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us stock market, trade stock
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6/12/06 Technical Traders Report
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Technical Traders Report Subscribers:
MARKET ALERTS
Targets hit alerts: None issued
Buy alerts: BWNG; CVTX; OXY; XPRSA, AYE
Trailing stops: None issued
Stop alerts: Cleared out of stocks that could not hold support. DXPE, PMTI; PRFT; PPDI
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:
- Market starts the week selling anew, takes out last week's lows.
- Fed unfortunately acting according to script and market knows it.
- Market getting oversold as it moves well into second leg lower, but showing no signs of bouncing yet.
More selling as no reason to change.
Futures were up pre-market on an early hope rally, but that dissipated by the open and stocks were lower from the bell. There was no reason for change as the same forces buffet the market. The Fed showed it remains obsessed with inflation (some call that 'tough' on inflation) as more Fed-speak demonstrated while at the same time the financial markets remain convinced the Fed is doing more harm than good as the diving stock market and inverted bond yield curve show. The end result was another high to low dive into the close wit a modest increase in volume and a large negative breadth reading.
The Fed clearly won't lay off as three more of the FOMC sound bite mavens sounded off on inflation. The Cleveland Fed president said inflation was past her comfort level; a loaded statement, but we will leave it alone at that. Bies from the Golden Gate Fed, the one who in late 2005 voiced concern about the Fed hiking too far, said she had no idea where the Fed would stop. She feels the Fed is in the range, but as to where and when you would be better off asking Punxsutawney Phil (the famous groundhog). Then there was the Dallas Fed president, old 'eighth inning' Fisher, who said there was 'some angst on the FOMC about inflation.' He did not elaborate as to whose angst, but if you think Bernanke has no credibility, Fisher was definitely his role model. On top of that, Monday night Bernanke launches his first of three speeches this week.
The same old dogma from the Fed resulted in the same old response from the financial markets, a sharp sell off in stocks and a rally in bonds. The bond yield continued its inversion with the 2 year at 5.01% and the 10 year at 4.97% as bond traders price in economic slowing even as the Fed is all twitchy about inflation in a still expanding economy. The Fed apparently thinks stagflation is around the corner. We don't, unless the Fed slows the economy enough to kill off corporate investment as it did in 2000. Maybe then the sticky higher prices would hang on even as the economy slowed because the supply side goes into hibernation.
In any event, stocks sold and closed on the low with modestly rising volume and another sharply negative breadth session (-3.5:1 NYSE, -4:1 NASD). The A/D line has crumbled after eroding all through April. New lows have still not spiked, and after taking out the bottoms attempted in late May they still have not spiked higher, indicating that this selling still has quite a way to go. There will be some sort of relief bounce starting at some point over the next two weeks, but after blowing out the recent lows even as sentiment indicators jumped, the market is in a serious downtrend at this point.
Just another correction in the uptrend?
The Monday evening financial station pundits were saying we had seen this in early 2005 and again in August to October 2005, and thus this was a buying opportunity. You heard the usual 'I am a buyer tomorrow.' Maybe they will be right, but the blowout of the prior lows after sentiment indicators spiked suggests to us that this correction is more than just the other corrections in this expansion.
Indeed, this correction is the sharpest since the July to mid-August 2004 sharp but short pullback that ended the 2004 selling after that screaming 2003 run in the markets. Okay, the current correction is about 1.5 months as well, so hey, why not a rebound? Again, maybe it will; after all, SP500 has just breached its old up trendline and is holding above the Thursday low. The 2004 sharp drop, however, was the end of a 7.5 month pullback. This current bout is the first fade since the indices hit new post-2002 highs this year. This is just the second leg lower in that selling. It thus appears this pullback still has room to move lower even if SP500 does muster a bounce here at the old trendline. That bounce, and one is due over the next week or two, is likely to be just another relief bounce as seen in late May when the market tried to bottom but had no leadership.
That would mean the uptrend since late 2002 is in jeopardy, and the primary driver of that possibility is the Fed is once again active and demonstrating the same behavior it typically does in its policy actions. The market may very well recover if left to its own devices, but the Fed is not going to let it do that. Some are saying this correction will be over and the market will be stronger for it. Well, someday the market will be stronger, but it is not because the Fed hiked rates here to quell some inflation. The risk is the market goes down much further as the Fed overshoots and the economy then has to rebuild the damage done.
THE ECONOMY
Fed is sadly too predictable.
It is never different this time, and the Fed is in the process of proving this yet again. Back in early 2005 we outlined the very scenario we are in now, i.e. a Fed that acted so rational and thoughtful, but when the battle heated up, so did the Fed's emotions, so much so the Fed has missed the meaning of key indicators of late and is having 'the usual.'
The Fed saw the commodities spike in late April and early May and gave in to the external cries about inflation being out of control instead of acting rationally, analyzing the situation, and seeing the spike for what it was. As we said at the time, this looked just like a blow off top, and with gold over $100 below its peak and copper well off its absurd $4 price as well, it certainly appears to be the case. Instead the Fed came out swinging in order to 'regain' the market's confidence. All it has done is confuse the picture and convince the financial markets, the real arbiters of the future, that the Fed is going to overdo it once more.
