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us stock market, trend trading stock
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1/17/06 Investment House Daily
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SUMMARY:
- Another day of struggle leaves NASDAQ still in good shape on the breakout test, but after hours earnings are going to test it again.
- Fed Beige Book, inflation data (PPI) send rates higher as market does Fed's work for it.
- Market sentiment turns south as many pundits pull a sharp 180.
- NASDAQ pullback to be tested again on more earnings reports, CPI, trying to fight off a change of character.
Another down session as market further tests last week's break higher.
INTC had some chips under pressure, but ahead of the PPI futures were doing pretty well. In short, INTC was not death for the market. The PPI did not help. It was lower than November but more than expected, and that sent futures lower. Oil was higher as well, bouncing off the $50/bbl level to close at 52.24, +1.03. It is likely to rebound some here after this tail kicking the past two weeks; the $50 mark has acted as support before.
That created drag on the market that some good earnings from JPM and others could not overcome on the open. Nonetheless the indices did try to rally after a lower open with NASDAQ, despite the INTC issues, making it back to flat early, and after a midmorning pause, again as lunch started. It was no massive surge of buying pushing a recovery to positive, but it was a rebound in the face of some not so great news on the economic, oil, and earnings front.
That was tosses aside, however, when the Fed came out with its Beige Book. It was not a fire and brimstone rendition of the Phillips Curve (you know, the old 'jobs, higher incomes, strong economic activity, a.k.a. prosperity, is bad' theme) as the Fed noted 'moderate growth' in all regions. It was enough to dash any hopes of a rate cut in the next few months (though there was not much hope left), and the market headed lower. NASDAQ peeled off 14 points before a modest last hour push cut the losses, holding above the November and December breakout points. The other indices posted rather modest declines, all basically holding their position from Tuesday.
Technically there were some mixed signals though overall the indices held their relative positions. NASDAQ sold the most along with SOX after the INTC news, but it was still in pullback mode after the breakout to a new post-2002 high. It held above that point on the close. SOX held the 50 day EMA support, showing a doji at that level. The NYSE indices were basically flat, slipping late to give back some modest session gains.
The internals were mixed. Breadth was modestly higher on NYSE, modestly lower on NASDAQ, neither enough to really make a difference. Volume climbed on both exchanges, just cracking average on NYSE with a modest 1% bump. NASDAQ trade jumped late, climbing above the Friday and Monday levels though below the breakout volume last week. That shows some distribution in the techs, aided in large part by selling in INTC, CSCO, and AAPL (ahead of its earnings). Outside of some very big names with some very big volume, the trade was mostly below average in the techs. Yes there was distribution, but it was limited to a smaller group of stocks and when you look at the nice pullback to test the breakout, NASDAQ still looked solid on the close, i.e. a rather normal pullback to test a good move higher and a breakout.
Thursday, however, is a new day and a new page to the story. The CPI is out of course, and after the PPI and Fed Beige book sent bond yields higher, investors are going to be sensitive to it yet again as bond yields continue rising. More on that below. Earnings remain foremost, however, and AAPL, while blowing out earnings, gave conservative Q2 guidance while Mac sales missed the mark (1.61M units versus 1.75M unites). iPod sales were huge at 21M versus 16M expected. Impressive but the guidance is always the key and after surging after hours AAPL faded. SOX has more of its own issues as LRCX reported but was spanked after hours. In short, once more the market will be challenged and NASDAQ will test the November and December highs. That is the key for the near term. Looks decent in the pullback still, but a lot of negative sentiment near term and the fears of inflation. If it can hold and rebound despite all of this that is a showing of real strength.
THE ECONOMY
Market fears are doing the Fed's work.
All Bernanke has to do Thursday when he addresses Congress is talk about how the economy looks to be recovering and frown a bit about stubborn, pesky moderate inflation, and his work will be done. He paused in August when inflation was still climbing. Inflation started to moderate since, making him look like a monetary policy genius in his first major move. Recall Greenspan's first major move was to send us into Black Monday. Quite a contrast.
