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us stock market, trend trading stock
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11/01/06 Technical Traders Report
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Technical Traders Report Subscribers:
MARKET ALERTS
Target hit alerts: None issued
Buy alerts: None issued
Trailing stops: ISE; PRFT; KNOT; MVSN; CWTR; SIGM; NVDA
Stop alerts: ADBE; HOLX; GYMB; IWM; OPSW; ISE
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SUMMARY:
- More weak economic data spurs more serious higher volume selling.
- National ISM follows the regional surveys lower as prices paid plunge.
- Bonds back to pricing in weaker economic activity; stocks are pulling back, but not yet following.
- NASDAQ still looking to pull off a consolidation, but getting no help from the small caps as they knife lower.
ISM splashes cold water on a rebound attempt.
After two sessions of trying to continue the lateral consolidation the ISM report further fueled the recent turn to the idea the economy is in jeopardy. With stocks sitting on gains in the typically weak months of September and October, and with a new month underway, it was easy for many to hit the sell button. Stocks were down across the board as DJ30 fell through the 10 day EMA for the first time in since late September, the small caps crumpled, and NASDAQ looked on the verge of doing the same. Trying to bite off a bit too much too soon on NASDAQ, and it came back Wednesday and bit techs on the behind.
Stocks started higher after two more or less lateral moves and NASDAQ trying the April high once more. When the ISM hit thoughts of upside breakouts were replaced by an uneasy jostling among investors toward the exits. Plenty of gloom the past few sessions, and the ISM only reinforced that attitude. At this stage, however, that gloom was not enough to provide a lasting kick higher.
Stocks made a quick dip lower on the word the ISM just managed to keep the expansion going, but then tried a rebound when the oil inventories came out stronger than expected (+2M). Looked good, showing a bid was still in the market even on this news. That spark was tamped out after a half or so and then the selling continued. It continued all session with the afternoon turning particularly negative. Stocks closed near the low as stocks turned from the low to high intraday action back to the high to low shown last Friday. Bonds rallied on the news as yields fell back toward the August lows (4.64% 2 year, 4.56% 10 year) and the inversion remained firmly in place. They are well off the Fed Funds rate once more, another 'inversion' in the curve that keeps coming back.
All of this was more than stocks could stand for the day. As noted, it was the first of the month, there were some good gains leading into the session, so the sell orders were entered. We said NASDAQ needed a further consolidation, but this was not really what we were looking for. Something kinder and gentler is what it needed. As it was NASDAQ tumbled 40 points high to close intraday and on a strong shot of volume; not a textbook consolidation effort but one where techs were unloaded just below resistance. Again, not the kind of action you want to see.
Technically DJ30 and SP500 are still fine, falling through the 10 day EMA but landing on the next level of support at the 18 day EMA. That is where you would expect any breach in the strong uptrend to land initially. Volume was up on NYSE, however, as the large caps showed some distribution. As with NASDAQ, that is not the type of gentle pullback that fizzles quickly and leads to the next leg higher. The money rotating out of the large cap NYSE indices did not move into NASDAQ or the small caps as we had looked forward to. Those indices were hammered lower on that rising volume, showing more severe distribution. SP600 tanked below its 18 day EMA and NASDAQ, after that test of resistance early, revered and sold on volume. Breadth was negative across the board as leaders sold to near support and some selling through that level.
That shows money actively seeking the exits after this run. The question is whether this was just something to start the month as it was in August, September and October, or something more intractable. Given the rather high level of bulls, the inability to break through resistance (NASDAQ), and some distribution cropping up the past few weeks (4 distribution versus 3 accumulation on NASDAQ), we opted to close many positions and see how this washes out. Though the economic data is weaker, the market looks further down the road than what happened back in October. Sure this impacts the short term market action, but unless the market views this as a change in the trend and that it got the take on the economy all wrong, then it is likely to be a shorter term pullback to consolidate the gains versus a major sell off. Again, however, we were closing positions if they were starting to violate support versus waiting to see how everything shakes out.
