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money investment, investment help
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12/12/06 Investment House Daily
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Investment House Daily Subscribers:
MARKET ALERTS:
Target hit alerts: AKAM
Buy alerts: ADM; CYTC
Trailing stop alerts: MA
Stop alerts: Cleared out some stocks that were not performing on this last bounce up by the market. ANAD; CRZO; BOBJ; DRQ; ISE
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SUMMARY:
- Stocks queasy ahead of FOMC, find some relief on a 'substantial' slowdown in housing.
- Fed says housing slowdown now substantial, notes some economic slowing.
- Early December retail sales 'sluggish.'
- Now it is all about sales heading into Christmas for a half-tired market.
Stocks actually move higher after FOMC result.
Stocks were characteristically tame ahead of the FOMC even as more data hit the market in the morning session. The trade deficit was better than expected (-$58.9B actual versus -64.3B prior) as exports hit another new record high, up 0.2%. Ah the power of a weaker dollar; it is about the only positive derivative of a weaker dollar, however. As Friedman said, no country every devalues its way to prosperity. Of course, explain that to the 'Baker Boys' who are now back in D.C., pushing the same old agenda that got Bush I run out of town on a rail of dissatisfaction as republicans splintered with some supporting Perot. Now that was a choice among choices, and Clinton walked through the open door. Hmm, sounds a lot like the mid-term elections and quite possibly the 2008 elections as well.
But once again I digress. The deficit was the 12% lower than a year ago and 14% lower than the record high in August. It was also the lowest since August 2005. That will help the Q4 GDP report as exports are added to the total. Is it a trend? With the weak dollar perhaps exports will continue to rise, but when you look at a graph of the trade deficit you see a mountain building since 1998, and this latest dip is just a fissure in the mountain's face. If you worry that suddenly other countries will view the US as a credit risk then you will take little comfort. If you don't believe this then you don't care.
We have an ongoing trend in the US: when our economy is good we export lots of goods. Lots of goods. When it is not good we don't buy quite as many. There have been 'buy US' campaigns for decades with limited impact. When China can make and ship a product to the US and still charge less than US goods while making a reasonable profit (by Chinese standards), it is hard for the US consumer to turn it down.
Moreover, when we import gargantuan amounts of oil daily in order for our economy to run, the trade deficit is going to be gargantuan as well. The latter is just a fact of life, and the trade deficit will NEVER, EVER right itself unless we start producing our fuel. That is not going to happen with fossil fuels, and if we are really interested in cutting reliance on foreign oil we have to get serious about alternatives. By that we don't mean ethanol; corn is a pretty crappy source compared to sugar and we would have to plant the entire nation in amber waves to make a serious dent. It might be a stopgap measure, but the real solution is the auto fleet, and mass producing hydrogen vehicles and service stations (they are viable right now) is how we do that. The hydrogen hybrids are impressive with power to spare on the SUV's. Geothermal heating and cooling and solar will all help, but the key is vehicles, and it requires a serious change.
Further, consider what that weaker dollar, designed to help the deficit, does when you have this massive 'fixed cost' each month: a lower dollar means other countries start pricing oil in euros. As the dollar sinks, oil becomes even more expensive and the deficit explodes. We have some really sharp nuts setting policy there in D.C.
But I digress yet again. The point was we don't lose much sleep over the deficit numbers because none of the carping addresses the real issues. The market didn't seem to take any solace. It sold off early, managing a modest rebound into the FOMC as some positions were covered from the morning weakness. The statement came out noting more housing weakness and nodding at the weaker ISM (though it didn't call it by name) and stocks actually recovered some lost ground. Not enough to close positive, mind you, but enough to let the near support hold again.
Technically we once again have to say there is no change in character. NASDAQ made its fourth test of the July up trendline in the past three weeks, managing to recover. SP500 tapped toward the 18 day EMA and rebounded as well. Another test and rebound as the market refuses to give up its gains. Volume was up on both NYSE and NASDAQ. With the rebound on SP500 that is not necessarily a bad thing. On NASDAQ with its more substantial loss it shows some distribution even with the hold at the 18 day EMA on the close.
Some distribution, some nice intraday recovery after the FOMC, but all of this is basically a tempest in a teapot. There was no change in the market's character. NASDAQ continues to hold up but struggling while the NYSE indices manage to hold up quite nicely. Everything remains in the trend. As noted before, if the indices were not as extended this would look pretty solid. After the long runs there is some distribution popping up and some leadership issues, particularly in retail today after BBY's so-so sales and the chain store sales that left many analysts cold. Leadership action was volatile; some up, some down. The indices refuse to give in but there are enough issues to warrant caution. That is one reason we took several positions off the table today. The bounce up is still intact, but with several showing weakness it was not worth the potential downside risk.
