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us stock market, trade stock
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10/14/06 Technical Traders Report
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Technical Traders Report Subscribers:
MARKET ALERTS
Target hit alerts: GYMB; SIGM; HYSL; LRCX
Buy alerts: ADBE
Trailing stops: None issued
Stop alerts: None issued
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/alertttr.htm
SUMMARY:
- Market posts more gains to close a week that saw NASDAQ, SOX, SP600 come to life.
- Retail sales just the latest reason for bond market to come around to the stock market's point of view
- Baby boomer's and the stock market's future.
- Energy prices are falling once more, just in time for this week's key (at least to the Fed) CPI.
Growth sectors lead once more to end the week.
After the big Thursday breakout stocks were a bit lower pre-market, somewhat hung over from the Thursday party that saw NASDAQ continue its breakout and the small cap SP600 join the action as well. Oil was up (58.67, +0.81) as Norway closed part of a major field for needed repair work. Retail sales were down on the headline number, and though it was all due to lower gasoline sales (lower prices), the market was still digesting the news into the open. There was also more Fed-speak, and once more some of it was quite hawkish (Moskow again bellowing about inflation too high; he probably wants more people jobless as he stated in 2000), but some if it very rational (Poole, now the moderate, suggesting he would back cutting rates if the economy falters). Six wanting to hike, one willing to consider a cut if things were going to hell; investors were not too uplifted by the prospects.
Stocks still managed to start just about flat and immediately NASDAQ, chips, and the SP600 started to rise. SP500 and DJ30 lagged, holding negative, but they were not selling off as the early futures indicated might be the case. Michigan sentiment (preliminary for October) came out much stronger than expected at 92.3 (86.5 expected), and that goosed the upside a bit more. Inventories came out at 10ET, and while they rose a bit more than expected (0.6%), as with wholesale inventories, sales rose more (0.8%). All the while the market was figuring out that the retail sales data was really quite solid, further corroboration with the Thursday trade gap numbers that show a lot of buying anticipated in the consumer sector. The dollar rose to an 11 month high against the yen on all of the news. Things were turning positive.
It all added up to more upside. The large cap industrials lagged negative most of the session as stocks once more put on a nice afternoon show. They all turned positive with just about 2 hours left, but then softened toward the close as we expected. After another good week, some profit taking ahead of the weekend was typical. Early on we took a few positions in some techs and also some partial gains on positions that had put in a good week. Market makes a solid move up, bank some gains, look for opportunity, let the rest of the positions run in a good market.
Technically the action was slower but solid. This past week was time for NASDAQ, SOX and the small caps to come around. NASDAQ broke out two Wednesdays back but had drifted higher since on low volume. SOX tried to move but could not put two solid sessions back-to-back. SP600 was hanging on in its base. This week NASDAQ confirmed its breakout, SP600 broke through key resistance in its base, and SOX put together three winning sessions. Price/volume action was good, and even though volume was lower again Friday, it was still above average on NASDAQ and average on NYSE. Good price/volume action on the buying.
Leadership is also good. Friday saw more tech stocks breakout, particularly some large cap numbers. We say it frequently: a market goes nowhere without leadership, and as the defensive stocks (e.g., K) and energy stocks suffer some money outflows, new leadership is coming up. While early leaders take a breather, new leaders emerge. That is what we saw last week. There are reasons for this, and we will discuss them in the economy section below.
All in all another positive week. In the back of your mind you still have to be saying 'but it is October and September was strong as well.' DJ30 and SP500 have run far and have not made an appreciable pullback. DJ30 is in new high territory, only governed by how top heavy it gets with gains. It is still below critical levels, and thus we can live with the 'rest-less' rise for now.
