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money investment, investment help
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10/28/06 Investment House Daily
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SUMMARY:
- Market was ready to take a breather on Friday, but decides to sell given rehashed PC/chip report, Middle East oil issues.
- Fed pause seems quite appropriate (and likely not enough) as first run at Q3 GDP already at the lowball estimates.
- Fed has followed oil prices with its hikes and should have started cutting already.
- Sentiment reports defy sentiment polls
- Friday afternoon drop was a jolt that needs a positive answer this week on NASDAQ, SP600.
Pullback turns sharp in afternoon as one too many issues surfaces.
Stocks started soft Friday after the strong break higher Thursday, and given the lower than expected GDP that was no real surprise. The market seemed to overlook the shortfall, however, as the lower GDP was expected to show up at some point in the series of readings. Moreover, the market overcame a morning report that coalition troops were guarding a Saudi Arabia oil facility on threat of some Al Qaeda action. Even with that, the losses were quite modest and the indices were even on the comeback through lunch with the help of the stronger than expected final October Michigan sentiment report.
Stocks were almost back to flat when another report hit, this one out of Goldman Sachs' Taiwan office regarding a sharp decline in motherboard shipments. This was basically a rehash of a Think Equity report a month earlier, but it showed conditions have not improved and the market, after a rebound in techs and chips, decided the better part of valor was to turn and run.
It was quite a run. Modest selling turned into a 28 point drop on NASDAQ. SOX flipped from leader to laggard with an 11 point reversal. A couple of weak attempts at recovery only stemmed the selling into the bell. When the smoke cleared all of the indices sans SOX were still above the 10 day EMA, not a bad result given the sharp afternoon drop. NASDAQ and SP600 may have given up their breakouts, but they are still in position to roll back up after this news is absorbed.
Technically the action was of course bearish for the day but not enough to overwhelm the recent action. Modest selling turned into an afternoon collapse as stocks reversed their typical intraday action in this rally, moving from high to low. As noted, NASDAQ and SP600 gave up their breakout and SOX was weak as well, falling back to the 50 day EMA. On the other hand, all the indices held near support on lower volume and modest breadth. Leaders faded to near support along with the indices. Further, all of the same issues that led to the break higher are still present. GDP was lower but that was a given. The Fed is still on pause and going nowhere after the GDP report, oil remains overall lower, and breakouts are still intact. We are looking for this to provide us a new opportunities to buy some more leaders as long as this chip/PC story doesn't overtake otherwise solid action.
THE ECONOMY
GDP drops to a quick 3 year low.
At 1.6% GDP was well below expectations of 2.1% and the 2.6% in Q2. So much for those predictions from some of the gung-ho cheerleaders of a 3% Q3 growth rate. We expected it to be low, but did not expect it to drop to this level until more data comes in for the revisions. The housing sector fell 17.4%; with that kind of drop from such a key element it is hard to put up a good overall result. Further, as expected, the widening trade gap also cut into growth. Imports rose 7.8% while exports rose only 6.5%, taking 0.6% off the overall number. Combined with the 1.1% cut from housing you have 1.7% stripped away (3.3% if added back into the overall number). Ifs and buts, but it shows just how much impact these had on the overall result.
Outside of those drags the numbers were not bad at all. Consumer spending rose 3.1% from 2.6% in Q2 (a whopping 4.8% in Q1). Business spending on structures jumped 14% while equipment and software spending rose 6.4% after falling in Q2. Those are strong numbers. Indeed, even though imports are subtracted from GDP, history shows that when the US consumer is consuming a lot of foreign goods the consumer is very confident.
All of this bodes well for Q4. Gasoline prices overall remain quite low though we would like to see this recent pop up in oil prices nipped in the bud. Retail stocks have enjoyed solid runs in anticipation of a strong holiday season. Given the import barometer and the lower gasoline prices, that seems a reasonable bet.
Inflation indicator falls as well, making Bernanke look pretty sage and Lacker somewhat lacking.
The GDP deflator fell to 1.8% after a year at 3.3%. The core, the PCE the Fed is so fond of, gained 2.3%, but that was down from Q2's 2.7% growth rate, moving back toward the 2.0% widely believed to be the top of the Fed's comfort zone.
