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us stock market, trade stock
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8/21/06 Investment House Daily
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Investment House Daily Subscribers:
MARKET ALERTS:
Target hit alerts: NVEC
Buy alerts: TRMB; ILMN; CAT; XPRSA
Trailing stop alerts: None issued
Stop alerts: None issued
The market alert service is a premium level service where we issue intraday alerts relating to the general market conditions, when stocks hit action points (buy, stop, target, etc.), and when we see other information impacting the market or our stocks. To subscribe to the Daily alert service you can sign up at the following link:
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SUMMARY:
- A market ready for a pullback will find a reason for a pullback.
- Gold and bonds revisited: heading the wrong way again on Monday.
- Letting the test complete and buys set up. Then it has to deliver this next leg higher in the shadow of September.
Market fades as expected, showing the right stuff thus far.
The big money was not ready to return to the market Monday, but it also was not ready to leave. Stocks had a solid run last week, were up on expiration Friday, and thus were very ripe for a pullback. They did. Things were soft in the futures when they started trading, and they did not get better into the open.
When stocks are extended investors look for a reason to confirm their wariness at taking new positions. Monday you could take your pick. Iran test fired several short range missiles and indicated no way it was going to give up its uranium enrichment aspirations. Oil was higher on that news, jumping back up over $72 ($72.48, +1.34). On top of that, LOW missed its earnings, inciting day-long commentary on the financial stations about the consumer was crapped out (a variation of tapped out) given lower housing prices, etc. Yep, the market found its reasons to sell. It couldn't, after all, be that the market has rallied. After selling off through mid-July, stocks rallied back, putting together their second leg last week. Before the third leg of this move the market needs this rest, and then it moves up again (if it has some bull legs).
The strongest sectors last week were the weakest Monday, not surprising given that techs, chips and small caps led the move. Those have the higher beta, and thus they go up more and go down more versus the overall market. On the contra side, the energy stocks, last week's laggards, moved higher. They did not, however, have any strength behind the move, so there was no clear rotation into these stocks, just a rise after the selling. That rather summed up the day: moves, but nothing with any conviction. For the stocks that rallied last week and were resting Monday, that is what you want to see. As for the energy stocks, they still have to prove that they are ready to move higher once more. They have made it back to support and are showing some life, but they need to start showing some strength once more or risk a further leg lower.
Technically the market did as you would want overall following an upside week. As mentioned, last week was the second leg higher since the July low. Market moves tend to come in threes (like bad news? That hard seems right), and thus if this is going to pan out as it looks, after this rest there should be that run higher into early September as we have written about.
The action was pretty much textbook. Volume dropped as stocks faded back, indicating no selling pressure. Indeed, volume was more akin to holiday volume at Christmas or New Years. Everyone is out for the summer ahead of school starting, and that gives the perfect backdrop for stocks to test the recent move and set up for the next run higher.
In addition, the indices easily held above near support as stocks drifted back toward their own support. Breadth was modest on NYSE (-1.4:1), a bit harsher on NASDAQ (-2:1). Leadership, again, was lacking even though energy tried to move higher. It had no strength and the moves even in the sector were scattered. Wanted to see a better countercyclical move by those stocks, but overall the pullback action was just what you want to see.
All in all, it is still time to be patient and let the market make its pullback and then go for the third leg higher in this run. We nibbled here and there, concentrating on some downside positions that were setting up with last week's rally and were showing weakness today. The upside needs more time, but even then several plays were looking solid Monday. Given the action we still see this as a time to let the market test last week's move and then continue on. Nothing Monday changed the prognosis for the near term. Nothing changed it for the long term either, come to think of it.
THE ECONOMY
Bond yields weaken further as a mini gold rush picks up.
As noted, there was a lot of chatter Monday about a weakening consumer. The financial stations did not have much to talk about with the rather slow, boring session, so why not beat the trouble drum some. Low earnings for LOW was the primary focus, but anecdotal evidence of slower sales at upscale restaurants was vaguely referenced as well. It is no surprise to anyone that sales at all restaurants slowed with gasoline prices holding high, but they too have drifted back some, helping boost consumer morale this past week despite the reported drop up in Michigan.
Much of the discussion inevitably wandered back to housing, the apparent root of all wealth in the US according to many touting their abilities on Bloomberg, CNBC, MSNBC, etc. It is a big store of wealth for the US, but it is not the only block of wealth. More than 50% of US households own equities, bonds, and other financial instruments outside of CD's (the money kind), money market accounts, checking accounts, etc. Moreover, as seen in the last recession, the business side of the economy is huge when it comes to prosperity. Business investment has backed off, but it has not faded much. But that doesn't make good copy, however.
Still, housing is important because history suggests its and Ben Bernanke feels it is. He has noted on many occasions that economic slowdowns emerge following a housing decline. Thus, if nothing else it has importance from what the Fed believes.
