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world stock market, us stock market
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2/17/07 Investment House Daily
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Investment House Daily Subscribers:
MARKET ALERTS:
Targets hit alerts: None issued
Buy alerts: CROX; ICON
Trailing stops: None issued
Stop alerts issued: None issued
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SUMMARY:
- Expiration week proves rather uneventful, and even Friday is quiet.
- Economic data gives rally a pause; late rebound brings it back to flat.
- Economic weekly data weaker despite Bernanke's positive tone.
- Expiration week posts a quiet rally. Will the volatility return after the holiday?
Expiration Friday presents few fireworks.
This was the expiration week that wasn't. Wasn't volatile, wasn't high volume, wasn't part of any major market change, and wasn't very exciting. Instead the indices, aided by a mid-week Bernanke boost, bounced back up in their uptrend channels as if it were just any other week. That allowed us to make some good buys and bank some nice gain as once more the market overcame distribution from the prior week and continued higher with the NYSE indices posting new all-time or new post-2002 highs.
Friday started slower than the prior sessions, basically because the NYSE indices had rallied back up near the top of their uptrend channels. That acts as a natural governor on a rebound, and it was aided by some more mushy economic data. The PPI was in line with the core up 0.2%, housing starts flopping 14.3%, and Michigan sentiment at 93.3 versus 96.5 expected. That muted some of the positive, rah-rah feeling after Bernanke's Wednesday testimony to the Senate. In addition, MSFT splashed some cold water on technology when the goofball CEO Balmer said, just two weeks after release, that the street's forecasts regarding Vista sales were too strong.
An aside about Microsoft.
This guy Balmer is a piece of work. Everyone talks about how Bill Gates was/is a nerd. He was at least a bit reserved in public as he led a bit technology leader. Every time you see Balmer or hear him talk your mind conjures images of a snake oil seller or a used car salesman complete with plaid pants, white belt and matching shoes. He talked up Vista and how it would be delivered to consumer in the summer of 2006. Make that the fall. Make that 2007. When it comes out it alienates one of the biggest areas it was supposed to help, the online gamers. It is so focused on security it is nearly impossible for the average PCer to use. He blathers incessantly, desperately seeking something to say because he cannot shut his mouth. He continues to snipe at Apple as being a pipsqueak in the market, panning its commercials and innovations such as the iPod and the iPhone as being too elegant and costly.
That is quite ironic since Microsoft, from practically its inception, has not produced an original idea of its own other than come up with new ways to steal and copy. It basically stole Apple's operating system though the ability to do so was also part of Steve Jobs' arrogance. That, however, set the trend for the company's future. It does not come up with new technology, it copies. It cannot even claim originality in copying; it copies the Japanese model of the 1970's but even then the products it produces are not better, just knock-offs. Outside of Windows and its bug-riddled progeny it has managed to copy and produce a game player, a cell phone, a PDA, and a music player. Let's see, Gates left the CEO spot a few years back to focus on developing long-term company strategies. My, that has produced some real innovation indeed. Outside of the game player its products leave the impression you are dealing with some third world knock off that probably won't last as long as it takes to get it home (so its only real contribution to the world in the past 10 years is a game player?). The company uses its cash cow (Windows) to fund its other parasitic ventures in a desperate bid not to be left behind in a world of advancing technology. As one commentator said, his worst nightmare would be buying MSFT stock then returning home from work only to hear on the news that MSFT has produced a Harry Potter knockoff.
There is nothing new out of Microsoft. Vista is no great breakthrough. All it does is try to fill the massive security holes in prior Windows products and in doing so it has become much too restrictive to use. That is one reason MSFT stock has declined ever since its release. Expectations built the price up; reality is sending it lower. Did we mention Balmer admits he sweats profusely? Now that is the guy you want as your CEO.
Back to the Friday action.
Stocks started lower after that batch of news. That did not sink the rally, however, and the indices spent the rest of the day recovering, closing mixed and trading around the flat line. That pushed the NYSE indices right back up to the tops of their uptrend channels, basically where they finished Friday.
On the week the indices did a good job of once again overcoming the distribution that has plagued the market each time it makes another advance. There has been enough tech selling to hamstring NASDAQ, keeping it from reaching a new post-2002 high after a brief breakout in mid-January that was tossed right back. Last week they shook off the selling and advanced again with the NYSE indices hitting some form of new highs.
In doing so they ignored that it was expiration week and that expiration week often produces volatile swings and a lot of volume either early in the week or on Friday. Last week there was hard any volatility or volume. Stocks started soft on Monday, hit the bottom of the uptrend channels, and then rebounded to close the week at the top of the channel.
Technically though the NYSE indices hit new highs it was not a powerful week. There was some good breadth on NYSE as the large and small caps punched through to new highs but outside of some solid NASDAQ volume on Wednesday's Bernanke bounce the trade was less than the prior week's selling volume. The market managed to climb, but it was more due to a lack of sellers this week as opposed to a real surge of buying. Without the sellers, the technical pattern took hold and the indices bounced off of the lows in their uptrend channels. The midweek goose from Bernanke was enough to keep them running right on into the weekend.
