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world stock market, us stock market
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7/13/06 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Target hit alerts: None issued
Buy alerts: FIZ
Trailing stops: ABI; CTRP; JCOM; FWRD; ININ
Stop alerts: LIFC
SUMMARY:
- Midday bounce attempt starts but world events scuttle it.
- Oil threatening all-time high in inflation adjusted dollars as gasoline spikes to post-Katrina highs
- Long rate hiking campaigns always leave market vulnerable to the unexpected.
- World events help push weak market into third leg lower. After initial concern re war wears off can market will attempt another rebound
Stocks try to rebound again but once more world events stymie the move.
Investors received no good news Thursday morning after world events stalled the Tuesday reversal and pushed stocks lower Wednesday. Explosions involving Nigerian pipelines added more pressure and price to oil. WMT was downgraded on dubious grounds, i.e. high oil and gasoline prices will slow the low end consumer. Yes, but as the past recessions have shown us, the discounters flourish in downturns because everyone goes there. WMT and COST also sell gas cheaper, and when it spikes, the lines are longer at the discounters. The specialty and mid-level retailers are the ones that will get hurt; the discounters will enjoy stronger market share.
Nonetheless, that was talk on the financial stations though not the trading floor. In addition there were other signs of trouble in the coming months. PII (snowmobiles, four-wheelers, personal watercraft) guided sharply lower for Q3. SAP, one of Europe's largest software companies, said sales were far softer than expected. On top of the sparking war in the Middle East this news was enough to continue stocks to the downside.
SP500 sold to the 2003/2004/2005 up trendline but held. After working to put in a floor at that level for over an hour stocks started to gel. SOX, the whipping boy of the decline that started in May, firmed and turned positive at lunch. NASDAQ fought back to flat. It had, once again, all the signs of a turn in the making, at least the rebound that we have been looking for. It was promising.
Then missiles started to fall inside Israel further than they ever have, Israel responded by bombing the Beirut airport and the main highway from Syria. The market responded by scuttling the rebound attempt and diving to session lows on rising volume.
Technically the market was ready to bounce but it could not overcome another dose of war in one of the world's main oil regions. SP500 held the trendline at first, but after the intensified hostilities that gave way. Volume jumped above average on both NASDAQ and NYSE. NASD made a new low in this correction. Breadth swelled to the downside. Strong stocks broke lower. Energy was stronger and weaker; a mixed response with spiking prices shows the market's confusion. Basically it was about as bad as it gets.
This was the start of the third leg lower, and if a market is going to recover, three downside moves are usually all there is. Bottoms are also born out of hopelessness, and there is a lot of that right now with all of the issues confronting the market. NASDAQ can put together a double bottom with this test and undercut of the June low. That is extremely sketchy at this juncture and we just have to see how it plays out.
What we do know is that the market started that next leg lower and thus far it has the look of pricing in slower economic activity ahead. Certainly earnings are not changing that proposition, and combined with the Fed still hiking rates, spiking energy prices, a mature expansion, an inverted yield curve, and now an open war, an expectation of slowing economic activity is nothing extraordinary. The vigor of the Thursday selling is likely an overreaction to the news; market moves typically are. The move downside was clear, however, and now the market has to work out another downside move and set up for another attempt higher. As noted, NASDAQ can form a double bottom as it tests some support at 2050. Again, that remains to take shape as this down leg plays itself out.
THE ECONOMY
Oil and gasoline futures jump as war heightens worries over supply.
Oil rose $2.18 to 78.24, a new all-time high in current dollars. Inflation adjusted, oil is still below the 1984 levels at $82.50. Gee, some consolation. Explosions in Nigeria and the Middle East war have pushed prices even higher, adding to that $20/bbl speculative portion of price. Let's see, by now that puts the speculative portion near $30/bbl if you believe that study. Gasoline futures rose to $2.30/gallon, the highest since they spiked up after Katrina. That means gasoline prices, already pushing $3/gallon nationally, are going to move through that level. We said it would take some external issue, and this looks to be it.
Thus far the slower climb back to $3/gallon has allowed consumers to adjust to the sticker shock as opposed to a jump from $2.50 to $3.00 overnight. There is going to be a jump higher over the next few days given the increase in futures, and this will be a test of just how strong the consumer psyche is. A slow climb back to highs and now a spike higher on top of that. Uncertainty will quell some demand near term, and after that we will see just how resilient the consumer is at these levels and with the world tensions.
Fed is not totally to blame, but its methodology continually leaves us vulnerable.
The 'go slow' approach to rate hikes is always applauded by the pundits, likely because they cannot think of or don't want to contemplate other methods. The theory is if the Fed goes slow it will be able to see the ramifications of its actions and react accordingly, thus avoiding any gross misreads that send the economy packing.
