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6/14/06 Technical Traders Report
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Technical Traders Report Subscribers:
MARKET ALERTS
Targets hit alerts: None issued
Buy alerts: LH; EGOV
Trailing stops: None issued
Stop alerts: None issued
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SUMMARY:
- Market absorbs more inflation and Fed bad news, breaks the string of losses.
- CPI hotter than expected, declared 'unacceptable' by wing nut Dallas Fed president.
- Beige book, others tout continued economic strength, but economy was strong in early 2000 as well.
- Talk of a bottom as stocks try to rebound from the second leg lower but no leadership in position to give it backbone.
Stocks overcome some more adversity, fight off afternoon sellers, manage a positive close.
There was plenty of bad news to start the day with the CPI hotter than expected both overall and on the core, pushing the year over year core to 2.4%. The Fed Beige Book came out early afternoon and reported strength across the country, indeed stronger growth in some regions. After that 'eighth inning' Dallas Fed president Fisher released a statement noting he was aware of the lag time between policy tightening and its impact, but that the Fed could take no chances with price stability. Okay, you can accept that. He went further, however, and said that the current inflation rate was not uncomfortable, it was unacceptable.
Someone needs to make sure Fisher is taking his medication. He tends toward the extremes in everything. First it was saying the Fed was in the eighth inning, something that appeared fresh and clear form a new Fed president. After that he flip-flopped more than the candidates in the 2004 election, coming out with Wednesday's jewel to top it off. This is exactly the problem we wrote about last week with the Fed talking much too much.
Even with all of that, the market managed to start higher, fought off some morning and afternoon selling, and when the sellers could not take it down further the shorts covered and bounced the market late to close positive and near session highs. As we surmised Tuesday night, the news was basically baked into the cake. We are only disappointed we did not get a further sell off on the open to really wash things out.
The gains were much heralded as NASDAQ managed to avoid 8 consecutive down sessions and DJ30 posted a triple digit gain. Outside of that, however, the move was not particularly exhilarating. Stocks struggled all session to hold positive. Only the late surge pushed them higher, and that surge was mostly short covering. Indeed, as the market turned back to positive late in the session breadth was remarkably weak. Even with the Dow scoring a 110 point gain and the indices closing 0.5% to 1+% higher breadth barely made it above the flat line. NASDAQ 100 easily topped overall NASDAQ's gain, more evidence of the narrow upside move. Volume was lower but it was not weak; the lower volume shows less intensity than the selling. It was still solid, but it often is when the shorts cover after hard selling.
Thus we had a move back up by some (not a whole lot) of beaten up stocks. They were getting ready to bounce with the decline on this leg roughly equaling the first leg lower and the news regarding inflation and Fed action getting overdone. Some mentioned a bottom, but this is no bottom. There is a lot of damage in the straight plunge lower, and given the seriousness of the reasons for selling (overactive Fed, inverted yield curve, plunging commodities) there is likely to be a third leg lower after this test. That makes this a relief bounce to test the recent move lower unless it shows otherwise. With leadership basically in disarray that is not the most likely scenario.
THE ECONOMY
CPI climbs again, declared unacceptable.
Consumer core prices climbed 0.3%, more than the 0.2% expected. That pushed the year over year core to 2.4%, its highest level since 2002 and if was not already a done deal, sewed up another rate hike in June. Indeed, the Fed Funds futures priced in a 100% certainty of a 25BP hike. It pushed August up to 75% of an additional 25BP. Maybe with the higher CPI the Fed won't feel compelled to speak out daily about the ills of the current inflation situation.
As noted above, that did not keep Dallas' Fisher from giving the market a piece of his mind about unacceptable inflation levels. One has to wonder if any part of his mind was left after giving his piece.
Fisher's comments bring up the point we made the other night about what you would rather have: some rising prices or another 2000-like wipe out. There is indeed inflation with contracts now including automatic price increases to finally account for the rise in steel and other materials wrought by rises in energy costs.
The Fed has just about won. Will it snatch defeat from the jaws of victory?
The economy, however, is already slowing. The Fed has been successful in slowing housing and choking off speculation (as the recent commodities blow off top and dive lower shows). Small businesses see slowing, retail sales are starting to flag. Energy not only pushes up costs of products that use energy in their manufacture and businesses that consume large amounts (e.g. airlines), but it has a destructive effect that ultimately outweighs the near term price implications.
Indeed, inflation lags the economy, showing up after the economy has matured. Thus the inflation we see now results from economic activity months before. As the economy slows the pressures will slow if the Fed and our political leaders don't commit economic suicide by choking off supply side capital (via lower money supply too much, raising taxes, etc.) and thus creating the situation where demand can outrun supply. That is where inflation starts in a slowing economy, giving you that whiff of stagflation. Congress is already talking about tax hikes as democrats sense a weaker president and potential success in the November midterm elections.
The trick here is to avoid sending the economy into recession by tilting at inflation alone. The action in the equity markets, commodity markets, and bond markets points to the 'R' word if the Fed is not very, very careful here. It has successfully slowed housing without crashing it. The liquidity led surge in speculation has popped. ECRI shows the business cycle as well as the inflation cycle to have peaked as well. The economic expansion can still proceed at a slower, modest yet healthy pace if the Fed will back off.
