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us stock market, trend trading stock
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2/01/07 Investment House Daily
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SUMMARY:
- NYSE stocks find new money, overcome weaker ISM, but NASDAQ can only limp home as large cap techs negative.
- PCE deflator holds steady as manufacturing slips to contraction.
- Once more the NYSE industrials (the small and the large) shake off dips, lead the market higher.
- Keep an eye out for how hard this latest move runs.
New money helps buyers continue the post-FOMC rally.
Personal income and spending matched expectations and one of the Fed's purported pet inflation gauges, the core PCE, came in lower for the month at 0.1%, but year over year held at 2.2%. With some new money hitting the market to start February and earnings still improving (e.g. XOM, ADM, RTN), that was enough to start the market on a positive note despite a continued pesky rise in oil (though by the close it was down to 57.30, -0.84).
Stocks rallied on that double shot of positive news. Then the ISM hit at 49.3 (51.5 expected), the lowest since early 2003, just like the Chicago PMI. With November at 49.9 that makes two sub-fifty readings in three months, and that put a bit of caution into the market. Maybe the reason the Fed was so magnanimous in Wednesdays statement was because it knew manufacturing was showing a continued slowdown. That knocked stocks back and sent NASDAQ negative to a new session low. Had the look of another rally attempt ready to get chopped off at the knees.
NASDAQ stumbled the hardest, dragged lower by large cap tech (GOOG struggled after its earnings that were labeled tax advantaged). The NYSE indices never took it so hard. The fell back after the ISM but always remained positive and then rebounded with a solid, crisp move to close near session highs. New all-time highs on DJ30, SP600 and SP400. SP500 logged a new post-2002 high. Hard to argue with that action.
Technically it was solid but not blowout. That is because of the split fashion in which the market traded. Indeed, it had a very familiar pattern to it. NASDAQ stumbled around as noted, something of a disappointing move. Breadth was not bad at all (1.8:1), thus indicating the large cap techs were holding it back. Indeed, NASDAQ 100 actually lost ground on the session. On the other side of the ledger, the stronger side, the NYSE indices showed some solid action. The new index highs noted above, excellent 2.8:1 breadth, solid leadership from across the spectrum, and a spurt of individual new highs all add up to strength.
Volume was lower, but it was still very solid, well above average and just off the Tuesday levels for both NASDAQ and NYSE. That was the best two-day volume showing on NYSE since the year started, and it shows some serious accumulation occurring in those stocks.
Back to that familiar pattern noted above. NASDAQ struggling, but energy, metals, materials, construction, retail, consumer products - - basically anything that would hurt your big toe if you dropped it - - led the move. That is the exact scenario that occurred in the July through December run. Those stocks led the rest of the market higher. NASDAQ was up as well, but it was a follower. After a brief jump to the lead to start the year, it is acting like a follower once more, the last of the indices to make and hold a new post-2002 high. Techs may still find themselves (it is a long year ahead after all), but they are going through a historically weak period and are showing it early in February.
THE ECONOMY
Economic data anticlimactic after GDP, FOMC.
It was inflation versus economic strength Thursday, the PCE inflation gauge against the manufacturing sector. Inflation was a bit tamer month over month (0.1% versus 0.2%) but the year over year core rose 2.2%, same as last month. That is well off the high twos over the past year but still above the Fed's preordained 1% to 2% range, a range that was basically plucked out of Alan Greenspan's nether regions during his tenure as Fed chairman. That was disappointing, and on the heels of the Fed's statement that took a more moderate view of the inflation threat, that raised some hawkish pundits' eyebrows and elicited some 'I told you so comments.'
You knew that was coming given the reading, but as we noted last night, the Fed has this number the day before it is released, i.e. during the second day of this week's meeting. The Fed also had the ISM number as well. That posted its second sub-fifty reading in three months with employment lower for three straight months. Production was below 50 as well, its second sub-50 reading in three months. Prices, while low overall at 53, were stronger than the 47 in December and October. New orders slipped to 50.3 but at least maintained some expansion.
With that weak ISM in its pocket and a trend in moderating inflation (even though the PCE did not show the negative reading we anticipated), the Fed decided to not only stick with the pause, but to set up for going neutral over the next couple of meetings. Many think that would be crazy, but they also thought the Fed was crazy in August for pausing when inflation reports (not indicators; big difference) were still rising. That worked out pretty well as we have seen. That doesn't mean the Fed can go on holiday, however. We feel it could and should, but if it did many people would overreact and all kinds of trouble starts. So the Fed holds the course, keeps talking tough about inflation, and at the same time keeps using history and leading indicators as its guide to setting policy.
THE MARKET
MARKET SENTIMENT
VIX: 10.31; -0.11
VXN: 17.11; -0.08
VXO: 9.96; -0.18
Put/Call Ratio (CBOE): 0.84; +0.05
Bulls versus Bears:
Bulls: 53.3%. Up from a brief dip to 50.5% a couple of weeks back, but still below the 55.4% hit on the just the week before. In short, bulls remain high and right at that 55% level that can be trouble because everyone is in the market.
