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1/20/06 Investment House Daily
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SUMMARY:
- Friday relief bounce provides little relief but some positives.
- First round of earnings shows some slowing, and market feeling it near term.
- NASDAQ trying to hold the line and reload for more relief from the selling.
Market finds relief in energy stocks.
After NASDAQ abdicated the early 2007 leadership with a nasty two-day sell off that reversed its breakout and dumped it back into its 9 week range the market found a little relief Friday. There was not a lot of news to really push any action. Earnings were mediocre with GE in line and C posting a bit better results. The Fed's Lacker was adding his commentary following Bernanke's Thursday testimony to the Senate, bloviating more about inflation remaining the 'predominant' risk though housing was an economic risk. Michigan sentiment jumped sharply to 98.0 versus 92.4 expected and 91.7 prior, but it was the preliminary report, and those dorm rooms surveyed have been known to alter the views dramatically by the final report in a couple of weeks. Of course, a plunge in oil prices (though up Friday at 51.99, +1.51) and thus gasoline (already well below $2/gallon in Houston area even with ozone reformulation costs) tends to work wonders on the American consumer's psyche.
With the so-so news headlines and a hangover from the Thursday thumping on NASDAQ, stocks started lower. No harsh sell off, however, and after an hour of sparring the indices advanced nicely, recovering the early losses and moving positive. Selling returned at lunch but the afternoon saw yet another comeback with all but DJ30 managing a positive close. After the pummeling it took Wednesday and Thursday, NASDAQ was primed for a bit of a relief bounce and/or some short covering ahead of the weekend, and that is exactly what it got.
The technical picture was mixed, but it held out a bit of promise. Just a bit. SP600 led the rebound, posting a 0.79% gain as it bounced off its 50 day EMA. It is trying to make that higher low in its 9 week range, and thus set up a breakout attempt from a larger 9 month cup with handle base. That helped push NYSE breadth to 2.3:1. Alas, much of the move was attributable to energy stocks that enjoyed their own relief bounce after a manhood-robbing decline over the past 6 weeks. Thus you have to look at the move with a grain of salt; positive in that the index bounced off the 50 day MA & continuing work on its bigger pattern, but driven by a beaten up sector recovering from a particularly harsh spanking.
THE ECONOMY
Data stronger, bond yields rising, Fed on the sidelines.
Michigan sentiment was sharply higher (at least in the prelims), the regional manufacturing reports were solid, and the inflation reports continued to soften. Interest rates rose all week on the stronger economic reports (4.92% 2 year, 4.77% 10 year on the Friday close), and while that is not the greatest scenario for the economy and thus the market longer term, they are still relatively low and importantly they are doing the Fed's work for it. Thus the Fed is likely to remain on the sidelines for the foreseeable future.
Earnings thus quarter not as strong as the economic data.
It is the oldest market saying (or in the top three) that earnings drive stocks prices. Current earnings results influence near term stock prices while guidance and the trend in earnings growth (or decline) guides prices longer term. Thus you can have a quarter with slower earnings and still have price appreciation if the market anticipates further earnings growth down the road. Thus a stock can take a hit on earnings results but then recover and move higher once the short term players are jolted out of positions because investors still see growth ahead.
Is this a quarter where earnings are slowing? Is this a slower quarter that will yield to growth yet again? Or is it a slower quarter foretelling even slower earnings well down the road? The economic data tends to lag reality. ECRI still shows advances down the road though they are still rather contained.
Thus far the Q4 results are tracking lower than Q3. This past week marked the real start of the season, and compared to Q3 positive earnings surprises top downside surprises 3:2. In Q3 they were up 2:1. Thus far the median profit growth is 9.4%, not the double digit growth seen the past two years.
If this holds it means that recent earnings are growing slower, and as seen with investors' response, that is not good for stocks near term. That is the norm. If the market is predicting continued future economic growth at a rate that will push profit growth rates higher, then stock prices should continue higher after working through the current issues. We can look at the leading indicators and predict more growth, but the market is the real barometer. What is predicted means little if the market does not follow. With NASDAQ dumping back in its consolidation range and SP600 still trying to form a handle to its base there is still the remains of a foundation to move higher. The NASDAQ breakout reversal crumbled some of the support, however.
This was just the first week of earnings and thus there is still a lot to work through near term. The key near term is whether NASDAQ holds in its range and SP500 holds in its handle. That at least gives them a chance to advance once the near term earnings issues work through the system.
