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1/29/06 Investment House Daily
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Stop alerts: None issued
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SUMMARY:
- Market tries to recover from late week selling but sellers undercut the move again.
- More correction talk. Less chance of a correction?
- Fed kicks off a data heavy week.
Mixed close as market shows mixed success in rebounding from late week distribution.
The M&A activity was again stirring the pot Monday with a smattering of small deals (MER buying FRC, LAUR going private) and earnings were cranking back up (VZ beat narrowly, SGP in line, MAT beating), but this was nothing compared to what is coming this week (FOMC meeting, confidence, ISM, GDP, jobs). It was enough to lift stocks, after a mixed open, at least through lunch. The indices started a bit choppy but then turned positive midday with NASDAQ and the SP600 sporting very solid moves.
As has been the case on just about every significant upside attempt the past two weeks, however, the sellers entered and undercut the move. There was no real news story hitting the wires, just a turn back down that took the indices to session lows and back to negative. Just as with the other selling incidents, however, the sellers could not finish the deal. As oil turned from positive to negative in the afternoon (closed at $53.98, -1.48/bbl) the indices managed a rebound, recouping about one-half of the afternoon decline. That left the indices mixed on the close with SP500 and SOX negative while SP600 led the upside move with a 0.44% gain.
Technically the market favored the sell side once more though you had to look hard to see it. Despite the mixed closes, breadth was positive on both NYSE and NASDAQ (1.2:1, 1.4:1). Volume rose on NYSE as the large caps sold and the small caps advanced; more mixed action. NASDAQ volume backed off as techs posted a gain, but also traded all over the map intraday. Out of that mishmash of data there were three important kernels. First, another rally attempt was torpedoed. Second, though the rally attempt was undermined the indices did not break down. Third, leaders were still moving higher on solid trade despite the overall struggle for the markets with that intraday sell off. Two out of three favor the upside, but we are still not calling it an upside day.
It was more of a draw, and that does not change the character of late, i.e. two big sell offs following what looked to be two solid breakout sessions. Breakout, sell off. Breakout sell off. Another break higher Monday and that invited the sellers. Thus the action Monday was not enough to overturn that harsh distribution. Of course, as we note each time this happens, the indices did not break down, holding onto their uptrends off the summer low or holding key support such as the 50 day EMA.
Monday was basically a warm-up for the rest of the week, kind of testing the water before all of the economic and earnings data hits. Earnings season is about half over and it started weak with techs getting a thumping. Despite the rather cloudy view of the future, NASDAQ, SP600 and the large cap indices are thus far weathering the storm and indeed are holding support, looking for a move higher. The momentum is waning and distribution is hitting, but thus far they have not cracked. The market needs a correction and it is showing some telling signs, but it is also finding enough leadership to keep it trending higher or at least holding up at support during some trying earnings. Momentum and new money has kept things going, and it is likely to keep some sectors moving, but if we get another couple of distribution sessions it is going to correct sooner than later.
THE ECONOMY
The big news starts Tuesday with consumer confidence and the start of a two-day FOMC meeting. The latest reading on the PCE, purportedly the Fed's favorite inflation gauge, is out Thursday, the day after the Fed's rate decision. Some are saying the Fed is going to make its decision without this data. No, the Fed is privy to this data the day before it is released, so the Fed will in fact get a read on the latest PCE as it makes its decision. Some smart economists are suggesting the PCE will show a much larger than expected decline, even a negative number. About time.
THE MARKET
MARKET SENTIMENT
VIX: 11.45; +0.32
VXN: 18.16; +0.64
VXO: 10.82; +0.11
Put/Call Ratio (CBOE): 0.99; +0.02. Still just one close above 1.0 on this recent turbulence, and it usually takes several to show sufficient anxiety to warrant an upside run.
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: +5.6 points (+0.23%) to close at 2441.09
Volume: 1.957B (-4.43%). Volume faded as NASDAQ posted a modest gain, so there was no accumulation on the session. Average trade as NASDAQ tested some minor resistance at 2450 but could not push through without the trade.
