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money investment, day trading
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1/25/06 Investment House Daily
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SUMMARY:
- Investors answer solid Wednesday upside with even stronger shot of selling.
- Bond yields continue rising toward Fed funds rate, sparking misguided talk of inflation.
- Indices have not broken lower but have to tread with caution given the volatile action.
Sellers return en masse on the heels of the strong Tuesday gains.
Earnings remained solid for a second session (NOK, T, QCOM, BMY, EBAY) and investors once again liked what they saw, a marked change from the prior week. Stocks started higher with NASDAQ pushing to clear the December high again, trying for another new post-2002 high after sellers committed new high interruptus last week.
No sooner did NASDAQ reach the December high, however, and sellers stepped in. Weak housing starts and worries over inflation given the rising interest rate picture were blamed. With earnings turning out fairly decent after a weak start, the market had to latch onto something, and existing home sales, the first economic data in awhile, were a good scapegoat. Throw in some inflation talk and you have grounds for selling, at least when that is what the market wants to do. If the market wants to sell or rally, it will grab whatever excuse comes along and ride it hard. Even oil could not turn the tide back when it reversed course from the past couple of sessions and started to sell once more (closed the session at 54.23, -1.14). Nope, the fix was in, and Thursday it was to the downside.
Regardless of the reason the sellers locked on and the indices sold all afternoon and into the close. They gave back the Wednesday move and in some cases even more. It was no breakdown, but the turn back down was clearly evident with higher volume and strong downside breadth.
That pretty much tells the technical story. The indices turned back down on the heels of what looked like a strong upside break. The Wednesday move was on strong volume, good breadth, and solid leadership. Thursday the selling was on stronger volume, stronger negative breadth than the Wednesday upside breadth, and many leaders sold hard as well.
As noted, the indices did not break down, just turned sharply lower again after what looked to be a solid upside attempt. When NASDAQ broke back down after its breakout, it took a few sessions to do so. Indeed, the first move lower looked like a normal pullback to test before it got out of hand and the breakout failed. The next solid upside move was immediately reversed; the sellers were bolder, using the rise to sell into. The were not only bolder, they were stronger with volume surging and downside breadth spread out to cover most of the market.
This back and forth high volume volatility shows there are big institutions fighting it out, but as the downside sessions show, the sellers are taking control, forcing the NASDAQ back into its range last week and trying to break it down again when it tried to rebound. This is the kind of action you see when a trend starts to falter. SP500 and DJ30 turned choppier in late 2006 but that passed as NASDAQ recovered and helped prop up the entire market. They are no less extended than they were at that point, and with NASDAQ distributing it won't be able to support them if it continues to fade.
You always have to be careful of big volume tennis matches after a run higher as that shows a large number of stockholders are moving out of position. Yes the upside is on high volume as well, but the path upside is much bumpier with plenty of big institutions using the upsides to sell into. At the end of the day you look and see what side is winning out. Right now the sellers are taking over on NASDAQ with the two reversals, the higher downside volume, and the stronger negative breadth. It is indeed time for caution.
Thus we were buttoning up positions Thursday, using the early bounce to start taking some money off the table and continuing to do so as the session progressed. Again, there were no breakdowns, but the downside strength is building and that makes it tougher for the indices to hold their trends.
THE ECONOMY
Bond yields still rising but finding some resistance at 5%.
The 2 year treasury closed at 4.97% and the 10 year at 4.87%. The inversion remains but it has closed to 10 BP from 14 just recently. The Fed funds rate, the short term rate set by the Fed, is at 5.25% and the 2 year is coming in line with that as the idea of a Fed rate cut was chopped out of bond prices and economic data continued to improve faster than expected. That is part of the inversion equation, and this one is improving, bringing rates more in line with what the Fed wants. That is a positive for the market because it pretty much tables the Fed, keeping it in the current holding pattern that began with the August pause.
The other inversion remains, i.e. long term money viewed as less valuable than near term money as the short term rates command higher interest rates than the longer term. There is an element of petro-dollars recycled in the US that is keeping the long end artificially lower, but no one can hang an accurate number on just how many basis points that impacts.
Despite that latter inversion, now lingering for close to a year, there is the view that the economy is going to improve down the road. At least that is what the rising rates tend to indicate. More demand for money raises rates, and as the economic data improved the past three weeks bond yields started higher.
Thursday we heard talk about rising rates indicating inflation. Someone read a chapter on the 1970's and came away with the idea that higher interest rates equals inflation. While it is true that the economy performs better with generally low interest rates, just because rates rise from low levels to higher levels does not mean inflation has arisen. If that were the case, a rise from 1% to 2% would be considered inflation even though we all know that in historical terms 2% is an extremely low rate of interest. Similarly, rates below 5% are historically low rates. Thus a rise toward 5% does not automatically mean inflation is here. Rates rise in a stronger economy, and indeed as the economic data has come in stronger than expected, rates have risen. Overall rates remain low. Hell, even the Fed cannot get them to where it wants despite almost two years of tugging at them with rising Fed rates.
