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us stock market, understanding the stock market
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11/14/06 Technical Traders Report Update
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Technical Traders Report Subscribers:
Full report issues Wednesday
MARKET ALERTS
Target hit alerts: BIDU; DRIV; ICE; IIG
Buy alerts: NVLS; UCTT
Trailing stops: None issued
Stop alerts: None issued
The market alert service is a premium level service where we issue intraday alerts relating to the general market conditions, when stocks hit action points (buy, stop, target, etc.), and when we see other information impacting the market or our stocks. To subscribe to the SSR alert service you can sign up at the following link:
http://www.investmenthouse.com/alertttr.htm
SUMMARY:
- Buyers use midmorning fade to load up the wagon.
- PPI tanks again, once more leading to some obtuse logic regarding inflation even as prices decline.
- Retail sales post better than expected month
- Leaders are back to leading, keying some important breakouts.
A rally that started to change the picture.
A much lower than expected PPI, a solid retail sales report, and some excellent earnings from TGT, AEOS, SKS, DDS and others jumped futures and had stocks surging on the open. Of course, as noted in the pre-market alert, a jump higher early typically finds it hard to hang on, and by midmorning the gains were frittered away with all but SOX posting losses. It was a question market itself, however, because it tapped the 200 day SMA on the initial surge and once again recoiled from that resistance. Bonds surged on the economic data and oil was a bit softer (closed at 58.28, -0.30), but stocks could not get a foothold.
Then the Fed started to talk, and unlike prior occasions, this had a positive impact. The reason is that Poole was doing the talking, and while Lacker is the designated hatchet man on inflation, Poole is his foil on the dovish side. It was Poole who opined a month ago that the Fed should follow the bond market with its rates as opposed to hammering on inflation regardless of what leading indicators are showing. Thus when he said Tuesday that the Fed was getting monetary policy 'just right' and that the continuing decline in housing was doing the Fed's work for it, the market took heart that indeed the Fed was watching markets not arbitrary inflation 'comfort zones'. If you do that then there is not much reason to lean toward rate hiking.
Leaders started to rebound, led by semiconductors, techs and small caps. Indeed, after the early failure at the 200 day SMA (again), SOX broke through and never looked back. SP600 broke out over the high in its handle, and NASDAQ pushed its breakout to a post-2002 high farther and deeper.
Technically this is what we were looking for. SP500 and DJ30 were not left out as they continued their rather amazing runs. They were lagging, however, as more money ran toward techs, chips, and small cap issues that lagged when the large cap NYSE stocks were breaking the ice in early fall. As noted, there were key breakouts by SOX and SP600, and there was a solid volume advance on both NASDAQ and NYSE, with volume forging back past average.
There was a lot of talk of short covering on the SP500 given the mid-afternoon spike in the market. There was no doubt some of the action was covering from those playing the SP500 range, but breadth was excellent at 3:1 on NYSE and 2:1 on NASDAQ. Leaders were surging higher once more. Those are not indications of short covering. Leaders that have been rallying on volume are not shorted stocks, they are stocks that are being accumulated by the big institutions. Thus when they rally on strong volume they are being purchased. Thus we view this action as solid buying returning to the market and driving NASDAQ, SOX and SP600 to breakouts.
Again this was more of the move we were looking for, i.e. a breakout on volume by SOX and SP600, and a continued breakout run by NASDAQ, all on a solid volume increase. That shows money moving into these areas and getting the started on a breakout move into the holidays and year end.
THE ECONOMY
PPI posts another decline, fosters further strange inflation logic.
PPI fell 1.6% (-0.5% expected, -1.3% in September) year over year a year after hitting a 15 year peak at 6.9%. Energy prices fell 5%, a powerful downward pressure on producer prices. The core fell 0.9% versus the 0.1% gain expected (+0.6% in September), its largest decline since 1993. Vehicle discounting helped pare down the core even after stripping out energy prices.
Last years pricing pressures that hit more than decade highs have not significantly passed through to finished goods. And low and behold, as we indicated back in the spring and summer, the September and October 2005 readings were in fact the peaks in the inflation cycle.
