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us stock market, trade stock
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11/30/06 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Target hit alerts: HOC
Buy alerts: None issued
Trailing stops: None issued
Stop alerts: None issued
SUMMARY:
- Stocks overcome economic obstacles, rally back from early weakness, but still haven't shaken the Monday thumping.
- Chicago PMI slips to contraction as jobless claims surge. Everyone focused on the national ISM.
- NYSE large caps in a challenged position heading into the Friday ISM.
Stocks make a comeback over some negative news but still challenged.
There was a series of so-so economic news that set the futures back basically to flat on the open. The other of the Fed's pet indicators, the PCE, rose more than expected in October (0.2% versus 0.1%) and the year over year number remained at 2.4%, still well outside the Fed's stated comfort range of 1% to 2%. Jobless claims jumped again (357K versus 316K expected), oil continued to rise (63.13, +0.67), retail sales were less than desired, and the Chicago manufacturing region contracted in November for the first time in April 2003.
Hard to get too happy after that and stocks struggled through the morning. They managed a rally into the PMI but faded upon its release. Nonetheless, stocks came back again and worked higher all afternoon, hitting new session highs in the last hour. After that Monday dump lower investors continued to buy into stocks. In the last half hour, however, the bids ended and there was a significant fade into the close. NASDAQ lost 9 points in a short span, taking it and DJ30 negative on the session. The other indices held positive but they too closed off their afternoon highs.
It was not a bad session as once more stocks fought to take back the ground lost on the Monday hard distribution session and continue the rally. Another mostly upside session that overcame bad news, but it was a struggle and by the close the move was less than impressive despite overcoming some bad news. You had a key sector that helped lead the rally higher come under pressure. Retailers reported somewhat disappointing same store sales and were lower. Even those that did well were not necessarily rewarded. TGT, FD, and LTD beat but had little to show for it. COST, JCP, ANF and BEBE missed and were hit. Retail was starting to weaken coming into the report, and the sales did nothing to reverse that new trend. The retail sector is a bit tired, similar to SP500, DJ30 and to a lesser extent NASDAQ. It is going to be a real struggle to continue on unless some new leaders step up to fill retail's shoes while they take a rest and a pullback.
Technically there were some continuing issues as well. Volume was up on NASDAQ and back over 2B, but it really surged on NYSE. At the same time SP500 showed a doji on the candlestick chart as it reached up to the November high and then faded. That indicates the rebound momentum after the Monday distribution session is waning. Same action on DJ30. NASDAQ pretty similar as well. That higher volume when the indices go nowhere is call churning, and when it occurs after a move higher it is not necessarily a good sign as it shows money moving out and money rushing in, but not enough to drive things higher. Kind of like the coyote chasing the roadrunner over the edge of the cliff; the momentum carries him out a ways and then when he realizes what he has done the momentum is over and the plunge to the bottom of the canyon with the small puff of dust is all that lies ahead. When you look at the struggles of SP500 and DJ30 in late October and early November as they were extended, the churning, the inability to blast back through the Monday dump lower, and the retail sector struggling, you have to be on guard that the market may try that deeper test, at least as far as SP500 and DJ30 are concerned.
THE ECONOMY
Chicago PMI posts a quick and sharp two month drop.
At 49.9 the Midwest turned in its first contraction since April 2003 and a sharp two-month drop from a very strong 62.1. An aberration? Perhaps, but volatility in numbers is always something to watch because volatility often marks the change of a trend. New orders (52) and production (54.4) held positive and show some continued demand, but backlogs fell to 45.9 and employment dropped to 49.4. It was good to see prices falling as quickly as the index (60.2, down from 89 in June), but when the region contracts the price drops just don't hold as much weight.
The main culprit was a decline in business investment, and that is exactly what the economy does not need if the consumer is going to slow as many anticipate. Consumer confidence has held to levels that are not threatening, but we know confidence is not the drive. Jobs are, and Thursday jobless claims posted another surprise jump, this time to 357K from 323K (316K expected). The 4-week average jumped to 325K. There are likely due to seasonal adjustments, but it is worth watching as jobs are the key: when consumers feel their jobs are threatened they spend less.
