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9/25/06 Investment House Daily
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SUMMARY:
- Stocks shake off last week's weak close, rally on rising trade.
- Existing home prices start falling as inventories continue jumping.
- Chips and techs look solid as market tries to sustain an early rebound attempt
Decent start to the week pushes SP500 to new post-2002 closing high . . . barely.
After a modestly weaker close last week on the heels of the fourth leg higher in this rally, the market decided to rally some more to start the last week of September. Oil was lower once more, hitting a six month low aided by BP's announcement it would soon reopen the other half of the Prudhoe Bay field. Gasoline fell to $2.42/gallon nationally (down from $2.65 the week before), but reports from many areas over the weekend indicated prices were already even lower. Bonds were strong again with yields falling further (4.64% 2 year versus 4.54% 10 year on the close). Nothing like lower energy prices and lower interest rates to energize the stock market.
Stocks started nicely positive with NASDAQ rallying to a 23 point gain. Then the market turned and stocks gave it all back and more, turning negative across the board. Existing home sales came out at 10ET and were basically in line though lower. The market posted an uptick and then kept on falling. SP500 managed to hold the 18 day EMA once more and NASDAQ managed to hold its old up trendline once more, however, and that started a rebound. It tried to stall after a half hour as it made a lower high, but it hung in there and turned back up. Even more talk from the lunatic from the Dallas Fed did not stall the move. Fisher said he was more worried about inflation than the economy (typical Fed late to the game reaction), though he salvaged his blunder by dazzling the market with another economic myth, i.e. that a slowing economy would keep inflation under check. The ability to weather more Fed-speak helped set the move for the session and the indices rallied on into the close, sporting rising volume, some decent breadth, and an every so slight new post-2002 closing high by SP500.
Technically the session showed positive upside action though hardly overwhelming. Oil reversed mid-session and closed positive ($61.45, +0.90) but stocks still rallied. Volume was up and back above average on NASDAQ, and breadth was better than 2:1 on NYSE. Leadership moved higher as well, always a prerequisite for any solid move. Volume was sporadic, however, with many stocks moving on mediocre trade. SP500 did clear the May closing high to put in a new post-2002 closing mark, but it could not take out the intraday highs. Moreover, NASDAQ rallied but it again could not punch through and into the spring resistance range that starts at 2250ish and runs up to 2316. SP600 and SOX moved higher as well, bouncing where they had to. They did not make any serious moves, they just moved when they had to.
All in all it was hard to complain about the move as it was a good recovery from the late week selling and moved our positions higher. We would have preferred to see another day or two of selling to fully test the fourth upside leg and give the indices a better run at next resistance. Now they are taking on those levels with two days of rest, jumpstarted by some end of quarter buying. It was not all just window dressing, however. Window dressing is characterized by the winners getting stronger and the losers getting weaker. Winners were definitely getting stronger Monday, but as noted volume was sporadic. Further than that, energy stocks had a pretty darn good session. They are still in terrible sell offs, but instead of continuing lower due to further window dressing dumping they rallied. Some semiconductors that are not in very good shape rallied as well.
Thus there is some underlying strength to a new upside leg trying to take hold. Indeed, we saw enough solid action in some leaders to initiate some positions on the upside move. Solid bounces by NASDAQ and SOX off important support give SP500's nascent move above the May closing high some backup. It still needed more rest before taking on resistance again, and the move still has some quarter end buying driving it, so we have to watch out for any reversal attempt if this buying pressure runs out of gas.
THE ECONOMY
Existing home sales beat expectations, but that is not the whole story.
The 6.30M units beat the 6.20M expected, and thus the market took the news basically in stride. Indeed the market is looking for a bit of positive economic data to support the idea that the economy is going to recover after this slowdown. The housing report, however, is not quite that tidbit of data to suggest economic recovery is as close as this holiday season (which, judging by the decorations in the stores this weekend, is closer than you think). Sales were above expectations even though they dropped 12.6% year over year. The key data point, however, was the median home price; it fell for the first time in 11 years, falling to $225K (-2% year/year). Year over year drops in prices are the key measure of health. You will get month to month variations, but when the trends shows up compared to the prior year that is key.
When you look at inventories, there is no secret as to why prices are falling. Homes on the market jumped 37% over 2005, pushing the inventory to 7.5 months. With existing home sales making up 80% to 85% of the entire market, that is a lot of 'for sale' signs in a lot of front yards.
Housing stocks did not seem to mind as they, after a brief rest last week, renewed their upside push. Those stocks have taken on so much water that they had to post a bounce, and some of them have built pretty good bases to move up from. At this stage, however, it is too early to call a bottom in the housing sector even with some better action in the housing stocks. The economy has not fully slowed on this cycle yet, and that means the market will soften some more before it finds its bottom.
THE MARKET
MARKET SENTIMENT
VIX: 12.12; -0.47
VXN: 17.72; -0.51
VXO: 11.11; -1.09
Put/Call Ratio (CBOE): 0.84; -0.08
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: +30.14 points (+1.36%) to close at 2249.07
Volume: 1.9B (+12.6%). Volume rallied back above average as NASDAQ held its trendline and posted a solid gain. Not overpowering trade but a good return of some accumulation as NASDAQ resumed the upside move. Price/volume action overall remains in good shape.
Up Volume: 1.538B (+1.123B)
Down Volume: 323M (-925M)
A/D and Hi/Lo: Advancers led 1.57 to 1. Ho-hum breadth as the large cap techs again dominated the upside action as they did on the prior upside day, last Wednesday after ORCL reported its strong earnings result.
