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money investment, investment help
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7/24/06 Investment House Daily
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SUMMARY:
- A new day, a new direction, at least for the day.
- Day to day volatility deserves watching closely.
- Commodities continue to struggle even after recovering from blow off top.
- More earnings provide more positive impetus as techs try to join in a recovery.
Post expiration rebound looks good though again lacks volume.
The market ended last week weak, with NASDAQ and SOX breaking sharply lower while the NYSE indices failed well below their early July highs, turning back down. It looked as if they had cracked similar to Landis in Stage 16 of Le Tour, but Monday they were back up. Unfortunately, the bounce did not show the convincing strength of Landis on his Stage 17 runaway move.
A post-expiration bounce was expected, and it got some help from some pre-market deals (HCA going private, AMD buying ATYT) and some better than expected earnings (MRK, SGP, BLS, FAL, PETS). As an indication of how ready the market was to bounce, HAL rallied even though it received a downgrade because a 'loss of investor confidence'; in other words, because it had sold off it was no longer a good buy. As noted, it didn't slow HAL's rebound, and it did not slow anything in the energy sector or any other sector as strong breadth again favored the market direction (4.4:1 NYSE, 2.9:1 NASD).
It was a nice price gain with strong positive breadth, but volume was weaker. Sure we expected weaker trade given post-expiration, but volume was well below average on both NYSE and NASDAQ. On a return to buying you would like to see some above average trade to show some real participation.
That said, NYSE, DJ30, and SP500 look pretty decent as far as their price patterns. SP500 has returned to last week's high just below the 50 day EMA and 200 day SMA. DJ30 moved back thru the 200 day SMA and is at the 50 day MA as well, topping last week's high. NYSE held the 200 day and cleared the 50 day EMA Monday; it looks good with a second higher low around that key 200 day SMA level. SP600 recovered the June low, trying to salvage something from the double bottom attempt.
Then there is the flip side with both NASDAQ and SOX bouncing back but still in their sharp downtrends. Some good tech earnings after the close may once again help NASDAQ and SOX (TXN, SNDK), but they are going to have to change course abruptly to turn the tide near term, and their downtrends indicate they still have to find that bottom before they can rebuild the damage done this month.
A key test is coming as SP500 continues trying to recoup lost ground. Last week the 50 day MA crossed down over the 200 day SMA, the first time that has happened since the 50 day EMA moved back up through the 200 day in September 2003. These crossovers show a change in momentum, in this case the selling momentum. During the past two months the 200 day SMA has flattened its assent, the first time since October 2005. The 50 day MA did not cross the 200 day at that point as it did this time. Again, the key test is ahead when the 50 day tries to move back through. If it fails the test there is typically more selling ahead. The index can move up in the interim and still fail the test if it runs out of gas (i.e., volume), and turns back down. Overall SP500 looks decent in its recovery, but with lower volume and the crossover, it has something to prove on this rebound.
Early 2000 similarities revisited.
The past two months the market has trended lower, but it has also provided a lot of day to day volatility. In June NASDAQ dropped 44 points on 6-12-06 and then jumped 58 points three sessions later. The next two sessions it lost 33 points just to rebound 34 points on 6-21-06. Down 33 on 6-27-06, then up 62 points two sessions later. Last week it bounce 37 points Wednesday then sold 41 Thursday and 19 Friday. Monday (today) up 41 points.
The back and forth action, the counterpunching that comes after 'sustained' moves either direction shows massive indecision about the market's future. Buyers rush in last Wednesday just to get spanked Thursday and Friday but then another rebound Monday. This is similar to the action seen in February and March 2000 when the market was going through the death throes of the long bull market. Each gut-wrenching plunge was met by a reassuring rebound on good volume. That volatility was not spiking the VIX because you had selling then recoveries that acted as relief valves, letting the pressure off that would normally drive VIX higher. Back and forth, jerky action on strong volume showed a fight between the bulls and bears. Bears would sell it off, but then bulls would buy back in as late-comer money continued to buy as other money moved out of the market. By the end of March the market was fragmented and out of new money. That is when it dropped hard. A summer rebound looked positive with strong price/volume action and some decent leadership, but a late summer fade and then the second top in September to a double top sent it lower for good.
