|
|
us stock market, understanding the stock market
* * * *
6/27/06 Investment House Alerts Report
* * *
IH Alert Subscribers:
MARKET ALERTS:
Target hit alerts: None issued
Buy alerts: FRK; OEF
Trailing stops: ODFL
Stop alerts: None issued
SUMMARY:
- Stocks reverse their action, give back early gain and sell on rising volume.
- Consumer confidence rises in face of gasoline, stock market struggles
- Gasoline pricing.
- Existing home sales down 1.2% from April, 6.6% year/year.
- Modest rise ahead of FOMC undercut as third leg lower tries to get underway.
Consolidation attempt gets downside jolt as oil rises, FOMC approaches.
Stocks tried another upside move out of the gates, but on this test of near resistance at the 18 day EMA and down May down trendline the sellers came in and shoved stocks lower with losses roughly 1% on the indices with SOX leading lower with a 3.75% loss.
Consumer confidence was stronger than expected at 105.7. Existing home sales fell off but not as much as expected. Not bad news at all, but with oil prices climbing back above $72/bbl and the FOMC meeting Wednesday and Thursday with talk of 50 BP on the line and rumor of 50 BP more in August, the market had enough. Bids dried up and this time the sellers came back to the market.
Stocks reversed their recent action of lower opens higher closes, turning an early gain into some much stronger losses than the recent gains, and on stronger trade. SP500 undercut its trendline while NASDAQ thudded to the bottom of its range at 2100. Large cap techs were the downside leaders (along with semiconductors) as the NASDAQ 100 sported a 1.87% loss versus 'just' 1.57% on NASDAQ overall. Volume was still below average, but it was clearly the strongest trade since last Wednesday's weak follow through attempt. Breadth was sharply negative once more (almost -3:1 on NASDAQ) as sellers moved in on pretty much everything.
The real key to the session was the rising trade as the indices tested resistance and then reversed. After a week of lateral moves following the jump higher on 6-15-06 trade finally came in and it did so to the downside. It was no blowout but compared to the recent trade the price and volume combination was significant. SP600 made it up the 200 day SMA as expected and DJ30 tapped its 50 day EMA last week while SP500 and NASDAQ bumped up against the 18 day EMA. That was apparently enough. With the market worried once more about what the Fed is going to do with rates and thus the economy, some big money was moving out of Dodge before the sheriff got to town. The action sure looks like the start of leg 3 to the downside.
Given the action we dabbled in some downside and took some gain off the table. We will likely get some upside rebound as the FOMC meeting starts, and unless that turns into a huge run upside we are looking to take some more positions off the table and look at some downside set ups. The market made a decent attempt at a consolidation, and it may still be able to salvage a move what with NASDAQ still holding 2100, but the return of volume on a sharp downside move indicates the May downtrend is still exerting control ahead of the FOMC.
THE ECONOMY
Consumer Confidence shows a surprise gain in the face of high gasoline.
Confidence easily topped expectations of 103.9 with a solid 105.7 reading. May was revised higher as well to 104.7. Current conditions fell to 132.7 from 134.1. Expectations gained a modest 87.6 from 85.1. That is somewhat of a reversal from the past few months with expectations falling while present feelings were more buoyant. With energy prices continuing to dig into wallets and purses every week consumers are feeling it near term. Overall they show better optimism though still just a shadow of current conditions.
The bottom line: at this level confidence is more than enough to keep the economy moving along. The big concern has been consumers get so tired mentally and stretched financially from paying near $3/gallon in gasoline that confidence falters and they stop spending. Thus far demand levels for gasoline are hanging in there as consumers appear to have no issues with travel this summer.
Is it coincidence that gasoline prices have settled just below $3/gallon?
We are not necessarily believers in gasoline price conspiracies, but you can build a circumstantial case if you want to. Of course you can build a circumstantial case regarding anything if you want to; it happens every day on the news.
With that in mind, note how after Katrina and Rita gasoline spiked to $3+/gallon on average nationally. It backed off, but then even before summer hit this year it was back at $3/gallon. On both occasions demand for gasoline fell. Now we are into summer and gasoline prices have fallen back to $2.87/gallon as the national average. As we reported last week, however, refinery utilization is still hovering around 93%, well below where it typically is in summer when it runs at 98% to 100%. Moreover, this week saw some refinery issues on the Gulf coast that took more production capability off line after gasoline inventories were well below expectations last week (+300K versus the +1.1M expected).
