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7/19/06 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Target hit alerts: None issued
Buy alerts: WOOF; ECL; INFY; FORM
Trailing stops: None issued
Stop alerts: None issued
SUMMARY:
- Core CPI hotter, but Bernanke cools the flame, provides trigger for rebound rally.
- Bernanke cuts a nice rug in front of Congress.
- Housing starts down a more than expected 5.3%.
- Energy demand falls as prices spiked and fear re war rose.
- Earnings still going both ways as market already approaching resistance.
News is all over the map, but market was set to rally and found its trigger.
Tuesday showed some promise with the higher volume rebound at the June lows. The stage was set for the CPI, Bernanke, and more earnings, and the only question was how the market was going to take all of them.
Futures were dicey, heading up and down and back up pre-market as earnings were solid outside of YHOO (IBM, KO, GD, LUV), the overall CPI was fine but the core was outside the Fed's definition of moderate inflation, and housing starts fell more than expected. Another slowdown in housing was just the latest sign of more economic issues, but late in the economic cycle the Fed continues fighting the last war as it always does.
Despite the mushy open, stocks rebounded to positive. When the Bernanke text hit, stocks jumped even more and bonds turned higher as yields fell. It was the same speech as we had heard before, you know, the one about the dual mandate as opposed to just inflation fighting. The market liked it at that time but bonds and gold hated it. The stock rally it engendered did not last long. Investors liked it again, but this time bonds were along for the ride.
Was just the right chord struck that assured the markets that Bernanke, though as tough as John Wayne when it comes to inflation, can take a John Kerry-like 'nuanced' approach that also factors in the importance of economic growth? Apparently so, at least according to the market reaction. The Dow posted its best gain of the year as last week's late losses were wiped away basically in one session. In reality, the market was oversold, beaten up, and full of negative vibes. It wanted a reason to move back up and was going to find it in the data regardless, similar to how it wanted to move down to start July and found the negatives in the data even if the news was overall positive. Thus the same ideas Bernanke trotted out on at least three other occasions suddenly become the basis for a rebound.
Technically the market continued its Tuesday reversal and did so with panache. Overwhelmingly positive breadth, big price gains, higher volume. In short, great additional work on the double bottoms for the NYSE indices. Stocks were jumping all over the place regardless of their pedigree. On the other hand, NYSE volume was a bit pensive, casting a bit of doubt on the move. Further, NYSE and DJ30, in one move, are almost at next resistance. There is more upside to the July highs that market the 'hump' in the double bottom attempts, but the very strength of the move could be its undoing as it races higher and burns itself out in a traditional 'bear market' or oversold rally. They tend to be fast and furious and burn themselves out in a hurry. From the looks of this, it won't take long to make the test of resistance.
Looking past the NYSE indices you have NASDAQ and SOX. They are not really in patterns, at least not the accumulation kind. SOX is in a downtrend. NASDAQ is in a downtrend, making a lower low on this last downside leg. It has returned to the June lows and it too has some more room to the upside, but as with SOX its pattern is still in the workout stage as opposed to having set something up as the foundation for a huge move. Maybe it makes a knifepoint turn and rallies out of this downtrend. Tech earnings, however, continue their mixed nuts flavor with INTC stinking things up after hours while AAPL and MOT posted some solid results.
In sum, a solid surge after the Tuesday reversal, and there is still more upside before a full collision with key resistance. We like the hold of the June lows, the breadth, the action of leaders. We still hate the NASDAQ pattern and the time of the year for a bottom. We will use this for what it will give us, but we won't be wedded to seeing it through if it starts to cough and sputter at next resistance.
THE ECONOMY
CPI does what was expected even though core was higher.
Yes the core was expected at 0.2%, but most figured it would come in at 0.3% and thus show a 2.6% annual core growth rate, the highest since 2002. It did and that caused futures to tank and bond yields to surge. Then the market opened and apparently all was forgiven.
This should have been bad news with the Fed saying 2.0% is the limit for inflation growth in the core on a year/year basis. Yet, you have Bernanke in front of Congress saying the economy is going to slow in the months ahead. Investors put 2 and 2 together and surmised Bernanke is inclined to pass on rate hikes if he can. Of course there is nothing at all new about that. Bernanke has wanted to pass for a few months, but he makes the mistake of letting everyone know that is what he wants to do. Thus chaos and the 'girly man' labels. That is likely why Greenspan learned to be so obtuse; he got butchered when he first became the Fed chairman.
Remember? One Senator this week said that Bernanke was an amateur, insulated in the ivory towers of academia for too long to understand how things really work. The action of the financial markets was cited as an example of his gross incompetence. Recall that Greenspan became chairman in August 1987. Recall Black Monday in October 1987. Recall hundreds of billions lost in the market during his first six months. By comparison, Bernanke is a smooth talking ladies man with a much better record with the financial markets.
