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us stock market, trend trading stock
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9/21/06 Investment House Daily
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Investment House Daily Subscribers:
MARKET ALERTS:
Target hit alerts: GYMB (Took some interim gain on the nice gap and run higher
Buy alerts: CRM; CHINA
Trailing stop alerts: SIMG
Stop alerts: None issued
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SUMMARY:
- Stocks try to extend the rally but negative Philly Fed gives a reason to sell the move.
- Philly Fed posts first negative reading in 3.5 years
- Leading economic indicators post another decline in a string of declines.
- Bond yields plunge and the inversion hits spring levels intraday.
- Indices look ready to test after the fourth leg; waiting on SOX to make an upside move.
Much weaker than anticipated economic data triggers selling in an extended market.
Stocks started higher but were mixed with the semiconductors once more lagging the overall market move higher. The action was choppy, selling after the initial bounce but managed a rebound even after the LEI report came in negative once more. We noted a potential intraday double top in the early alert, but the market hung in with SP500 moving through the May high for a second time in the session, showing good resilience. The market was making a modest test, at least until the Philly PMI came in negative for the first time since early 2003.
That was enough to kill any upside attempt. The market rallied well Wednesday after some solid earnings reports and a 'hold the course' from the Fed, but it was extended on this move and with SP500 and DJ30 still unable to clearly punch through their May highs the economic news was enough of a trigger to get the sellers and profit takers from this last move to move in.
Technically it was more of the same. DJ30 and SP500 tried the May highs again, but were unable to hold the moves and faded back from this key level. That talk on the financial stations of surging right on through earlier in the week was a bit emotional, not looking at how far the indices had moved to get here. As noted Wednesday, this fourth leg has matched the others in rally off the July low, and rallies typically hold their pattern as they advance. Once they started selling, they were on for the session, unable to rebound and show that intraday bullishness that has characterized the upside moves. Indeed, when we see that intraday bullishness die out that has marked the start of the tests lower. That is precisely what the market showed today.
Volume was lower on the NASDAQ, so no distribution there; a positive since it showed some distribution Wednesday though it was blunted by the afternoon rebound. NYSE volume rose again as the Thursday selling was stronger than the Wednesday buying. SP500 and DJ30 have looked a bit winded with their inability to move through key levels, and we have to watch closely if the volume continues higher on a further test.
Breadth was not bad as all indices faded, but held support. SP500 and DJ30 held the 10 day EMA, NASDAQ was easily above its 200 day SMA, SOX landed on the 18 day EMA, and SP600 held its 200 day SMA once more. Thus far that is not a bad pullback. Have to watch the volume as NYSE showed higher trade on the selling, but overall it is still contained and rather orderly. DJ20, the Dow transports, are at a critical stage. They tanked in July, then formed a double bottom with handle over the past 8 weeks, the handle forming just below the 200 day SMA. It tried to make the break Wednesday but faded back through the 200 day. Thursday it was sharply lower, still in the handle, but this is where it has to find some support. If it breaks lower once more the NYSE is going to experience difficulty holding this modest test of support.
In sum, an extended run was given a reason to sell and it took it. It was mostly contained with hints of some dumping on the NYSE as SP500 and DJ30 once more failed to take out the May highs. Overall the pullback is what you expect, but given the proximity to the old highs and the number of runs on this rally thus far, you don't want to see selling volume jumping any higher.
THE ECONOMY
Philly Fed tumble seen as a recession indicator, or at least that is the word.
The first negative reading since April 2003 (-0.4% versus the 14.4% expected and 18.5 prior) rattled the headlines. The first thing you have to know about the Philly Fed is that the overall reading is independent from the components. That means it can give some aberrant readings as it did early in the year when it was sharply lower but the components were still strong. This time, however, the components were lower as well. Prices were strange as well; prices paid fell sharply but prices received rose. Could there be pricing power in the air?
There is more. The index went from a record high in August to negative in September. The Philly Fed is a very volatile report. It is a small area. It is greatly affected by moderate swings, generating cycles within cycles. It was hit hard after the Gulf storms last year. It took a long time to recover. It was down again in December and then in July with a sharp, unanticipated drop. It is impacted more than other regions and can give false signals. In the last recession, however, it showed early weakness that turned out to be accurate.
Thus you cannot ignore the Philly downturn, particularly with the unexpected July decline as well. There is economic slowing as we have written about all summer, and that means watching the other manufacturing sectors such as Chicago to see if they start showing the same trend lower.
Leading Economic Indicators post another negative reading.
Four out of five of the last months turned in a negative showing. Looking back a bit further five of seven months have been down. August posted a -02% drop, in line with expectations. July was revised lower, however, to -0.2% from -0.1%. Over the past six months cumulative growth rate is not growth at all, checking in at -0.6%. Seven components declined with only 3 rising. Stocks were up the most while consumer expectations were down the most.