Gasoline prices, however, have not really budged (unleaded gas was up a penny Tuesday). Despite the kind of news that would have sent gasoline through $3/gallon even before the summer driving season started and demand increased as it has in June, gasoline has settled in just below $3/gallon. Maybe the hype and worry heading into another storm season has died down and thus allowed gasoline prices to settle. Or maybe producers have found the highest price that maximizes demand and thus profits, and they are doing what they can to keep it at that level. Certainly they cannot prevent a spike if a big storm hits the Gulf, but with all external forces equal they, just like market makers, are able to direct prices within a range during these 'normal' times.
Existing home sales fall to weakest pace since January.
The 1.2% decline was still better than expected (6.67M versus 6.65M) and put the year over year loss at 6.6%. That boosted housing inventory to 6.5 months or 3.6M units. That is a 5.5% gain, the sharpest monthly climb since 5-1997. It was high enough form some in the real estate business to call worrisome or scary.
Prices rose yet again, reaching $230K, up from $217K. You would think that would mean demand is increasing. In the housing market, however, there is a rush to sell when there is a sense the market is turning, and at first sellers are reluctant to lower prices. Indeed those that are putting the homestead up on the block trying to hit a home run but who don't really want or need to sell won't lower their prices; they finally just pull the property from the market. Others take their time to lower prices, waiting until harsh reality hits home and they realize the market just won't pay them that much for their homes. As inventories climb and that reality sets in, prices start to decline.
The data shows no precipitous drop but simply more of the continued decline in the market overall. The inventory level is by no means a record, but it is approaching the point where prices will not hold up and we will see some pretty sharp declines. That is where one of the real economic impacts of housing comes to roost, i.e. when homeowners feel they no longer have a war chest to turn to in the form of their houses. At that point housing becomes housing: where you eat, sleep, recreate, and other things we are not going to get into here.
THE MARKET
MARKET SENTIMENT
Though sentiment indicators hit some extremes that sparked earlier rebounds in this longer term rally. As we noted a couple of weeks back, they have not sparked a sustained move higher on this selling, and it looks as if last week's follow through attempt is not going to survive the selling with the renewed downside on higher trade Tuesday. We would like to see VIX make another very sharp climb here to push through the prior high at 23.81 to match the bulls/bears and put/call ratio.
VIX: 16.4; +0.78
VXN: 22.11; +1.28
VXO: 15.75; +1.42
Put/Call Ratio (CBOE): 1.02; +0.28. Back above 1.0 on the close after a quick trip lower.
Bulls versus Bears:
Last week they were converging and this week they actually met at 35.6% each. 35% bulls is bullish and the highest level since the October 2002 bottom. Bears are higher than they have been on any time in this rally. It is always bullish when bulls/bears converge, and super bullish of they cross over. If the market continues the rebound after the Wednesday follow through they will likely not make the cross, but even back in late 2002 they did not cross one another when the market bottomed after that long downtrend. This is more than good enough to rouse the upside as it means there is enough money on the sidelines to sustain a push higher as opposed to flaring out after a brief move.
Bulls: 35.6%, down sharply form 38.7% last week. A new low on 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: 35.6%, up from 34.4% last week. Not as dramatic a move higher as last week (up from 31.5%), but easily posting a new post-2002 high as it 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: -33.42 points (-1.57%) to close at 2100.25
Volume: 1.874B (+29.6%). Volume jumped up to last Wednesday's follow through attempt volume as NASDAQ tested near resistance and dumped to support. Distribution as big investors got a case of nerves ahead of the FOMC and just how far it will go and what it will say about how far it wants to go.
Up Volume: 251M (-664M)
Down Volume: 1.609B (+1.095B).
A/D and Hi/Lo: Decliners led 2.95 to 1. Breadth gets pretty ugly again as the techs sold off after the consolidation attempt that saw middle of the road advances. The A/D line peaked in March and has worked laterally since, making two lower highs the past three weeks. NASDAQ was bad but NASDAQ 100 was worse as it lost 1.87%. The large cap techs were leading lower.
Previous Session: Advancers led 1.55 to 1
New Highs: 60 (+1)
New Lows: 149 (+61). Want to see this really climb on another leg lower in the event NASDAQ cannot hold support at 2100.
