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investment help, financial investment
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7/17/06 Investment House Daily
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SUMMARY:
- World makes it through the weekend, but market needs more.
- Economic signals continue mixed. No surprise when an economy is slowing.
- 'Hot' economic data, a quick history lesson, and strange gold
- NYSE indices have made the test and looking around for a reason to rebound.
Market relieved no huge escalation over weekend, but not enough to initiate a bounce.
If Monday was the bounce from the selling, better plan on watching the Tour de France for your action this week. There was more violence in the Middle East over the weekend, but no upping the ante with respect to Syria or Iran, and thus some of the tensions waned. Indeed, the Iranian nuclear issue took on a bit better tone and that helped quell fears and particularly oil prices as crude lost $1.80 (76.91) on the 'improved' outlook.
The economic data was mixed once more with a weaker NY Empire State index but stronger production and capacity utilization. As noted over the weekend, no surprise given a weakening economy. Seems simple: when the economy slows you start seeing some reports turn down while others continue to progress. They do so at different rates, but when you see more and more reports falling you know the economy is facing headwinds. Yet we wring our hands and whine over what the Fed should do as if there was some big mystery out there. Good grief.
Investors were unmoved by the war or the economic data. They are looking at earnings guidance and what the CPI says about what the Fed will do. Citigroup failed to excite investors, at least in a positive way, as its earnings came up short and could be even worse than reported given your take on the way C calculated its profits (one method gives C a 5 cent miss versus the penny shortfall). McDonald's said June sales were up, but hitting the burger stand is not necessarily a sign of national economic health.
With no help on the earnings front the market just sat there all day. It was up and down, but always around the flat line. The shorts were not ready to move in again without some kind of upside bounce after the market butt-kicking last week, and the longs were not motivated by the earnings or the prospect of the CPI and Bernanke ahead. The selling pressure was off, but there were no bids to push any upside.
Technically the NYSE indices held at the June lows, keeping the potential for a double bottom in the realm of possibility. Volume was lower and breadth was modest (-1.4:1 NYSE, -1.7:1 NASD) as they sat on the June low. It is potentially a nice double bottom with 5 weeks between the legs. If it can form up and deliver the upside move, great. As noted over the weekend, it will take some better earnings guidance from a lot more companies. At this point, any company would be a positive. IBM and YHOO are out after the close Tuesday. IBM tends to purposely undershoot guidance while YHOO tends to do well but gets sold anyway. Maybe this time around with all of the negatives in the market and the world this will be what sends the market higher. Big maybe.
NASDAQ remains relatively ugly, having undercut the June lows last week and not giving the push lower it needed down toward 2000 to round out the selling and match the prior down legs. It did hold the October 2005 low once more, however, trying to set some stones for a bottom. Very iffy call at this juncture. With this most modest of rebound attempts, the market is telling us it needs something more clear cut in terms of earnings guidance and the Fed to have any assurance earnings are not going to suffer worse in this environment that now sports a hot war on top of all the other issues.
THE ECONOMY
New York Empire Index slows, production and capacity surge.
Once more the economic data comes in mixed, but the most current data of the day, the New York PMI that was much weaker than expected (15.6 versus 21.8 expected and 29.0 prior) was mostly overlooked in favor of June data regarding production and capacity utilization. Those jumped more than expected, and that gave everyone pause.
The market is caught in a nasty catch-22 at this point. Used to be good news was good news, then when the Fed started in bad news was good news. Now with the Fed close to done, bad news is kind of good as it further pushes the Fed to call off the dogs, but it is also bad because that means when the Fed is done we already have a slowing economy. As we know, it will take the Fed six months or so to finally get it figured that it went too far and needs to cut rates, so at best you see some cuts after the first of the year, too late to really help anything. That, at least, is how things worked under the Greenspan Fed, and thus far we see nothing to indicate a change under the Bernanke Fed.
Production rose 0.8%, doubling the 0.4% expected and far ahead of the -0.1% in May. Capacity hit 82.4%, the highest since June 2000 (82.6%). Mines jumped 1.2% and utilities 0.7%. When you can get $75 for a barrel of oil and $650 for an ounce of gold, you bet mines were busting their hump.
Too hot again? Only the weather my friend.
That prompted talk of a 'hot' economy that the Fed still needed to rein in. The only thing too hot right now is this heat wave. It was 100.8 in the shade here today, and this town rarely hits 100. It is not so much the heat, just the dad blamed humidity. Today it was both and there were worries of a national blackout given demand.
You have to look at this data in perspective. Everything in the economy basically lags, and it is up to our fearless leaders on the Fed to ascertain how much slowing is built up in the pipeline in order to gauge the actions needed. Recall in 2000 these figures were used to refer to a 'white hot' or 'red hot' economy and justified the rate hikes to that point, the last being a 50 BP hike that May. As we know, however, just because the data is 'hot' it does not mean it will stay that way. The Fed had already mortally wounded the economy and the market was already made a major move lower (NASDAQ fell from 5000 to 3165 by May). That was the second leg of a double bottom and it recovered into the summer only to get slaughtered after the return from Labor Day.