The LEI has correctly predicted the 1990 and 2001 recessions, but gave a false signal in the 1995 'soft landing.' What you look for in this indicator is the cumulative 6 month falling to -1 with three or more consecutive monthly declines. That is time to be concerned but it is also not a lock with this indicator. The more accurate is ECRI, and it is still showing a slowdown but not flashing a recession at this point. With bond yields falling hard, however, ECRI is starting to factor that in and weakening a bit more.
Bonds rallying, yields plunging, inversion trying to rise again.
Bond yields have been falling steadily. Wednesday they ended at 4.82% (2 year) and 4.73% (10 year). Thursday they closed at 4.70% and 4.64%, respectively. That is a licking. Intraday the spread between the 2 year and 10 year hit 10 basis points, the highest since the spring. As a refresher, the curve righted itself, or at least moved just a bit better than flat right after the initial pause in August. It then turned back, but was not out of hand. It is now getting out of hand. Now it did recover by the close to just 6 BP, but it is not showing the right kind of action.
What bonds are showing is that the Fed needs to cut rates, now a full 50BP worth. The Fed Funds rate, the short term rate for banks, is 55BP above the current 2 year rate. That is the second inversion we have discussed in the past. Not only the inversion in the nominal yields but where they are in relation to where the Fed has artificially set rates. Nominal yields are saying demand for money is not going to be that strong in the future on either the short end or the long end. That implies the Fed will have to act to follow the market or risk the so-called soft landing turning into something harsher. Been there, done that, don't wan to go back.
The Fed has been pretty good at listening and Bernanke appears to have done a more artful job even in his first attempt. Indeed, there was a comparison done on CNBC the other day and it showed Greenspan's actions resulting in much more severe downturns and they occurred later in his career. Be that as it may, that does not mean Bernanke hit the nail on the head. Bonds are strongly suggesting the Fed could still overdo it and may have already baked a more significant slowdown in the cake. We discussed last week how there would be slowing, the question being how much. With bonds continuing lower they are suggesting more than less.
The market has still not shown that indication, however, making this current pullback from the SP500 and DJ30 May highs all that more important. Can they make new post-2002 highs once more and make them stick? Can NASDAQ and SP600 follow them higher? That is the acid test as the market prices in the future economic action. Low interest rates, after all, are generally good for the economy and stocks. Generally is the operative word. If it is caused by a looming recession, that falls outside the general rule (duh). Thus this market pullback, for the thousandth time, is very important in showing us how stocks are pricing this in.
THE MARKET
MARKET SENTIMENT
VIX: 12.25; +0.86
VXN: 18.2; -0.25
VXO: 11.96; +1.44
Put/Call Ratio (CBOE): 0.97; +0.1. Pushed back up after the selling but still below the 1.0 level. It will take some more testing to get a few more of higher readings to start indicating a bounce.
Bulls versus Bears:
Bulls: 47.4%. Up again, climbing from 45.8%, 43.2% , and 42.1%. Climbing steadily up toward the 55% level considered bearish. Still below the peaks from January and April, and well below the 55% level considered bearish, but it is heading that way and getting too high.
Bears: 33.7%, down from 35.4%, but still well above the 20% level considered bearish. It is the holdout but the bulls are making the move. This matches the 33.7% hit the two prior weeks. Back into the 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: -15.14 points (-0.67%) to close at 2237.75
Volume: 2.049B (-9%). Volume faded but was still above average as NASDAQ gapped higher and then sold off. Not good price action but the lower volume was positive given the selling.
Up Volume: 598M (-1.128B)
Down Volume: 1.426B (+916M)
A/D and Hi/Lo: Decliners led 1.74 to 1. Not out of hand.
Previous Session: Advancers led 1.74 to 1
New Highs: 107 (-25)
New Lows: 69 (+20)
The Chart: http://www.investmenthouse.com/cd/^ixic.html
NASDAQ once again gapped higher but this time it could not hold the move, turning over and selling back after another punch at the resistance range from 2250 to 2316. It made it to 2261 this time around, but it did not get the large cap leadership it had Wednesday, and SOX again sat out the move. Thus NASDAQ faded back from resistance and looks to test the 200 day SMA (2222) or the early June high (2234) though it is not likely to hold that level. Has gotten choppier the past week and even more so this week with the Tuesday gap up and rollover, the Wednesday gap higher, and then the rollover Thursday. Signs of some iron poor blood, needing some Geritol or just a rest. So far it is ready to pullback and is rather orderly.
SOX (-1.76%) dropped through the 10 day EMA (456.60) down to the 18 day EMA (451.69) on the close. Some pretty good chip names fell hard, e.g. MCHP, MSCC, but others held up well with TXN announce a stock buyback and dividend after the close. That bumped it all of 40 cents. SOX is very important to this rally, and SMH, the semiconductor ETF was selling through the 18 day EMA on high volume Thursday. SOX needs to buck up at this level as 450 is also some price support.