This action we are seeing now comes after a 2 month drop on NASDAQ that gave techs a 15% haircut. Thus maybe this back and forth volatility means the selling is over and the market is ready to try a rebound. Could be. Maybe stocks have already priced in the slowing seen in the earnings guidance thus far and are forming the bottoms of their next moves higher. After all this is the second round of this kind of volatility. We wrote about the back and forth day to day volatility earlier in the year, particularly in April when it was doing this same sell hard, rebound hard dance. That was the precursor to this May through July selling. We will have to see how it pans out, but we can also say we don't like the look of the volume or the leadership at this stage. A definite defensive tone exists in the leadership despite these big blasts to the upside accompanied by strong breadth. In short, it is not a new round of the normal kind of growth leadership that you typically see take the market higher.
Healthcare can lead, and we have seen energy do so as well, but ultimately the market needs growth to make its more serious upside moves. As of now earnings guidance has not shown the overall growth that accompanies strong runs. If the Fed gets done and we get through this little slowdown in the economy we will be sitting nicely for a recovery. At this juncture the NYSE indices are trying to hold on and will be getting some tech help near term as the earnings letdown is assuaged by some solid reports. All of this is leading up to a test late this week or next week of this rebound taking shape. It will have to show more upside strength than it has thus far in order to change the current market character. Until then we will ride the move higher and take what we can from it, but we have to be ready to move out when it starts to show more cracks.
THE ECONOMY
Commodities adding their two cents worth to the story.
Back in April and May nearly all commodities surged higher as a lot of that world liquidity chased the hot investment of the day. Gold peaked at 730 in May and tanked. It recovered in June and early July after losing 25%. In April it climbed further on worries Bernanke might not be tough enough on inflation, but it peaked near 660 and the past week or so it is selling again after making a lower high. It has now come back to test its late June gap higher, filling part of that gap Monday and rebounding after gapping lower on the session. That June gap was an 'island gap reversal' and it indicates the item in question is heading in the direction opposite of the island. It did that, but now a critical test is ahead, and the pattern has taken on a bearish look once more.
The oil pattern is almost identical to gold, i.e. same run, same crash, same island, same lower high. You can repeat this over most commodities. Okay, so what does it mean? First, the outcome of this test of the island reversal is very important. If commodities crash back through they are heading lower. If commodities head lower that is typically a sign of economic slowing ahead, regardless of China GDP growing at an 11% clip. It seems contrary to the data regarding overseas recoveries and growth in Japan and elsewhere, but markets tend to lead actual economic performance. Heck, how many times did Japan choke off a recovery by raising rates during the past 15 years? Enough to keep it in depression for most of that time.
Back in 1999 we wrote about commodities and how they were in the tank despite a supposed world economic boom. There was a drought in the US and Canada and corn harvests were down, yet corn prices were spiraling lower. Soybeans were down despite lower yields. All over the world commodities were heading lower even as the US' 'white hot' economy led a global economic boom. When trying to understand the Fed's hell bent attitude on hiking rates to fight off some imaginary inflation, we asked the question why was the Fed worried about inflation when, among other things, commodities were in dire condition. As it turned out the Fed turned from worrying about inflation to worries of deflation soon after it broke the economy's back.
So, right now we watch to see how commodities fare in this test of the gap higher, and watch whether they continue to head lower. There is such certainty they won't do it what with predictions of $100/bbl oil and the like that you tend to take it for granted. Further, prices are so high right now that a little giveback seems only proper. In short, there is indeed buffer space for the commodities to fade and still be fine for a continued climb. If they start breaking down the pattern each chance they test it, however, that starts the new trend. With NASDAQ in a downtrend and stocks still in their earnings struggle, the plight of commodities is key. We think they will fail this test of the gap higher and fall to the February and March consolidation range. That puts oil down near 560, right at its 200 day SMA. That in itself does not mean the economy is collapsing; from there it will try to set up again and bounce, and even if that ultimately fails it is still just pricing in slowing as opposed to collapse. Near term, however, that is quite important for the market and our investments.
THE MARKET
MARKET SENTIMENT
VIX: 14.98; -2.42. Volatility fell hard Monday as stocks rebounded. No fear in the recent Middle East crisis was a strange response similar to gold's overall failure to react as well.
VXN: 21.78; -1.42
VXO: 14.07; -2.48
Put/Call Ratio (CBOE): 0.68; -0.63. That week-plus of closes above 1.0 has been trying to push the market, and once more the market found some footing.
