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us stock market, stock split
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8/26/06 Stock Split Report
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Stock Split Report Subscribers:
MARKET ALERTS
Targets hit alerts: None issued
Buy alerts: WFR; OXY; CRI; EXPD
Trailing stops: None issued
Stop alerts issued: 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 SSR alert service you can sign up at the following link:
http://www.investmenthouse.com/alertssr.htm
SUMMARY:
- Market ends the weak cocked and loaded, but doesn't pull the trigger.
- Recession, slowdown, or 3% growth? Aiming for the middle.
- Knowing when to take an interim gain.
- Last week of August and just looking for another week-long move ahead of September.
Market takes the entire week to consolidate.
The market needed a reason to move, and it did not get it. A pensive open ahead of the Bernanke end of conference address turned to gains when Bernanke kept his promise to Congress and did not use alternative forums to deliver policy statements, but after that first surge investors looked around for a 'what is next.' There wasn't anything. With a tropical wave turning to a tropical storm in the Caribbean, stocks lost their bid and back during mid-session.
That storm had oil prices higher, moving up over $1, and that had energy stocks on the move as well. They too, however, lost their bid along with oil (closed at 72.51, +0.15) and faded into midday. Once more the market moved higher late, however, and salvaged a mixed close. Basically right back to where it started from: still ready to move but after the early morning false start, the starting gun was never fired again.
Technically there was no change. The action was the same. SP500, NASDAQ, DJ30 and SOX all tapped at the same near support and rebounded, all on very low volume and flat breadth. The recent leaders held as well, some firing higher but flaring out, some just testing and holding, while others posted modest gains. Basically the same action all week as the indices just tested near support on low volume, trying to consolidate the gains from the week before and set up the next leg higher.
Without any bump higher last week the market just has another week to deliver the third leg up. We may be a bit too focused on that, but with the Labor Day holiday a week from Monday and the official start of the 'fall season,' we want to get the last move of this late summer rally in the books. With the bond yields forecasting a slower economy and small caps doing the same, when everyone gets back into the gain we don't want to be too exposed.
You may think that is expecting a lot out of one week, but look back at the rally. The move to end July took a week, and the second leg took just a week as well to send SP500 up 35 points and NASDAQ up just over 100. This past week was a very solid consolidation. It was orderly but had its ups and downs to shake things up. Some news sent it down (the housing reports, Moskow's missiles), but it bounced back. Volume was lighter showing no share dumping after the two legs higher. Leadership from the prior two legs held up very well, setting up nicely for another move as well. It is set up to make the move whether it is a week, two weeks, or extends well into September. We are going to take advantage of it, but it has to show the move. As we say, it is just another pretty face until it makes the move.
THE ECONOMY
Growing, slowing, or the 'R' word?
You cannot swing a dead cat without hitting some financial commentator talking about the economy's prospects. Larry Kudlow is convinced 3% growth remains in the picture; you have to give him some deference as he is one of the lone wolves who called the recovery correctly, but he is also doing a lot of cheerleading lately that seems more like hope than hard fact. Then there are the slowdown pundits who think we get close to a recession but no actual negative growth (Roach at Morgan Stanley). Of course there are also those who think we are inevitably going into recession as part of the continued problems confronting the economy after the 2000 collapse.
All of this leaves most people wondering just what is going to happen. The majority feel a slowdown is inevitable; makes sense as the middle of the road usually attracts most as it is the comfort zone. Well, you just have to look at what matters with respect to the economic future, but even that is difficult because everyone talks about every possible indicator imaginable. As we teach in our seminars, there are indicators for everything in the market; the goal is to slice through the fog and use those that are accurate and usable.
Same for the economy. There are so many factors to look at, the number one being the Fed and its track record at snatching recession from the jaws of prosperity. Some prognosticators are simply betting on the Fed's penchant for ruining a good thing, and you cannot blame them for that. It is batting 13 for 15 in wrecking good economies, and that not only gets it in the Hall of Fame but puts it in its own league. The main cause for concern is this ridiculous 'data dependency' where the Fed puts each piece of 'new' data (data that can be 2 months old when it is compiled) under the microscope to help it determine policy. Forget historical empirical data that shows inflation lags the economic cycle; if that is your focus you are fighting the last battle. Just look at the stock market; it rallies in anticipation, but by the time the news is confirmed the move is basically over. Economic cycles are no different. The Fed has always been eager to thwart inflation before it even showed up, but it is always reluctant to stop before it sees the economy actually stall. Yep, the Fed is a tough nut, and that is why the 'don't bet against the Fed' saying arose.
