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money investment, financial investment
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6/28/06 Investment House Daily
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SUMMARY:
- Sellers cannot push Tuesday advantage as stocks rebound positive in afternoon.
- Mortgage applications falling as rates bump back up.
- Gasoline inventories down sharply but gasoline futures close flat.
- Market fights back to trading range as Fed steps up to bat.
- Fed likely to go just 25BP and leave statement pat, and that likely won't satisfy the market.
Sellers fade midmorning & market rebounds on Fed hedging, quarter end shuffling.
Sellers moved in again after a modest bump higher to start Wednesday, and NASDAQ joined SP500 below near support. Volume was running stronger and it looked as if it was Wednesday all over again. Gasoline and oil inventories were much lower than expected and that only added gas to the fire, so to speak. NASDAQ undercut the lows from the past two weeks and SOX was tumbling. That was all the sellers could accomplish, however. SOX tapped the October closing low, and rebounded with NASDAQ following. A lunchtime lateral move, one modest attempt at selling, and then stocks rallied mid-afternoon against our expectations. They ran out of gas in the last hour and a half, but at least held onto their rebound into the bell.
The sellers could not push their Tuesday advantage, but buyers could not either as volume fell in the afternoon recovery. Thus no accumulation after the shakeout, just a lot of back and forth trading as all investors tried to position themselves in the uncertainty ahead of the Fed and with the end of quarter. That has exacerbated the volatility the past two sessions as the indices bounce around and manage to stay in their ranges despite some higher volume selling Tuesday.
Technically the indices held on with a rebound back into their ranges formed the past two weeks. Volume was unimpressive with the positive close, but unimpressive has been its calling card during the lateral move other than the attempted follow through last week and the Tuesday selling. Heck, even that volume was rather weak, coming in well below average. Breadth was fair on NYSE to basically flat on NASDAQ; that did not do anything to change the faltering advance/decline line. The internals are not much to hang your hat on.
The price pattern had improved up to Tuesday's dump lower though the Wednesday recovery helped keep it in the game. Even with the recovery from the Tuesday distribution, however, the indices did not move out of their downtrends that started in May. They are trying to move laterally and make a move higher, but thus far with the Fed overhang they have not been able to make anything further out of it. Bigger picture they remain in a downtrend that started on fears the Fed was going to go too far. Bond yields have recovered but the curve is still modestly inverted and stocks have not rebounded. Indeed, the yield recovery is more a technical move to match the expected 25 BP rise in the Fed Funds rate that futures market is predicting.
In sum, the market overall remains in a downtrend, still bumping up against resistance in its second test during this selling, and with some distribution entering again on Tuesday. Leadership is showing signs of improvement with energy, some metals, some medical and healthcare, shipping, and more showing some good bases and recoveries off of support. That remains a plus for this attempt; it cannot succeed without it but it is also no guarantee the rebound attempt will succeed. With the Fed in control of the game at this juncture, the market is in limbo, held hostage by a Fed that won't say it is near done and history that says the Fed will get it wrong and overshoot, fighting inflation after it has already peaked. That means the FOMC decision Thursday will be the driver near term. If it is the same old, same old we think the market won't like it. If the Fed says 50 and we are done, the market likes it. It will likely be the former simply because the Fed feels it cannot be too decisive lest it is second-guessed for months to come and thus loses its power.
THE ECONOMY
Weekly mortgage applications take a licking.
It takes no grey matter to realize the housing market is on the decline. Sure you can look at the new home sales numbers sans cancellations and talk yourself into believing everything is fine, but you know it is not the case. Home sales are plunging in hot markets such as south Florida (maybe formerly hot markets?) as sales drop 40%. Inventories are jumping. Prices are just starting to soften, typically the last indication of a slowdown.
You really don't need more; this has been ongoing since mid-2005, but it has done so in such an orderly manner that many remained convinced the market was still rising. That is exactly the way you want a decline: so orderly it is hard to pick out a trend. The worry is a sudden collapse. After all, the housing market is a market, and it can go about its own business seemingly immune to policy actions but all the while the foundation is eroding. Then it falls inward. That is what we hope to avoid during this rate hiking campaign, but the Fed has yet to show real indications it thinks housing is important enough to forego and rate hikes after number sixteen in May.
Tuesday the mortgage bankers released their weekly review of mortgage applications. As interest rates hit a four year high at 6.86% (up 0.13% from the prior week) mortgage applications naturally fell. Last week they dropped 6.7% from the prior week but a whopping 31% year over year. New home applications fell 6.2% while refinance applications dropped 7.5%.