We always take a skeptical view of market action, looking for problems. We do that because it keeps you honest with respect to the upside, i.e. it keeps you from getting too enthusiastic and thus blinding you. We felt a bit of enthusiasm this week as we banked a lot of gains, and that had us looking back again at the move to see if it was all smoke and no substance. As we said more than once the past week (including Thursday), you have to defer to the strength of the market moves and act according to what the market signposts are saying. In that way, we can have our doubts about a move, but when we see stocks move with strength, we are in the action. At the same time our skepticism helps us keep a more emotionless, critical view of the action, and that helps identify if there are trouble signs that could lead to what the majority of enthusiastic bulls don't see. For this week, however, the action was solid.
THE ECONOMY
Strong retail sales another reason forcing the bond market to retreat from an economic slowdown stance.
September retail sales fell 0.4% when they were expected to rise 1.0%. Ouch. Take out autos and they were down 0.5% when a flat number was expected. Ouch again. Of course, headlines are usually deceiving, especially given the way our government keeps records (case in point, the trade gap discussed in the Thursday report).
Digging deeper it was a good report. The decline was due to a 9.3% drop in gasoline sales. Remember, retail sales are measured in dollars, not units. Thus a decline in gasoline prices means lower sales dollars but not necessarily fewer gallons sold. When gasoline prices tumble, the dollars sold tumble, and that pulls down the retail sales number. Take out fuel sales and you get a 0.6% rise in retail sales. Still not the 1.0% overall expected, but that number was pushed higher by gasoline sales estimates as well. Clothing sales rose 3%, general merchandise +1.1%, restaurants +1%, department stores +1%, furniture +0.2% (-0.4% prior), building/gardening +0.6%.
Those are not numbers suggesting a consumer slowdown, at least not one that is lasting. Consumers did feel the bite through the summer as gas topped $3/gallon. Friday some in the northeast saw gasoline decline by $0.05 from the time they drove to work from the time they drove home. There is a definite slowdown in the economy, but it is one that is still showing mixed data, and the consumer, buoyed by lower gasoline prices, is coming back already. Look at Michigan sentiment hitting 92.3 Thursday, well ahead of expectations (though it is the much less reliable preliminary report); it bolsters the IBD poll earlier in the week that showed a nice recovery in consumer sentiment as well.
Bond market sells, rates rise.
After hitting 4.5% on the 10 year just over a week ago as bonds rallied in anticipation of further economic slowing and a Fed rate cut, the tough Fed talk in speeches, the minutes from the September meeting, and some improving economic data points, bonds are selling and yields are jumping as the view of a weak economy is priced back out of treasuries. Friday bonds closed higher again at 4.87% on the 2 year and 4.80% on the 10 year. That is a 30BP swing in the 10 year, more than the typical Fed rate move. The 2 year is still 38 BP below the Fed Funds rate, suggesting the bond market is still out of whack with the Fed, but that is pretty normal. The Fed usually overshoots the true market when it acts, up or down.
The bond market is basically in the process of coming more into line with the stock market and its rally off of the July low. Bonds overshot on their estimate of economic weakness and are now adjusting to get back to more in line with an economy that will weather the current slowdown and continue expanding. Basically, it is trying to sync up more with what the stock market is saying.
We have discussed the tension between the stock and bond markets on several occasions, particularly when the bond market was rallying and yields were falling as the stock market rallied at the same time. The stock market tends to look 9 months and more down the road, and after slumping from April to July it found bottom and has rallied, pushing DJ30 to new all-time highs and SP500 to new post-2002 highs.
But that is not the whole story, particularly for the economy. A large cap rally is more typical of the later cycles of an economic expansion, so no problem there. Small caps were lagging as well, moving from leader to laggard. That is also typical in an aging economic expansion. But NASDAQ was lagging and SOX was dragging as well. We said many times NASDAQ had to get it in gear or things would fall apart. Well, NASDAQ broke out over a week ago and Thursday it was rallying well again. Very importantly, SP600 broke through resistance in its base and surged. SOX also put together three upside sessions, something it has failed to do since its last run higher in early September. In addition, materials and industrial metals enjoyed a solid week as well, starting to rebound after selling off since May. Retailers are already rallying as are financials.
