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money investment, investment help
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7/18/06 Investment House Daily
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SUMMARY:
- Up, down, and back up as shorts decide to cover ahead of CPI, earnings, Bernanke.
- PPI hot on energy, core tame, but CPI has all the attention.
- Chinese GDP scorching, gold still melting.
- YHOO threatens techs as market has set up for a rebound in the face of some serious reports.
Another sell off, another rebound on volume, but will the June lows make a difference?
Pre-market the overall PPI was hotter than expected (0.5%), but the core was in line (0.2%) and lower than May, and after an initial jolt investors seemed to view that as positive. Futures move higher, and on the open stocks did as well. It did not hurt that UTX, KO and MER reported stronger than expected earnings, also contributing to the early upside bias.
Stocks opened higher, but as has been the case of late, early bounces are selling targets. Sellers were waiting for a bounce higher to sell into, and Monday was a disappointment. The early bounce Tuesday that put NASDAQ up 14 points was a prime target and the sellers moved in, sending NASDAQ down 28 points by midmorning. The other indices were not immune with SP500 and friends selling down to the June lows after a midmorning bounce rolled over and sent the market to new session lows.
With the CPI in the morning and the fact that the core PPI was in line and rather tame and some big name earnings after the close, shorts stepped in to cover some after another pretty harsh decline. It did not hurt that oil reversed intraday from being up more than $1 to down near $1.75/bbl. That combination pushed stocks higher into the close, turning all indices other than SOX positive. Seems no one wants to get caught out on the other side of the fence given all of the volatility in the market.
Technically it was a decent reversal session as the NYSE indices reached down to the June lows and then rebounded on a strong shot of rising volume. Nice reach to shakeout, solid volume to send it back up as the buyers moved in. Always good when they hold support and rebound to positive as well.
We have seen this before, most recently last Tuesday. The NYSE indices reached lower through the 200 day SMA and rebounded positive on volume. Then they imploded in the three day selling binge. Thus there are no guarantees on these reversals. This time there is a bit of a difference, however. First, the indices tested the June bottom and used it as support to rebound. Second, volume was much stronger, moving back above average (it could not scratch average the prior attempt). Third, the market is way oversold here after getting the crap beat out of it on the Middle East war selling.
Of course much of the move was short covering: a new low on the selling often triggers covering, and the rising volume and narrow breadth are pretty classic signals of a short covering move. The financial stations like to imply it is buying from the long term players, but when you have a blood letting like the one last week and this kind of rebound, it is short covering. That is nothing bad; as we always say, rallies from selling start with short covering. The trick is whether the longer term buyers do come back in after the initial surge from covering starts to wane. Typically the shorts will send the market higher for a few sessions and then it runs out of steam. It fades some on light selling, and then we see if the longer term buyers take over or just keep the bids at bay and allow the shorts to take it back down.
The NYSE indices have a shot at a double bottom here, but there is a long run up to 1280 on SP500 to just get to the 'hump' in the pattern. Once there then the test and we see if those longs come in or stay away. Back in May we set something of an outline as to how a recovery would try to work, and this second low, the recovery from that low, and then the test of that to see if the longs come in will take you basically to the end of July or early August. Still a bit early to set a bottom, but it is closer to the more 'traditional' sell offs in the market through the summer that wind to a close in Q3.
As for NASDAQ and SOX, they remain relatively ugly, but they did post their own rebounds on volume as well. Both sold sharply and both recovered with SOX closing right on its lower channel line in the downtrend. They are oversold and set to rally, but they have been that way for a few sessions. They need a trigger, but YHOO did not provide it with its earnings after the close. NASDAQ will have to emerge from the ash of disappointment if it is going to put together a rally from here.
THE ECONOMY
PPI jumps on energy and food, core at a more palatable level.
Overall prices rose 0.5% for June, pushing the year over year rate of ascent to 4.9%. For some perspective, the 15 year high was in September 2005 at 6.9%. Of course that was after Katrina and Rita. The reading was higher than expectations. Energy rose 0.7% but the unexpected gain was in food that saw a 1.4% rise versus the 0.5% decline in May. Volatile weather is the main culprit with massive rains and withering heat. The ethanol rush has pushed prices up as well. No matter how you slice it, a 5%ish gain in prices in a year is hard to swallow, particularly when you can't just say 'oh its oil going higher.'
The core was in line at 0.2%, and that put it at 1.9% year over year. Some perspective here as well. The high in the past 10 years was July 2005 at 2.8%.
More perspective you ask? Well, if those were so damn high, they sure have not 'passed through' to the core PPI or the CPI, at least not in any significant amount. Indeed, the upside pressure has faded in the intervening months, further lessening the threat of a pass through. Golly, you think ECRI could be right in saying US inflation peaked in October 2005? The data coming in months after the prediction are proving it to be true.
