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money investment, investment help
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7/12/06 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Target hit alerts: None issued
Buy alerts: ALJ; CTRP
Trailing stops: CTSH
Stop alerts: AKAM; CONR
SUMMARY:
- Geopolitical and economic slowdown concerns stifle Tuesday rebound attempt.
- Early earnings season starting to confirm bond yield curve.
- Oil inventories fall, refining capacity down, gasoline higher.
- NASDAQ heading for test of June lows as SP500 struggles to go its own way.
Tuesday reversal attempt dies from a lack of takers.
The market may have shown the right action Tuesday with the sell off on geopolitical worries and then a rising volume rebound, but Wednesday there was no one there to take the torch and continue the move. Israel and its neighbors are basically in open warfare, Iran is getting referred to the UN security council, oil inventories were well off pace, and the young earnings season is thus far a big goose egg, at least in the market's view.
Stocks started soft, nothing bad after a rebound to close positive Tuesday. That often leads to a rebound, and the Viagra started to kick in just before the oil inventories report. When that came in with inventories 4 times lower than expected, however, the market suffered premature rally-interruptus. Bids dried up and trade became limp. Within a half hour the morning losses doubled.
NASDAQ, however, managed to hold 2100 and set about forming an intraday base at that level. It bounced higher off that support just before lunch and held out the possibility of once again finding a floor and moving higher. That floor was inferior grade, and half way through lunch it gave way. NASDAQ fell through 2100 while SP500 and SP600 fell below the 200 day SMA.
Volume was lower on both NASDAQ and NYSE. No sellers swarmed the market, but buyers left the building as bids were pulled. With no one to pick up the torch from Tuesday stocks slid lower with no one willing to stick the neck out and buy. Breadth was -2:1 on NYSE and almost -3:1 on NASDAQ. Without the buyers stocks fell through support. Not a great response to a session that looked as if stocks had shaken out the near term sellers and were ready for a bounce.
The market action has once again turned many investors negative as the summertime chop continues. This is pretty typical action as summer works through and the market tries to find some footing among many geopolitical worries and some market-specific issues such as the bond curve and a potential earnings slowdown. Earnings have not been blowing anyone away, fostering the notion that the economic growth all the CEO's and pundits are so adamant about may not be so strong. Indeed, even with strong earnings reports the market is in the mood to sell first and then maybe buy after the initial downdraft. It will take a series of stronger reports and solid guidance to turn the tide. After this selling, at least the market is set up for some good news. Small comfort.
THE ECONOMY
Early earnings are showing weakness ahead in sync with the bond yield curve.
Wednesday BC, maker of boats and boat motors among other consumer products, lowered its guidance. After some warnings from MMM, LU, AMD and some weak guidance from early earnings announcers, the Brunswick warning was a more direct indication that the consumer is slowing some. The season is young, and while the DNA and AA earnings were likely treated rather unfairly in a market that is suddenly shooting from the hip, the results thus far are less than encouraging with respect to future economic growth. There is still growth, it is just not going to be as strong as thought. Bernanke has said something to that effect the past few months, but is certainly has been the footnote in most of the economic coverage.
We discussed the bond yield curve throughout the spring and early summer as it inverted and yields traded below the Fed Funds rate. Both of those typically signal economic slowing. Both Greenspan and Bernanke have said, and many have now parroted, that the yield curve is not as accurate an indicator anymore due to the large foreign buying in US Treasuries, action that works to keep yields lower. Problem is, neither Greenspan nor Bernanke is able to quantify the degree to which that purchasing tamps down yields.
More importantly, after the recovery of yields in June, the return to the inversion and yields substantially lower than the Fed Funds rate shows foreign purchases are not driving the inversion. Once more, it is the bond market placing bets on the economic future and the demand for money down the road. An a flat to modestly inverted curve as we have today (the 2 year bond at 5.17%, the 10 year bond at 5.10%) does not necessarily foretell recession, but it does predict economic growth well shy of 2%, and when you are coming off of 5% growth that hurts. Moreover, when the yields are below the Fed Funds rate it is telling you that money is simply not viewed as being in that much demand down the road.