An eye on next week.
There is still leadership moving higher, and while some are extended there are many solid stocks still in position to move higher after leading the move and resting earlier than the others. We discussed this in the Thursday report. Nonetheless the market remains extended and with the lack of any volatility the past week you need to have an eye out for the post holiday week. First, the indices did not show much power on the last move higher. They are at the top of the channel, and without a surge of buyers last week they are likely to come on back down to test the trend again. Second, distribution tends to strike after these moves higher. Thus far the rally has survived these bouts, but they tend to be cumulative, eroding the foundation out from underneath. Accordingly, if we see higher volume selling hit again we have to play carefully again, not letting positions get out of hand in the event some selling in a pullback inside the trend turns into a sell off. Some very smart traders are concerned about this week, us included.
THE ECONOMY
Bernanke relatively upbeat, the weekly data not so much so.
Bernanke goosed the markets with his 'moderate growth, lower inflation' speech to Congress, apparently hitting the 'just right' button for investors. He was not saying that the economy was going to take off. Indeed he worried about housing declines still hitting consumers harder as the year continues. He worried about oil and commodity prices adding to inflation and (though unspoken) impacting the consumer on top of housing.
This view is more in line with the long leading indicators that suggest the economy is going to expand moderately in 2007 versus the gangbuster growth that looked set to occur after the surprising upturn in Q4 2006 GDP. The data last week suggest the rebound is going to be more moderate than that surprise indicated.
Retail sales were less, jobless claims were up, net foreign purchases were way off, the Philly Fed was lower, housing starts plunged again. Not a banner week for economic data. Indeed, much of the data thus far this month coming out of December and January has not been the caliber that would build upon the 3.5% Q4 GDP growth.
ECRI shows some slowing as well.
The best 'man-made' index for forecasting economic activity is slowing a bit as well. Its weekly leading index fell from 140.2 to 138.9. The annualized rate dropped to 3.5% from 4.3%. Even with this drop it is still well above the August 2006 lows, so it is still suggesting growth ahead, just slowing a bit. The slowing manufacturing sector (ISM and regional PMI's) is the main problem.
That coincides with the slowing data seen recently. ECRI takes all of that into account and formulates a near term economic indicator and also some long-term indicators that look well down the road. All together they still show sustained, albeit moderate, growth for 2007, but the growth is more down the road after we get through the spring, and if this recent dip continues, it may pus that to after the summer.
Thus we could be getting that correction in the market this spring (or earlier) that is a bit overdue. The market moves head of the data, and the extra liquidity has fought off its correction as we discussed Wednesday. It should be correcting given the economic data outlook and the distribution, but that extra money comes in to fill the cracks like Chevy Chase's gum in 'Vegas Vacation' every time the market is about to correct. Eventually there won't be enough gum and we will get the correction.
Housing's role.
Even with that, however, it is not going to be the end of the overall run from 2002 as some suggest. Housing is down, but it is interesting to note that even at this stage new and existing home sales are just at their third highest level ever. The bears say there is a lot more downside to come. The bulls say it will be contained.
Housing is interesting indeed. This long boom in that sector led to inventiveness when the boom started to wane as sellers tried to come up with ways to keep making money. Hence the no cost mortgages, etc. As seen two weeks back, those are the first areas to run into trouble.
The other area to run into trouble is the speculation. You know what we are talking about, those houses that were bought by people who had no business doing so with the expectation they would flip them and bank a nice, quick gain. We were approached many times in late 2005 by friends and investment groups to buy specific houses or groups with the sole intent of flipping them. We knew at that point the market had topped. We knew it before, but that was the confirmation. The same thing happened in the 1980's just before real estate went completely bust. In Austin raw land was flipped five, six, ten times without a shovel being turned. Many of those parcels never saw a construction worker for another 15 year, until the last boom. This current market is NOWHERE near as hot and frothy as that market was. Nowhere. Not close.
There are vast differences, and we have written about them already. First, as for the creative financing, the economy is still climbing and producing jobs. Those who are in trouble because rates have risen and they cannot make the monthly nut are not going to lose their jobs if they decide to give up the house. They will continue to consume. Second, much of the current housing problem is overbuilding due to speculation by both builders and after-market speculators. The builders were too bullish just as they always are at the top. We called the top in May 2005 when all of the CEO's were on the financial stations gushing over 'ten year demographics' that supported a continued double digit rise in sales. After a 6 year boom that was just ludicrous. They built too many homes and those novice speculators were buying them as well as existing homes that owners wanted to cash out of at a premium.
Now that builders are no longer building homes and the speculators are getting out of the market, the main problem, excess inventory, will be corrected. With the average citizen still confident about his or her job, the demand for home ownership will remain relatively steady. Once the inventory situation works off the housing market will stabilize. It should stabilize late summer or in the fall as we said to end 2006.
