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us stock market, trend trading stock
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8/30/06 Stock Split Report Update
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Stock Split Report Subscribers:
Full report issues Thursday
MARKET ALERTS
Targets hit alerts: LH. Interim targets: DRIV; MOLX; NVDA
Buy alerts: BRCM
Trailing stops: FTO; RAI
Stop alerts issued: DRQ; NBL
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:
- Slow start but then techs post a solid recovery while large caps struggle.
- GDP revision stronger but weaker than expected.
- Bonds showing two inversions and the second is getting wide.
- Stocks looking to extend gains Thursday on some good after hours news, but still expecting the rally to stall ahead of holiday weekend.
Stocks stumble early on GDP issues and Fed-speak, but techs lead another rebound.
Once more the market did not get a solid bell to bell run as seen in the second leg of this rally when we had a couple of gaps and runs, but it did once more overcome some early weakness to post gains, at least for part of the market. The GDP report was better than the first go round but less than expected (2.9% versus 3.0%), but COST in the retail sector lowered its Q4 outlook while ADP's jobs forecast showed just 107K versus the 140K anticipated on Friday. ADP's credibility aside, when FOMC dissenter Lacker told Bloomberg he was unconvinced by any of the recent data that the Fed should continue its pause, the market took an early plop lower after trying to get going early.
Indeed, NASDAQ's early lead turned to red until but then got a bid when it tested the mid-August high it just broke. Then when the oil inventories came in at 10:30ET much stronger (+2.4M versus -3.5M expected) and oil fell below $69/bbl stocks really caught a bid. At least techs and small caps did.
NASDAQ led the move into lunch, tested, then rebounding in the early afternoon. They tried to sell the move with just under 1.5 hours left, but NASDAQ again managed to find a bid and rebound for a new session high as it moved into the last half hour of trade. The large caps were not so successful, lagging all session, particularly when oil prices staged a 2% intraday reversal and closed positive (70.03, +0.32). SP500 closed flat, unable to push through 1305 and really put the shorts on the defensive. Without that key part of the market pushing, the move lacked power. Techs, chips and small caps on the upside, large caps basically flat.
Technically the move did not accomplish much. SP500 could not push through key resistance as noted, or at least put some distance on the August high at 1302. NASDAQ pushed higher, closing in on the July high. SOX surged through 450 with next resistance at 460 and then 475. The small caps were not bad, clearing the August high and now moving up to the 10 day EMA. That is about all we expected from these indices, and another push higher Thursday will get them close.
Volume was modestly higher on NASDAQ; it was up about 10% in the last hour but then trade trailed off and it had to hurry to top the Tuesday levels. Not bad as trade moved higher once more. NYSE volume did not, indicative of the lack of interest and the fact that shorts did not have to cover their positions because it could not drive higher. Breadth was lower, more to the mediocre.
Basically the move started to lose power though there were some technology, healthcare, and other stocks from many sectors that did put in some very nice moves. Moreover, NASDAQ once more rallied well from a weak first hour to a nice, solid close, with SOX and the small caps running along with it. That leads us to look for that continued move higher Thursday before things start to get overdone ahead of the long weekend.
True to our plan we were taking some gain off the table as the market continued to run. We will continue to do that Thursday on another run and then really consider taking many positions off the table ahead of the long weekend. That may be overkill as the rally has been solid, but again, as noted last night, it is just a summer rally with lower volume. If it continues higher after the holiday, great; we will move right back in when we get the entry points, and they will come if the market is going to keep rallying. For now we are going to stick with the plan, particularly with the higher beta stocks that just recovered, namely techs. Healthcare and related defensive areas we can hang with given that if the market turns defensive they will be better able to ride it out.
THE ECONOMY
Second iteration of GDP shows more but less growth, stronger business investment.
GDP expectations were pushed back up to 3.0%, the original expectation prior to that 2.5% bust initially reported. Once more reality came up shy of expectations, but at 2.9% it was much more palatable than the first read.
