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9/07/06 Investment House Daily
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SUMMARY:
- Volatile session lets an intraday rally slip away on more tough Fed talk.
- Fed-speak remains tough outside the meetings, but with the bond market indications, housing woes, and a slowing economy, it knows hikes are not the answer at this stage.
- Showing some life but still need to pick and choose with care while the market works through this selling.
Soft start, a midday rally, but then backsliding to the close.
After the selling started Wednesday, the downside momentum continued pre-market and into the open. There was no news to turn the tide. Jobless claims were lower at 310K and there was more angst in housing as HOV profits fell while KBH said it had a shortfall for Q3 and indeed the year. Stocks sold early, but then NASDAQ held the 18 day EMA and found some footing. SOX found its footing at the 50 day EMA. When the oil inventories showed a gasoline build they bounced, the market rebounded with them on into lunch.
After that nice recovery a lunchtime attempt to sell was held in check and stocks started higher one more in the early afternoon. NASDAQ and SOX were in the lead with their leaders reversing course and stretching their legs once more. Then San Francisco the typically dovish Fed president Yellen (she was one of the first to voice concerns the Fed might go too far) stated that inflation was above her comfort level and that the Fed might very well have to step in and hike rates again. While that is extremely unlike to happen given the bond market indications (4.82% 2 year versus 4.79% 10 year), the accelerating housing decline, the slowing consumer, slowing Fed regional growth, and very mixed economic data, it was enough to derail the afternoon rally just as stocks started a modest turn positive. Stocks sold for the last two hours, managing to hold above the session lows but unable to try another bounce after the yellin' by Yellen.
That showed just how tenuous the rebound was, i.e. it was easily derailed by some Fed huffing and puffing that serious economic watchers know was just bluffing. That simply shows a nervous market where volumes are still iffy but stronger and stocks heading in different directions though from the breadth readings (-1.95:1 NYSE, -1.8:1 NASD) most stocks were again lower.
Technically NASDAQ and SOX managed to hold support (18 day EMA and 50 day EMA, respectively) and rebounded, showing that the upside has not been totally abandoned in the market. Volumes were higher, but they too were not surging as the market sold for a second day. There was distribution, but again, the techs managed to hold support and tried a bounce. NASDAQ and SOX maintained their patterns as indeed so did SP500 and DJ30, though NASDAQ and SOX actually look better than the large cap industrial indices, at least in the early going of this pullback. At the end of the day you have the indices suffering a bit more distribution but still holding their patterns in the current pullback and the base building that started in May. This current pullback is likely not over, but as we noted as we prepared for a September fade, as long as the indices hold their current bases without heavy distribution the prospects ahead improve as the basing continues.
THE ECONOMY
Jobless claims were a bit lower than expected at 310K (315K expected), but the market hardly noticed. Further softening oil prices (67.32, -0.18) and continued housing woes dominated the early news front. Oil hitting 5 month lows is much better for the economy, but many are not viewing it that way, particularly in the bond market. As oil fades some are reading it as an indication of slower economic activity to come and thus lowered demand for oil. As for housing, we noted above the continued revisions in expectations for more homebuilders. They are a long way from those projections of a strong 10 years ahead based on demographics from last summer.
The real news of the day was the somewhat surprising talk from Yellen where she turned from worrying about too many rate hikes and an economic slowdown or worse as her primary concern to a worry over what are likely transient inflation pressures that are showing up even as the economy slows. It is folly to say that we need to slow the economy more with rate hikes in order to stave off any inflation. What the Fed needs to do is continue Bernanke's tighter management of liquidity, trying to get liquidity levels to a point where the economy can still expand but that the speculation is out of the market. It has been quite successful in doing that. It would be incredibly short-sighted to scuttle that carefully executed plan with some more rate hikes. That is why we view this as all talk. Problem is, with a skittish market it was enough to stall things out on Thursday.