THE ECONOMY
National ISM delivers a belated trick or an early turkey.
The national manufacturing survey hit just over a 3 year low (June 2003 was the last time at this level) with a less than scintillating 51.2% reading. That was below the also less than scintillating 53.5 that was expected, and that was above the rather ho-hum 52.9% in September. So why all the heartburn over this number when not so great results were expected (results, mind you, that still show an expansion even when things slowed quite considerably in Q3 as the 1.6% GDP report showed)?
Because it is in vogue to worry about the economic future. Stocks have rallied a long way and all of the sudden some investors saw their shadows and got spooked; bearish sentiment took a quick spike higher. It is election season as well, and suddenly investors are deciding that gridlock of the kind foreshadowed is not really a good thing for stocks. Over the past two weeks the Dems have adopted the line they are for tax cuts and won't work to repeal the dividend and investment tax incentives, or only do so as a 'last resort.' You get the feeling it won't take but a couple of months to get to the 'last resort.' Further, that says nothing of the marginal tax rate cuts they have never, ever been fond of. The 'rich' are riding the backs of the poor; you have to understand, however, the 'rich' as they define them are those making $100K or more.
Of course, they don't have to work to repeal the tax cuts because they can let them expire without lifting a finger. It is good election tactics and I would do the same thing if I was in their shoes, but investors know what the results are and in all the turmoil leading up to the actual vote (are you also tired of the endless projections that basically conclude they are within the margin of error so mean absolutely nothing?) the idea is building to back off, let Caesar have that which is Caesar's, and then get back to work when it is all over and the smoke clears.
The report itself was weaker, but there were positive parts as well. New orders fell to 52.1 (not chopped liver), but employment was back above 50. Order backlogs fell to 44.5, but export orders jumped to 57.8. Significantly, prices paid fell to 47.0 from 61 in September and 73 in August. That means that prices, finally, are not just rising at a slower pace but are actually declining. Of course, in the current mindset of the market, that is viewed as bad because it could mean less demand and thus more weakness. That, as we now, is baloney because prices are down due to lower oil and thus lower component costs across the board. That is good for business in many respects. Again, in the current mindset that was views as a negative. Definitely time to let the smoke clear a bit and let saner heads prevail after this knee-jerk reaction.
Bonds are back to pricing in weakness, matching the curve inversion.
Even with the continued overall strong economic data, you cannot ignore the bond curve. Actually, the bond curves. No we are not talking about the girls on the new 007 flick, but the actual short versus longer term inversion (currently narrowing to 8BP from 10 BP last week) and the nominal bond rates versus the Fed Funds rate.
The current inversion is well over 100 days, and though it is rather modest, it has put in the requisite time to call for a recession. Bummer. Second, with the 10 year yield again bouncing along near 4.50% and at the August lows, it is almost 75BP below the Fed Funds rate. The 2 year, more of a match to the Fed's short term FFR, is at 4.64%, not a whole heck of a lot better. This 'other' inversion again starts to suggest the Fed is behind the curve.
Bonds had tried to recover, and started to follow the stock market's more positive view of the economy down the road. That was a positive, holding out some hope the 2 year/10 year spread inversion would right itself if the Fed said it was done. Bond yields are becoming a bit too detached from the Fed Funds rate to react in that manner if the Fed does say it is done. Indeed, it is now even more imperative that the Fed say it stands ready to cut as Poole did a couple of weeks back. This absurd game of playing tough on inflation at the risk of a recession has now gone well past too far. We opined last week that the Fed's pause was not enough, and the action of bonds is unfortunately starting to indicate this.
The question is whether stocks will follow the bond market's lead or just suffer through a near term correction and resume the rosy outlook. We were down on the economy even as stocks rallied, knowing that it was going through a down cycle. Now others are turning negative on the economy, and to us that is often an indicator the worst is over. We will have to see how the stock market plays out this test and how the bond market handles the 10 year at 4.5%. That is where it bounced back last time and that becomes a critical level.
