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us stock market, top stock pick
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7/27/06 Investment House Daily
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Stop alerts: SOX
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SUMMARY:
- Stronger start flips, leaving SP500 at support and NASDAQ fading from trendline.
- Strong durable goods orders, low jobless claims fail to alter bond rally.
- Once again it's a fight between growth and defense but positive signs are starting to show up to help down the road.
Early gains tossed back in a big swing from positive to negative.
Investors were ostensibly taking a different view of economics early Thursday with futures pushing solidly higher after a stronger than expected durable goods report and initial jobless claims dropping below 300K. Combined with some pretty solid earnings reports from technology and industrials stocks opened higher as good news was perceived as good news. SP500 pushed onward and upward toward the July high (1280) as DJ30 did the same. NASDAQ and SOX moved through the 18 and 10 day EMA, respectively, something they have not done since July started.
The new home sales report issued at 10ET, and it showed slower sales than expected. Before that news hit, however, the market was already testing the early move. It continued lower until SP500 tested the 200 day SMA. That initiated an overall market bounce back higher, and then a lateral move through lunch. In a stronger market that would set up an afternoon upside move. In this market it set up an afternoon of selling. SP500 fell through the 200 day SMA and closed at the 50 day EMA. DJ30 held on, losing no ground and looking quite solid as it continued its lateral consolidation.
NASDAQ did not fare as well. It swung 39 points from high to close, finishing below both the 18 and 10 day EMA. SOX actually held positive into the close, but it gave back more than half its gain by the close as it hung onto the lower channel line of its downtrend. Strong move indeed.
Technically the market remains split but the slugs were taking over again. DJ30 is acting as if nothing negative is going on. No dumping transports (DJ20), no struggling SP500, no weakness in techs. Problem is, those are market negatives. The transports continued to dive lower, furthering the move through the 200 day SMA. That is bad for DJ30 and generally all of the market. SP500 did not fold up its tent, but it gave up the 200 day SMA after giving away a 7.5 point gain. NASDAQ reversed at its downtrend. SP600 tried the 18 day EMA as well and it too reversed and gave back its gain and more.
This reversal was accompanied by rising, above average volume on both NYSE and NASDAQ. Not a huge surge of volume, but another higher volume session on the heels of the 'churn' Wednesday where the indices could not make any headway as volume rose. The intraday action was a high to low flip, bearish in itself. When accompanied by that rising volume and NASDAQ's failure at downtrend resistance, you have the same issue in prior declines, i.e. the NASDAQ and growth sectors leading the rest of the market lower. With the overall slowing economic data and weak bond yield curve, the decline in growth stocks and sectors suggests the market is still struggling to find a floor for this round of selling. We have seen NASDAQ lead the moves lower during this selling, and with it swinging 40 points high to low Thursday, we have to be ready in the even the large cap NYSE stocks and indices get dragged lower as well following this last recovery attempt.
THE ECONOMY
Durable goods orders surprise to the upside on strong airplane orders.
June durables rose 3.1% versus the 2.3% expected and up from May's 0.3% gain. June topped expectations, and May was revised up a half point from a 0.2% loss initially reported. Take out the 8.8% rise in civilian aircraft and 12% gain in military planes and orders rose 1.0%, still stronger than the 0.7% predicted.
Pretty strong stuff, but one of the keys ahead for the economy as the consumer wanes is business spending. In June the non-defense capital goods orders ex-aircraft rose just 0.4% versus the 1.3% gain in May. Likely just a lull in buying, but this area needs continued strength as energy prices continue their rise; any drops have to be watched as the summer progresses.
Jobless claims duck below 300K.
For the first time in six weeks jobless claims fell below 300K, coming in at 298K. That beat expectations of a gain to 310K from 305K. The Labor Department cited no special factors for the drop.
It is interesting to note that the report was framed as signaling 'stable conditions' in the labor market. It is all a matter of perspective; we all know numbers are used in different contexts in order to make the point of the day. Back in 1999 and 2000 the Fed used the 300K jobless claims level as indicating an overheated, too tight labor market, requiring the Fed to raise rates in order to prevent so-called jobs related inflation. Right now the Fed is just about done with hikes as the claims level heads back down and the 4-week average falling to 312,750. If you want to make the case for rate hikes, 300K shows a tight labor market. If you are just about done with rate hikes, 300K shows a stable jobs market. No wonder people get a bit jaded with the Fed and its actions and even motivations.
New home sales struggle as cancellations rise, but still at solid levels.
June sales fell 11% year over year, one of the larger percentage drops in the data. That means 556K homes were for sale, either completed or under construction, the largest ever in the report. The completed homes for sale was 132K, also a record. That was a modest increase from May, year over year they were up 24% and 28% respectively.