Bernanke could still screw things up, i.e. start hiking and draining all of the money with an irrational fear of prosperity, but thus far he has resisted. The data is still giving the Phillips Curve apostles plenty to squawk about. PPI was lower, but more than expected, and that helped send bond yields higher. PPI was 0.9% versus 0.5% expected and 2% prior. Core was 0.2% versus 0.1% and 1.3% prior. The core rose to 2.0 year/year, right at the Fed's threshold and the highest since September 2005. Gasoline drove the move, rising 7.1%, and we know that energy has plunged this month. Food was up 1.0%, however, and that will have many puckering.
Even though it was higher than expected, it was down and still shows the weakening that prices started the past four months. The inflation pressures peaked over a year ago, and after a long wait it is showing up in the numbers. It is not as fast as the Fed likes, however, and that is a holdover from too much liquidity in the Greenspan era. Bernanke made the right moves and it is working. Hopefully he can withstand the barking dogs and keep a good plan working.
In addition production rose 0.4% versus the 0.1% expected and capacity hit 81.8%. With talk of a higher than expected Q4 GDP thanks in part to falling energy prices and rising exports, that has investors of all stripes worrying if indeed Bernanke can stay the course.
The effect? Bond yields are on a climb toward the Fed Funds rate at 5.25%. Wednesday the 2 year closed at 4.92% and the 10 year at 4.79%. Still inverted, and indeed widening a bit to 13 basis points, but heading back toward the Fed's rates. The 'rate cut play' is getting trashed as bond investors remove any vestige of a near term (or for that matter mid-term) rate cut. The 10 year is still a long way from the Fed Funds rate, but the move is doing us all a favor. Rates are still relatively low, low enough for the economy to easily expand. At the same time, if they are climbing the Fed will feel comfortable in holding pat. That is the biggest positive, i.e. ensuring that the Fed stays off the market's back.
With oil falling the Fed is basically in nirvana: inflation, while higher than the Fed wants, has shown its peak. The economy is still solid as Fed rate hikes and money supply reduction has not poked a hole in it. Oil is taking the heat off inflation and at the same time keeps consumers buying, but not too much (the Fed called it "moderate growth"; wow, talk about Fed mana indeed.
Of course the Fed has to stick to the company line. Yellen was doing that today though she did digress from the script, noting that the current Fed Funds rate was "somewhat restrictive," implying that if things cooled the Fed could cut. That was all pipe smoke musing to the market, however, because Yellen concluded that the risks of inflation were still out there, thus necessitating this 'somewhat restrictive' policy. Oh well; the game continues, and tomorrow with the CPI and Bernanke speaking to Congress it will be in full flight. Bonds will likely struggle some more (sending yields higher) and stock investors will worry about rising bond yields (not to mention earnings).
THE MARKET
MARKET SENTIMENT (with a technical flavor)
Man the sentiment sure is negative near term. Suddenly everyone has turned negative, expecting a correction. Cramer suddenly did a 180 on tech after trumpeting it to start the year. Ten days seems to be a pretty short span to 'booyah' a sector and then dump it. We don't like the higher volume pullback on NASDAQ and the action of some big names, but it is still trying to test that breakout. We have said all along that SP500 and DJ30 are overextended, and Wednesday many pundits were talking about this and the potential for money coming out. Well, it HAS been coming out and going into tech. That is the flip side of the worry that DJ30 and SP500 are going to sell off. Thus far money has moved to tech as it leaves the other areas that led to the end of 2006. That makes this test so important; strong money flowing into tech's upside move to start this year that led to the breakout and now the test of that breakout. This tells us whether money will continue to shift into technology or whether the earnings outlook is just not enough to push it further.
Maybe it will crack, but at this stage much of what we saw Wednesday even with the INTC, CSCO and AAPL downside volume was orderly, lower volume pullbacks to test the recent run. It would take a change of character to send NASDAQ lower, meaning not only would buyers not want NYSE stocks but no longer want tech stocks that they sought so hungrily to start the year as money shifted out of the large and small cap NYSE stocks.
VIX: 10.59; -0.15
VXN: 16.92; -0.36
VXO: 10; -0.47
Put/Call Ratio (CBOE): 0.87; -0.04. Faded on a downside day.
