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us stock market, trend trading stock
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12/11/06 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Target hit alerts: None issued
Buy alerts: CTRP; LIFC; MA
Trailing stops: SAY; SMSC
Stop alerts: ININ; SMSC
SUMMARY:
- Market indecisive ahead of FOMC, but when in doubt, move with the trend
- Fed set to hold the course, harp on inflation.
- NASDAQ still trying to find the ingredients to move higher after refusing to give up gains.
- Tax considerations may let the rally continue to year end.
Stocks mostly drift higher in the absence of any major catalyst.
Monday morning saw the usual plethora of news events we have come to expect of late. M&A activity again dominated the headlines, typically a lagging indicator as companies tend to buy when things look so good that they will never slow down. Of course that is usually exactly when things start to slow, but let's not be too critical; the merger news keeps the financial station journalism graduates excited. In addition, Asia was up nicely, the dollar rebounded in a relief move against the euro (after a drubbing the past few weeks), and toy and electronics weekend sales were solid. On the other hand Saudi Arabia said it was cutting supplies to some customers 8% to 9% (though oil finished the day lower at 61.22, -0.81) and the Tuesday FOMC meeting was just a day away.
The negatives appeared to weigh on the market at the open, but within the hour stocks reversed and squirted higher once more. No new ground was plowed, however, and after that early recovery move stocks spent the session whittling back gains. By the close only the large cap indices held positive. The moves were so modest that nothing changed with respect to the index patterns, leaving NASDAQ and DJ30 working just below the November highs while SP600 makes a sweet pullback to the 10 day EMA as it tests the break to a new all-time closing high.
So, is the glass half full or half empty? On the one hand you have a strong move that is holding up even as some churn and distribution crop up, riding out the increased volatility with a lateral move. A lateral consolidation is not bad at all; except for the long runs to get to this point you could get pretty jazzed up about another break higher to come. Given the time of year and the propensity to rise with the trend during that time, another move higher is not that crazy an idea.
What is crazy is expecting it to happen and then not have any kind of reckoning after the fact. The market is indeed refusing to give up gains but it is also unable to advance past the November highs even with some good economic data last week that should 1) cause the Fed to take even a bit more pause whether it admits it or not (e.g. the ISM), and 2) still showed solid economic gains indicating more growth could be ahead (ISM services, ECRI). After 230 points on NASDAQ and 190 points on SP500 off the July low there is going to be a deeper test. As we have noted before, that does not mean an end to the really, just a regrouping to consolidate for another advance. It also means the risk versus reward is higher now overall, though there are always stocks that more or less ignore what the market is doing. Overall, however, three-quarters of the stocks follow the market, so if the indices start to sell, most stocks go with it. Thus the less than ideal risk/reward position right now.
Technically the action was not bad nor was it really good. Investors faced a bit of indecision with the FOMC meeting ahead and when that happens the existing trend tends to hold. Overall it did just that on Monday with some positive low to high intraday action. Volume was a fraction higher on NASDAQ and lower on NYSE. Breadth was middle of the road to flat. The market basically held its position, working laterally as it refuses to give in but also can't quite get off the dime. Of course if the Fed came out and said a slower ISM had it backing off from its fear of inflation there would be a near term and quite powerful move. That is not going to happen, so we have to keep things back in boring old reality. That reality shows techs struggling a bit, moving laterally (a positive) but tapping the July up trendline 3 times in the past two weeks. It acts as if it is being dragged down to that level, no longer able to make snap moves off of that level that spark new rallies. It is moving laterally, hanging on, trying to rest enough to continue higher. Again, given the season stocks may must move on up again, holding the trend. Just time to remain on the cautious side and continue to ride any rise and look for opportunity on those 25% stocks that can move higher even if the market stumbles after this move.
THE ECONOMY
Part of the Monday lag was the looming FOMC meeting Tuesday and the CPI on Friday. The Fed is not likely to change its stance even with the 49.9 December ISM reading that showed the manufacturing sector contracted for the first time since the tax incentives kicked in back in 2003. It had a decent employment report to follow up (who cares if employment is well behind where the economy is going, much less where it is now) and the CPI is not out until Friday. There is no way the Fed is going to make public statements about rate cuts (what the market really wants to hear), at least statements indicating cuts are being discussed or contemplated while the CPI could come in hot once more just three days later. Thus some drag ahead of the FOMC statement where investors can see just how hawkish the Fed still is.
