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trading system, money investment
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12/07/06 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Target hit alerts: None issued
Buy alerts: BRCM; LVLT; NTGR; SVVS
Trailing stops: AAPL; NYX
Stop alerts: AXTI
SUMMARY:
- Sellers start to emerge ahead of jobs report.
- China not helping its cause by lecturing the US on its deficits.
- Jobs are important, but NASDAQ to face more pressure Friday as chip sector gives the first warning of the season.
Stocks fade back toward near support but NASDAQ volume starts to rise.
A lower jobless claims report (324K, -34K) and a stronger Monster jobs report helped buck up futures and set the stage for a higher open. Stocks started higher but the early rise was used for selling, particularly on NASDAQ. Stocks managed a midmorning to lunch rebound, but after lunch the trend lower resumed. Oil swung from lower to modestly higher ($62.49, +0.30), and as it moved higher in the afternoon, stocks weakened further.
The close saw the indices sitting on session lows but there was no real breakdown in the indices. NASDAQ fell through the 10 day EMA on stronger, above average volume, but it closed holding the 18 day EMA. SP500 and SP600 both held their ground above the 10 day EMA on lower volume, hardly a surge in selling. It was a split market with the growth tech stocks once more showing weakness. Recall they lagged Tuesday as the NYSE indices rallied; definitely some cracks in tech, and if NASDAQ falls after its lower high this week then the other indices will be under pressure as well. One of the reasons SP500 has continued higher is because NASDAQ joined the breakout crowd in October. That kept things rolling even though extended, and if NASDAQ goes it will take quite a bit of wind from the sails with it.
Technically the market leaned toward weakness for the session. While NASDAQ was the only index that showed distribution, the other indices could add nothing positive. If sellers move into the growth areas that means they view economic prospects as a bit darker. NASDAQ made a lower high the past week while showing some churning (money moving out as fast as it comes in) and now some distribution. It looks ready to head for a lower test even before the overextended SP500 and DJ30 though it managed to hold the 18 day EMA on the close. DJ30 is trying to set up a double top, another weaker technical position.
Again, if NASDAQ goes under on stronger trade it will likely pull the large cap NYSE indices as well given they are already extended and given DJ30's emerging double top. As of the Thursday close, however, there were no breakdowns in the trends and the indices on whole still looked decent. Leadership started to struggle in certain areas again, however, as electronics, electronics retailers, and some semiconductors started lower. Most stocks are still holding onto support, but volatility has increased over the past month, the indices are extended, distribution is cropping up, leadership is turning spotty, and bullishness is high. The odds favor a break lower, but of course the indices have yet to break their trends and have had an uncanny knack of pulling out gains just when they look ready to given in.
THE ECONOMY
China ready to shoot itself in the foot, chastises US on its deficits. Or is the US complicit?
It happens about every fifteen years or so when the US is having issues at home and abroad. Other countries feel that the US is past its prime and they test the waters, trying to show how strong they are and how weak the US has become. Right now with the arguments in the government over Iraq and Bush's unpopularity other countries are pushing the boundaries. North Korea's pajama modeling dictator issues a weekly rant at the US, claiming we are about to invade. As if we would want to invade North Korea; we could have done it in the fifties if we wanted to do it. Iran blows hard about its nuclear ambitions, believing the US is in no position to respond. They are emboldened by the Baker commission on Iraq and its suggestion to basically surrender to Iran's and Syria's will in the region. I don't know about you, but hearing Baker's whining again about the Middle East is like a bad dream. He blames Israel for all of the Middle East woes, preferring to reward our enemies' bad behavior while stiffing our allies. We heard enough of that defeatist attitude that wrecked the Bush I presidency. Now the son has brought him back in to wreck the last of his presidency. Like father, like son, only there is more at stake here then legacies.
Thursday China was lecturing the US about its budget deficits and its current account deficits, suggesting that if they continue the dollar could experience fluctuations in value. China has already talked about diversifying out of dollars, and Iran is already pricing oil in Euros. China figures it can exert some pressure on the US to back off form some of the threatened sanctions if China does not work faster toward a float of the yuan. It is also likely that China feels the US is vulnerable with some slowing economic activity, the weakening of the Bush presidency, and the issues confronting the US overseas.
Problem is that this kind of talk only fuels the fire under Senators Graham and Schummer who already want to slap 22.5% tariffs on Chinese goods. China lecturing the US about our trade deficits (the current account gap) is ludicrous as one of the reasons for the current account deficit is the less than level playing field with respect to currencies. Unfortunately, China is grossly underestimating how easy it would be for the anti-China fervor to take root if US citizens perceive China is trying to take advantage of the situation. Of course those tariffs would hurt us as much as China, but when the blood gets going those realities are brushed aside.
The bigger picture here is the international perception of weakness in the US, an opportunity that many would like to exploit. Typically this is a mistake. The US system is the best in the world. We have phases where other economies shoot ahead; in the 1970's and early 1980's the US was deemed a has been, an interesting experiment that failed. We learned during that time that too much regulation brought us back toward a socialist system and our growth rates (or lack thereof) reacted accordingly. Only when we got back on track to the free market ideals that made us a powerhouse did we recover from that malaise and lead the world again.
