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world stock market, us stock market
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11/27/06 Investment House Daily
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SUMMARY:
- Holiday retail spending stronger, stocks are not, however.
- Black Friday or Cyber Monday, holiday season has the look of being off to a solid start.
- Busy economic week kicks off as tech sector deals with sweaty Palms.
Friday selling snowballs in a full session.
Stocks ended last week with a sudden dip, and Monday the dip turned into a plunge lower as the indices knifed through near support in the form of the 18 day EMA. Many issues came to a head and after almost four up months from the July low, investors decided to sell and see where things land. A weak dollar was again blamed as it fell to a 20 month low against the Euro, suffering its fifth straight losing session. Bonds, however, where most of the dollar trade occurs (on the order of 10 times the dollars of the stock market), hardly seem to notice the dollar, so it is hard to pin the stock market's woes all on a weaker dollar. On top of the dollar, however, there were spending issues as the holiday shopping season starts (WMT November sales were negative for the first time in a decade, but most stores are showing solid gains to start the season). There were also some valuation downgrades (JCG in retail, MAR in lodging), and once more oil was higher (60.32, +1.08) on Saudi Arabia saying it would support a second production cut, more violence in Nigeria, and the shut down of a northern Iraq pipeline due to an explosion.
With all of that, stocks were on the defensive early, but with the current trend a rebound is always possible. After a couple of relief bounce attempts were squashed by sellers and the afternoon found no takers, stocks simply slid lower and lower into the close. Sellers were firmly in control, and even the bulls were not willing to step in and buy given the climate for the day.
Technically, it was a bad day. Wow, that is some deep, insightful analysis. A weaker open this time did not lead to any rebound from buyers. Stocks were hammered across the board (breadth running -4:1 on both NYSE and NASDAQ), giving rise to the notion it was just profit taking after a long run. No doubt that was the case, similar to Friday as some got a jump on the holiday season and started to sell early. After 4 months without a serious correction it was easy to parrot 'profit taking.'
There was more, of course; there always is. All sectors sold, but the small cap SP600 was rejected right at the prior high; a solid rebuilding of the base, just on the verge of the breakout, and pow, right in the kisser. The small caps are really economically sensitive, and the thumping at the old high is something to watch as to whether it can recover from this body blow and make the breakout. Volume was higher on the selling as well. You will say 'big deal, Friday was just a half session.' True, but it was also higher than the 5 previous sessions and back up to average. It was not blowout volume but there was enough to show some conviction to the downside in the largest single day point loss since the rally began.
The acid test is always leadership. It was mixed. Some broke through near support but many held, and if they continue to do so they will be in good position for buys as they rebound. How they hold the line will be the key battleground for the market as it makes this test.
There was some damage done Monday; you don't get those kinds of point losses in just an ordinary, plane Jane, vanilla, run of the mill profit taking. After six rebounds off of the rising 18 day EMA, DJ30 and SP500 are threatening that deeper test that comes after a long run. Despite the large point losses, that action is normal. The market cannot continue to distribute on higher and higher volume as that indicates the buyers are heading into hibernation; as noted last week the bulls are in excess, and more higher volume selling indicates a more severe correction. Again, given the long run higher a deeper test this time is not abnormal and typically helps the trend gain strength. Thus a pullback to the 50 day EMA on the indices would not be unusual. We were taking positions off the table Thursday if they threatened to break support. We will then look to see if they can find bottom at the 50 day EMA and give us new entry points with some strong rebounds off that level. If they show that kind of action we can view the rally as just taking a much needed pause, testing deeper to key support, and then resuming the upside. In 2005 immediately after Thanksgiving the market had a slump and then continued to rally. It is certainly the time of year the market typically rallies, but near term it looks ready to give back some of the run to set up the next.
THE ECONOMY
Less people buying more as the season starts.
In the financial world the holiday season is pretty much boiled down to sales dollars, and the early data from 'Black Friday' was a bit hard for investors to figure out. The National Retail Federation reported sales rose 18.9% with the average customer spending $360.15. Shoppertrack said Black Friday sales rose 6%. Visa said sales were on track to rise 7.5% for the entire season. JCP said sales were off to a 'good start.' KB toys offered some discounts, but noted that customers were buying the full-priced merchandise. Seems that old 'loss leader' gimmick we all learned in school actually works.
Then there was WMT, and the world's largest retailer reporting the most recent sales growth was not growth at all, declining 0.1% for the first time in over a decade. Is it just Wal-Mart with its issues, or is it something deeper, a sinister indication that the holiday season is going to be crappy? Personally, WMT is good for toilet paper, paper towels, some groceries, toothpaste, and 50 pound bags of dog food. For holiday shopping in a solid economy, however, WMT is not the destination of choice. In a recession the discounters clean up. In an economy where people have jobs and are comfortable in that regard (as the consumer sentiment levels indicate), shoppers seek the specialty and higher end stores.