In short, the additional breakouts in the stock market this week suggest an even better economic scenario than just the large cap breakouts and runs did. Further the bond market action this past week is starting to back that position up as rates recover. A big issue is still the inversion between the 2 year and the 10 year (back to 7 basis points to end the week after narrowing to 2BP at one point). We could blow that off and go with the crowd, but that would not be an honest assessment. But for this small but sustained (and the latter is the key) inversion we would have to buy off on the market and bond move. There is still the issue of the Fed being in the game, and as we have discussed before, that is keeping the bond market nervous. Thus despite the retracement in yields this week, the inversion worsened slightly. With the Fed still with its hand on its holster, ready to shoot from the hip, the markets are not letting go as they did in 1995 once the Fed said 'no mas.'
Will Boomer retirement retire the stock market?
The Baby Boom generation has swept across the country like a wave, lifting different sectors of the economy as Boomers move through the stages of their lives. The home market is a classic example. From small, starter homes in the 1970's when they were just getting on their feet to mansions, to second homes at the beach and in the mountains in the 1990's, and likely retirement condos in 2010 and beyond, the boomers have driven the residential market. When the kids are gone and they can no longer maintain (or don't want to maintain) those big homes, they will leave behind a lot of formerly high-priced real estate looking for owners. Perhaps the new wave of immigrants that are now making the starter home level the hottest in the market will fill the void ten years from now just as the boomers did. That will be the interesting story for the real estate market.
That is just one example, and another oft-cited area is the stock market. Conventional wisdom says when the boomers retire they will start withdrawing assets from equities and put them into safer, lower yield securities to fund their retirement. Conventional wisdom, as is often the case, is dead wrong.
One of the primary reasons this is wrong is that people are simply living longer now. I saw Art Linkletter on the tube the other night and he is 94 years old and just an amazing man. He says one of the keys to long life is lowering stress, and one way to do that is to be able to laugh at yourself. He tells others they can get a good laugh as he does each morning just by standing naked in front of the mirror.
The point, and Linkletter is very adamant about this, is that the average lifespan is 77 years now and increasing. You are going to live longer than you think. Part of living longer means having the financial wherewithal to do it. You have to plan ahead and that means saving and investing so as to have the finances staying in shape in order to be able to generate the additional resources that longer life requires. Those financial resources are not likely to come from just your standard conservative income generating devices. Many models were built on a shorter lifespan horizon and the generation of interest income. If interest rates continue their 20 year trend, they will not jump higher. Good for real assets, not so good for those looking for modestly higher rates to fund their retirement. That means 'retirement' accounts (now more accurately called 'living' accounts) will have to include more high powered income generators such as equities, not to mention income generation strategies that we employ on our stocks, such as selling calls against stock positions for income.
This leads into the second major, and it is major, reason the market is not going to find itself without any funds driving it. Two-thirds of the financial assets in the US are held by 10% of the citizens. That means for 90% of the populace, the house represents the major financial asset. As noted, when Boomers get older history and demographics show they won't stay in the big houses used to raise the kids. They will downsize into luxury condos and the like. That means one of the big assets they have will likely lose a lot of value just as they want to cash out.
Further, most Boomers simply don't have enough savings to support their retirement just by generating interest income off the principal financial assets. That means they are going to have to keep a sizeable portion of their 'living' accounts invested in equities in order to generate the higher level of funds needed for living during retirement. Eventually boomers will die off, but until they do, they are going to be invested in equities. Just look now how the government is encouraging more investment by giving higher deductible levels for those age 55 or older. The government likely should reduce that to 45 and older to really help get retirement funded, and that would have a very strong near term and longer term impact on the stock market.