Right now we are in a war that has stretched our military resources. Other economies are enjoying growth spurts as they emerge from economic backwaters and are able to take on new tasks in technology. Many are reading this as the decline of the western economies, especially the US. That is likely far from the truth. The trade deficit is not going to make the US less of a technological innovator. Some budget deficits that are less than historic norms as measured by GDP are not going to do it.
Let's face it, you have to look at deficits in relative terms. You cannot compare the actual dollar amounts of the deficit for the 2006 economy to the deficit in the economy 30 years ago. The economy today is so much larger the deficit could be larger and still be the same percentage. If you make $500K a year now you can afford a larger house than when you made $250K a year. You are no less fiscally responsible if your house payment makes up 20% of your income even though in actual dollars it is more.
China is playing on perception, trying to get the world on its side. The big battles ahead are economic, and perceptions play a key. If China can erode some economic strength from the US by carping about relatively meaningless deficit amounts when viewed against our 200+ year economic history, it will do it. Of course, with the James Baker crowd (of which the new Treasury Secretary Paulson can be considered one) back in D.C., the Bush II presidency could be employing the same foolish gambit it did back in Bush I, i.e. wanting a weaker dollar to supposedly benefit big US corporations. Baker and his predecessors from the same school really helped mess things up with this notion. Who knows? China could be speaking out as part of a plan, a deal between us and them where they help push the dollar lower so China does not have to do so much to raise the value of the yuan. We typically hate conspiracy theories, but with Baker pushing the same bad policies re the Middle East he espoused under Bush I, it is not a far leap to conclude his dollar ideas are filtering back in as well. By the way, if Baker and company had not convinced Bush I from going into Baghdad, we would not be in the mess we are today. Now is that a track record we want to hitch our future in the Middle East and in the currency market to?
THE MARKET
MARKET SENTIMENT
VIX: 12.67; +1.34
VXN: 17.93; +1.47
VXO: 11.96; +1.21
Put/Call Ratio (CBOE): 0.87; +0.02
Bulls versus Bears: Bulls moved further above the key 55%, but bears rose over a point and one-half as skeptics are growing along with the bulls. Somewhat of an offset to the rise in bulls, but not a complete offset. Still a warning to watch for distribution, failing leadership and the like.
Bulls: 59.8%. Another solid jump, up from 58.5% and 56.4% the week before. Third 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: 23.9%. Up from 22.3%, bouncing after getting as close to 20% as it has on this entire run. Held steady at 22.3% for 2 weeks then started this rebound attempt. 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: -18.17 points (-0.4%) to close at 2427.69
Volume: 2.082B (+8.37%). Volume jumped to the highest in a month as NASDAQ sold down to the 18 day EMA. After the churn to end November and on Tuesday, the volume is wearing on the index.
Up Volume: 700.493M (-96.699M)
Down Volume: 1.363B (+289.331M)
A/D and Hi/Lo: Decliners led 1.6 to 1. Picking up but still under control, at least nothing out of hand.
Previous Session: Decliners led 1.17 to 1
New Highs: 101 (-26)
New Lows: 17 (-1)
The Chart: http://www.investmenthouse.com/cd/^ixic.html
NASDAQ looks to have made a lower high below the November peak (2469), turning sharply lower Thursday as volume moved through average and to its highest level in a month. Definite distribution and NASDAQ closed down at the 18 day EMA (2426). That still keeps it within its July uptrend (2420), but the distribution and churn over the past three weeks and the lower high are not good technical indications it is going to extend the rally hear term.
SOX (-1.69%) turned back down after tapping the November high intraday Thursday, falling through the 10 day EMA and closing just over the 18 day EMA (470) similar to NASDAQ. The chips started well but definitely struggled, and after hours XLNX warned and the chips were heading even lower on that news. Friday is going to at least start out as a struggle for the chips. It is not helping them that NASDAQ sold off on rising trade Thursday.
SP500/NYSE
Stats: -5.61 points (-0.4%) to close at 1407.29
NYSE Volume: 1.448B (-5.55%). Volume backed off Thursday as SP500 faded back. No distribution here as the NYSE indices test back, still holding above near support. Good counterbalance to NASDAQ for now. We will see if it can hold if NASDAQ continues to distribute.
Up Volume: 526.741M (-156.436M)
Down Volume: 899.553M (+64.958M)
A/D and Hi/Lo: Decliners led 1.45 to 1. Very modest.
Previous Session: Decliners led 1.23 to 1
New Highs: 186 (-107)
New Lows: 5 (+1)
The Chart: http://investmenthouse.com/cd/^gspc.html
SP500 stretched to a new post-2002 high intraday and then rolled over and closed negative. It was still easily above the 10 day EMA (1404) and on lower, below average volume. After a bounce higher this is typical action in an uptrend. We just have to see if the large caps are not infected by any further NASDAQ weakness.
The small cap SP600 (-0.48%) turned back as well, consolidating some on low volume after a good surge higher to a new all-time high. It is also easily above the 10 day EMA (402.29) not to mention the 18 day EMA and the up trendline near 393.
