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trading system, money investment
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11/11/06 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Target hit alerts: CTRP; NYX
Buy alerts: PFWD; GLDN (bonus)
Trailing stops: PCU
Stop alerts: HOLX
SUMMARY:
- Buyers win the rubber match but it doesn't change much.
- Battle of economic beliefs has the first shot fired Friday
- Founding Fathers would try again.
- Its growth versus tired NYSE large caps as growth leaders try to set up for a rebound.
Mixed open, positive close, not much change.
The score was 1 to 1 post-election. Wednesday the market overcame the 'surprise' win of Senate control along with the House and posted a solid upside session. Thursday strong CSCO earnings tried to keep the run going with a big gap higher. Harsh reality started to creep back in, however, as investors envisioned the adverse economic impacts coming when the pleasant talk leading up to and immediately after the election inevitably gives way to the same old agendas we all know the parties still seek to push. Friday stocks rebounded to close out the week positive. An endorsement of the action? The market has not really made its decision yet.
Friday there were plenty of positives to try and help pick the market back up from the Thursday selling. The IEA forecast lower oil demand for 2006 and 2007, and that helped push oil right back down after its Thursday jump over $61/bbl (closed at 59.59, -1.57). Oil is extremely volatile day to day, but it is volatile within a range with 57ish on the low and 61ish on the high. Friday it was down again, and as it faded stocks fared better after a soft open. Earnings were also positive with KSS, DIS, AIG and NVDA all beating the street. BA received a $10B helicopter contract. DNA bought TNOX. Once more all of the elements investors like to see cropped up again.
The good news had its counterparts. China announced it was going to diversify out of its dollar holdings (it holds an estimated $1T in dollars) into euros, oil, gold, etc. The dollar matched the August lows while bonds rallied, driving yields lower yet again (4.73% two year, 4.59% 10 year). Suddenly the 10 year is back near 4.5% as bonds continue to bounce up and down similar to the dollar. In addition to China, Clinton's old Treasury Secretary was again espousing is strange view of how the economy works, proffering that taxes could be raised without affecting the economy, and indeed calling for democrats to raise taxes. More on this later.
Technically stocks managed to overcome these rather serious issues with all indices positive by the close. It was one of the days where there was all flash but no substance. Yes the buyers won the day, but nothing changed. Volume was puny (Veteran's Day) though NYSE breadth was solid at 2:1. The relative position of the indices did not change, however.
SP500 still has that toppy look to it with the mini twin peaks spanning late October and early November, spiced with that high volume distribution session Thursday as it came off the second peak. It hasn't showing this action since this run started, so it is flying a caution flag. NASDAQ was up, sprinting to the close. Volume was lower but NASDAQ made a significant accomplishment considering its last breakout attempt: it managed to rebound from the Thursday selling that threatened to blow another breakout as soon as it started. SP600 and SOX didn't change position either, but they are in pretty sold lateral moves, working on their bases and trying to set up the next break higher.
Again, the indices finished in the same relative position with the large cap NYSE stocks still looking tired as a group, NASDAQ testing its resolve to hold a breakout, and the small caps and chips trying rather valiantly to hold their lateral ranges and make an upside breakout. As usual leadership is the key, and we see many leaders that have pulled back and are ready to try a bounce. It was not all just easy pullbacks for top stocks on the week, however, as more than a few coughed up their gains. Given that, however, we like what we see with many, and we are looking their way for leadership this week. Heaven knows we are not going to get it from our 'leaders' in D.C.
THE ECONOMY
The battle of economic beliefs to come gets a preview Friday.
All week we talked about how the calm and restrained discussions of economic policy, the handshakes and assurances of bipartisan cooperation would not last long when the different views of the federal government's role the two parties hold ran loggerheads when the talk tried to turn to action. The beliefs are fundamentally opposed. One side thinks the federal government should provide everything to everyone despite the Constitution and the express language limiting the government's authority to the enumerated powers and reserving all else to the states. They used like-minded courts in the 1960's and 1970's to find 'fundamental rights' and 'penumbras' of rights when there is just no correlation at all with the Constitution's language. When the Constitution was drafted, more than one founding father noted that the 'general welfare' clause so often used to find additional federal powers was limited to providing for the general welfare THROUGH the expressly enumerated powers in the Constitution.
The other side thinks the Feds should be limited and those issues not included in the Constitution are reserved to the states. At least the true believers think that way. The President does not; he came up with Medicare Part D, expanding federal healthcare, not an enumerated power, by hundreds of millions of taxpayer dollars. Through his 'hybrid' belief system he estranged the more conservative republicans and they didn't give any money in the last election and as the turnout shows, the base did not show up. It happened in 1992 and it happened in the mid-terms of 2006. It will happen in the presidential election of 2008 unless there is a major change not yet seen on the horizon or unless Hillary Clinton runs (that is a joke; heard it on Fox).
