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us stock market, trend trading stock
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9/19/06 Investment House Daily
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Investment House Daily Subscribers:
MARKET ALERTS:
Target hit alerts: ORCL (Took the interim gain off the table ahead of earnings)
Buy alerts: HPOL; CTCM
Trailing stop alerts: PRFT; SPIL
Stop alerts: None issued
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SUMMARY:
- Market gets a pleasant PPI surprise, lower oil, but can't do anything with it ahead of FOMC.
- Core PPI negative for second month; pass through fears have to be fading.
- Housing picture is more of the same: weak and getting weaker. The gloom is peaking.
- After the higher volume selling on NASDAQ, the market needs to rebound here unless it can get downside volume under control for a more orderly test.
Another lower PPI cannot compete with YHOO warning.
Futures were lower as the market continued to consolidate some of the recent gains. Then the PPI data was released and came in lower overall and negative on the core. Futures recovered and turned positive even though housing starts were again very weak. After just beginning a consolidation of the last leg higher, however, we were wary of a higher open on this news, cautioning of same in the morning alert. The move did have difficulty holding, but was hanging in there until YHOO announced lowered guidance for its Q3, blaming lack of auto and financial advertisements. That sent all the indices well into negative territory just ahead of lunch.
The market bottomed, however, over lunch and then started a slow, steady climb into the close. It did not take back enough lost ground to close positive, but it shaved enough off the lows to get NASDAQ and SP600 back near the 200 day SMA on the close. If it has simply been a pullback and rebound we would cal this good action, shaking out the sellers and rebounding to cut the losses. On NASDAQ, however, volume was higher, indicating some distribution, the first since the early days of September. It was good to see the indices cut their losses into the close; that mitigated the higher volume selling on NASDAQ somewhat. It was not clear at the closing bell, however, if this rebound would be able to hold.
Technically there was that distribution on NASDAQ, a key leader in this recovery, and that put a question mark on the consolidation effort even with the afternoon rebound to cut the losses. We have been concerned about a return of higher volume selling. It was a positive that NASDAQ and the other indices rebounded; without that it would have clearly been some trouble as the indices would have shown distribution after testing key resistance at the post-2002 highs on DJ30 and SP500. As it is, NYSE volume was flat, indicating that the NASDAQ selling was mostly related to the YHOO announcement. Again, in that light, the afternoon rebound was a real positive.
As noted, NASDAQ tested below the 200 day SMA, but it did hold the old uptrend on the low and rebounded. SP500 tapped the 10 day EMA on its low and recovered nicely. SP600 undercut its 200 day SMA as well, but it rebounded furiously to hold that level on the close. SOX undercut the 10 day EMA, and just made it back by the close. SOX and SP600 are keys on this move, and they are hanging in there with the rebound.
One of the reasons is that the leaders tested and rebounded nicely as well. Stocks such as AAPL, AKAM, WFR, DRIV, SMSC, WEBX, etc. reached lower but then rebounded in the afternoon. That shows the buyers are not dead yet, and as long as leadership holds that bodes well for the market. Many of these leaders, however, just like the indices, need a bit more consolidation before they are ready for another sustained upside run.
In short, the market is getting the test it needed, but it did on more volume than it should have, at least on NASDAQ. Now there is the ORCL news after hours and large cap tech stocks are moving higher; the market could try to rally again tomorrow even with the FOMC results at 2:15ET. Indeed, it almost has to rally after that NASDAQ distribution, or at least get the selling volume under control. Problem is, with the kind of impetus ORCL provides, the market is not likely to make small, lower volume moves. Again, it almost has to rally tomorrow on the news, AND hold the gains into the close. With the FOMC announcement in the afternoon that is problematical. We are not going to do a whole lot Wednesday until after the FOMC announcement works through the market. Then we will see where it leads and either be protecting positions or going after some new ones.
THE ECONOMY
PPI comes in light for a second month, even before the big energy drop.
PPI pleased on most all fronts with the overall reading at 0.1% (0.3% expected) and the core at -0.4% (0.2% expected), its second consecutive negative month. Moreover, the core was +0.9% year/year, the lowest level since March 2004. Gasoline dropped 2.2%, autos down 2.6%, and capital goods -0.3%. This was even before the big drop in energy prices really started. It was also not just the drop in autos; take those out and prices were still flat.
While this does not get the stir the CPI generates, it is important when looking down the road. The worry all along is that higher energy prices will lead to a pass through into higher consumer prices as the higher costs caused by energy prices works into consumer prices. The decline in the producer side indicates this is not going to happen, at least to any extent that causes the kind of inflation worries many had just 4 to 6 months back. Indeed, as noted Monday, it is a familiar story: no pass through when prices spiked comparably in the early 1980's, and then no pass through in 1994. If the trend holds, this would be another instance where higher energy prices did not result in proportionately higher consumer prices.