The industry insiders say the slowdown is worse than the government numbers report because those numbers do not factor in cancellations. Indeed, it is estimated that May cancellations were 14% when there were just 4.4% cancellations in May 2005. Netting the cancellations with the actual declines in sales for that month and you get a drop in sales more in the 30% range. June cancellation data is not yet available.
We almost hate to say it, but despite the lower sales and cancellations, the market is not collapsing, just steadily eroding as it has for over a year now. We were talking about this last spring and summer, how the market was in a peaking process. It has definitely gone over the top of the peak now as the downside is picking up speed, but even with that the market is quite strong. You are always leery of saying 'still hot' as a sector declines, because hot becomes cold rather quickly without a fire beneath it. Thus far, however, the decline has been orderly, and if Bernanke sticks true to his word regarding his beliefs on housing and the economy the Fed is done on August 8.
THE MARKET
MARKET SENTIMENT
VIX: 14.94; +0.32. Never really spiked on the last selling round, not reaching 20 on the bump higher. It had hit 23 in June, and we note that VIX can take a few months and a few spikes higher to make a difference.
VXN: 20.79; +0.1
VXO: 14.44; +1.17
Put/Call Ratio (CBOE): 1.05; -0.01. Another day another close above 1.0, about two weeks straight with a day off in the middle. This suggests a lot of speculation on the downside but it is also not an accurate timing device. It shows sentiment is getting speculative, but alone it is not an absolute predictor.
Bulls versus Bears:
Bulls: 42.2%. Bumped back up to the level two weeks back as bulls are in a lateral holding pattern. (42.1% last wee, 42.2% the week before). 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: 34.5%. Bears are moving higher the market sold off and then rebounded. Up from 33.7% last week and 33.3% the week before. Still lower than the 34.4% hit three weeks back, but on the climb again. 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: -15.99 points (-0.77%) to close at 2054.47
Volume: 2.185B (+1.53%). Volume remained above average and bumped higher as NASDAQ tried the move through the 18 day EMA resistance but then rolled over and closed sharply lower given the large intraday point reversal. Not good action, indicating the sellers moved in with more numbers after this rebound to the trend resistance.
Up Volume: 762M (-328M)
Down Volume: 1.405B (+371M)
A/D and Hi/Lo: Decliners led 1.66 to 1. Breadth was quite modest given the 16 points lost. Breadth tends to lag reversals in the market, and thus this figure somewhat masks the selling as the large cap NASDAQ 100 fell less than overall NASDAQ.
Previous Session: Decliners led 1.2 to 1
New Highs: 73 (+8)
New Lows: 129 (+4)
The Chart: http://www.investmenthouse.com/cd/^ixic.html
NASDAQ pushed through the 18 day EMA (2078) for the first time since early July, coming within 7 points of next resistance at 2100. Then it turned over and reeled off 39 points to the downside, falling back through the 18 day and the 10 day EMA (2064). Some support here at 2050, but this is not the kind of move you want to see for a continued attempt higher. The tech sellers moved back in after a pause.
SOX (+1.07%) was the lone index to hold positive by the close, but it too had its troubles on the session. It moved up through the bottom channel line of its downtrend, cleared the 10 day EMA (402.20) and tapped toward the 18 day EMA (410.54). It then gave back almost two-thirds of its gains, ending up below the 10 day EMA. It is still showing more life than NASDAQ right now as its rollback was not a complete reversal. Maybe it will provide some tech leadership here after getting rocked for three months, but we are not counting on anything from tech at this point.
SP500/NYSE
Stats: -5.2 points (-0.41%) to close at 1263.2
NYSE Volume: 1.82B (+0.36%). Volume was above average again as the large caps tried to push higher but faded to the 50 day EMA and the small caps took a beating similar to NASDAQ. You can find a silver lining but you are looking hard to do so.
A/D and Hi/Lo: Decliners led 1.31 to 1. Modest downside breadth given the 1.24% decline in SP600. Again, a reversal typically sees breadth lag.
Previous Session: Advancers led 1.22 to 1
New Highs: 121 (+22)
New Lows: 92 (+24)
The Chart: http://investmenthouse.com/cd/^gspc.html
The large caps pushed higher once more, hitting 1276ish on the high, the best showing since the mid-July sell off. That left it below the July high at 1280. After that test it folded and closed lower, breaking the 200 day SMA (1266) and closing on the 50 day EMA (1262). Still at support and still able to hold the line here and continue its attempt at basing laterally and forming a handle to its double bottom spanning June and July. There were definitely sellers in the crowd today following the Wednesday churning where shares traded hands quite often. Thus far it is handling it.
SP600 (-1.24%) was not handling it. The small caps tried their hand at breaking through near resistance at the 18 day EMA but rolled over and fell back for a substantial loss. Unlike SP500, the small cap index did not even come close to clearing the 50 or 200 day SMA on this most recent bounce after making a lower high and then a lower low. Has the look of a downtrend setting up a la NASDAQ as the growth sectors continue to struggle.