With this number falling significantly for the second straight month, concern rises regarding the ISM. It tends to lag the regions by two months, and that would put the ISM at risk of a lower than expected number as well (52.0 expected). There is a line of thought that if the ISM slips below 50 the Fed won't think of hiking rates. Just about a year ago the ISM flirted with 50 as well, and the question of what the Greenspan Fed would do if it slipped below that level arose. Greenspan would likely have continued on; Bernanke will likely take note. That, however, does not mean rate cuts. As the Fed is already on pause it would certainly solidify the lack of further hikes, but it is a big step from a pause to cuts when the Fed's pet inflation measures are still above its arbitrary comfort zone.
The sad irony is, if the ISM drops below 50 it would likely take a few such readings for the Fed to act given its pet indicators are still at 'uncomfortable' levels. Never mind that leading indicators are heading lower. The Fed gets itself in these self-made boxes that it (and of course us as well) have to live with lest it look impulsive. By the time we get three sub-50 readings the decline is really on the rise so to speak, and it takes extraordinary action to rectify the damage. Thus at the earliest you could get rate cuts late in Q1 and more likely in Q3.
Bonds still inverted, breaking a key level.
We are not saying that the economy is heading into the tank at all, but if these readings persist, they line up with the bond market and its inversion. The inversion between the 2 and 10 year stands at 16 basis points, improving some from the 18 to 19 shown the past few weeks. The other inversion, the one between the Fed Funds rate and the 10 year stands at 79 basis points, a rather amazing differential. Further, the 10 year bond yield fell below 4.50% Thursday, dropping to 4.46%. If that holds rates are going to go lower.
Low rates are not bad for the economy or for stocks. The problem arises with respect to the policies that are promoting inversions, signals that typically tell us that something is amiss. In this case the inversions suggest the economy is not going to be as strong as the Fed thinks (and thus the PMI and ISM figures loom much larger after Thursday) and that even though the Fed paused it may not have done enough fast enough. Let's see where the national ISM comes in, but if it is a weak one, bond yields are going to head south faster now that 4.50% is broken.
THE MARKET
MARKET SENTIMENT
VIX: 10.91; +0.08
VXN: 16.53; -0.25
VXO: 10.36; +0.13
Put/Call Ratio (CBOE): 0.77; +0.1
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: -0.46 points (-0.02%) to close at 2431.77
Volume: 2.168B (+9.89%). Volume moved past 2B shares for the first time since mid-November when NASDAQ surged higher. That last move on volume was a good one. This one was not nearly as positive. Even if NASDAQ managed to hold onto a modest gain at the close (it didn't) it would be hard to call the session accumulation. It was a churn after a rebound from the Monday selling. That is not a good indication for a continued move higher.
Up Volume: 1.191B (-179M)
Down Volume: 955M (+410M)
A/D and Hi/Lo: Advancers led 1.14 to 1. Reflected the late fade to flat.
Previous Session: Advancers led 2.17 to 1
New Highs: 146 (-5)
New Lows: 38 (-6)
The Chart: http://www.investmenthouse.com/cd/^ixic.html
NASDAQ put in a third session of gains after the Monday dump lower, at least until the last half hour when it gave a modest move back with a 9 point decline in short order. It managed to tap the 18 day EMA (2417) on the low and recover to close right at the 10 day EMA (2430); not bad action but not definitive. After a rebound attempt the higher volume and doji shows some churn. NASDAQ is not in bad shape, particularly when compared to SP500 and DJ30, but if those two go down, NASDAQ is likely to do the same as we saw earlier in this rally. If it does we can look for another hold of the July trendline near 2398 or even the 50 day EMA (2355).
SOX (+0.55%) in contrast showed solid action, holding the 18 day EMA again after reaching below that level on the close, continuing its 3 day lateral move as it attempts to regroup and continues its breakout. Not nearly extended, just looking for another reason to continue the break higher.
SP500/NYSE
Stats: +1.15 points (+0.08%) to close at 1400.63
NYSE Volume: 1.97B (+22.8%). Big surge in volume, the largest in over 2 months as SP500 tapped at the prior November high and faded to a doji. Very much a churning session, and the proximity to resistance and the inability to take it out suggests some unloading of shares and that SP500 could again struggle as it did at the end of October. It held the July up trendline at 1377 earlier in the week, but the 50 day EMA is not much farther (1369).
Up Volume: 1.218B (-92.084M)
Down Volume: 716.664M (+432.867M)
A/D and Hi/Lo: Advancers led 1.79 to 1. Decent breadth but nothing spectacular.
Previous Session: Advancers led 3.9 to 1
New Highs: 373 (+84). Nice rise in new highs as the energy sector again performed decently though its gains Thursday were small compared to Wednesday.