THE ECONOMY
FOMC notes more weakness, but cannot afford to change its tune.
The Fed left the Fed funds rate at 5.25%, holding steady since the June 2006 move that took it to that level. Since then the statement has gone through fewer changes than the evolution of slugs over the past 10 million years. Tuesday's version offered little change yet again, but the Fed gave the slightest affirmation the economy was a bit weaker. It has noted the housing slowdown and its potential impact in prior statements, and it has ratcheted up the adjectives describing the slowdown. Tuesday it described the housing slowdown as 'substantial.' That has the faintest whiff of change, of admission, that the housing slowdown may be of such magnitude that it has a drag effect on the economy.
It also gave a sideways glance at the sub-50 ISM. It did not call it by name, but the Fed noted that 'recent indicators have been mixed.' That admission in itself is pretty big as it builds on the continuing theme that the economy will slow some in 2007. It might, but the leading indicators are saying growth will start to pick up to moderate levels after a further slowdown nearer term. So the Fed is half-right, but as in everything else, timing is everything. One thing is for sure from this, however, and that is the Fed is not going to raise or lower interest rates anytime soon. It is wedged into a holding pattern as it waits for its inflation indicators (you know, the lagging ones) to fall. The PPI has started to fall off, but of course the PPI price increases never really made it over to the CPI, so that technically should not impact CPI. It may be a bit too early for a fall in the CPI here, but we anticipate one this week. That is likely crazy talk, but with the easing in prices from the producers' side history suggests the consumer side will fall after a modest lapse of time.
Make or break time for retailers as December sales thus far termed sluggish.
Weekly chain store sales rose 1% ending 12-9-06. Year over year they rose 3.2%. Predictions are for a 5% increase over last year. Surveys indicate many consumers are still not done with their shopping. That sets up a big rush to end the year. Remind me to finish my shopping yesterday. Retailers we are talking with note big crowds and solid buying, but they say many are out looking, kind of scouting out the turf to move in when the markdowns come. Better not have anything specific in mind, however, because a lot of the 'good stuff' that is hot is gone. Waiting is good for Uncle Ernie and your second cousin when the phrase 'it's the thought that counts' runs continually in your head, but when little Jenny wakes up and doesn't see the Little Mermaid magical talking vanity next to the tree it could be a cold night for Santa.
Yet I digress again. Retail sales are not exploding, hence the BBY warning about holiday sales. That got a lot of retail investors nervous and some extended stocks sold off while others already in sell offs sold further. Others (e.g. URBN, DBRN) continued their nice tests. There is going to be a lot of buying, however, and the season will come out fine. Many retail stocks, however, are likely to sell off before that news comes out.
THE MARKET
MARKET SENTIMENT
VIX: 10.65; -0.06
VXN: 15.25; -0.29
VXO: 10.97; -0.13
Put/Call Ratio (CBOE): 0.97; +0.24. Running up toward 1.0 in what was a lot of jockeying ahead of the Fed's announcement.
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: -11.26 points (-0.46%) to close at 2431.6
Volume: 1.979B (+7.34%). Volume moved up to just above average after a couple of lower volume sessions as it tried to bounce Friday and Monday. Higher volume last Thursday on the selling, lower volume on the two day relief move, and then higher volume as it lost ground. Two more distribution sessions as NASDAQ struggles below the November high. Three distribution sessions in the past 2.5 weeks along with at least two churning sessions. There is unloading of stocks here, but thus far it has not led to a lower low.
Up Volume: 593.11M (-451.846M)
Down Volume: 135.51M (-559.043M)
A/D and Hi/Lo: Decliners led 1.66 to 1
Previous Session: Advancers led 1.04 to 1
New Highs: 113 (-6)
New Lows: 47 (+22)
The Chart: http://www.investmenthouse.com/cd/^ixic.html
NASDAQ sold down just below the July trendline in the morning session (now at 2426) then managed a rebound to hold just over the 18 day EMA (2429). Volume moved above average for the first time in three sessions. NASDAQ recovered as many points off its low as it lost, a decent rebound but still some distribution. The index remains in its lateral move above the trendline, but four visits in the past 2.5 weeks shows it does not have a lot of strength to bounce it higher. It is trying to rectify that with this consolidation, but it is fighting that churn and distribution, and for now that is keeping it below the November high (2468).
SOX (-0.7%) was struggling on the TXN update, falling to the 50 day EMA intraday before rebounding to cut its losses in half. Trying to recover from last week's failed attempt to take out the November high just over 492. Needs to find support here.
