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trading system, stock trading system
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10/25/06 Investment House Daily
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SUMMARY:
- Market waffles in front of FOMC, rallies back after Fed holds pat.
- FOMC stays the course with a modest wrinkle.
- September existing home sales fall again as the median price tumbles.
- Market weathers the latest Fed iteration with NASDAQ and SP600 still set to move and SOX trying to rejoin the party.
Market reclaims gains post-FOMC.
Earnings were again mostly positive before the open though pockets of disappointment continue (e.g., BA, SWK). The market leaned more toward the positive and opened higher though the Dow was weak early and all session. Stocks faded after the morning surge, pensive ahead of the FOMC decision. Lots of rumors swirled regarding whether Moskow would join Lacker, Lacker would join the majority, the Fed would be more hawkish, the Fed would be dovish. In addition oil rallied sharply (61.40, +2.05) on pledges of cuts by OPEC members and a big inventory drop (-3.3M bbl versus -1.6 expected).
With that backdrop stocks faded toward the announcement but managed to mostly hold positive. SOX and SP600 were the standouts all session, rallying early and refusing to give up their gains even as the rest of the market tested back ahead of the FOMC. When the Fed announced status quo and Lacker and Moskow held their positions, the market bounced around but then managed to turn back up as bonds started to rally as well (yields fell to 4.85% versus 4.77%). Again, SOX and SP600 led the charge, holding their gains to the close.
Technically the action improved from Tuesday. There was some good, rising volume on both NYSE and NASDAQ as the indices rallied back. SOX cleared the 50 day EMA with some authority, trying to rejoin the game on some better earnings (e.g. KLAC). That was a positive for the market; SOX did not breakout but it did not break down, and as discussed Tuesday, all it needs to do at this point is continue work on its base. NASDAQ and SP600 continued their consolidations with the small caps approaching their breakouts. In addition, the market overall weathered the last iteration of Fed monetary policy, finding something to like once more.
All in all it was another positive, constructive session. Earnings are overall good, but the market rallied into the earnings season, so when some results missed and guidance was disappointing the hatchet was taken out and pow, pow, pow. There has been a sag in NASDAQ, and SOX was close to losing it. It is starting, however, to look as if the market has steered through earnings, i.e. has gotten the gist of where things are going, and is now ready to move on.
THE ECONOMY
Fed does the expected, holds the status quo with a modest new wrinkle.
Tuesday we discussed the budding view that Lacker might relent from his two dissents and go with the group. After all, back in 2000 McTeer dissented twice and then joined the group as the Greenspan Fed continued to ratchet up rates. McTeer explained there were no changes in his beliefs regarding no need for further rate hikes but that he simply felt it was doing no good to dissent. Following that line of thinking you could maybe hypothesize that Lacker would relent. But Lacker is new and full of vinegar, so he stuck to his guns.
Thank goodness he did. He acts as the balance for the Fed. Indeed you have to wonder that since he is the new guy the other FOMC members are hazing him, forcing him to be the odd man out so the Fed can pause but keep up the look of really considering all sides of the argument even as the Fed's pet inflation measures continue to run strong. Add to that Moskow's public statements about uncomfortable inflation and you have a pretty good counterbalance to the Fed's pause stance. Speaking of Moskow, he did not join Lacker, another fortuitous event; if Moskow had jumped ship the market would have faltered.
The Fed gives, the Fed takes away.
As it was the market was up, down, and up in response to the policy move. In other words, it was a typical response. The statement was virtually the same, but the Fed tweaked it in two spots, one more dovish, the other more hawkish. To wit, the Fed stated "economic growth has slowed over the course of the year, partly reflecting a cooling of the housing market." That differs from the prior statement where the Fed was more obtuse: "the moderation in economic growth appears to be continuing." Instead of just moderating, the growth has slowed; stronger language. That was the 'give' for the dovish side. In the next sentence, however, the Fed came back to the hawkish tone in noting the economy "seems likely to expand at a moderate pace" going forward.
So, the economy has slowed over the year due in part to housing (which was lower again in September), but the Fed sees it expanding in the months ahead. Actually that jibes with what we have seen: the Q3 slowdown that was presaged with declining housing and other weakening indicators. That last comment can be viewed as skewing the statement to a more hawkish stance given the Fed still sees inflation rates as 'uncomfortably high' and the economy expanding moving ahead.