Maybe the earnings guidance that comes out as earnings season really gets underway will blow the early warnings and reports out of the water and reaffirm strong growth ahead. The bond market is not forecasting this and indeed the inversion started anew well before the earnings warnings and reports started hitting. The inversion gap has widened since the earnings; 7BP is the high since the FOMC meeting that saw yields rise and the inversion fade as the meeting approached. Before that the inversion hit 17 to 20 BP; if it gets back to that level it will start getting more air time as if it just occurred. The inversion has been on the table to varying degrees since Q4 2005. It isn't new; it was simply ignored until earnings started to come in missing the current quarter and projecting tamer growth ahead.
What economic slowing? CEO's, pundits still economically bullish.
This flies in the face of a lot of bullish CEO's who are still on the financial stations talking about glowing times. Of course, they were pessimistic even as most early economic indicators showed a recovery in the works. That is the usual timetable: CEO's are not divorced from emotion and they tend to be pessimistic until business is where it was before the prior slowdown, and they are optimistic even as the indications are the expansion is slowing. In the 1970's and early 1980's a lot of oil huge buildings were constructed for oil companies only to sit empty or go uncompleted.
Indeed this week we have met with several companies in the technology sector, and they are sticking to the typical game plan you see every economic cycle. They were loathe to build supply at the start of a recovery, and now they cannot keep up with demand at the peak of the cycle. Thus they are building new plants and capacity all over the world. TXN is building another plant in India. Several companies are building new plants in the US in order to meet demand. Typically the plants are completed after the cycle has peaked, and that only goes to exacerbate the decline in earnings on top of a slowing expansion as that new capacity is throttled back or idled. Not only have they expended to build the plant, but they are not able to recoup the costs because they built at the peak and demand is not there anymore.
How slow a slowdown?
We specifically noted this to several of the corporate officers and they looked at us as if we had offered some strange new economic theory. We showed them the history of economic cycles, and while they agreed that the facts were the facts, they just did not see it the same right now as demand was so strong. Been there and heard that one before. Some went on to say they had no other choice, that they could not go to their bosses or shareholders and say they were not going to expand to meet current demand. They are compounding the problem: they should have built early in the recovery and then gained market share. Now they are building late and are not only going to miss building market share but also are likely to sit on excess capacity as the economy slows.
We are not saying the slowdown will be catastrophic; that in large part depends upon what the Fed does from here, whether oil shoots over $80/bbl on the new geopolitical tensions (a.k.a. war in the Middle East). In the back of many minds is whether things escalate to the point of being a catalyst for Iran to step in and really send things into a downward spiral. If this was not the fourth year of an economic expansion but the second or third year of a contraction, then this would likely be working to set up a turn higher in the markets and the economy. In a lengthy expansion this is not the kind of news that typically sparks significant new gains. It is harder for older expansions to weather high energy costs, etc.
Oil inventories fall but demand hangs in.
Oil inventories fell 4M bbl versus the 1.2M to 2M bbl decline anticipated. Gasoline fell 400K versus expectations of a 100K decline. The oil number of course got the headlines. Oil did not jump higher, but it had already moved to new unadjusted highs the past week as world tensions escalated. It is said that $20 of the cost of each barrel is speculation. That was the number someone calculated a few weeks back. If that is the case, then it is up to $25/bbl or so due to the recent rise related to world tensions. Of course, isn't there always a speculative amount in the price at any given time? As with option volatility, it goes up and down as events unfold and time goes by.
In any event, it is high and threatens to go higher if the Israel/Palestine conflict escalates. Iran is already on the verge of oil reprisals regarding its nuclear ambitions, and it is being accused of assisting the attacks against Israel. If it gets embroiled we could see oil over $80/bbl fairly quickly.
That won't help matters and it won't help gasoline. Over the past four weeks even with prices rising to $3/gallon nationally, consumption is up 1.7% ahead of the same period last year. Seems consumers are still buying gas despite its rise to $3/gallon. Unlike after the Gulf storms in 2005, price has gradually risen toward $3. That allows some adjustment of consumer psyches and thus the continued consumption. Gasoline chains are noting, however, that though consumers are still ponying up to buy the gasoline, sales of food and drinks have stalled since May. Those sales make up half of the profits of the 'food mart' gasoline format.