As you know, however, we are looking at a couple of other indicators, gold and bonds (reminds me of that Gold Bond Cream commercial). Even before this year they have had a stormy time of it with inversions and yields ever moving lower as the Fed Funds Rate rose. Bernanke did himself and the bond market no favors with his dovish commentary, but even after that jump in gold and dive in rates on those 'we may pause if we want to' comments and then his private retraction to Bartiromo, gold started to fall and yields rose. After the FOMC pause meeting they did just that again, a very good indication the market liked what the Fed did, i.e. the bond market believed the Fed acted in time to stave off an economic decline and also avoided any debilitating inflation. Bravo.
The past few sessions, however, gold has started to run back up. Not a dollar or two, but some serious jumps. Monday it was up another $13.50 to $635.20 after it threatened a drop below $600 last week. Maybe Monday was all related to Iran's missile launch and its early response to the UN on Tuesday where it will say it is going to go ahead on with its enrichment program. Also there is talk of 'doomsday' on Tuesday according to the Drudge Report. Maybe.
Problem is, bonds continued to rally, driving rates even lower. Monday the curve remained inverted with the 2 year at 4.86% and the 10 year at 4.82%. Two points to note once again: first, the curve is still inverted after doing so again just over a week back. Flat yields to slight inversions mean economic slowing. A more seriously inverted curve suggests recession. It is not there yet, but it is doing no one any favors. Second, the curve is moving lower away from the Fed Funds rate (5.25%). After the FOMC meeting yields moved up to 5% from the 4.85%ish range, a solid endorsement of the Fed action. We wanted to see rates continue higher; not surging but moving higher. Now they have reversed course and are back at the low end on this leg. That is the bond market basically saying the Fed has to cut rates given the market's take on the economic future.
With this deterioration, we have to be very wary of the stock market after this next move higher off of this test. Longer term the bond market is not indicating a vote of confidence for the economy right now, somewhat matched by the ECRI indicator.
THE MARKET
MARKET SENTIMENT
VIX: 12.22; +0.58
VXN: 19.87; +1.42
VXO: 11.05; +0.05
Put/Call Ratio (CBOE): 1.13; +0.24. Back over 1.0 for the first time in over a week.s
Bulls versus Bears: High readings helped trigger the rally seen the past few weeks, but topping out a bit for now.
Bulls: 40.9%. Ticked higher from 40.2% but still down from 41.5% the week before, continuing the retreat toward 38.7% five weeks back. It remains 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: 36.6%. Bears became more scarce, falling from the jump to 37.1%, but holding well above the 36.2% and 34.5% hit in the preceding weeks. The 37.1% was the highest level in this entire cycle, easily clearing the 34.4% hit in late June back when bulls and bears kissed, just missing a crossover. 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: -16.2 points (-0.75%) to close at 2147.75
Volume: 1.367B (-21.57%). Holiday-like volume, just what you want to see on a pullback.
Up Volume: 364M (-619M)
Down Volume: 992M (+261M)
A/D and Hi/Lo: Decliners led 1.95 to 1. A bit more aggressive than we want, but given the modest pullback it is livable.
Previous Session: Advancers led 1.12 to 1
New Highs: 51 (-17)
New Lows: 60 (-1)
The Chart: http://www.investmenthouse.com/cd/^ixic.html
Gapped lower and sold further, but the selling never got out of hand. Volume was light, and by lunch techs found their bottom and rallied to a session high in the last hour. Gave it up as volume did not move up with it, but the intraday action was again bullish despite the loss. Not hugely bullish, but the upside emerged again. Low volume, modest losses, stocks pulling back to near support. So far so good, but it is not likely over just yet.
SOX (-2.05%) was a bit uglier. Chips were generally downgraded Monday with some in particular such as NSM. Fortunately SOX broke through its 50 day EMA (429) and is in the process of testing. With that support it too can make the test hold and move into its third leg.
SP500/NYSE
Stats: -4.78 points (-0.37%) to close at 1297.52
NYSE Volume: 1.114B (-17.02%). Very light trade as the NYSE faded, the smaller caps more than the large caps.
A/D and Hi/Lo: Decliners led 1.42 to 1. Decent breadth but we note that once more the small caps were the weaker in the NYSE.
Previous Session: Advancers led 1.37 to 1
New Highs: 103 (+12)
New Lows: 31 (+8)
The Chart: http://investmenthouse.com/cd/^gspc.html
Similar to NASDAQ, SP500 was down early, bottomed at lunch, and then recovered in the afternoon session. A bit of weakness ahead of the bell, but overall a decent rebound from early selling in basically a bland and boring session. After a move higher the week before, this is a very good start to the pullback to set up the third leg. We note that the 50 day EMA (1271.85) is moving up close to the 200 day SMA (1274), in the process of making the test of the mid-July crossover. That crossover occurred just as SP500 bottomed, and now it has fought back and ready to test what is now a rising 200 day SMA (it flattened late May through July). Looks as if it will be ready to test just about the time this pullback is over and SP500 is ready to try for that third leg.
