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us stock market, trend trading stock
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1/06/07 Technical Traders Report
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Technical Traders Report Subscribers:
MARKET ALERTS
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SUMMARY:
- Stronger wage growth, Fed concerns give sellers the session.
- Indices split the first week of 2007: January indicator.
- State of confusion: Wage increases worry investors re the Fed, but Fed worries re the bond inversion also worry investors
- Time for techs to pick up the torch as large cap industrials sag.
Techs can't keep the Thursday move going in face of Fed worries.
Before the session the buyers faced a setback with stronger than expected jobs (167K) and rising average hourly wages (0.5% versus 0.3% expected). That sparked fears of wage-led inflation and thus more Fed action. MOT warned its Q4 was thinner than expected (yes earnings season is just about upon us). A Fed official opined the bond yield curve inversion is flashing "yellow" regarding a potentially slowing economy. Investors were worried from both ends: inflation due to higher wages (a common misconception) precipitating further Fed action versus a potentially slowing economy.
A big factor was the slew of downgrades. XOM, INTC, DELL, NOK, BRCM. Outside of the big energy name note the heavy tech bias. Techs made a surprise move on Thursday, surging past the NYSE industrials as they struggle after a strong, market leading move higher. That move caught many managers flat-footed right at the start of a new year. Many are looking at the results from last year when the market, after a tougher first half of 2006, took off in July and left many of them behind. Remember all of the performance chasing that kept pushing the large caps higher late in the year when they were extended? These managers were a large part of that. The Thursday turn to tech threatened to leave many behind again.
The answer? Proactive steps such as zeroing in on the some big tech names and downgrading them. It is an old play in the game book. It is not meant to derail any move, just to slow it down, knock it back some, and give the play callers the chance to get in on the move closer to the same level it started. If the move is for real stocks will rebound. How many times in the past do you recall an analyst going negative on a stock that made a sudden breakout, and then after it has peeled back turns positive again? Saw this same scenario with one analyst just last month and he was busted so to speak on CNBC. They call it a 'valuation call' because once it sells back some they can say it is a good value again and can start the buy.
There was some of that behind the downgrades Friday, and it was interesting to see the techs fight their way back in the afternoon and recover much of the lost ground. Many large cap techs managed a complete recovery. Again, if a move is for real this spat of downgrades won't hold it back. Friday already saw big techs rebounding in the afternoon as buyers came back in on the dip. Of course they need to break past the Thursday close to show they are really back in business, but even after the Friday session, tech patterns were in better shape than the rest of the market.
Technically it was quite a weak session. The internals were just crappy as the -3:1 breadth shows. Of course Thursday was no blowout mind you as breadth was lousy even as NASDAQ posted strong gains. It was the money rotation that was the key factor on Thursday. Friday the news piled up and set them back on their heels a bit, but as noted, they were rebounding smartly in the afternoon.
The small caps really hurt the market to close the week as SP600 broke below its 50 day EMA. SP500 and DJ30 were not roses either as SP500 closed below its July up trendline. It takes more than just small caps to produce really crappy breadth. NASDAQ and particularly NASDAQ 100, however, showed some relative strength. They lost ground, but the large cap techs recovered late after losing as much as the other indices during the morning session. SOX was decent as well; no breakout and it did close lower, but it was up smartly off session lows.
Volume was above average still, but it was modestly lower. There was no major drop off so it is hard to declare the action was unequivocally positive, but it does show there were simply fewer sellers in the Friday loss than buyers in the Thursday gain. When you get down to parsing what the action means, that is an important factor.
As for leadership, there were no clear emerging groups Friday. On Thursday money was moving to tech and many stocks started higher. They still have to make their moves to claim leadership. Other areas that led on the move higher are struggling after their runs as some money leaves the building (many NYSE large caps had a touch close to the week). As noted Thursday, the fact that techs moved higher, or in Fridays case held the line, shows money is accumulating in these stocks. Again, they still have to show the breakout moves higher, but we want to be ready for them when they again show the money is moving their way.
In sum, Friday showed that the early year positioning was not over on Thursday. After a long layoff those wanting to buy and those wanting to sell to start the year were doing so, and the result was an up and down fight the three days the market was open. This is some of that profit taking we wrote about ahead of the new year, but as you can see, the indices are not tanking as a result because the money is not leaving, just moving around to 'new' areas. If you look at the charts outside the techs, chips, healthcare, and biotech, you would think things are ready for the wastebasket. After a long run by the NYSE large caps and a rather typical mid-life economic cycle shift from smaller caps, those areas are not set up to rumble higher near term. If you looked only at them the market looks very top heavy. The techs, chips, medical and biotech do not automatically mean the upside move is secure, but they are giving it some footing to continue if the buyers come back to them this week after letting things cool a bit on Friday.
