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7/25/06 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Target hit alerts: None issued
Buy alerts: HOLX; BID; VLO; KNOL; ZVXI
Trailing stops: None issued
Stop alerts: FORM; STTX
SUMMARY:
- Market fights through mixed earnings with large cap NYSE indices clearing resistance on rising trade.
- Consumers 'resigned' to higher prices according to Conference Board
- Housing market continues orderly slide as hopes of Fed getting it 'just right' continue.
- NYSE putting in a recovery in face of many issues. Overestimating the peace process?
Stocks put on another day of gains as NYSE tries to lead.
Earnings were all over the map late Monday and early Tuesday. TXN bucked up the techs, furthering the Monday oversold bounce in NASDAQ and SOX. The 'old economy' reports were mixed with UPS announced a miss on the bottom line and lowered guidance ahead. Revenues were okay, however. The culprit: higher costs eating into profits. Guess that spells energy costs to a company where business is based upon moving packages by air and land. MMM followed through on its warning two weeks back, but it did it one better, missing the reduced expectations by 2 cents. It was hammered all over again. The post-it from accounting about the shortfall on top of the shortfall must have fallen off the CFO's desk.
Despite that lead in, there were many positive earnings reports such as X, reporting expectations of continued 'healthy' consumption as the year continued. After more than a few big name techs guided lower, the theme this season seems to be 'old economy' forging ahead, tech trying to hang on.
That was enough to start stocks with a slight advantage and they rallied nicely in the first half hour. The move received a boost from consumer confidence that came in with a surprise move higher. Existing home sales were lower but the decline is still orderly; no big collapse here. As noted, the combination gave stocks a bit more upside goose, pushing SP500 to its 200 day SMA. Key level as we have noted.
Then the selling set in once more. There was no real trigger other than stocks had been sold hard, and were in the second day of a rebound; sellers were still out there looking for rebounds to sell into. They succeeded in taking the indices to the session lows, i.e. back to negative. There and back in one hour. Then a lateral move all session that led up to a last hour run higher, taking NASDAQ back to its early session highs while SP500 rallied back to the 200 day SMA, sidestepped for 10 minutes, then broke on through. Modest dip late, but the gains, and the move above the 200 day SMA, held.
Technically the move was important on SP500 as it broke the 200 day SMA and it did son on some rising volume. Volume was still below average, but at least there was some accumulation Tuesday. That keeps it below the July high at 1280, but the break through the 200 day gives it a fighting chance to make it close to the July high and set up a better pattern to consolidate, let stocks shed their sellers, and attempt a breakout move further down the road. Positive action: good volume, good break through resistance, good breadth as well.
NASDAQ's move was important as well. After this kind of butt kicking all moves are important in one way or another. NASDAQ rallied up to the 18 day EMA twice. Twice it failed to take it out, keeping it in the current downtrend. Volume edged higher, a bit of a positive, but it was still below average. That simply means the move just is not that powerful. Upside move in a downtrend is not powerful. Go figure. SOX was up as well with the TXN move helping drive it back up to the lower channel line of its downtrend. Cleared it intraday but could not hold it. Hint: it is likely not going through it Wednesday either because XLNX, CYMI, SUPX were all getting crushed after hours after reporting results.
Basically it is coming down to the strength of the two sides of the market. Techs are reporting some better results and guidance after a slow start, and they have bounced. They have not taken out their downtrends, however. That growth issue is still out there with concerns as to whether the economy is going to just slow a bit and then restart when the Fed is done or it slides into a significant slowdown or even the 'R' word. On the other side you have the NYSE indices where a lot of healthcare, drug, and energy stocks reside. They are trying to fight off the curse of the techs and set up their base for a breakout down the road.
NASDAQ drag versus NYSE defense. Right now the market is saying slower growth as techs and growth areas continue in downtrends while the defensive areas move higher and thus drag the NYSE indices up as well. Thus we cannot get too enamored with this NYSE break through of near support. It is, however, a key to continuing the rebuilding process, allowing stocks to recover and build patterns for a break higher at the end of summer or in the start of fall. That is the more typical timetable, and that also lets the market figure out the economic direction.
THE ECONOMY
Consumer confidence rises in stoic consumers.
July confidence climbed to 106.5 versus the 104.0 expected and 105.4 in June. Off the April high at 109.8, but damn solid considering $3/gallon gasoline, war, etc. Basically consumers are a bit more cautious than early in the year both with respect to present conditions and expectations regarding the future, but they are easily high enough to remain favorable overall, at least as far as spending. Typically it takes a plunge into the 60's or so to send off the flags regarding recession, and that helps put this 106.5 reading into perspective.