Thus you scratch your head and wonder when the Fed speakers (outside of Poole) talk of the need to fight inflation with more rate hikes. It is a strange twilight zone of half-logic when the Fed is hiking rates. You are told to beware of inflation even as history and a common sense understanding of economic cycles tells you inflation has peaked. Pundits who have educations in economics that place 5 or 6 letters after their names start making up reasons to back the Fed in its Don Quixote-like fight with inflation that is on the decline.
For example, as soon as the PPI was released Tuesday we heard tortured discussions of the impact of energy prices on inflation. Now we all know the story we heard as energy and gasoline prices were surging: that was inflationary because high prices would 'pass through' to producers and then to consumers. We took somewhat of an opposite view based on history: higher prices tend to damage consumption and thus are much more of a worry for economic growth than any potential inflationary effect. Indeed, in this scenario you only worry about inflation when the Fed floods the economy with too much money as it did in the 1970's and get a slower economy because of higher prices and nasty double digit inflation because all of that money did nothing to stimulate the economy; it only bid up prices.
Thus when a pundit says that a drop in gasoline and energy prices is inflationary because consumers will spend more of their money on other goods and services, you have to just step back and call BS. Higher gasoline prices are a tax on the economy; they take money that would go to other purchases and sends it down the gas tank. That means a weaker economy when prices are rising. Indeed, we are finally seeing the effects of that with the Q3 slowdown. Gasoline prices have been falling, however, and now that money that was diverted to the gas tank CAN go elsewhere if the consumer wants to spend it elsewhere (the very definition of discretionary capital). If rising prices were inflationary according to these pundits, can falling prices be inflationary as well?
Only if you conduct your economics analysis within a flawed structure such as the Phillips Curve. In that paradigm prosperity is inflationary. Thus any 'extra' money consumers have by virtue of no longer having to pay higher prices for gasoline is considered extra stimulus on the economy and thus inflationary. But let's face it; even IF you buy into that flawed model, with the GDP falling to less than 2% in Q3, is more consumer buying with money saved from lower gasoline prices inflationary or just helping the economy back on its feet? The answer is so clear it is not worth reciting.
You can see where a pundit may get off track if he or she plays too close with the Fed. Many in 1999 and 2000 wanted to get onto the Fed and thus were quick to parrot whatever nonsense Greenspan was peddling, the very nonsense that helped torpedo the 'white hot' economy in two short quarters. The same is happening now, but fortunately, what we hear from many of the Fed speakers is not what Bernanke, Poole, and his inner circle really believe in. While there is still plenty of reason to be concerned whenever the Fed is active, this Fed is thus far head and shoulders better than the Greenspan Fed without regard to any period of Greenspan's tenure. Indeed, if this was still the Greenspan Fed there would be plenty of reason to sell everything, lock up your daughters, and keep 1 year's worth of food and water at hand. After all, Monday Greenspan said the housing market had bottomed; in Green-speak that means the economy is just fine and that the CPI and PCE warrant additional rate hikes. For once you don't long for the good old days.
Retail sales feel the impact of falling gasoline prices, but are solid nonetheless.
The headline decline of 0.2% was less than the -0.4% expected. Take out auto sales and sales were down 0.4%. Seems auto sales helped buoy the consumer. But wait. Take out gasoline and autos and sales moved up 0.3%. Thus gasoline declines were rather massive, and as discussed above, that is a boost, not a downer. Indeed, September was revised lower to -0.8% from -0.4% as gasoline plunged in that month as well. Gasoline sales are included in retail sales, but as we know, they don't add anything productive to the economy. They are burned in the tank to get us to work, to the mall, the movie theater, etc., but putting money in the tank in itself does not create any good or service. Thus when prices decline, even though it drags retail sales lower, it actually benefits sales because the consumer has more to spend elsewhere, and when a consumer buys some clothes or some other product, that product needs to be replaced and the ripple effect works through the economy.
Some view this as a sign of weakness heading into the holidays. What the retail stock prices have told us, however, is that the holidays will be just fine, and the retail sales results indicate the same as the primary driver in the decline is a drop in fuel prices. That money is now available to buy uncle Jack that new pair of suspenders he won't wear (he wanted an iPod Nano) or a cell phone for Grandma (who won't turn it on because she is worried the battery will run down). Sentiment still remains at solid levels and lower gasoline prices have a very positive impact on the psyche in addition to adding to the bottom line of discretionary capital. Hard to complain about that.
