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trend trading stock, swing trading stock
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11/28/06 Investment House Daily
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Target hit alerts: None issued
Buy alerts: IAAC; HET
Trailing stop alerts: JCP; LTD; SPIL
Stop alerts: BEAV
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SUMMARY:
- Market continues the selling but holds the line and manages a modest close higher.
- Durable goods orders fall from the skies as airline orders drop.
- Existing home sales managed first gain in 10 months.
- Good to see the rebound, but leadership has to, well, take the lead.
Stocks come back from a weaker open as leaders hold the line.
The downside momentum from the Monday selling continued early as PALM's lowered forecast hurt the wireless makers and component providers. The economic news did not help either as durables fell back to earth after surging in September. Consumer confidence was lower than expected though still strong, oil was up again (60.99, +0.67), and Bernanke was still on the 'inflation watch' kick. Early on that won out over the first rise in existing home sales since July (a 0.5% gain).
Stocks sold early once more, and the selling was again across the board. Unlike Monday, however, stocks found a bottom and rallied in the afternoon, closing at session highs. Nice return to the positive intraday action after a one-day upset. We have seen this before during this rally, i.e. a one-day hiccup and then a resumption of the move. Hard to make that call here given the magnitude of the Monday decline, but there were some important points technically.
Namely, NASDAQ and SP500 both tapped their July up trendlines on the low and that helped set off the afternoon rebound. Volume was basically flat, breadth was solid on NYSE (1.8:1) and flat on NASDAQ; the nuts and bolts did not show any major change, but the ability to turn positive was a plus. In addition there was leadership that tested lower and rebounded to hold support or moved further to post a gain. Leaders by definition are always the first to make the move, and after this shakeout and recovery, many are poised to continue higher. Not out of the woods and they could still fade again to test the 50 day EMA, but we like the way so many leaders turned back up and are poised to continue higher. We let many of our plays make the test and now we will be watching for the recovery and new buy points as they rebound.
THE ECONOMY
Follow the bouncing ball: durable goods orders bounce down 8.3% in October.
In September durables soared on a 200% increase in airplane orders. Plane sales crashed in October, falling 44.5%. Thus an 8.7% gain turned to an 8.3% loss (-5.0% expected). That was the largest decline since July 2000. Take out planes, trains, and automobiles and the loss was a more palatable -1.7%. Computer orders swung from +0.9% to -26%. Communications fell 17% versus -0.7% in October. Business investment (non-defense capital goods ex-aircraft) fell hard from +3.2% to -5.1%.
Everyone is quick to note how volatile this number is and thus they discount any sharp change. Looking back over the past year you see its volatility: down 8%, up 8%, flat, down 3%, up 3%, up 0.2%, down 5%, up 6%, up 3.5%, down 7%, up 1%, etc. Volatile yes, but wildly volatile is not good no matter what you are looking at. The range was narrowing some until October and November showed wildly varying results. Typically when a trend becomes more volatile there is some potential change ahead. As noted, things were quieter ahead of the last two months, so you don't want to read too much into the big swings of late, but if we get another month of a monster swing in durables that is an indication that the overall positive trend is downshifting and indicating some slower buying levels ahead.
Existing home sales bump higher by 0.5%, spurring talk of a bottom.
6.24M units versus 6.14M expected and 6.21M prior (revised from 6.18M). That modest bounce was enough to start a chorus of 'bottom' calls on the financial stations. Of course, just as many are still looking for further slowing in sales on through the summer of 2007. If it is a bottom, it is likely to be a long ride in the trough.
Despite the rise, the indicia still suggest more weakness to come. It was the first rise in sales since February, but prices are just now starting to come down. Median prices fell 3.5% year/year and posted their third consecutive month of declines. Prices are the last to go, and when they finally give in that is the start of the end of the decline. Again, maybe the bottom is close, but nothing suggests a rebound off that bottom near term. Inventories held roughly steady at a 7.4 month surprise. Yet another indication that the sharp slide lower this year is slowing and trying to pull into a flatter trajectory.
Those inventory levels, however, indicate there is still 8 to 10 months of soft sales before the market can realistically contemplate a rebound. That is a pretty generous call in itself. The housing market rallied through the last recession and then really exploded over the past three years. After this kind of run it takes almost an equal amount of time to work out the excess. We reported the housing market peaked in early summer 2005. Summer 2007 gives it two years, still far short of the length of the rally. Thus if this is the bottom, the trough could be rather lengthy.