Housing was a major drag on the report, down 9.8% versus the 6.3% decline originally reported. It is not going to get any better anytime soon as mortgage applications for last week fell more than 22% year/year. Electronics and software investment was lower than first reported as well, dropping 1.6% versus 1.0%. Those declines, however, were offset by some solid gains in business investment that jumped 4.7% versus the 2.7% originally reported. Commercial building soared 22.2% over 12.7%, and that has to be due somewhat to Katrina rebuilding, but it cannot all be just Katrina.
On the profit side, they fell 2.1% quarter/quarter though they were still up year/year. Profits have kept the expansion moving forward because those profits are being pushed into capital expenditures. As seen in the 2001 recession, when business does not invest it does not matter what the consumer does. Investment went negative for three years and so did the economy. As a result we lost a lot of our technological lead and many jobs went overseas as the technology gap narrowed. Instead of investing the R&D, etc. that would generate the next generation of high tech jobs, we did nothing. Now we are paying the price. Thus the profit slide is worrisome but it is not indicative of any trend at this point. Businesses have been investing all along in this recovery, really putting money to work the past year. We cannot afford to have this spurt in Q2 be the last hurrah of spending. All the more reason to keep incentives to invest in capital equipment alive and well in the tax code.
Bonds continue to rally as both inversions widen.
Bonds rallied again on the latest economic data that showed growth but slower growth than expected. Bond yields continue to fall, bring interest rates lower. There is nothing wrong with a bond rally and low interest rates by themselves, but the problem arises when yields start to put on bearish economic clothes.
We have talked about inversions quite a bit over the past 10 months as the curve between the 2 year treasury and 10 year treasury flattened and then inverted. It has gone through two major bouts of inversion. The first started back when Greenspan was Fed head, and he dismissed it as partially due to heavy foreign buying of US bonds. He is right; it was partially due to that. Problem is, he could not give any exact figures on it. As usual with Greenspan, it was a best guess estimate, and while that served him well overall during his tenure, when it came to crunch time he got too conservative and fell back on old Phillips Curve theories and thus caused more than his share of nasty stock market declines and recessions.
The second round of inversions started over the past month. The yield curve actually improved as Bernanke discussed the possibility of a pause. You could say that was caused by a fear of inflation because gold shot higher as well. Indeed all commodities shot higher in April and May, but that was part of a blow off top, a climax run. They have since fallen and are adjusting at more reasonable levels. The inversion started to creep back in, however, as the Bernanke Fed got tough on inflation, talking a mean game. When the Fed actually paused, however, the inversion righted itself. That was a real positive as it showed the market was buying into the Fed's strategy.
As the economic data continues to unfold, however, the inversion has returned and has found a comfort range at about 8 basis points. That is not too bad; it usually takes about 25 to 30 BP to call for recession, but if it holds an inversion for several months (about six), the level of inversion does not rally matter. Right now we are in the second period of inversion, and it is just about a month in duration. Not necessarily a bad omen for recession, but it does forecast slowing.
The 'other' inversion is getting quite critical. This is the difference between bond market yields and the Fed Funds rate. The Fed hikes short term rates to 5.25% prior to the August pause. Bond yields rallied after that pause, tapping at 5%. That indicated, as noted above, the market liked what the Fed did, i.e. it was not going to wreck the economy. At the same time gold declined; that indicated it was not an inflation scare. Well done. We wanted a steady improvement to bring the nominal bond yields more in line with the Fed Funds rate to show that, almost unbelievably, the Fed got it right.
Well, that was indeed unbelievable. After that bump higher, more and more data has come to light regarding the economy, and more Fed speakers have continued to talk tough despite the pause ('step out of line and we will whack you upside the head'). Although the market is not believing the tough talk, it is factoring in the weaker data and factoring in more economic slowing than even Bernanke has opined in the aftermath of a housing slump. Indeed, the inversion is getting so wide (49 BP between the FFR and the 10 year note) that the inversion is not only suggesting serious economic slowing that will require the Fed to CUT rates a lot sooner than anyone expects.
