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us stock market, top stock pick
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7/31/06 Investment House Daily
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MARKET ALERTS:
Target hit alerts: CRAY
Buy alerts: DJO
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Stop alerts: None issued
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SUMMARY:
- Stocks take a pause after rallying in anticipation of a Fed pause.
- Prices moderate some in Chicago region, but still strong as sector improves.
- FOMC members getting in their last shots before their own quiet time.
- Economic data rolls in as first of the month money likely to try and find a home Tuesday.
Slow session is a good session after choppy two weeks of gains.
The way this market has acted since the early May peak, you almost were afraid for the market to open Monday. Most rally attempts have met sellers and have lost. Monday, despite the rising escalation in the Middle East during the one-sided ceasefire, stocks started just a bit softer and basically closed that way. The large caps were down a bit while the smaller caps and the chips were up a bit, all on light volume. Given the low volume rise Friday, holding gains on low volume in a quiet session was a relief.
Earnings continued, but at this stage of the season the jig is up; basically earnings are strong but guidance is showing some cracks and thus the market is looking to other issues. WMT reported 2.4% sales growth for the week, but that is now the top end of the range. Hard to get excited about that when 5% to 6% was the top end not too long ago. Thus last week investors looked toward the Fed as the most important impact on future stock prices, and that continued Monday. While the Fed did not say much last week (through its members, of course), the bond market priced in just a 30% chance of a Fed rate hike on August 8.
Given that, you could anticipate some Fed-speak to try and rein in that movement. Sure enough, the Poole hawk was out early Monday, saying the chances of rate hikes were still 50/50, a loosely veiled threat that the Fed could still get ugly on inflation. The bond market ignored it as yields continued to fall. The curve is no longer inverted, but with both the 2 year and the 10 year both under 5% (4.96% and 4.98%, respectively), it is clear that the bond market is shouting its view that the Fed should stop now.
Stock investors basically ignored Poole as well, starting soft, rallying back, but then unable to hold the moves and closing flat. We know investors ignored Poole because the Fed's Yellen was out later saying that the Fed was "close to the end of the road" with respect to rate hikes. The market yawned. Sure it was up midmorning, and Yellen's comments may have helped to move stocks along with a stronger than expected Chicago PMI, but by lunch stocks were lower, and a late rebound could not get them all back to positive again.
Technically it was a consolidation session. The large caps finished lower with DJ30 and SP500 just below the July highs. NASDAQ continued to try and struggle higher, bumping 2100 on the high and fading back some. Basically no movement on no volume on flat breadth. As we said, a consolidation session.
That leaves DJ30 and SP500 just below the July highs, and doing what they should if they are going to form handles to their double bottoms. At least they were doing that on Monday. Also, they avoided the biggest issue this market faces: an immediate sell off. Instead, a nice, slow, low volume session, just how a consolidation that sets up the next move would begin. NASDAQ remains over its 18 day EMA and just below 2100 resistance, trying along with SOX to bounce higher in their downtrends. As with the NYSE indices, that is how you try to break a trend, i.e., make a move to resistance, pause, then break through, pause, etc.
In sum, the indices did what they needed in order to try and continue the upside. It was time for a pause and they took it. Tuesday brings in August, and the past few months that has meant new money into the market and thus gains for the day, or at least the first part of the day. The past few weeks money has been leaving US money market accounts so we might not see the same punch this time. As long as the market can avoid selling off sharply, however, a bit of consolidation is just what it needs here.
THE ECONOMY
Chicago PMI counterbalances the New York and Philly regions.
It was not blowout, but it was an upside surprise as July in Chicago and the Midwest is not only hot outside but getting a bit hotter in manufacturing. The 57.9 reading topped the 56.0 expected and the 56.5 June reading. That puts July just below the midpoint of a three year range. New orders jumped back above 60, and production vaulted to points to 64.2, both good signs for the future. Employment was still just above breakeven at 50. Prices paid moderated, falling to 86.8. That is off of a 16 year high at 89.0 in June. It fell, but it is hard to break out the champagne of beers when prices are still this high.
Chicago is considered a more accurate harbinger of the national ISM; of course the ISM is out on Tuesday, so Chicago's forecasting of the national number is not that key anymore. And of course, the regions are basically just predictors of the national level because the Fed is concerned nationally. So you ask why are we covering this and we have to say because it is there.
Dueling Fed opinions.
We also look at data such as the Chicago PMI just to know what goes into the minds of Fed officials. You could say we try to crawl into their heads and determine where they stand, but the last thing I want to do is get into that mess, particularly when you hear what comes out in their comments.