Likely as not the Fed will keep just about everything the same including the Fed Funds rate (5.25%) and the statement (still more worried about inflation over other worries). It may throw a bone to the bond market with a nod that the ISM was lower and bears watching, but beyond that would be rather earth shaking, and the Fed is not ready for that.
The bond market, however, sure is. Bonds closed at 4.66% on the 2 year and 4.52% on the 10 year, a 14BP spread. Not much change in the overall position or the spread, but that is after the inversion widened on the ISM services and the jobs report. Following the ISM manufacturing report the spread closed down to near 5BP on anticipation the Fed was closer to a cut. Then the stronger economic news and the inversion widened again as the chance of a cut in March fell from over 80% to 32%. Bond investors want the Fed to show some inkling it is leaning cut. Then we will see that inversion tighten up.
THE MARKET
MARKET SENTIMENT
VIX: 10.71; -1.36
VXN: 15.54; -1.6
VXO: 11.1; -0.17
Put/Call Ratio (CBOE): 0.73; -0.05
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: +5.5 points (+0.23%) to close at 2442.86
Volume: 1.843B (+0.66%). Volume edged higher on a modest gain in techs, indicating an ever so slight day of accumulation in the techs. With below average volume, it was indeed slight. A modest improvement from the recent churn and distribution, but with the light trade not enough to turn the clock all the way back. Good, however, to see it turn as the index continues to move laterally and tries to consolidate.
Up Volume: 1.045B (-180.35M)
Down Volume: 694.553M (+116.608M)
A/D and Hi/Lo: Advancers led 1.04 to 1. As flat as on Friday when the index posted a gain as well. More of a large cap move (NASDAQ 100 +0.31%) and thus the narrow breadth.
Previous Session: Advancers led 1.03 to 1
New Highs: 119 (-8)
New Lows: 25 (+4)
The Chart: http://www.investmenthouse.com/cd/^ixic.html
NASDAQ tapped the 18 day EMA on the low and rebounded for a modest gain on modestly higher, below average volume. Did not change the recent trend; NASDAQ is still in the uptrend but below the November high (2468). It is making higher lows along the trendline and below that November high. The ability to hold the line after the Thursday selling and continue to work laterally gave the uptrend some more life. Indeed, this pattern can indicate an upside breakout to come. NASDAQ 100, however, despite leading NASDAQ Monday, still looks top heavy, and if it goes, NASDAQ is going to go lower as well given it is market cap weighted. Some signs of life, but still extended and making a lot of visits down to the up trendline (2423).
SOX (-0.25%) held at 475 again despite the modest loss. Holding the October high as it tries to set up along with NASDAQ for another move higher. After hours TXN lowered its earnings (0.37 to 0.40 versus 0.42 expected) and revenue range. It was down after hours but modestly so. The third warning from a chip stock in the past week (TXN, XLNX, NSM).
SP500/NYSE
Stats: +3.2 points (+0.23%) to close at 1413.04
NYSE Volume: 1.303B (-4.11%). Volume faded yet again, the sixth consecutive session of below average trade. Nice trade for a consolidation, and that is what SP500 is doing after the early month move to a new post-2002 high.
Up Volume: 712.975M (-3.992M)
Down Volume: 575.569M (-47.096M)
A/D and Hi/Lo: Advancers led 1.48 to 1. Decent breadth given the mixed showing with the small and mid-caps coming in slightly lower.
Previous Session: Decliners led 1.03 to 1
New Highs: 259 (+56)
New Lows: 11 (+3)
The Chart: http://investmenthouse.com/cd/^gspc.html
SP500 continued in its week long lateral move as the 10 day EMA (1406) rises to meet it. Nice break higher and a nice, low volume lateral move while it takes a breather. It is not giving up gains, and as noted earlier regarding the market in general, that is a good indication. SP500 remains extended but it is not showing any signs of wear for it after recovering from that late November heave lower that was rather quickly rectified. Indeed, it is still above the 10 day EMA and has not come close to revisiting the July trendline as it rests.
SP600 (-0.04%) continues its solid performance, showing a second consecutive doji at the 10 day EMA (402.82) as it tests its last break higher to a new all-time high. If the small caps are ready to sell they certainly are not showing it as they set up for the next break higher.
DJ30
Higher low last week off of the 18 day EMA and another bounce on top of the Friday gain puts DJ30 right at the November high (12,262) once more. The trend is in place and holding as DJ30 tries the November high again, trying to break up the potential double top. Not a bad response and even though extended and a more volatile pattern because of that it is still trying to set up for one more break higher and move upside into the holiday. Still watching that November high closely.