Does that really happen though? There is an admitted lag in monetary policy moves, and as we see even on this round of hikes, the Fed is often in the dark as to just where it stands with respect to the impact of its actions. Even if the Fed feels rates are 100 or 200 basis points too low, it starts off with 25BP hikes, dribbling them out every six weeks as we play the game of water torture. Some game.
This can go on for extended periods. The current cycle has seen 17 hikes spanning almost 2 years. This might be fine if the Fed and the economy acted in a vacuum. The Fed could plod along raising rates until it hit nirvana and then stop. Problem is there are not any vacuums outside of the lab or space. What always, always, always happens is that world events step in and work havoc on the economy. In times past it has been energy spikes, election contests, scandal, geopolitical crises (Russian currency crisis, etc.); when you drag out the period you are toying with the economy, basing your actions on a stable world, you are playing with fire. The Fed often leaves us burned as a result.
With rate hikes hanging out there still to hit, the uncertainty escalates just as it is now. How can you quantify spiking energy prices, huge storms, corporate scandal (again with the options issues), nukes in a rogue state's hands, and new war in a major oil producing region? It is damn hard to do, and with the extended rate hike campaigns it is extremely difficult. Certainly the Fed was not anticipating war, nuclear tensions, scandal, etc. when it started. The bond curve and the stock market are good indicators. The bond curve is inverted and rates are falling, both indicating slowing ahead. The market is pricing in slower earnings growth, helped by the thus far unexpectedly slower earnings and guidance.
The answer is to get it over with faster. The Fed goes in with an idea where rates need to be. It can let everyone know what that level is, and then in a few larger and relatively quick hikes get rates in that ballpark, then stop and see what happens. The lingering effects are still out there, but that cannot be helped. What you do is close the window of potential disaster from outside sources when you get the hikes over and done with.
THE MARKET
MARKET SENTIMENT
VIX: 17.79; +3.3. Sharp jump off the 200 day SMA, leaving VIX 6 points below its mid-June high. This could ratchet up quite quickly with the concern in the world. We noted in June that a move into the forties would be best, and you would be surprised how quickly it can hit that level from here if tensions remain high.
VXN: 24.66; +2.59
VXO: 17.92; +3.81
Put/Call Ratio (CBOE): 1.13; -0.21. Third session above 1.0 on the close. This indicates the downside anticipation is getting a bit overdone.
Bulls versus Bears:
Bulls: 42.2%. Big spike higher from 38.7% the week before, but that is going to get washed away after the results from the current week. Even at this level we note it is below the levels hit on the last market sell offs. On the last pullback bulls 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: 33.3%, down from 34.4%. Lower, meaning fewer bears. As with bulls, that will likely change after this week. Kissed the bulls three weeks back, just missing crossing over with the bulls, but that in itself is not a bad indication for the upside. Two weeks back Bears hit 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: -36.12 points (-1.73%) to close at 2054.11
Volume: 2.098B (+12.71%). Volume cracked above average for the first time since NASDAQ posted the follow through session two weeks back. That rally, however, is over as NASDAQ undercut the lows in this correction. The selling volume was low again until the new attacks. That sent it spiking. At this point more selling was panic related, and it could sell itself out. Of course there is not a lot of evidence of that other than the midday bounce that looked to be turning the tide before more fighting started.
Up Volume: 264M (-110M)
Down Volume: 1.819B (+335M)
A/D and Hi/Lo: Decliners led 4.04 to 1. That's a little harsh. At this stage you like to start seeing extremes and this is getting there.
Previous Session: Decliners led 2.96 to 1
New Highs: 35 (-14)
New Lows: 211 (+106). Over 400 would be a start at an extreme.
The Chart: http://www.investmenthouse.com/cd/^ixic.html
NASDAQ gapped lower but tried to recover, returning to flat and looking ready to set a second bottom in a potential double bottom base. Then the new reports of shelling in Israel and the Israeli response sent the market lower. Markets hate violence because it is uncertain in outcome. NASDAQ was hating it Thursday just as it did Wednesday. The index is approaching some support at 2050 from a six week trading range in the summer of 2005 and a test of that level in October 2005. If it can hold at that point it would be an interesting development as NASDAQ would have the underpinnings for a classic double bottom where the right leg slightly undercuts the left. It is at the point it has to make that move, however.
SOX (-1.43%) was actually positive at lunch (up 6 points), leading the move back up after just getting hammered the past three months. That move was cut short by the war escalation and SOX turned back down in its downtrend, hitting a new low in this sell off. We noted this week that SOX was getting sold out on this move lower and ready to bounce. It is still sold out and is still ready to bounce. We won't be surprised if it starts back up in the next few sessions.