Up Volume: 1.089B (+59.656M)
Down Volume: 844.046M (-134.11M)
A/D and Hi/Lo: Advancers led 1.42 to 1. The overall NASDAQ outperformed the NASDAQ 100 again (+0.12%) and thus some decent breadth.
Previous Session: Advancers led 1.47 to 1
New Highs: 120 (+39)
New Lows: 20 (-5)
The Chart: http://www.investmenthouse.com/cd/^ixic.html
NASDAQ rallied to some minor resistance at 2450 and that stopped it. Volume was lower and though it was average that was not enough to fight off the selling attempt. It is noteworthy that NASDAQ was under pressure again as soon as it tried its next rally after the Thursday distribution. It is also noteworthy that it has yet to give up its 50 day EMA (2425) despite the selling. It thus can still make a higher low here at the 50 day and continue its move. NASDAQ 100 has given up the 50 day EMA but no implosion. The distribution has wounded NASDAQ, but two days have not torpedoed it.
SOX (-0.55%) sold off again after an upside attempt, but it also held above the 200 day SMA on the close. That is the key hold for SOX right now after rebounding off 450 support. If it fails here SOX sets up a downtrend toward 430.
SP500/NYSE
Stats: -1.56 points (-0.11%) to close at 1420.62
NYSE Volume: 1.54B (+2.09%). Volume moved up to average as SP500 faded modestly, but still holding well above the 50 day EMA. Modest distribution but hard to call it that.
Up Volume: 726.296M (-57.656M)
Down Volume: 800.063M (+92.854M)
A/D and Hi/Lo: Advancers led 1.23 to 1. Modest positive breadth as the small and mid-caps moved higher while the large caps struggled.
Previous Session: Advancers led 1.38 to 1
New Highs: 131 (-4)
New Lows: 11 (+2)
http://investmenthouse.com/cd/^gspc.html
SP500 sold back but on the low (1418) held above the early December peak. Finding a bit of support as it tries to maintain its uptrend and hold above the 50 day EMA (1410). Volume was up, but as noted above, though technically distribution it paled in comparison to Thursday. Not a positive but SP500 continues to hold the line, refusing to break down in the seven month of the rally.
SP600 (+0.44%) looked like aces on Monday, continuing the rebound off the 50 day EMA test Friday and trying to make that higher low as it forms the handle to its 9 month cup with handle base. This index has nine lives and it appears it still has a few left. While the other indices look heavy, SP600 is showing some renewed vigor.
DJ30
DJ30 eked out a gain on the session as the blue chips struggle to hold the 18 day EMA (12,501) and thus the uptrend out of July. Some distribution Thursday and Friday and closes below the 18 day the past two sessions. Doesn't seem all that serious but DJ30 has closed below the 18 day so few times during this uptrend that it is noteworthy. Overall DJ30 has not felt the distribution on NASDAQ or SP500 as it remains overall solid in its uptrend.
Stats: +3.76 points (+0.03%) to close at 12490.78
Volume: 234M shares Monday versus 247M shares Friday. Average volume on the session, down from the distribution suffered Thursday. Overall very few DJ30 distribution days.
The chart: http://www.investmenthouse.com/cd/^dji.html
TUESDAY
The economic and earnings data picks up speed again Tuesday. The FOMC starts a 2-day meeting and consumer confidence for January is released. It is interesting that some polls taken indicate a vast dissatisfaction regarding economic conditions when consumer confidence is climbing and views toward jobs is good. Indeed, headhunters are reporting companies have to pay a lot more now to do their cherry-picking.
Of course perceptions always lag reality. Confidence is not a leading indicator whether it is consumer or CEO. They only feel good when things are currently good. They worry when economic times are improving rapidly and then they are satisfied as the peak nears. So take confidence for what you want. As long as it is at these levels there is simply no reason to fear the consumer is going to stop spending anytime soon regardless of what the doom and gloomers say about the empty household equity 'piggy bank.' If consumers had no money and were going to stop spending confidence would be in the 50 to 60 range. It isn't. It isn't close.
