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us stock market, trade stock
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2/03/07 Investment House Daily
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Investment House Daily Subscribers:
MARKET ALERTS:
Target hit alerts: Took some interim gain after a nice run into the weekend. CRM; CROX, ICE, MNST, MRVC, WMS
Buy alerts: BMC; GS; MON
Trailing stop alerts: RNOW
Stop alerts: None issued
The market alert service is a premium level service where we issue intraday alerts relating to the general market conditions, when stocks hit action points (buy, stop, target, etc.), and when we see other information impacting the market or our stocks. To subscribe to the Daily alert service you can sign up at the following link:
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SUMMARY:
- Fed adjusts its course again and market adjusts as well.
- Job creation offsetting predictions of housing-led recession.
- Sentiment quite ebullient after this last push: yes you can buy higher and sell higher, but you have to be smart about it.
- Transports confirm DJ30 new high.
- Beyond the latest FOMC meeting and earnings season
As the Fed goes the market goes.
The market entered the week struggling under some heavy distribution, particularly on NASDAQ with its two breakouts then beak downs. NYSE was not immune either, reversing a solid break higher with an immediate gut punch lower just a week earlier. Thus the week started quiet, but as we noted often early last week, the indices refused to break down. Indeed, energy came back to life after a long slumber as oil, fresh off a visit to $50, decided it really was more valuable than that. It closed out the week at $59.02, adding another $1.72 on Friday.
That got the energy stocks off to a rousing start for the week as noted, but the steady climb in oil didn't stall the market. Yes techs seemed to enjoy a resurgence as oil fell to $50/bbl, leading the market higher as the year started and oil tanked. But the market has seen oil in the high fifties before. Indeed it has seen oil close to $80. Now that did not bring great joy to buyers when it was tapping at $80/bbl in the summer of 2006, but it did not send the economy or the market into the abyss. Thus even as oil climbed higher last week back toward the upper fifties, the market did not tank. Tech continued to struggle, but the market did not tank.
Stocks rallied even as oil rallied, not because investors particularly like climbing crude but because the FOMC gave investors a mid-week tweak to the Fed's inflation outlook, no longer calling inflation pressures elevated even as it noted improved economic activity. The 'growth without inflation' twist to the Fed statement was the second significant alteration in Fed-stance since Greenspan started the hikes over 2.5 years ago. The first was the August pause, and now a recognition that inflation pressures are fading. That is a set up for going neutral on its bias. (Whether that ultimately leads to a cut is up for debate on down the road, but history suggests that Fed tightening is eventually followed by Fed loosening at some point, typically because the Fed goes too far with hikes. Almost hate to say it given my distaste for the Fed, but Bernanke's first run at monetary policy manipulation may not require rate hikes anytime soon. He basically undid the Greenspan damage that ignited inflation and at the same time kept the economy growing. As the two Guiness beer guys would say, brilliant!).
That change may seem minor, and in comparison to pausing rate hikes (a.k.a. stopping rate hikes) it is. As far as the necessary chain of events to get the Fed off of its tightening bias and thus off the market's back, however, it is a critical link. Stocks seemed to think so as well, and they posted two strong volume upside sessions in response. The last time the Fed introduced a significant change in policy the market rallied for 6 months. Last week it renewed the current yet faltering rally (those reversal days on distribution) with some solid accumulation.
Moreover, it was not just the SP400 and SP600 leading the way, though they definitely started things off with the energy move. As the week progressed, anything that dealt with industry and consumer needs was moving higher. Once more as in late summer and the fall, the industrial, retail, materials, machinery, consumer, metals, and transport stocks started higher and indeed that entire segment of the market appeared to be on rails. At the same time tech, while going along for the ride, just stumbled along.
Friday was similar but less forceful a session. Jobs were lower, but with revisions they really were not. Labor costs ticked lower. Factory orders surged. Michigan sentiment was a bit lower but still solid. Earnings were overall solid with some stellar performers and some slackers. The strong were rewarded, the weak were led to slaughter. More of the same but also a bit slower with DJ30 fading to negative on the close. Given the move higher, particularly in the small and mid-caps, and the approaching weekend, a bit of weaker action, a bit of profit taking is not uncommon.