Nonetheless, everyone is going to be foaming about the CPI on Wednesday. Keep these points in mind to give it perspective. It hit a 14 year high in September 2005 at 4.7%. It is expected to show a 4.3% year/year gain, matching October of 2005. Core is expected to run 0.2%, pushing the year over year gain to 2.6%, matching February 2002. Currently it stands at 2.4%, matching the February 2005 high. The key to CPI is whether there is actual gains in prices or if it is the government adjustment for 'equivalent rents.' Recall how the government starts factoring rises in rents when the housing market slows. It is a fiction, and sometimes it skews the numbers, making them look stronger than they are.
It all remains to be seen at this point. Of course the market will view an inline or hotter number negatively because it implies the Fed will continue raising rates. Of course inflation lags, and Bernanke is well aware of the Fed's dual mandate; it isn't just about inflation. Problem is, the market just thinks about inflation, and there is still inflation rising in the rest of the world because other central banks have let the US do the work, at least up to now. Japan did finally raise rates 25BP last week. Much rejoicing. Yea.
China GDP surges again. Gold is melting again.
China scorched the world economy with an 11.3% growth rate. That means it sucks up more oil, materials, etc. Indeed, I watched a program the other night about a suspension bridge built across the Yangtze River. The materials that went into that bridge were just astonishing. That was just the tease. China plans to build 50 (fifty) bridges across the river. You have to wonder if there is enough steel and cement on the planet to satisfy that demand.
Even with that growth story, however, gold has tanked once more, dropping sharply Tuesday ($22) after a steep $16 drop Monday. That left gold at 629.50. That is not at rock bottom prices, but it stalled out on its attempt to recapture $730 and is backtracking again. Gold is falling even as fears of inflation are still present and the world saw the start of a new war in a major oil producing region. Gold flat-lined through it and then went down. Curiouser and curiouser, as some say.
It suggests that inflation is not the screaming issue many make it out to be. Inflation lags; markets lead. Gold has not fallen off a table, but events suggest it should be rising. It is not. Other leading indicators suggest inflation has peaked here in the US. The economic data is mixed. The Fed should not hike rates and lower money supply just because the rest of the world is not doing its job. Inflation here is coming under control. The Fed should sell some more treasuries to get rid of the remaining excess liquidity, leave rates where they are, and take a summer break. It is too hot to be contemplating more rate moves. Too easy to go crazy from the heat.
THE MARKET
MARKET SENTIMENT
VIX: 17.74; -0.9. Rallied to 19.58 on the high, still well off of the June high at 23. Did not spike as high as you would expect given the world events.
VXN: 23.89; -0.63
VXO: 17.24; -0.33
Put/Call Ratio (CBOE): 1.13; +0.04. Sixth day above 1.0.
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: +5.5 points (+0.27%) to close at 2043.22
Volume: 2.082B (+32.53%). Volume jumped back above average as NASDAQ tested low and rebounded to a gain. Showed the right volume for a reversal.
Up Volume: 1.189B (+394M)
Down Volume: 851M (+136M)
A/D and Hi/Lo: Advancers led 1.12 to 1. The rebound brought it back to positive but just barely. Characteristic of short covering, particularly after the harsh sell off.
Previous Session: Decliners led 1.72 to 1
New Highs: 28 (-1)
New Lows: 251 (+40)
The Chart: http://www.investmenthouse.com/cd/^ixic.html
NASDAQ continued to plow lower, undercutting the October 2005 low intraday (2013). It shed 30 points from the morning pop to mid morning low, and then another 10 points from that low after lunch. That took it within a whisper of the 2000 level we talked about last week, and close to the 200 point drop of the other legs (177 points). That was enough, and then it joined the rest of the market in a short covering rebound that closed it positive. Volume reached above average, almost matching the Thursday selling volume. Good reversal that sets up an oversold bounce. Problem is, it is in such a hole it has incredible amounts of work to do. YHOO won't help it out though IBM will help other parts of tech.
SOX (-0.38%). Big rip lower to 395and then a furious rebound, just missing positive, but holding the bottom channel of its downtrend. This kind of reversal typically signals a rebound is ready to test the top of the downtrend channel. The 18 day EMA is up at 425, and that is where you would expect it to hit fairly easily. It is time for a bigger test higher, but much of that depends upon the NYSE indices and how the tech earnings pan out. So, looking for a technical bounce to the 18 day EMA, and then we see from there what strength remains.
SP500/NYSE
Stats: +2.37 points (+0.19%) to close at 1236.86
NYSE Volume: 1.723B (+16.5%). Volume returned to above average as well for the first time since last week's selling. Big reach lower toward the June low and then a rebound to positive. Short covering of course, but this is the kind of action you want to see at the prior low when looking for a double bottom to try and form.
A/D and Hi/Lo: Advancers led 1.17 to 1. Also reversed from negative, but also indicative of some short covering.
Previous Session: Decliners led 1.38 to 1
New Highs: 29 (+5)
New Lows: 200 (+38)
The Chart: http://investmenthouse.com/cd/^gspc.html
Rallied early as did NASDAQ but that gassed out and it took a 15 point swing intraday that tested toward the June low (1223 closing, 1225 intraday Tuesday) to set the rebound for the session. It was exactly where you want to see a market turn. The volume was back above average. The index finished positive. Damn. That sounds like something you cannot ignore. Despite the time of the year, the turmoil, the iffy earnings future, SP500 is trying to set up a double bottom and is showing all of the right attributes. It won't break out from this pattern until it clears 1280, but it is likely set for a pretty serious rebound here to get it much closer to that level than not. The 200 day SMA is at 1264, a good first target on a much needed oversold bounce (at least that is the way we have to look at it for now).