All you have to do is look at economic history for the past 100 years and compare Fed actions to economic results shortly thereafter. We are not talking about the minutia the Fed goes into as to why it is 'different this time,' but the very clear cause and effect you see when you overlay Fed action versus economic growth. It is easy to see the recurring theme.
Instead the Fed has launched into its latest version of tough guy, last seen in late 1999 and early 2000. It has gone every bit as far as it has locked itself into a course of action that now only a tanking economy could avert. We thought Bernanke was leaving himself an out after his initial tougher comments, but those were reinforced daily by an almost daily diatribe from the other FOMC members. Even with the financial markets predicting otherwise, the Fed has left itself no out and thus cannot alter its policy for at least two months. I watched the 'Eiger Sanction' over the weekend, and that movie shows the foolishness of bravado leaving you no escape route. The Fed has left itself no escape route yet again.
Tough chairman or a right chairman?
When Bernanke was approved, there was talk about his need to 'sow his inflation fighting oats.' We said at the time the market prefers a Fed chairman who takes the right actions versus one who talks a tough game. The market doesn't care how a Fed chairman appears, at least not outside the extreme short run. It wants a chairman that makes the right decisions.
The market is telling us Bernanke's posture is not nearly as important as his decisions. The market is telling us that the Fed's course of action is the wrong one. The Fed is not going to listen, to all of our detriment.
Where is inflation today?
As in most instances, timing is everything. What about that inflation rate that is at or above the so-called comfort range of many FOMCE members? Right now that rate is no greater than it was in 2004 when Bernanke was concerned about deflation. You can argue that was a different time and thus not applicable. Well, the economy was still seen as in jeopardy then with tepid jobs growth and other supposed woes. Right now the economy, by the Fed's own admission, is slowing and was doing so even before the Fed got tough on inflation. With high energy prices, a slowing housing market, etc., the real concern appears to be a real slowdown once more, and that makes it more along the lines of 2004. Now that Bernanke is chairman, however, he is expected not to talk about such things and unfortunately is allowing himself to be pushed into actions he may not really want to take.
THE MARKET
MARKET SENTIMENT
VIX: 20.96; +2.84
VXN: 25.64; +2.42
VXO: 19.69; +2.21
Put/Call Ratio (CBOE): 0.96; -0.06
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: -43.74 points (-2.05%) to close at 2091.32
Volume: 1.949B (+7.65%). Volume was up but was still below average. Indeed much of the volume has been below average the past two weeks outside of the big Thursday volume. Nonetheless the selling is very real as stocks cave in after the distribution in May set the stage.
Up Volume: 168M (-475M)
Down Volume: 1.775B (+620M)
A/D and Hi/Lo: Decliners led 4.02 to 1. Very heavy downside breadth in techs. It fits the selling and is getting extreme again.
Previous Session: Decliners led 1.44 to 1
New Highs: 56 (-6)
New Lows: 173 (+102). Hardly at the level that would show the index is getting sold out. That would be in the 400 to 500 range.
The Chart: http://www.investmenthouse.com/cd/^ixic.html
NASDAQ dove lower, underscoring its breach of the August 2004 up trendline (2149). More than that, it undercut the Thursday intraday low that saw a big rebound. This time no rebound as volume edged higher as the index sold. Modest distribution, but as noted above, the distribution that set this up was back in April and May. Now NASDAQ is in freefall and trying to find the bottom on this second leg lower in this correction. 80 points lower on this leg thus far; the first leg was 200 points down. Unable to hold some support at 2100, but might get a bit of a rebound after the breach of that support level.
SOX (-1.91%) continued its downtrend after failing at the 10 day EMA (453.87) Friday. Nothing much to say other than SOX could not respond to some decent news last week and is locked in a nasty down spiral that has led the rest of the market lower during this entire sell off.
SP500/NYSE
Stats: -15.9 points (-1.27%) to close at 1236.4
NYSE Volume: 1.617B (+1.37%). Volume edged higher on NYSE as well as SP500 undercut its trendline and the small caps plowed under the 200 day SMA.
A/D and Hi/Lo: Decliners led 3.53 to 1. With the small and mid-caps in full retreat, breadth was ugly on NYSE as well.
Previous Session: Decliners led 1.15 to 1
New Highs: 24 (-8)
New Lows: 179 (+117)
The Chart: http://investmenthouse.com/cd/^gspc.html
SP500 tanked through its August 2003/August 2004/October 2005 (1239) similar to Thursday, but this time it did not rebound. Volume was higher, so modest distribution but no real change in the selling volume after trade ramped up last Tuesday. That leaves SP500 near some support from August and September 2005 near 1245. This leaves SP500 close to a bounce point to test this breach, but likely to see a bit more downside before it makes that move.
SP600 (-2.45%) was pounded below the 200 day SMA (365.56), slightly undercutting the Thursday intraday low. The small caps are paying the price of a potential economic slowdown; as these companies thrive on recovering economies, the prospect of a Fed-induced slowdown or recession hits them the hardest. Monday they turned an attempted bounce at the 200 day SMA into a rout.