Bears: 21.1%. Bears managed to rise even as bulls rose, up from 20.9%. where they flirted with the 20% bearish threshold. As with the bulls, it is still too close at this juncture as it indicates not enough pessimism. When bears are low it is the same as high bulls: everyone is in. 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: +4.45 points (+0.18%) to close at 2468.38
Volume: 2.283B (-2.79%). Another solid volume session on NASDAQ, so despite the struggle there was some accumulation outside the large cap names. Two back to back solid volume sessions on the upside as NASDAQ comes off the 50 day EMA. That shows some promise thought the price action did not match the volume strength.
Up Volume: 1.067B (-343.785M)
Down Volume: 1.133B (+395.755M)
A/D and Hi/Lo: Advancers led 1.8 to 1. The reason the price action for NASDAQ did not match volume is the large cap techs were lower and held the overall index gains back. Most NASDAQ stocks were rising.
Previous Session: Advancers led 1.29 to 1
New Highs: 174 (+69)
New Lows: 24 (+5)
The Chart: http://www.investmenthouse.com/cd/^ixic.html
NASDAQ gapped higher on more enthusiasm, but it sold back to negative and it took an afternoon rise to hold positive. It was not a robust rebound; NASDAQ closed below its gap open price. It was also unable to close above the December high at 2471 even as the other indices posted new post-2002 or all-time highs. The techs were notably absent.
SOX (+0.79%) recaptured the 200 day SMA Thursday but it could not push past the recent highs, closing or otherwise. It is still in the doghouse and a drag on NASDAQ. It made a higher low after that mid-January thud as the chip earnings came out and died. It is still a toppish pattern; there are other areas that look better right now because as a group chips are still distributing some.
SP500/NYSE
Stats: +7.7 points (+0.54%) to close at 1445.94
NYSE Volume: 1.686B (-2.34%). As with NASDAQ volume faded modestly but was still sold, the best two-day showing since the start of 2007. That trade carried the NYSE indices off a 50 day EMA test and to new highs of one sort or another. No complaints on the price/volume action; there is accumulation in them thar' shares.
Up Volume: 1.293B (+68.178M)
Down Volume: 383.116M (-103.899M)
A/D and Hi/Lo: Advancers led 2.8 to 1. Very nice breadth as the big stocks and little stocks worked together.
Previous Session: Advancers led 2.07 to 1
New Highs: 357 (+166). Some decent new highs on this move. You would expect better new highs given SP400, SP600 hit new all-time highs and SP500 hit a new post-2002 high.
New Lows: 7 (+3)
http://investmenthouse.com/cd/^gspc.html
The large caps were impressive with financials coming back some and joining the metals, materials, chemicals, builders, equipment, etc. stocks in gains. Blew right through the late January high to a new post-2002 high. It looked to be on the ropes a bit with last week's distribution, then it just runs back up.
SP600 (+1.13%) led the market once more with the percentage gain, rallying to a new all-time high on another solid volume shot. Classic cup with handle and now a classic, high volume breakout as energy comes back (along with most all other small caps) and pushes the index higher. Money is chasing them and stocks go where the money takes them. The rise in oil from 50 to 58 certainly did not hurt it.
DJ30
DJ30 moved to a new high yet again, riding the stronger, above average volume from Wednesday that jumped the Dow off the 18 day EMA. Once again the Dow did not even get within spitting distance of the 50 day EMA before it rebounded. There is a lot of talk about how strong this move is, but that last fact is one of the most amazing. In 5.5 months of rallying the Dow has not touched or really come close to its 50 day EMA (we say 5.5 months because that was the last time it saw that level, and that was on the test of the July break higher off of the downtrend low). The strength is impressive, but we have to watch for too much of a surge after months of rallying. That can lead to trouble. See below for more on this.
Stats: +51.99 points (+0.41%) to close at 12673.68
Volume: 235M shares Thursday versus 258M shares Wednesday. Volume backed off as DJ30 continued the Wednesday break higher. Not a calamity and at least you don't have to worry about a rush of buyers masking a sell out by the smart money. Just the same action DJ30 has shown all the way up.
The chart: http://www.investmenthouse.com/cd/^dji.html
THURSDAY
Don't chase. Buy stocks that are ready to break higher.
Jobs report Friday but from the after market comments on the financial shows you would assume the market is bulletproof and there are no worries. The 'Fast Money' crew was pushing stocks that were already up four to five sessions. Heard a lot of the 'gotta buy this stock here' even after a 10% move. While the past three sessions have shown good moves for the large cap indices, most of the leaders started moving a week to two weeks back. SP600 just posted its fifth consecutive gain itself. That is why we were banking some gain today as the market moved higher. We were buying a lot when things were not so bullish, i.e. when the market had not broken out and was in the process of setting up for this breakout.