Finally, lets not forget about those immigrants who are making the low end of the housing market so hot right now. Despite the rhetoric that is flying in an election year about the intentions and goals of immigrants, the actions in the housing market speak volumes. They are here and they are buying houses. Most want better lives for themselves and their families. There is no reason a majority won't pursue the traditional American dream of working hard, getting ahead, and moving up the socioeconomic ladder. Who is to say that they, combined with non-immigrant 'generation X' citizens fill the void in the housing market and the stock market left by the boomers? The numbers at the low end of the housing market are impressive; that market was hot long after the high end peaked in 2004 (yes, it was early 2004 for the high end). One thing history has shown in the US: the lower socioeconomic end of the curve seeks to move higher, and the stock market has opened up to the individual investor over the past 15 years. It will only become more accessible in the future, and that will assist in bringing more investment dollars to equities.
THE MARKET
MARKET SENTIMENT
VIX: 10.75; -0.34. Falling toward, but still easily above, levels hit in July and December of 2005 and March 2006. Those low points led to interim downturns in SP500.
VXN: 17.83; +0.17
VXO: 10.26; -0.62
Put/Call Ratio (CBOE): 0.84; +0.01
Bulls versus Bears:
Bulls: 52.2%. UP from 49.5% and 47.4% before that. Making some big jumps as the market does the same. This has caught the April high and is moving closer to the January peak at just over 60%. 55% is considered a bearish indication.
Bears: 30.4%, the largest drop on the move, falling from 33.3%. Down from 35.4% before that and well off the 37.1% hit in July 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. It is still well above the 20% level considered bearish, and if it holds at a high level even as bulls move higher, it acts as a governor on the bullishness. 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: +11.11 points (+0.47%) to close at 2357.29
Volume: 1.996B (-1.72%). Lower but still above average volume as NASDAQ extended the Thursday breakout. Showed some potential churn Wednesday, but answered it with solid upside moves on solid volume.
Up Volume: 1.418B (-329.018M)
Down Volume: 518.984M (+269.515M)
A/D and Hi/Lo: Advancers led 1.57 to 1. A shadow of the Thursday breadth as the large cap techs asserted themselves more, but just a bit more (0.50% versus 0.47% for overall NASDAQ).
Previous Session: Advancers led 3.32 to 1
New Highs: 145 (-23)
New Lows: 13 (-10)
The Chart: http://www.investmenthouse.com/cd/^ixic.html
NASDAQ posted another solid upside session, starting soft and then moving higher up through the afternoon. It closed modestly off the session high ahead of the weekend, but that is rather typical action after a good move for the week. NASDAQ cleared the top of its Q1 trading range (2333) on Thursday and Friday moved closer to its April high (2376), coming within 16 points of that level. That is a key breakout for NASDAQ as well as that puts it at a new post-2002 high, a significant move as it indicates NASDAQ continues to price in better economic times ahead. NASDAQ is a growth index and thus needs economic growth to fuel earnings and raise prices. The two breaks higher the past week indicate it is building those better economic times to come. It will likely not clear the April high without a pause or test, but with money shifting into techs it might be a bit surprising with its strength.
SOX (+0.95%) put in its third straight upside session, making it four out of five for the week as it came off another 50 day EMA (449) test. It still has not cleared its September intraday high (473.45) that stalled it out just below the early June high (479.38). There is the 200 day SMA (477) to deal with as well. SOX is showing some strength, following NASDAQ higher, but it is about to get a serious test as it tries to move higher from the Friday close (471.27). Some solid moves within the sector such as LRCX overcoming its poor outlook and shooting higher. Always good to see stocks overcome bad news.
SP500/NYSE
Stats: +2.79 points (+0.2%) to close at 1365.62
NYSE Volume: 1.508B (-3.34%). Volume faded back to average as the large caps edged higher and the small caps put in another solid session. Not great trade but not bad at all for a Friday.
Up Volume: 907.51M (+779.594M)
Down Volume: 552.664M (+294.889M)
A/D and Hi/Lo: Advancers led 1.44 to 1. Middle of the road on a slower session, but showed a good resurgence this week. Indeed, breadth has improved over the past two weeks and is in much better condition than the flattening to topping action shown in September.