Unfortunately, the yield curve will scream "CUT!" long, long before the Fed acts. The problem is perceptions and the lagging effects of inflation. The Fed just now paused and some on the committee are indeed still worried about inflation. Yet because inflation lags the economic cycle, the Fed probably waited too long to pause in the first place, and thus it has to wait an 'appropriate' period before it cuts lest it look like the collection of amateurs it is. Bernanke wanted to stop in the spring but as a new Fed chairman he would have been fried. Thus we are being 'institutionalized' by the system, i.e. we are going to all pay a price because Bernanke had to prove he was a tough guy as opposed to a smart guy. Instead of pausing in spring we got three more rate hikes (remember, Greenspan stayed overtime so he could raise rates in January).
Now we run the serious risk of another significant economic slowdown because our institutions that are charged with preventing such problems have become such public figures that they cannot act with the speed and agility they need to have. It is insane that you cannot stop hiking rates when you want to and instead have to wait 6 months in order to put forth a good public perception and not look in charge of the situation. The irony is, the Fed looks foolish after the fact BECAUSE it waits and tries to maintain that good public perception. IF we are going to have a Fed at ALL, this is one strong argument for going back to the closed door, no news meetings, no public appearances, and just simple announcements of Fed policy changes when they are made. In the efforts not to roil the markets, the Fed's openness policies have simply made it easier to do so. We have often said the Fed should state its goal and then do it, and then adjust as necessary. Forget the water torture and the attempts at calming statements. That market throws tantrums about anything when it wants to, so it is best just to give it the medicine based on what is RIGHT, not what is EXPECTED. Then we could avoid a lot of the issues the system has built in, just like the serious problems ahead of us simply because the Fed could not do what it wanted to when it wanted to for fear of its perception.
THE MARKET
MARKET SENTIMENT
VIX: 12.22; -0.06
VXN: 16.8; -0.49
VXO: 11.02; +0.13
Put/Call Ratio (CBOE): 0.96; -0.05
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: +13.43 points (+0.62%) to close at 2185.73
Volume: 1.7B (+3.11%). Volume continued its advance along with NASDAQ, showing that there is ongoing accumulation as NASDAQ progresses. NASDAQ continues to lead the market of late in volume, but it is still below average volume indicative of the summer. It is promising but we will have to see how it blends into the 'fall' season after Labor Day.
Up Volume: 1.243B (+128M)
Down Volume: 437M (-62M)
A/D and Hi/Lo: Advancers led 1.58 to 1. Backing off some even as the move continued. Not weak, not strong.
Previous Session: Advancers led 1.95 to 1
New Highs: 115 (+26)
New Lows: 34 (-13)
The Chart: http://www.investmenthouse.com/cd/^ixic.html
NASDAQ led once more, overcoming some first hour weakness and then putting together a steady rally that gained strength in the early afternoon. It survived a mid-afternoon attempt at selling and then caught fire late. It is closing in on the July high (2195.50), and a bit more of a push through that level toward the June high (2234) where it bounced down from the 200 day SMA at that time. The 200 day is now at 2225. Not expecting NASDAQ to get past that point on this run unless it gets a lot more strength here.
SOX (+1.81%) cleared the August high and is moving in on the mid-June high at 459 and the June high at 479. The 200 day SMA (491.79) is there as well, and as with NASDAQ, we don't expect it to make it past that level on this run. Indeed, if it makes it to that level during this leg it will be an important move as it would make another key higher high.
SP500/NYSE
Stats: -0.01 points (0%) to close at 1304.27
NYSE Volume: 1.281B (-6.95%). Struggled to get any trade all session, and as the shorts were not required to cover the volume languished as did the index.
A/D and Hi/Lo: Advancers led 1.7 to 1. Better than average, helped along by the small cap recovery.
Previous Session: Advancers led 2.09 to 1
New Highs: 212 (+51)
New Lows: 23 (-17)
The Chart: http://investmenthouse.com/cd/^gspc.html
SP500 moved to 1306.74 on the high but could not make the push it needed to get the shorts nervous and covering up. This is a key level for the index due to the overhead supply from March and April and the fact that many view this as the upper limit of SP500's trading range. If it can follow through on its breakout from two weeks back during the second leg of the rally it will for the shorts to cover and drive the move higher. Given the action Wednesday we don't expect it to make that move this week ahead of the Labor Day holiday. That does not mean it won't make the move the following week; SP500 has built a strong pattern and we don't expect the large caps will continue to lag if the rally resumes after the summer break.