DJ30
DJ30 busted its 200 day SMA (10,877), this time closing on the low below that level though still above last Thursday's intraday low (10,757). Volume barely edged up and remained well below average. The head and shoulders from March through early June continues its selling and has another 250 or so points technically to go. There is support near 10,750, however, and with the breach of the 200 day SMA it is likely to try and hold that level and rebound to test that undercut.
Stats: -99.34 points (-0.91%) to close at 10792.58
Volume: 272.4M shares Monday versus 272.9M shares Friday. Volume still well below average as DJ30 moved below its 200 day SMA.
The chart: http://www.investmenthouse.com/cd/^dji.html
TUESDAY
The market made something of the Thursday reversal, but instead of a rebound it tossed out a sell off. More Fed-speak contributed to the Monday selling, and now Tuesday the PPI is out, and everyone will be looking at the potential rise in prices paid and whether producers are experiencing further price increases that might see a pass through into the CPI and thus the consumer. That, of course, leaves Wednesday's CPI as the bigger of the two reports.
It is likely that nothing in the PPI or CPI will make a change in the current course of events. The CPI would have to be negative to even bring the prospect of the Fed rethinking its June rate hike. If the data did somehow come in negative, however, it would likely be viewed as an aberration. If it is lower than expected, however, particularly the CPI after another day of selling Tuesday, then that could trigger the relief bounce from this hard selling the past week.
Even with that, we still see stocks that sold last week, rebounded late in the week following the Thursday reversal, but are already turning back over. We will look at those on some more selling. We will also continue to look at the upside leaders, particularly those that are in the defensive areas such as utilities (the ones that can move well), insurance, etc. Upside leadership thinned out over the past few weeks, and needless to say this recent selling has not improved the situation much.
Support and Resistance
NASDAQ: Closed at 2091.32
Resistance:
2100 from the early and mid-2005 peaks held on the Thursday low did not hold but will likely be tested before too long
2149 is the August 2004/April 2005 up trendline.
2155 is the 10 day EMA.
2162 to 2155 from December 2005 and September 2006
The 18 day EMA at 2180
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 2230
2240 is closing low in February range.
The 50 day EMA at 2236
Support:
2063 is modest, soft support
2050 from the summer 2005 lateral range lows.
2045-47 from June and October 2005 lows and June 2004 highs
S&P 500: Closed at 1236.40
Resistance:
1239 is an old trendline from the August 2003/August 2004/October 2005 lows.
1245 from the August 2005 high & May intraday low; 1241 from the September 2005 high
1250 to 1248 from the November and December 2005 lows.
The 200 day EMA at 1260
The 18 day EMA at 1268
1272 to 1268 is the November and December 2005 closing highs and March 2006 closing low
1280 from the April lows
The 50 day EMA at 1282
The late January peak at 1285
1297.57 is the recent February high.
1315 is the May and May 2001 peaks
1317, the recent intraday highs from April.
1324 to 1329 from the October 2000 lows.
Support:
1225 from the March 2005 high
1213 from December 2004 high
Dow: Closed at 10,792.58
Resistance:
The 200 day SMA at 10,877
10,890 is the December 2005 closing high.
10,931 is the November 2005 high
10,965 from Q4 2000 and November/December 2005
10,985 is the March 2005 intraday high
The 10 day EMA at 11,001
11,044 is the January high.
11,088 is the 18 day EMA
11,097 to 11,137 is the last peak from the February top.
11,159 is the February high.
The 50 day EMA at 11,176
The March 2006 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
Support:
10,740 - 10,750 is some support December 2005 and February 2006 lows
10,705 - 10.965 from July/August 2005
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
June 12
Treasury budget, May (2:00): -$42.8B actual versus -$39.0B expected, -$35.4B prior
June 13
PPI, May (8:30): 0.4% expected, 0.9% prior
Core PPI, May (8:30): 0.2% expected, 0.1% prior
Retail sales, May (8:30): 0.0% expected, 0.5% prior
Retail ex-auto, May (8:30): 0.5% expected, 0.7% prior
Business inventories, April (8:30): 0.6% expected, 0.7% prior
June 14
CPI, May (8:30): 0.4% expected, 0.6% prior
Core CPI, May (8:30): 0.2% expected, 0.3% prior
Crude oil inventories (10:30): 1.146M prior
Fed Beige Book (2:00)
June 15
Initial jobless claims (8:30): 320K expected, 302K prior
NY Empire State Index (8:30): 11.0 expected, 12.4 prior
Net foreign purchases (9:00): $69.8B prior
Capacity utilization (9:15): 82.0% expected, 81.9% prior
Industrial production (9:15): 0.2% expected, 0.8% prior
Philly Fed (12:00): 11.0 expected, 14.4 prior
June 16
Current account, Q1 (8:30): $223.0B expected, -224B prior
Michigan sentiment, prelim, June (9:45): 79.0 expected, 79.1 prior.
End part 1 of 3
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