With energy prices and commodity prices in a dive, the next month is going to be even better on the producer side and likely better on the consumer as well even with inflation lagging the economic cycle. We have a feeling the Fed realizes this and Wednesday even the hold out hawks will be in agreement to go ahead and pause again. They won't agree it was the right thing to do last month, but they will go along with the group this time given the 'I told you so' kind of evidence that can be pointed to. Seems Bernanke got it right, at least that the Fed should stop. He may still be too late given the slowing indications are already here and the Fed just closed its book. We don't want to build Bernanke up too big; after all, he wants an inflation target.
Housing continues to fade as homeowners close the so-called 'ATM.'
August housing starts plunked 6% lower with 1.67M starts versus the 1.75M expected. That is a 20% drop from August 2005. That makes 6 declined in the last 7 months and puts starts at the lowest level since April 2003.
The cutback is needed. In July the number of new homes on the market hit an all-time high. Builders are aggressively reducing the building and that will, eventually, start lowering the number of houses on the market. From the data it does not look as if that level is here yet. Indeed, it will likely take until summer 2007 to get to the bottom.
At the same time builders are cutting back, housing inventories are growing, and prices are starting to fall, new data shows that consumers are supposedly turning away from their homes as 'piggybanks' or 'ATM' machines as discussed the past year or so. Indeed, according to new records 'value extraction' is at its lowest level since 2001. Apparently that is a good thing because some studies suggest that equity as a percentage of disposable income is now at just 1%.
What does it all mean? It is part of that slower economy scenario we have discussed. Housing continues to fall, still looking for a bottom, and consumers are getting a bit more conservative with their spending. At the same time, optimism levels remain easily high enough to support sufficient consumption to keep the economy in a growth path. Thus we still have the slowing in the growth rate, but not a recession showing up in the Taro cards at this juncture.
THE MARKET
MARKET SENTIMENT
VIX: 11.98; +0.2
VXN: 18.26; -0.19
VXO: 10.85; +0.21
Put/Call Ratio (CBOE): 1.41; +0.44. Big surge in put activity as the market showed a bit of weakness. Big jump. That indicates there is a lot of anticipation of the downside, and this mitigates the higher volume selling on NASDAQ to some degree. It is not a complete offset of course, but it does show plenty of speculation. It can also show upside speculation as a lot of puts that were sold in anticipation of a further advance were closed out when the market started to buck some on Tuesday.
Bulls versus Bears:
Bulls: 45.8%. Up from 43.2% last week and 42.1% before. Steady climb this month toward the 55% level considered bearish. Still well below the peaks from January and April, and well below the 55% level considered bearish.
Bears: 35.4%. Bulls may be rising but so are the bears. As the market gets higher they are growling, coming back strong from a 33.7% the two prior weeks. This has reversed somewhat 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: -13.38 points (0%) to close at 2222.37
Volume: 2.131B (+8.32%). Volume jumped well above average again, though lower than Friday expiration trade (of course). It was a strong shot of volume as techs sold off mid-session after YHOO announced lower Q3 guidance. Not all of the techs were shot, and the fact that NASDAQ rebounded prettied up the picture a bit. Still distribution and still a warning flag as the market moves forward on this test and what will likely be a rally attempt on the ORCL news.
Up Volume: 641M (-287M)
Down Volume: 1.334B (+600M)
A/D and Hi/Lo: Decliners led 1.68 to 1. Not too bad, and given the rebounding into the close (A/D tends to lag intraday moves) we are not too worried about it.
Previous Session: Decliners led 1.12 to 1
New Highs: 67 (-40)
New Lows: 61 (+21)
The Chart: http://www.investmenthouse.com/cd/^ixic.html
Reached down to the up trendline on the low (2203) and then manage to cut 20 points of losses by the close, just missing closing above the 200 day SMA (2222.60). Volume jumped up on the YHOO selling, and as noted above, but for the rebound to take back some of the losses, the session would have been clear trouble. As it is, it is more of a warning flag, alreting us to watch out for any further volume selling. The tech leaders tested and rebounded as well, so for now pretty good action. ORCL's earnings had large cap techs rallying after hours, and if they start the session higher, they had better finish the job. NASDAQ is not really ready to continue the move higher, but if it can hold a rebound from here on the earnings news and after the FOMC, then it took another step in proving itself. Still below 2250 resistance, the bottom of its early 2006 trading range. Still plenty of upside work to be done.
SOX (-2.20%) took a licking, but after a waive to the 18 day EMA and some support at 450 it rebounded to hold the 10 day EMA on the close. Actually the action was just what it needed, a test similar to the prior tests in depth and then a rebound. This, of course, occurred in one session while the others took several. It remains in good position to move higher and still has a lot of semiconductor stocks positioned to move higher as well.
SP500/NYSE
Stats: -2.87 points (0%) to close at 1318.31
NYSE Volume: 1.5B (-0.07%). Volume remained flat as SP500 and the small caps tested and managed a rebound. Some distribution but solid rebounds kept the NYSE indices in very solid condition.
A/D and Hi/Lo: Decliners led 1.37 to 1. Modest.