That suggests consumers are paying to drive and cutting other areas. That is precisely how higher energy prices work: consumers have to have a certain amount of gas to get to work, get the kids to school, get to the Piggly Wiggly, etc., but as that takes more out of the budget they cut back on the nonessentials such as, for example, that Starbucks coffee (and SBUX sales were at the low end of the projections this past month, dropping SBUX sharply). In short, as gasoline prices have risen slowly we might not see the sharp decline in gasoline demand, but we are seeing declines in other consumer 'discretionary' spending.
THE MARKET
MARKET SENTIMENT
VIX: 14.49; +1.35
VXN: 22.07; +1.89
VXO: 14.11; +1.35
Put/Call Ratio (CBOE): 1.34; +0.24. Continuing higher, posting the second close above 1.0 after spending a couple of weeks below that level as the market bottomed and bounced into the follow through session. The return of the selling has ratcheted up the downside speculation once more.
Bulls versus Bears:
Bulls: 38.7%. With the Thursday advance investment advisors turned more bullish, up from 37.4% and 35.6% the week before. After a decline from 53.2% at the April peak bulls are on the rise once more. On this pullback, however, they hit the lows for this rally, i.e. since 2003. That put it below the 42.3% hit on the last low and the May and October 2005 readings that preceded new upside runs.
Bears: 34.4%. After kissing bulls two weeks back the bears are on the decline this week, down from 36.3% the week before. Just missed crossing over with the bulls, but that in itself is not a bad indication for the upside. That prior week put Bears at a new post-2002 high, eclipsing 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: -38.62 points (-1.81%) to close at 2090.24
Volume: 1.862B (-9.91%). Volume backed back down to below average once more as NASDAQ turned down after the higher volume rebound Tuesday. It was short covering for sure, but Wednesday no buyers stepped up and the index simply faded and faded as bids were lowered and lowered in hopes of finding a bid. Didn't happen.
Up Volume: 374M (-885M)
Down Volume: 1.484B (+690M)
A/D and Hi/Lo: Decliners led 2.96 to 1. Pretty ugly downside movement, led by the large caps (NDX lost 2.06%).
Previous Session: Advancers led 1.31 to 1
New Highs: 49 (+1)
New Lows: 105 (-18)
The Chart: http://www.investmenthouse.com/cd/^ixic.html
NASDAQ held 2100 Tuesday and rebounded. It tried to hold 2100 Wednesday, and it was rebounding off that level midmorning before the entire market caved. It closed below that support and is looking to test the June closing low at 2072. The selling is not harsh; most of the downside has been a lack of buyers. Thus it has a chance of holding at that level and trying to set up a double bottom. Much depends upon earnings guidance in the next two weeks. If guidance completely repudiates the worries of a weaker economy ahead then there is a much better chance of a new base and a break higher. Right now that obviously has yet to occur.
SOX (-11.55 pts) could not even clear the 10 day EMA (429.31) after the Tuesday bounce, turning lower and giving back most of that move. Lower NASDAQ volume helps, but there was no attempt at continuing Tuesday's bounce up from the selling. Much depends upon what NASDAQ does at its June low as to how SOX responds from here.
SP500/NYSE
Stats: -13.92 points (-1.09%) to close at 1258.6
NYSE Volume: 1.479B (-5.9%). Lower and still below average volume as SP500 and SP600 broke their 200 day SMA. No new selling, just a lack of buying.
A/D and Hi/Lo: Decliners led 2.18 to 1. Not great at all but not nearly as bad as NASDAQ. Of course, there are just degrees of weakness, and comparing NASDAQ breath to SP500 is similar to comparing a 500 acre blaze to a 100 acre blaze.
Previous Session: Advancers led 1.68 to 1
New Highs: 64 (-3)
New Lows: 119 (+15)
The Chart: http://investmenthouse.com/cd/^gspc.html
SP500 broke below the 200 day SMA (1264), support that has held the past week as it eased back to try and form the right shoulder to a 7 week reverse head and shoulder attempt. The breach of the 200 day is not an automatic breakdown; it is a band of support, and a breach can correct itself quickly, particularly with lower volume such as seen Wednesday. Still holding above the May closing low (1256), but it is knocking on the door. It is at the point it has to hold now to keep the pattern and the attempt to hold the follow through intact.
SP600 (-1.7%) sold through its 200 day SMA (367.53) as well, matching the Tuesday intraday low on Wednesday's close. This also matches the late May intraday low that saw a furious rebound. Kind of a thin thread to hang on. As with SP500, the 200 day is a band of support and it can trade below and above it and still keep a trend in tact. How it responds tells the story of the institutions support the stocks in the index. Still trying to set up its pattern, but it is not making it any easier for itself.