Technically Friday was not that special with lower volume, narrower breadth, and that DJ30 fade from some of its gains. That didn't keep the S&P indices from notching new all-time or post-2002 highs, however. The momentum that started in the small and mid-caps held up through the Friday close, and importantly it was not all energy related. Energy started the move but it was not the closer. Other sectors jumped into the game and that is what gave those indices their strength through Friday.
In sum a good week of renewed accumulation, solid breadth, leadership, and new highs as a major part of the market try to reignite their rallies. There still may need to be some rest required even with this positive response to the Fed's next step in the sequence. There is still a 6.5 month untested rally underway, and markets simply cannot continue higher unabated without at least taking a breather. Problem is, you can know a market is extended but the market doesn't seem to know it or at least let on that it knows. It can run until it cannot run anymore, and that sometimes makes those tests appear pretty cataclysmic even though they are just tests of a continuing run.
DJ30 was already a bit weak Friday though nothing serious. We have to be on guard, however, as noted in the Thursday report because the market is still overbought, and now that the Fed has made the start of its next move, the economic data is overall improving (though the ISM keeps things interesting), and investors know the lay of the land with respect to earnings, there is a tendency for a letdown. Everyone was very excited Thursday and Friday on the financial stations with 'buy' shouts across the board. After a weeklong rise on top of a multi-month run, that kind of gung-ho attitude can reach up and bite you. As we said Thursday, just keep your head on and look for opportunity as it presents itself.
THE ECONOMY
Jobs data remains solid based on the revisions.
Non-farm payrolls came in at just 111K, well below the 150K anticipated. That number along with a tick higher in the unemployment rate (4.6% versus 4.5%) was enough to get the critics ready to pounce on any apparent weakness (after all the 2008 campaign has already kicked off) talking, but no one is listening to that noise. Why? Because there were the usual revisions to the prior months (81K for December) that, when factored in, produce an average of 150K jobs per month, right on the button with expectations.
The jobs report has really lost its market moving mojo of late because of those repeated and rather massive revisions, and also because it is pretty much accepted that the jobs market is solid along with the economy. The continued complaint is that the jobs are not good jobs, but those making the argument are mostly those that complained there were no jobs until the month after month data simply made that a fool's argument. Indeed, when you talk to head hunters the jobs they are trying to fill are high quality jobs and we are not just talking about the $100M S&P 500 CEO jobs. Sure we are not at the end of a 20 year boom when the job cycle is at its peak throwing off its best jobs, but these are not burger flipping positions either. As with the 'jobless recovery' argument, this one is losing its steam in the light of reality.
Housing recession theories losing their foundation.
Given that jobs are lagging indicators and that job creation is now pretty much accepted, the focus is more on inflation given the Fed remains at least active in its talk and leading indicators. Sentiment remains high as both surveys reported last week, but sentiment is not leading; it just tells you when you are in a safe zone or not, and we have been well into the safe zone for years now.
Leading indicators such as ECRI point to continued strengthening ahead and as discussed last week, despite very gloomy talk about housing. There are still pundits who view the housing decline as the head shot to the economy. Many predicted a recession due to the housing decline to already be in progress. That did not happen and now one of the leading housing-based recession pundits has changed from a recession to a 'growth recession' prediction, i.e. where the economy remains flat or grows up to just 1% annually. As with the 'jobless recession' crowd, in the face of the economic data these recession predictors are losing their argument as well.
One thing these folks are not considering is the jobs market itself. When jobs are plentiful and consumers are not worried about losing their jobs they tend to be content (thus the higher sentiment readings) and they tend to consume (recall how the holiday season came out better than expected). With the unemployment rate indicating 3M jobs created in 2006, even if some people lose their houses through some of that crazy financing, they still have jobs and will still keep consuming. That oversimplifies their plight considerably, but the point is this is not a situation where an economic decline is causing mass numbers of owners to lose their houses. In that event they lose the house and stop consuming as well because they don't have a job. Right now they still have jobs because there is no general economic decline.
