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world stock market, us stock market
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6/17/06 Technical Traders Report
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Technical Traders Report Subscribers:
MARKET ALERTS
Targets hit alerts: None issued
Buy alerts: ABI; MRY; RTI
Trailing stops: None issued
Stop alerts: None issued
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:
- Quiet exit to a loud week.
- Fed gets last shots in before quiet time ahead of June 28-29 meeting.
- Bond curve remains inverted, but overall rates rebound above Fed Funds Rate.
- Looking for a follow through . . . and some leadership.
Expiration Friday a piker compared to the rest of the week.
We thought expiration might be a bit anticlimactic after a week that saw NASDAQ lose 62 points on Monday and Tuesday as it sold further in its second down leg of this correction and then vault 71 points Wednesday and Thursday when the oversold condition got a goose on the butt from a more moderate Bernanke. The other indices acted similarly with early week losses and late week rebounds. On expiration Friday, NASDAQ and the other indices faded modestly, basically closing the week flat. Man. A lot of running in place for a push.
Of course, this action all took place in the context of a much more telling picture. While the Wednesday and Thursday gains mostly eclipsed the Monday and Tuesday losses, those declines were at the tail end of the two week market pounding that made up the second down leg of this correction and matched the losses in the first leg that started mid-May. This was the sharpest pullback since the summer of 2004, and as discussed earlier in the week, coming at this stage of the economic expansion that raises some questions as to it being just a bump in the road in a continuing market uptrend.
You can view the Wednesday and strong Thursday snapback as an indication the market is just fine. Indeed many have been saying just that. It may simply be a case where the market overreacted to the Bernanke and company nuvo hawkishness and factored in an economic slowdown. The Thursday afternoon rocket shot higher after the 'kinder and gentler' Bernanke speech gives that notion some credence. Bond yields, while still inverted, moved back up after the speech, a better indication that there was some short term overreaction.
Even with that this still looks more like a classic deeper correction resulting from Fed tightening policies. Commodities had screamed higher on hot money, and then the world central banks clamped down, draining money from the pool. Commodities made a classic move of their own, the old technical blow off top and dove lower. Gold fell from $730 to $555 before rebounding late in the week to close out at $581. Basically a 25% haircut in short order. The Fed has a terrible track record at knowing when to say 'when,' and even though the market took some solace in Bernanke's Thursday afternoon speech, the Fed is not going to back off from rate hiking soon. It has gone from pausing in June to potentially hiking to 6% through year end or worse, jacking up the intensity to 50 BP as more than a few on the FOMC are talking about.
In any event, investors received 3 more Fed speeches Friday and the Fed-speak was back on point, i.e. tough on inflation after a modest backtrack by Bernanke on Thursday. Stocks tried to continue the move higher out of the gate, but turned sloppy. A late afternoon rebound tried to salvage modest gains on the Dow, but a late dip left all indices short. The Fed-speak is likely not what dealt the market a losing hand Friday; it was just beat down to the socks after the down and up action the preceded expiration. It didn't help coming on the heels of a more conciliatory Bernanke, but the market was technically whipped after two strong rebound sessions, and with the weekend ahead no big bets were made.
Volume was up as you would expect, and losses were negligible (on DJ30) to noteworthy (SP600 -0.76%, NASDAQ -0.66%). Breadth was a bit more than you would want to see at -1.95:1 on NASDAQ. Technically there was distribution, but with expiration you would be hard-pressed to really label it that. Many stocks tried to rebound further early, but wound up stalling at near resistance. Many energy stocks that galloped higher Thursday showed a stall at resistance Friday. There were some decent moves, but most stocks struggled at near resistance after that break higher. Most of those moves were scattered across the market and had a defensive look about them. Again, lack of leadership is a key shortcoming right now. With the hard selling that is not surprising, but with all of the talk about bottoms and the like, you have to take a close look at just what is leading. Again, it is scattered and defensive at this point, and a market without stocks ready to lead has a hard time maintaining rebound attempts.
THE ECONOMY
Hawkish Fed speakers get the last shots in ahead of June 28-28 FOMC meeting.