DJ30
The blue chips fell through their support as well, undercutting both the 50 day and 18 day EMA (11,108 and 11,083). The move fell below the May lows that made up the left shoulder in its potential reverse head and shoulders base. Looks as if a test of the 200 day SMA (10,931) where the index held twice in late June is ahead.
Stats: -121.59 points (-1.09%) to close at 11013.18
Volume: 266M shares Wednesday versus 298M shares Tuesday. Stronger volume rebound Tuesday was washed away without a concern Wednesday. Lower volume as on the other indices, but just a lack of buyer interest.
The chart: http://www.investmenthouse.com/cd/^dji.html
THURSDAY
Jobless claims and the Treasury budget are the scheduled economic reports on tap, but they are ho-hummers compared to continuing earnings reports and warnings and the events unfolding in the Middle East. The attacks against Israel look very calculated and the Israeli responses are what you would expect. The result, however, is up in the air as to how far this is going to go. Israel's opponents (those in the fight thus far) cannot compete conventionally, so things might die down without escalating much further, i.e. a return to the usual bombings, etc.
During this time the market is finding a lack of buyers as all of these issues hit and investors digest and measure the impact on the economy. Basically they are in a holding pattern waiting to see what the consensus of the earnings guidance tell about the economic future versus say the bond curve. As noted, early results have been suspect, and thus the struggles in the market.
The indices have not sold hard, and they are lower heading into the bulk of earnings; that puts them in position to rebound near term if the earnings start supporting continued earnings growth ahead. It will take some doing to turn the tide, but again, the selling has not been harsh. It is summer, stocks had a good run in Q1, there is international intrigue, and most importantly, there are questions about the future growth what with high gasoline prices, the Fed raising rates still, etc. That is the typical stuff of a summer base building process.
A few good reports and the market gives an interim relief rally as part of the base building. There are still solid stocks holding up just fine, ignoring the selling. If the selling intensifies more and more of them will be taken down. Thus we tighten stops and be willing to sell out a position to avoid a big loss and come back later if it turns out to be nothing much. At the same time we accumulate, not with a sudden rush but some shares or a few option contracts at a time, those stocks that are in good shape and show us good moves. Still a lot of turmoil, but with no heavy volume selling and many solid stocks, we will take some positions as they show us they are strong.
Support and Resistance
NASDAQ: Closed at 2090.24
Resistance:
2100 from the early and mid-2005 peaks
The 18 day EMA at 2136
2162 to 2155 from December 2005 and September 2006
2167 is the August 2004/April 2005 up trendline.
2177 is the December 2004 high.
The 50 day EMA at 2176
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 2228
2234 is the early June high
2240 is closing low in February range.
Support:
2072 is the June closing low
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 1258.60
Resistance:
The 18 day EMA at 1262
The 200 day EMA at 1264
The 50 day SMA at 1270
1272 to 1268 is the November and December 2005 closing highs and March 2006 closing low
1280 is the recent July peak.
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:
1249 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 11,013.18
Resistance:
11,044 is the January high.
The 18 day EMA at 11,083
The 50 day EMA at 11,108
11,097 to 11,137 is the last peak from the February top.
The 50 day SMA at 11,158
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 10,931
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.
July 10
Wholesale inventories, May (8:30): 0.8% actual versus 0.5% expected, 1.3% prior (revised from 0.9%).
Consumer Credit, May (3:00): $4.4B actual versus $3.2B expected, $9.3B prior (revised from $10.6B)
July 12
Trade balance, May (8:30): -$63.8B actual versus -$65B expected, -$63.4B prior
Crude oil inventories (10:30): -6M bbl vs -1.8M bbl expected
July 13
Initial jobless claims (8:30): 320K expected, 313K prior
Treasury Budget, June (2:00): $20.0B expected, $22.9B prior
July 14
Retail sales, June (8:30): 0.4% expected, 0.1% prior
Retail sales ex-auto, June (8:30): 0.5% expected, 0.5% prior
Michigan sentiment, preliminary, July (9:45): 85.5 expected, 84.9 prior
Business inventories, May (10:00): 0.4% expected, 0.4% prior
End part 1 of 3
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