The housing stocks are already finding the bottom of their in their 15 month decline, preparing to move higher in their bases. As we know, stock prices look down the road at least 6 months and usually 9 to 12 months. With that in mind, the bottom ending in late summer 2007 appears just about right.
Bernanke continues to publicly worry about inflation.
The Fed chairman gave his first public speech in two months and he didn't do much to part from the company line: inflation still remains the greatest threat, housing likely to bottom soon, economy to grow moderately in 2007. As with all of the Feds the past 30 years or more they tend to see things through rose colored glasses until the muck rises so far the glasses become caked with it.
We still see Bernanke as more of a Milton Friedman Fed chairman given he slowed money supply growth as soon as he took over in an effort to curb inflation pressures. Greenspan grew money supply at a 6% rate through the end of the year but Bernanke cut that back to 0.2% when he took over. That tells you he knows inflation is a product of money supply vis- -vis economic activity. You have to curtail money supply to curtail inflation pressures and Bernanke did this. His most closely allied Fed president, Poole, says that the Fed should follow markets; Bernanke himself has noted this. Thus even though he is still talking the inflation pressures line he is watching other indicators. The clearest example is the decision to pause even as the Fed's pet inflation gauges (CPI, PCE) continued their rise. They are lagging indicators, and Bernanke acknowledged this in pausing as they moved higher. He is looking at forward-looking indicators in making his policy, but he is also caught up in the Greenspan hangover when he said (he had to) that he was going to continue Greenspan's policies.
Thus for now he is in the position of the fellow in the song 'Junk Food Junkie': toeing the health food line in public but then sneaking some Fritos corn chips, Dr. Pepper, and an old Moon Pie when back in the privacy of the Federal Reserve halls. The bond market is back to pricing in a rate cut given the data and despite the Fed's public statements, but a cut is not priced in until the March meeting. The inversion remains at 18 BP (4.68% versus 4.50%) and the 10 year is a good 75BP below the Fed Funds rate. Not a lot of confidence in the bond market regarding the Fed and if Bernanke is watching he will have to do something about rates before too long. Thus far, however, there is no attempt to even change the public perception as to the Fed's intentions, and that is likely going to have to occur before there is any chance of cutting rates. That or a major collapse in the economic data. Then we would all be pulling out the Pringles potato chips and the Ding-Dongs.
THE MARKET
MARKET SENTIMENT
VIX: 11.62; -0.68
VXN: 17.33; -0.27
VXO: 10.88; -0.7
Put/Call Ratio (CBOE): 0.93; -0.34. Still a high level as the put players remain active.
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: 58.5%. Bulls are jumping even more, posting another big gain from the already high 56.4% last week. Second week the bullish advisors topped 55%, the level where the market is viewed as overdone and some corrective activity can enter. It started to do just that Friday and Monday. A sharp jump from 52.1% the week before and closing in on the January peak at just above 60%.
Bears: Held steady at 22.3%, hovering just above the 20% level considered bearish. 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: +6.69 points (+0.28%) to close at 2412.61
Volume: 2.031B (+0.13%). Volume remained elevated and average as the techs tapped the trendline and rebounded for a positive close. No huge surge, but good to see the volume remain solid as NASDAQ tested and bounced positive.
Up Volume: 1.009B (+869.133M)
Down Volume: 967.111M (-893.889M)
A/D and Hi/Lo: Advancers led 1.09 to 1. Not great but given the -4:1 Monday (a level that is getting close to extreme), not bad at all for a reversal session off another early decline.
Previous Session: Decliners led 4.21 to 1
New Highs: 71 (-23)
New Lows: 56 (+6)
The Chart: http://www.investmenthouse.com/cd/^ixic.html
NASDAQ opened lower once more, gapping down as the Monday selling continued as PALM hurt the wireless sector and that initially cast a pall over all techs. The index continued to sell after the gap lower, testing to 2390 on the low, the upside trendline off the July low. That was enough to stop the selling for Tuesday, and NASDAQ rebounded to close just off the session high at the 18 day EMA. The rebound was not as intense as the Monday selling, but it was a good shakeout lower and recovery off its trendline. A good start, particularly with some tech leaders doing the same.
SOX (+0.13%) was quite under control considering the other indices. It tested below 475 and the 18 day EMA (476.01), holding support and then posting a positive gain as it held above the September and October highs that it broke over with its breakout move two weeks back. Good hold and recovery. Now we want to see some leadership with a strong move up off of this support level.