Then there is housing, the consumer, business spending, energy costs, and more. Bernanke has already discussed how housing declines often lead economic declines, giving some hope the Fed is looking at those historical cycles. Housing is an early cycle sector, and normally its decline is a normal part of a maturing expansion. The Greenspan Fed, however, held rates too low for too long and artificially pumped up the market. Once more Greenspan's real legacy is creating a bubble in an attempt to fix the aftermath of the last bubble he caused and then broke. Thus housing is a serious issue for the economy ahead if it continues plunging at the sharp rates seen in July.
Energy costs are not helping, and with causal and upscale restaurants starting to show declining sales, popular stores such as CHS and WSM lowering their guidance specifically citing a weak consumer, the decline in housing takes on more meaning.
What lies ahead: slowing yes, but no recession yet.
These are just a few of the many indicators you can look at, but just as the Fed should focus on historical trends of economic cycles when it gets involved, we need to look at what historically works in predicting economic cycles. It comes back to bonds, equities, and the few accurate leading economic indicator reports.
The bond market is speaking rather loudly. Yields had reverted to a 'normal' curve, i.e. with long term rates higher than short term rates just over a month ago, a welcome sight after the inversion in late 2005 and early 2006. Following the Fed pause yields started to rise toward 5% and that inversion reverted. Good action. Since then, however, yields have once more inverted, and this past week yields reached their widest spread (9 basis points) since turning back from a normal curve. That can signal recession, but the inversion has to get more severe. At this level it is signaling slowdown but not recession.
The stock market is also suggesting a slowdown with the sharpest selling since the recovery in October 2002 ended the bear market. The small and mid-caps have turned to laggards as more investors look to the large caps. The smaller cap issues need growth to advance, and when they turn from leaders to laggards that is an indication that the growth is at least slowing. It is normal for them to become laggards as an expansion matures, but as with housing they were leaders much longer than normal.
Now NASDAQ and the rest of the market have managed to hold bottom in this last pullback thus far, a pullback that is roughly the same size as the others since the expansion rally started in late 2002. If they continue to do so then this does not represent a more significant economic slowdown, just a slowdown in an overall expansion. Thus equities are showing a slowdown that even the Fed expects and have yet to blow out the bottom of this pullback to suggest a more serious bout of selling.
Then there is ECRI, the best compilation of indicators to predict business cycles. Its growth indicators have slowed and indeed even turned negative of late, but they are still not indicating recession at this point, just a slowdown in the economic cycle.
Today versus 2000: History is not repeating itself.
Finally we can look at some other factors to gauge what the Fed is doing now versus what it did the last time it hiked rates prior to the 2000 crash. The Fed was a major contributor to that crash in that it totally clamped down on the economy after offering it candy and cookies in 1999. In an overblown fear of Y2K the Fed pumped billions into the money supply as 'just in case' liquidity. Turns out no one wanted or felt they needed it. That money was put into the market by the billion, not to mention other areas. Mind you, this was during the period the Fed was raising rates in order to fight off inflation; raising rates yet blowing liquidity through the roof. Talk about opposite purposes. When Y2K came and went, the Fed called all the money back cold turkey. Not over time, but right then and there. You could see the market start jerking back and forth in March and then tumble. The Fed dried up the money supply, restricted banks to what they could loan, and then added an additional 50 BP in rate hikes in May. It crushed the economy from all sides and the economy reacted predictably.
