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7/26/06 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Target hit alerts: NGA
Buy alerts: MAN
Trailing stops: None issued
Stop alerts: ININ
SUMMARY:
- Market takes a moment after a couple of upside moves.
- Oil demand remains strong as gasoline inventories plunge: consumers do seem resigned for now
- Beige Book suggests more weakness, sparking bond rally, lower yields, less chance of an August hike.
- Transports dive lower, making this test by NYSE indices a bit important.
NYSE large caps test their move, holding support.
Earnings were on both sides of the line yet again, and once more the treatment of the reporting stocks was widely disparate. Those with good earnings were toasted, while those disappointing were roasted. Most everything else played it middle of the road, the indices included.
They started softer, and after two upside days that was not a big issued. A couple of good moves deserves a breather. Further, a bit of opening softness after an upside move lets off some pressure and gives buyers that are interested another shot at stocks at a bit better price. Oil inventories came out and were well lower than expectations. That pushed stocks a bit lower, but SP500 tapped the 50 day EMA and rebounded back above the 200 day. That set the stage for a slow, steady climb into lunch and the afternoon session. The Fed Beige Book noted signs of economic slowing despite overall growth; that gave stocks another kick in the pants and pushed the recovery further, with all indices turning positive heading into the last hour.
That was it. After that bounce stocks ran out of gas and faded into the close, giving up positive territory. Modest losses, and after the 2.75 day bounce in a fairly weak market, a bit of giveback was what we expected.
Technically it was a test of the rebound with the indices doing the testing the ones that rallied (SP500, DJ30). They managed to hold support on the lows and rebound. Volume was up on the move; there was some churn, i.e. where stocks change hands on higher volume but go nowhere, indicating stocks were something of a hot potato that no one wanted to hold. Overall, however, the NYSE indices did just what you want, i.e. testing, holding support, and recovering.
The technology indices moved higher as well and also finished slightly lower as well. NASDAQ tapped resistance at the 18 day EMA and faded while SOX showed a hanging man doji at the bottom channel line of its downtrend. After a rebound they are testing key levels as well, but this is from the bottom side of resistance versus the NYSE large caps coming back to test the break through resistance. One testing from a position of relative strength, the other still in search of any strength.
That makes this pullback by SP500 and DJ30 a pretty important test for any further upside. They have pulled to within spitting distance of the July high and are taking a breather. They can work laterally, form a handle, then make the break higher later. Once more they will have to fight NASDAQ's drag as it butts up against resistance in its downtrend. NASDAQ doesn't have the look of a champion right now as it tries to make the break higher above the trendline. Another reason this test by SP500 and DJ30 is key for this bounce.
THE ECONOMY
Oil and gasoline inventories fade.
Oil inventories were flat over last week, well shy of the 1.3M bbl build expected. Gasoline inventories slumped 3.2M bbl as refinery run rates slipped again, down to 92.5% as refinery problems in Beaumont and Venezuela made gasoline harder to come by.
The key remains demand, and even with $74/bbl oil and $3/gallon gas demand continues to rise. The corresponds to the Conference Board's description of consumers as 'resigned' to higher prices right now. Of course being resigned to it is one thing while finding the funds necessary to pay for it as well as everything else is a bit tougher. Despite confidence, we see retail sales weakening and have anecdotal evidence that consumers are driving less and passing up some of the 'want to have' items as they look at the budgets and factor in the 'no choice but to have' staples.
Thus far consumers are meeting high prices and paying energy surcharges to service providers, but if oil spikes to $80/bbl as some sage oil traders are suggesting, then we enter a whole new realm of tribulation for the consumer. Not saying he can't handle it, but each rise is on top of prior rises, and they build up over time until a psychological pain level is hit and the consumer shuts down. Fortunately we are not there yet.
Fed Beige Book sees continued growth but more slowing.
In June to mid-July the Fed was also cognizant of the slowing economy, though at this juncture it would take denial or serious myopia not to see it. The signs have been present for more than a few months. Bernanke has obviously seen it; his public excoriation regarding his more dovish comments is quite an interesting study: this time the Fed chairman is more aware of the slowing and the potential for a harder fall than the critics.