Stats: +20.99 points (+0.17%) to close at 12328.48
Volume: 213M shares Monday versus 240M shares Friday.
The chart: http://www.investmenthouse.com/cd/^dji.html
TUESDAY
FOMC day is here again, the last one for 2006, the year the Fed slashed the money supply growth rate from 6.2% to 0.2% and initiated a pause even as the PCE and CPI moved higher. That shows a deeper current running there than what is mouthed weekly by the various Fed governors and presidents. Will that change what the Fed says it is thinking about interest rates now that the ISM turned to contraction? Nah.
The Fed is the big game in town on Tuesday, but not the only one as the trade balance is out before the market opens and the Treasury budget is out 15 minutes ahead of the FOMC. They won't change the Fed's decision, but they are always at least interesting because the reactions are often misguided inanity. Talk of becoming a third rate debtor nation to 'record deficits' always accompanies these reports. Good fodder for the campaign trail but not all that meaningful to the financial markets. There is also the TXN news where it lowered earnings and revenues ranges, but that was expected, and given the prior chip warnings there may not be a lot of collateral damage. After hours there was some weakness but no rampant selling.
The FOMC does remain the main course and given the up and down action over the past month as some selling crept in there could be some short covering ahead of the number. Most of the action has been buying, however, so that will likely be modest in its effect. No one seriously expects any change in the statement though the sub-50 ISM has hope rising that the Fed will change something. That hope is often foolishly spent, however, with respect to the Fed.
Despite the lack of any likely change in what the Fed says, it could still be an important decision. The market has rallied well since just before the Fed's decision to pause. The action turned a bit bumpy the past 5 or so weeks but has held course. Investors are looking for the Fed to stand down at some point, and continued tough 'inflation is our greatest fear' talk could send a weary market lower for some R&R.
That is a possibility, but this market continues to show an uncanny ability to work past its troubles and continue the trend. With the holidays just ahead it is likely to rally a bit more to the end of the year; after all, many are not going to want to take gains this year but instead push them out to next year. That will likely mean some air pockets at the first of the year, but that is not unusual. For now we will continue to ride the trend, close out marginal players on upside moves, and look for those stocks exhibiting strength and still fresh in their patterns and thus can drive higher for us even if the market does not undergo a big run higher near term from here.
Support and Resistance
NASDAQ: Closed at 2442.86
Resistance:
2468.42 is the November 2006 high
2477 from January 1999
2493 is an interim peak from February 1999
Support:
The 10 day EMA at 2436.84
The 18 day EMA at 2429
2423 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 2375
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 1413.04
Resistance:
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:
1410 is an interim high from March 2000
1408 is the November high
1401 is a low from April 2000
The 10 day EMA at 1406
The 18 day EMA at 1401
1393 is the July up trendline.
1390 is the October high.
1389 is a low from November 1999
The 50 day EMA at 1379
1378 is a low from May 2000
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 12,328.48
Resistance:
12,361 is the November 2006 high
Support:
The 10 day EMA at 12,281
The 18 day EMA at 12,250
October high is 12,167
The 50 day EMA at 12,074
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 11
Wholesale inventories, October (10:00): 0.8% actual versus 0.6% expected, 0.7% prior (revised from 0.8%)
December 12
Trade Balance, October (8:30): -$63.0B expected, -$64.3B prior
Treasury Budget, November (2:00): -$73.0B expected, -83.1B prior
FOMC policy meeting statement (2:15): Expecting no change in rates and no change in inflation concerns despite mentioning and brushing off the sub-50 ISM
December 13
Retail sales, November (8:30): 0.1% expected, -0.4% prior
Retail ex-auto (8:30): 0.3% expected, -0.4% prior
Business inventories, October (10:00): 0.5% expected, 0.4% prior
Crude oil inventories (10:30): -1.04M prior
December 14
Initial jobless claims (8:30): 320K expected, 324K prior
December 15
CPI, November (8:30): 0.2% expected, -0.5% prior
Core CPI, November (8:30): 0.2% expected, 0.1% prior
NY Empire State PMI, December (8:30): 18.0 expected, 26.7 prior
Net foreign purchases, October (9:00): $65.1B prior
Capacity utilization, November (9:15): 82.1% expected, 82.2% prior
Industrial production, November (9:15): 0.1% expected, 0.2% prior
End part 1 of 3
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us stock market
trend trading stock
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