Bulls versus Bears:
Bulls: 42.1%. Ever so slight of a dip in bulls after a continued brutal market, down from 42.2%. There was a big spike higher from 38.7% two weeks back, but we hoped for more here. 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: 33.7%. Up slightly from 33.3%, but still lower than the 34.4% hit three weeks back. Kissed the bulls to end June, just missing crossing over with the bulls, but that in itself is not a bad indication for the upside. Hit a new post-2002 high in that late June move, 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: +41.45 points (+2.05%) to close at 2061.84
Volume: 1.952B (-19.03%). We expected volume to decline after expiration Friday just as we expected stocks to rebound. Stocks rebounded and volume fell back below average. That was disappointing after several above average sessions last week, albeit those too were likely swayed by expiration. In any event, despite the big point gain Monday, it is hard to call it a success with volume that fell back to below average, particularly with the continuing downtrend on NASDAQ.
Up Volume: 1.703B (+1.067B)
Down Volume: 236M (-1.467B)
A/D and Hi/Lo: Advancers led 2.91 to 1. With stocks to the upside just flip the breadth figures, at least that is the way it has seemed of late.
Previous Session: Decliners led 2.85 to 1
New Highs: 57 (+26)
New Lows: 120 (-155)
The Chart: http://www.investmenthouse.com/cd/^ixic.html
Gapped higher Monday once the expiration declines and pre-weekend selling ebbed as we made it through the weekend once more without Syria or Iran joining the war. It did not gap and dump, however, instead pushing higher, fighting off early afternoon selling, and running late to close at the session high. That kept it below the June low (2073) and just below the 10 day EMA (2064). That does not take it out of the downtrend: it made a lower low last week as well as a lower high. It is trying to rectify that this week, and we will likely see more upside on this move. Unless volume gets a bit more aggressive on the upside it will find itself challenged to clear the 18 day EMA (2083).
SOX (+1.83%) rebounded as well, coming back from that Friday drubbing after INTC and AMD managed to much up the entire chip outlook. After hours SNDK and TXN reported some strong results and both were up. They have a chance to inject a bit more life into SOX and rally it back to its bottom channel at 400 and maybe even on up to the downtrend at the 18 day EMA (416). As with NASDAQ, it is in a downtrend, and last week it blew out the bottom of the channel, starting another steeper trend lower.
SP500/NYSE
Stats: +20.62 points (+1.66%) to close at 1260.91
NYSE Volume: 1.579B (-17.74%). Similar to NASDAQ, NYSE volume could not crack average, coming in well off that pace and below just about every session last week. Will need more help to get it through the next resistance that it hit last week as well.
A/D and Hi/Lo: Advancers led 4.38 to 1. Breadth flipped back to massively positive on the sharp rebound. The recovery in energy stocks really helped the recovery in the NYSE breadth.
Previous Session: Decliners led 1.92 to 1
New Highs: 86 (+43)
New Lows: 63 (-104)
The Chart: http://investmenthouse.com/cd/^gspc.html
Strong price surge Monday, roughly equaling last Wednesday though not on the same volume scale. It shot higher that day, sold it all back Thursday and Friday, and then recaptured the move Monday. Net wash, but it did make a higher low at the late June lows at 1240. It is now right back at the 50 day EMA (1262) that stalled it last week, and also just below the 200 day SMA (1265). Volume was not there, but the pattern is not dead yet with this recovery that made a higher low on top of the higher low the prior week. Now it has to show something at the 200 day SMA to see if it can make it up to 1280, the 'hump' in the double bottom attempt. Intriguing recovery, but needs to show us the beef.
SP600 (+2.54%) was smoking Monday, but the 8.84 point gain still fell short of the 9.85 drop Thursday. But hold on, it was up 10.15 last Wednesday. That followed a 20 point drop leading into that bounce and the double bottom attempt at 350. It is all over the map, but similar to SP500 it is trying to make the recovery and try to form that double bottom. It has resistance at 365 from last week and of course the 200 day SMA and 50 day EMA teaming up at 368. The energy recovery aided greatly in the rebound; if commodities cannot continue higher, SP600 is going to find it harder to complete this double bottom attempt.