This time around the Bernanke Fed is trying to be more suave with its actions. Money supply was growing at 6.2% annually through the end of 2005, but the Fed has reduced that to a 0.2% rate this year. Significantly slowed but not a complete cold turkey drawdown. Moreover, it is allowing banks to lend by keeping credit at reasonable levels. Credit growth is at 13% annually and bank credit is still growing as well. The Fed has lowered money supply growth and helped end the speculation in commodities (remember the blow off top in May?), it has sold treasuries, and it has raised rates, all sopping up the excess liquidity. At the same time it is keeping the system working by keeping credit standards and growth reasonable. Basically Bernanke is trying to drain liquidity while keeping the wheels greased so the economy can run at a level it can build a new expansion off of. It may not be perfect, but it is a quantum leap above the absurd and internally contradictory failure, the colossal, future robbing failure, the 'maestro' Greenspan orchestrated in 2000.
Should I take that gain or let it ride, baby?
Over the past couple of weeks we have taken some interim gains, i.e. taken some money off the table as positions rise but before they hit our target. This is not new as we take interim gains quite often, but there are times were it is more prudent to do so.
We believe that our plays can make the target we set or else we would not set the target at a particular level. We base that on the stock's ability to move based on past cycles as well as where it is in the advance (or decline), and of course, market conditions. That said, it is always a good plan, particularly with options due to their time-limited life, to take interim gains, i.e. after a stock makes a quick, sharp move in our favor. We like to buy options that are several months from expiration to remove that element from the equation while we use them to leverage our returns, but because they are time-limited, we usually don't turn down the opportunity to book a gain when a stock makes a solid move in a short period simply because a stock often tests that sharp move once it is done.
Now when the market is overall weak as it has been since May, we are even more inclined to take money off the table after a good run. Thus we pulled some money in when the techs jumped higher in their breakouts in the second leg of the rally. If we get the third leg this coming week you can bet we will be taking money off the table, even those positions that we start at the first sign of the leg starting. We did that in the second leg and we will do it again, particularly as this time we fell there may be some headwinds once we get back from Labor Day.
How do we do it? Well, we look to the stock's past performance with respect to the kind of moves it makes. In an extended run in a strong market with an expanding economy a stock will rally, test, rally, test, etc., all the while making higher lows. In that market we let it go, particularly the stock positions. But we also observe how far the stock tends to run on its legs higher. In a continuing trend we can see that rather clearly, and when the stock makes the surge that matches the prior moves it is a candidate for some interim gain. Even more so if the stock has bounced to its upper channel line in the trend. When that happens and we are still satisfied the stock and the market are in good shape, we can take half of the position off the table.
We also move the stop loss up (we use mental stops versus setting them in the system). If the stock is performing well we will put it below the trendline or the near term moving averages (10 or 18 day EMA; they often are coincident with the short term trendline). If we have our doubts we will put it at the buy point so at worst we hold the gain on the half of the position we took profits on. Basically, if we want to ride the stock longer term in a continuing uptrend we keep the stock looser, below those short term moving averages, and let the stock run. For our options we will do this as well if we have bought a lot of time and we are confident with the stock's strength. In this way we get those 200% and 300% gains in the options that really improve the bottom line. If we are just playing the rotation higher a leg at a time, however, as when a stock moves up to its channel line and stalls, then we will move that stop up to where there is no breathing room; basically the stock breaks higher again and makes us a whole lot more money or we end up taking the gain as the trendline pushes it back down.
Which positions? ANY position is a candidate when we have a good move and want to lock in gain. Usually we lean toward the sprinters, the stocks that shoot higher on a strong breakout, news story, etc. Those will jump but then there will be profit taking. If we are looking to bank some sure gain and are not sure if the news can get any better soon to drive it further without a rest period, then by all means take at least part off the table. When DRIV, NVDA, and WEBX jumped two weeks back we were taking gain on those solid breaks higher. A steady plodder can be left alone, but with options you have to be careful here as well, particularly if the play is getting within 60 days of expiration. That is when options start to show time decay, particularly with a steady, slow mover. That is whey we were taking gain on HCR when it made its last jump higher; the options were getting within that 60 day range, and the stock is a slow, steady mover. We did not want to lose the solid premium built up with a pullback. Sure enough, it started the pullback just a session after we booked the gain.
