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us stock market, top stock pick
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10/18/06 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Target hit alerts: SIGM; MOLX
Buy alerts: BDX (bonus)
Trailing stops: BA; HITT; RSTI; XING
Stop alerts: DIOD; ASML; MOT; NVLS; SIMO; TXN
SUMMARY:
- Expiration volatility continues as stocks jump higher on in line CPI, but can't hold the move.
- CPI tumbles on lower gasoline, but core in line and highest since January 1996
- AAPL earnings exciting, but market having trouble making much out of good earnings.
Stocks put on the mirror image of Tuesday.
After a lower start and rebound Tuesday, stocks were champing to move higher Wednesday ahead of the open. Some strong IBM earnings and a lower than expected overall CPI (-0.5%) and an in line core (0.2%) helped spur futures higher in what was already something of a reflex rebound from the Tuesday downside. Stocks jumped higher with NASDAQ surging back toward the April high, but as is often the case with rip roaring opens, particularly those during expiration week, once the rocket fuel was spent the fall to earth was far.
DJ30 cleared 12,000 to modest fanfare (thank goodness), but that occurred in the first few minutes, and after that it was a struggle to hold onto gains the rest of the session. Despite the hurrahs at the open and the upside Dow move, the chips set quite a negative tone from the outset with the chip equipment sector gapping lower in response to disappointing earnings and INTC's capital equipment spending forecasts. That put a drag on NASDAQ from the get go, and though NASDAQ amassed a nice 18 point advance early, the rest of the morning was a countdown to when it would turn negative.
We took some money off the table on the opening salvo, but we also had to close out some chip stocks that were under that early pressure. Unlike Tuesday, this did not have the look of some softness ahead of a rebound; this looked like an ugly response to the outlook ahead, so there was not much point waiting around with some of these stocks. The market continued to weaken through the morning, though after oil prices started to turn on a big build in crude (5.1M bbl) they managed a bounce into lunch. After that there was more selling that took the indices to session lows, and then a modest bounce in the late afternoon.
While the chips were a big drag, overall it was not a terrible session. The large cap NYSE indices posted modest gains while NASDAQ, though lower, did hold the top of the Q1 trading range on the low, the second consecutive session it has found support at that key level. The small caps were lower, but just modestly, still holding onto their nice break above interim resistance, testing that move. SOX, as noted, was the weak fish, unable to keep up as the others simply tested their moves. It has the potential to turn into an anchor on NASDAQ, and AMD's after hours earnings did nothing to change the posture heading into Thursday. Sure there are some chips that continue to perform well, but they are getting to be the minority of late.
Technically the action was a mixed bag, mostly positive, but then again, SOX was really weak. DJ30 again stalled at 12,000 while NASDAQ made a stab at the April high again only to roll over and close negative. Volume was up, indicating some distribution in technology but modest accumulation on the NYSE. With expiration this basically means nothing as expiration week typically pushes volumes higher, and this is pretty typical. Breadth was a non-event, indicating the action in the major indices was benign. Still, you have a solid climb in the indices that is being tested again in the face of earnings and some heavy hitting economic data. The market did not sell off, but it did reverse solid early gains. That shows some indecision at this point, but we also note that many are saying the market is overdone near term and needs a pullback. Yes, it certainly looks like it does; with more expecting that to happen, is another breakout ahead? That would be the contrary play, but with SOX tanking it is a harder argument. In the end, the market remains in need of some rest, but it also showed some character even with the early reversal by holding some key levels.
THE ECONOMY
CPI shows the same trends as the PPI.
Overall consumer prices fell by 0.5%, less than the -0.3% expected, driven by a 13.5% decline in gasoline prices and a 1.7% drop in commodities. Fruit and vegetables were up 3% on weather issues. The drop in the overall number was the largest since November 2005. The core was not lower but was in line at 0.2%. With the overall decline larger than expected, investors reacted positively (at least at first) to the in line core even though it pushed the year over year rise to 2.9%, the largest since January 1996, the year of irrational exuberance.
That kind of puts things in perspective in itself. In 1996 the Fed was cranking up its campaign against prosperity. Greenspan started verbally abusing investors with his IE comments, and later he turned to the 'runaway' consumer when he could not slow down the stock market. This was the start of the new era of inflation indicators, those new indicators that were no more than indicia of prosperity. Stock market up? Inflation must be ready to follow (just as the 1929 central bank and its horrific policies that collapsed the stock market just ahead of the Great Depression). Lots of people working? The job market is too tight and we will have 'wage-led' inflation. The list goes on.