The January Indicator
The January indicator is a 2-part indicator. It says as January goes, so goes the market for the year. Further, the first three days of January tell you what January is going to do. This past week the NYSE indices were all lower while NASDAQ, NASDAQ 100, and SOX were all up. That is a split decision but it also reflective of the general state of the market: NYSE indices winded, NASDAQ trying to get some upside started after lagging.
The indicator itself is fairly accurate as far as indicators of this sort go (11 out of the past 15 years), but it is only looking at a snapshot, i.e. where the indices close. There can be a lot of travel in between. 2006 was a classic example. The first three days were up and January finished higher as well despite a pretty sharp dip in week three after earnings were flying. Things were rocking along until May when the move peaked and SP500 suffered a 15% correction that put the market lower for the year. It took a pretty torrid run and it was October before the market recovered its gains.
The indicator worked, but you don't just buy and hang on or sell out right after the 'indicator' makes its call. You still have to listen to what the market is telling you and act accordingly. Thus the January indicator is interesting as you juxtapose it against what you see in the economic numbers and see if they are congruent or not, but as a foundation for basing your year upon other than in the most general terms, it does not provide a lot of direction so to speak.
THE ECONOMY
Details of the jobs report, newly voiced Fed concerns tug at investors.
Jobs came in hotter than expected with a 167K December advance (100K expected), and upside revisions pushed the prior two months higher by 29K. For the year ended March 2006, revisions accounted for 810K more jobs than originally reported; this trend of higher and higher revisions shows the monthly reports underreport job growth.
While we have no reason to fear stronger jobs growth, the higher than expected rise in average hourly wages (0.5% versus 0.3% expected and upward adjustment to 0.3% in November) kept year over year growth at 4.2%, a 5 year high. There is this Phillips Curve mentality that if you have high employment and workers with money in their pockets the economy runs the risk of inflation. The entire history of earth economics outside of a shot 6 year sting shows that is not the case, but this arcane belief lingers even at the highest level of economic thought, the Federal Reserve. We have though about this long and hard and can only conclude that the Fed keeps this theme alive so it has more excuses in its bag to allow it to tinker with the economy when those with power request it to do so. After all, it is a quasi-governmental entity and the last thing it wants to do is spread around the truth.
Whatever the reason, the result is that when we see solid wage growth there is worry that inflation will follow. It could, but only if there is much to much money in the system. If there is too much money floating around for the level of economic activity, higher wages are just a symptom of the inflation, they are not the cause. The Fed, however, views them as causing inflation because workers bid prices higher with that extra cash. If liquidity fits the economic activity, however, higher wages simply cause more goods to be produced to meet demand.
The result left investors skittish because they know the Fed, at least in its public pronouncements, worries about wage growth. If you dig a bit deeper into the numbers, however (and if you buy the story about wages causing inflation), you see unit labor costs rose just 2.9% year/year. Those costs represent the TOTAL cost of an employee, not just wages. They include benefits, training and the like. While wages might be climbing faster, over the past 12 months the total employee cost again showed steady, modest growth. It is hard to argue that wage earners are going to binge and suck up all available supply when total compensation growth remains at a tame pace.
Is the Fed worried about inflation or economic slowing (yield curve woes)?
From the Fed's statements and minutes it is more concerned about inflation than economic growth, but on Friday the Boston Fed President (Minehan) pondered whether the inverted yield curve indicated economic weakness ahead. As we have discussed for the past year, the curve is inverted, and no amount of dismissing it based upon foreign buying of treasuries (with oil money and profits from newly capitalistic economies) can explain away the long term inversion in yields that historically suggests economic slowing and indeed recession to come.
This was a major milestone for Minehan to even broach the subject. Back in November 2005 Greenspan talked of an inversion as meaning less today than in the past due to the foreign buying of treasuries. He did not and indeed could not tell us just how much the buying impacted the inversion. The Bernanke Fed has continued this line of thought, and not until Minehan's comments Friday has any Fed official during the entire inversion opined that the inversion could mean economic slowing ahead.
Minehan's comments won't change the Fed's stance one iota, and that was another factor that led to some investor angst on Friday. The Fed has talked of a slowing economy reducing inflation pressures, and if the inversion might slow the economy, shouldn't the Fed be more concerned and shift its bias to at least neutral from one leaning toward inflation. Of course economic growth rates and inflation do not have a cause and effect relationship. The 1970's proved that when unemployment shot higher, the economy suffered its worst downturn since the Great Depression, and inflation ran well into the double digits. Investors know this, and thus Minehan's comments did not sooth them because you can still have inflation with a slower economy, and when that happens the Fed is much like a carp on a hot fishing dock: it flops around not knowing what the hell to do. Not to mention a slowing economy means slower earnings and thus less justification for rising stock prices.