Basically the Beige book noted continued expansion, and there is, but also reported that some regions were slowing. Philly, Cleveland, Richmond, Chicago, Dallas, and San Francisco reported declining growth rates. Higher prices were noted along with more success at passing them along, but the report also demonstrated that continued productivity was helping businesses offset those rising costs.
What the Fed is doing is building the case for the pause or cessation of rates, whatever you want to call it. Maybe there is still a hike in August; before the report the Fed Funds Futures gave a 54% chance of an August hike. After the report that dipped to 38%, the lowest in 6 weeks, before rebounding to a 43% chance at the close. With less than 2 weeks to go before the August 8 rate hike this is a pretty solid indicator of what the Fed will do. Hovering near 50% it leans toward a hike, but it is by no means a lock.
A pause in August getting likelier.
Indeed, we feel this meeting will give the market the answer it wants with respect to rates. If there is no hike that will speak for itself. If there is a hike, the statement will likely say that is all for now.
Many say that will give the market the final boost it needs to shake off the lethargy. It will likely give the market a boost, but the likelihood it lasts is questionable. The market typically rallies ahead of the cessation of rate hikes and then struggles some afterward given the move in expectation. This market has sold ahead of the cessation (if it is indeed the pause in early August), and that means it is concerned about economic growth even if the Fed stops hiking. Maybe it is totally fooled as to what the Fed will do and thus no rally. In that case a pause would trigger a solid move near term; indeed, it will likely get a run short term regardless. After that, however, the market responds based on its view of just how much the Fed damaged future growth. A surge, a giveback, and then the bottom as the market heads into September or October. If SP500 and DJ30 pull off this consolidation and hold it into the FOMC announcement, however, they could be the indices that for once drag the rest of the market with them. In the interim that means the same: more consolidation work just as they are doing now.
THE MARKET
MARKET SENTIMENT
VIX: 14.62; -0.23
VXN: 20.69; -0.83
VXO: 13.27; -0.05
Put/Call Ratio (CBOE): 1.06; +0.06. Another day over 1.0 as the market stalled their move some. Lots of put activity this week even as the market rose. That is an indication that many anticipate further downside action and thus are loading up as the market rebounded. A contrary indication that the market is getting a bit overdone and wants to try and rally. Another factor that makes this test by SP500 and DJ30 key.
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: -3.44 points (-0.17%) to close at 2070.46
Volume: 2.152B (+7.91%). Volume finally moved back above average as NASDAQ tested its resistance. That is churn, high volume turnover. It can signal a move is running out of gas.
Up Volume: 1.09B (-177M)
Down Volume: 1.034B (+354M)
A/D and Hi/Lo: Decliners led 1.2 to 1. Modest, matching the session.
Previous Session: Advancers led 1.53 to 1
New Highs: 65 (-17)
New Lows: 125 (+11)
The Chart: http://www.investmenthouse.com/cd/^ixic.html
NASDAQ rallied to tap the 18 day EMA (2081) on the high both early and late, then backing off to close modestly lower, holding the 10 day EMA (2066) as it did. Overall NASDAQ remains in a downtrend, making lower lows and lower highs, and thus it has to show us a break through this resistance to change its character. SP500 is trying to lead the way but as of yet NASDAQ earnings have not shown the type of growth expectations where investors start pricing in future gains. Critical test to see if it can make it through and follow SP500. The 18 day EMA is the first step, then 2100. That is the near term problem. We are not too confident it will break the 18 day.
SOX (-0.09%) rallied to tap 400 once more and then it faded again to close flat, right at the bottom channel line of the downtrend channel. Tanked lower last week, lower volume rebound this week, doji at the trendline. That is a lower volume test of a breakdown, and typically signals further selling. Of course SOX is massively oversold, but even massively oversold stocks or indices can still go lower. Wednesday after the close chips got a bit better news as WFR posted some solid results and perked the chips up. As with NASDAQ, however, this is a very bearish look as SOX stalls for now near resistance on its rebound attempt.
SP500/NYSE
Stats: -0.48 points (-0.04%) to close at 1268.4
NYSE Volume: 1.813B (+8.18%). Volume rallied above average as the NYSE indices added some gains early but could not hold them into the close. A big doji on SP500 along ith the volume indicates some churn, where the large caps ran in place on higher volume as they were passed around with no one really wanting to take them. It was a good sign that SP500hit the 50 day EMA and rebounded on higher trade: some buyers came in.