During this time of what the Fed today would call high inflation, the economy kept growing and so did the stock market. We never had inflation run out of control. Indeed, the more we grew, the LESS inflation there was. The best thing for a free market economy is to let it grow and let it allocate resources where they are needed. It balances its own pressures, indeed the imbalances that the Fed and the government foist upon it unless they meddle too much.
Right now the inflation rate as measured by the CPI is lower than it was in January 1996. The US economy boomed through the end of the decade when the Fed finally got impatient and drained money supply and hiked rates to the point that not only could the economy not grow, it was violently strangled. Right now we are hearing the same impatience on the current Fed as Moskow and Lacker whine about how inflation is not falling fast enough and that rates need to be higher to ensure that it does. Moskow was on the Fed in 1999 and 2000 and lamented there were too many people employed and we needed more out of work. This same joker is once again trying to convince everyone that inflation levels that were lower than they were in 1996 (when the Fed had already stopped its inflation campaign at the end of 1994) are a danger. The only danger is a Fed that won't learn from history, from its past mistakes, and pontificate the same failed policies they used to create the last recession.
Given the Fed's mindset and this impatience creeping in, you have to be concerned. If Greenspan was Fed chairman we would throw in the towel. Bernanke has thus far indicated he wants to avoid the sins of his fathers. We will see if he can hold to his theories even as the pressure to make the mistakes of the past rises.
THE MARKET
MARKET SENTIMENT
VIX: 11.34; -0.39
VXN: 18.09; -0.79
VXO: 11.26; +0.14
Put/Call Ratio (CBOE): 0.97; +0.07
Bulls versus Bears:
Bulls: 52.2%. Still 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: -7.8 points (-0.33%) to close at 2337.15
Volume: 2.215B (+3.17%). Volume was strong again as NASDAQ was up then down on the session. A high volume reversal that closes lower can be one of the worst indicators, especially after a run higher. Still, it is expiration week and a lot of the volume is related to that. It was also related to some of the weakness in the semiconductors. A second session of distribution with the caveat this is expiration week and we have seen this action on the prior expirations.
Up Volume: 862M (+68.837M)
Down Volume: 1.33B (-36.105M)
A/D and Hi/Lo: Decliners led 1.04 to 1. Very much under control.
Previous Session: Decliners led 1.68 to 1
New Highs: 189 (+83)
New Lows: 31 (+8)
The Chart: http://www.investmenthouse.com/cd/^ixic.html
Gapped higher, reached toward the April high (2376), fell 6 points short, and then turned over and gave the 18 point move back and more. It once more held above the top of the Q1 trading range (2330) and bounced modestly. NASDAQ is testing the last strong move higher that took it right up to the April high, and it likely has more work to do before it can seriously make a breakout attempt. The key is how deep it tests. We want to see it hold in this Q1 range, work laterally, and then blast higher. AAPL may help, but it will need more help to move tomorrow. Again, it will likely take longer to set up the next break higher given the key level it represents (post-2002 high).
SOX (-2.79%) was another bomb after tapping at the 200 day SMA Monday. It has swapped moving averages, closing at the 50 day EMA (450.97) Wednesday. The chip equipment stocks were bombed on Intel's cap-ex forecast, and indeed INTC sold back to basically flat after gapping higher on its earnings. There was just not a lot of love for chips Tuesday or Wednesday given their earnings outlooks. Thursday won't be much help with AMD and its crappy margin guidance. An important support for NASDAQ and indeed the market is really struggling. Not just a pullback, but really struggling as there were many chips under distribution Wednesday.
SP500/NYSE
Stats: +1.91 points (+0.14%) to close at 1365.96
NYSE Volume: 1.621B (+6.95%). Volume was up on NYSE as SP500 tried for a new post-2002 high but fell back for a modest gain. SP600 was down modestly, but no real distribution given the action and the expiration week.
Up Volume: 754.83M (+305.128M)
Down Volume: 823.118M (-211.781M)
A/D and Hi/Lo: Advancers led 1.28 to 1. Very modest, matching the action and thus very much under control.