THE MARKET
MARKET SENTIMENT
VIX: 11.51; +0.41
VXN: 17.98; +0.7
VXO: 11.05; +0.64
Put/Call Ratio (CBOE): 0.91; -0.06. Notable in that it did NOT move above 1.0 on the close with all of this selling.
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: -32.36 points (-1.37%) to close at 2334.35
Volume: 2.071B (+4.97%). Volume jumped further above average, pretty much wiping out the feeble Tuesday move higher. It was not the strongest volume in the past week, but it was no slouch and was a distribution session on a big price loss. Techs were being sold as NASDAQ tested resistance and reversed. Four distribution sessions to three accumulation sessions in the past three weeks; the bias has shifted to some distribution as NASDAQ tried the April high. That shows some big money unloading shares at this key point.
Up Volume: 407.448M (-687.087M)
Down Volume: 1.65B (+814.429M)
A/D and Hi/Lo: Decliners led 2.71 to 1. Pretty ugly downside breadth after a nice swing back to solid upside breadth.
Previous Session: Decliners led 1.11 to 1
New Highs: 107 (-56)
New Lows: 52 (+7)
The Chart: http://www.investmenthouse.com/cd/^ixic.html
NASDAQ started higher, all full of spit and vinegar. That ran out quickly and that tap at the April high quickly petered out and turned into a pretty nasty 40+ point dive. NASDAQ tried to hold the 18 day EMA (2337) but failed, slipping just below that near support on rising volume. After a failed break over the April high (2376) and a few more taps at that level, it ran out of backers. Those backers backed out Wednesday and NASDAQ took a tumble. It simply was not ready to run through that April high, and that early week move back up to that resistance set it up for anyone wanting to sell. The question is now whether NASDAQ can pull it back together after an early month fade, consolidate, and then make the next shot at the breakout. Some leaders broke support, some held. NASDAQ 100 lost some more ground than NASDAQ overall. Likely to see some more downside before it can try to stem the tide.
SOX (-1.93%) fell back through the 50 day EMA (451.57) without much of a struggle. When the NASDAQ cut loose to the downside SOX gave up any pretense of being a leader. When the sellers came at it, it ducked out the side door. It is still in the range of the past 7 weeks, still above the October low (444), but as with NASDAQ, whether that holds remains to be seen.
SP500/NYSE
Stats: -10.13 points (-0.74%) to close at 1367.81
NYSE Volume: 1.798B (+2.9%). Volume edged higher and remained above average for the second session. Some churn Tuesday and a dump lower Wednesday to the 18 day EMA. Some distribution setting in after the October peak. Not death to this rally, but definitely worth all of our attention as SP500 makes a test and SP600 thuds lower.
Up Volume: 415.797M (-387.997M)
Down Volume: 1.359B (+444.931M)
A/D and Hi/Lo: Decliners led 1.92 to 1. Not out of control as with NASDAQ, but still very strong downside.
Previous Session: Advancers led 1.06 to 1
New Highs: 94 (-187)
New Lows: 17 (-7)
The Chart: http://investmenthouse.com/cd/^gspc.html
SP500 turned some churn into a distribution session down to the 18 day EMA (1367) as SP500 had to get rid of some of its gains to this point. This is the lowest support it has tested on the run from August, so how it responds here is quite important. Given the close at the session low it doesn't look as if it is ready to snap right back up, but we also have to recall it is the first of the month, and this has been the action the past three months.
SP600 (-1.57%). You could hear the giant sucking sound as the small caps could not hold another test of the 18 day EMA and instead cascaded lower on that rising NYSE volume. They breached the bottom of their three week range, closing at the low. Some support from 382 to 380; we see if it can hold on there.