SP500/NYSE
Stats: +4.82 points (+0.35%) to close at 1386.72
NYSE Volume: 1.58B (-0.95%). Volume slipped a bit but was basically flat when compared to the Monday selling. A test lower to its trendline and then a rebound positive on solid volume.
Up Volume: 981.061M (+800.452M)
Down Volume: 596.171M (-805.082M)
A/D and Hi/Lo: Advancers led 1.84 to 1. Better upside breadth as the large and small caps rallied together. As with NASDAQ, the Monday breadth was bordering on extreme.
Previous Session: Decliners led 4.28 to 1
New Highs: 139 (-36)
New Lows: 24 (-3)
The Chart: http://investmenthouse.com/cd/^gspc.html
The large caps tested lower as well, continuing the Monday thumping. As with NASDAQ, the SP500 hit its July up trendline on the low (1378) and then rebounded to close positive on another session of average trade. Good response to the selling, holding the first major support and bouncing with some good breadth. Not out of the woods yet and similar to the end of October that saw a dump lower, a pause, another fade, and then a recovery. Hard to call this the bottom of the selling so suddenly, particularly with SP500 still overextended and typically needing a deeper test before it can reload and continue its run up the 10 and 18 day EMA. This market, however, has made many quick recoveries, and if leadership turns back up with some more volume we cannot ignore that.
SP600 (+0.24%) also tested lower, tapping at its August trendline on the low and then rebounding to close positive, maintaining its trend after the in August and then again a couple of weeks back. It fell like a stone from the May high (406) Monday, but managed to hold some key support thus far.
DJ30
The blue chips sold further as well and managed to recovery but that was not enough to take it back over its July up trendline. Volume was lower on the rebound attempt versus the dump lower on Monday; not a lot of strength on this rebound attempt. The pattern has a very toppy look to it, about two-thirds of the way through a head and shoulders pattern. Of course, a head and shoulders is not head and shoulders until it is completely formed and breaks down. Recall we have seen many set up during the rally just to see stocks shake off the top and continue on. DJ30 is extended on this run, however, and a test to the 50 day EMA (11,985) would not hurt it.
Stats: +14.74 points (+0.12%) to close at 12136.45
Volume: 222M shares Tuesday versus 236M shares Monday.
The chart: http://www.investmenthouse.com/cd/^dji.html
WEDNESDAY
A lot more economic data hits tomorrow with the GDP second iteration, new home sales, crude oil inventories, and the Fed Beige Book. CHS, a former retail leader but currently in a 10 month correction, reported a drop in profit, but it did meet street expectations. After a dip post close it 'jumped' about 35 cents after hours. Not likely to spark a big rally Wednesday.
It is a key session once again, the first rubber match for the week after a hard sell off Monday and a reversal Tuesday. SOX is set up well to rebound and NASDAQ along with SP500 did hold their near term trendlines on the session though the latter two are hardly in a great position to mount a strong surge higher.
The action will be determined by how the leaders respond. Stocks such as AMAG, BIDU, NYX, ISE, QLGC, IAAC, IIG and others have tested strong moves and are in position to continue higher once more. We might think it is a bit early to mount a good and sustained recovery once again, but the market will be the final judge of that. With these solid stocks in position to rebound after running higher ahead of the market and then testing the past week or so, they could be off and running ahead of the overall market yet again.
Support and Resistance
NASDAQ: Closed at 2412.61
Resistance:
The 18 day EMA at 2414
The 10 day EMA at 2429
2412 from June 1999 low
2477 from January 1999
2493 is an interim peak from February 1999
Support:
2390 is the July up trendline
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 2348
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 1386.72
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
1376 is the July up trendline.
1371 to 1373 is the December 2000 peak and the January 2001 peak
The 50 day EMA at 1366
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 12,136.45
Resistance:
October high is 12,167
The 18 day EMA at 12,188
The 10 day EMA at 12,218
Support:
11,986 is price support from mid-October and the early November low.
The 50 day EMA at 11,984
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): -8.3% actual versus -5.0% expected, 8.7% prior
Consumer confidence, November (10:00): 102.9 actual versus 106.0 expected, 105.4 prior
Existing home sales, October, (10:00): 6.24M actual versus 6.14M expected, 6.21M prior (revised from 6.18M).
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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