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: 55.4%. Bulls ticked modestly higher from 55.3% after declining the past several weeks from 59.6% (down from 56.5%, 58.8% and 59.6% at the high on this last spike). Still above the 55% level for over two months. Came within a whisker of the January 2006 peak at just above 60%.
Bears: 20.7%. Bears faded, mirroring somewhat the move in bulls. Down from 21.3% after jumping back above the 20% level for a week. That level is considered bearish. Still struggling to trend higher 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: -18.36 points (-0.74%) to close at 2479.42
Volume: 2.382B (+6.11%). Volume was up and though lower than the Wednesday breakout volume it was the second highest over the past two weeks. There was distribution in techs, but it was focused on a few big names in particular for specific reasons, i.e. INTC, CSCO, and AAPL. Technically it is distribution and that keeps us alert as to what NASDAQ does at the breakout point for sure, but as noted above it would take a change in character to break down. Maybe the earnings are bad enough to do that. We will see.
Up Volume: 1.308B (+320.451M)
Down Volume: 1.741B (+633.12M)
A/D and Hi/Lo: Decliners led 1.31 to 1. Not bad at all. Of course the selling was not bad at all either.
Previous Session: Decliners led 1.15 to 1
New Highs: 74 (-78)
New Lows: 23 (+8)
The Chart: http://www.investmenthouse.com/cd/^ixic.html
Gapped lower but twice managed to return to flat. When the Beige book came out, NASDAQ investors gave up and it lost the bulk of its points (16) after that news. It closed near the session low but still held above the December and November highs (2471, 2468, respectively) that marked the new post-2002 high. That is the point NASDAQ has to hold near (2454, the 18 day EMA can suffice but won't be great) to keep the breakout alive. AAPL, a NASDAQ large cap was under some pressure after the close; another test for NASDAQ to pass, but if it does hold and delivers a rebound form there over the next few sessions that is an affirmation of the positive character that started the year.
SOX (-0.81%) struggled under the INTC miss, but after gapping lower it held to close above the 50 day EMA, showing a doji. That looks like a nice end to the pullback, but LRCX was hammered after hours on its report and that is going to pressure SOX yet again tomorrow.
SP500/NYSE
Stats: -1.28 points (-0.09%) to close at 1430.62
NYSE Volume: 1.524B (+1.25%). Modest volume bump up to average as the NYSE indices held steady. No selling, no buying. They too are looking to see what NASDAQ does.
Up Volume: 832.967M (+113.439M)
Down Volume: 649.237M (-114.001M)
A/D and Hi/Lo: Advancers led 1.14 to 1. Flat yet again.
Previous Session: Decliners led 1 to 1
New Highs: 116 (-131)
New Lows: 7 (0)
http://investmenthouse.com/cd/^gspc.html
SP500 when nowhere again, showing a second doji at the new post-2002 high. After a so-so move up on NASDAQ's breakout coattails it is lost without NASDAQ's direction similar to the orcs and trolls in 'The Return of the King' when the ring of power was destroyed and Sauron fell. It is holding for now, but how NASDAQ fares on its test will bear on SP500's ability to hold up here. Even if NASDAQ does hold, that means more money from SP500 to NASDAQ, and that means SP500 still can't make too many strong upside moves. It is losing its mojo.
SP600 (-0.11%) held steady but it is still in no-man's land between the old high in a broad top over the past 2 months but still trying to form a handle to its larger base. It can still make a higher low on a test here and try a breakout. Much of its future rides upon NASDAQ as well. My how times have changed.
DJ30
Volume was up thanks to INTC's massive churn, and DJ30 stalled its 5 session move, showing a doji. That can spell a near term pullback similar to what we have seen time and again as DJ30 has moved higher in this trend up from the July low. Once again we will note it is overextended and ripe for a pullback, a notion that received a lot of play today. Still not a great entry point; maybe that pullback talk is just wishful thinking.
Stats: -5.44 points (-0.04%) to close at 12577.15
Volume: 272M shares Wednesday versus 242M shares Tuesday. INTC made up 192M shares of that.