SP600 (+0.41%) was a dog early on, just as it was a dog Monday when at least the other NYSE indices showed a bit of life. Tuesday it undercut the June low (352.77 closing) and then rebounded for a positive close. As with SP500 it has set up the foundation for a double bottom and at least a rebound here toward the 200 day SMA (367.70).
DJ30
Similar to the other NYSE indices the Dow slightly undercut the June low (10,706; 10,683 Tuesday low) and then rebounded for the best gain of the session. IBM will help tomorrow if it can hold its after hours gain after the guidance. The 200 day SMA (10,937) is much closer for the Dow than the SP500 or the small caps, but DJ30 will likely move through that on more closer to the 50 day EMA (11,060) on a rebound attempt here.
Stats: +51.87 points (+0.48%) to close at 10799.23
Volume: 288M shares Tuesday versus 251M shares Monday. Volume was up, but nowhere near the level of the Wednesday and Thursday selling trade. That was even with strong trade from KO and UTX after their earnings and IBM ahead of its after hours report. Decent trade; at least it was up on the session and the gain.
The chart: http://www.investmenthouse.com/cd/^dji.html
WEDNESDAY
CPI is out before the open, Bernanke goes to Washington a half hour into the session, and oil inventories are out at 10:30ET. Plenty to keep the market occupied. Oh yes; earnings are out as well. After hours IBM rose on some decent earnings while YHOO was pistol whipped after hours when its costs per click were higher than expected. Its earnings were in line, its net revenues beat, but that gross revenue versus net revenue is what did it in. It was down $5 after hours. IBM was up $2 but finished late up just $1.
Unless there are a lot of other earnings that blow away the street, this is going to continue the overall disappointment with results thus far. Then there is the inflation and Fed overlay to those earnings. As usual, when the market has dug itself into a hole, getting out of it is very difficult. After the negativity, things have to merge to put together the expectation of a rising in future earnings. Right now that is a tough prediction to make.
In other words, it is often said that the market finds bottom when things look the bleakest. Usually the worst news hits and things seem the most hopeless when a long market and economic decline have held sway. The market can bottom because it sniffs out change in the economy that is going to lead to a recovery in earnings and earnings growth. Right now earnings have grown at double digits for something like 17 quarters. The expansion is 3.5 years old. The Fed has been crimping growth. Do we think earnings are going to rebound from here and continue double digit growth levels?
The pro theory is that because the Fed has crimped growth, once it is done that allows growth to resume. That presupposes the Fed did not screw the pooch and go too far as it has done in 12 of the last 13 rate hiking campaigns. That remains to be seen, and the ECRI forecast still calls for slowing but nothing like a recession. If the Fed calls off the dogs then perhaps growth can resume. One more rate hike is still in the cards, however, unless there is significant slowing ahead of the August meeting. Problem is, if there is significant slowing, then the economy is likely already too slow and you don't have that 1994-1995 comeback.
Thus though the market is set up for a rebound and will likely give it at some point in the near future whether it does so Wednesday or not thanks to YHOO, it still behooves us to play it more defensive with respect to our longer term position plays, i.e. medical, healthcare, energy, consumer staples, etc. As we have seen, those can still tear off good chunks of gains based on the leaders we have found to this point. If things get worse that will likely narrow our scope of choice, but that is just what we have to deal with.
As for short term plays we can look at some recovery bounces in the indices, adding too some positions and taking new ones as well as other stocks that are set up to bounce as opposed to deliver any breakout moves. We still want to see a good upside move to see if any real downside sets up again. All of that is based on the strength of the rebound, e.g. volume, leadership position, breadth. We remain concerned the inflation fight has gone too far already and this market sell off, the worst since the October 2002 bottom, is the start of a longer decline. We just have to stay nimble, take what the market gives, and then move on to the next rotation.
Support and Resistance
NASDAQ: Closed at 2043.22
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 2082
2100 from the early and mid-2005 peaks (and the 18 day EMA as well).
The 50 day EMA at 2156
2173 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 1236.86
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 1253
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
1223 is the June 2006 closing low.
1213 from December 2004 high to 1215
1205 from the August lows
Dow: Closed at 10,799.23
Resistance:
10,890 is the December 2005 closing high.
10,931 is the November 2005 high
The 200 day SMA at 10,937
10,965 from Q4 2000
The 18 day EMA at 10,975
11,044 is the January high.
The 50 day EMA at 11,060
11,097 to 11,137 is the last peak from the February top.
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
10,706 is the June 2006 closing low
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): 0.5% actual versus 0.3% expected, 0.2% prior
Core PPI, June (8:30): 0.2% actual versus 0.2% expected, 0.3% prior
Net foreign purchases, May: $69.9B actual versus $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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