In sum, it is always a good idea to take some gain after a strong surge, regardless if the stock hits your target. You are getting what you wanted, so why not take some of it? Then we can let the rest of the position work for us as long as we have confidence the trend will hold and we have time on any options we have purchased. We don't want to cut off a strong run by closing out all positions after the first break. We can take some gain to lock in profits and protect us from something unexpected, but as long as the stock and the market is in good shape, we can really make the strong green by containing our emotions and letting a strong play work for us. Putting some money in the bank is one way to keep the emotions in control as the pressure is off with respect to the money we have put at risk.
THE MARKET
MARKET SENTIMENT
VIX: 12.31; -0.09
VXN: 16.98; -2.54
VXO: 11.29; -0.01
Put/Call Ratio (CBOE): 0.81; -0.23
Bulls versus Bears:
Bulls: 40.0%. Bulls fell from 40.9% as the market moved up ahead of the current consolidation. Somewhat contra-intuitive given the market put in a decent move. Has waffled some the past few weeks (40.2%, 41.5% the week before, still well above the 38.7% in July. 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: 34.7%, much lower than the 36.6% reading last week. Bears continue to become more endangered, sliding from 37.1% hit in July. 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: +3.18 points (+0.15%) to close at 2140.29
Volume: 1.324B (-8.14%). No volume once more as volume declined all week and remained below average all week. Very good consolidation action, but we also have to put it in the context of what it is: late summer before Labor Day, and volume is weak.
Up Volume: 800M (-182M)
Down Volume: 497M (+59M)
A/D and Hi/Lo: Advancers led 1.12 to 1. Flat, pancake-like once more. Again, this is just fine for a consolidation.
Previous Session: Advancers led 1.05 to 1
New Highs: 54 (+6)
New Lows: 54 (-12)
The Chart: http://www.investmenthouse.com/cd/^ixic.html
NASDAQ rallied well early on, posting a 16 point gain on the early run from the bell. That kept it within the recent range on the high and on the low as it held the 10 day EMA (2131) once more. Well, that is status quo for the week, a week spend consolidating the strong break higher, the second leg in the run, two weeks back. It is set up as well as it can be for the next move higher. Now it has to deliver.
SOX (-0.21%) remained right on top of the 10 and 50 day EMA, showing a second consecutive doji over that support in its pullback to test the breakout over the 50 day EMA (430) that followed the break from its 3 month downtrend from May. Similar to NASDAQ and many of the stronger stocks in the chip sector, it is ready to move, just needing the trigger to send it higher.
SP500/NYSE
Stats: -0.97 points (-0.07%) to close at 1295.09
NYSE Volume: 1.065B (-14.78%). Very low, holiday like volume as the NYSE indices settled over near support once more. An entire week of pretty incredibly low volume. No complaints after a strong move as it shows no one unloading what they bought on pretty good volume the week before.
A/D and Hi/Lo: Advancers led 1.08 to 1. More flat breadth.
Previous Session: Advancers led 1.17 to 1
New Highs: 72 (+1)
New Lows: 39 (-8)
The Chart: http://investmenthouse.com/cd/^gspc.html
SP500 once more traded in a narrow range above the 10 day EMA (1292) as it continues to hold the breakout over the June high and early August intraday high (1293 - 1291). Picture perfect test; got a bit rattled on the housing data, but held the 10 day EMA each session. It managed to hold onto that near support and the breakout just as the 50 day EMA (1275.38) crossed back over the 200 day SMA (1275.30). We are looking for more over cross as SP500 moves higher and continues the breakout for at least another leg.
SP600 (+0.07%) tried to come off of the Thursday test lower, but basically found no running room below the 50 day SMA (362). It is still trying to make a higher low at 360 after the higher high at the 200 day SMA (371) just over a week back. Still a laggard in the market, and really at this point it is realistically just trying to base out while holding above the July low down at 354. Making a higher low here would help that process and it would also go a long way toward showing the economy is not going into the tank.
DJ30
The blue chips posted a loss, but after reaching a bit lower on the low down toward the 18 day EMA (11,241) and then recovering to close right on the 10 day EMA. Basically the same action as on SP500, a low volume test of the break higher just over a week back, still holding the breakout and set up to bounce higher this week.
Stats: -20.41 points (-0.18%) to close at 11284.05
Volume: 150M shares Friday versus 170.7M shares Thursday.
The chart: http://www.investmenthouse.com/cd/^dji.html
MONDAY and the week ahead.