Previous Session: Advancers led 3.8 to 1
New Highs: 283 (+42)
New Lows: 2 (0)
The Chart: http://investmenthouse.com/cd/^gspc.html
SP500 posted a modest gain, coming back in the afternoon twice to close positive; the upside bias/momentum is quite strong in this one (indeed in DJ30 as well). Not a bad response to the Thursday break higher from the week long flying plateau. It remains extended after helping lead the market higher, but it got some rest the past week as it worked laterally, refusing to give up ground. The financials are still pushing it higher even as some of its components come back to take a breather.
SP600 (+0.60%) posted a solid session on the heels of the key Thursday breakout move that took the small caps through 385, a point made up of a few highs and lows. It is not at the breakout point; still has to get through a peak at 397 and at 402 before it can take on the all-time high hit in May (406; closed at 388.79). That is still a lot of key ground to recover, but SP600 is joining the game now after lagging through early October. It is still well off the breakout and is bringing up the rear with SOX, but making key moves that will at least provide support for the rest of the market.
DJ30
DJ30 continues to bounce up the 10 day EMA (11,847), something it has done four times and is working on the fifth since it broke out in August. The technology components are contributing to the move, and when they came to the fore this week that helped DJ30 break higher from its flying plateau despite having bounced 4 times off near support already. A stock or index will make 4 to 5 such moves after a breakout before testing lower, but thus far DJ30 is making its way higher still.
Stats: +12.81 points (+0.11%) to close at 11960.51
Volume: 295M shares Friday versus 291M shares Thursday. Another solid volume move even heading into the weekend.
The chart: http://www.investmenthouse.com/cd/^dji.html
MONDAY
We saw the impact of lower oil on retail sales; it was positive despite the headline number as lower gasoline prices lead to gains in spending in other areas. This week the next iteration of the CPI is released on Wednesday. This will be the next key step for the market as the Fed remains, according to its most widely dispersed commentary, ready to jump rates higher again if inflation does not slow. Once more the Fed has painted itself into a corner and thrown away the key. By talking so loudly about its 'comfort zone' for inflation, it has left itself a very small window of time to let inflation pressures fade. Indeed, to end the week both Lacker and Moskow commented on how inflation was not falling fast enough, and combined with the absurd worries in the minutes about the Fed losing credibility (something it doesn't have with the financial markets anyway), the Fed is closing the window even more.
In any event, we saw the impact of lower gasoline prices on the consumer. Now we need to see it impact prices as well. With all of the worry about energy price 'pass through' the Fed voiced over the past year, the reduction in energy prices should be heralded as having a reverse effect and thus lowering the risks of inflation. Instead, the Fed shifts focus to other areas such as wages ('yes, energy is lower, but look at how rages have risen.'). This is the same shifting target that we saw in 1999 and 2000 as the Greenspan Fed invented several new 'inflation indicators' that were basically nothing more than the characteristics of a strong economy. In short, if it was an economic positive it was likely inflationary.
While we are convinced that inflation has peaked, and even if some on the Fed feel the same (Bernanke with his willingness to 'pause' and Poole with his comments about cutting rates if warranted), the public comments have put the Fed in a position where it has to be tough on inflation, and with it outside the Fed's comfort zone . . . well, you get the picture.
Thus the import of Wednesdays CPI. It is anticipated to be lower overall due to the energy decline, but the core is expected to rise 0.2% again, and that would put the year over year core at 2.1%. That in itself is not so horrid, but if it turns to be fact it shows that inflation as measured by the CPI is still increasing, and of course, that puts more pressure on the Fed to live up to the perceptions it has fostered. The market made it through the FOMC minutes and more tough Fed rhetoric, revived some by the Beige Book. It is still acting as if the economy is going to advance again, but as seen in 2000, the Fed can play a big role in any economy's life. That Fed took a supposedly 'white hot' economy that year and sent it into recession by the end of the year.
