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world stock market, us stock market
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10/17/06 Technical Traders Report Update
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Technical Traders Report Subscribers:
Full report issues Wednesday
MARKET ALERTS
Target hit alerts: None issued
Buy alerts: SIE
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 needed some expiration week selling, & Core PPI gave it the reason.
- Core PPI 3 times expectations, but pushed by vehicle price adjustments
- Energy prices inflationary on the way up, inflationary on the way down? Time to get off the fence.
- Net foreign purchases huge as foreign investors clamor for US treasuries.
- After hours earnings lean toward the positive, but still have to deal with the CPI and its Fed implications.
Stocks pullback, but then bounce back.
As discussed Monday, after NASDAQ, SOX and DJ30 tapped at key levels on the Monday high, they were likely ready for some give back. Given it is expiration week and we typically see some midweek shuffling, there was even more reason to believe some selling pressure would develop. The PPI core rose 3 times expectations, and that definitely gave the market a reason to sell, but futures were already lower ahead of the report, so it was not all worries about 'pass through' to the CPI. Indeed, the overall number was sharply lower (-1.3%) and investors, after a rocky start, appeared to realize that the jump in the core was due to seasonal adjustments in autos and trucks (+2.8% and 3.5%); take out autos and the core was up 0.1%, less than the 0.2% expected.
The stock market sold off early, using the PPI news as a trigger for the expiration week adjustments, ignoring some solid UTX and MER earnings and some huge foreign investment in the US (two times expectation for July). Both stock and bond investors, however, looked right through the number as stocks rebounded solidly in the afternoon, taking back nearly half the session losses while bond yields held basically flat for the session. The market action brought NASDAQ back from a more than 1% decline, a steady recovery but no major reversal given the inability to recover positive. Good to see the recovery, but it does not signal the end of any one-day pullback.
Technically the action was a mixed picture but listing to the negative. As noted, key indices were a bit extended after tapping at next resistance on the Monday high, and expiration week is a typical time to adjust positions for the next expiration period. Volume jumped as it typically does during the ups and downs in the middle of expiration week. That can be read as distribution as the indices closed lower on a jump in volume, or you can view it as buyers coming back in after a sharp early test lower. Given the indices did not recover positive, it is technically distribution, but an upside move can have a session or two of higher volume selling and still continue on its trend.
The intraday action was somewhat bullish as the sharply early selling gave way to a steady, climb back up on the afternoon. It was too far to go to turn positive, though the Dow gave it a close shave before a late fade. Leadership held up well with our plays testing and holding near support. You want to see strong stocks test near support, hold their trends, and then resume their moves. Thus far they are doing that, though it is just the first day of this selling.
The pullback is likely not done yet. Earnings were overall solid after hours from IBM, YHOO, and INTC, but MOT and NVLS left plenty to be desired. With the CPI likely not to give any relief to the Fed's inflation interpretation we are likely to see more testing the strong move as some expiration adjusting continues. The CPI can always surprise us, but there is nothing in any data to suggest that it is ready to start showing a decline at this point. Over the next few months it should start to reflect the slowing in the leading indicators, but it is too much to expect it to start up just now.
THE ECONOMY
PPI a very mixed picture
The headline number plunged 1.3% month over month due to a record decline in gasoline prices. That was the biggest decline in 3 years. Gasoline and energy prices have had a dramatic impact on prices and everyone's mindset, regardless of which way they are moving. In September they were falling again and spirits were rising again.
The apparent problem was in the core, rising 0.6% month/month. That sparked commentary that inflation was running out of control, the Fed would hike rates at least three times to start 2007, cats would start sleeping with dogs, the Texans would take Reggie Bush next time if they had the chance, etc. Knee-jerk reaction. As noted, auto and truck prices jumped higher due to the time of the year when those prices are adjusted. Take out those increases and the core rate was up 0.1%, less than the 0.25 expected.
What is so inflationary about that? Nothing. The bond market figured it out as bond yields held basically steady on the session (4.84% 2 year versus 4.77% 10 year). You have to weed out the trash to see the real numbers. The overall versus the core does not do it. Inflexible reports such as this require the closer look to determine why something jumped or tanked. To us, and more importantly the markets, the data indicate not a lot of inflation.