The chart: http://www.investmenthouse.com/cd/^dji.html
THURSDAY
Big day ahead, and not just in terms of earnings, economic data (CPI), and Bernanke. NASDAQ will be under pressure because AAPL was under pressure after the close along with some big name chips such as LRCX. That is setting up the biggest test of the year (and not just 2007) as NASDAQ tests last week's big breakout to a new post-2002 high. If NASDAQ reverses that move and cannot recover, that means it would fail, and given SP500 and DJ30 are already as extended as a goose's neck in full flight, they would likely domino after it.
Thus the market is riding on techs bucking the overall trend and leading higher from here as the new, unquestioned market leader. Thus far the tech earnings results have not supported that position though the breakout was very strong and the pullback thus far, though on some stronger volume Wednesday, remains rather orderly.
If things start lower which they are likely to do given AAPL, that will be three down sessions for NASDAQ, and take it near the December high at 2471. Three or so days of pullback is about right for a test, particularly if it takes it back to the breakout point; duh. There is the lick log, where the rubber meets the road, etc. NASDAQ will need to hold and rebound from there. The news will certainly be bad enough with likely a CPI that is not 'just right' and more earnings worries and warnings; if there is going to be a final sell off and turn back up that would do it. With all of the short term negatives there is enough for it to hold and turn back on all of the negative pundits.
NASDAQ is bucking the trend somewhat with its turn positive to start the year, but after a strong run in the NYSE, that money was looking for somewhere to go and NASDAQ was in position to get it. Strong volume buying showed that is where the money went to start the year; that reallocation that was so apparent. Now the resolve of those buyers will be tested.
NASDAQ is going to sell early, and then it will try to rebound. That will be the near term key. If the rebound cannot hold then we will close out those stocks that are struggling to hold support. At the same time we will watch for those that do hold support and be ready when they start to move higher.
Support and Resistance
NASDAQ: Closed at 2479.42
Resistance:
2493 is an interim peak from February 1999
2523 is price resistance November 2000
Support:
2471 is the December 2006 high
2468.42 is the November 2006 high
The 50 day SMA at 2430
The 50 day EMA at 2419
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
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 1430.62
Resistance:
1432 is the December 2006 high
1444 from February 2000
1475 from peaks in December 1999 and January 2000
Support:
1425 is an interim high from November 1999
1421 is the July up trendline
The 18 day EMA at 1420
1408 is the November high
The 50 day EMA at 1404
1401 is a low from April 2000
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 12,577.15
Resistance:
About 9% above the 200 day SMA. It turned choppy after hitting 8.5% of separation in late October, but is has not sold off and has gained some strength.
Support:
The 10 day EMA is 12,505
12,499 is the December intraday high.
12,361 is the November 2006 high
The 50 day EMA at 12,325
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 pre-2000 all-time high
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
January 16
NY Empire State PMI, January (8:30): 9.13 actual versus 20.0 expected, 22.19 prior (revised from 23.1)
January 17
PPI, December (8:30): 0.9% actual versus 0.5% expected, 2.0% prior
Core PPI (8:30): 0.2% actual versus 0.1% expected, 1.3% prior
Net foreign purchases, November (9:00): $68.4B actual versus $81.7B expected, $82.3B prior
Industrial production, December (9:15): 0.4% actual versus 0.1% expected, -0.1% prior
Capacity utilization, December (9:15): 81.8% actual versus 81.7% expected, 81.8% prior
Fed Beige Book (2:00)
January 18
CPI, December (8:30): 0.4% expected, 0.0% prior
Core CPI (8:30): 0.2% expected, 0.0% prior
Housing starts, December (8:30): 1.570M expected, 1.588M prior
Building permits, December (8:30): 1.505M expected, 1.513M prior
Initial jobless claims (8:30): 315K expected, 299K prior
Leading Economic Indicators, December (10:00): 0.2% expected, 0.1% prior
Crude oil inventories (10:30): -4.99M prior
Philly Fed, January (12:00): 2.0 expected, -2.3 prior
January 19
Michigan sentiment, January prelim (10:00): 92.4 expected, 91.7 prior.
End part 1 of 3
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