Previous Session: Decliners led 1.64 to 1
New Highs: 305 (+116)
New Lows: 11 (-3)
The Chart: http://investmenthouse.com/cd/^gspc.html
SP500 ran to a new post-2002 high but then faded to a modest close on rising volume. Reversal session? Not likely though SP500 could use some rest. The move is running out of some momentum here as the upside volume, though stronger than the downside on the move, was lower as well. Still moving higher in the same strong trend.
SP600 (-0.34%) made its second pullback after the strong run last week, but it is holding its gains quite nicely as it tests back toward 385 (closed at 388.54), the interim resistance it broke above on this breakout. Very nice action.
DJ30
Raced to 12,049 and then spent the session whittling away the gain until it closed below that level. Volume was up, and you can say the close off the high is a reversal sign. Not a really clear one but we are going to watch it as DJ30 is due for a pullback as this is its fifth bounce off the 10 and 18 day EMA since the August breakout. That is usually all you get on this kind of breakout and uptrend before needing a deeper test. If all is well after that it can make yet another run up the 10 and 18 day EMA.
Stats: +42.66 points (+0.36%) to close at 11992.68
Volume: 276M shares Wednesday versus 238M shares Tuesday. Some strong volume as it jumped higher and faded. Could be some money moving out under the cover of the advance.
The chart: http://www.investmenthouse.com/cd/^dji.html
THURSDAY
Leading economic indicators and the Philly Fed are out Thursday, along with a lot more earnings reports. After hours AAPL was very strong, AMD was very weak; that is more of what we have seen this week. Thus far the market has held up as earnings have come out, making some headway, giving some back. SOX is now tanking and with the indices a bit extended, that is putting pressure on NASDAQ. As noted, we want to see NASDAQ hold in its Q1 range 2330 to 2250 and from their mount a move on the April high. The higher in the range it holds the better, but a lateral test for a week or two would not hurt it.
Guidance needs to improve for stocks to start higher near term. They are a bit extended and earnings have not generated a lot of widespread excitement given the run higher into the reports. As we noted over the weekend, at these levels, even with the strength the indices have shown in the run, the risk is higher than the reward. In addition you have expiration masking a lot of the action with higher volume and some sell offs that have pushed some good stocks lower but that likely won't last when the expiration related action subsides.
One thing we will be watching is how the strong earnings from AAPL and others are treated tomorrow. AAPL and others were jumping after hours on their earnings reports, but how those moves hold up Thursday will tell more of the story about how the market is set to move at this stage. NASDAQ could use that additional time to set up its next move, and indeed with SOX in trouble it may take that time, waiting for SOX to get over earnings and start getting its act back together.
Outside of the chips, most of our plays held up at near support, just what you want to see as they make a test with the market. After the sharper selling in chips on Wednesday where we did not feel there would be a rebound intraday given the nature of the news, Thursday we may see an intraday test and then some buying try to come back in. We are going to watch for strong stocks that are making tests of near support and see if we can pick them up as they rebound. AKAM is falling to the 50 day EMA on strong volume; we will see if it can hold there and tries a bounce. LRCX is a chip that reported excellent earnings and had a delayed upside reaction. We will see if this low volume test of the 10 day EMA can yield another break higher despite it being in the chip sector. SMSC, NUE, PCP, UARM and others are showing similar action. It is time to be patient, see how stocks react to this test of the near support, and then move in if they show us they are ready to be bought again.
Support and Resistance
NASDAQ: Closed at 2337.15
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 2326
2316 from interim tops in January and March 2006 trading range
The 18 day EMA at 2302
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 2238
The 200 day SMA at 2227
2225 is the August 2004/April 2005 up trendline
S&P 500: Closed at 1365.96
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 1358
The 18 day EMA at 1349
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 1323
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 11,992.68
Resistance:
12,000 is proving to be some near term psychological 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 11,905
The 18 day EMA at 11,824
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 11,592
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): -0.5% actual versus -0.3% expected, 0.2% prior
Core CPI, September (8:30): 0.2% actual versus 0.2% expected, 0.2% prior
Housing starts, September (8:30): +5.9%
Building permits, September (8:30): 1.691M actual versus 1.715M expected, 1.727M prior
Crude inventories (10:30): 5.1M this week, 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 3
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us stock market
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