THE MARKET
MARKET SENTIMENT
VIX: 10.5; -0.36. Still heading toward those July 2005 and December 2005 lows, but as noted before, volatility can remain at what are considered 'complacent' levels for years when the market is rallying. Indeed, when we see volatility start to climb even as the market climbs, then we have to be concerned about a top setting up.
VXN: 15.36; -0.84
VXO: 10.89; -0.12
Put/Call Ratio (CBOE): 0.81; +0.02
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: +24.28 points (+1.01%) to close at 2430.66
Volume: 2.02B (+14.45%). Solid bump in volume as NASDAQ broke to a new post-2002 high. This is the trade we wanted to see as it pushed its breakout further and deeper.
Up Volume: 1.427B (+207.324M)
Down Volume: 519.74M (+3.542M)
A/D and Hi/Lo: Advancers led 2.13 to 1. Solid advance in breadth as NASDAQ moved up across the board with NASDAQ and NASDAQ 100 posting similar gains.
Previous Session: Advancers led 1.42 to 1
New Highs: 231 (+56). Solid. Not huge but solid.
New Lows: 62 (+7)
The Chart: http://www.investmenthouse.com/cd/^ixic.html
Not much to say about this move as NASDAQ put some shoulder into it and drove its breakout to a new post-2002 high further and deeper. It needed this extra volume and solid breadth as it added to the move and shook off the distribution from last Thursday. Still plenty of upside room in its uptrending channel. Another good session and it will likely need a bit of a breather to set up another push, but that is healthy action.
SOX (+2.83%) posted the move we were most interested in. On the open it tapped the 200 day SMA (470.53) and faded, looking like another failure. They were showing too much strength to stay down, however, and indeed after SOX made a brief foray into negative territory it shot higher and blew through the 200 day SMA with ease. That move also took it past the September and October highs, putting in a higher high following the May 2006 peak. This is the move we were looking for.
SP500/NYSE
Stats: +8.8 points (+0.64%) to close at 1393.22
NYSE Volume: 1.712B (+21.34%). Volume moved back above average as the large caps cleared the short twin tops. More money chasing it, but hard to argue with the results.
Up Volume: 127M (-743.685M)
Down Volume: 422.2M (-162.901M)
A/D and Hi/Lo: Advancers led 2.9 to 1. Excellent breadth as the small caps broke out as well.
Previous Session: Advancers led 1.2 to 1
New Highs: 320 (+64). Not bad. Not great, but not bad.
New Lows: 24 (-3)
The Chart: http://investmenthouse.com/cd/^gspc.html
SP500 cleared those twin peaks at 1390 after making that higher low at the 10 day EMA. Volume moved above average as it did, showing buyers were back in the game once more. Some short covering for sure as CNBC was harping about, but the breadth indicates otherwise. This is momentum; big money was coming into the market to chase performance again after a three week lateral consolidation and that drove the index higher.
SP600 (+1.54%) posted the other key move for Tuesday as it broke out above its 4 week handle in its cup with handle base, and now it is on track to challenge its May high (405.94) which, of course, is a new all-time high. As noted Monday, SP600 is a growth-driven index, and this breakout bodes well for the market as a whole.
DJ30
Volume was up and above average Tuesday as the blue chips also bounced off that higher low at the 18 day EMA (12,079) and posted a new all-time high once more. Of course the financial stations were flashing 'new record high' steadily as if that was something new. Well, in this instance it was as both DJ30 and SP500 were a bit toppy, and this move on rising volume was a helps shake that off.
Stats: +86.13 points (+0.71%) to close at 12218.01
Volume: 255M shares Tuesday versus 194M shares Monday. Good volume surge as DJ30 broke to a new high, always a positive.
The chart: http://www.investmenthouse.com/cd/^dji.html
WEDNESDAY
Almost forgotten in the Tuesday rally was the CPI out before the market open Thursday. It is expected to show a 0.2% gain once more in the core, and you tend to suspect by the move Tuesday that investors are expecting the core to start showing some of the softening demonstrated in PPI the past two months. While Poole and likely Bernanke are not using CPI as the go by, a softer number would finally start undermining the hawks' view on continued rate hikes. Problem is the market has to buy off on what the Fed is saying, and the most of what we hear from the Fed is the likely need to hike in the future, Poole notwithstanding.