Yes there are a lot of good looking stocks out there, but you don't want to chase the bus on most of these. They will give us another buy point when they test. While we wait for those to set up for buys again there are other stocks that are in various stages of a run. Some are just getting ready to breakout while others are actually making pullbacks or are coming off of nice little pullbacks. Talk about the early leaders. These are doing what some of the stocks that have just made the breakout will do over the next week or so, i.e. come back to test the move and set up the next run. What we do is catch the sequential waves of stocks that set up and breakout. Rarely do all stocks set up at once and make their move. The tend to do so sector by sector, not across the entire market. Thus even after good moves we have good stocks to look at buying, just not stocks that are up 5 consecutive days and have logged 10% or better gains on that move.
Something to keep an eye on as everyone gushes about nirvana.
The last time the Fed did something as dramatic as it did Wednesday (to recap, the Fed indicated it was not as concerned about inflation and the Fed is setting up to go neutral) was the August pause. The pause helped spur the run to, well, here. Now the Wednesday change was not as dramatic, but the clear turn away from inflation worries (remember the vote was unanimous this time for the no action and changed wording) is another step in the Fed process. When the Fed changes the market takes note and reacts. We are seeing a reaction to this latest change.
That change can spur another solid rally. The economy is strengthening (at least it looks that way sans the ISM), companies are a bit too pessimistic about the future given what the leading indicators are showing. You don't want to be butting heads with the move even if this turns into a blow off run (indeed if it turns into a blow off run the last place you want to be is opposite the trend).
What does that mean? Because the NYSE indices have run so far without any correction there is something we need to keep an eye on just for the fact that. We have been cautious but buying even as the indices have become further extended; you have to do what the market says not what your intestines want.
What we have to watch out for (as we let it ride higher with the other indices) is something of a blow off top forming, i.e. a strong charge straight up on strong volume as everyone rushes in while the early buyers use the cover of the fools rushing in to liquidate. When the early buyers are out and the new buyers sink their last dime in, no one is left to sell to. As you can imagine, the price drops can be rather dramatic.
Maybe it does not go that far. Maybe it manages to hold the line at the 50 day EMA (when it does actually decide to correct) and make the much needed test of that key level so it can regroup and continue. That is far different from a blow off top. Much depends upon how violent the last runs are. A stock or index tends to make orderly runs when it first breaks out. It charges higher on the breakout, then tests and starts a more contained rise up the 10 or 18 day EMA. After 3 to 5 bounces the tests of and rebounds off support tend to get more violent. That volatility is an indication the run is meeting selling resistance and needs to come back for a deeper test. After it tests the 50 day EMA, if all drivers remain in place the move up the 10 and 18 day EMA starts anew.
Again, it depends upon how hard and fast the stock or index runs higher in the last throes of the run as to what route it takes. A straight shot higher on very strong volume is a big warning sign. Sell at least some positions into such a move because the collapse can be dramatic. It can always hold at some support, but if it surges 10% or so on the run higher, you lose an awful lot of gain letting it come back to support.
So, we continue to look for opportunity as the waves of stocks break higher, moving into good entry points and not chasing the bus, taking advantage of the continued rally and the FOMC gift. We also watch for any change in the market character that is a little too strong. All this means is that we just be aware of the bigger picture as we buy into the move with individual stocks. No great need for angst, hand-wringing, etc. Just keep a bit of skepticism and your head on.
Support and Resistance
NASDAQ: Closed at 2468.38
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:
2450 is minor support
The 50 day EMA at 2429
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 1445.94
Resistance:
1444 from February 2000
1475 from peaks in December 1999 and January 2000
Support:
1438 is the July up trendline
1432 is the December 2006 high
The 18 day EMA at 1428
1425 is an interim high from November 1999
The 50 day EMA at 1413
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
Dow: Closed at 12,673.68
Resistance:
About 8.6% above the 200 day SMA. Still going strong, overcoming the chop as it pushes to a series of new highs once more.
Support:
12,499 is the December intraday high.
The 50 day EMA at 12,396
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): 110.3 actual versus 110 expected, 110.0 prior (revised from 109.0)
January 31
GDP Q4 advance (8:30): 3.5% actual verus 3.0% expected, 2.0% prior
Chain deflator (8:30): 1.5% actual versus 1.6% expected, 1.9% prior
Employment cost index (8:30): 0.8% actual versus 1.0% expected, 1.0% prior
Chicago PMI, January (9:45): 48.8 actual versus 52.0 expected, 51.6 prior
Construction spending, December (10:00): -0.4% actual versus 0.0% expected, 0.01% prior (revised from -0.2%)
Crude oil inventories (10:30): +2.7M versus 789K prior
FOMC policy statement (2:15): Held at 5.25%, no longer calling inflation elevated.
February 1
Personal income, December (8:30): 0.5% actual versus 0.5% expected, 0.3% prior
Personal spending, December (8:30): 0.7% actual versus 0.7% expected, 0.5% prior
Initial jobless claims (8:30): 307K actual 315K expected, 327K prior
ISM Index, January (10:00): 49.3 actual versus 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): 1.8% expected, 0.9% prior
Michigan sentiment, revised (10:00): 97.8 expected, 98.0 prior
End part 1 of 3
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