SP500/NYSE
Stats: -7.15 points (-0.54%) to close at 1318.03
NYSE Volume: 1.69B (+4.97%). Volume was up and above average as the NYSE indices faded. Showing some distribution as the large caps tested the May highs and faded again. Not major at this point, but we don't want to see it ramp up after this test of the highs. Volume needs to lighten up already on the way down.
A/D and Hi/Lo: Decliners led 1.4 to 1. Very modest still.
Previous Session: Advancers led 1.88 to 1
New Highs: 142 (-58)
New Lows: 34 (-13)
The Chart: http://investmenthouse.com/cd/^gspc.html
SP500 once more ran through the May high (1326.70), tapping at the same level as on Wednesday but then turning down, and tapping the 10 day EMA (1315.71) on the low. Still holding the trend up that near support, but likely to test lower down to 1310 and the 18 day EMA, the top of the March and April trading range. That is where it will meet the lick log and have to hold the line.
SP600 (-0.87%) also tapped the Wednesday high at 378, and this time the moved did not hold. It turned over and fell back to the 200 day SMA (372.49), recovering off the low to hold that level. It still has some wiggle room to fall with the 18 day EMA at 370 or the 50 day EMA (367) and still make a higher low and continue its base. An economic indicator is this one, and it is key along with SOX and NASDAQ to this rally.
DJ30
The Dow also tapped at the Wednesday high (11,631), this time rolling over, testing the 10 day EMA (11,518) on rising, slightly above average volume. It is holding near support for now, but the inability to break through the May high after this run indicates it has some more testing to do. The fall in the transports is not helping either. The 18 day EMA (11,466) is the next support level, matching the early September interim high. 11,400 is real support.
Stats: -79.97 points (-0.69%) to close at 11533.23
Volume: 241M shares Thursday versus 226M shares Wednesday. Volume continues to rise as DJ30 tests the May high. It needs a test here, and just want to see volume lighten up on the way down.
The chart: http://www.investmenthouse.com/cd/^dji.html
FRIDAY
Fresh out of economic data for the week, and after the reaction to the Philly Fed that is a good thing. Let the market test back without anything to send volume higher as it does. The indices need this test, and they need to do it on lower volume. Don't want to see the sellers taking over as it makes its test. While the market has shown accumulation and good action to this point it is in its fourth leg higher on this move and the large caps are not stepping up to the plate as you keep hearing they will do on the financial stations. That leaves it up to NASDAQ and SOX to continue showing some leadership. Right now SOX, making its test ahead of the rest of the market, is struggling. It will need to step up once more to keep the rally moving after this test. It shouldn't test much more either; it has already been working on it the past week.
Now we are not expecting that to happen Friday. We just expect some more testing that is needed after this run higher. As noted earlier, this is yet another important juncture in the market's recovery off the July lows. The large caps have made it back to the peak but are running a bit low after getting there. NASDAQ, SOX and SP600, all more economically impacted, are still down in their bases and still trying to rebuild. Same story, next verse in the rally, but more wear off the tread given the four legs higher.
We are thus looking at another shakeout after the last run, with the SP500 and DJ30 bumping their old highs, and with bond yields diving, we are going to be quicker than slower in protecting positions. Another time it is better to err on the caution side given the move higher to this point. Stocks and indices typically make 4 to 5 runs before testing deeper. The indices can still continue the rally after a deeper test, we just don't want to ride everything through that move. We will protect positions, let it test, and if it turns back up after we exit some positions we will simply move in again. This is an important juncture here and we have had some good gains. No point in watching things evaporate if this distribution continues.
Support and Resistance
NASDAQ: Closed at 2237.35
Resistance:
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:
2234 is the June 2006 peak (intraday)
The 200 day SMA at 2221
2206 is the August 2004/April 2005 up trendline
The 18 day EMA at 2202
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.
The 50 day EMA at 2164
2158 from the May 2005 low.
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 1318.03
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 1315
The 18 day EMA at 1310
1302 the recent August highs
1294 is the January 2006 high and 1297.57 is the February 2006 high.
The 50 day EMA at 1293
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
1268 is an old trendline from the August 2003/August 2004/October 2005 lows.
Dow: Closed at 11,533.23
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 11,518
The 18 day EMA at 11,466
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 11,323
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 11,110
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 5.25% Fed Funds Rate. Removed 'gradual' as an adjective describing the housing decline.
September 21
Initial jobless claims (8:30): 318K actual versus 310K expected, 311K prior (revised from 308K)
Leading Economic Indicators, August (10:00): -0.2% actual versus -0.2% expected, -0.2% prior (revised from -0.1%)
Philly Fed, September (12:00): -0.4% actual versus 14.4 expected, 18.5 prior
End part 1 of 3
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