That is part of what we discussed Thursday: there is no confluence of bad economic events necessary to trigger a recession. The housing decline is not great but it is not fatal. Housing was going to decline as the expansion continued. It ALWAYS does in normal expansions because housing is an early cycle event. When people feel better, when they get a new job after an economic downturn, they look for that new house. Housing starts things off but then fades as the recovery progresses. This last time it was artificially strong due to 9-11 when everyone bought houses because of historically low interest rates and then became homebodies because no one wanted to travel. That kept the market alive much longer than normal after a recession. Now people are traveling again and are generally looking outside the house, and are consuming along those lines. Housing is fading, but it is not blasting a hole in consumption or the economy because there is simply a shift in focus.
Thus those that want to say it is different this time are really missing the bigger picture. It is not different, it was just that the normal cycle was stretched out by an extraordinary event that temporarily altered our habits.
THE MARKET
MARKET SENTIMENT
We touched on this Thursday about how many pundits including the television guys are saying you have to go ahead and step and an pay up for stocks right now even after some have made impressive two, three or even week or two week moves. The idea behind this is that the market is running now and you don't want to miss it. We pointed out the danger of that, i.e. that after such runs you can get caught in some backwash as the stocks come back down to test just as you move in. No fun.
I appreciate what they are trying to do, i.e. get people used to the idea that they can buy high and sell higher. Many people see a stock move up and assume it is gone for good. As you know, we teach there are many points you can buy in on a stock in its up or down lifecycle. The trick is avoiding as much as possible buying as a stock makes a countercyclical move. That will happen to anyone no matter what their level of investing skill, but you certainly can mitigate the potential damage by choosing WHEN to buy high and still look for more upside.
In other words, pick your shots. Look for the pullbacks in ongoing uptrends, look for breakout tests, look for that next wave of strong stocks with good fundamentals growth rates (the market does not move up all at once; there is rotation of money within uptrends). If a stock is up 3 to 5 days in a row that is likely not a great point to jump on in. It may still squeeze out a session or three but we would rather pluck the juicy middle of a run versus just trying to scrape the icing off the plate. Sure there are times we will try to do the latter, but we go in knowing that a stock has made 4 runs up its 18 day EMA after the breakout and if we get one more good push higher we had better take it and smile.
With all of this bullishness about the return of the late summer/fall trends you have to remain alert for the pullback that many (including us) were (and in some cases still are) concerned about. Just when everyone starts thinking one way you can get slapped. That is why it was worth it for us to take some interim gain off the table Thursday and Friday, particularly on options that we don't care to ride back down.
Sure we were (and still are) concerned about an overbought condition that could lead to a correction, but we did not let that stop us from buying into leaders when they flashed the 'buy me' signals. You have to do what the market is telling you, not what you feel or what sentiment seems to be telling you everyone else feels. Things were choppy and uncertain but we were still stepping in and buying leaders when they were right. Thus as many were doing the 'buy, buy, buy, buy' on Thursday and particularly Friday, we were in the position to say 'sell' and take some gain off the table while others drove our stocks and options higher. That is why I am looking at a new wakeboarding boat for my kids this weekend.
Sentiment is still too bullish. There is still the potential for a fast, scary, attitude-adjusting correction ahead, particularly now that many that feared a correction are shrugging it off. A lot of new money hit the market to start February as well as money taken out of techs after going their way to start January. With everyone so bullish, a lot of ammunition was shot up Thursday and Friday, and now we see if there are still buyers with full magazines ready to shoot some more.
VIX: 10.08; -0.23
VXN: 16.43; -0.68
VXO: 9.79; -0.17
Put/Call Ratio (CBOE): 0.97; +0.13
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: +7.5 points (+0.3%) to close at 2475.88
Volume: 1.932B (-15.36%). Volume fell to average Friday as NASDAQ posted a modest continuation of the gains for the week. NASDAQ, similar to NYSE, posted accumulation on Wednesday and Thursday, a positive development after the two high volume reversal sessions in January after NASDAQ appeared to be back on track for a leadership role.
Up Volume: 1.197B (+130.057M)
Down Volume: 700.584M (-432.895M)
A/D and Hi/Lo: Advancers led 1.22 to 1. Breadth was never up to the NYSE caliber during the week.