Tuesday was the start of a good move on SOX, SP600 and even SP500 and DJ30. NASDAQ already has a pretty solid week behind it other than that distribution session last Thursday. The point: this is a good breakout but after another day of rallying ahead of the CPI, some of the buyers may want to take a rest. We will look to take some gains, interim or otherwise, on a further solid rally over Wednesday, and then see what the CPI on Thursday brings.
At the same time we will continue to look at potential buys in stocks that are set up to move but have not had the money rotate to them just yet. The market action is healthy, and one of the attributes of health is the emergence of money rotation and new money seeking areas that have lagged (NASDAQ, SOX, SP600). Thus there will still be opportunity even with this move already under its belt, but for those leaders that have been out in front of the move, we will look to lock in some gain after another strong surge or two in the market. There is nothing incongruous in doing that as the market rallies and pauses, rallies and pauses. Again, that is healthy action, and the pauses give us opportunities as strong breakouts use the pullback to test before continuing the breakout run. As you know, that is one of our favorite entry points.
Still boatloads of data ahead, and even before the CPI we get the FOMC minutes Wednesday afternoon (2:00ET). The minutes can be market movers as well, and if there is a strong continued run into that number, that may trigger some profit taking. Ahead of that we will see how the market responds to the strong Tuesday gains. Often it is sluggish after such a move, but can find its feet by the afternoon. We would prefer a sluggish start that builds back into buying versus a gap; if we get a strong gap and early run we will indeed look to lock in some gain and then see what the test of that move brings.
All in all you cannot complain about the action. SP500 and DJ30 remain extended, but once more buyers used a short consolidation to move back in and chase performance. Fortunately they were more interested in pushing money into the growth indices, and that yielded important moves in SOX and SP600. Nice moves that we were looking for and excellent action with more upside ahead of resistance. It won't be straight up, but the action has resumed its stronger look.
Support and Resistance
NASDAQ: Closed at 2430.66
Resistance:
2477 from January 1999
2493 is an interim peak from February 1999
Support:
2412 from June 1999 low
2384 is an interim peak from January 1999
The 10 day EMA at 2384
2379 is the October high.
2376 is the April high, the former post-2002 high
2368 is the early October handle high.
The 18 day EMA at 2367
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 2307
2300 represents some price support
S&P 500: Closed at 1393.22
Resistance:
1398 is a low from January 2000
1401 is a low from April 2000
Support:
1390 is the October high.
1389 is a low from November 1999
The 10 day EMA at 1381
1378 is a low from May 2000
The 18 day EMA at 1376
1371 to 1373 is the December 2000 peak and the January 2001 peak
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 1353
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 12,281.01
Resistance:
8% above its 200 day SMA. Has been struggling since it hit near 8% above that level previously in late October. Tends to start about 10%, so this is a bit early but it has been a long run.
Support:
October high is 12,167
The 10 day EMA at 12,123
The 18 day EMA at 12,079
11,865 from the early October consolidation
The 50 day EMA at 11,864
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): -$49.3 actual versus -$47.0B expected, -$47.3B prior (revised from -$47.4B)
November 14
Retail sales, October (8:30): -0.2% actual versus -0.4% expected, -0.8% prior (revised from -0.4%)
Retail ex-autos (8:30): -0.4% actual versus -0.3% expected, -1.2% prior (revised from -0.5%)
PPI, October (8:30): -1.6% actual versus -0.5% expected, -1.3% prior
Core PPI (8:30): -0.9% actual versus 0.1% expected, 0.6% prior
Business inventories, September (10:00): 0.4% actual versus 0.5% expected, 0.6% prior
November 15
NY Empire PMI, November (8:30): 14.0 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): 310K expected, 308K prior
Net foreign purchases, September (9:00): $71.0B expected, $116.8B prior
Industrial production, October (9:15): 0.3% expected, -0.6% prior
Capacity utilization, October (9:15): 82.0% expected, 81.9% prior
Philly Fed, November (12:00): 5.0 expected, -0.7% prior
Housing starts, October (8:30): 1.680M expected, 1.772M prior
Permits, October (8:30): 1.625M expected, 1.638M prior
End part 1 of 2
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us stock market
understanding the stock market
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