The Chart: http://www.investmenthouse.com/cd/^ixic.html
NASDAQ tried to move through the 18 day EMA (2136) and it did for about 20 minutes. Then it turned lower and sold pretty much straight down all session though there were a couple of modest upside attempts. NASDAQ managed a close at 2100, and that is the do or die point for this attempt at a consolidation. After the lateral move that sported a couple of solid upside sessions, this turn lower on rising volume is showing that consolidation is failing, and it won't take much to send NASDAQ lower in its third leg. The FOMC is the wildcard; if it produces a 50 BP hike and says it is done, that is likely enough. Otherwise more of the same with guessing about Bernanke's manhood.
SOX (-3.75%) was particularly ugly. The only thing it did not do this time around was cast the first stone; in other words it did not start down Monday ahead of the rest of the market. When it went, however, it when. It is already down to the early June lows and is ready to move lower to test 425 support. That is not that strong of support and SOX is likely to continue lower through that level.
SP500/NYSE
Stats: -11.36 points (-0.91%) to close at 1239.2
NYSE Volume: 1.556B (+15.72%). Volume was up but still below average as well as SP500 kissed resistance and rolled over as well. Never like to see these failures at resistance on rising trade as that shows sellers jumping onto a downside move.
A/D and Hi/Lo: Decliners led 2.48 to 1. Same issues as with NASDAQ, i.e. most stocks heading lower and breadth peaking at the end of Q1 and now making lower highs. Breadth is not necessarily a timing instrument, but as it continues to erode the market will continue to struggle.
Previous Session: Advancers led 1.65 to 1
New Highs: 35 (-6)
New Lows: 231 (+47). Starting to spike up. Want to see it well above 400 on any further leg lower.
The Chart: http://investmenthouse.com/cd/^gspc.html
SP500 moved through its 18 day EMA (1251) early but it too could not find any buyers and then the sellers moved in. The drove the large cap index through its 2003-2005 up trendline (1243) on the close. That still keeps it in its range over the past week but the breach of the trendline on higher volume is not a positive development as the downside momentum got a big head start. Has the look of the start of the third leg lower.
SP600 (-1.58%) sported a big move higher Monday and was hammered lower Tuesday after it rallied through the 200 day SMA (366.30) on the high only to roll over on rising trade. It hit the 200 day as expected and it could not find any more buyers. That sent it lower below the 18 day EMA and the down trendline from May at 362. Very much the look of the start of another leg lower after the low volume rise to test the 200 day SMA.
DJ30
After last week's test of the 50 day EMA (11,100) DJ30 lost its strength. Tuesday it was down as well, blowing through the 10 day EMA (10,984) that held it up all last week and down toward the 200 day SMA (10,901). Will try to hold some at the 200 day, but likely to head on down for another test of the early June low at 10,700; one low typically leads to a test to see if buyers step in again at that level.
Stats: -120.54 points (-1.09%) to close at 10924.74
Volume: 269M shares Tuesday versus 202M shares Monday. The consolidation volume melted away in the face of strong selling volume.
The chart: http://www.investmenthouse.com/cd/^dji.html
WEDNESDAY
The attempted consolidation that showed some stirring leadership was knocked back Tuesday. Many strong stocks faded, but most leaders managed to hold up without breaking down their recent positive patterns. They will be tested as the market approaches the FOMC meeting and then gets the result. We will watch for a pullback to support or continued pattern building in the interim to gauge the strength of the market even with this Tuesday selling. It was not promising, but many solid stocks held up and we may once again get to buy into some leaders after they test their recent moves in this pullback.
Oil inventories are out at 10:30ET and with energy prices rising this week they will get a close look. It is also the start of the two-day FOMC meeting, and that is where most of the attention lies. Tuesday the market once again got a dose of concern over the Fed and whether it will go overboard with rate hikes. As noted, there is talk not only of a 50BP hike Thursday but a statement that won't suggest that the hiking is over. Some scuttlebutt has it that such a hike would be a precursor to another 50BP hike.
We are not able to come to that conclusion, at least not yet. We speculated last week that a 50 BP hike might come but that the Fed would indicate that was it unless something really got out of whack. That would be a cause for market relief versus the water torture treatment. Worst case is a 50 BP hike and no indication of a stop. Second worst is a 25BP hike with no indication of a stop. We are likely to get the latter though the former is still somewhat factored in by the Fed Funds futures.