Last week there were nine Fed speeches, three by Bernanke. The Monday speech was a fire and brimstone type, adding to the 'we are strong, we are invincible, we are Fed' verse sung the past month. The market sold off. Bernanke was joined by others, notably Moskow who is a perennial hawk who firmly believes prosperity and inflation go hand in hand. Thus statements such as more people need to be unemployed sometimes slip from his lips. The Dallas Fed head-case Fisher has come full circle now, vocalizing his contempt for inflation and the need to hike, hike, hike to keep it in control. You have to hand it to old 'eight inning;' he provides the comic relief.
Then on Thursday Bernanke struck a more conciliatory tone, reassuring everyone that though there was inflation, it was not passing through in an unmanageable way to the retail level. Basically it was a 'we are on top of the situation' speech and it was delivered deftly with Bernanke actually exuding some confidence. The market liked it. It liked it a lot. A modest Thursday gain early afternoon became a huge Thursday gain.
Friday the last of the order was up (nine speeches, remember?), and they apparently did not get Bernanke's script change. They came out blasting away at inflation of any kind, ready to shoot first and ask questions later. Krozner is worried about future inflation jumping past current levels. Poole was adamant the Fed had to keep acting upon the current inflation signs lest inflation and inflation expectations get out of control.
The real Fed-speak story for the day, however, goes to nominated vice chairman Kohn. Kohn is against inflation targets, a good thing (Bernanke likes them), but he is a walking version of the Phillips Curve. He said inflation concerns in the US had become 'unhinged,' apparently meaning there was some confidence loss in the markets. He indicated the Fed had to remain tough to get expectations of a low inflation environment forged by Volker back in line or else we would face costly times ahead fixing the problem.
That is not too bad, but the more he spoke the more his anti-prosperity, Phillips Curve background came out. "If the FOMC were to allow the U.S. economy to run beyond its sustainable potential for some time, inflation would eventually rise. And this pickup would become self-perpetuating if it became embedded in inflation expectations." In other words, if we have great prosperity as we had in the late 1990's and 2000 when GDP was humming along at a strong pace, inflation would inevitably follow. As you recall the Fed saved us from that inflation, inflation that never, ever showed up, by throwing us into a recession and bear market. Thank goodness for that. Sure would hate to have any inkling of an inflation expectation becoming embedded. Would much rather go into recession, lose millions of jobs as companies folded right and left, and a few trillion in retirement accounts than risk at some point in the future any hint of inflation arising.
As you can tell, we have no respect for this school of thought. The Phillips Curve only worked for six years in the entire history of the world economy. Yet since the 1929 Fed, the US Federal Reserve has acted as if it were law. In 1929 the Fed fought inflation that never showed up, helping throw the US and then the world into the Great Depression. Inflation was certainly NOT the problem as the world plunged into deflation. In 2000 there was no inflation but the Fed fought it and pushed us close to deflation again.
The problem is, the Fed is populated by a lot of Phillips Curve disciples. Poole, Kohn, Moskow and yet, Bernanke; those are big names you hear a lot and that carry weight, spouting about 'running beyond potential', i.e., a strong economy. It is really scary to have the Fed heads working to stall what we work so hard to create, i.e. a prosperous economy. As soon as we get some prosperity, the hawks start hawking about inflation.
A few subscribers have voiced their frustration and asked if anything can be done. You can call your senators and House reps and voice your concerns. That helps some if your representatives know something about economics, but so few do that they typically defer to the Fed. Nonetheless if we voice our displeasure in great enough numbers then they will have to ask the questions when the Fed gets before Congress twice a year. Unfortunately, the Fed is populated by unelected officials and was designed precisely to be autonomous. Thus doing anything about policy other than appointing the right people is difficult. Unfortunately Bush has appointed too many PC types and now we are stuck with them.
Bond curve rises across the board.
Friday the yield curve remained inverted, but the extent of the inversion was improving (3 basis points from 7 earlier in the week) and the overall rate levels rose (5.16% 2 year, 5.13% 10 year). Both are better signs for the economy.
Bonds rallied on the hawkish Fed talk, meaning yields were lower as money out in the future lost value. That was because the bond market was worried the Fed would go too far, push us into a serious economic slowdown, and thus there would be less demand for money.