The number makes Bernanke and his closest allies look pretty solid as they predicted a slower economy would bring about slower inflation growth. That is a dubious correlation, however; as noted last week, increased output reduces inflation. As the 1970's showed, you can have no growth and still have massive inflation. It is the amount of liquidity vis- -vis the economic activity that determines if inflation takes hold. It is really Bernanke's curtailing the money supply growth since taking over that has made the difference, not the rate hikes. The pause in hikes was appropriate and it makes Bernanke look mighty good in they eyes of the public (particularly versus his hallowed predecessor's horrific debut as Fed chief), but is a pause enough at this stage?
Is the Fed following the PCE or is it following the oil slick?
We posited the past three weeks as to whether the Fed is really following the PCE and the core CPI as its main monetary policy indicators. Sure the Fed says those are the important indicators, but would a Fed that was really set on those indicators as its primary guides pause for three straight meetings as those indicators rose to highs not seen in over a decade? Either Bernanke has connections he is not talking about or he is looking at something else.
Some comments from Fed governor Poole suggests Bernanke is looking elsewhere. Poole noted two weeks back that the Fed should look at the markets for their lead and follow them. Some had surmised back in the summer that is what Bernanke was doing. Bond yields were rising and so was the Fed Funds rate. There is an inversion, but the Fed tried to talk around that and kept hiking as rates moved higher as well. Bonds started to dive lower in the summer, and lo and behold the Fed paused in August.
Another interesting aspect of the Fed's actions (not its language) is a comparison of the rate hikes to the price of oil. Over the past two years as oil prices have more than doubled the Fed has followed them higher with quarter point hikes each FOMC meeting. Oil prices peaked in May and started to fall, along with most other commodities. The Fed, apparently still not yet totally divorced from its Phillips Curve roots, has only had the will power to pause. If it sticks true to the principals it has been following, it should start cutting.
Finally, there is another aspect of the Fed's actions under Bernanke that are notable. Bernanke is a history buff. In his public appearances he talked about avoiding the mistakes of the past. His actions in following the oil climb with hikes and dropping money supply growth is in contrast to the Fed's actions in the 1970's when the Fed flooded the economy with money trying to spur growth in the face of surging energy costs. A slow economy slowed further by energy costs yet a flood of money. Inflation exploded. Bernanke has avoided flooding the market with liquidity, indeed, draining it slowly but still allowing enough to keep the expansion going. A tricky and fine line and likely a lot of guesswork along the way, but he has been closer than most.
Don't want to make this sound like a Bernanke love affair. It is just that compared to the prior Fed chairman and his massive blunders to start and end his career this newbie that some pompous asses in DC called an amateur has the right instincts. He needs to switch to a cut at this point; that is what the markets are suggesting and what history dictates. He may have waited a bit too long, and cutting would fly in the face of 'experts' all over the globe. If he is really an independent thinker there is hope. Maybe just a fool's hope.
THE MARKET
MARKET SENTIMENT
VIX: 10.8; +0.24
VXN: 17.41; +0.82
VXO: 10.73; +0.38
Put/Call Ratio (CBOE): 1.03; +0.27. Jumped quickly over 1.0 on the first day of selling of the week. Pretty big jump for just a day, indicating a bit of worry after this move higher that was just joined by NASDAQ and SP600.
Bulls versus Bears:
Bulls: 52.7%, up modestly from 52.2% where it held for 2 weeks. Still advancing toward that 55% level considered bearish. Up from 49.5% and 47.4% before that. 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: 30.1%. Actually rose a bit from 30.0% as bears hold near 30% after dropping rather sharply from 35.4% before that and 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: -28.48 points (-1.2%) to close at 2350.62
Volume: 2.275B (-7.26%). Volume was lower but still strong and well above average as NASDAQ sold. It was not a low volume session as trade ratcheted higher as the techs sold in the afternoon. Positive that it was lower on the selling, but again, it was not a modest volume pullback. Have to see how it shakes out this week.
Up Volume: 768M (-916.664M)
Down Volume: 1.493B (+812.287M)
A/D and Hi/Lo: Decliners led 2.02 to 1. Breadth was stronger than we wanted on the downside, matching the upside breadth on the breakout. A/D has improved the past month, so one session does not alter that, but want to see it snap back this coming week.