DJ30
The Dow clipped through the 10 day EMA, but as expected, it found some support at the 18 day EMA (11,999), the first time to touch that level since late September. Since then the 10 day EMA has acted as support. Volume was lower on the Dow; it still shows very good action. The 18 day EMA is key at this point given it has been the support for this run.
Stats: -49.71 points (-0.41%) to close at 12031.02
Volume: 245M shares Wednesday versus 277M shares Tuesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
THURSDAY
Productivity and factory orders are out Thursday, a warm up for what will now be a more important jobs report given the weaker economic data this week. The irony of it is, the jobs picture lags, so it could be stronger and really confuse those running back and forth on each economic data point. In any event, with the jobs report Friday, if investors really are pensive here as opposed to just a start of the month giveback as seen the past few months, we are not likely to see any return to the upside Thursday.
The bigger story for the market is how NASDAQ and SP600 respond to the distribution session Wednesday where SP600 dumped lower and NASDAQ had no picnic of a day. NASDAQ is having a hard time with the April high and that distribution won't help its attempt; it needed to consolidate, and a sharp point loss on higher volume is not good consolidation action. Again, we have to see if it is a one day event as seen in the early session or two of the past few months (and yes some of those were distribution sessions) and then an attempt at a recovery. The indices have since added a lot more gains and thus there is a better chance for further pullback than a one-session event.
Thursday we will be watching our current positions to see how they hold after the Wednesday selling. Many are trading around near support and are thus on the bubble. It is always good to see a strong stock hold near that support, move laterally, and then rebound. Indeed, we are continuing to look for those as our next upside plays when this test runs its course. Given the length of the run we have to be cautious at this level, particularly with NASDAQ testing the prior resistance and unable to break through, but we also have to keep in mind the strength of the move thus far and that the economic situation has shown a downturn in the cycle but not a collapse. Thus we will continue to keep an eye out for stocks in position to rebound. We likely won't get a lot of opportunity ahead of the Friday jobs report, however.
Support and Resistance
NASDAQ: Closed at 2334.35
Resistance:
The 18 day EMA at 2337
The 10 day EMA at 2350
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:
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 50 day EMA at 2276
2273 is the recent September peak
2250 is the March 2006 closing low.
2234 is the June 2006 peak (intraday)
2232 is the August 2004/April 2005 up trendline
The 200 day SMA at 2229
S&P 500: Closed at 1367.81
Resistance:
The 10 day EMA at 1374
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:
1371 to 1373 is the December 2000 peak and the January 2001 peak
The 18 day EMA at 1367
1358 to 1362 mark a series of peaks from April 1999 to August 1999 high and the February 2002 low at 1360.
The 50 day EMA at 1341
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.
Dow: Closed at 12,031.02
Resistance:
The 10 day EMA at 12,059
Falling back through the 10 day EMA for the first time in 5 weeks.
Support:
The 18 day EMA at 11,999
The 50 day EMA at 11,755
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
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): 0.5% actual versus 0.3% expected, 0.4% prior (revised from 0.3%)
Personal spending, September (8:30): 0.1% actual versus 0.3% expected, 0.2% prior (revised from 0.1%)
October 31
Employment cost index, Q3 (8:30): 1.0% actual versus 0.9% expected, 0.9% prior
Chicago PMI, October (10:00): 53.5 actual versus 58.0 expected, 62.1 prior
Consumer confidence, October (10:00): 105.4 actual versus 107.8 expected, 105.9 prior (revised from 104.5)
Trick or Treat (6:00 on)
November 1
Construction spending, September (10:00): -0.3% actual versus 0.0% expected 0.0% prior (revised from 0.3%)
ISM, October (10:00): 51.2 actual versus 53.0 expected, 52.9 prior
Crude oil inventories (10:30): +2M versus -3.2M prior
November 2
Initial jobless claims (8:30): 310K expected, 308K prior
Productivity, Q3 preliminary (8:30): 1.1% expected, 1.6% prior
Factory Orders, September (10:00): 3.6% 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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