New Lows: 19 (+2)
The Chart: http://investmenthouse.com/cd/^gspc.html
SP500 rallied to the November high hit last week but once it got there it beat a hasty retreat. Though it posted a gain on rising volume for the session it was not accumulation but rather the churn we have already discussed. SP500 is extended and it recovered once from some issues with a good bounce the second week of November. It has some more issues already with the Monday dump lower. Key point for this index, but it is worth noting that the 50 day EMA (1368) is not all that far below.
The small cap SP600 (+0.28%) posted another gain though it too closed off its intraday high that tapped at the prior November highs before heading lower to close. Not nearly as extended as the large cap NYSE indices but if they go lower the small caps are likely to test near the August trendline gain near 392.
DJ30
Very similar to SP500, the blue chip index showed a doji on the session following a 2-day rebound from the Monday drubbing. It did not come close to the prior November high, however; not a lot of strength on the day even when it was moving higher. Volume jumped well above average, and coupled with the flat price trade that is indicative of churning, the high volume turnover that shows a lot of sellers and not enough buyers to push the stock higher. Remember the coyote. A test to the 50 day EMA near 12,000 is not an insane notion.
Stats: -4.8 points (-0.04%) to close at 12221.93
Volume: 295M shares Thursday versus a below average 219M shares Wednesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
FRIDAY
The big cheese Friday is the ISM report, particularly after the Chi-town report, one considered a national harbinger, was below 50 and down sharply for the second consecutive month. A result below 50 rattles stock investors already fearing an economic slowdown and sends bonds jumping and rates tanking. That puts tremendous pressure on the Fed, but again, the Fed's rhetoric has left it in a box that will take some time to crawl out of, particularly since it no longer uses box cutters.
A weak ISM, i.e. one below 50, likely sends the indices along into that deeper test that may find support at the near term trendline or for DJ30 and SP500 more likely the 50 day EMA. There are areas of leadership, and if they can hold their ground during any additional pullback, that only shows their mettle and we will look to buy them once the pullback runs its course and they indicate they are ready to move higher.
If we have positions that are not holding their support we will have to protect our downside, particularly with options we hold. Many of our stock positions can come back modestly and still be in great shape to resume their moves once the pullback is over. With options you have time and volatility considerations, and thus, particularly with nearer term expirations such as January, you don't want to ride them lower.
If there is a pullback on a weak ISM number, we are not anticipating a major decline but one that seeks the next key support. In this run the 10 and 18 day EMA have acted as support. After the runs SP500 and DJ30 have put in the books, a test to the 50 day EMA is typical, and that sets the stage for a continued move higher to the end of the year and into the first of 2007.
Support and Resistance
NASDAQ: Closed at 2431.77
Resistance:
The 10 day EMA at 2430 is not dead yet
2468.42 is the November 2006 high
2477 from January 1999
2493 is an interim peak from February 1999
Support:
The 18 day EMA at 2417 held again Thursday
2412 from June 1999 low
2395 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 2355
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 1400.63
Resistance:
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:
The 10 day EMA at 1395
The 18 day EMA at 1391
1390 is the October high.
1389 is a low from November 1999
1378 is a low from May 2000
1377 is the July up trendline.
1371 to 1373 is the December 2000 peak and the January 2001 peak
The 50 day EMA at 1368
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 12,221.93
Resistance:
The 10 day EMA at 12,220
12,361 is the November 2006 high
Support:
The 18 day EMA at 12,195
October high is 12,167
The 50 day EMA at 12,003
11,986 is price support from mid-October and the early November low.
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): 2.2% actual versus 1.8% expected, 1.6% prior reading
Chain deflator, Q3 (8:30): 1.8% actual versus 1.8% expected, 1.8% prior
New home sales, November (10:00): 1.004M actual versus 1.05M expected, 1.075M prior
Crude oil inventories (10:30): -360K versus +5.161M prior
Fed Beige Book (2:00): All regions reported modest growth except Dallas that noted some slowing.
November 30
Initial jobless claims (8:30): 357K actual versus 316K expected, 323K prior (revised from 321K)
Personal income, October (8:30): 0.4% actual versus 0.5% expected, 0.5% prior
Personal spending, October (8:30): 0.2% actual versus 0.1% expected, 0.1% prior
Chicago PMI, November (10:00): 49.9 actual versus 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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