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us stock market, trade stock
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8/23/06 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Target hit alerts: RS
Buy alerts: None issued
Trailing stops: None issued
Stop alerts: HWAY
SUMMARY:
- A calm pullback gets its doors rattled.
- Largest part of housing market falls 4.1% in a month, 11.2% year over year.
- Outside shock delays start of the third upside leg.
Market consolidation gets testy.
Through the Tuesday close the consolidation was orderly and quite calm with stocks easing back to near support, testing their nice gains the prior week on light volume. I noted almost as an aside that the pullbacks in individual stocks looked almost too good, that the in passing that the pullback in leaders looked too steady and that the pullback was almost too calm, too pat. That will teach me to keep my mouth shut.
The market started out just fine with stocks and leaders moving higher right out of the gate. Futures were wobbly, but improving by the bell, and prices continued to strengthen. Didn't want that to happen so early, preferring to see stocks build into the session. Again, be careful what you ask for.
A half hour into the session July existing home sales were released and they fell 4.1%, much more than expected. Inventories surged to 7.3 months. We were not looking for too much of an impact from this report. After all it is no secret housing is on the way down. Maybe it was the size of the decline that did it, but stocks immediately fell under pressure, and the repeated theme we heard from brokers and hedge fund runners was concern about the economy. That was no doubt a large part of the reason for the weakness. Just look at the action on the small and mid-cap indices; they fell like stones.
Kind of ironic. Tuesday the inflation hawks stooped on the market and sent stocks lower midday as investors feared the Fed would get back into the game if the economy remained too strong (whatever the heck that means). Wednesday the news all but assured that a Bernanke-led Fed is not going to raise in September and is likely not to raise again. So with one worry out of the way the market replaced it with another. That is not the same character that it exhibited of late when confronted with issues.
Oil inventories fell much less than expected, but the market did not take any solace. Crude fell by 400K bbl (-1.09B expected); gasoline rose 400K when it was supposed to fall 2.4M bbl; heating oil surged by 2.3M bbl versus the 340K expected. Oil continued to backtrack on that data, closing at 71.76, -1.34. All rather positive for stocks, but stocks did not seem to care. Still too high to offset the slump in housing. Further, energy stocks, after a modest blip higher this week as the rest of the market rested from last week's move, fell back again in the face of those rising inventories. Even the tougher US' response to the Iranian nuclear response failed to spark any interest in oil, instead just adding to the pressure on the market overall.
Technically still hanging in the consolidation.
Though somewhat wishy-washy in its response to news Tuesday and Wednesday, technically the market is still in position to continue higher. The major indices sold more than they have to date in the consolidation, but they also held the 10 day EMA on the close. Volume was lower than already low levels, indicating there was no distribution in Wednesday's action. Breadth was roughly -2:1, not out of hand.
Leadership remains in good shape overall, pulling back to near support as well as they continue to test the solid breaks higher last week. We continue to look to them to resume their moves after the Wednesday news works through the system. NVDA, HITT, VARI, WEBX, DRIV, BRCM, IDTI, NVLS, SEIC, WFR, etc. are all in good position to rebound for more gains. Indeed, these type of patterns will provide the best vehicles to ride the next leg higher into September: they already broke out, and the rebound off the first test of a breakout can run quickly, just what we want heading into an iffy time of the year.
Some of the action did give reason for concern. There were some intraday reversals from strong stocks that were on the hunt (e.g. FORM, BAM). There were also some downside blowouts from stocks in pretty good shape. That always happens in tests as the market weeds out the weak, but when you see some solid stocks turn lower you need to note that and keep watching for other signs of weakening.
One such area was the breakdown in the small and mid-cap indices. They fell through the 50 day EMA and out of their lateral consolidations. These indices harbor growth stocks, and growth stocks need an expanding economy. Between the Fed-speak and the very weak housing data, seems the weaker economic data won out and they went lower. That does not speak very well for the economy down the road.
But then again, we know that. Right now we are focused on what the market can do before those ramifications are felt. The large caps and technology can still put in a third leg on this rally as anticipated, and they are still going about setting up to do that. The small caps have lagged for months now while SP500 and DJ30 built their patterns. The fact that they smaller issues are struggling is not going to crush the large caps in the near term. Indeed, large caps typically take over for the small caps as an expansion matures, and that is exactly what is finally happening (two years after many were convinced it had to happen way back then).