SP600 (-0.91%) turned back without even challenging its 200 day SMA (370.57), but that is okay as we did not anticipate it would make that challenge to star the week. Thursday it bumped that level at the top of last week's move and now it has to test and try again. It is pinching between the 50 day EMA (364.36) and the 200 day, and Monday it was already back to the 50 day, even undercutting that level intraday. Serious test for the small caps this week. The best we can see from them is a tight lateral move and then see if they can make the break higher later with the rest of the market after their pullback. The small caps are an economic canary; they don't do too well when the economy slowing down the road. Thus the weakness since May where they slipped from leadership to laggards.
DJ30
Very modest pullback for the Dow, basically working laterally over 11,300. If it holds above that level during this consolidation that will indicate a good bounce ahead as it refuses to give back its breakout gains from last week. On the other hand, it certainly did not put any strong moves on after making the break; it was all it could do to push through and then hold the move.
Stats: -36.42 points (-0.32%) to close at 11345.05
Volume: 196M shares Monday versus 282M shares Friday.
The chart: http://www.investmenthouse.com/cd/^dji.html
TUESDAY
No economic data scheduled for Tuesday, and just as well given the market will still be in the consolidation stage, continuing to digest last week's gains and attempting to hold support and set up for the next move. After the rebound off the July low we are starting to see more downgrades pop up as analysts try to avoid the Labor Day rush. Labor Day is always an iffy time of year. It marks the transition for the dog days of summer to the historically tough September and October months. Those months are infamous for selling, but famous for laying the groundwork of bottoms. Of course, if the economy is going south, it is also a time when things can just start getting ugly as they did just after Labor Day in 2000. Labor Day is on September 4, just two weeks away.
Labor Day may or may not be significant this year, but with bonds, gold, and ECRI starting to waffle, we are very aware this year of the September effect. We still anticipate another upside leg from this rally and then a September sag. The bigger question is what happens after that sag, i.e. will the market put in an October bottom and rally, indicating the economy just hit a slow patch (something that is entirely normal), or will it continue to sell, indicating that this pullback that started in May is indicative of a much deeper base and a much more serious economic slowdown.
Remember, to this point this pullback has been rather typical of those in this post-2002 expansion. It was one of the steepest, but it did bottom in July and recovered. If it cannot renew the upside move in the market overall, the first sign being another breakdown that does not recover, then we have that more serious pullback on our hands.
For now and the near term we will continue to look for a pullback to test last week's move and then a break higher on into September. We are not anticipating the same two week lateral move NASDAQ showed after the first leg of this move off the bottom; those are typically longer as the market is in the process of shaking off selling (look at the early 2003 test of the move off the 2002 low). After that the recoveries are quicker. Thus we still anticipate stocks holding their patterns and having enough time to post good trades and gains up into September. Again we will be playing smart; not looking for home runs at this juncture, but a lot of solid base hits where we can bank some solid gain and be ready for any September issues that crop up.
Support and Resistance
NASDAQ: Closed at 2147.75
Resistance:
2158 from the May 2005 low.
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
The 200 day SMA at 2225
2230 is the June 2006 peak
Support:
The 50 day EMA at 2116
2100 from the early and mid-2005 peaks
2072 is the June closing low
2050 from the summer 2005 lateral range lows. It has held the past three weeks.
2045-47 from June and October 2005 lows and June 2004 highs
2037 at the October 2005 closing low
2020 is the July closing low
2019 is the April 2005 interim high
S&P 500: Closed at 1297.52
Resistance:
1315 is the May and May 2001 peaks
1311 is the April closing high.
1324 to 1329 from the October 2000 lows.
Support:
1294 is the January 2006 high and 1297.57 is the February 2006 high.
The early June high at 1288
The late January peak at 1285
1280.37 is the recent July peak.
The 200 day EMA at 1273.79
The 50 day EMA at 1271.84
1259.50 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.
Dow: Closed at 11,345.05
Resistance:
11,350 from the May 2001 peak
11,401 from the September 2000 peak and April 2001 highs
11,642 is the May 2006 closing high
11,670 is the May intraday high
Support:
The March 2006 highs at 11,329 to 11,335
11,279 is the late May high
The 10 day EMA at 11,258
11,243 is the August closing high.
11,228 is the July closing high.
11,097 to 11,137 is the last peak from the February top.
The 50 day EMA at 11,136
11,044 is the January high.
The 200 day SMA at 11,034
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
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
August 23
Existing home sales, July (10:00): 6.55M expected, 6.62M prior
Crude oil inventories (10:30)
August 24
Durable goods orders, July (8:30): -0.8% expected, 2.9% prior
Initial jobless claims (8:30): 315K, 312K prior
New home sales, July (10:00): 1.105M expected, 1.131M prior
End part 1 of 3
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