Nothing new here. Rates heading higher, mortgage applications lower. More and more are concerned regarding the creative financing that many are still, even in the supposedly more cautious lending environment today, using to purchase their homes. We hear reports that the higher end houses are not moving as well. Again, nothing new there. What is disturbing are the reports and our firsthand knowledge of the deals being put together to move these homes. The owners and realtors want to push sales and some of the more 'aggressive' lenders are allowing some pretty shaky financing arrangements with buyers who are at best borderline to make the purchases.
Unfortunately for all involved and the rest of us as well, these are going to go bad as the real estate market continues to decline. If the Fed goes too far it is really going to hurt. Already in parts of Florida delinquencies are up 40% to 50%. This is the kind of data the Fed needs to be focusing on versus fighting a battle with inflation running 1% to 2%. If it continues fighting the battle when the war is likely already won it will burn down the economy. It is getting close to that point, and if it gets too aggressive the next couple of months it will set the stage for trouble as the bond market is still warning.
Oil and gasoline inventories post sharper decline.
Oil inventories were expected to fall 1.4M bbl, but they fell 2.5 times that amount. Gasoline was supposed to rise 450K bbl but fell 1M. Demand rose to 9.5M bbl/day.
Given these surprise declines oil and gasoline shot higher, right? Not today. Unleaded gas futures closed flat at 2.18 after two weeks of surprise inventory declines. Oil rose just 27 cents to $72.19. Maybe it was priced in, but gasoline prices have fallen even as inventories do the same the past two weeks.
Maybe this is the trade off point between peak usage and demand destruction. In other words maybe gasoline prices have reached equilibrium with demand, i.e. the current national average of $2.87/gallon is the level where demand holds; above that level demand starts to erode. That appears to be the case.
The question raised last night is whether this is a natural market mechanism or just the producers and suppliers loosely coordinating this level. Some like Bill O'Reilly believe this is the case. O'Reilly has talked with independents and their view that the big producers manipulate the market and thus prices, putting the squeeze on the independents in favor of their company owned outlets. Of course this has been their complaint for decades and we are not aware of any major lawsuit victories by the independents. As noted last night, it has the look of potential manipulation, and if you are aggrieved you are quick to conclude that.
Markets, however, strive for equilibrium, i.e. what is the most the consumer will pay and still use the product. That appears to be where gasoline is right now, and thus the lack of movement in response to the inventory data. If something major rolls along prices will jump regardless of the equilibrium point. Then we will see demand fall off, and if the news event passes without major infrastructure or lasting impact, prices will correct.
THE MARKET
MARKET SENTIMENT
Very middle of the road Wednesday with the market recovering. VIX hit 17 on the high before turning back down to its lateral range of the past week. If the selling returns you wan to see VIX surge past 23 hit in early June and frankly, much higher toward 40 to really give a good indication.
VIX: 15.79; -0.61
VXN: 21.45; -0.66
VXO: 15.62; -0.13
Put/Call Ratio (CBOE): 0.87; -0.15
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: +11.59 points (+0.55%) to close at 2111.84
Volume: 1.648B (-12.05%). Volume was tracking higher early in the session as stocks sold, but closed lower as it faded as stocks rebounded in the afternoon. That is backward price/volume action from an upside perspective, but overall volume was lower so there was no real distribution or accumulation, just more low volume trade ahead of the FOMC meeting.
Up Volume: 990M (+739M)
Down Volume: 581M (-1.028B)
A/D and Hi/Lo: Advancers led 1.15 to 1. Paltry upside breadth when compared to the downside breadth Tuesday. Of course NASDAQ lost 33 points Tuesday as well. Suffice it to say the upside is just not that strong in the techs.
Previous Session: Decliners led 2.95 to 1
New Highs: 43 (-17)
New Lows: 177 (+28)
The Chart: http://www.investmenthouse.com/cd/^ixic.html
NASDAQ broke below the recent lows in the trading range, taking out 2100 on the low (2091). Volume was up on the early selling as NASDAQ continued to distribute as it did Tuesday. Volume dried up, however, and came in lower and very low once more. No rush to buy as NASDAQ recovered back above 2100 to maintain its lateral range. High volume selling Tuesday, modest recovery Wednesday. All things equal NASDAQ is still showing more downside bias even with the lateral move remaining in tact. It is below the 18 day EMA (2133) and SOX is acting as a big drag. Growth index and it needs some good growth news, i.e. the Fed wrapping things up, either by express word or the market implying it. Without that it is likely to struggle through another pullback on this correction.
SOX (-0.57%) was the lone index to close negative. SOX tanked Tuesday and was down hard to 423 Wednesday before it held some modest support at that level and rebounded. TXN and RFMD were cited by JPM as experiencing order push-outs from NOK. TXN was supposedly experiencing 'sizeable' order cancellations. That gapped TXN lower on strong volume, closing near its early June low. SOX fell hard Tuesday, and it has to make a rebound here to give NASDAQ and indeed the rest of the market the support it needs.