The Wednesday action helped shake things up, and instead of wrecking the consolidation attempt it likely aided it by getting some to go ahead and sell out. That shakeout is often how the market gets the last pieces in place before moving back up. Needs to make that move, however, as the indices are now at a point where they have to hold and resume the move higher if it is going to get this third leg in the books.
THE ECONOMY
Existing home sales hit the skids.
Housing is down and the pace of the decline is picking up some as sellers realize they are not in Oz anymore (back to Kansas). Sales dumped 4.1%, the hardest decline since January of 2004. They were down a manhood robbing 11.2% versus July 2005. The real crusher, the data point that made everyone realize there is a mountain of work to do in the housing market before it recovers, is the 3.2% rise in inventories to 7.3 months. That is the highest since April 1993 and represents 3.86M homes for sale. That is a 40% rise from last July.
Hard to be happy about that. The cause is what we were talking about in late 2004 and into the summer of 2005: the overbuilding by builders. As is usual, they overbuilt during a boom. How many times leading up to the fall of 2005 did the homebuilder CEO's appear on CNBC, Bloomberg, etc. and tout how there was a 10 year boom still ahead in the housing market because of demographics? At the time we noted that this unwarranted bullishness would lead to overbuilding, and it has.
Now you will say how does builder overbuilding add to existing homes? The market was hot and there were a lot of speculators. A lot of those new homes sold to speculators and they are now on the market unable to sell them. That is pushing prices lower in all regions of the US outside of the South. Another round of year over year declines indicates a solid weakening in prices. Nationwide prices fell 0.91%. Not much, but compared to the 12.4% gain in prices during 2005 and the 9.3% rise in 2004, it shows a serious slowdown. Think of it in terms of the 2001 recession. It was shallow in terms of how negative the economy turned, but the drop from lofty heights (10+% GDP growth rates to negative in three short quarters) was indicative of a massive collapse in business activity.
Eventually declining prices will bring buyers back into the market, looking for houses they can now afford. If interest rates remain low that will only help. Indeed, mortgage activity jumped last week as the low rates spurred some purchasing and a lot of refinancing.
THE MARKET
MARKET SENTIMENT
VIX: 12.4; +0.21
VXN: 20.29; +0.33
VXO: 11.26; +0.22
Put/Call Ratio (CBOE): 1.33; +0.18. Another close above 1.0, making it 3 in a row. This can indicate that the selling is getting overdone, and indeed it is doing just that, but it has lost some of its strength as an indicator of imminent change. It is showing things are getting overdone but that is about all we can take from it right now.
Bulls versus Bears:
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: -15.36 points (-0.71%) to close at 2134.66
Volume: 1.511B (-6.76%). Volume faded back, still coming in at very low, below average levels. That is good to see on the rougher selling Wednesday. Last thing we wanted here was a resumption of distribution, i.e. dumping of shares by the big money. A lower volume hold at support by NASDAQ is just fine.
Up Volume: 579M (-400M)
Down Volume: 893M (+281M)
A/D and Hi/Lo: Decliners led 2 to 1. Getting a bit friskier but still within reason for the session, particularly when compared to the readings in late July and early August.
Previous Session: Advancers led 1.28 to 1
New Highs: 50 (-10)
New Lows: 65 (-1)
The Chart: http://www.investmenthouse.com/cd/^ixic.html
NASDAQ gapped higher and tried to run but failed before hitting the Tuesday high (2163), rolling over to the 10 day EMA (2127). It held the 10 day on the intraday low, manage a bounce, albeit a modest one, into the close. Though it traded lower than the prior three sessions, NASDAQ is still holding support as it consolidates on lower volume. It broke above the 50 day EMA (2118.60) last week as part of its run on breaking its downtrend. Now it is testing that break above the 50 day, and that is very normal action. Still looking for NASDAQ to rebound from here as we see many solid tech stocks holding a pullback to near support.
SOX (-0.74%) was holding up better than most of the market, but then it lost its drive as well. Similar to NASDAQ, it is settling back on lower volume, tapping the 50 day EMA (420.6) on the low, coming back to test after breaking its downtrend and blasting over that level as well last week. Nice, modest test, and now it is ready to rebound and try 450 once more, and if successful, on to price resistance at 475 and the 200 day SMA (483). That will likely be all that SOX gets for some time.
SP500/NYSE
Stats: -5.83 points (-0.45%) to close at 1292.99
NYSE Volume: 1.214B (-0.08%). Basically flat trade over Tuesday, and still solid price/volume action as SP500 came back to test near support along with DJ30. SP600, despite the low volume, fell hard.