Previous Session: Decliners led 1.23 to 1
New Highs: 86 (-33)
New Lows: 43 (+22)
The Chart: http://investmenthouse.com/cd/^gspc.html
SP500 tapped the 10 day EMA (1313) on the low and rebounded for a most modest loss. Nice shakeout action in the continuing move up the 10 day EMA and after it butted up against the May high (1326.70) the prior two sessions. Needs a bit more testing to really set the move for the break through the May high, but as with NASDAQ, it might be up early with the FOMC meeting still to come in the afternoon. Unlike NASDAQ there was no distribution on SP500 so it is still setting up quite nicely.
SP600 (-0.47%) took an intraday licking, falling down through the 18 day EMA and just above the 50 day EMA (366.63) on the low before a strong 6 point rebound to close it right at the 200 day SMA (372). This keeps it in its nice attempt at building another higher low in its base. With the large caps set to move on the ORCL news, how SP600 responds tomorrow if the large caps rally will tell a lot about where the market is heading.
DJ30
DJ30 sold back intraday as well, but similar to SP500 it held near the 10 day EMA (11,493) and rebounded into the close, posting just a modest loss. Volume was lower and below average; no distribution. DJ30 is making the test it needs before taking on the May high (11,670.19) and the all-time high at 11,750.28 again.
Stats: -14.09 points (0%) to close at 11540.91
Volume: 178M shares Tuesday versus 192M shares Monday.
The chart: http://www.investmenthouse.com/cd/^dji.html
WEDNESDAY
A confluence of events on Wednesday with the Tuesday distribution on NASDAQ, the rebound by all the indices, ORCL's earnings, and the FOMC decision Wednesday afternoon. The tech stocks were rallying after hours, cutting more losses after the bell. After a brief test they are not really in position to rally and take on the May highs (DJ30, SP500), but at least they had something of a rest beforehand.
Given the action Tuesday, the run to this point, the tap at the May high by SP500 and DJ30, and the FOMC meeting Wednesday, we are going to be doing a lot of watching tomorrow. There are times to nibble, there are times to load the boat, and there are times to back off and be patient. Given the action in NASDAQ and the FOMC, we are going to exercise more patience tomorrow and wait and see what happens after the FOMC announcement. If we see a really solid move setting up by a really solid stock we will nibble some. Other than that we will wait, see how the market treats the FOMC result and then go from there. We will watch NASDAQ and SP600 and how they respond given NASDAQ's distribution Tuesday and the small cap's lagging this move. If they show no ill effects after the FOMC we will do what we usually do, move into the leaders as they present opportunity. Big day.
Support and Resistance
NASDAQ: Closed at 2222.37
Resistance:
2234 is the June 2006 peak (intraday): still trying to get through.
2250 is the March 2006 closing low.
2316 from interim tops in January and March 2006 (the 2250 to 2316 range is the Q1 trading range for NASDAQ)
2376 is the April high, the post-2002 high
Support:
The 200 day SMA at 2222.60 is trying to hold
The 10 day EMA at 2210
2206 is the August 2004/April 2005 up trendline
The 18 day EMA at 2191
2190 is the July 2006 high
2185 to 2182 is the September 2005 peak and interim high from November 2005.
2177 is the December 2004 high.
2168 is the August intraday high.
2158 from the May 2005 low.
The 50 day EMA at 2157
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 1318.31
Resistance:
1324 to 1329 from the October 2000 lows.
1326.70 is the May 2006 high
1334 is an October 1999 peak
Support:
1315 is the May and May 2001 peaks
1311 is the April closing high.
The 10 day EMA at 1313
The 18 day EMA at 1307
1302 the recent August highs
1294 is the January 2006 high and 1297.57 is the February 2006 high.
The 50 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 1280
1265 is an old trendline from the August 2003/August 2004/October 2005 lows.
Dow: Closed at 11,540.91
Resistance:
11,642 is the May 2006 closing high
11,670 is the May intraday high
11,750.28 is the all-time high
Support:
The 10 day EMA at 11,493
The 18 day EMA at 11,440
11,401 from the September 2000 peak and April 2001 highs
11,384 is the August intraday high.
11,350 from the May 2001 peak
The March 2006 highs at 11,329 to 11,335
The 50 day EMA at 11,302
11,279 is the late May closing high
11,243 is the early August peak closing high.
11,228 is the July closing high.
11,097 to 11,137 is the last peak from the February top.
The 200 day SMA at 11,103
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
September 18
Current Account, Q2 (8:30): -$218.4B actual versus -214.0B expected, -$213.2B prior
Net Foreign Purchases, July (9:00): $32.9B actual versus $75.1B prior
September 19
PPI, August (8:30): 0.1% actual versus 0.3% expected, 0.1% prior
Core PPI, August (8:30): -0.4% actual versus 0.2% expected, -0.3% prior
Housing starts, August (8:30): 1.665M actual versus 1.75M expected, 1.772M prior
Building permits, August (8:30): 1.722M actual versus 1.74M expected, 1.747M prior
September 20
Crude oil inventories (10:30)
FOMC policy statement (2:15): No change expected from 5.25% Fed Funds Rate
September 21
Initial jobless claims (8:30): 310K expected, 308K prior
Leading Economic Indicators, August (10:00): -0.2% expected, -0.1% prior
Philly Fed, September (12:00): 14.4 expected, 18.5 prior
End part 1 of 3
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