But is expansion inflationary? Of course not, and we can only lament that McTeer is not on the Fed anymore. He noted after the announcement that rising output actually reduces inflation pressures. He is absolutely right: when the economy produces goods and services, when it has the money flowing to where it needs to flow, it meets demand and thus avoids the bidding of prices higher and higher when there is too much money in the system and not enough output to match it. Thus if we believe the Fed is not populated by a bunch of Phillips Curve worshippers, there is hope the Fed will just remain on pause and ride off into the sunset. Bernanke is thus far acting as a supply sider despite his 'inflation target' roots; he would have never paused with the Fed's inflation indicators higher than the Fed's accepted ranges. We can only hope that he continues to dominate the Fed with his views.
September existing home sales drop for sixth month, prices plunge.
Existing sales fell 1.9%, a bit more than anticipated. It was the sixth consecutive drop with only two gains posted since the June 2005 record high. That is pretty much the definition of a downtrend. While that speaks a few volumes, more telling is the year over year price decline. The median and average price fell 2.2% over the past 12 months. Doesn't sound like much but it is the largest decline in something like 40 years. The worry about price declines is that consumers will feel poorer and thus less likely to spend. Hmmm. That can happen but these 'wealth effect' hypotheses are somewhat dubious. Even after hiking rates in an attempt to slow the consumer and stall the stock market back in 1998 to 2000, Greenspan admitted in 2003 that the Fed needed more data to verify it was real, asking the public for information.
There is a silver lining in the report. Inventories held steady for the third straight month. They may be trying to bottom, and that is the start of the bottoming process for the housing market overall. Prices are still going to fall but inventories have to level off before they stabilize. So, there is a positive in the continuing decline.
THE MARKET
MARKET SENTIMENT
VIX: 10.66; -0.12
VXN: 16.78; -0.47
VXO: 10.43; -0.01
Put/Call Ratio (CBOE): 0.84; -0.32
Bulls versus Bears:
Bulls: 52.2%. Held steady at 52.2% for the second week. Good to see it stall its advance some, but it is still too high. 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: 30.0%. Down modestly from 30.4% after a 3 point drop, the largest of the move, the prior week. Bears are down from 35.4% before that and well off the 37.1% hit in July (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: +11.75 points (+0.5%) to close at 2356.59
Volume: 2.189B (+14.04%). Solid jump in volume as NASDAQ tested the 10 day EMA on the low and rebounded toward the top of its lateral range. Good price/volume action resumes.
Up Volume: 1.225B (+645.265M)
Down Volume: 636M (-681.223M)
A/D and Hi/Lo: Advancers led 1.26 to 1. Modest, but right in line with what you would expect from a consolidation move.
Previous Session: Decliners led 1.37 to 1
New Highs: 133 (+23)
New Lows: 38 (-3)
The Chart: http://www.investmenthouse.com/cd/^ixic.html
NASDAQ was up all session though it weakened midmorning ahead of the FOMC decision. It held the 10 day EMA (2341) on the low and then rebounded to close near the session high. A solid volume increase on the shakeout and recovery, and that gives it more ammunition for the breakout. Solid action from the techs, and the internets are going to help again Thursday as FFIV reported strong results after hours.
SOX (+2.60%) came back from the dead, rallying back through the 50 day EMA (451), helped by some strong guidance from KLAC and a general rebound in chips after a drubbing the prior week. Sure it was part relief move, but the chips were down but managed to hold the line, work laterally, and retake the 50 day EMA. A good start to recovery and continuing rebuilding its base.
SP500/NYSE
Stats: +4.84 points (+0.35%) to close at 1382.22
NYSE Volume: 1.824B (+7.85%). Volume was up along with the NYSE indices. After some churn on SP500 Tuesday it was good to see some rising volume on a rise in price both in the small and large caps.
Up Volume: 1.198B (+226.004M)
Down Volume: 615.951M (-77.01M)
A/D and Hi/Lo: Advancers led 1.69 to 1. Not great but solid. When SP600 and SP400 breakout, we want to see it jump.
Previous Session: Advancers led 1.25 to 1
New Highs: 323 (+139). Getting very respectable and on a breakout by the small and mid-caps we want to see it break over 400 to show the broad strength in all the NYSE indices.
New Lows: 16 (-2)
The Chart: http://investmenthouse.com/cd/^gspc.html
SP500 continues higher, posting another modest gain on rising, above average volume. The large caps keep getting more money thrown their way as money funds that missed the start of the rally chase performance into Q4, betting on a continued momentum move to end the year.