SP500/NYSE
Stats: -1.48 points (-0.1%) to close at 1411.56
NYSE Volume: 1.526B (+17.12%). Volume moved up on SP500 as well but remained below average for the sevenths consecutive session. Not a lot of volume on this move higher here in December but right now it is consolidating, and the lower volume is not a bad thing.
Up Volume: 565.544M (-147.431M)
Down Volume: 948.571M (+373.002M)
A/D and Hi/Lo: Decliners led 1.28 to 1
Previous Session: Advancers led 1.48 to 1
New Highs: 232 (-27)
New Lows: 17 (+6)
The Chart: http://investmenthouse.com/cd/^gspc.html
SP500 reached down close to the 18 day EMA (1402) on the low and rebounded for a modest loss. Volume rallied close to average, not bad action for a rebound session from near support. It is holding its uptrend, working laterally in a pretty tight range over near support. It has not even tested its July trendline as the large caps are not getting the turnover as on NASDAQ, i.e. they are not undergoing distribution; in short they are not under any selling pressure. Just not a lot of buying right now either.
SP600 (-0.50%) faded a bit further on Tuesday, but still managed to hold the 18 day EMA (400.82) on the close. As with SP500, it is easily holding its uptrend, having yet to test it on this latest market softness. The energy issues were quite volatile Tuesday, and that impacted the small and mid-cap indices.
DJ30
The blue chips also tested lower on the session, fading to the 18 day EMA (12,257), tapping there and then rebounding for a modest loss. That keeps it working laterally above near support and just below the November high (12,262) as it also attempts to ride out the current indecision and set up for another upside move. The indecision itself after such a long run is another indication it is tired, but the new money keeps holding it up, along with the rest of the market.
Stats: -12.9 points (-0.1%) to close at 12315.58
Volume: 248M shares Tuesday versus 213M shares Monday.
The chart: http://www.investmenthouse.com/cd/^dji.html
WEDNESDAY
Retail sales are out before the open on the heels of Tuesday's chain store results. They are for November, however, so the impact will be limited. As noted above, the focus is on what is happening heading into the holidays.
Now that the Fed is in the books the key for us will be how the indices respond to the ongoing NASDAQ distribution. It is mild, but it is ongoing as that index moves just below the November high. The indices have moved little over the past couple of weeks with DJ30 and NASDAQ moving back up to the November highs and stalling while the 'other half' of the market (SP500, SP600) posted new highs. The current trend and the end of the year ahead are giving it the support it needs as there is reluctance to sell and incur tax burdens this year. It would not take much to trigger some selling, however, particularly given the distribution in NASDAQ and some weakness cropping up in retail. Some are already selling as evidenced by that distribution on NASDAQ. In 2003 and 2004 the market rose to the end of the year and then spent some time selling after the turn of the year; in 2005 it sold the week before year end only to rebound after the first of the year.
Bottom line we are still concerned about the market at this level, and while it can likely ride through the year end holding its gains, the NASDAQ distribution is a problem along with more stocks turning lower through support. As this bounce struggled Tuesday, particularly on NASDAQ, we closed some positions as we indicated we would. With SP500 and SP600 still looking solid we are inclined to let solid positions continue on and even look at new upside positions if they show a good breakout move from a good pattern. Three-quarters of stocks move with the market; that means we can still get good moves from quite a few stocks even if the market struggles on from here. There is plenty of money still looking for homes and we can take advantage of that. As for the other 75%, well, we are also looking at downside positions as well.
Support and Resistance
NASDAQ: Closed at 2431.60
Resistance:
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 2429
2426 is the July up trendline
2412 from June 1999 low
2384 is an interim peak from January 1999
2379 is the October high.
The 50 day EMA at 2377
2376 is the April high, the former post-2002 high
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 1411.56
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 1407
The 18 day EMA at 1402
1394 is the July up trendline.
1390 is the October high.
1389 is a low from November 1999
The 50 day EMA at 1380
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 12,315.58
Resistance:
12,361 is the November 2006 high
Support:
The 10 day EMA at 12,287
The 18 day EMA at 12,256
October high is 12,167
The 50 day EMA at 12,083
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): -$58.9B actual versus -$63.0B expected, -$64.3B prior
Treasury Budget, November (2:00): -75.6B actual versus -$73.0B expected, -83.1B prior
FOMC policy meeting statement (2:15): Left Fed Funds rate at 5.25%. Noted 'substantial' cooling in the housing market and some more economic slowing.
December 13
Retail sales, November (8:30): 0.2% 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): $69.5B expected, $65.1B prior
Capacity utilization, November (9:15): 82.1% expected, 82.2% prior
Industrial production, November (9:15): 0.0% expected, 0.2% prior
End part 1 of 3
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