Friday the views of the new majority in Congress started to emerge, and surprise, surprise, they are no different than they were before the election. Robert Rueben, Clinton's Treasury Secretary called on democrats to raise taxes, indicating that higher taxes in this economy would not hurt anything. He said this would help reduce the deficit and bring our 'fiscal house in order.' How statesmanlike.
Raise taxes, lower revenues.
He is right, but only to a certain extent. You can raise taxes in a strong economy and get more tax revenues . . . at first. The economy has surged, and along with it, tax revenues. Lower tax rates once again equaled higher tax revenues. That paradox proves itself again and again in history, but it is denied again and again by politicians. In the US we have cut taxes few too many times, but each time tax revenues have exploded to levels far in excess of previous receipts in the years leading up to the cuts. The Laffer Curve correctly shows generally that if you continually raise taxes you get fewer tax receipts until you hit a point where you get no revenues because no one wants to work and pay everything to the government. Conversely, if you cut taxes you get increasing tax revenues until you hit a level where further reductions fail to stimulate further investment and thus no further economic activity is generated. To this date in our 230 year history we have NEVER cut taxes to the point where we did not have an explosion in higher tax receipts.
Back to Reuben. If you raise taxes in a strong economy you will get more tax receipts right off the bat. The strong economy is already producing a huge jump in receipts, and if you raise taxes you will tap into even more of the economic productivity. Ultimately, however, you will get less investment. That means slower economic activity, less tax receipts, and critically, you start losing your technological leadership edge. Higher tax rates make tax shelters more lucrative because you get safety (you don't risk your capital on business ventures that are inherently riskier than holding cash) and get a commensurate return for the risk. Taxes reduce your return, so immediately riskier ventures are curtailed. Thus a lot of our innovation at the far edge of technology is gone when taxes go up and risk capital is pulled to tax shelters. That money gets locked away until the tax environment becomes conducive to risk taking, i.e. you get to keep more of the return by virtue of lower taxes. Thus higher taxes take money away from the economy, and money is the lifeblood of new ventures. As business slows, less and less money is put to risk in productive investments. The snowball starts rolling. The economy doesn't create as many new businesses, jobs, etc., and tax receipts start to fall. This was the scenario in the 1970's until Reagan's tax cuts suddenly made it more lucrative to take money out of tax shelters and put them into new ventures. The government was not trying to take 75% to 90% of that additional dollar you earned so suddenly money came pouring out of tax shelters and was put to work. Investment in the US surged, the economy exploded higher, and tax receipts did the same.
Where does Ruben stand on spending? He didn't say, but we all know.
A misunderstanding of history and thus how higher taxes impact the economy is just one problem with Reuben's views. The other is what happened in the 1980's that causes many democrats and independents to point to the tax cuts and say they did not work. Federal spending. Tax receipts exploded, but so did federal spending. Reagan rebuilt the military to take the fight to the USSR, forcing them to spend to keep up. Its economy could not match ours and generate the revenue needed, and collapsed. Ultimately we did benefit even with all of that spending as the 'peace dividend' of the Clinton years showed: we did not have to spend so much on the military and our federal receipts continued to boom. The problem of the 1980's was that Congress did not cut back in any other spending; that's the 'be all to everyone' mentality discussed above. The result was huge deficits. That wasn't because of the tax cuts; they sent revenue through the roof. As usual, it was the spending.
Nowhere in Ruben's comments did he mention curtailing spending, and that is the MAJOR problem for us as the new Congress takes over. Why do we always turn to the taxpayer first in order to solve the Federal government's profligate spending? We are always asked to tighten our belts for the good of the country, but there is no such attempt by Congress to limit its spending. Congress falls back on the old argument that so-called discretionary spending is such a small part of the government expense that there is no use trying to curtail it. Even Tom DeLay, the supposed leader of a conservative Republican congress, stated in 2005 that there just was not anything more to cut from the spending. What horse crap. No one believed it, especially in his party, and of course, where is DeLay today? Many in his party did not back him when his troubles hit because of such ridiculous statements. Is it ever an answer to a problem to say it is too big to take any remedial steps? Of course not. We wont the cold war not by a big battle but by relentless pressure from all sides that ultimately caused the USSR to collapse. Small victories add up.