THE MARKET
MARKET SENTIMENT
VIX: 13.88; +0.14
VXN: 20.27; +0.08
VXO: 12.86; +0.19
Put/Call Ratio (CBOE): 0.94; -0.33
Short Interest:
NYSE short interest hit 6.82, shooting higher to end August at a 5 year high. This is another contrarian indicator, and when it jumps higher that can signal a market rally. It is not a great timing device, however, and is often off by weeks. Nonetheless we are going to keep it on the radar and watch for other indications the selling experienced to start September is fading.
Bulls versus Bears:
Bulls: 43.2%. Bulls continue to rise, up from 42.1% last week and 40.0% the week before, a post-June high (bulls and bears kissed in June. That is still, however, well below the peaks from January and April, and well below the 55% level considered bearish.
Bears: 33.7%. Bears held steady, stalling the steady decline from the 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: -12.55 points (-0.58%) to close at 2155.29
Volume: 1.897B (+3.02%). Volume was above average once more and rose for the third straight session. That makes two back-to-back sessions of modest distribution as NASDAQ gave back the gains on the third leg of the summer rally. It has sold on rising trade to a support level, and that brings about a key test.
Up Volume: 531M (+363M)
Down Volume: 1.328B (-277M)
A/D and Hi/Lo: Decliners led 1.8 to 1. Negative breadth was still decisively downside as NASDAQ struggled once more with losses.
Previous Session: Decliners led 3.07 to 1
New Highs: 48 (-12)
New Lows: 56 (+19)
The Chart: http://www.investmenthouse.com/cd/^ixic.html
NASDAQ gapped lower for a second straight session, falling through the 18 day EMA (2153) on the lose but bouncing up off a 90 day MA (2147) test. Volume was higher so there was some distribution, but we also note that the index tested support on the lows and rebounded, showing some upside interest at those support levels. A midmorning to early afternoon rally was promising, moving NASDAQ positive in an early afternoon surge. The move was scuttled on the Yellen commentary as NASDAQ sold off into the bell. Nonetheless it held above the 18 day EMA on the close and that also kept it over the mid-June highs near 2150. Doji on the candlestick chart shows the attempted momentum change Thursday, but that is only a potential reversal; doji's are warnings and they have to be confirmed. All in all NASDAQ is holding its pattern rather decently. How it responds after this first leg lower to near support will tell us more about its strength right now.
SOX (-0.36%) also held up reasonably well, undercutting the 50 day EMA (434) early on but then recovering to hold above that level on the close. It too is showing a doji on the candlestick chart, indicating it has a bit of backbone at this level after breaking its downtrend and 50 day EMA in August as it started this recovery and base-building episode. Again, not bad action thus far.
SP500/NYSE
Stats: -6.24 points (-0.48%) to close at 1294.02
NYSE Volume: 1.471B (+2.42%). Volume moved higher but remained below average once again as the NYSE indices sold lower for the second straight session.
A/D and Hi/Lo: Decliners led 1.95 to 1. Better but still broad selling on the continued move lower as the large and small caps sold.
Previous Session: Decliners led 3.93 to 1
New Highs: 48 (-19)
New Lows: 41 (+14)
The Chart: http://investmenthouse.com/cd/^gspc.html
SP500 was weak once more, continuing the selling with a drop through the 18 day EMA (1296) on once more stronger volume. The index rebounded similar to NASDAQ intraday but also struggled after the Yellen comments, fading into the bell. It is still above the next support at 1290ish where it peaked in early June and put in a low in mid-August. After two days of selling, a further move lower will likely try to find some bounce in its step at that point. If it fades, and it likely will, it will fall back toward the 50 day EMA (1283) and the double bottom 'hump' at 1280. The pattern set up was nice, but it is giving back some pretty big chunks of real estate this week.
SP600 (-0.54%) continued its struggle after showing a modest attempt at regaining some leadership capability at the end of the summer rally. In two sessions it went from clearing the 200 day SMA back to closing at the 50 day SMA (363.30), trying to hang on here but likely to test the late August higher low at 360. Still in the pattern and that means it is still base building, but it failed at the 200 day SMA as expected, and now is struggling to hang on.