The real problem is he is Fed chairman and the history of Fed rate hikes is typically one of financial carnage. He has an uncomfortable position, coming in during a rate hiking campaign. There is always the same issue: inflation spikes even after it appears the economy is slowing. Inflation is lagging; it typically does this. A new Fed chairman knows history and wants to avoid it, knowing inflation will calm down naturally, particularly after 15 or so rate hikes (I would call that unnaturally, but then again, I am a strict constructionist as well). If he acknowledges this he gets tarred and feathered as a weakling on inflation by those from the 1970's. Thus the Fed typically goes too far, pushed by opinion into one hike too many, cracking the economy like that last mountain cracked Landis Wednesday in the Tour de France.
Wednesday Bernanke danced as well as any Fed chairman could. It was more than the market expected after interviews on the side with Maria Bartoromo and hypotheticals about pausing a rate hiking campaign. That was all it took. No stumbling, no gaffes, just fine ballroom dancing with deft moves between inflation fighting and economic prosperity. The market got what it needed and rallied.
Housing starts fade 5.3%, again.
The June decline was more than expected, and the drop pushed starts to their lowest level in 18 months. That makes four down months out of five. Year over year starts fell 11% while permits fell 14.9%.
Bernanke again made special note of housing once more in his remarks to Congress. He is a student of the history of the economy and housing declines, noting that the economy often follows the housing market lower. Again, nothing new here, but the decline in housing starts gave him a bit more credence in front of Congress along with his prediction the economy was going to slow some from here and thus the Fed had to be vigilant with its dual mandate re inflation AND economic growth.
Oil demand drops as prices surged on war concerns.
Crude inventories rose a modest 151K when they were expected to fall while gasoline inventories surged by 1.5M when they where expected to post just a modest gain. That helped bring oil a bit lower once more after spiking to a new record in current dollars on the Middle East hostilities.
The more important news in the report dealt with demand. It fell 0.54% to 9.569M bbl last week after climbing the week before. Once more we see a run well into the seventies crimp demand. This one was likely more significant due to the cause of the run, i.e., the Middle East war. It shocked pretty much everyone as seen in the market, and consumers were taken aback as well. Demand fell off on the sharp price climb and the news that made it climb.
Thus it is incorrect in our view to say the consumer will simply keep on shelling out for higher and higher gasoline prices. There is something of a wall in the mid-seventies where demand starts to fade as prices move to that level. The more sudden the move, the more demand decline. There are predictions oil is going to $80 and above in the not too distant future. We have a feeling that regardless of the speed of that climb demand will fall off.
It is interesting to note that in this part of the country, despite the run into the mid-seventies, gasoline prices held just below $3/gallon, ranging from $2.85/gal to $3.00/gal.
THE MARKET
MARKET SENTIMENT
VIX: 15.55; -2.19
VXN: 22.83; -1.06
VXO: 14.17; -3.07
Put/Call Ratio (CBOE): 0.88; -0.25. The rallied cleared out the downside speculation for the day after a week of closing 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: +37.49 points (+1.83%) to close at 2080.71
Volume: 2.417B (+16.09%). Solid above average volume, the best of the month, as NASDAQ jumped higher to the June lows. Still in a pretty severe downtrend but higher volume on the upside is always good.
Up Volume: 1.84B (+651M)
Down Volume: 564M (-287M)
A/D and Hi/Lo: Advancers led 3.35 to 1. Strong upside breadth. NASDAQ 100 was the laggard to the upside (1.24%) just as it was the NASDAQ leader to the downside.
Previous Session: Advancers led 1.12 to 1
New Highs: 56 (+28)
New Lows: 89 (-162)
The Chart: http://www.investmenthouse.com/cd/^ixic.html
Followed up the reversal with a strong surge to eclipse the June closing low (2072). It could not move through the 10 day EMA (2081) after trying intraday. Still below 2100 resistance where the 18 day EMA is as well. It is in a deep hole and trying to bounce up for some air. 2150 is the 50 day EMA and the July high is 2190. That July high was stalled by the 50 day EMA, by the way.
SOX (+2.29%) bounced off the bottom channel of its downtrend, stalling at the 10 day EMA (416.79) after moving through that level intraday. It should at least try the 18 day EMA (424.65) on this bounce; that has stalled the index all the way down from May. It is due for a higher bounce near the 50 day EMA at 450. That depends upon the rest of the market, i.e. if the NYSE indices can continue their moves and NASDAQ earnings are good enough to keep that index moving higher.
SP500/NYSE
Stats: +22.95 points (+1.86%) to close at 1259.81
NYSE Volume: 1.865B (+8.29%). Solid, above average volume, but now blowout. Easily the strongest of the month and it is summer. Still, with this move you would like to see huge trade.
