. That would put the breakout point at the 200 day SMA (2230), where the early June 'hump' resides from the last rebound attempt.
SOX (-0.18%0 rebounded as well, recovering almost 12 points off the low and closing flat. After the 40 point tank in the past five sessions it is due for a rebound to test its downtrend, and that is what this doji is likely telling us. We still view SOX as in a continuing downtrend here with the 18 day EMA (469.61) acting as its resistance point. TXN and NSM posted some good numbers (mid-quarter update for TXN, earnings for NSM), and they could help jump SOX back up toward its resistance for the next move lower in the downtrend.
SP500/NYSE
Stats: +1.78 points (+0.14%) to close at 1257.93
NYSE Volume: 2.544B (+38.65%). A big jump in volume on NYSE as well. The NYSE site shows just 1.7B shares and there is some question as to the actual result. Suffice it to say volume was very strong on the NYSE as those stocks sold and then rebounded.
A/D and Hi/Lo: Decliners led 1.3 to 1. Very tame after a -3+:1 showing in the morning.
Previous Session: Decliners led 1.5 to 1
New Highs: 27 (-2)
New Lows: 202 (+101)
The Chart: http://investmenthouse.com/cd/^gspc.html
A 21 point drubbing took SP500 below its August 2004 up trendline (now at 1240) and then a recovery to positive on the close. Huge volume as on NASDAQ. In the last hour SP500 hit the 200 day SMA (1260.37) and faded similar to NASDAQ, but SP500 held onto the green on the close. Similar to NASDAQ with the second leg of a potential double bottom making the undercut and scaring the crap out of investors before the rally back. That is the classic scenario of a double bottom: down, up, and back down to really scare the pants off of all investors. When the confusion reigns, then the market is ready to turn.
SP600 (-0.14%) blew through its 200 day SMA (365) on the low (357.48) and then recovered that level and came close to a positive close. Now this is a very classic double bottom trying to set up: initial dip to strong support (the 200 day SMA), a rebound to the 50 day EMA (384) at the hump, undercutting the prior low and the support, then the strong surge back up off that low after the 'scare out.' Now it has to show the move and clear the hump.
DJ30
DJ30 collapsed below its 200 day SMA (10,873) on the low (10,757), and then the 180 point rebound to hold that level. DJ30 does not have the double bottom, just a tank off of its head and shoulders base that looks like it is ready to try a bounce to test resistance near 11,000 and up to 11,200 (the 50 day EMA) to 11,300.
Stats: +7.92 points (+0.07%) to close at 10938.82
Volume: 442M shares Thursday versus 333M shares Wednesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
FRIDAY
More of a classic double bottom
Export/Import and trade balance numbers out before the open are not likely to show us much; it takes awhile for a consumer slowdown in the US to take hold and oil prices climbed after trying to fall during the period. Thus the trade balance is not likely to improve as we have to factor in the tens of millions of barrels per day that we import.
Of course, what scares the market is that the Fed's new tough look wont' be mitigated unless the economic reports really tank. That is the way the old Feds have done it: hike until you see the slowing occurring, never minding that there are still 6 to 10 rate hikes still to ram into the economy. By that point it is all too late and the Fed is typically cutting rates before the last rate hikes have had time to impact the economy. Talk about getting whiplash.
The market is really just technically driven right now with the overhang of the Fed. The sentiment indicators are strong enough for a rebound and NASDAQ, SP500, SP600 have set up potential double bottoms, and with the undercut of the low set two weeks back the clock starts again on a potential follow through. To have a successful one the market will have to find some leadership. When you look at the trade today it is again spattered across the market with defensive issues, even with the rebound, still strong (e.g., food). It will need to develop more as the market tries to recover and show a follow through and some breakouts from the double bottoms trying to form. TXN and NSM had some decent forecasts (TXN) and earnings (NSM), and maybe that can help scrounge up some leadership. The market has also been selling hard for about a month now, and that is a typical time period historically for this kind of selling to run its course and for a rebound.
The rebound gain holds out promise as the indices held generally near their lows, sold off and then snapped back to that level. That sets up a rebound move. Will it be the same as before, i.e. a nice try but failure, or was this enough to be the real thing?
The problem is the Fed and world central banks and how the bond market and commodities are responding. The economy has not slowed significantly, but the bond market is in the initial stages of a potentially signaling a slowdown to come despite the market reversal Thursday. The stock reversal did not change the bond curve. Thus we have to really watch the strength of the rebound and the leadership as it makes the move back up. If they don't show up convincingly we have to view the rebound as just part of a continued market sell off ahead of an economic slowdown the bond market is starting to predict.
We are going to look for some plays off of this level, both trades and longer term plays in the event a follow through develops and the market shows a lot of upside strength. We are also going to let the market rebound and if it is weak and stalls at resistance, we are going to close out the upside and be putting on a lot more downside plays for another dip lower. In short, the rebound has promise, but that promise has to be fulfilled with some upside strength and leadership. If it cannot pull it off we have to be ready to take whatever the market is giving away at the time, and in that case, while we will still have some upside to play, we will also have to really focus on the downside. For now we will let the market show us what its intentions are and participate with those stocks and indices that can give us some gain on a rebound.
Support and Resistance
NASDAQ: Closed at 2145.32
Resistance:
2146 is the August 2004/April 2005 up trendline.
2162 to 2155 from December 2005 and September 2006
2177 is the 10 day EMA.
2185 to 2182 is the September 2005 peak and interim high from November 2005.
The 18 day EMA at 219
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 2230
2240 is closing low in February range.
The 50 day EMA at 2247
2273 is December 2005 closing high.
2278 is December 2005 intraday high.
2288 from December 2000 low.
2300 from the April intraday lows.
Support:
2100 from the early and mid-2005 peaks held on the Thursday low.
2045-47 from June and October 2005 lows.
S&P 500: Closed at 1257.93
Resistance:
The 200 day EMA at 1260
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 1274
The late January peak at 1285
The 50 day EMA at 1285
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.
1324 to 1329 from the October 2000 lows.
Support:
1250 to 1248 from the November and December 2005 lows.
1245 from the August 2005 high & May intraday low; 1241 from the September 2005 high
1238 is an old trendline from the August 2003/August 2004/October 2005 lows.
1225 from the March 2005 high
Dow: Closed at 10,938.82
Resistance:
10,965 from Q4 2000 and November/December 2005
10,985 is the March 2005 intraday high
11,044 is the January high.
The 10 day EMA at 11,082
11,097 to 11,137 is the last peak from the February top.
11,150 is the 18 day EMA
11,159 is the February high.
The 50 day EMA at 11,204
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
11,380 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:
10,931 is the November 2005 high
10,890 is the December 2005 closing high.
10,872 is the 200 day SMA
10,740 - 10,750 is some support December 2005 and February 2006 lows
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): 302K actual versus 330K expected, 337K prior
Wholesale inventories, April (10:00): 0.9% actual versus 0.5% expected, 0.6% prior (revised from 0.2%).
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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world stock market
us stock market
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