When you look at the bigger picture you have to wonder what the Fed is up to. A 1% to 2% inflation rate is extremely conservative and is quite European where they will stop everything if inflation exceeds their low acceptable levels. Just a couple of years ago we were worried a 1% inflation rate was leading us to deflation; that is what the inflation rate was at the time of the great worry. This Fed is very much acting as if it is targeting inflation as Bernanke is fond of doing even if it denies it.
That is at the root of the market concern. Indeed, the worry of that has kept the yield curve inverted (5.24% versus 5.20% Tuesday) even as short and longer term rates rise into the inevitable rate hike. Indeed, the strength of the rise the past two weeks (from 5% on the 2 year and 4.96% on the 10 year) shows how certain the market is and has opened the door for that 50BP hike possibility.
With that, Wednesday is going to be the start of Fed watch and uncomfortable trade for the most part. The market is acting as if trouble is rapidly approaching in the form of the FOMC statement but with a new Fed chairman, tough talk or not, it is impossible to fully anticipate what his Fed may do. Greenspan sent us into Black Monday when he was a new Fed chairman because he was an eager beaver at controlling inflation and the market did not know how to take him. Very similar issues now face us with Bernanke's inflation fighting ability in question, a mature economic expansion that really cannot handle too much stress, a declining housing market, high energy prices, etc. We can only hope Bernanke is able to put his understanding of history and Fed policy actions into practice without feeling the need to succumb to the pressure of some in the market.
That leaves things in flux ahead of the FOMC announcement, but unless Bernanke wants to toss the market a bone and risk being labeled an inflation weakling, we are likely to see 25BP and possibly 50 BP but neither saying the Fed is done. Something like more rate hikes might 'yet' be necessary is likely, and the market is not going to be pleased with that. Thus with this renewed selling after a consolidation attempt we are likely to see more downside, particularly when the Fed likely disappoints the market by not indicating it is done. Thus we continue to ride our existing downside and look at some more positions in anticipation of further selling. At this juncture the external forces are in control, but history suggests the Fed is not going to indicate it is done, particularly with a new Fed chairman under the gun.
Support and Resistance
NASDAQ: Closed at 2100.25
Resistance:
The 18 day EMA at 2136
2157 is the August 2004/April 2005 up trendline.
2162 to 2155 from December 2005 and September 2006
2185 to 2182 is the September 2005 peak and interim high from November 2005.
The 50 day EMA at 2194
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 2228
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 1239.20
Resistance:
1243 is an old trendline from the August 2003/August 2004/October 2005 lows.
The 18 day EMA at 1251
The down trendline at 1251
The 200 day EMA at 1262
The 50 day EMA at 1268
1272 to 1268 is the November and December 2005 closing highs and March 2006 closing low
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:
1225 from the March 2005 high
1213 from December 2004 high to 1215
1205 from the August lows
Dow: Closed at 10,924.74
Resistance:
10,965 from Q4 2000
11,044 is the January high.
11,097 to 11,137 is the last peak from the February top.
The 50 day EMA at 11,108
11,159 is the February high.
11,279 is the late May 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:
10,931 is the November 2005 high
The 200 day SMA at 10,901
10,890 is the December 2005 closing high.
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 26
New home sales, May (10:00): 1.234M actual versus 1.15M expected, 1.180M prior (revised from 1.198M)
June 27
Consumer confidence, June (10:00): 105.7 actual versus 103.9 expected, 105.6 prior (revised from 103.2)
Existing Home sales, May (10:00): 6.67M actual versus 6.61M expected, 6.76M prior.
June 28
Crude oil inventories (10:30): 1.385M prior
June 29
GDP, final Q1 (8:30): 5.6% expected, 5.3% preliminary
Chain deflator, Q1 (8:30): 3.3% expected, 3.3% preliminary
Initial jobless claims (8:30): 310K expected versus 308K prior
FOMC decision (2:15); Expecting a 25BP hike according to the Fed Funds Futures contract but there is talk of a 50 BP. If we see a 50 BP that will likely mark the end of the hikes.
June 30
Personal income, May (8:30): 0.2% expected, 0.5% prior
Personal spending, May (8:30): 0.4% expected, 0.6% prior
Michigan sentiment, final (9:45): 82.5 expected, 82.4 prior
Chicago PMI, June (10:00): 59.0 expected, 61.5 prior
End part 1 of 3
|
us stock market
understanding the stock market
|