The Conference Board described the results as showing the consumer was 'resigned' to higher prices. Hard to get a bead on that, but the CB said consumers were for now willing to shell out more for higher gasoline and still buy other items, but how long that could last was in question. Optimism is slipping and has the CB concerned, but as noted, it is still in the safe zone for consumer spending.
Existing home sales in June fall 1.3%, making it a buyers market.
NAR officially labeled the housing market as a buyers market as existing sales fell for the third straight month. Sales were the slowest since January, and price gains were the smallest in 10 years.
The 1.3% drop puts sales 9% lower than June 2005 when we noted that the housing market was definitely in a peak. Prices rose to $231K, up from $229K in May. That was just a 0.9% gain year/year, however, the smallest since May 1995. Compare that with October 2005 that saw prices jump 16.8% year/year.
That price drop is the shift that always occurs, one from where sellers buck lowering their prices despite no nibbles to one where the real sellers, those needing to sell, drop their prices. The 'maybe' sellers, those that are testing the market to see if they can make a killing, reel their properties back in when they realize the buyers are not there. Their high priced homes are gone, and that leaves just the motivated sellers. That is when price starts to drop.
Prices also are dropping, however, because inventories are jumping. Despite the 'maybe' sellers, there are many other sellers out there that cannot get rid of their homes. Inventories rose 3.8% to 6.8 months. That is up from 4.4 months same time last year. That is the key driver in the shift to the 'buyers' market' moniker.
What it shows is that housing is now seriously declining, at least serious in the sense the double digit price gains are gone and that bidding wars are waning. It is not a crash, but that is still up to the Fed to some extent. Housing was an early target of Greenspan, and it worked. Now Bernanke is concerned the housing decline will slow the economy. He sees it and thus the prediction, based on his past studies of economic cycles, that the economy will slow as well in the second half. That, among other items such as earnings, regional activity, ECRI, tells us Bernanke feels the housing war, indeed the inflation war, has been won. If he pauses at the next meeting that may be a truly historic move.
THE MARKET
MARKET SENTIMENT
VIX: 14.85; -0.13
VXN: 21.52; -0.26
VXO: 13.32; -0.75
Put/Call Ratio (CBOE): 1; +0.32. The ratio jumped back to 1 on the close as the market rallied. As SP500 moved through the 200 day SMA and DJ30 through the 50 day EMA, some shorts were forced to cover.
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: +12.06 points (+0.58%) to close at 2073.9
Volume: 1.994B (+2.17%). Volume moved higher as NASDAQ moved into its second day of recovery. Still below average so no groundswell of buyers, but volume is running higher than early in the month when it slid lower on low trade. May not be enough to push it through the near resistance at the 18 day EMA.
Up Volume: 1.267B (-436M)
Down Volume: 680M (+444M)
A/D and Hi/Lo: Advancers led 1.53 to 1. Pretty moderate breadth for a change on a move.
Previous Session: Advancers led 2.91 to 1
New Highs: 82 (+25)
New Lows: 114 (-6)
The Chart: http://www.investmenthouse.com/cd/^ixic.html
Rallied up to the 18 day EMA (2083) twice on the session high, backing off both times. The last right before the close and thus not much time to score another flop as it did in the first hour of trade. Volume was up, a better indication, but still below average overall. NASDAQ remains in its downtrend below the 18 day EMA after rebounding to the 50 day EMA (2138) on the last bounce in Late June and early July. This is the key test in this move for the techs as they will either try and join the NYSE indices in their move higher to next resistance or resume the downtrend. The odds favor the latter.
SOX (+1.08%) rallied as well, aided by TXN's results. It moved through the lower channel of the downtrend (396) but after hitting 400 it slipped to close right at the lower channel line. It cracked Friday, breaking through that support in a sharp move. This is the recovery move and as with NASDAQ, this is where it tries to mount a better recovery or folds up shop. Lots of chips were getting whacked after hours on their earnings, e.g. CYMI dragging down the chip equipment sector (AMAT). It will be tested tomorrow.
SP500/NYSE
Stats: +7.97 points (+0.63%) to close at 1268.88
NYSE Volume: 1.676B (+6.17%). Volume was below average, but it rallied as SP500 moved through the 200 day SMA. Not overpowering at all, but a positive move development after SP500's move.
A/D and Hi/Lo: Advancers led 2.09 to 1. Not bad, and normally a strong enough reading. Of late the breadth has swung massively back and forth with the market direction. Settling down is not necessarily a bad thing.