DJ30
DJ30 held tough, closing basically flat on continued below average volume. Another doji on the candlestick chart, this one a tombstone doji. After a move higher that indicates a pullback ahead. Now it does not suggest a massive rollover. DJ30 is holding tough near the July high (11,228) after tapping at that level Thursday (11,188) before falling back to close flat. It remains above the 50 day EMA (11,052) and is continuing to try and set up a break higher. No distribution as on the other indices, no rollover on volume. It gave up ground, but it rallied nicely the past two weeks. For a continued move higher it needs to hold in the range of the 50 day EMA as it tests back, working off the move higher and then preparing for the next move. It and the NYSE are the best looking patterns in the indices.
Stats: -2.08 points (-0.02%) to close at 11100.43
Volume: 286M shares Thursday versus 287M shares Wednesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
FRIDAY
Earnings have led the market to this juncture, and by the state of affairs they have not done a very good job: DJ30 is holding nicely, but SP500 is trying to hang on at the 50 day EMA while NASDAQ and SP600 are diving back down on stronger trade. Friday the Q2 advance GDP reading is out, and that piece of data will be logged in the Fed's book of rate hikes. True it is not an inflation indicator at all; you can have prosperity without inflation as we all saw in the 1980's and 1990's, but hey, if the Fed believes growth impacts inflation, then lower growth in an economy that needs the Fed off its back is a good thing.
As subsets of GDP we get the chain deflator, an inflation measure, and the Employment Cost Index, both closely watched for their supposed inflation indications. The point is that we will get some time-dated data that might have an impact on the market in addition to the earnings reports and the key guidance. Recently the guidance has improved, particularly outside of technology, but stocks continue to struggle overall. Strong results set stocks free to race ahead. Weak results or guidance sends stocks into the tombs. The market is at best in a holding pattern (if you look at NYSE, SP500, DJ30) and at worst resuming its downtrend (NASDAQ, SP600), both vying for control.
We are not seeing a lot of improvement in the economy moving forward, and while you can have a rising market with earnings growth contracting, that is a hard recipe to get right. It is about as easy as the Fed getting its rate hiking just right to where we maintain jobs and economic growth yet stamp out inflation. Gee, that has happened about never in the Fed's history. It got close in 1994 and 1995, but it had the help of a 20 year economic boom that was sans inflation in any event.
Right now we have a bond yield curve that actually flipped from inversion today, with the 10 year bond at 5.08% and the 2 year at 5.05%. That is a real positive for the market if the Fed lets up on its rate hikes. The problem remains that the yields are well below the Fed Funds rate, meaning the bond market, though feeling better, still believes economic activity is heading lower before it goes higher. Stock prices in the growth areas are telling us that as well.
The big question is when is the bottom put in. The yield curve has made a positive turn. Stocks have not done so, and NASDAQ is threatening a harder fall. We did not want it this soon but would have preferred a bounce on into august, then some sideways work, and then a failure that takes it into September where it does some more bottom work and then is set up. It is all occurring in roughly the right time frame, however, and while growth looks ready to try another low here, as with the Fed's rate hiking, the selling may be approaching the end given the yield curve action. The market sells ahead of the slowdown and bottoms ahead of the rebound.
Again, while we feel there is still more downside work to be concluded, there are positives showing up. Part of that would be the Fed letting us know on August 8 that it is done, hike or no hike on that date. The market would rally but would also then need to come back once more. Again, not bad timing in the typical calendar year for stocks.
This means that while the market has turned defensive, the defensive days are numbered. At this juncture, however, technology is not showing any sign it is ready to buy, and thus riding out the dip that is still likely to come means still playing some defensive sectors as well as looking for some downside opportunity as it presents itself. This is still a very weak time of year and the action has reflected that. At the same time things look bad there are some positives trying to emerge. They could still fold and not come to be, so we continue to play some defense with what we buy, and we are going to be ready to close out positions if SP500 cannot hold the line at the 50 day EMA. We can always pick up a stock or play again.
Support and Resistance
NASDAQ: Closed at 2054.47
Resistance:
2072 is the June closing low is still out there
The 18 day EMA at 2078
2100 from the early and mid-2005 peaks (and the 18 day EMA as well).
The 50 day EMA at 2132
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 1263.20
Resistance:
The 200 day EMA at 1266
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 50 day EMA at 1262
1252 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 11,100.43
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 11,052
11,044 is the January high.
10,965 from Q4 2000
The 200 day SMA at 10,959
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): 3.1% actual versus 2.3% expected, +0.3% prior (revised from -0.2%)
Initial jobless claims (8:30): 298K actual versus 310K expected, 305K prior
New home sales, June (10:00): 1.131M actual versus 1.164M expected, 1.116M prior (revised from 1.234M).
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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