The pork belly oracle.
In any economy you can look find a sector where prices are rising and argue that inflation is picking up. Healthcare is often used, but healthcare costs have risen over the past 10 years and more regardless of what else was happening in the economy. Same with tuition. In 2001 and 2002 the Fed was worried about deflation but healthcare and tuition were not heading lower. Regardless of economic conditions tuition costs tend to rise.
To get a real idea of inflation you have to look at the broader range of prices, including the materials that go into all of the stuff that we buy. Commodities tell a lot about economic activity and inflation based upon their price movements. Recall that we wrote inflation pressures (as opposed to inflation itself) peaked in October 2005. Inflation was still rising, but the forces that cause it to rise had peaked. Inflation is a lagging indicator, and thus it continued to rise well after the pressures that lead to inflation stalled out. Just over the past few months have we seen inflation start to fade.
Before that, however, commodity prices started to fall, peaking in May 2006. Oil still had some upside to it as it hit near $80 in July, but commodities overall started lower. Oil fell into line over the past month as well. Indeed, the commodities index (CRY0) peaked in May, formed a head and shoulders top, and has trended lower since. It bounced the past week, but that too will likely fail and send commodities to a 2 year low. They are still much higher than they were when the run started in late 2001, but they are going to head lower once more. In sum, they are no longer trending higher but are now trending lower with no bottom yet. Commodity declines are indications that inflation pressures are falling. They are an important indicator that prices are not inclined to rise.
Misguided inflation talk masked the real issue?
Thus though the talk about inflation taking the market lower was likely misguided. Falling commodities can be a sign of economic slowing, and with tech outlooks (and indeed outlooks from other sectors as well) less than inspiring, the worry is that things are lining up for slower growth. Stocks don't like inflation, but they really don't like slowing growth that robs earnings growth.
Thus the real culprit underlying this market move is a concern that earnings growth might not support higher prices, and some big money is coming off the table to see how things pan out. And, of course, the long sustained run from the summer 2006 lows has yet to suffer a correction. The elements are piling up for a correction, and whether or not there is slowing, the market will suffer periodic corrections.
THE MARKET
MARKET SENTIMENT
VIX: 11.22; +1.33
VXN: 17.63; +1.02
VXO: 10.79; +1.74
Put/Call Ratio (CBOE): 1.2; +0.36. First close over 1.0 on this cycle of selling that started last week. Not really a cycle, just selling.
Bulls versus Bears:
Bulls: 52.7%. Well, bulls jumped right back up after plunging to 50.5% from 55.4%. That break higher by NASDAQ last week jumped them up and the reversal did not quell the spirit. The action this week likely will. Peaked in January 2006 peak at just above 60%.
Bears: 20.9%. As bulls rose, bears declined from 22.1%. Right back down after a nice recovery where bears almost undercut the 20% level considered bearish. It fought off 20% but is heading back to that level that is considered bearish for the market. Hit a new post-2002 high in that late June 2006 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: -32.04 points (-1.3%) to close at 2434.24
Volume: 2.279B (+6.23%). Volume rallied on NASDAQ as the index reversed the Wednesday gains that came on rising trade as well. The buyers were in pitching on Wednesday, but the sellers were back in and stronger on Thursday. Despite the strong upside trade last week on the breakout and on Wednesday, the sellers have answered both moves with stronger downside action. That tells us there is a large contingency of managers, institutions, etc. that are selling into any upside move by techs right now.
Up Volume: 594.208M (-1.224B)
Down Volume: 1.599B (+1.217B)
A/D and Hi/Lo: Decliners led 2.43 to 1. Solid upside breadth Wednesday, stronger downside breadth Thursday. That pretty much tells the story: big fight and the sellers are a bit stronger right now.
Previous Session: Advancers led 2.06 to 1
New Highs: 50 (-68)
New Lows: 22 (+2)
The Chart: http://www.investmenthouse.com/cd/^ixic.html
Gapped higher on the continued solid earnings news but then sold the move and more on that rising volume. They once again held the 50 day EMA (2424), but unlike Tuesday there was no doji on higher volume above this support, just a dive back down toward it. NASDAQ can still hold here and make that higher low but the odds decreased considerably with its second reversal in as many weeks. The higher volume selling indicates that big funds are unloading tech shares on the bounces, and unless other buyers step up NASDAQ will struggle to hold support.
SOX (-0.56%) managed to control some of the damage with the smallest loss of the day. It rallied to the 50 day EMA on the high but then gave it all back and closed lower and below the 200 day SMA once more. That action uses up the buyers and the inability to move past resistance is also a negative. SOX is in danger of setting up another turn lower as it appears this rebound to test last week's thump lower is running out of steam.