After a dearth of economic data the past week, get ready for a torrent of biblical proportions starting Tuesday. Consumer confidence, FOMC minutes, GDP, personal income and spending, Chicago PMI, factory orders, ISM Index and the jobs report. Back to information overload. For a market that got hung up on the housing data that everyone expected to be weaker, this week offers all kinds of potential.
Balance that against a market that has put in two upside legs and has a very nice test under its belt with the technology stocks, after a long dormancy, showing life once more (e.g., ORCL, AAPL, HPQ). As discussed a few times, it is ready for a move higher. At the very least it is set up about as good as it can get for another bump higher here. Not saying it is ready to run higher to new highs; still have concerns that the market has yet to fully deal with the economic slowdown. Not a recession, but more of a slowdown than built in just yet. No, we are looking for a third leg higher off this great breakout test for about 100 points on NASDAQ, just like the prior legs on this rally.
How are we going to play it? Well, we already have positions taken in advance of the move and more toward the end of the week, but we are also looking to move in with new positions as we catch the break higher early on. We took some nice gain out of the second leg higher from when it started to when it peaked; we can do the same thing on the next leg with new positions in addition to banking some nice gain on current positions.
It is set up but you cannot count on the market bending to your will or even following what it looks prepared to do. Nonetheless it looks solid and we will be ready with plays that can move fast and hard for us in the next leg higher. At the same time we will also prepare for what happens next, i.e. some downside plays to take advantage of any weakness after a run higher. As we saw late in the week, even as the upside leaders set up for the next move there were stocks falling in their downtrends. The market is not all moving together and thus we will see the continued divergence that will likely result in another leg lower before a more long term upside move can form.
Support and Resistance
NASDAQ: Closed at 2140.29
Resistance:
2158 from the May 2005 low.
2168 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
2195 is the August 2004/April 2005 up trendline
The 200 day SMA at 2225
2230 is the June 2006 peak. This is what we are shooting for on the next leg. About.
Support:
The 10 day EMA at 2131
The 50 day EMA at 2120
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 1295.09
Resistance:
1294 is the January 2006 high and 1297.57 is the February 2006 high.
1302 the recent August highs
1311 is the April closing high.
1315 is the May and May 2001 peaks
1324 to 1329 from the October 2000 lows.
Support:
The 10 day EMA at 1291
The early June high at 1288
The late January peak at 1285
1280.37 is the recent July peak.
The 200 day EMA at 1275
The 50 day EMA at 1275
1260 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 11,284.05
Resistance:
The March 2006 highs at 11,329 to 11,335
11,350 from the May 2001 peak
11,384 is the August intraday high.
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 10 day EMA at 11,282
11,279 is the late May closing high
11,243 is the early August peak closing high.
11,228 is the July closing high.
The 50 day EMA at 11,161
11,097 to 11,137 is the last peak from the February top.
The 200 day SMA at 11,050
11,044 is the January high.
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
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
August 29
Consumer confidence, August (10:00): 103.7 expected, 106.5 prior
FOMC minutes, August 8 (2:00)
August 30
GDP prelim, Q2 (8:30): 3.0% expected, 2.5% prior
Chain deflator, Q2 (8:30): 3.3% expected, 3.3% prior
Crude oil inventories
August 31
Initial jobless claims (8:30): 313K prior
Personal income, July (8:30): 0.5% expected, 0.6% prior
Personal spending, July (8:30): 0.8% expected, 0.4% prior
Chicago PMI, August (10:00): 57.0 expected, 57.9 prior
Factory orders, July (10:00): 0.5% expected, 1.2% prior
September 1
Non-farm payrolls, August (8:30): 125K expected, 113K prior
Unemployment rate, August (8:30): 4.7% expected, 4.8% prior
Hourly earnings, August (8:30): 0.3% expected, 0.4% prior
Average workweek, August (8:30): 33.9 expected, 33.9 prior
Michigan sentiment final, August (9:45): 79.5 expected, 78.7 prior
Construction spending, July (10:00): 0.0% expected, 0.3% prior
ISM Index, August (10:00): 55.0 expected, 54.7 prior
End part 1 of 3
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us stock market
stock split
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