What about those Fed futures?
As noted, the Fed Futures contract has fully priced in 5.25% on June 29 and though a long way off, another 25BP to 5.5% by August. The real worry here that has not been vocalized much the past two weeks is a 50 BP hike in June. This has emerged in the FOMC minutes as the Fed discussed pausing versus raising. Even before the more recent inflation data some on the committee wanted 50 BP. Yikes.
That is very reminiscent of May 2000 when the market had already sold off hard in March and April and the economy was showing some signs of trouble for those who cared to look. Very similar to today: there are signs of weakness from the leading indicators as opposed to those in the rearview mirror the Fed is watching. In May 2000 Greenspan fired a last 50BP torpedo at the economy to help control the runaway consumer.
That was the shot felt by all retirement funds and new businesses in the US. As usual, the Fed was behind the curve, fighting a war that was already over similar to the battle of New Orleans in the War of 1812. This time the battle did not come out so well for us. That along with the drained money supply was enough, but as is always the case, the unexpected happened. The elections tore into the market. Corporate scandal hit. 9-11. By their very nature, these long, drawn out rate hiking campaigns run the risk of crossing economic, political, etc. events that add to the economic pressures. The Fed doesn't operate in a vacuum, it just acts as if it does.
Thus we are extremely concerned about what the Fed does in June. It is so rabid about inflation it has left itself no choice but to hike. If additional data suggests inflation pressures remain elevated the question becomes 25 or 50 BP. Mark my words, the speculation regarding this will start over the next week or so. Needless to say we feel that no rate hike is necessary at this juncture. The Fed's actions to this point have done what it wants, and there are still several rate hikes yet to impact the economy. The economic and inflation trajectory with those hikes factored in looks pretty solid. A 50 BP hike would likely send the flight path spiraling lower.
THE MARKET
MARKET SENTIMENT
VIX: 21.46; -2.35. VIX gave back most of the Wednesday move that cleared all of the 2004 levels. This current market selling will likely require a move up into the 45 range to affect a turn in the market given that the prior levels that sparked sustained rebounds in this rally have been hit and have not resulted in a rebound. Indeed, the market kept selling after hitting those levels.
VXN: 24.34; -1.39
VXO: 20.57; -1.68
Put/Call Ratio (CBOE): 1.12; -0.22.
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: +13.53 points (+0.65%) to close at 2086
Volume: 2.156B (-16.16%). Volume fell back to average after that Tuesday surge on the selling that as we noted looked rather cathartic. Trade was still solid, typical with some short covering.
Up Volume: 1.465B (+832M)
Down Volume: 656M (-1.212B)
A/D and Hi/Lo: Advancers led 1.12 to 1. Breadth was better than NYSE all session, but it was negative until the late run pushed it just above the flat line. The narrow breadth shows the move was driven by rebounds in a few stocks, the hallmark of a short covering bounce.
Previous Session: Decliners led 2.81 to 1
New Highs: 28 (-16)
New Lows: 235 (-43). Didn't get the next push lower to get the 400+ new lows. Another indication this is not 'the' bottom some are suggesting.
The Chart: http://www.investmenthouse.com/cd/^ixic.html
NASDAQ was up and down all session, making a token run at 2100 resistance early but coming up well short (2092 on the high). A midday sell off, an afternoon yoyo session, and then a late rally that took it back up to close near session highs. That last push occurred when the shorts started to cover when the last effort to push stocks lower could not take out the early afternoon low (2065). NASDAQ 100 (+0.88%) outpaced overall NASDAQ, another indication that what we saw was short covering after an ugly sell off. No issue with that; all rallies start with short covering.
SOX (+1.37%) was the market percentage leader, typical for this volatile index. It bounced from the depths, heading back up to try the 10 day EMA (448) that acted as resistance on the last bump higher last week. It will likely try the 18 day EMA (458) on this attempt as it did in early June given the intensity of the selling this time around.
SP500/NYSE
Stats: +6.35 points (+0.52%) to close at 1230.04
NYSE Volume: 1.972B (-0.95%). Volume was lower but remained quite strong as the NYSE indices reached lower and rebounded late after a seesaw session. Strong flush out volume Tuesday and more solid trade as it recovered. Not bad but doesn't mean a lot at this point.
A/D and Hi/Lo: Advancers led 1.11 to 1. Breadth was -1.8:1 in the last hour before the 11 point run that hour swung it slightly positive. Given the NYSE was flat to positive before that late run, the poor breadth shows that the move higher was on the back of some beaten down large cap stocks that managed to rally and pull the market cap weighted indices up with it.
Previous Session: Decliners led 3.25 to 1
New Highs: 15 (-1)
New Lows: 266 (-27). As with NASDAQ, did not get that next push lower to really get the new lows up to that extreme, flush the pipes level.