Given that backdrop there is no wonder investors took some pause on Friday with the economic data and Fed comments. Almost anyway you slice them it was not great news based on the Fed's spoken word. The saving grace under Bernanke, however, is that the Fed may say one thing and then do the right thing. Based on its public comments and its supposed continuation of the failed Greenspan policies it had no business pausing with rate hikes in August. Nonetheless it did just that and in doing so (along with Bernanke comments regarding monetary policy before and after that time) put everyone on notice that it was indeed watching the bond market and other markets and not just the rise and fall of inflation as measured by the CPI and PCE. That is why the market continues to rise even as the Fed threatens to lower the boom; actions speak louder than words.
THE MARKET
MARKET SENTIMENT
VIX: 12.14; +0.63
VXN: 17.9; +0.91
VXO: 11.87; +0.68
Put/Call Ratio (CBOE): 0.9; +0.07
Bulls versus Bears: Bulls are still easing back but still remain above the key 55% level. Bears continued their decline, and this time they broke below the 20% level and that is considered bearish. If you get too many bulls and too few bears, there is no ammunition on the sidelines to keep shooting the market higher.
Bulls: 55.3%. Bulls continue to decline, down from 56.5%, 58.8% and 59.6% at the high on this last spike. Still above the 55% level and two months above the point where there are too many for the market's good. Came within a whisker of the January 2006 peak at just above 60%.
Bears: 21.3%. Moved back above the 20% level considered bearish after falling below that level (19.6%) for a week. Bears finally heading in the direction of bulls but not at levels that indicate any major surge in the market. Trying to trend back up after a steady slide (20.6%, 21.3%, 23.9%) from the 37.1% hit in July (the highest level in this entire cycle), now so far in the distance you can barely see it. 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: -19.18 points (-0.78%) to close at 2434.25
Volume: 2.103B (-2%). Volume remained above average but was lower as NASDAQ gave back two-thirds of its Thursday gain. Technically no distribution and there were more buyers in techs Thursday than sellers on Friday.
Up Volume: 648.91M (-959.826M)
Down Volume: 1.437B (+927.508M)
A/D and Hi/Lo: Decliners led 2.82 to 1. Pretty ugly downside breadth; NASDAQ 100 lost 0.42%, much better than NASDAQ overall, and that is not enough to offset the rest of the techs.
Previous Session: Advancers led 1.32 to 1
New Highs: 73 (-16)
New Lows: 50 (+20)
The Chart: http://www.investmenthouse.com/cd/^ixic.html
Gapped lower and sold through the 18 day EMA (2429), but easily held above the 50 day SMA and by the close was back above that near support. That easily keeps it in the 8 week lateral range and trying to make a higher low for a breakout attempt over the 2471 high in the range. Showing relative strength; now needs to show a real breakout and not just relative strength versus a weaker NYSE. Set up well, but the money has to keep moving their way as it was on Thursday.
SOX (-1.12%) was no relative strength leader, but it bounced well off its intraday low to close near the 50 day EMA. It is hardly overextended, and still in then pullback to test the 200 day SMA after breaking above that level in November. Kind of a protracted test, but there was a lot of money chasing performance in the large cap NYSE stocks through November and December 2005, and that was sucking up a lot of money. Now that those indices are looking for a pullback, that money is ready to move toward techs. Some chips did not fare so well Friday (NSM, TSM) after the MOT news; we will see if the money is ready to come their way as well.
SP500/NYSE
Stats: -8.63 points (-0.61%) to close at 1409.71
NYSE Volume: 1.711B (-1.05%). Volume was down on NYSE as well as it broke lower. It was just a whisker lower, however, and did not provide much encouragement as SP500 fell below its July trendline and the SP600 broke hard below the 50 day EMA.
Up Volume: 423.353M (-347.147M)
Down Volume: 1.262B (+324.612M)
A/D and Hi/Lo: Decliners led 3.02 to 1. With the large caps and small caps both struggling, heavy downside breadth was in the cards.
Previous Session: Decliners led 1.02 to 1
New Highs: 97 (-63)
New Lows: 26 (+2)
The Chart: http://investmenthouse.com/cd/^gspc.html
SP500 hit the skids somewhat Friday, selling off as it did Wednesday and Thursday but this time it could not rebound and closed below the July up trendline (1413). Volume was a hair lower, but with the price action that modestly lower trade was not very comforting. SP500 does not look well here after a quick, small double top in December. Looks as if a test of the 50 day EMA (1398) is in store, and that is not unusual after the kind of run it had off the July low.