Previous Session: Advancers led 1.8 to 1
New Highs: 119 (-55)
New Lows: 15 (-9)
The Chart: http://www.investmenthouse.com/cd/^ixic.html
NASDAQ gained every session last week after testing its 50 day EMA two Fridays back. It only managed 40 points for the entire week, however, not nearly enough to challenge the January high at 2509. It did manage to close above the December high (2471), a resistance level it turned back from on Thursday, though Friday volume was low. NASDAQ continues to lag, unable to take the leadership role it assumed briefly to start 2007. That was its position all during the Fall rally, and it looks as if it is taking that rear position once again.
SOX (0.85%) regained more lost ground on Friday, stretching its recovery above the 200 day SMA up to the 50 day EMA (467). It tried to retake that level but faded into the close. It is moving back up but it still has yet to make a higher low or higher high after peaking in November and December. Thus it is hard to get too excited about this rebound, particularly with NASDAQ taking up a rear guard role with respect to the NYSE indices.
SP500/NYSE
Stats: +2.45 points (0%) to close at 1448.39
NYSE Volume: 1.428B (-15.31%). Volume faded below average on NYSE as the small and large caps posted new highs. There was accumulation Wednesday and Thursday as the indices powered to new highs. That pretty much washes away that one distribution session that sold off the last new high two weeks back.
Up Volume: 779.935M (-513.305M)
Down Volume: 623.147M (+240.031M)
A/D and Hi/Lo: Advancers led 1.39 to 1. After a string of impressive breadth advances it took the day off.
Previous Session: Advancers led 2.8 to 1
New Highs: 231 (-126). Started to get interesting on Thursday. Will see if it can ramp up again toward 500 as the indices advance further.
New Lows: 3 (-4)
http://investmenthouse.com/cd/^gspc.html
SP500 posted 4 consecutive upside sessions with Fridays gain, pushing to its second new post-2002 high of the week. A very nice response to the reversal of the new high last week. It could be that the test of the 50 day EMA (1414) back in early January when NASDAQ took the lead and the NYSE stocks fell back was enough to reset the climb higher just as such a test does for a strong stock breakout and run. The renewed accumulation and breakout to a new post-2002 high would suggest that.
The small cap SP600 (+0.24%) did not lead Friday, but it along with SP400 were the clear leaders for the week as both broke out early on to new all-time highs. At first energy pushed them, but after that initial push just about everything else joined in. At one point in the fall we were only looking for the small caps to not breakdown. Now they are breaking out; that is hardly a sign that the economy is going into hibernation.
DJ30
DJ30 could not make it 5 straight for the week, giving back some ground on very light, below average volume Friday. As with the small caps, it was able to shake off the distribution from the prior week and post a new all-time high. Volume was not blowout, but Wednesday volume was strong as it made the key move to the prior high. It won't die off and it has yet to really come back and test the 50 day EMA (12,406) on any of its tests during this long run and more particularly for us, the recent tests. It was the only down index on Friday, possibly a precursor to more downside, maybe that needed correction, but there was nothing in the action to suggest that at all.
Indeed, in addition to the new DJ30 high, the Dow Transports (DJ20) closed at a new all-time high on Friday, capping off an impressive sprint higher. According to Dow Theory, when the industrials hit a new high followed by a new high in transports, there is a significant uptrend in place and with more ahead of it. So the Dow has that going for it as well.
Stats: -20.19 points (-0.16%) to close at 12653.49
Volume: 203M shares Friday versus 235M shares Thursday. Trade fell below average, declining for the second day after that stronger Wednesday burst. No mass exodus on the move higher.
The chart: http://www.investmenthouse.com/cd/^dji.html
THURSDAY
Yes there are still earnings on into February, lots of earnings. The season is really only half over in January, and some key reports are still ahead including CSCO in the tech sector. As noted above, however, investors have a good draw on the earnings season at this point, and after weathering the weaker earnings reports (or indeed selling on even the strong reports) early on they are comfortable with another 10+% gain in results. Thus what is to drive the market from here?
One thing is momentum. Up until the summer doldrums the market typically performs well, i.e. into May. Moreover, there is that last Fed adjustment to its policy, the little change that says a lot. Leading indicators continue to improve, suggesting further economic upside and thus good news for earnings. Finally, there is the notion that inflation is coming under control and that goes hand in hand with that Fed policy change.