The Chart: http://investmenthouse.com/cd/^gspc.html
SP500 jumped early as well, but then spent the session trying to hold on, trading back and forth over the flat line. It was lagging the entire session, but did lead the small cap index in gains. Good 11 point recovery in the last hour pushed it positive as the shorts covered some positions after two weeks of selling, something the narrow breadth indicates. Still down in the depths and below the up trendline but bouncing back after its second leg lower in this sell off. The next key is the August 2003/August 2004/October 2005 up trendline (1240).
The small caps (+0.46%) held support at 350 on the intraday low and closed out the session with a flourish to the upside as with the other indices. It too is still deep down in the hole but looks ready to rebound after the second leg lower to test its 200 day SMA (366) or the rapidly falling 10 day EMA (now at 365).
DJ30
One of the better moves in the market, but it took a late rally to assure the triple digit gain that only SOX eclipsed on a percentage basis. BA was a big winner with its announcement of Dreamliner contracts, but it was one of many stocks that rebounded from some pretty sharp prior selling. It did not make it to the next support level (10,665 to 10,678 is some soft support), instead using 10,700 to star the move. The 200 day SMA (10,880) is the next resistance level it will face.
Stats: +110.78 points (+1.03%) to close at 10816.92
Volume: 355M shares Wednesday versus 399M shares Tuesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
THURSDAY
The CPI is history but the economic data continues its torrent Thursday with some regional manufacturing indices, foreign purchases of US assets, production, and capacity utilization. It will be interesting to see how the regional indices fare over the next couple of months. They have been up and down, showing some volatility the past four months and the ISM for May came in lower already.
The inflation damage has been done, however, and the market has filled up on all of the Fed speak and inflation data, enough so that it went ahead and started the rebound even as the news came in worse than expected.
This start of the rebound after the second leg of selling took a bit to get going, and we will have to see if the late short covering continues into Thursday and drives the rebound further. The market is primed for a relief move after the second down leg that was equivalent to the first in May. As we said before, we expect a third leg lower after this rebound, and we look to see VIX spike into the forties on that one. Also, by that time we want to see some leadership having formed up new bases so when the rebound comes after that there will be plenty of strong stocks to lead higher.
After that third leg there will likely be a test of that level; that would take the market into August. That is a much better time on the calendar to try and find a bottom than right now in June or even July. After the bear market the 'usual' calendar for the market was thrown off. Now it is back on track, making the summer a difficult time to find a bottom.
Thus we are looking for the rebound here to be another relief move that sets up the next leg lower. It can always prove different, but it will show the usual signals when it does. One thing it won't have near term, and that is a lot of leaders ready to move higher out of good bases. Rebounds without leadership, despite hitting all of the other indicia of a bottom, fail. We saw it all through the bear market, and unless some patterns improve much faster than they appear they can, this will likely be just a rebound.
That leaves us looking for some stocks in position to give us a good and relatively fast upside run on a rebound and also building a list of positions for a turn back down for the next leg. We will be putting some of those on the report if they start looking ripe even as the market rebounds because we want to be ready to jump on them. As with upside leaders in an improving market, the downside leaders tend to set up and deliver the downside moves quicker than the rest of the market.
Support and Resistance
NASDAQ: Closed at 2086.08
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
The 10 day EMA at 2130
2150 is the August 2004/April 2005 up trendline.
2162 to 2155 from December 2005 and September 2006
The 18 day EMA at 2160
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 50 day EMA at 2224.
The 200 day SMA at 2229
2240 is closing low in February range.
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 1230.04
Resistance:
1240 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
The 10 day EMA at 1249.
1250 to 1248 from the November and December 2005 lows.
The 18 day EMA at 1260
The 200 day EMA at 1261
1272 to 1268 is the November and December 2005 closing highs and March 2006 closing low
The 50 day EMA at 1277
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 to 1215
1205 from the August lows
Dow: Closed at 10,816.92
Resistance:
The 200 day SMA at 10,880
10,890 is the December 2005 closing high.
10,931 is the November 2005 high
The 10 day EMA at 10,924
10,965 from Q4 2000 and November/December 2005
10,985 is the March 2005 intraday high
11,024 is the 18 day EMA
11,044 is the January high.
11,097 to 11,137 is the last peak from the February top.
The 50 day EMA at 11,144
11,159 is the February high.
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:
10,678 to 10,665
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): 0.2% actual versus 0.4% expected, 0.9% prior
Core PPI, May (8:30): 0.3% actual versus 0.2% expected, 0.1% prior
Retail sales, May (8:30): 0.1% actual versus 0.0% expected, 0.8% prior
Retail ex-auto, May (8:30): 0.5% actual versus 0.5% expected, 0.8% prior
Business inventories, April (8:30): 0.4% actual versus 0.6% expected, 0.7% prior
June 14
CPI, May (8:30): 0.4% actual, 0.4% expected, 0.6% prior
Core CPI, May (8:30): 0.3% actual versus 0.2% expected, 0.3% prior
Crude oil inventories (10:30): -900K actual versus -100K expected, 1.146M prior
Fed Beige Book (2:00): Strength and expanding strength.
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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