There are times where the market is going to do what it is going to do regardless of the data, economic, earnings, or otherwise. The Fed is on hold indefinitely. We have the gist of earnings. Maybe the PCE will be much lower, but that is not likely to change the outlook because without 3 or 4 or more months of declining PCE the Fed is not going to cut rates, and even then it will resist doing so if everything looks okay to it.
The point is that the market has a good read on earnings, elections, economics, etc. and now has to choose a near term course. It has some recent distribution and each rally attempt is met with selling. First the breakout that was sold off a few sessions later. Then a strong break higher that was sold the next session. On Monday an intraday rally was sold into. The selling response has come faster and faster. As noted, however, as of yet there are no breakdowns.
We have a feeling the market is going to correct relatively soon given the action on NASDAQ, SOX and SP500, but you also have SP600 and its solid action trying to offset their heaviness. You also have a lot of pundits now talking about the need for a correction. It was all over CNBC and Bloomberg today. It looks like a correction but when a lot of people expect it, the correction can keep just out of reach until everyone gives up on it. Then you get hammered. Again, the market does what it wants to do when it wants to do it. We think it wants to correct some but it may put it off given expectations right now. If there is a low PCE on Wednesday and the market tries to rally, however, that could very well trigger the next distribution session.
Our game plan is the same as it was this weekend. We still see some sectors that are working very well and are not showing some of the issues others are. We will focus on those for further upside while we also look at weaker stocks that are primed to fall, particularly if some selling resumes.
With some sharp distribution sessions in the market, it is always good to keep that in mind with current positions. If you get a good strong move in an upside play, consider taking some interim gain and then if the selling gets harsh, keep the stops tighter. We can always move back into a stock that we take some early gain on that sells off modestly and then recovers, treating it as if it were a brand new play on a brand new stock. It is said that a football defensive back's best friend is a short memory. That is true for good investors and traders; the past is the past with respect to a play and it means nothing moving ahead. Thus don't fret about taking some gain or protecting positions if the stock then bottoms shortly thereafter and recovers. If you still like it, if it has the same strong attributes, it is still a good source to make money even if you just sold it.
Support and Resistance
NASDAQ: Closed at 2441.09
Resistance:
2450 is proving to be some minor 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 2425
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 1420.62
Resistance:
The 18 day EMA at 1424
1425 is an interim high from November 1999
1432 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 50 day EMA at 1410
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 12,487.02
Resistance:
The 10 day EMA at 12518
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 put in a new high last week.
Support:
12,499 is the December intraday high.
The 50 day EMA at 12,369
12,361 is the November 2006 high
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 30
Consumer Confidence, January (10:00): 109.5 expected, 109.0 prior
January 31
GDP Q4 advance (8:30): 3.0% expected, 2.0% prior
Chain deflator (8:30): 1.7% expected, 1.9% prior
Employment cost index (8:30): 1.0% expected, 1.0% prior
Chicago PMI, January (9:45): 52.0 expected, 51.6 prior
Construction spending, December (10:00): 0.0% expected, -0.2% prior
Crude oil inventories (10:30): 789K prior
FOMC policy statement (2:15)
February 1
Personal income, December (8:30): 0.5% expected, 0.3% prior
Personal spending, December (8:30): 0.7% expected, 0.5% prior
Initial jobless claims (8:30): 318K expected, 325K prior
ISM Index, January (10:00): 51.5 expected, 51.4 prior
February 2
Non-farm payrolls, January (8:30): 150K expected, 167K prior
Unemployment rate (8:30): 4.5% expected, 4.5% prior
Hourly earnings (8:30): 0.3% expected, 0.5% prior
Average workweek, January (8:30): 33.9 expected, 33.9 prior
Factory orders, December (10:00): 1.5% expected, 0.9% prior
Michigan sentiment, revised (10:00): 97.8 expected, 98.0 prior
End part 1 of 3
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