PPI question left unanswered: is energy inflationary or not?
Given the core was skewed by a season adjustment, the PPI was tame. Nonetheless if you listen to what many are peddling on the financial stations (and no one would blame you if you didn't), you hear a bunch of double talk or position shifting based on the point to be made, particularly with respect to energy's role in inflation.
Remember when energy was spiking higher the Fed and many Fed wannabes always glad-handing for an appointment viewed this as inflationary. The idea is that if energy prices get high enough they 'pass through' to other areas of the economy. Higher energy thus was an inflation pressure that would ultimately result in a spike in prices. Sounds logical and it did have some impact, but no more than the rise in price of steel, chemicals, etc. most of which rely on energy in the manufacturing process.
Now that energy is falling the reverse should be true, or so you would think. Yet, the good news of falling energy is viewed by some on the Fed and other so-called serious economists as inflationary as well. Instead of reducing pressures due to less chance of a 'pass through' of high costs, it is viewed as inflationary because consumers may decide to spend that extra money on goods and services.
The intellectual dishonesty of these positions is insulting to anyone who stops to think about it. High energy costs are considered a tax because the money has to be paid without getting anything more out of it, and it takes away spending from other discretionary areas. Simply reversing the price spike is not adding to spending; it is just allowing the consumer to spend as it would have BEFORE the energy price spike. Returning to prior spending levels is not an added inflationary pressure. Of course, spending is not inflationary. It is a necessary part of a healthy economy. What happens when consumers or businesses stop spending? Recession. To say spending is inflationary, as this argument basically states, is to say you cannot have prosperity without inflation pressures. As we saw in the 1980's and 1990's, that is absurd.
This smacks of the Greenspan Fed with all of its new inflation indicators based on economic prosperity: they wanted to find reasons to hike in 1999 and 2000, and as there were no signs of traditional inflation, they used indicia of prosperity as symptoms of inflation, and everyone, at least those who could stand up and call BS, that they were right. We know the result.
Thus we run the risk here with this fervor to fight inflation of once again getting tunnel vision and ignoring the real world. Just look at different interpretations of the PPI: some reports Tuesday saw it as an indication the Fed would do nothing (low overall, core low outside autos) while others saw only the core and panicked over its potential inflation indications.
August net foreign purchases double expectations.
One of the reasons we saw the bond market rally to end the summer was a big jump in net foreign purchases to $116.8B, twice expectations. We discussed in the past the natural movement of funds to the US when emerging or other foreign markets senses some economic obstacles ahead. Money moves to safety, and US treasuries are still considered safe havens.
Thus the bond market rally and interest rate decline was part of that money coming to safety as it does in other periods of economic uncertainty. Bonds rallied on the expectation of US and other world economies suffering some downturn. The influx of money overshot and is having a technical bounce (off of 4.5% on the 10 year at the low) as well as a fundamentals bounce as the stock market continues to price in better economic times after this slowdown.
The bond market is not there, however. It closed with a 7 basis point spread on Wednesday, not the highest of this cycle (12 BP) but also well off the lowest (2 BP) hit intraday. It actually reverted after the initial FOMC pause in August, but that obviously did not hold. Thus while bonds correct back from that strong rally, the inversion is not leaving, and that is another indication of economic weakness ahead if it cannot right itself. Frankly, it has shown no inclination to do so ever since that August reversion and that near miss in September.
THE MARKET
MARKET SENTIMENT
VIX: 11.73; +0.64
VXN: 18.88; +0.43
VXO: 11.12; +0.7
Put/Call Ratio (CBOE): 0.9; +0.11. Jumping back up as the selling returned. A lot of put activity is rolled over midweek of expiration week, particularly after the run higher and some protective puts have been purchased and the funds still want more protection.
Bulls versus Bears:
Bulls: 52.2%. Getting too high but helped by the continued bearishness. 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: -18.89 points (-0.8%) to close at 2344.95
Volume: 2.147B (+15.84%). Volume surged back above average as NASDAQ sold down close to the 10 day EMA and then recouped about half its losses. Good to see volume return on the rebound after the early plunge lower, but it is still some distribution as the indices did not return to positive. It is also expiration shuffling, however, something we have seen the past three expirations as positions are shuffled and rolled over ahead of Friday.