SP600 (+0.72%) was a market leader again Wednesday, moving up off the 10 day EMA test (388) and toward the October high (393) that marks the top of the handle to the 5 month base. The small caps are on the verge of a breakout when they looked pretty weak just a couple of months back. See, there is hope for the chips as well. Steadily increasing in strength and we are ready for the breakout move.
DJ30
The blue chips have struggled the past two sessions after the strong Monday break higher. DJ30 is now making one strong move off the 10 day EMA and then basically baby-stepping for a few sessions higher before another test. The Dow continues its run up the 10 day EMA, and there is not a lot you can say about it other than it too continues to get more money coming its way.
Stats: +6.8 points (+0.06%) to close at 12134.68
Volume: 238M shares Wednesday versus 257M shares Tuesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
THURSDAY
Durable goods orders, jobless claims, new home sales top the line up for economic data after the FOMC meeting. Not a lot there to move the market though housing continues to be a closely watched area because once again the Fed noted the housing slowdown in its Wednesday statement. Earnings are still going to push stocks around, but as noted above, the market seems to have a bead on where earnings are going. Thus we could see earnings start to drive the entire market higher overall as opposed to just the specific stocks involved. The market typically moves through this phase where it has to get measure of the earnings season and then move. The action the past couple of sessions suggests it is just about there, particularly now that the Fed has completed its third meeting with a pause and one dissenter acting as the 'proof' the Fed remains on guard for inflation.
Indeed, SP600, SP400 and NASDAQ are all poised for breakout moves to join SP500 and DJ30. Only NASDAQ is ready for a new post-2002 high on the next break higher, but that does not diminish the recoveries by SP400 and SP600. We like the action shown from the breadth to the price/volume moves to leadership. SP500 and DJ30 are extended, but these other indices are set to move. With SOX trying to rebound and rejoin the party, it looks more and more as if a breakout by NASDAQ and friends is ahead.
Support and Resistance
NASDAQ: Closed at 2356.59
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:
The 10 day EMA at 2341
2333 is the top of the Q1 2006 trading range (the January and mid-March 2006 highs)
The 18 day EMA at 2322
2316 from interim tops in January and March 2006 trading range
2273 is the recent September peak
The 50 day EMA at 2258
2250 is the March 2006 closing low.
2234 is the June 2006 peak (intraday)
The 200 day SMA at 2228
2228 is the August 2004/April 2005 up trendline
S&P 500: Closed at 1382.22
Resistance:
1389 is a low from November 1999
1398 is a low from January 2000
1401 is a low from April 2000
Support:
1378 is a low from May 2000
1371 to 1373 is the December 2000 peak and the January 2001 peak
The 10 day EMA at 1369
1358 to 1362 mark a series of peaks from April 1999 to August 1999 high and the February 2002 low at 1360.
The 18 day EMA at 1360
1339 is the late September closing high
1334 is an October 1999 peak
The 50 day EMA at 1333
1326.70 is the May 2006 high
1324 to 1329 from the October 2000 lows.
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 12,134.68
Resistance:
Still climbing up the 10 day EMA but struggling a bit. 8% above the 200 day SMA. It tends to being struggling when it gets to the 10% level where it typically will start to falter.
Support:
The 10 day EMA at 12,024 has acted as support all the way up. When it breaks on the close that is noteworthy.
The 18 day EMA at 11,936
11,750.28 is the prior all-time high
11,723 is the January 2000 closing high
The 50 day EMA at 11,681
11,670 is the May intraday high
11,642 is the May 2006 closing high
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 25
Existing home sales, September (10:00): -1.95 at 6.18M versus 6.25M expected, 6.30M prior
Crude oil inventories (10:30): -3.3M versus +5.02M prior
FOMC policy statement (2:15): Fed Funds Rate at 5.25%, still watching inflation.
October 26
Durable Goods Orders, September (8:30): 2.3% expected, 0.0% prior
Initial jobless claims (8:30): 308K expected, 299K prior.
New Home sales (10:00): 1.05M expected, 1.05M prior
October 27
GDP advance, Q3 (8:30): 2.1%, 2.6% prior
GDP Chain Deflator, Q3 (8:30): 2.8% expected, 3.3% prior
Michigan sentiment (revised), October (9:45): 92.5 expected, 92.3 prior
End part 1 of 3
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