It is also discouraging when you continually have the Fed chairman wannabes (or the next author wannabes) trying to one-up each other between meetings. Poole gives a speech and says they are at 50/50. Yellen fires off a salvo of 'close to being done.' Now we have to ask, does that mean the Fed is in the ninth inning? Better get Fischer in on the commentary. After all there is only one day left before the Fed goes into its quiet time and what would a pre-FOMC warm-up be without Mr. Ninth Inning (as stated in early summer 2005) throwing his rather obtuse 2 bits into the fray. Someone call Dallas and ask.
One of the Fed goals is to become more transparent. Both Greenspan and Bernanke have done a lot to alter the closed door meetings with no minutes and a decision coming out weeks later with no announcement, just a hike in your bank's prime rate. One of the by products, however, is the incessant commentary from the Fed. Sometimes you just want to say enough already. Grow up, stop trying to grab the limelight, keep your mouth shut, vote on rates, and then tell us in clear and concise manner why the Fed voted as it did and where the Fed thinks it needs to be. Now that is clarity, at least useful clarity. All of this speechmaking, exclusive interviews, etc. just muddies up whatever has been done to clarify the picture. Again, we are fortunate that Tuesday is the last day we will have to hear the dueling banjos of the FOMC members until after the August 8 meeting.
THE MARKET
MARKET SENTIMENT
VIX: 14.95; +0.62
VXN: 20.33; +1.07
VXO: 13.77; +0.33
Put/Call Ratio (CBOE): 0.84; -0.04. Second close below 1.0 in a row after almost two weeks above 1.0. Got a bounce but not a powerful one. Still, the large cap NYSE indices are working on a double bottom and perhaps there is strength to come.
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: -2.67 points (-0.13%) to close at 2091.47
Volume: 1.693B (-9.79%). Volume was once again lower as NASDAQ reached up toward next resistance at 2100, but as it rolled over and finished modestly lower, a lower, below average volume session was not bad. Given its pattern, no renewed stronger volume selling is a good thing.
Up Volume: 748M (-792M)
Down Volume: 864M (+538M)
A/D and Hi/Lo: Advancers led 1.1 to 1. Breadth managed to drag itself positive in the last hour of the day, not bad for a downside session. Matched the entire market action: middle of the road.
Previous Session: Advancers led 2.32 to 1
New Highs: 78 (-5)
New Lows: 79 (-22)
The Chart: http://www.investmenthouse.com/cd/^ixic.html
NASDAQ tapped at 2100 resistance on the high and the 18 day EMA (2081) on the low. It remains perched on the 18 day EMA, trying to gather itself to make the next step up toward the 50 day EMA (2129) where it stalled in early January on that bounce. Still in the downtrend but trying to show some life. In order to overcome the downtrend it will have to show some strength and not just follow the crowd on another bounce up to the 50 day EMA. Thus far NASDAQ stocks are still primarily in disarray, needing this rebound to work on setting up bottoms once again.
SOX (+0.13%) managed a positive close, holding the 18 day EMA (410.95) on the low, just managing to hang onto that resistance level that has stalled SOX since early May. Trying to pick up the pieces and continues its move up toward the 50 day EMA (435.67) and make that oversold bounce in its downtrend that is a bit long in coming.
SP500/NYSE
Stats: -1.89 points (-0.15%) to close at 1276.66
NYSE Volume: 1.617B (-4.27%). Volume slipped on NYSE as the large cap indices faded and the small caps bumped higher. Virtually no change in their positions, so a nice below average volume session is good for the market.
A/D and Hi/Lo: Advancers led 1.02 to 1. Positive action in the small and mid-caps helped bring the advancing issues out on top.
Previous Session: Advancers led 4.05 to 1
New Highs: 94 (-26)
New Lows: 59 (-7)
The Chart: http://investmenthouse.com/cd/^gspc.html
SP500 held steady under the July high at 1280. As noted, avoiding a sell off is the first step. Nice, low volume consolidation of the Friday move, and basically of the entire two weeks now that it has hit the 'hump' in its 11 week double bottom that looks as if it is trying to start a handle, i.e., a low volume shakeout that sets it up for the next break higher through resistance. As SP500 makes this lateral move we are going to keep watching the 50 day EMA versus the 200 day SMA to see how that crossover responds. It is turning up slightly toward the 200 day. While price/volume action and leadership will key the move, if they don't come to the fore we would expect to see the 50 day EMA stall out before the 200 day SMA even if the index moves a bit higher from here.