A/D and Hi/Lo: Decliners led 2.18 to 1. Those small and mid-caps sucked the breath out of breadth.
Previous Session: Advancers led 1.41 to 1
New Highs: 97 (-25)
New Lows: 30 (-2)
The Chart: http://investmenthouse.com/cd/^gspc.html
SP500 tried 1300 on the high once more, kind of a token gesture on the session, then faded. It slipped below the lows in the lateral move, but tapped the 10 day EMA (1290) on the low and bounced modestly. Still very much in its pullback and still very much set to move higher and put on the next leg. The question is when. It looks as if it could take another session to get right after getting jostled around a bit more on Wednesday. The 50 day EMA (1274) is just about up to the 200 day SMA (1275). Coming up from below to test the crossover. A move higher by SP500 will push it back across and then it will test. That will be the lick log for the index.
SP600 (-1.41%) dove lower, falling through the 50 day EMA (364) and the 50 day SMA (362). It tapped some support at 360 on the low and bounced modestly. Quite the jumbled pattern. It managed to break up the head and shoulders that formed from June to early August, making it up to the 200 day SMA last week. Now it is rolling back. Small caps remain weak, working at best through a long base that has found its bottom near 350.
DJ30
Not bad action here either, fading back to the 10 day EMA (11,278) on the low and rebounding modestly. That took it to the early June high and the early August peak and it bounced. Low volume so no distribution. Still in the nice test of its strong move higher last week that took it out of its double bottom with handle base. Not bad. A break upside from here puts 11,500 into play.
Stats: -41.94 points (-0.37%) to close at 11297.90
Volume: 170M shares Wednesday versus 213M shares Tuesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
THURSDAY
Well, more economic data Thursday with durable goods orders and new home sales, the first before the open, the latter at 10:00. If the market is worried about the economy, durables will be important on top of the existing home sales. New homes? Well, the damage was done by the existing homes.
What we want to see is the market take it like a man, showing the character it started showing last week and some on Tuesday when it recovered from the Moskow speech. It has made the test of last week's move, got rattled a bit on Wednesday, and is now at the point it needs to hold and start the move back up. Leaders have pulled back with the indices and are set to move as well. Looking for a trigger to send them higher.
Not sure the economic data Thursday is going to do that. Stocks are going to have to find reason on their own, something they did to resume this rally last week. The Fed paused and the market didn't respond. It ignored economic data. Then it finally liked some earnings from CSCO and that helped trigger the second leg higher in this rebound off the August low. It is set up to make the move and now it needs to put its head down and do it.
As noted, Wednesday saw the leaders continue their pullback to support. Some came back a bit harder than we wanted, but still held near support on low volume on the close. We are going to focus on those in a market rebound. We like stocks that are making their first test of breakouts; they often make their best moves off of this test and they can make good moves quickly. As we are not comfortable as the market moves deep into September, the ability to log a good gain relatively quickly is a big benefit. We will be looking at both stock and option positions, liking the options as we can leverage bigger gains in a shorter period of time.
CWTR reported strong results after the close and upped it guidance, and perhaps that will be the trigger the market needs as the consumer/retail sector was a concern given the doubts about the economic future. Maybe it will provide a CSCO-like boost that triggers the next move. We would like to see a soft open turn into strength. If CWTR can provide a trigger, we see how the early bump plays out, then look to move into the leaders coming back off of that support.
Support and Resistance
NASDAQ: Closed at 2134.66
Resistance:
2158 from the May 2005 low.
1268 is the August intraday high.
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 10 day EMA at 2127 held as support Wednesday.
The 50 day EMA at 2118.60
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 1292.99
Resistance:
1294 is the January 2006 high and 1297.57 is the February 2006 high.1315 is the May and May 2001 peaks
1311 is the April closing high.
1324 to 1329 from the October 2000 lows.
Support:
The 10 day EMA at 1290
The early June high at 1288
The late January peak at 1285
1280.37 is the recent July peak.
The 200 day EMA at 1274
The 50 day EMA at 1273
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 11,297.90
Resistance:
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
11,642 is the May 2006 closing high
11,670 is the May intraday high
Support:
11,279 is the late May high
The 10 day EMA at 11,277
11,243 is the August closing high.
11,228 is the July closing high.
The 50 day EMA at 11,150
11,097 to 11,137 is the last peak from the February top.
11,044 is the January high.
The 200 day SMA at 11,042
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): 6.33M actual versus 6.55M expected, 6.60M prior (revised from 6.62M)
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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