Late in the week, after the Bernanke Thursday speech to be precise, bond yields started to rebound. The 10 year went from 4.96%, below the Fed Funds rate, to 5.13%, a quick 17 basis point move in less than 2 days. The 2 year moved above the 5% Fed Funds rate as well.
Inversion is never good, but an inversion with rates below the Fed Funds rate is really bad. Longer term money is worth less than shorter term money, and the market is so disillusioned about the future it moves below the Fed's bank rate. That puts an exclamation point on the pessimism about the future. The curve showed a remarkable improvement in short order. This coming week will be very instructive as we see if it continues to improve or if the late week recovery was just a bounce higher with the stock market.
As we noted last week, there are already signs the Fed has done much of its job. Commodities have come back closer to earth after the hot money fueled by world liquidity was drained off. The dollar halted its 2 month slide last week. Housing has peaked and is making an orderly decline. Bernanke noted these in his Thursday speech, indicating he is not completely in tunnel vision mode as is often the case at this juncture in a Fed rate hiking campaign. That helps the curve.
Problem is, even if Bernanke feels this way, he has a fight on his hands with the rest of the Fed. So many of the hawks are bubbling with glee because they don't have to hold back their feelings on inflation. The Fed is a lock on 5.25% and likely 5.5% given the rhetoric and the unlikely event economic data is going to fall off a cliff. Convincing some of the hard liners that the Fed is done when many of those hawks want to see inflation falling before they stop won't be pretty to witness. Of course with inflation being a lagging indicator, if you wait until it falls then you are way behind the curve and are looking at recession. Even the Greenspan Fed stopped before inflation peaked (if indeed there was any inflation) and look at its record with recessions. Bernanke is going to have to be very eloquent and show he is quite a leader to pull it off, particularly with some of these guys calling for 50BP hikes and a 6% Fed Funds rate.
THE MARKET
MARKET SENTIMENT
Another week that saw volatility shoot to new highs on this run, hitting the highest levels since 2003 when the market was making its comeback. It hit 23.81 on the Tuesday high.
Bulls and bears tanked and jumped respectively, coming close to a crossover, just about the best indicator you can get for this indicator. They were less than 5% between them before the late week rally shifted a bunch of folks back to bullish.
These indications are enough for a bottom in a continuing move higher. They were enough two weeks back to do that as well, but the market kept selling. Perhaps this was the key that will lead to the recovery on this bounce, but we still feel another leg lower and the VIX moving up to the forties is still likely. Have to watch those bonds, however; they improved late in the week on just a speech from Bernanke.
VIX: 17.25; +1.35
VXN: 21.69; +2.22
VXO: 14.92; +0.13
Put/Call Ratio (CBOE): 1.27; +0.41. It has been above 1.0 on the close more times the past month than below it. That shows how this indicator has lost some of its weight over the past few years with the increase in options trading by hedge funds, retail investors, etc.
Bulls versus Bears:
The two are converging, hitting their lowest ratio since March 2003 when the market followed through on a continued rally after spending three months testing the bottom off of October 2002 that ended the bear market. This is a positive and supports the strong move higher Thursday that started with the Wednesday rebound.
Bulls: 38.7%. This brings the bulls to their lowest level in this cycle, well off the 53.2% at the April peak. It 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: 34.4%. Big spike higher from 31.5% the prior week. That eclipses the March 2006 high (33%) and well above the 2005 highs that spawned new rallies (30% in May 2005, 29.2% in October 2005).
NASDAQ
Stats: -14.2 points (-0.66%) to close at 2129.95
Volume: 2.511B (+9.12%). Volume jumped back up to Tuesday levels Friday as expiration again generated more volume. Hard to label this distribution given expiration trade. On the week the index showed distribution on Monday and Tuesday, accumulation on Thursday, and then the Friday trade. All influenced by expiration and the big swings in the market, but overall there was more selling volume.
Up Volume: 815M (+815.002M)
Down Volume: 1.686B (+1.547B)
A/D and Hi/Lo: Decliners led 1.95 to 1. Not to be dismissed even though Thursday positive breadth was better than twice as nice.