Thus the reaction to WMT's retail results is not that indicative of the holiday sales season to come. Consumers started stronger than they did last year and the sales season will be stronger overall. We are looking forward to the tabulations on so-called Cyber Monday, but don't put too much stock in these early numbers. The recent trend in holiday buying is for consumers to shop early in the year and also to really pour it on right at the end. So, get some extra champagne or sparking wine this year (we like Schramsberg out of Calistoga, California) and enjoy it often during the season.
THE MARKET
MARKET SENTIMENT
VIX: 12.3; +1.57
VXN: 17.6; +2.01
VXO: 11.58; +1.19
Put/Call Ratio (CBOE): 1.27; +0.21. For the third session out of four the ratio closed over 1.0. That can indicate the speculation on the downside is getting a bit extreme. Last week there was a lot of put selling as the market continued higher, but then as the market started to sell those positions had to be closed and the put sellers were under the gun. Now we see if the ratio remains high as the indices test further. It should slow down as the put sellers finish closing their positions and then pick back up if the selling continues. That would show the options traders, as a whole, are betting hard on the downside. In that case the action would be positive for the upside.
Bulls versus Bears: Bulls have moved above the key 55% but this is not the best timing indicator. It is a warning to watch for distribution, failing leadership and the like.
Bulls: 56.4%. Bullish advisors have finally topped 55%, the level where the yee ha view of the market is overdone and some corrective activity can enter. A sharp jump from 52.1% the week before and closing in on the January peak at just above 60%.
Bears: 22.3%. Sharp drop from 26.0% and flirting with the 20% level considered bearish. Well off the 37.1% hit in July (the highest level in this entire cycle). 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: -54.34 points (-2.21%) to close at 2405.92
Volume: 2.028B (+197.43%). Back over 2B shares and back up to average as NASDAQ turned over and dove lower. Not huge trade and it was expected that volume would rise post-holiday, but it topped the volume of 8 of the last 11 sessions. It was not timid selling, and after the extreme bullish figures seen last week it is serious indication. Don't want to see higher volume selling continue.
Up Volume: 140M (-79M)
Down Volume: 1.861B (+1.418B)
A/D and Hi/Lo: Decliners led 4.21 to 1. Some very massive downside breadth as just about everything was thrown out on Monday. Pretty extreme for one day of selling, and that in itself suggest the selling was a bit overdone even as it got started. We will see.
Previous Session: Decliners led 1.23 to 1
New Highs: 94 (-10)
New Lows: 50 (+26)
The Chart: http://www.investmenthouse.com/cd/^ixic.html
NASDAQ gapped a bit lower, tried to hold near the 10 day EMA (2432) but that didn't work. It tried a higher low just before lunch. That didn't work. It slid lower and lower all session, cracking below the 18 day EMA (2413) on the close though it did hold above the 20 day MA. Volume jumped up to average; definitely some distribution as trade topped all the trade from the past week. A first day of distribution after many positive upside sessions. Could just be working a knee-jerk reaction after a solid advance into the holiday; the few days after Thanksgiving can be softer. Okay, this was not just soft; it was a tail kicking. We will have to see if the tech leaders can hold support and keep NASDAQ from breaking down. It has a trendline off the July low at 2378ish that could hold, but we could also see a test of the 50 day EMA (2346 on NASDAQ) by all the indices before this pullback is over.
SOX (-2.35%) was right in the pack of losers Monday, giving back most of its breakout move from two weeks back though it did hold onto the break higher. Needs to hold near 475 (the 18 day EMA is at 476) to keep the breakout in tact.
SP500/NYSE
Stats: -19.05 points (-1.36%) to close at 1381.9
NYSE Volume: 1.595B (+207.71%). Volume jumped up to average on NYSE as well as the large and small caps were drummed lower. After several solid sessions of price/volume action as the market moved higher distribution returned in a big way. As with NASDAQ we have to see if it was just a knee jerk reaction after the first holiday of the holiday season, but with the strong bullish sentiment this downturn in the nuts and bolts is an important step to watch.
Up Volume: 180.609M (-34.454M)
Down Volume: 1.401B (+1.123B)
A/D and Hi/Lo: Decliners led 4.28 to 1. As with NASDAQ, a real drubbing.
Previous Session: Advancers led 1.2 to 1
New Highs: 175 (-77)
New Lows: 27 (+18)
The Chart: http://investmenthouse.com/cd/^gspc.html
The large caps were thumped. The break higher after the late October, early November volatile range was given back. SP500 had already made 6 to 7 bounces off the 18 day EMA on the run and it is a bit top heavy. Obvious given it returned the breakout and the subsequent crawl higher back in one move. A sharp break lower sending it toward the 50 day EMA (1365).
SP600 (-2.27%) gave back its breakout as well with a serious tumble. Looking at the move off the July low, it tends to have these rather nasty periodic declines that start a pullback and then the selling slows, it holds support and bounces once more. Unlike SP500 and DJ30, SP600 is not as extended. It is still above the trendline off the August low (390) and the 50 day EMA (387). A test to that point gives it a good foundation to resume the move higher, but we have to see the volume slack off as it makes the pullback.