THE MARKET
MARKET SENTIMENT
VIX: 10.4; -0.45
VXN: 16.81; -0.82
VXO: 9.75; -0.56
Put/Call Ratio (CBOE): 0.83; -0.08. Held fairly low all week even as NASDAQ sold, clearing 0.90 but not approaching 1.0 on the close. Still rather tame, indicating not a lot of downside bets being placed.
Bulls versus Bears:
Bulls: 50.5%. Quite a drop for the week, down 5 points form 55.4%. After a blip higher they are resuming what was a modest dip (down just 4 points over the past 6 weeks). Major drop here even as SP500 and DJ30 remain in good shape. Peaked in January 2006 peak at just above 60%.
Bears: 22.1%. Moving back up after nearly undercutting the 20% level considered bearish Up from 20.7% last week after a few weeks trading near 20%. 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: +8.1 points (+0.33%) to close at 2451.32
Volume: 2.079B (-18.14%). Volume was lower but held above average as NASDAQ faded back from that massive Thursday surge on the selling. The lower volume indicates a relief bounce when stacked up against that higher volume selling regardless of whether trade was above average.
Up Volume: 1.225B (+816.923M)
Down Volume: 817.605M (-1.122B)
A/D and Hi/Lo: Advancers led 1.59 to 1. Not bad but rather middle of the road. Note how overall NASDAQ topped NASDAQ 100 (+0.17%) as the rest of NASDAQ (biotech, healthcare) continued to perform better.
Previous Session: Decliners led 2.48 to 1
New Highs: 46 (-21)
New Lows: 19 (-25)
The Chart: http://www.investmenthouse.com/cd/^ixic.html
As noted above, NASDAQ gapped lower to test the 50 day SMA (2435) and then posted a modest recovery. It took a couple of tries to make the move stick, but by the close it traded near session highs. That still keeps it below the 18 day EMA (2453) as it tries to mount a recovery from the distribution and back in its range with a top at 2471. The hold at the 50 day MA is a good point to rally from but the big investors need a reason to move into tech once more, and that would be pretty fickle. After all they broke higher to start the year on heavy volume and then sold off a week later on heavy volume. Many of the large caps that led the early charge are still on the ropes or fell off the end of their ropes as of Friday. Thus it is up to the rest of NASDAQ to pull it up. It is in position of the buyers return, but at this juncture we just have a relief bounce from a hard breakout reversal.
SOX (+0.54%) showed the recovery of the mortally wounded on Friday, keeping a stiff upper lip with its intraday tap at the 200 day SMA before fading and giving back more than it gained on the close. It managed to hold above some support at 450, but that Thursday drop left it gut shot from the looks of it.
SP500/NYSE
Stats: +4.13 points (+0.29%) to close at 1430.5
NYSE Volume: 1.637B (+1.44%). Volume was up on NYSE as energy stocks recovered and indeed many NYSE stocks were higher. You could call it accumulation but it was also expiration Friday and that will bump volume some. In any event, volume was low on the week overall as NSYE avoided the distribution issues NASDAQ faces.
Up Volume: 1.154B (+531.026M)
Down Volume: 474.483M (-491.984M)
A/D and Hi/Lo: Advancers led 2.33 to 1. Sold breadth as the small and mid-caps took the lead with the energy recovery.
Previous Session: Decliners led 1.56 to 1
New Highs: 137 (-14)
New Lows: 4 (-4)
http://investmenthouse.com/cd/^gspc.html
SP500 held its July up trendline last week, easing back to the 10 day EMA as NASDAQ suffered. The large caps hit a new post-2002 high last week before a modest fade, but once again they refuse to give up any ground in this uptrend. As NASDAQ checked up its selling Friday, SP500 had no pressure on it and managed a modest rebound.
SP600 (+0.79%) held the 50 day EMA after the Thursday dump to that level and then rebounded for a scintillating, market leading 0.79% gain. Yes, pretty sarcastic, but it was that kind of a week. In any event, SP600 held the 50 day and is trying to make a higher low in the 8 week handle to its 9 month cup with handle base.
DJ30
DJ30 held flat for the third straight session, sitting on the sidelines as the rest of the market gyrates. DJ30 had its share of movers last week with INTC, GE, MO, C, IBM, and that kept the volume up above average, but the index has held its ground way out there on the edge of the cliff. Thus far it has a lot of mountain goat in it, managing to skirt higher and higher in its six month uptrend. Even though extended and having earnings issues, it continues to fight off any selling and trends slightly higher. It was down to end the week, but just a pullback to tap the 10 day EMA on the low and then rebounding.