Previous Session: Advancers led 4.17 to 1
New Highs: 53 (-1)
New Lows: 88 (+13)
The Chart: http://www.investmenthouse.com/cd/^ixic.html
NASDAQ gapped a bit lower and all it could do on the session was match the Thursday close. It faded on stronger volume, turning back from the August 2004/April 2005 up trendline at 1250.50. You could get all worked up about this and call it a rollover at resistance presaging a further sell off. After all, NASDAQ is in a downtrend since topping in April, and it failed at the 18 day EMA on the bounce after the first down leg; NASDAQ came within 7 points of the 18 day EMA (2155) on the Thursday high. Or you could say it was a pause after the Thursday thunderbolt higher on Bernanke's words, a needed rest before trying higher. With expiration pumping up volume the action was clouded. Likely NASDAQ will try a move higher again this week and will likely try the 18 day EMA. It may find itself lower on Monday first, however. We are going to be patient and let this rebound run its course while we watch how the bond market reacts. If bonds continue to improve, the chances of recovering from here improve as well.
SOX (-0.89%) turned back at the 18 day EMA (457.67), the level that acted as resistance in the rebound at the end of May and early June. SOX is definitely worth watching at this point as it has led each move lower in this correction.
SP500/NYSE
Stats: -4.62 points (-0.37%) to close at 1251.54
NYSE Volume: 2.009B (+1.67%). Volume was up on NYSE, but it was up all week and well above average as NYSE stocks sold and then rebounded. Rebalancing at the end of the week added to the weeklong volume surge. Distribution and some accumulation similar to NASDAQ.
A/D and Hi/Lo: Decliners led 1.72 to 1. Still strong but nothing compared to the strong upside breadth. Of course, the downside breadth was impressive as well on the selling. Indicates a very back and forth market in upheaval.
Previous Session: Advancers led 4.26 to 1
New Highs: 26 (0)
New Lows: 103 (-15)
The Chart: http://investmenthouse.com/cd/^gspc.html
SP500 fell back from the 18 day EMA (1258) that it tapped on the Thursday high. It was down almost 10 points on the low but then rebounded to hold the 10 day EMA (1250) on the close. Below a lot of ice (resistance) at the 18 day, price resistance at 1260, and the 200 day SMA (1261). Expecting another test up to this resistance this week. The rebound has already been as strong as the last May rebound off the 200 day SMA. Key test at the 200 day is ahead this week. Failure starts the third leg lower.
SP600 (-0.76%) tested the 200 day SMA (365.94) on the Thursday high and faded back from that level Friday. There is some support at 360, but after a test of the 200 day or even up to the 18 day EMA (369) this week, we anticipate the small caps making another run toward the June low at 350. That is also the level of the November and December 2005 lows and some interim peaks from the 2005 summer.
DJ30
DJ30 flirted with positive all session, closing just below that level after a late dip. The up and down action left a tight doji just below the 18 day EMA (11,022). Volume shot higher, the highest in a month, but as noted above, volume on expiration is hard to gauge. DJ30 is butting up against resistance at the 18 day, the January high (11,048), and the April intraday lows. We expect it to make another run at those levels this week after an early test down to the 10 day EMA (10,954) or the 200 day SMA (10,886) to start things off.
Stats: -0.64 points (-0.01%) to close at 11014.55
Volume: 452M shares Friday versus 358M shares Thursday.
The chart: http://www.investmenthouse.com/cd/^dji.html
MONDAY and the week ahead
The Fed will be within two weeks of the FOMC meeting to end June, so the market will finally get a reprieve from the tough Fed talk and have to make its own wake. The economic data is not that heavy (housing starts, Leading economic indicators, durable goods orders), but we are going to start hearing from companies re the Q2 earnings, particularly given all of the conferences upcoming.
Technically the market has rebounded from the selling to near resistance, and now it has to show if it can break through and deliver a follow through to the Wednesday reversal. We anticipate the indices will test some to start the week, and then make an attempt to move through the near resistance.
There are some keys that we will be watching. First, the price/volume action now that expiration week and its volume and volatility are past. Always look to the nuts and bolts as the surest indication of market direction; sentiment can tip you off, but as we have seen the past month, they can be at rebound levels and the market still sells lower. Indeed, back in other bottoming events it can take weeks and even months before high sentiment is matched by the bottom and reversal.