A/D and Hi/Lo: Advancers led 1.22 to 1
Previous Session: Advancers led 2.09 to 1
New Highs: 99 (-4)
New Lows: 68 (+13)
The Chart: http://investmenthouse.com/cd/^gspc.html
Was up, was down below the 200 day SMA (1266), held the 50 day EMA (1262) on the low, and the rebounded to hold the 200 day. Whew. Lots of ground to cover in a session. Basically it was a test of the prior two moves, and it held some support on the low and rebounded, showing some rising volume. A bit of churn, a bit of buying, but holding support. It hit 1274ish on the high, closer to the 1280 level. That means if it holds here and works laterally it can form a handle to its double bottom over the next week and then be ready to break higher. That might be getting way ahead of the game. It is in position to do that, but we also want to see how NASDAQ responds to its test of the downtrend.
The small cap SP600 (-0.56%) took a bigger hit, but it came back nicely after its reach down to 355 on the low. It held the 10 day EMA (358.85) on the close, still below the 18 day EMA (360.87) and well below even the first major resistance at the 200 day SMA (368), not to mention the July high at 379. The small caps are not looking all that great here. This looks as if it is finally the point where the large caps have stepped in front of the small caps in terms of performance.
DJ30
Similar to SP500, sporting a doji that tapped the 50 day EMA (11,050) on the low and rebounded to close flat. That leaves DJ30 below the July high (11,228) and above near support at the 50 day. Volume was higher but below average; not the churn of SP500. In position to work laterally and base out a handle.
Stats: -1.2 points (-0.01%) to close at 11102.51
Volume: 287M shares Wednesday versus 281M shares Tuesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
THURSDAY
Durable goods and new home sales are out at 8:30 and 10:00. Durable goods will have some bearing on the Fed, and we want to see how strong the business orders remain. The consumer is a bit weaker; need the businesses to continue purchasing and maintain the recovery.
Earnings of course remain the key driver for market direction, but the market has a pretty good bead on where they are coming in, has rebounded as some tech earnings improved this week, and is now set to decide on its direction after this relief move from the selling two weeks back. Transports are getting drubbed, as the DJ20 cracked its 200 day SMA on the Wednesday close. It has not done that since October 2005. It double topped spanning May to early July and just broke through support at 4500. The move through the 200 day SMA will likely open up more selling before a test. The point is, transports are key to the economy because they typically lead weakness in other sectors. That makes the double top and the break lower another weight on the market just as is NASDAQ's downtrend as growth expectations fall.
The factors against the market are still stacking up even as SP500 and DJ30 attempt to hold their move back above support and base out some. Earnings have not provided any real groundswell of buying; this move back up was a relief bounce that used some improving tech earnings as a trigger. It did not alter NASDAQ's position, and the large cap NYSE indices still have to show they have the strength to maintain the rebound and base out some more.
That means the market remains quite defensive even with this bounce, and we have to continue looking at defensive plays because we still feel that despite the better positioning of NYSE, the tide has not turned yet. SP500 can prove us wrong, but one of the reasons it is doing better is due to healthcare. Of course, financials are also holding up well, and they are not prone to do that if there is not some chance of economic growth. Thus we continue to let SP500 set up and look for upside opportunity within those stronger sectors and their stocks. As this continues we won't forget techs; they look bad, but if SP500 can continue basing they should start finding bottom and start to work on building some patterns. That is getting pretty far ahead of the current game, however. Indeed, ahead of that we are likely to see some stocks turn back down after this bounce, and that spells some downside opportunity as well.
Support and Resistance
NASDAQ: Closed at 2070.46
Resistance:
2072 is the June closing low is still out there
The 18 day EMA at 2081
2100 from the early and mid-2005 peaks (and the 18 day EMA as well).
The 50 day EMA at 2136
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 1268.40
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 11,102.51
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 11,050
11,044 is the January high.
10,965 from Q4 2000
The 200 day SMA at 10,955
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): Flat. Gasoline -3.2M bbl
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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