Stats: -2.4 points (-0.02%) to close at 12565.53
Volume: 287M shares versus 250M shares Thursday. Volume continues to ramp up as GE, C and particularly IBM all traded on higher volume following earnings releases.
The chart: http://www.investmenthouse.com/cd/^dji.html
MONDAY
A lighter calendar of economic data this week but once more the real focus is on earnings and what companies have to say about the future. As noted above, the first wave of earnings is positive but less so than the prior quarters, and the misses are being treated rather spectacularly negative. Warn just a bit or if your guidance is a little iffy and you had better put on the fireproof suit because the blowtorches are coming out. This virulent response to earnings that are generally quite solid in the grand scheme of things just shows how extended things are. NASDAQ is on a hair trigger: miss by a hair and investors pull the trigger. It is as if it is the whipping boy for DJ30 and SP500. There have been some misses there as well as the other indices, but they have mostly skated by while NASDAQ gets cold cocked.
NASDAQ is a market key for 2007 given it is a growth index, it took the leadership reins to start 2007, it posted a strong breakout then puked it all back, and someone has to lead given that SP500 and DJ30 are overextended. After that gut punch on Thursday it managed to hold its 50 day SMA after gapping lower and posted a gain on lower but still solidly above average trade. Can it hang on here and resume leadership?
Holding the 50 day is always a good sign some big institutions are in there buying at key support, but it is not definitive after such a harsh blasting. Leadership is the key, and NASDAQ is having its issues in that regard. The large caps lagged the Friday rebound after helping lead upside early in 2007. If the large cap techs are not in the game NASDAQ struggles. That can still be a positive for the NASDAQ biotechs, healthcare, and other stocks that are not called DELL, INTC, AMAT, etc. as the former show some solid patterns and moves higher. Right now the big name leaders are having a confidence crisis that is yet unresolved. They were thrown back hard last week and are now back in the confines of the 9-week lateral move to try and lick the wounds and set up another attempt. That holds some promise, but it is never good to see an index reverse on volume while key leaders show the same action after starting the break well.
Now last week was an expiration week and usually that means some midweek pre-expiration shuffling that results in volatility. Well, that was no doubt the case, particularly in technology. The virulence of the selling suggests there was more there than just expiration edginess, but with NASDAQ holding the 50 day SMA again there is some potential.
NASDAQ starts the week still searching for strong earnings outlooks to get some investors interested again. There was not a lot of faith regarding heading back into techs Friday; modest gains on lower volume was the general rule. Problem with that bounce is that these pauses with modest gains let off some of the selling pressure without much of a bounce, letting the sellers reload to take another shot. If the sellers are earnest, they use the pause to do just that. There is potential to bounce but there is also the fact that techs were dumped in the face of a breakout. As for the downside, we will let this bounce play out, and if it fails we will step in and make that play.
With that set up we will continue to look at the areas mainly outside tech that weathered the week well and even started higher. That shows there is money staying in the market, still looking to drive some areas higher (e.g. biotech, healthcare, metals, internets), and as the big institutions push them higher we will go with them.
Support and Resistance
NASDAQ: Closed at 2451.31
Resistance:
2468.42 is the November 2006 high
2471 is the December 2006 high
2493 is an interim peak from February 1999
2523 is price resistance November 2000
Support:
The 50 day SMA at 2435
The 50 day EMA at 2421
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 1430.50
Resistance:
1432 is the December 2006 high
1444 from February 2000
1475 from peaks in December 1999 and January 2000
Support:
1426 is the July up trendline
1425 is an interim high from November 1999
The 18 day EMA at 1422
1408 is the November high
The 50 day EMA at 1406
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 12,565.53
Resistance:
About 8.4% 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 12,525
12,499 is the December intraday high.
12,361 is the November 2006 high
The 50 day EMA at 12,328
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 22
Leading Economic Indicators, December (10:00): 0.2% expected, 0.1% prior
January 24
Crude oil inventories (10:30): 6.78M prior
January 25
Initial jobless claims (8:30): 310K expected, 290K prior
Existing home sales, December (10:00): 6.30M expected, 6.28M prior
January 26
Durable goods orders, December (8:30): 3.5% expected, 1.6% prior
New home sales, December (10:00): 1.05M expected, 1.047M prior
End part 1 of 3
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