The hunger to spend, indeed overspend, is so endemic in Congress, however, that the vast majority still conclude it is folly to consider trying to cut the budget. I was struck in October when I received a letter from Senator McCain asking me to contribute to a private watchdog group that was trying to limit wasteful federal spending. Here we have a senator asking for money to fund a private organization doing what he should be doing. Why isn't he, drawing a senator's salary and all of those amazing benefits we can only dream about (dream because in the last attempt to reform social security many of our leaders said we were too stupid to handle our own retirement accounts similar to the senators) not introducing bill after bill after bill to limit spending, thus drawing public attention to it in Congress? It does no good to make speeches to Congress; introduce bills and make them vote on it and talk about it so that it can be used against them in elections. I can only shake my head in amazement as I realize how pervasive the belief is that spending just cannot be controlled.
What would our founding fathers think?
If the founding fathers came back today they would think they had failed. The government is too big and is into every aspect of our lives by virtue of Medicare and Social Security and the IRS. Many people today would counter, pointing to how successful the US is; surely the fathers would be proud. Well, England was the world power when we fought for our independence; size and strength does not mean fair government. A monarchy can be strong and successful and yet tyrannical. The founding fathers wanted a limited central government with most issues controlled by the states. Do we have that today? Many things are handled by the states day to day, but they are controlled by the Feds because if the states don't toe the line they don't get those federal dollars that pay for most everything from roads, to schools, to museums, dams, etc. If an individual does not follow federal directives fines and prison time follow. The power of money has put the federal government into every aspect of our lives.
No, the founding fathers would start over, knowing they had failed. How would they fix it? First, make certain parts of the Constitution non-amendable such as how the Federal government can tax incomes. The sixteenth amendment was only supposed to apply to 5% of the population according to its proponents. Yeah, right. It gave the Federal government far too much power to take without due process. The IRS is our own branch of the KGB, using frozen bank accounts, seized property, and suicides to control us as opposed to guns and poisons.
Next, if you are going to limit the president's term, then limit Senators and House representatives commensurately. Otherwise you have what we have now, 10-term senators waiting out any president whose policies they don't like. If they knew the president could be there forever then they would have to come to the bargaining table and compromise. That is what a system of checks and balances is all about, i.e. knowing you have to come together to do what the Constitution says you have to.
The fathers would also reign in the courts, giving Congress clearer authority to set the court's jurisdiction. That is actually in the Constitution. It's just that no one pays attention to it, especially the courts. I had a conversation with some fellow attorneys about the Chivo case and others, and they were adamant that the Congress could not tell the courts what they could and could not look at. We pulled out the Constitution and there it was in black and white. There was a lot of rationalization and frankly BS to explain how we had let the courts take control of the other two branches of government. When the lawyers are taught the courts are the new King George, then it is hard to change the system.
Finally and most importantly, clearly, clearly, clearly state that the federal government's powers are limited solely to the enumerated powers, and that no other clause could be used to expand them.
That last fix is why I really like the Missouri initiative on stem cell research. Not that I like the legislation, but that it was argued and voted on at the state level. That is where it should be argued and voted on. The fathers did not want an all-powerful central government making decisions about every aspect of our lives, with those decisions reviewed by 9 people in black dresses without regard for what the rest of the government or people think. Those 9 have taken the views of hundreds of millions of US citizens and replaced them with their own. That was never the intended result of our 'representative' form of government, but we have allowed it to turn into an elite group of leaders in D.C. that can raise and lower our incomes at will, appoint unelected Fed chairmen to control our finances, and sanction an untouchable agency to take our money to fund whatever result the select 9 in robes deem fit. Now is that what our founding fathers wanted? Not by a long shot.
New Congress or not, that is the real problem we have in whether we succeed or not in the next 200 years. One of the express powers is to protect and defend the people of the US. With the federal government into everything from healthcare to retirement to your choice of lifestyle to what is moral or immoral, etc., it took its eye off of what it is expressly supposed to do. As a result we were attacked. We had the information to prevent 9-11 but the federal government's mission, so clearly set out in the Constitution, has become so twisted and tangled that we could not see the forest for the trees. Our founding fathers were so much wiser than we credit them for. They knew a central government could not do everything so they limited it to what it could do and left the rest to the states. That systems also allows us to remain free. They understood why Rome fell and tried to create a system that would avoid that. They came close but the great experiment is falling into the big government pit. I suppose the appropriate saying here is one that ironically was generated because of the ineptitude of a large central government: good enough for government work. Unfortunately, when it comes to our safety and freedom, that is not good enough.