Up Volume: 793.163M (-502.635M)
Down Volume: 1.366B (+867.383M)
A/D and Hi/Lo: Decliners led 1.68 to 1. Not bad, roughly matching the slower advancing issues number on Monday.
Previous Session: Advancers led 1.78 to 1
New Highs: 106 (-90)
New Lows: 23 (+5)
The Chart: http://www.investmenthouse.com/cd/^ixic.html
The techs were under pressure, selling off more than 1% in the morning, typical when it leads a run higher as it did the past week. It tested the 10 day EMA (2324) on the sharp early turn lower, but held and rebounded. Volume jumped on the pre-earnings, pre-expiration action that had investors nervous after the move higher that really got some wheels three weeks back with the breakout from the pattern. It tapped at the April high Tuesday (2376), however, and that was another reason for the buyers to take a pause. Looks like some sellers came in as the large cap techs took a whacking (-1.04%), but the damage was not as bad as the numbers would suggest. Distribution is never good, but a day or two can show up in an otherwise healthy run without causing major issues. Still likely more pullback before it is ready to make the break over the April high and to a new post-2002 high.
SOX (-2.46%) took the hardest hit ahead of INTC's earnings. After hours INTC was not bad; its margins were so-so for the next quarter, but the report was good enough to push it higher. It faded late in the after hours session; just not a lot of upside juice in the report. SOX will have to find the juice somewhere, however, after tapping at the 200 day SMA (477) on Monday and then leading the tank lower Tuesday. It managed to tap and bounce modestly off the 18 day EMA (460) on the low, but it is still below the key resistance at the 200 day SMA.
SP500/NYSE
Stats: -5 points (-0.37%) to close at 1364.05
NYSE Volume: 1.516B (+5.23%). Volume just cracked average Tuesday as the NYSE indices were down early but managed an afternoon rebound as well. Higher volume but very tame, not suggesting much of anything in the way of increased selling.
Up Volume: 449.702M (-440.602M)
Down Volume: 1.035B (+584.441M)
A/D and Hi/Lo: Decliners led 1.64 to 1. Very tame downside breadth, particularly when compared to the strong return of upside breadth on the recent break higher.
Previous Session: Advancers led 2.27 to 1
New Highs: 189 (-113)
New Lows: 14 (+2)
The Chart: http://investmenthouse.com/cd/^gspc.html
SP500 had the same morning dip as NASDAQ, tapping at the 10 day EMA (1356) on the low and rebounding to shave more than half of its losses by the close. Not bad action with the rebound in volume as it made the recovery. It was not rally much of a shakeout for the index, just a one day correction. Volume strength faded the past week as it moved higher, i.e. it was not as strong as previous moves this month, as the move loses a bit of momentum. It is not selling off yet, but it is way up in its trend higher, and that makes it susceptible to a further pullback.
SP600 (-0.76) was one of the downside leaders Tuesday after leading higher the past week. After a strong 3 session surge its fade was nothing extraordinary, testing the strong move. Could come back to the 10 day EMA (384) to find its footing before continuing the move.
DJ30
Similar to the other indices, the blue chips sold off early to tap the 10 day EMA (11,885) and then rebounded, shaving 63 points (more than it lost on the close) off its losses. Volume was back above average on the move, and this is the same action it has shown all the way up in this trend. It remains in a 3 month, 45 degree move higher, and it just broke higher on strong trade last week. DJ30 is extended as is SP500, but it is still not too far ahead of its 200 day SMA (11,198).
Stats: -30.58 points (-0.26%) to close at 11950.02
Volume: 238M shares Tuesday versus 217M shares Monday. Volume was up on the early selling but also on the rebound in the afternoon that almost turned the Dow positive before a modest late fade.