As for this week, it is the same story for SP500 and DJ30, just another bounce (now the fifth since the breakout) in a strong run. More than five runs is an anomaly, thus we expect a deeper pullback to come. At the same time we have new breakouts from NASDAQ and SP600, though both remain within their bases, below the post-2002 highs hit this year. NASDAQ is approaching its April high, just 20 points off that level. DJ30 and SP500 stalled for about a week below that level before they made their breakouts. We expect NASDAQ to run up to test this level and, given the break higher and run to this point, work laterally itself before making its move as well. Digesting the CPI if it continues to come in high at the core level would take about a week or so.
Thus on a further run by NASDAQ toward its April high we will look again to lock in some gain, then we will see how NASDAQ handles that prior high. Money continues to rotate into technology from other areas, as well as back into sectors that sold off after the run into May (those discussed above that are dependent on an expanding economy to grow earnings). We will continue to look for opportunity in those stocks as they set up and make breakouts. Money continues to find its way into and around the market. The semiconductors are trying to shake free, and they will add to the strength if they can. We are likely to get a test as NASDAQ approaches the May high, but with the action the market has shown thus far that is only going to allow it to set up better for the next move higher.
Support and Resistance
NASDAQ: Closed at 2357.29
Resistance:
2376 is the April high, the post-2002 high
2384 is an interim peak from January 1999
2493 is an interim peak from February 1999
Support:
2333 is the top of the Q1 2006 trading range (the January and mid-March 2006 highs)
2316 from interim tops in January and March 2006 trading range
The 10 day EMA at 2309
The 18 day EMA at 2284
2273 is the recent September peak
2250 is the March 2006 closing low.
2234 is the June 2006 peak (intraday)
The 200 day SMA at 2225
The 50 day EMA at 2224
2223 is the August 2004/April 2005 up trendline
S&P 500: Closed at 1365.62
Resistance:
1371 to 1373 is the December 2000 peak and the January 2001 peak
1378 is a low from May 2000
1389 is a low from November 1999
1398 is a low from January 2000
1401 is a low from April 2000
Support:
1358 to 1362 mark a series of peaks from April 1999 to August 1999 high and the February 2002 low at 1360.
The 10 day EMA at 1351
The 18 day EMA at 1342
1339 is the late September closing high
1334 is an October 1999 peak
1326.70 is the May 2006 high
1324 to 1329 from the October 2000 lows.
The 50 day EMA at 1318
1311 is the April closing high.
1302 the recent August highs
1294 is the January 2006 high and 1297.57 is the February 2006 high.
Dow: Closed at 11,960.51
Resistance:
Has broken free and now we just look at how far above its 50 and 200 day SMA it gets to gauge how overbought it is. It is 6.9% above the 200 day SMA so it has some room before it gets to the 10% level where it typically will start to falter.
Support:
The 10 day EMA at 11,847
The 18 day EMA at 11,764
11,750.28 is the prior all-time high
11,723 is the January 2000 closing high
11,670 is the May intraday high
11,642 is the May 2006 closing high
The 50 day EMA at 11,544
11,488 is the early September high.
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
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
October 16
NY Empire Index, October (8:30): 12.0 expected, 13.8 prior
October 17
PPI, September (8:30): -0.6% expected, 0.1% prior
Core PPI, September (8:30): 0.2% expected, -0.4% prior
Net Foreign Purchases, August (9:00): $50.0B prior
Industrial production, September (9:15): 0.0% expected, -0.1% prior
Capacity utilization, September, (9:15): 82.3% expected, 82.4% prior
October 18
CPI, September (8:30): -0.3% expected, 0.2% prior
Core CPI, September (8:30): 0.2% expected, 0.2% prior
Housing starts, September (8:30): 1.65M expected, 1.665M prior
Building permits, September (8:30): 1.715M expected, 1.727M prior
Crude inventories (10:30): 2.408M prior
October 19
Initial jobless claims (8:30): 308K prior
Leading Economic indicators, September (10:00): 0.3% expected, -0.2% prior
Philly Fed, October (12:00): 6.5 expected, -0.4 prior
End part 1 of 3
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