THE MARKET
MARKET SENTIMENT
VIX: 10.79; -0.22
VXN: 15.52; -1.14
VXO: 10.61; -0.39
Put/Call Ratio (CBOE): 0.98; +0.14
Bulls versus Bears:
Bulls: 52.1%. Ticking down from 53.7% last week and also below the 52.7% rung up the prior week. Still flirting with 55%, the level considered bearish. Has caught the April high and is moving closer to the January peak at just over 60%. 55% is considered a bearish indication.
Bears: 26.0%. Moving the opposite from the bulls, bears fell sharply from 28.4% and 30.1% before that, continuing the faster decline. Down from 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 remains above the 20% level considered bearish but is back to heading that way with more speed. 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: +13.71 points (+0.58%) to close at 2389.72
Volume: 1.714B (-30.26%). Veteran's Day light trade gave the upside move little substance, particularly after the big spike in volume Thursday as NASDAQ gapped higher then reversed for a loss. Hardly the kind of trade that overcomes such a reversal distribution session.
Up Volume: 968.201M (-121.771M)
Down Volume: 724.678M (-598.28M)
A/D and Hi/Lo: Advancers led 1.56 to 1. Middle of the road.
Previous Session: Decliners led 1.92 to 1
New Highs: 108 (-33)
New Lows: 50 (-4)
The Chart: http://www.investmenthouse.com/cd/^ixic.html
NASDAQ put together a decent price session to end the week, keeping the total week gains solid despite the Thursday distribution session as sellers moved in on the new post-2002 high. The significant move Friday was the hold of the April high (2376) where it closed Thursday and the hold of the breakout. Above that there was nothing really impressive. I guess you could say it avoided immediately reversing the breakout this time, but it is hardly out of the woods after this move. Still some good techs out there are ready to move and with NASDAQ holding a much needed breakout we will be watching them and ready to pick some up if they can show us they are ready to resume their moves.
SOX (+1.01%) recovered some from its own Thursday drubbing, but it had to see more first, dropping to tap at the 50 day EMA on the intraday low and the recovering to close at the session high. That keeps it locked in its trading range, but trying to get on the upside bounce again. The key move to the upside is a break through the 200 day SMA (471.20). It is still moving laterally in its 9 week range, working on its base, just as we wanted it to do. Given NASDAQ's less than stellar strength, a breakout over the 200 day would be really quite nice.
SP500/NYSE
Stats: +2.57 points (+0.19%) to close at 1380.9
NYSE Volume: 1.423B (-23.41%). Another volume plunge as SP500 posted a modest gain. As with NASDAQ, hardly an offset to the Thursday distribution session.
Up Volume: 789.643M (+57.914M)
Down Volume: 611.915M (-475.4M)
A/D and Hi/Lo: Advancers led 2 to 1. Solid breadth returned as the small caps led all the indices but the semiconductors.
Previous Session: Decliners led 1.42 to 1
New Highs: 210 (-5)
New Lows: 19 (-4)
The Chart: http://investmenthouse.com/cd/^gspc.html
SP500 bounced modestly, trying to make a higher low, holding above the 10 day EMA (1377) on the close. Maybe it can make that higher low and take out the tops of the twin peaks at 1289; it will have to show more upside strength than that Thursday volume sell off and the short term twin peaks indicate it has. As noted Thursday, this is the first time SP500 has shown this type of action on this run, and it is a toppy look. It is extended, but to this point it has shown excellent strength, and it may be able to work through this shorter term lateral (at least thus far) stumble. A higher low from here would be a good start.
SP600 (+0.71) continues its lateral move over the 18 day EMA after that quick drop the prior week that took it to support near 382. It rebounded crisply and continued its work on the handle to its 6 month cup with handle. Pretty solid action all things considered. Starting to become more important as NASDAQ needs a push.
DJ30
The blue chips held up Friday, showing a doji and closing above the 10 day EMA (12,095). Low volume here as well as it tries to make a higher low at this near support. Still struggling and overextended, but doggedly refuses to give in. As with SP500, it is trying to work through this choppy period, and thus far in the run it has not given in, so there is always the possibility it consolidates and continues on. Given the run thus far and the recent action, however, it is still not a great risk/reward position and it will have to show us the move.
Stats: +5.13 points (+0.04%) to close at 12108.43
Volume: 204M shares Friday versus 275M shares Thursday.
The chart: http://www.investmenthouse.com/cd/^dji.html
MONDAY
The market is still going to be working through the election aftermath, and it has a boatload of economic data to consider as well, particularly the October retail sales. Retailers have rallied well ahead of the holiday season, and after a hiccup when same store sales were announced early in October they rebounded right back. Now we get the next read. In addition the Fed gets its next look at prices with the PPI and CPI. The market now has to not only worry about what the data shows and what the Fed will do, but also what the government will do as the new majority tries to 'lead' us out of the dire straights we are suffering through. Seems when people don't agree with your means to an end they conclude the end is wrong. No, a solid economy with low unemployment is the end we want. We can continue to work at making it stronger and deeper, but that does not mean we have to try to take away from what we have worked so hard to attain.