A/D and Hi/Lo: Advancers led 6.08 to 1. Almost unreal breadth
Previous Session: Advancers led 1.17 to 1
New Highs: 76 (+47)
New Lows: 56 (-144)
The Chart: http://investmenthouse.com/cd/^gspc.html
SP500 surged off the Tuesday reversal, tapping at the 50 day EMA (1263) on the high, just below the 200 day SMA (1264). This is serious resistance for the index, but the July high (1280) can likely get tested here. That is the 'hump' in the double bottom trying to form. 1260 to 1280 is the key range for the large caps on this move. Now if it gets to 1280 and stalls, all is not lost. It can still form a handle to the base, and that really would be ideal action, taking more time and letting the market get through July and into August. That is part of the not liking this time of year theory.
SP600 (+2.87%) was rocking as it too moved off the June low at 350 and continues work on a double bottom. It closed at the 18 day EMA (364) and is still below the 200 day SMA (368) and 50 day EMA (370). Those are both resistance points and are both below the 'hump' that is the July high at 379. That is a pretty good throw from here. We will just have to see how it continues to set up, but it is likely to at least slow down at the 200 and 50 day EMA range.
DJ30
Best volume of the month as DJ30 continued its move off the June low at 10,700. The blue chips jumpstarted the rest of the market with a decent gain Tuesday as a precursor to this blast higher. Cleared the 200 day SMA (10,939) with ease but still has the 50 day MA (11,058 expo, 11,092 simple) before the July high at 11,230. That range form 11,100 to 11,230 is going to be its test, and similar to SP500 it will either hold and form a handle or break back down at that point. Good start to the recovery, but has to show it was not just a relief move, and that means consolidating after it gets back up and then driving higher from there. That will take time. For now we use this move.
Stats: +212.19 points (+1.96%) to close at 11011.42
Volume: 343M shares Wednesday versus 288M shares Tuesday. Strong move as it continues off the June lows. Bullish.
The chart: http://www.investmenthouse.com/cd/^dji.html
THURSDAY
Earnings are looking better, but they have yet to take investors by the collar and say 'see, these are great!' MOT and AAPL were better after the close, adding to the improving earnings in the non-tech areas. INTC was chopped liver once more, but QQQQ managed to rally back after trading lower in the aftermarket.
Very strong rebound on the heels of the Tuesday reversal, just what you want to see to show there was substance there as opposed to another reversal attempt that just folds up shop in a continuing move lower. The leaders, after a tough week, were bouncing back with many moving off support after testing a breakout or finishing a pullback or base.
Showing the right attributes for sure, but does it just flare out as relief bounces tend to do? There is definitely relief here from the selling, but also solid underpinnings with the volume, breadth, hold of prior lows, leadership. We will definitely play this for what it is worth, but we also have to be careful when it approaches that resistance. That means keeping stops tight and be willing to take a smaller gain faster when resistance is encountered, then see how it shakes out and be ready to move back in.
As you can surmise, though the volume, breadth, etc. are good, we still don't like the time of the year for this. It is a bit early to bottom. Of course the market does not have any hard and fast schedule, but with the high energy prices and other events, you get the sense there is one more big thing lurking out there that could really upset the cart and send stocks down one more time before the fall. That is conjecture, and that is why we have to act based on what the market is saying and just recognize it is trying to dig out of a hole and that things will be more uncertain.
We are looking for some more upside toward those resistance points discussed above, but that doesn't mean a straight run to those levels. After such a big move some softness is typical, and that will freak some out and think the move is over. That will lead to some profit taking, but that will only fuel the upside a bit more once it is over. We are going to continue looking to profit from the remaining upside move, but once there we have to be willing to be shaken out on some positions just to protect what we have until we see whether it is just a consolidation or something more nefarious such as a return to the selling. So, a bit of softness after the surge, a resumption of the upside to real resistance, then we see how the move shakes out.
Support and Resistance
NASDAQ: Closed at 2080.71
Resistance:
2072 is the June closing low. Cracking through this level.
The 10 day at 2081
2100 from the early and mid-2005 peaks (and the 18 day EMA as well).
The 50 day EMA at 2153
2175 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:
2050 from the summer 2005 lateral range lows.
2045-47 from June and October 2005 lows and June 2004 highs
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 1259.81
Resistance:
The 200 day EMA at 1265
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.
1239 from the late June consolidation range.
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 11,011.42
Resistance:
11,044 is the January high.
The 50 day EMA at 11,058
11,097 to 11,137 is the last peak from the February top.
11,228 is the July closing 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
The 200 day SMA at 10,939
10,931 is the November 2005 high
10,890 is the December 2005 closing high.
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% actual versus 0.2% expected, 0.4% prior
Core CPI, June (8:30): 0.3% actual versus 0.2% expected, 0.3% prior
Housing starts, June (8:30): 1.850M actual versus 1.900M expected, 1.953M prior
Building permits, June (8:30): 1.862M actual versus 1.920M expected, 1.946M prior
Bernanke testimony to Congress
Crude oil inventories (10:30): +151K versus -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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