DJ30
The blue chips struggled again, falling to close at the 18 day EMA (11,332) on rising but still below average volume. As with SP500, the index is still holding the mid-August breakout from its double bottom with handle base, but with the rising selling volume it is likely to come back to fully test that breakout, i.e. a test back to 11,260ish.
Stats: -74.76 points (-0.66%) to close at 11331.44
Volume: 213M shares Thursday versus 191M shares Wednesday. Volume remains below average, but continues to creep higher as DJ30 fades. More selling volume than upside, and you cannot ignore that as the blue chips distribute modeslty.
The chart: http://www.investmenthouse.com/cd/^dji.html
FRIDAY
The first week of September draws to a close and thus far September has not been a roaring bear, but stocks are definitely under pressure as more players get back into the game after the late summer rally. That selling on Tuesday and Wednesday basically washed away the last upside leg of the rally and has put the late rally leaders, NASDAQ and SOX, back at support, moving there on rising volume. That rising volume makes this test a bit more interesting as the leaders in the late summer move try to shake off this first bout of September selling. We saw some of that Thursday with NVDA and AAPL bouncing back on some strong upside volume. That will have to get contagious as not many were following.
It is still a very chancy time of year after a low volume summer rally and some rising volume selling creeping in. To be sure it was not out and out dumping as volume remains rather low overall even with the return from summer. We don't want to ignore that creeping volume even if it seems rather contained. After taking a lot of gain off the table in the third leg of the rally, we have continued to pare back this week, erring on the side of caution right now as the market works through this test of the late summer rally. It could very well find itself and find upside volume and continue on; the patterns, particularly in NASDAQ and SOX are quite solid. That is why we will continue to pick up positions in leaders such as NVDA when it rebounds on strong trade. They are resisting the selling and even thriving; if the rally continues they will obviously be out in front and so will our positions.
We will continue to look for those types of stocks, but as noted last night, we are going to remain rather agnostic at this point, letting the market show us what it wants to do. Thus we will look for strong upside plays as well as downside plays ready to break lower. That way we can profit whichever way the market moves, taking what it gives as opposed to hoping it moves one way or the other.
Support and Resistance
NASDAQ: Closed at 2155.29
Resistance:
2158 from the May 2005 low.
2168 is the August intraday high.
The 10 day EMA at 2168
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
2201 is the August 2004/April 2005 up trendline
The 200 day SMA at 2224
2230 is the June 2006 peak (2234 intraday)
2250 is the March 2006 closing low.
Support:
The 18 day EMA at 2153
The 50 day EMA at 2136
2100 from the early and mid-2005 peaks
2072 is the June closing low
2050 from the summer 2005 lateral range lows
S&P 500: Closed at 1294.02
Resistance:
The 18 day EMA at 1296
The 10 day EMA at 1301
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.
1326.70 is the May 2006 high
1334 is an October 1999 peak
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 50 day EMA at 1283
The 200 day EMA at 1278
1264 is an old trendline from the August 2003/August 2004/October 2005 lows.
Dow: Closed at 11,331.44
Resistance:
11,350 from the May 2001 peak
The 10 day EMA at 11,373
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 March 2006 highs at 11,329 to 11,335
The 18 day EMA at 11,332
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 11,225
11,097 to 11,137 is the last peak from the February top.
The 200 day SMA at 11,078
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
September 6
Productivity, revised (Q2) (8:30): 1.6 actual versus 1.6% expected, 1.1% prior
ISM services, August (10:00): 57.0 actual versus 55.0 expected, 54.8 prior
Fed Beige Book (2:00)
September 7
Initial jobless claims (8:30): 310K actual versus 315K expected, 319K prior (revised from 316K)
Wholesale inventories, July (10:00): 0.8% actual versus 0.7% expected, 0.8% prior
Crude oil inventories (10:30): -2.2M bbl
September 8
Consumer Credit, July (3:00): $6.5B expected, $10.3B prior
End part 1 of 3
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