SP500/NYSE
Stats: -9.84 points (-1.13%) to close at 1423.9
NYSE Volume: 1.755B (+10.84%). Volume jumped to its highest level since the first session of the year as NYSE stocks reversed and gave back the Wednesday gain and more. NASDAQ was not the only whipping boy as big investors moved out of the NYSE stocks as well, unloading financials (a strong leadership group) in addition to energy.
Up Volume: 464.399M (-717.604M)
Down Volume: 1.28B (+891.029M)
A/D and Hi/Lo: Decliners led 3.27 to 1. Now that is pretty ugly breadth as all sectors joined in.
Previous Session: Advancers led 2.27 to 1
New Highs: 110 (-163)
New Lows: 11 (+6)
http://investmenthouse.com/cd/^gspc.html
The large caps struggled when financials started to crumble and energy gave up on that bound it tried to mount over the past week. SP500 rolled over and sold through the 18 day EMA (1424) on the close. This action is similar to that NASDAQ started to show last week and again on Thursday. Thus far SP500 has fought off each selling attempt in its long run. With the volatility discussed above we have our doubts it will hold again, but again, each attempt to sell it has failed.
SP600 (-1.08%) is still in the game. It was down on rising volume but it is still easily in the handle to its 9 month base, closing near the 18 day EMA. Energy was lower and that hurt the small and mid-caps, but as the chart shows, the action was not fatal. If the other indices, particularly NASDAQ, give it up, SP600, as a growth index, is likely to do the same.
DJ30
The reversal game was not limited to NASDAQ and SP500. DJ30 joined in, giving the Wednesday move back and more and doing so on rising, above average volume. It still managed to close right at the 18 day EMA, and that keeps it in the July uptrend. Thus far it has resisted all efforts to take it down. This one has a bit more behind it given the turn in NASDAQ, again, and the sharp, higher volume dive by SP500.
Stats: -119.21 points (-0.94%) to close at 12502.56
Volume: 245M shares Thursday versus a measly 217M shares Wednesday. This is the third big volume showing in the past week and one-half. The first was on a doji at the top of the last run, the second was last Friday on expiration. And the third was Thursday on the dump lower. Definitely not accumulation at this point.
The chart: http://www.investmenthouse.com/cd/^dji.html
FRIDAY
Durable goods orders before the open and new home sales at 10ET 'heat up' the economic data, but housing is not likely to be all that snappy, and Thursday it was used as a reason to unload stocks. With the sellers moving back in and the market looking for reasons to sell this could provide more ammunition.
In any event, NASDAQ tried its rebound from last week's reversal and this week's hold of the 50 day EMA, and it worked for a session. Thursday it was pretty much trashed and now we see if NASDAQ can hold the line once more and try to make a rebound stick, or work on taking out this support level. With the high volume reversal yet again on the heels of a strong upside move and with SP500 posting a pretty nasty decline on strong trade, NASDAQ cannot run to any other index for help.
Whether it holds or not, this back and forth high volume action begs caution at this point and that is why we were taking positions off the table, using the rebound to lock in some gain in the event things turned over. Many positions held up well, but if the selling continues most won't hold out (3 of 4 stocks follow the overall market). Thus if things don't improve we will continue to button up positions as they give us the chance.
As noted above, there is no breakdown yet, but the action is hard to like from an upside perspective: two reversals on the heels of two solid looking breaks higher. High volume tennis matches between the big money is not a good game to play, and as it often ends up with both sides tearing the other down, as we get opportunity we will move money out of harm's way. There are always sectors that perform even in the selling and we have seen that with biotechs and healthcare in the current environment. At the same time we will look at some downside action as NASDAQ, SOX and some others set up for a break lower. The market signposts are showing caution now for the upside, and as always it is up to us to take what the market gives.
Support and Resistance
NASDAQ: Closed at 2434.24
Resistance:
2468.42 is the November 2006 high
2471 is the December 2006 high
2509 is the January 2007 high
2493 is an interim peak from February 1999
2523 is price resistance November 2000
Support:
The 50 day EMA at 2424
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 1423.90
Resistance:
1425 is an interim high from November 1999
1430 is the July up trendline
1432 is the December 2006 high
1444 from February 2000
1475 from peaks in December 1999 and January 2000
Support:
The 18 day EMA at 1424 is back to trying to hold
The 50 day EMA at 1409
1408 is the November high
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 12,502.56
Resistance:
About 8.6% above the 200 day SMA. It turned choppy after hitting 8.5% of separation in late October, but is has not sold off and just hit a new high.
Support:
The 18 day EMA is 12,504
12,499 is the December intraday high.
12,361 is the November 2006 high
The 50 day EMA at 12,359
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 23
Leading Economic Indicators, December (10:00): 0.3% actual versus 0.2% expected, 0.1% prior
January 24
Crude oil inventories (10:30): +0.7M versus +6.78M prior
January 25
Initial jobless claims (8:30): 325K actual versus 310K expected, 294K prior
Existing home sales, December (10:00): 6.22M actual versus 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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money investment
day trading
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