If SP500 does not look that great here, SP600 (-1.52%) looks bad here. Friday it broke below the 50 day EMA for the first time since early October when it was just starting the run toward its breakout that month. It was not a slip below the 50 day; it was a thud. Some support at 390 but with this move problematical if that will hold.
DJ30
No major breakdown but slipped below the 18 day EMA (12,409) on the close. It has done this occasionally in this run, particularly since November when it turned a bit choppier. Overextended, but even so it is not making the drop that SP500 is starting.
Stats: -82.68 points (-0.66%) to close at 12398.01
Volume: 235M shares Friday versus 259M shares Thursday.
The chart: http://www.investmenthouse.com/cd/^dji.html
MONDAY
If you look at the NYSE indices things look like a correction coming. A five month run up the short term moving averages starting to sag lower, and in the SP500's case, closing below its July up trendline. The money has flowed into DJ30 and SP500 but started to pullback in December. Now money looks to be heading toward techs, at least based on the relative weakness in NYSE and the relative strength in NASDAQ.
After buyers spent the shortened week to start 2007 jockeying for position, it is time for the techs buyers to step up again and pump more money their way. It is unlikely that SP500 is going to recover immediately and lead any rebound attempt. After a good run and leading the way higher with DJ30 they need a break. The key is whether the money simply moves to other areas that lagged in the 2006 move, namely tech, and keeps the overall advance moving forward in kind of a role reversal. In the 2006 second half rally it was techs that followed along while DJ30 and SP500 broke to new post-2002 highs first. It is time for the techs to step up and lead the way. The Thursday action indicated that move was trying to get underway, and even with the setback Friday the techs still showed nice relative strength, particularly the large caps.
Earnings season is rapidly approaching and we are going to see more warnings. Thus far there has been a bit of drama with warnings from the likes of MOT. Don't want to see too many more in tech if those stocks are going to take up the torch to advance the market. Techs have put in a pretty good lateral consolidation heading into earnings, and that gives them a better launch pad if some surprises come in. SOX is also in position to make up some ground if the money keeps coming in and some good earnings show up from the likes of BRCM. It is not all rosy in the chips; important week for them as well as they try to hold the 50 day EMA and continue the move up off the 200 day SMA.
We will be ready in the event that money continues to move toward the techs. We took some positions Friday as some key stocks checked up from the early selling and rebounded. There are more in position to move if the money flows their way as the second week of the year gets started. As the buyers and sellers left things somewhat in limbo to end this week we are also going to be ready with some downside plays so we can take what the market gives in the event it heads south or it splits its ways near term with NASDAQ moving higher and the NYSE stocks heading south near term.
Support and Resistance
NASDAQ: Closed at 2434.25
Resistance:
2468.42 is the November 2006 high
2471 is the December 2006 high
2477 from January 1999
2493 is an interim peak from February 1999
Support:
The 50 day SMA at 2414
2412 from June 1999 low
The 50 day EMA at 2401
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.
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 1409.71
Resistance:
1413 is the July up trendline, and it held on Wednesday
The 10 day EMA at 1417
1425 is an interim high from November 1999
1432 is the December 2006 high
1444 from February 2000
1475 from peaks in December 1999 and January 2000
Support:
1408 is the November high
1401 is a low from April 2000
The 50 day EMA at 1398
1390 is the October high.
1389 is a low from November 1999
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 12,398.01
Resistance:
The 10 day EMA at 12,440
12,499 is the December intraday high.
Back to 8.6% above the 200 day SMA, about the point where DJ30 started to struggle in late October.
Support:
12,361 is the November 2006 high
The 50 day EMA at 12,244
October high is 12,167
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.
January 8
Consumer credit, November (2:00): $5.5B expected, -$1.2B prior
January 10
Trade balance, November (8:30): -$59.5B expected, -$58.9B prior
Wholesale inventories, November (10:00): 0.5% expected, 0.8% prior
Crude oil inventories (10:30): -8.132M prior
January 11
Initial jobless claims (8:30): 329K prior
Treasury budget, December (2:00): $21.0B expected, $11.2B prior
January 12
Export prices, December (8:30): 0.1% prior
Import prices, December (8:30): 0.7% prior
Retail sales, December (8:30): 0.7% expected, 1.0% prior
Retail sales ex-auto, December (8:30): 0.6% expected, 1.1% prior
Business inventories, November (10:00): 0.4% expected, 0.4% prior
End part 1 of 3
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