The chart: http://www.investmenthouse.com/cd/^dji.html
WEDNESDAY
Once more it will be earnings and inflation data headlining the market action. IBM reported stellar results and shot higher, YHOO was well received, INTC appears to be scraping by. MOT disappointed on its revenues and moved lower. Mostly good but still quite mixed. There is no consensus of strength as of yet, however, and as the indices have rallied in early October, that leaves them susceptible to earnings disappointment.
The CPI is out as well, and that has more implications with respect to the Fed, the ultimate trump card for the market. Normally earnings expectations drive the market, and the market has built in some solid future earnings data based on this run from the July low (1200 points on the Dow, 300 on NASDAQ). That raises two issues. The first is the run to this point and the early October run into earnings. As opposed to April and July when there was some selling before and early into earnings that allowed stocks to build into the season, stocks are up sharply in October. Some earnings expectations that are not up to snuff and that run comes out in a hurry.
Second, the Fed can trump earnings results if investors feel the Fed is going to overdo rate hikes. To this point the market has basically decided the Fed is done and started this rally just before the Fed's August meeting where it paused. It has rallied straight up since. If the CPI core is hot and there is nothing for the market to look through as with the PPI, then there could be some chances of a Fed rate hike getting built back into the market. Bernanke has not shown any inclination that he is worried inflation is not falling fast enough, but some of his colleagues certainly are in a lather over the inflation potential. Note that even with the auto sector skewing core prices on Monday, the market still sold off. Of course it was not all PPI as the futures were lower ahead of the number, but it certainly provided a reason to take back some gain.
As noted above, the Monday losses are not likely all we will see unless the core PPI is really a soft number. There is not much to suggest that is the case just yet; inflation has not fallen off a cliff and that leaves it more likely the core CPI won't give the market any 'aaaahh' inspiration. So, will it be earnings or inflation that trumps Wednesday? As we noted, earnings have not built a consensus of strong guidance, stocks rallied into the results, and the CPI core is likely not to show inflation slowing. That would give an extended market that just tapped resistance a reason to fade further, not to mention midweek in an expiration week with its added volatility.
Those factors make this point in the market one where risks are higher than the potential reward. Sure some stocks will roar with earnings, but we are not seeing a big 'penumbra' effect or what we earlier called a positive consensus. Thus we are going to mind our positions and let them test near support and see if they will rebound and continue the move. If they don't we will exercise some caution and close them. This is the other part of taking some interim gains the past couple of weeks as stocks ran higher. We are willing to let the remaining positions work for us if they make a normal pullback and then continue higher. If the cannot, we close them, let them make a deeper test and then move in.
We will still be looking at stocks in position to move higher, particularly from areas that are recovering and getting some of that rotation money. As rallying sectors pullback we have seen money rotate to new areas, one of the signs this upside move is healthy. Again, we will continue to look for those plays, but if the overall market is ready to pull back some after a solid upside move into earnings and the CPI, then we will have to approach any new positions with some caution. We will also we watching for our solid leaders to test near support and then deliver a new upside entry point for us after any pullback.
Support and Resistance
NASDAQ: Closed at 2344.95
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)
The 10 day EMA at 2324
2316 from interim tops in January and March 2006 trading range
The 18 day EMA at 2298
2273 is the recent September peak
2250 is the March 2006 closing low.
2234 is the June 2006 peak (intraday)
The 50 day EMA at 2233
The 200 day SMA at 2226
2224 is the August 2004/April 2005 up trendline
S&P 500: Closed at 1364.05
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 1356
The 18 day EMA at 1347
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 1322
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 11,950.02
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 11,885
The 18 day EMA at 11,804
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 11,576
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): 22.9 actual versus 12.0 expected, 13.8 prior
October 17
PPI, September (8:30): -1.3% actual versus -0.7% expected, 0.1% prior
Core PPI, September (8:30): 0.6% actual versus 0.2% expected, -0.4% prior
Net Foreign Purchases, August (9:00): $116.9B actual versus $53.0B prior
Industrial production, September (9:15): -0.6% actual versus -0.1% expected, 0.0% prior (revised from -0.1%)
Capacity utilization, September, (9:15): 81.9% actual versus 82.2% expected, 82.5% 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): 310K expected, 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 2
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world stock market
us stock market
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