Modest upside bump by SP600 (+0.31%) holds the 18 day EMA (360.64) as SP600 tries to set up its own double bottom. As noted over the weekend, it is still deep down in the pattern, well below the 50 and 200 day MA (367 and 368.5, respectively). Lots of work still to be done with these stocks in order to put together a recovery. Given a softening economic condition, they will find it harder to recover.
DJ30
Once more very similar action in the two large cap NYSE indices. DJ30 posted a modest pullback (though the largest of the market Monday), falling back from the July high (11,228) on very low, below average volume. Of course, the entire move last week was on below average volume, so you have to look at relative levels. Strong upside price move and now the first day of a possible handle forming. As noted above, doing what it has to do at this juncture to set up a better move. Low volume to this point so you have to be a bit concerned, particularly with NASDAQ and the small and mid-caps still deep in their bases. For now it is setting up, doing what it can despite the other indices
Stats: -34.02 points (-0.3%) to close at 11185.68
Volume: 226M shares Monday versus 270M shares Friday. Now that is low volume on a decline, indicating no real selling.
The chart: http://www.investmenthouse.com/cd/^dji.html
TUESDAY
First of the month, and as noted above, the past 8 months that has meant new money moving into the market on that first session. Some days it has turned over by the close after a higher open, but the money has come in to start things off. It will be very interesting to see how this month performs given the outflows. There will also be some important economic data out early (personal income and spending at 8:30) and then the ISM at 10:00.
Once more investors will have plenty to chew on, likely with some Fed commentary sprinkled in. The thing we will watch more than anything is whether the market continues ignoring the data as it did Monday and work on its pattern, at least the patterns SP500 and DJ30 are setting up. There are times the market puts its head down and gets about its business regardless of the news. It has made its decision and is going to go with that. Look at the bond market; despite all of the Fed-speak, high PCE in Q2, war tensions, etc. it has decided the Fed is not going to hike and has priced that in. If there is some conviction the indices will continue working on their patterns or just go ahead and break higher.
You still have to approach this action with caution. NASDAQ, SOX and SP600 remain in poor shape, price/volume action on this bounce has been poor, and despite the Fed at or right at stopping its rate hiking, there is economic slowing. As noted over the weekend, the market tends to price a Fed cessation in ahead of the fact and then stall some after. Not necessarily bad as it lets stocks rest from the move higher and set up the next move, the breakout move. Thus far the rally has fought off some distribution on the way up, but if we see some strong volume if the indices stall it could wash it away.
Thus some caution but we saw some good stocks stirring with some decent moves Monday, and every rally needs leadership. This one is still lacking good leadership, though energy stepped up some Monday to join some healthcare, drugs, etc. Tech is trying, but the action is very spotty and a lot of it is rebounding from some pretty harsh downtrends. We are going to continue looking for upside plays here as well as keeping an eye on some downside as this market makes its decision as to life after the rally the past two weeks. NASDAQ and SP600 could very easily still play some catch-up to their 50 day EMA while SP500 and DJ30 work laterally.
Support and Resistance
NASDAQ: Closed at 2091.47
Resistance:
2100 from the early and mid-2005 peaks (and the 18 day EMA as well).
The 50 day EMA at 2129
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:
2072 is the June closing low
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 1276.66
Resistance:
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:
1272 to 1268 is the November and December 2005 closing highs and March 2006 closing low
The 200 day EMA at 1267
The 50 day EMA at 1263
1253 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 11,185.68
Resistance:
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:
11,097 to 11,137 is the last peak from the February top.
The 50 day EMA at 11,064
11,044 is the January high.
The 200 day SMA at 10,969
10,965 from Q4 2000
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 31
Chicago PMI, July (10:00): 57.9 actual versus 56.0 expected, 56.5 prior
August 1
Personal Income, June (8:30): 0.6% expected, 0.4% prior
Personal Spending, June (8:30): 0.4% expected, 0.4% prior
Construction spending, June (10:00): 0.1% expected, -0.4% prior
ISM Index, July (10:00): 53.5 expected, 53.8 prior
August 2
Crude oil inventories
August 3
Initial jobless claims: 308K expected, 298K prior
Factory Orders, June (10:00): 1.7%, 0.7% prior
ISM services, July (10:00): 56.5 expected, 57.0 prior
August 4
Non-farm payrolls, July (8:30): 145K expected, 121K prior
Unemployment rate, July: 4.6% expected, 4.6% prior
Hourly earnings, July (8:30): 0.3% expected, 0.5% prior
Average workweek, July (8:30): 33.9 expected, 33.9 prior
End part 1 of 3
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