DJ30
Outside of the NYSE pattern, DJ30 sports the best index pattern. It sold last week and volume was crappy Monday, but it made a higher low and cleared last week's highs. It is butting up against the 50 day SMA (11,054) once more, but it has a bit of momentum to try and get to the July highs at 11,228 closing. Its double bottom attempt remains intact as it hangs in there supported by more 'old economy' stocks. If NASDAQ pitches in, DJ30 and NYSE could make the move near term. Then they have to deal with NASDAQ and its downtrend longer term.
Stats: +182.67 points (+1.68%) to close at 11051.05
Volume: 269M shares Monday versus 433M shares Friday. Volume tanked following expiration week and that was expected. What is important for DJ30 is whether it can muster enough trade to really make the push through the 50 day SMA, 11K (late May low), and on up to test 11,230, the July high where it can form a handle, wind on into August, and then really have set up an upside move.
The chart: http://www.investmenthouse.com/cd/^dji.html
TUESDAY
Consumer sentiment and existing home sales are out Tuesday, but right now the earnings waves are washing over the market. Last week they were swamping the indices. Now there is some relief as a few tech earnings are joining in with the 'old economy' stocks and posting solid earnings and guidance. The market has to see growth down the road to keep pushing money into stocks (or we should say, to start pushing money into stocks once more); this guidance from techs helps. TXN and SNDK gave just that after hours Monday and they drove nicely higher.
Good timing for a market that made a rebound Monday and needs some more strength to avoid the kind of collapse suffered last week after a solid Tuesday reversal and strong upside move Wednesday. NASDAQ and SOX are still in the pit, but they can provide support to the NYSE indices and help get money moving back into the market based on their guidance. Money might not all move toward the techs, but if they sport solid guidance, investors may be inclined to move into other areas and help push the NYSE indices higher and build a better pattern just when they looked to be crumbling under the weight of NASDAQ's downtrend.
We really don't like this day to day volatility, the slugfest that wins big one way and then the other. If the patterns continue to recover, however, we won't fight it. The lower volume indicates to us there is still a need for better base building to even consider a sustained move higher. As noted, NYSE indices can work on their patterns on into mid-August or so and then be ready for a move higher. Much depends upon how NASDAQ can respond and what kind of leadership develops along the way. A lot of leadership groups have been racked by the selling and need some recovery time to rebuild their bases. A continued rebound by the NYSE indices to the early July highs and then some lateral work to form a handle to the double bottom gives stocks exactly that time needed to set up.
Thus while we really don't like the set up for the market given the price/volume action, commodities, etc., we can't just conclude we are right and the market is wrong. We will continue playing some offensive defense with our buys, i.e. looking at those sectors and stocks that are more defensive that have good patterns and can still move well enough to make us money. We still have to be concerned about this move running out of gas when it continues higher, thus the more defensive approach. If it is setting up for a new breakout of leadership, we will see the patterns developing in many stocks and we will be ready to jump on board. Right now leadership and good patterns remain scattered with most techs needing to first find bottom. For now they look ready to play a supporting role in helping the NYSE indices try and match their last highs and try to set up something for a move further down the road.
Support and Resistance
NASDAQ: Closed at 2061.30
Resistance:
The 10 day at 2064
2072 is the June closing low
The 18 day EMA at 2083
2100 from the early and mid-2005 peaks (and the 18 day EMA as well).
The 50 day EMA at 2141
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 1260.91
Resistance:
The 50 day EMA at 1262
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:
1251 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 11,061.05
Resistance:
The 50 day SMA at 11,054
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:
11,046 is the 50 day EMA.
11,044 is the January high.
10,965 from Q4 2000
The 200 day SMA at 10,947
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 25
Consumer Confidence, July (10:00): 104.0 expected, 105.7 prior
Existing home sales, June (10:00): 6.60M expected, 6.67M prior
July 26
Crude oil inventories (10:30): 151K prior
July 27
Durable Goods orders, June (8:30): 2.3% expected, -0.2% prior
Initial jobless claims (8:30): 310K expected, 304K prior
New home sales, June (10:00): 1.164M expected, 1.234K prior
July 28
GDP advance, Q2 (8:30): 3.0% expected, 5.6% Q1
Chain deflator, Q2 (8:30): 3.4% expected, 3.1% Q1
Employment cost index, Q2 (8:30): 0.8% expected, 0.6% prior
Michigan Sentiment, final July (9:50): 83.0 expected, 83.0 prior
End part 1 of 3
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