Thus 'hot' data when the Fed has 17 rate hikes under its belt does not mean squat. Everything shows strength until it peaks. Then the slide can be ugly as we saw in GDP. The market broke before that as well, something we have to note in this the strongest batch of selling since the October 2002 low. We have a Fed that is long in the tooth of its hiking, an economy showing mixed data, earnings that are thus far well below expectations, and a market that is in a real struggle to hang on. Even gold is acting quite If the NYSE indices do form a double bottom and bounce, that bounce will have to be closely watched to see what strength is really there. That is how critical the situation is economically and thus for the market as well. Too hot? Only the weather baby.
Gold is also a bit strange here, at least if you are looking at it as an inflation indicator. It has definitely moved up off of its June lows after it suffered the blow off top in May, pushed higher when the new Tough Fed backslid into the 'sensitive, thoughtful Fed.' Even with the advent of the war, however, gold did not explode higher. It made modest moves but had not gusto. It then tanked Monday. Failing to run higher on international tensions may be telling us the gold buyers feel inflation may just not be the issue it was earlier in the year. We have to watch it at this point, but the action is very curious.
THE MARKET
MARKET SENTIMENT
VIX: 18.64; +0.59. The VIX was the subject of some anchor chatter on the financial stations Monday as they discussed how the VIX was jumping. It has moved up, particularly lat Thursday, but it is still well below the 23 level hit just in June. For the amount of butt-kicking to end last week, the VIX was a major disappointment in its rather paltry move.
VXN: 24.52; -0.1
VXO: 17.57; -0.43
Put/Call Ratio (CBOE): 1.09; -0.14. Fourth day above 1.0 on the close. It takes quite a few of them to start a rebound from the selling.
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: +0.37 points (+0.02%) to close at 2037.72
Volume: 1.571B (-14.68%). Very low trade to start the week as the earnings have yet to hit and the war did not rampage out of control. No sellers ready to sell again, and no buyers ready to put in bids.
Up Volume: 795M (+197M)
Down Volume: 715M (-487M)
A/D and Hi/Lo: Decliners led 1.72 to 1. Lower but still significant given NASDAQ held steady.
Previous Session: Decliners led 2.13 to 1
New Highs: 29 (-6)
New Lows: 211 (-28). As one subscriber noted, there are fewer new lows even as NASDAQ moved past its June low as the large caps (NASDAQ 100) sold harder than overall NASDAQ. Fewer stocks hitting new lows even as the index does. That can indicate a distortion in the level of selling, i.e. that fewer stocks are really selling off hard and thus indicating more of a sold out condition for at least a bounce. Very good catch.
The Chart: http://www.investmenthouse.com/cd/^ixic.html
NASDAQ sold lower again, but held within the Friday low. Indeed, it held within the Friday high. That is an inside day and is shows damn little about direction. If anything, in this situation it is more of a negative as it tends to indicate simply a continuation of the trend. NASDAQ certainly is not showing anything that would change the trend right now other than a harsh sell off and a slower session Monday. It may try to glob onto the NYSE indices and their attempt to move higher.
SOX (-0.55%) was no picture of strength either, but for the second session it has given up little ground as it sits on top of the bottom channel line in its trend lower from May. In short, it is ready to rebound to at least test the top of the channel, most likely the 18 day EMA (428) at the minimum.
SP500/NYSE
Stats: -1.71 points (-0.14%) to close at 1234.49
NYSE Volume: 1.479B (-13.87%). Volume fell to below average after above average trade Thursday and Friday. Good to see trade back down as the NYSE indices test toward the June lows. There is such a thing as a soft bottom, i.e. where there is no cathartic sell off, just a quiet capitulation. There are possibilities here, but just possibilities at this stage.
A/D and Hi/Lo: Decliners led 1.38 to 1. Very modest.
Previous Session: Decliners led 2.07 to 1
New Highs: 24 (0)
New Lows: 162 (-58)
The Chart: http://investmenthouse.com/cd/^gspc.html
The large caps held above the June low once more (1223 closing), showing a loose doji that again tested 1230 on the low and then recouped some losses. After two high volume selling sessions a modest trade decline. As with NASDAQ it was an inside day, but the hold above the June lows remains key at this stage for any kind of reversal of the selling. This has been a 'scare them out' move, i.e. one where the market action and external events have teamed up to drive investors crazy. Thus the up and down action that sets up the double bottom in the index as well as in many stocks we are looking at. Right now it has the potential to set up a double bottom and recover some of the losses from May. If it does, great. After that the concern is how far it can go. That will tell us just what the economy is going to do down the road with the rate hikes and high energy prices.
SP600 (-0.86%) was the worst market performer. It made no bones about heading lower for the fourth consecutive session in the July sell off. Small caps are being abandoned in the fear in favor of larger caps because the latter tends to pay dividends, part of the 'safe haven' status. It did not help that a lot of smaller energy companies reside on SP600, and with energy lower the index was under pressure from that as well. Closed right at the June closing low (352.77). This is where it needs to hold if it is going to keep the double bottom chances intact. It is not a precise science; holding in this sense means holding in this general vicinity.