Previous Session: Advancers led 2.11 to 1
New Highs: 167 (-65)
New Lows: 36 (-12)
The Chart: http://www.investmenthouse.com/cd/^ixic.html
NASDAQ was lower from the open but nothing severe. It started to recover, got just about flat, then suffered a serious case of the dips. It gave up its breakout above the April high (2376) but managed to hold near support at the 10 day EMA (2348) on the close. Not a great ending to a solid week that saw the breakout Thursday on strong volume, but not a breakdown either. Over the past week the 50 day EMA crossed up over the 200 day SMA, an indication of some serious upside momentum. We have to see how this selling related to the chip and PC sectors plays out, but oftentimes you see a test of that crossover before a continuation of the upside move. Not always, however, as SP500 demonstrated after its 50 day EMA moved through the 200 day SMA in late August. It may test further, but want to see the index hold near this level and not give up much ground as it measures up the April high again.
SOX (-1.94%) was a relative leader early in the session, but when the going got tough it hit the skids, sliding below the 50 day EMA (451.15) but managing enough of a recovery to hold the 50 day EMA on the close. It was a good recovery week for SOX after the hard drop the week before, but with the Friday sell off on the GS report this is where it has to make a stand and avoid heading back down. Still quite dicey as it works more or less laterally in a 7 week range below the 200 day SMA (475), but still working on its base as it needs to do.
SP500/NYSE
Stats: -11.74 points (-0.85%) to close at 1377.34
NYSE Volume: 1.552B (-11.05%). Volume backed off to the lowest in two weeks, coming in just above average. It was more or less immune from the news that sent NASDAQ and SOX lower. This keeps the string of much improved price/volume action working nicely.
Up Volume: 387.445M (-742.856M)
Down Volume: 1.148B (+567.561M)
A/D and Hi/Lo: Decliners led 1.82 to 1. Tamer breadth on the downside action, very much in line with what you want to see, i.e. overall moderating internals on the downside sessions.
Previous Session: Advancers led 2.21 to 1
New Highs: 255 (-128). Bounced up close to 400 on the Thursday breakout, and that is getting into solid territory.
New Lows: 18 (+7)
The Chart: http://investmenthouse.com/cd/^gspc.html
Gave back the Wednesday and Thursday move in one swoop, but held above the 10 day EMA (1374) on the close. It was another post-2002 record week for SP500 even with the Friday fade. This has been an impressive run and as we have said for a couple of weeks, it is overextended and in need of a pullback, but the money coming in has thus far pushed it higher after every pause.
SP600 (-1.23%) was down blow for blow with NASDAQ as both of the Thursday breakouts faded and gave up the move. That nicely lower NYSE volume, however, makes SP600's fade a bit more palatable as it too faded to close just above the 10 day EMA. Still a nice base, still set up well, and a test for it this week as it tries to make a higher low here at near support and resume the upside breakout.
DJ30
The Dow gave back as well, but even a 73 point drop appears as a drop in the bucket so to speak compared to the upside move even for the week. DJ30 held above the 10 day EMA (12,057) even on the session low (12,073), easily maintaining its strong move above that near support. Volume was higher, however, spiking back above average and the highest trade since the prior Friday (expiration). Once more all you can say is strong uptrend, still overextended, some modest volume issues popping up the past two weeks, but as of yet no break in the trend.
Stats: -73.4 points (-0.6%) to close at 12090.26
Volume: 277M shares Friday versus 237M shares Thursday.
The chart: http://www.investmenthouse.com/cd/^dji.html
MONDAY
Earnings season is half over (half empty?) and up until early afternoon Friday it looked as if the market had come to grips with a not so hot Q3, something the GDP more or less echoed Friday. A ton more earnings this week along with an overly full economic calendar give the market a chance to show it is indeed comfortable with the economic future. Of course the future is what the market is concerned with, not the past or the present. Those latter two can impact the market short term, but if the overall parameters stay in place, so does the trend.
Personal income and spending, employment cost index, Chicago PMI, consumer confidence, ISM, productivity, and the jobs report. Definitely enough to impact the market short term, particularly the monthly read on the PCE after the Q3 PCE showed that decline. If the PCE falls that will be the true market moving news as it reinforces the pause, the weak housing market, the weak Q3 GDP. It would be nice if it also prompted some serious consideration of a rate cut as opposed to just reinforcing the Fed's decision to pause. The Fed has already done its job. It did its job when it finally drained out the excess money supply, something Greenspan simply would not do. Now that is done and it needs to start thinking about the economic expansion's future as opposed to inflation. That war is over.