DJ30
DJ30 broke through its trendline from the first test of its June and July double bottom, falling on rising, average volume. As with SP500, it was extended after 6 bounces off the 18 day EMA (12,194). The late October to early November shuffle showed some stress, and the last push higher after that move ran out of steam in a big way Monday. The 50 day EMA (11,978) beckons after this solid run higher. As with the other indices, if that holds that sets up a new point to continue the rally in a more refreshed posture.
Stats: -158.46 points (-1.29%) to close at 12121.71
Volume: 236M shares Monday versus the half-session snooze of 77.6M shares Friday. As with the other indices, however, the trade was higher than the last week of upside.
The chart: http://www.investmenthouse.com/cd/^dji.html
TUESDAY
The economic data starts anew Tuesday with existing home sales, the largest part of the housing market, consumer confidence, and durable goods orders. That starts a flood of data for the week, and the market will be looking for something to key its action off of. It looks more technical for right now, however, and after this rather extended run higher by SP500 and DJ30 a deeper test say toward the 50 day EMA on the indices sets up a year end run much better. As we discussed for the past few weeks, an extended rally will have to come back and test. If the rally is going to hold the indices will bounce off of the 50 day EMA and resume the move. That rejuvenates the move and gives us some good buying points for the next advance.
We see some stocks setting up such a move, but it is likely too early to start moving in; the indices have a lot of downside momentum and are ripe for a test of the steady move higher. We want to wait for the selling to dissipate and pick off the strong stocks that held support as they rebound for a continued move higher. Of course the price/volume action bears watching; we want the indices as well as the leading stocks to throttle back on the volume as the pullback continues; that shows the sellers are not in charge, that the big money is not unloading all of their stock positions taken on this run. Lower volume shows the buyers are just waiting for an opportunity to come back in.
The Monday move was not great but it was also not the end of the rally in itself. We are going to protect positions; many stocks joined the move higher as it extended itself, but not all will be able to hold on. We will close those positions that break down technically and focus on those that hold support and are in good shape to turn back up when the selling dissipates.
It is not likely to do that early Tuesday. After hours PALM warned about its quarter, and did so in a pretty big way (0.11 to 0.12 versus 0.22 originally forecast). PALM won't destroy the tech sector in itself, but there are chips that go into the units (PALM blamed the shortfall on getting the Treo out the door) and if investors are anxious any excuse will do. Indeed, the PALM news will be important as it will take investors' temperature as to how committed to the upside they are. They will either continue selling hard or step in and use the weakness to start buying. Again we don't think the move will be over on Tuesday, but we will continue to keep an eye on those leaders that are holding near support.
Support and Resistance
NASDAQ: Closed at 2405.92
Resistance:
The 18 day EMA at 2414
The 10 day EMA at 2432
2412 from June 1999 low
2477 from January 1999
2493 is an interim peak from February 1999
Support:
2384 is an interim peak from January 1999
2379 is the October high.
2376 is the April high, the former post-2002 high
2368 is the early October handle high.
The 50 day EMA at 2345
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
S&P 500: Closed at 1381.90
Resistance:
The 18 day EMA at 1389
1389 is a low from November 1999
1390 is the October high.
The 10 day EMA at 1393
1401 is a low from April 2000
1410 is an interim high from March 2000
1420 is a July 2000 low
1425 is an interim high from November 1999
1444 from February 2000
1475 from peaks in December 1999 and January 2000
Support:
1378 is a low from May 2000
1371 to 1373 is the December 2000 peak and the January 2001 peak
The 50 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.
1354 from the early October consolidation
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 12,121.71
Resistance:
October high is 12,167
The 18 day EMA at 12,194
The 10 day EMA at 12,237
Support:
11,986 is price support from mid-October and the early November low.
The 50 day EMA at 11,978
11,865 from the early October consolidation
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 28
Durable good orders, October (8:30): -5.0% expected, 8.3% prior
Consumer confidence, November (10:00): 106.0 expected, 105.4 prior
Existing home sales, October, (10:00): 6.14M expected, 6.18M prior
November 29
GDP, Q3 second round (8:30): 1.8% expected, 1.6% prior reading
Chain deflator, Q3 (8:30): 1.8% expected, 1.8% prior
New home sales, November (10:00): 1.05M expected, 1.075M prior
Crude oil inventories (10:30): 5.161M prior
Fed Beige Book (2:00)
November 30
Initial jobless claims (8:30): 316K expected, 321K prior
Personal income, October (8:30): 0.5% expected, 0.5% prior
Personal spending, October (8:30): 0.1% expected, 0.1% prior
Chicago PMI, November (10:00): 54.5 expected, 53.5 prior
December 1
Construction spending, October (10:00): -0.4% expected, -0.3% prior
ISM Index, November (10:00): 52.0 expected, 51.2 prior
End part 1 of 3
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world stock market
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