Previous Session: Decliners led 2.2 to 1
New Highs: 85 (+38)
New Lows: 84 (+13)
The Chart: http://www.investmenthouse.com/cd/^ixic.html
NASDAQ started positive but then flipped the move over and turned negative, falling back down to the August 2004/April 2005 up trendline (2210). Once more it found some footing there, and in a big way. It reversed 37 points low to close, ending near the session highs. In the process it moved back through the 200 day SMA (2222) and right up to the bottom of the January to March trading range (2250 to 2316). Right back to where it ended Wednesday and started the pullback to end the week. It could use more rest, but it worked more or less laterally last week, holding key support levels and rebounding from them. Same action Monday, but with more force behind it. Large cap techs are being accumulated, and that suggests some window dressing that could lose power once the adjustments are made. Nonetheless we like the move.
SOX (+2.51%) found support at a trendline as well, using the short term trend off the July low as purchase to send it back up off 450, an important level to hold on this test. Good recovery move after a very solid test. Remember, SOX was testing before the rest of the market, and that put it in position to rebound at any point. It has started to do just that and it can provide some very good leadership with NASDAQ to take stocks higher as its stocks are not the kind being used for a lot of window dressing.
SP500/NYSE
Stats: +11.59 points (+0.88%) to close at 1326.37
NYSE Volume: 1.7B (+17.4%). Not blowout trade, but solid, above average volume to send the NYSE indices higher and punch SP500 to a new post-2002 closing high
A/D and Hi/Lo: Advancers led 2.13 to 1. Solid breadth, aided by the recovery in energy stocks, prominent on the small and mid-cap indices.
Previous Session: Decliners led 1.62 to 1
New Highs: 127 (+56)
New Lows: 79 (+26)
The Chart: http://investmenthouse.com/cd/^gspc.html
SP500 tapped the 18 day EMA (1312) on the low just as it did Friday, and it found some good footing Monday, vaulting 15 points off that level to post a new post-2002 closing high. It hit a new intraday high as well, but could not take out the May intraday high with the close. That is slicing it pretty thin and you may wonder what that means. It means it is cracking that resistance, but it has not yet punched through. It has tapped at this point for over a week, and came back to test some to end last week. It needed more rest to sustain a move, but Monday it was not waiting around. Now we see if it has any strength to it, something it lacked last week.
SP600 (+1.09%) found support at the Friday low, close to the 50 day EMA (367.53). It used that as support and rallied to close just above the 200 day SMA (372.61). That keeps it in the game for now, making a higher low at a key point in its base. It remains below the recent highs at 378 where it stalled last week, right below the July high at 378. Still a lot of work to do in order to make a real difference in the market move.
DJ30
Another index that tested the 18 day EMA (11,481) on the low and rebounded to post a gain. DJ30 was the laggard for the day, unable to hold near its high on the close (gave back 35 points). That keeps it hemmed in below the May high for now ( 11,670), and not really looking as if it wants to take on that level. That leaves it up to SP500 and NASDAQ to drag it there. Always fun having to drag the large in-laws around with you.
Stats: +67.71 points (+0.59%) to close at 11575.81
Volume: 268M shares Monday versus 198M shares Friday.
The chart: http://www.investmenthouse.com/cd/^dji.html
TUESDAY
Next read of consumer confidence is due out Tuesday at 10ET. Nothing like lower gasoline prices to spray some starch on the buying public. Of course, the survey won't have the benefit of the most recent decline, but the drop thus far will have its positive impact.
Likely more important to the market than sentiment will be the steady increase of earnings guidance coming out ahead of the October season. Last week some good guidance sparked some strong moves, and if they continue to come in upside when many expect the numbers to finally start eroding, that bodes well for prices. In addition, there is that window dressing issue at quarter end, and Monday we had a pretty sizeable upside move without getting a couple more downside days to set a solid rebound. That only means you keep an eye out in the event volume dries up on a further upside move, suggesting the bounce was for show; once the portfolio moves are made then the market would need another catalyst.
For now we are going to keep looking for stocks ready to move off of recent tests. Still have to like the positioning of NASDAQ and SOX even if DJ30 looks a bit soft here. Those first two were leaders in this move and after the chips made that nice week-plus test and the nice Monday bounce, techs and chips could be a good leading duo higher.
Support and Resistance
NASDAQ: Closed at 2249.07
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 2222
2210 is the August 2004/April 2005 up trendline
The 18 day EMA at 2208
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.
The 50 day EMA at 2170
2168 is the August intraday high.
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 1326.37
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
The 18 day EMA at 1312
1311 is the April closing high.
1302 the recent August highs
The 50 day EMA at 1296
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
The 200 day EMA at 1281
1280.37 is the recent July peak.
1268 is an old trendline from the August 2003/August 2004/October 2005 lows.
Dow: Closed at 11,575.81
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 18 day EMA at 11,481
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 50 day EMA at 11,340
The March 2006 highs at 11,329 to 11,335
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 11,117
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
September 25
Existing home sales, August (10:00): 6.30M actual versus 6.20M expected, 6.33M prior
September 26
Consumer Confidence, September (10:00): 103.0 expected, 99.6 prior
September 27
Durable goods orders, August (8:30): 0.4% expected, -2.5% prior
New home sales, August, (10:00): 1.04M expected, versus 1.07M prior
Crude oil inventories (10:30)
September 28
GDP, final Q2 (8:30): 2.9% expected, 2.9% prior
Chain deflator (8:30): 3.3% expected, 3.3% prior
Initial jobless claims (8:30): 315K expected, 318K prior
September 29
Personal income, August (8:30): 0.3% expected, 0.5% prior
Personal spending, August (8:30): 0.2% expected, 0.8% prior
Michigan sentiment, revised (9:45): 85.0 expected, 84.4 prior
Chicago PMI, September, (10:00): 56.0 expected, 57.1 prior
End part 1 of 3
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