After weathering the first half of earnings season that saw so-so tech and chip guidance but the strongest SP500 profit growth since 2004, NASDAQ and the small caps started to break higher before the Friday PC report. Now they have to hold on near this level, show that Friday was a near term overreaction to news, and then continue to follow DJ30 and SP500's lead with respect to the breakouts. DJ30 and SP500 remain overbought and thus vulnerable to an interim pullback, but that could benefit NASDAQ and the other indices as money moves out of the large cap industrials and into the techs again.
We will use the pullback to look at leaders that make orderly tests of support and set up for the next move higher. There were some breakdowns Thursday and Friday, and that is never a good sign; with the extension of DJ30 and SP500 that can lead to more of a pullback than just a test. Thus we want to see the pullback hold at near support for the leaders to start the week. If they do we have our upside plays and can move in as they start to rebound as NASDAQ and SP600 move to try that breakout again. The key is to be patient and let the pullback develop then show the move start. If the market needs some more time we protect positions, let it test, and be ready to move in when the leaders make their bottoms.
As noted earlier, outside the GS report and the oil issues rising anew that triggered some selling Friday, the factors contributing to the market rally are still in place. We will be watching the leaders that have pulled back to hold and start to rebound, affirming that the big money still sees those same factors as positive.
Support and Resistance
NASDAQ: Closed at 2350.62
Resistance:
2368 is October handle high.
2376 is the April high, the post-2002 high. Just cracked through this level.
2384 is an interim peak from January 1999
2493 is an interim peak from February 1999
Support:
The 10 day EMA at 2348
2333 is the top of the Q1 2006 trading range (the January and mid-March 2006 highs)
The 18 day EMA at 2330
2316 from interim tops in January and March 2006 trading range
2273 is the recent September peak
The 50 day EMA at 2266
2250 is the March 2006 closing low.
2234 is the June 2006 peak (intraday)
2230 is the August 2004/April 2005 up trendline
The 200 day SMA at 2229
S&P 500: Closed at 1377.34
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 1374
The 18 day EMA at 1365
1358 to 1362 mark a series of peaks from April 1999 to August 1999 high and the February 2002 low at 1360.
1339 is the late September closing high
The 50 day EMA at 1337
1334 is an October 1999 peak
1326.70 is the May 2006 high
1324 to 1329 from the October 2000 lows.
Dow: Closed at 12,090.26
Resistance:
Still climbing up the 10 day EMA but still struggling a bit. Back down to 7.5% above the 200 day SMA. It tends to begin struggling when it gets to the 10% level where it typically will start to falter.
Support:
The 10 day EMA at 12,057 has acted as support all the way up. When it breaks on the close that is noteworthy.
The 18 day EMA at 11,974
11,750.28 is the prior all-time high
11,723 is the January 2000 closing high
The 50 day EMA at 11,715
11,670 is the May intraday high
11,642 is the May 2006 closing high
11,488 is the early September high.
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
October 30
Personal income, September (8:30): 0.3% expected, 0.3% prior
Personal spending, September (8:30): 0.3% expected, 0.1% prior
October 31
Employment cost index, Q3 (8:30): 0.9% expected, 0.9% prior
Chicago PMI, October (10:00): 58.0 expected, 62.1 prior
Consumer confidence, October (10:00): 108.0 expected, 104.5 prior
Trick or Treat (6:00 on)
November 1
Construction spending, September (10:00): 0.0% expected 0.3% prior
ISM, October (10:00): 53.1 expected, 52.9 prior
Crude oil inventories (10:30): -3.2M prior
November 2
Initial jobless claims (8:30): 308K prior
Productivity, Q3 preliminary (8:30): 1.5% expected, 1.6% prior
Factory Orders, September (10:00): 3.0% expected, 0.0% prior
November 3
Non-farm payrolls, October (8:30): 125K expected, 51K prior
Unemployment rate (8:30): 4.6% expected, 4.6% prior
Hourly earnings (8:30): 0.3% expected, 0.2% prior
Average workweek (8:30): 33.8 expected, 33.8 prior
ISM Services (10:00): 54.5 expected, 52.9 prior
End part 1 of 3
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