DJ30
The Dow posted a modest gain on lower volume, tapping toward the June lows (10,706) intraday and rebounding for that gain. Very much the look of an attempted double bottom as with SP500. It is coming to the lick log over the next several sessions to show if it has what it takes to deliver.
Stats: +8.01 points (+0.07%) to close at 10747.36
Volume: 251M shares Monday versus 312M shares Friday. After some higher volume selling to end last week the Dow took a breather on lighter trade. Had to hold here and it did, but there were no upside takers either.
The chart: http://www.investmenthouse.com/cd/^dji.html
TUESDAY
The PPI is out ahead of the open, and it often impacts the market, but usually just a hors d'oeuvre for the CPI that is out Wednesday. Bernanke is also on deck Wednesday as well, addressing Congress with the state of monetary policy.
Before that, however, earnings are the rule with IBM and YHOO the big names out after the close Tuesday. It is going to take some better earnings guidance and more of an idea that the Fed is done to rescue the market. It is primed to bounce and we believe the earnings are going to start coming in better than the initial results have led most to believe. It is rarely the case that earnings projections start to turn down before the economy really heads lower. Why? Because corporations are always too pessimistic at the bottom and too optimistic at the top. Sarbanes-Oxley may change that some, but it won't be a watershed movement.
Thus we are expecting earnings guidance to pick up and help take a beleaguered market higher. If the CPI comes in tame that may be just what the market needs to put in a more sustained move and help the NYSE indices better set up their double bottom base attempts. The big news re the war is waning, negative warnings typically outpace anything positive 2:1, and the market is really oversold. It is primed for a bounce if it can just get a foot in the door.
After that is another story. There remain many parallels to 2000 though on a smaller scale. After screaming to 5000 on NASDAQ, however, anything is on a smaller scale. In any event, a rebound here is a start. After that a completed double bottom and breakout is better. Even then, however, we have to keep an eye on the economic front to see if the Fed went too far. In 2000 a nice rebound was ultimately scrubbed due to a continuing collapse in the economy ahead. ECRI is still showing just slowing and nothing akin to a recession. With its inflation indicator, at least for the US, peaking last October, if the Fed gets off the brake the economy has a chance to continue on without a major slowdown or worse (the 'R' word).
Could we be that fortunate? Typically not with the Fed. That is why we are taking it a step at a time here, starting with an oversold bounce. Given the selling, it is hard to initiate a lot of new downside positions (though there are still some good looking ones out there even tonight) until this oversold bounce runs its course and we can get a pulse on the strength of the move. We continue to see upside taking shape though the flavor is still defensive. We will look that way primarily for now.
Support and Resistance
NASDAQ: Closed at 2037.72
Resistance:
2045-47 from June and October 2005 lows and June 2004 highs
2050 from the summer 2005 lateral range lows.
2072 is the June closing low
The 10 day at 2090
2100 from the early and mid-2005 peaks
The 50 day EMA at 2161
2171 is the August 2004/April 2005 up trendline.
2177 is the December 2004 high.
2185 to 2182 is the September 2005 peak and interim high from November 2005.
2190 is the July 2006 high
Support:
2037 at the October 2005 closing low
2019 is the April 2005 interim high
2008 is the January 2005 low
1971 from an October 2005 peak and 1973 from a March 2005 low.
S&P 500: Closed at 1234.49
Resistance:
1239 from the late June consolidation range.
1249 is an old trendline from the August 2003/August 2004/October 2005 lows.
The 18 day EMA at 1255
The 200 day EMA at 1264
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:
1225 from the March 2005 high
1213 from December 2004 high to 1215
1205 from the August lows
Dow: Closed at 10,747.36
Resistance:
10,890 is the December 2005 closing high.
10,931 is the November 2005 high
The 200 day SMA at 10,936
10,965 from Q4 2000
The 18 day EMA at 10,995
11,044 is the January high.
The 50 day EMA at 11,071
11,097 to 11,137 is the last peak from the February top.
The 50 day SMA at 11,120
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 17
New York Empire State Index, July (8:30): 15.6 actual versus 21.8 expected, 29.0 prior
Capacity Utilization, June (9:15): 82.4% actual versus 81.9% expected, 81.8% prior (revised from 81.7%)
Industrial production, June (9:15): 0.8% actual versus 0.4% expected, -0.1% prior
July 18
PPI, June (8:30): 0.3% expected, 0.2% prior
Core PPI, June (8:30): 0.2% expected, 0.3% prior
Net foreign purchases, May: $46.7B prior
July 19
CPI, June (8:30): 0.2% expected, 0.4% prior
Core CPI, June (8:30): 0.2% expected, 0.3% prior
Housing starts, June (8:30): 1.900M expected, 1.957M prior
Building permits, June (8:30): 1.920M expected, 1.946M prior
Bernanke testimony to Congress
Crude oil inventories (10:30): -5.985M prior
July 20
Initial jobless claims (8:30): 332K prior
Leading Economic Indicators, Jun (10:00): 0.2% expected, -0.6% prior
Philly Fed, July (12:00): 12.0 expected, 13.1 prior
FOMC minutes, June 29 (2:00)
End part 1 of 3
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