Thus the underpinnings are in place to help push things higher, but we still have to be cautious of a letdown after such a run and so much bullishness in the market and economy. Indeed, as noted above, even the bear economists are upgrading their views to growth but at a slower rate. At this rate only Howard Dean will be left grousing about how horrible things are here in America.
That is always a scenario to watch out for a stray ball from right field that cold cocks you. Thursday we talked about a hard run that reverses; Friday was certainly not that, but it is also still early in this move. The first thing we want is to avoid a reversal similar to the last new high on SP500 and NASDAQ. Aside from that a nice leisurely test is okay. The break higher on volume, breadth and leadership is a big positive but we want to see it avoid a high volume sell off to feel better about the move. There is still a correction looming out there and that is why we still use the rallies to lock in some gain regardless of the general level of enthusiasm.
That reminds me of a situation back in early 2003. The market had double bottomed in the fall 2002 and there was, for the first time in the long downtrend, some leadership that was set up well to move higher and indeed had started breakouts off the October low (EBAY and TSCO were two big winners that we bought into off that low and we held EBAY through 2004). In early 2003, however, the market pullback back once more. The pessimism soared as almost 100% of the pundits said it was s continuation of the bear market. We saw the underlying economics improving and the leadership. We saw the pullback was on low volume and holding support, that price/volume action still showed accumulation. Thus we were buying stocks that were setting up and starting moves while most were still extremely negative. Listening to what the market was saying and not the crowd made us a ton of money.
Right now there is a lot of enthusiasm about the recent gains. Understandable. Stocks went from getting hammered on earnings to getting rewarded. Leadership swelled, accumulation returned, breadth spread out. Nothing wrong with this at all; enthusiasm is going hand in hand with solid market moves. As long as it stays that way things are okay. We just need to keep our heads on straight and be wary of the problem areas. Another fast distribution reversal would be one. Leadership decay would be another, i.e. leaders reversing as well on strong volume and slicing support.
The market is still due a correction, and given the gains it is likely to be sharp and rather fast when it comes. We can continue to play the upside because the market took on a good look with the renewed accumulation and new highs. NASDAQ is still a sore spot and could be an undoing of sorts, but it has yet to show that. Thus you look for opportunity and take it; that means don't chase it because that is EXACTLY how people get hurt when there is a turn during times of high enthusiasm and a stretched market. They are lured in to 'buy, buy, buy, buy' after strong runs are in place and then watch as the market turns on them.
Again, this is not meant to dissuade anyone from buying into solid stocks that are in position to buy. There are still many out there as this move spreads out and market action continues to improve. Just keep your feet grounded and don't chase any move just because you feel you are missing out on it. There are rarely any stock moves that you miss out on; you almost always get another chance to buy. Patience is one of the keys to a successful investor and trader. Patiently let the play set up and then let it start to move. At that point you move fast to take what the market is giving.
Support and Resistance
NASDAQ: Closed at 2475.88
Resistance:
2509 is the January 2007 high
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
2450 is minor support
The 50 day EMA at 2431
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 1448.39
Resistance:
1475 from peaks in December 1999 and January 2000
Support:
1444 from February 2000
1440 is the July up trendline
1432 is the December 2006 high
The 18 day EMA at 1430
1425 is an interim high from November 1999
The 50 day EMA at 1415
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 12,653.49
Resistance:
About 8.5% above the 200 day SMA. Still going strong, overcoming the chop as it pushes to a series of new highs once more.
Support:
The 10 day EMA at 12579
12,499 is the December intraday high.
The 50 day EMA at 12,406
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.
February 5
ISM services, January (10:00): 57.0 expected, 56.7 prior
February 7
Productivity, Q4 (8:30): 1.7% expected, 0.2% prior
Crude oil inventories (10:30): +2.684M prior
Consumer Credit, December (3:00): $6.5B expected, $12.3B prior
February 8
Initial jobless claims (8:30): 310K expected, 307K prior
Wholesale inventories, December (10:00): 0.6% expected, 1.3% prior.
End part 1 of 3
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