Second, we are going to watch the bond market. Bonds rallied and yields fell on the harsher Fed rhetoric, fearing the Fed was going too far. The 2 year rate moved up past the 10 year, the inversion reaching close to 10 BP. The 10 year fell below the Fed Funds rate on the tough talk. After Bernanke's Thursday speech, bonds sold and yields rose with both the 2 year and 10 year moving over the Fed Funds rate. The inversion gap narrowed to just 3 basis points. All of this based on what the Fed said. The rather dramatic recovery in the yields back above the Fed Funds rate suggests the market, as usual, overreacted in the short run. How well it continues, or does not continue, to adjust and cure the inversion will tell us more about the economic future.
Third, SOX is definitely worth keeping an eye on. It has lead each move lower in this correction, from the topping in April to the last leg lower this month. Last week it rebounded with the market but stalled Thursday and Friday at the 18 day EMA, the near resistance that stalled it out on the last market rebound. If SOX rolls over again, the market is likely starting that third, and likely last, pullback in this correction before it starts putting together a real rebound.
A big shortcoming in the market right now is the lack of leadership. So many stocks were really damaged in this selling as big money dumped them in quantity. Thus, even a rebound at this point will find it hard to generate new stocks to push it higher. When stocks shoot higher in a rebound after getting dumped by the big institutions, they tend to burn out and fall once more. It takes more accumulation and some time to build new bases and set the foundation for a new and sustained rise. After the rebound to end last week, a lot of stocks were back up to near resistance after a sharp sell off, in neophyte downtrends very similar to the indices. Those are not exactly good bases ready to launch stocks higher on sustained moves.
There is some leadership in the health and medical sectors, traditionally more defensive but very capable of leading market advances. We are trolling there quite a bit for our upside plays. As for the rest of the market, a bit more selling in a third down leg would leave stocks lower ahead of July earnings reports. That would set up a rebound on those numbers and then a consolidation of that bounce would form those bases and take the market through July. That would be much better timing to start putting in some sort of bottom just as the market did in 2004.
That means this week we are going to continue looking at downside plays that have set back up after the Wednesday and Thursday rebound. That is what we were looking for mid-week, and Friday we saw many setting up once more. As with the indices we need to let them set up and not rush it too much; they may test, rebound, and then be ready for a deeper move. Despite the lack of widespread leadership, there are leaders and solid stocks that have held up remarkably well during some pretty voracious selling as noted above. We were moving into some of these Friday and will continue to look for them if the show the right moves.
Support and Resistance
NASDAQ: Closed at 2129.95
Resistance:
2150.50 is the August 2004/April 2005 up trendline.
The 18 day EMA at 2156
2162 to 2155 from December 2005 and September 2006
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 2218
The 200 day SMA at 2229.54
2234 is the early June high
2240 is closing low in February range.
Support:
2100 from the early and mid-2005 peaks
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 1251.54
Resistance:
The 18 day EMA at 1259
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 1276
The late January peak at 1285
The early June high at 1288
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:
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
1241 is an old trendline from the August 2003/August 2004/October 2005 lows.
1225 from the March 2005 high
1213 from December 2004 high to 1215
1205 from the August lows
Dow: Closed at 11, 014.55
Resistance:
The 18 day EMA at 11,022
11,044 is the January high.
11,097 to 11,137 is the last peak from the February top.
The 50 day EMA at 11,134
11,159 is the February high.
The March 2006 highs at 11,329 to 11,335
11,279 is the late May high
11,350 from the May 2001 peak
11,401 from the September 2000 peak and April 2001 highs
Support:
10,965 from Q4 2000
10,931 is the November 2005 high
10,890 is the December 2005 closing high.
The 200 day SMA at 10,886
10, 737 to 10,730 from December and February lows
10,705 - 10,965 from July/August 2005 range top to bottom
10,678 to 10,665
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
June 20
Housing starts, May (8:30): 1.961M expected, 1.973M prior
Building permits, May (8:30): 1.860M expected, 1.849M prior
June 21
Crude oil inventories (10:30): -980K prior
June 22
Initial jobless claims (8:30): 310K expected, 295K prior
Leading economic indicators, May (10:00): -0.4% expected, -0.1% prior
Durable goods orders, May (8:30): 0.8% expected, -4.4% prior.
End part 1 of 3
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