DJ30
The blue chips reached out and touched the November high (12,361 intraday) but could not hold the move. The index slid back to the 10 day EMA (12,262) to close, falling on lower volume. No distribution so we were not in a hurry to short it today, but there is a nascent double top that could turn into something if the higher volume selling on NASDAQ gets contagious. Thus far DJ30 has shaken off each period of weakness. It is going to have a chance to do it again. For now it is still in the uptrend but once again it looks ready to test the limits of that uptrend.
Stats: -30.84 points (-0.74%) to close at 12278.41
Volume: 212M shares Thursday versus 220M shares Wednesday. Low volume on this second high in the short double top. Thus far it is not accelerating on the downside, and that is good for the uptrend. Again, if the NASDAQ selling gets contagious it could face some issues.
The chart: http://www.investmenthouse.com/cd/^dji.html
FRIDAY
The jobs report is the headliner for Friday, and indeed Wednesday and Thursday were likely just a lull in the action until the report hits. Although it is a lagging indicator and its impact on the economic outlook has waned since it became more or less an accepted fact the economy was stronger once more, jobs are very personal to all Americans, and we like to see healthy numbers each month. That is reassuring to workers in regard to their job safety, and a reassured worker is a confident consumer. History shows that concern over future employment prospects is the number one driver of consumer consumption. Fear of a pink slip means significantly lower spending. Many available job opportunities means the spending gates are open.
The Monster.com jobs report and the ADP forecast earlier in the week both suggest something higher than the 105K expected. On the other hand we heard commentators suggesting that the market malaise the past two sessions was due to a fear that jobs would tumble below 100K and cast doubt upon the soft landing theory being trotted about the past couple of months.
Perhaps the jobs report can rescue the NASDAQ and thus the rest of the market that is susceptible if NASDAQ heads into a deeper pullback. Technically the NYSE large caps remain extended and more volatile and NASDAQ is selling and churning on higher trade. Thus far the market has not been concerned about the technical aspects, simply finding new money to push it higher toward the new year. That new money to start December has run dry and now the indices are fighting to hold the gains they just made. There may be some more upside here heading into the end of the year, but the action is getting bumpier.
Most positions continued to hold support, and as long as the do that we are comfortable with them. We unloaded some laggards on the last bounce and took some gain as well. With NASDAQ showing some distribution, DJ30 struggling at the November high, and the indices still extended, we expect a deeper correction is not too far into the future. The price/volume action on NASDAQ the past two weeks suggest it may be getting close, particularly as the indices rallied in September and October. This market has done a great job of shaking off each selling attempt, however, so we could still get a bounce on into the new year. The risk/reward ratio is getting a bit thin, and we have some good profit built into positions. We will continue to take gain if the market continues to show some distribution, particularly if it starts to spread.
Friday NASDAQ will indeed be under more pressure as XLNX warned after hours, sending semiconductors even lower than they were at the close. The chips were down Thursday and that contributed to the NASDAQ weakness. They will not help NASDAQ Friday, and we will have to see just how much pressure it places on the rest of the market.
Support and Resistance
NASDAQ: Closed at 2427.69
Resistance:
The 10 day EMA at 2435
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 2426
2420 is the July up trendline
2412 from June 1999 low
2384 is an interim peak from January 1999
2379 is the October high.
2376 is the April high, the former post-2002 high
The 50 day EMA at 2370
2368 is the early October handle high.
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 1407.29
Resistance:
1408 is the November high
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:
1401 is a low from April 2000
The 10 day EMA at 1404
The 18 day EMA at 1398
1390 is the October high.
1389 is a low from November 1999
1383 is the July up trendline.
1378 is a low from May 2000
The 50 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.
Dow: Closed at 12,264.41
Resistance:
12,361 is the November 2006 high
Support:
The 10 day EMA at 12,262
The 18 day EMA at 12,233
October high is 12,167
The 50 day EMA at 12,053
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.
December 5
Productivity, Q3 revision (8:30): 0.2% actual versus 0.5% expected, 0.0% prior
Factory orders, October (10:00): -4.7% actual versus -4.0% expected, 1.7% prior (revised from 2.1%)
ISM Services, November (10:00): 58.9 actual versus 55.5 expected, 57.1 prior
December 6
Crude oil inventories (10:30): -1M versus -360K prior
December 7
Initial jobless claims (8:30): 324K actual versus 325K expected, 358K prior
Consumer credit, October (2:00): -1.2B actual versus $4.5B expected, $4.0B prior (revised from -$1.2B). With this much variance, why even bother putting out the results so early?
December 8
Non-farm payrolls, November (8:30): 105K expected, 92K prior
Unemployment rate (8:30): 4.5% expected, 4.4% prior
Hourly earnings (8:30): 0.3% expected, 0.4% prior
Average workweek (8:30): 33.9 expected, 33.9 prior
Michigan sentiment, Dec. preliminary (9:45): 92.0 expected, 92.1 prior
End part 1 of 3
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trading system
money investment
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