SP500/NYSE
Stats: -16.31 points (-1.3%) to close at 1242.29
NYSE Volume: 1.779B (+20.27%). Volume moved above average for the first time in July and it surged late as the NYSE indices gave up the rebound scratched out through lunch. Sell first, ask questions later. The large caps, small caps and mid-caps were all taking their licks.
A/D and Hi/Lo: Decliners led 3.15 to 1. Strong but not enough to really show the baby was thrown out the window as well.
Previous Session: Decliners led 2.18 to 1
New Highs: 33 (-31)
New Lows: 182 (+63). Not nearly strong enough, but on the other hand, NYSE has held up better.
The Chart: http://investmenthouse.com/cd/^gspc.html
The large caps held the 2003 to 2005 up trendline in the morning, bouncing off of that support and heading higher. It ran into the same news wall and the was gutted, closing well below the trendline and at the closing lows of the late June consolidation (1240). Some support there that also coincides with the August and September 2005 interim peaks. Not a bad point for SP500 to try and make a stand, but it is likely to undercut the level a bit first.
SP600 (-1.93%) took a major beating as the more speculative smaller cap issues were sold off a bit more than the big names. Just a bit more. It continued its move below the 200 day SMA (367.59), knifing lower to the late June lows on the close (358ish). Not likely to find much love there, and 352 to 350 (June and December 2005 lows; September and October 2005 interim highs) looks to be much stronger support.
DJ30
The blue chips joined the other indices in obliterating its 200 day SMA (10,933) on rising, above average volume. It is heading for a test of the June low (10,706) that also coincides with other support and lows from December 2005 and February 2006.
Stats: -166.89 points (-1.52%) to close at 10846.29
Volume: 328M shares Thursday versus 266M shares Wednesday. This time there was selling as opposed to lack of buyer interest, but the volume still did not spike to anything noteworthy.
The chart: http://www.investmenthouse.com/cd/^dji.html
FRIDAY
The end of the week, and with so much international intrigue buyers are not likely to come back in with any vigor. What we will likely see is another open lower and then some short covering after a harsh sell off Wednesday and Thursday. That will bring the indices back some, and that is all part of a rather typical pattern when a major break of support is made.
We will look for that rebound and see just what it has in it. Not just Friday, but on into next week because we saw SOX ready to rebound after an extended sell off; it took more news form the Middle East to quell the move, but once that news is absorbed, SOX will be ready to bounce again. With so much downside built in you can only hold it down so long before it pops. That is why relief moves in downtrends are pretty sharp as the steam is let off.
Thus we will look for some more downside early and then a rebound as shorts cover and everyone moves to get square or hedged ahead of the weekend. We want to see the potential patterns set up a bit better, i.e. see DJ30 and SP500 test the prior lows; that would be the next step in establishing a nearer term bottom. It still might be early for a real bottom to take root, but we are at mid-July and we can get a hell of a bounce here even if it gives way for another test in September and October.
Gold was not doing much on a day it should have surged. Maybe some downside is there for us to take. We also see many energy stocks still looking nice; the tape on energy was mixed, but with prices still high and the patterns we see they should be moving higher. Time to pick and choose, moving in steadily but not putting in all the eggs at once, keeping those positions that hold support, letting some that are waffling try to rebound given all of the downside pressure. Again, the corks will pop up some after this kind of selling, and we can use that at least to get better exit points on plays that are not performing.
Support and Resistance
NASDAQ: Closed at 2054.11
Resistance:
2063 is modest, soft support
2072 is the June closing low
2100 from the early and mid-2005 peaks
The 18 day EMA at 2127
2162 to 2155 from December 2005 and September 2006
2169 is the August 2004/April 2005 up trendline.
2177 is the December 2004 high.
The 50 day EMA at 2171
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:
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 1242.29
Resistance:
1249 is an old trendline from the August 2003/August 2004/October 2005 lows.
The 18 day EMA at 1260
The 200 day EMA at 1264
The 50 day SMA at 1269
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:
1239 from the late June consolidation range.
1225 from the March 2005 high
1213 from December 2004 high to 1215
1205 from the August lows
Dow: Closed at 10,846.29
Resistance:
10,890 is the December 2005 closing high.
10,931 is the November 2005 high
The 200 day SMA at 10,933
10,965 from Q4 2000
11,044 is the January high.
The 18 day EMA at 11,058
The 50 day EMA at 11,098
11,097 to 11,137 is the last peak from the February top.
The 50 day SMA at 11,147
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, 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): 332K actual versus 320K expected, 313K prior
Treasury Budget, June (2:00): $20.5B actual versus $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): 0.3% 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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world stock market
us stock market
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