Just more fodder for the market to sort through as it also works through something of a dichotomy. The large cap NYSE stocks that led the move are tired, trying to hold on but stumbling some. Growth stocks are trying to move out to some leadership as NASDAQ broke out to a new post-2002 high, though its action since has not been stellar. SP600, and to a lesser extent SOX, are setting up for breakouts of their own. Growth trying to grow, the large cap industrials trying to hang on.
With same store sales missing expectations (recall 60% missed) retail sales expectations have dropped to -0.4% versus September. This is a case where the market can likely handle lower sales, but not sales that fall below expectations. With SP500 struggling, a retail decline greater than anticipated will send it lower. Kind of an acid test ahead for SP500 where we see if this is just a different form of a lateral move on this run or the prelude to a decline. Hard to bet against it on this run, but it is ancient in market years.
We keep looking for NASDAQ to assert itself when SP500 and DJ30 stumble, getting some of their money. It has broken to a new post-2002 as they stumbled last week, so maybe it is. If that is the case, however, it needs to take a few self-assertion courses or read L. Ron Hubbard; this has not been a massive breakout thus far. There are still techs set to move higher, and we will look for volume to come in as they do. Even with that, it still looks as if SP600 is going to play a larger role in any further move higher as it continues constructive action just as the large caps struggle after a strong move higher. With the flood of data coming this week the large caps may need the help as they sort through the election results as well. For that matter, the growth indices that are looking pretty decent may need help as well as more views regarding what direction our leaders are going to try and take us.
Support and Resistance
NASDAQ: Closed at 2389.72
Resistance:
2384 is an interim peak from January 1999
2412 from June 1999 low
2477 from January 1999
2493 is an interim peak from February 1999
Support:
2379 is the October high.
2376 is the April high, the former post-2002 high
2368 is the early October handle high.
The 10 day EMA at 2367
The 18 day EMA at 2354
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
2300 represents some price support
The 50 day EMA at 2298
2273 is the recent September peak
2250 is the March 2006 closing low.
2234 is the June 2006 peak (intraday)
2237 is the August 2004/April 2005 up trendline
The 200 day SMA at 2233
S&P 500: Closed at 1380.90
Resistance:
1389 is a low from November 1999
1390 is the October high.
1398 is a low from January 2000
1401 is a low from April 2000
Support:
1378 is a low from May 2000
The 10 day EMA at 1377
1371 to 1373 is the December 2000 peak and the January 2001 peak
The 18 day EMA at 1373
1358 to 1362 mark a series of peaks from April 1999 to August 1999 high and the February 2002 low at 1360.
1354 from the early October consolidation
The 50 day EMA at 1350
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 12,108.43
Resistance:
October high is 12,167. Making the break through.
7.8% above its 200 day SMA. Has been struggling since it hit near 8% above that level. Tends to start about 10%, so this is a bit early but it has been a long run.
Support:
The 10 day EMA at 12,095
The 18 day EMA at 12,054
11,865 from the early October consolidation
The 50 day EMA at 11,838
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.
November 13
Treasury Budget, October (2:00): -$47.0B expected, -$47.4B prior
November 14
Retail sales, October (8:30): -0.4% expected, -0.4% prior
Retail ex-autos (8:30): -0.2% expected, -0.5% prior
PPI, October (8:30): -0.4% expected, -1.3% prior
Business inventories, September (10:00): 0.5% expected, 0.6% prior
November 15
NY Empire PMI, November (8:30): 16.0 expected, 22.9 prior
Crude oil inventories (10:30): 435K prior
FOMC minutes, Oct. 25 (2:00)
November 16
CPI, October (8:30): -0.3% expected, -0.5% prior
Core CPI (8:30): 0.2% expected, 0.2% prior
Initial jobless claims (8:30): 308K
Net foreign purchases, September (9:00): $116.8B prior
Industrial production, October (9:15): 0.2% expected, -0.6% prior
Capacity utilization, October (9:15): 82.0% expected, 81.9% prior
Philly Fed, November (12:00): 5.5 expected, -0.7% prior
Housing starts, October (8:30): 1.70M expected, 1.772M prior
Permits, October (8:30): 1.625M expected, 1.638M prior
End part 1 of 3
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trading system
money investment
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