SP500/NYSE
Stats: +6.8 points (+0.55%) to close at 1246
NYSE Volume: 1.492B (-4.1%). Volume faded a bit from the Tuesday selling (but the second strongest of the past week) as the NYSE indices rebounded. The trade was more pronounced than NASDAQ on the downside but it did fade on the rebound. There was some distribution, but the sellers backed off.
A/D and Hi/Lo: Advancers led 1.55 to 1. Mediocre at best.
Previous Session: Decliners led 2.48 to 1
New Highs: 25 (-10)
New Lows: 223 (-8)
The Chart: http://investmenthouse.com/cd/^gspc.html
SP500 continued lower below its 2003 to 2005 up trendline (1244), but never cratered and then rebounded with the rest of the market in the afternoon to retake that level. It closed right at the 10 day EMA, still in the downtrend below the 18 day EMA (1250.48) and the down trendline (1247). Working laterally but yet to crack the downtrend.
SP600 (+0.24%) faded as well but it found bottom above its prior low at 355 (a higher low than the early June bottom at 351), and rebounded for a modest gain. SP600 is trying to stair-step its way back out of the downtrend, but it failed miserably at the 200 day SMA (366.33) Tuesday and has more work to do before it is ready. Another test of 350 that holds and then takes off is a better launch point.
DJ30
DJ30 tapped the 200 day SMA (10,902.71) on the low and rebounded on lower volume. It closed just below the 10 day EMA (10,982); if that holds it back this move upside is really weak. Trying to make a higher low similar to SP600, but it is holding a key support level. Money is working into some of the big names as a type of defense against the Fed going too far and hurting the small caps. Based upon the overall market action and what the Fed is likely to do we would anticipate a test of the June low at 10,700. That would at least make a much better level to bottom off of.
Stats: +48.82 points (+0.45%) to close at 10973.56
Volume: 260M shares Wednesday versus 269M shares Tuesday. Volume was not much lower than the Tuesday selling trade. More evidence money was favoring the big blue chip names versus other areas of the market.
The chart: http://www.investmenthouse.com/cd/^dji.html
THURSDAY
The big day is finally here, the day where the Fed either makes a serious statement or it drops back and punts, following in the footsteps of its predecessors. You get one guess as to what it will do. Bernanke is in a no-win situation short term. Greenspan left him with too much liquidity to drain off and thus having to battle the perception of inflation though ECRI and history suggests that war is already over. Maybe Greenspan wanted Bernanke to share the angst he had when Greenspan became chairman back in the 1980's. Whatever the intentions, Bernanke is getting a Greenspan-like baptism. We can only hope that his sound reasoning espoused before becoming Fed chairman bears out and he does not make the Greenspan mistakes, i.e. fight inflation after it is over and crash the market. It seems unlikely, but it did in 1987 as well.
What is likely to happen Thursday is that the Fed splits the baby, i.e. no 50BP and we are done but just another 25BP with more hikes that may 'yet' come. The worst case scenario: 50 BP and no change in the statement. The market would literally collapse on that news as its worst fear would be taking shape, i.e. an Alan Greenspan repeat.
With Bernanke on the hot seat he is likely to punt, meaning the 25BP and 'stay the course' statement. The market won't like that as well. It will continue pummeling the NASDAQ and the small caps with their needed growth IV being shut off. It will likely push the indices into their next leg lower, and in a way, it is the selling that is needed to set some bottom for a rebound later in the summer. The market often takes three legs lower when it starts more serious corrections, and this is the worst correction of the post 2002 era. It needs to run its course, and the Fed may just oblige it Thursday. In short, no matter what the fed does, the odds are 3 to 1 it is going to do something that hurts stocks.
That does not mean all upside plays are dead. As noted above we see good bases in shipping, freight, some energy, financial markets, healthcare and medical, etc. As there is some bearishness re the Fed hurting the economy, there is money moving into some defensive areas that still have plenty of upside.
We are going to be looking at those as well as looking to the downside with some index plays and with the growth areas that rebounded some but are in a weak position still (just like the indices). It is definitely a time to take what the market is giving, and it is in a defensive mode with the Fed most likely to disappoint the market with its decision.
Support and Resistance
NASDAQ: Closed at 2111.84
Resistance:
The 18 day EMA at 2133
2158 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 2190
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 1246.00
Resistance:
The down trendline at 1249
The 18 day EMA at 1250.48
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:
1244 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 10,973.56
Resistance:
11,044 is the January high.
11,097 to 11,137 is the last peak from the February top.
The 50 day EMA at 11,096
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:
10,965 from Q4 2000
10,931 is the November 2005 high
The 200 day SMA at 10,903
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): -3.4M versus -1.4M expected and 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
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money investment
financial investment
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