SP600 (+0.40%) was back in the hunt again Wednesday as it rallied up to the mid-August high (369.61 intraday), just below the 200 day SMA (370.32). It closed at 368.78, so we are not looking for much more ahead of Labor Day for the small caps. If they do break through it will mean something, but it will have to show some volume and ahead of the weekend that is likely not to be the case.
DJ30
The blue chips barely scratched again, tapping at 11,400 where it stalled two weeks back and fading to hold a modest gain. Volume was lower as with NYSE. Basically the blue chips are just biding time, unable to find any buyers to push them through resistance. Good pattern similar to SP500, just no strength at this juncture to push it higher.
Stats: +12.97 points (+0.11%) to close at 11382.91
Volume: 180M shares Wednesday, down from the 198M shares Tuesday. Dow trade remains light.
The chart: http://www.investmenthouse.com/cd/^dji.html
THURSDAY
The economic data notches it up a level Thursday with personal income and spending, Chicago PMI, and factory orders. We will also get reports from the retailers as to same store sales. That started coming in Wednesday afternoon with AEOS posting some solid results. In addition, NVLS in the semiconductor sector posted a good mid-quarter update after the Wednesday close.
If we can get some decent income and spending numbers the individual company reports can give the market another good push higher Thursday. That may be the last hurrah ahead of the weekend, particularly with the jobs report on Friday ahead of a long weekend. If we get the run we will be taking some more gain off the table. Indeed, as we have been discussing, we will be taking positions on the more volatile stocks off the table as we approach the weekend. If a stock is in a great uptrend and is making a strong move we will likely leave some into next week, particularly if the indices surprise us and start showing more accumulation.
In general, if a position is moving well we will look at taking some gain and letting the rest of the position run for us into next week. If it has put in a good move and is taking a breather at support, we will let it ride into next week. If it is struggling to hold on and cannot suffer a downside break, we will take it off the table. We have banked some gain and will bank some more on plays running well. That will bank us some gain and put us in good shape with additional cash for more moves after the holiday if they materialize as well as keep us in strong plays to take advantage of another move up if it comes, or to better ride it out if the market stumbles.
Support and Resistance
NASDAQ: Closed at 2185.73
Resistance:
2185 to 2182 is the September 2005 peak and interim high from November 2005.
2190 is the July 2006 high
2199 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:
2177 is the December 2004 high.
2168 is the August intraday high.
2158 from the May 2005 low.
The 10 day EMA at 2151
The 50 day EMA at 2126
2100 from the early and mid-2005 peaks
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
2020 is the July closing low
2019 is the April 2005 interim high
S&P 500: Closed at 1304.27
Resistance:
1311 is the April closing high.
1315 is the May and May 2001 peaks
1324 to 1329 from the October 2000 lows.
1326.70 is the May 2006 high
1334 is an October 1999 peak
Support:
1302 the recent August highs
1294 is the January 2006 high and 1297.57 is the February 2006 high.
The 10 day EMA at 1297
The early June high at 1288
The late January peak at 1285
1280.37 is the recent July peak.
The 50 day EMA at 1278.56
The 200 day EMA at 1276.43
1262 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 11,382.91
Resistance:
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:
11,350 from the May 2001 peak
The March 2006 highs at 11,329 to 11,335
The 10 day EMA at 11,322
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 11,184
11,097 to 11,137 is the last peak from the February top.
The 200 day SMA at 11,061
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.
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
August 29
Consumer confidence, August (10:00): 99.6 actual versus 102.5 expected, 107.0 prior (revised from 106.5)
FOMC minutes, August 8 (2:00): Some read it hawkish, some dovish. Looked to be long on the reasons not to hike.
August 30
GDP prelim, Q2 (8:30): 2.9% actual versus 3.0% expected, 2.5% prior
Chain deflator, Q2 (8:30): 3.3% actual versus 3.3% expected, 3.3% prior
Crude oil inventories
August 31
Initial jobless claims (8:30): 315K expected, 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): -0.8% 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): 79.0 expected, 78.7 prior
Construction spending, July (10:00): 0.0% expected, 0.3% prior
ISM Index, August (10:00): 54.7 expected, 54.7 prior
End part 1 of 2
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