Previous Session: Advancers led 4.38 to 1
New Highs: 103 (+17)
New Lows: 55 (-8)
The Chart: http://investmenthouse.com/cd/^gspc.html
SP500 broke back up through the 200 day SMA (1265.42) on some rising though below average volume. It was a move it could not make last week, and one it needed in order to continue a good basing action as the market works through the summer doldrums and uncertainty in the economy and on the world front. SP500 can make that test of the July high at 1280 and do some good work in setting up for a move higher, perhaps when the Fed announces its pause at the early August FOMC meeting.
SP600 (+1.03%) rallied back as well, coming off an undercut of the June low last week. It made it through the 18 day EMA (361.07) intraday, but closed at that level in the late market dip. Small caps have recovered helped by the energy recovery the past two sessions. In order for SP600 to make it to the 200 day and 50 day EMA (368) resistance (and still well below the July high at 379), it has to find the legs to clear this near resistance.
DJ30
DJ30 cleared the 50 day EMA (11,049) after making a higher low the past week. Volume was modestly higher, tough MMM volume was a big chunk of the action. It now sits at some resistance at 11,100, the last point before the July high at 11,228. As with SP500, it has a good shot of making that level and putting in a much better basing process. It could hold that level and form a handle, setting up a double bottom with handle that takes it into early August and lo and behold the FOMC meeting that could provide the catalyst with a pause or a raise 25BP and 'all clear' statement.
Stats: +52.66 points (+0.48%) to close at 11103.71
Volume: 281M shares Tuesday versus 269M shares Monday. Volume edged back up, helped by MMM's 18,8M shares as it sold off in another nasty plunge.
The chart: http://www.investmenthouse.com/cd/^dji.html
WEDNESDAY
Crude inventories are out at 10:30ET. Natural gas prices have surged on the heat wave, and gasoline prices are up because of refinery problems in Texas and Venezuela. Gasoline has priced in these issues, and thus unless there is a pretty sharp decline it likely won't jump a whole lot more. After a jump higher on the Mid East war, crude has faded back; no collapse, but it has faded back.
A lot of the ease this week is due to no heavy escalation over the weekend and now the idea the peace process is going to solve the issue. We think they are overestimating the success of that process. There was a lot of tough rhetoric today from Saudi Arabia, Israel, and now Hezbollah (deeper strikes into Israel). Maybe it is all just posturing as they head to the negotiating table; not an unusual ploy. There appears to be a bit too much confidence that the peace process will once again result in a cease fire and calm things down. The US wants Israel to take out Hezbollah because the UN won't enforce its resolutions, one being that Hezbollah disarm. Europe is even on board, though aloofly, with giving Israel a couple of weeks to finish the job, though 'quietly.' Have yet to figure out how you fight a war quietly, but then again I am not European.
In any event, we may see a further escalation that rocks oil a bit more than expected, and that is not good for the overall market. Energy may prosper, but outside of that the rest of the economy won't like it. We already see the results with respect to UPS: it is taking the hit in earnings as it has not or is not able to pass all of the costs off to customers.
It is always hard to factor in hostilities. The market has been doing that on its own, however, as the defensive sectors are getting more of the money. We like how NYSE, SP500 and DJ30 are moving up to test the July highs; very positive, but also driven by defensive issues as well. At this point the market needs to recover and build new bases, and if defensive issues pave the way for the others to move in later, no problem.
As for NASDAQ, there were some disappointing earnings after the close, at least disappointing based upon the responses. Some late recovery with some, but even then that was just bouncing back off an after hours whacking. HPQ might stir things up with an acquisition, but that is typically not an overall driver. NASDAQ made it to the 18 day EMA, and it looks as if it will be a challenging session for it once again as it tries to do something more than die at the 18 day EMA and continue its downtrend.
That keeps us looking for the more defensive leaders even as SP500 heads toward a test of its July highs. If it can continue higher and form its base then other sectors will set up good patterns as well, and when they are ready we can move into them. If they fail, we stick defensive.
Support and Resistance
NASDAQ: Closed at 2073.90
Resistance:
2072 is the June closing low is still out there
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 2138
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 1268.88
Resistance:
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:
The 200 day EMA at 1265
The 50 day EMA at 1262
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 11,103.71
Resistance:
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:
The 50 day SMA at 11,048
The 50 day EMA at 11,048
11,044 is the January high.
10,965 from Q4 2000
The 200 day SMA at 10,951
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): 106.5 actual versus 104.0 expected, 105.7 prior
Existing home sales, June (10:00): 6.62M actual versus 6.60M expected, 6.71M prior (revised from 6.67M)
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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