THE MARKET
MARKET SENTIMENT
Things are getting a bit bullish. You can look at VIX and the bulls/bears indicators, but one rather sure indicator is the late comer indicator. We discussed this with respect to the housing market above, and it is true for the stock market. Every time there is a good run in the market we start getting calls from some folks who have turned away from the market, but after hearing of a strong of new highs and the like they start looking back over the shoulder. Before long they are calling, wanting to know if it is time to get in.
At that point the answer is 'not now.' When they are interested that typically means just about the last nickel available for investing is in the market. They are the proverbial last buyers with no one else to sell to once they sink in their cash. They are the last person in the Ponzi scheme.
The market can still run higher even when it hits this stage of bullishness. It did so last February when we got these calls, but once that last money was in the market over March and April it corrected into the summer 2006 correction. We are looking for something like that to come along after this last money is put into the market.
VIX: 10.02; -0.2
VXN: 14.83; -0.44
VXO: 9.66; -0.22
Put/Call Ratio (CBOE): 0.84; +0.08. The put/call ratio hit over 1.0 on the close to start the week but then faded as the week progressed. Not enough closes over 1.0 to make an argument the market is ready to stop the selling. Oh, what selling? That liquidity has driven prices higher even as the put/call ratio has climbed.
Bulls versus Bears:
Bulls: 51.1%. Off again, continuing the modest slide. 52.2% last week, 53.3% before that. This follows a bounce 50.5% a in late January, and after grazing past 55% (the 55.4%) just before. Still quite a bit of bullishness though backing down from the 55% threshold considered bearish as it signals pretty much everyone is in the market.
Bears: 21.1%. Down from 22.2%, not the direction we want to see (up is better as more pessimism). Was moving in a direction more favorable to market upside as bears were bouncing back from flirting with the 20% level considered bearish. Back to 21.1% from two weeks back and 20.9% before. 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: -0.79 points (-0.03%) to close at 2496.31
Volume: 1.922B (-3.26%). Volume backed off further even on expiration Friday, coming in below average for the third time during the week. Wednesday it enjoyed a huge surge of trade on the Bernanke bounce that pushed it up close to the January high. It managed to hold that level to end the week as volume backed off. The Wednesday action was in the right direction but NASDAQ still has to deal with all of that prior distribution after key upside moves. Indeed we have to watch for some this week.
Up Volume: 959.915M (-334.136M)
Down Volume: 925.868M (+257.489M)
A/D and Hi/Lo: Advancers led 1.29 to 1
Previous Session: Advancers led 1.01 to 1
New Highs: 105 (-36)
New Lows: 9 (-16)
The Chart: http://www.investmenthouse.com/cd/^ixic.html
After the Wednesday surge on volume NASDAQ basically finished the week working laterally, holding the gains on low volume as it eyes the January and post-2002 high at 2509. It could only look at that level last week, unable to push past 2500. Overall it continues its ascending pattern of the past 13 weeks, making a higher low at the 50 day EMA (2446) this past week. Higher lows are always good as they build pressure from below for the breakout. The distribution up to this point remains a concern (eroding the foundation), but thus far NASDAQ has fought it off.
SOX (-0.16%) took a day off after a good bounce and recovery off the 200 day SMA last week. It stalled right at 475 interim resistance, but it is set up well to hold and break on through this week. SNDK won't help; it announced a lot of bad news after the close Friday. The old 'announce after hours on the Friday ahead of a 3-day weekend and hope no one notices come Tuesday' trick. It doesn't work. Techs looked to be just trying to come out of the woods and now have another obstacle to face.
SP500/NYSE
Stats: -1.27 points (-0.09%) to close at 1455.54
NYSE Volume: 1.355B (-1.59%). Another day of below average trade as the NYSE indices rallied to the top of their uptrend channels. Without the volume punch they are likely to come back toward the bottom of the channel now.
Up Volume: 671.002M (-95.195M). A dead heat.
Down Volume: 674.666M (+90.516M)
A/D and Hi/Lo: Advancers led 1 to 1. A dead heat as well here.
Previous Session: Advancers led 1.44 to 1
New Highs: 141 (-183)
New Lows: 3 (-3)
http://investmenthouse.com/cd/^gspc.html
SP500 rallied off the bottom of the uptrend channel and Thursday and Friday it kissed that level. It made a good recovery from the Friday low, but the internals show it was out of gas: even up to down volume, flat breadth, low volume. It has dogmatically held this channel for 3.5 rotations now. Combined with the internals it is very likely to turn back down toward the bottom of the channel. The key to watch on that move is what the volume does. Two weeks back volume spiked up with some distribution. It handled that once more, but another round erodes more of the uptrend foundation.
SP600 (+0.34%) squeezed another gain out of its week, posting four consecutive gains and closing at a new all-time high. The move puts it just below an upper channel line connecting the initial peaks of this trend from October. Not as defined as the SP500 channel but it is getting close to the top of its own.
DJ30
As with SP500, the blue chips climbed to the top of their uptrend channel from the bottom of the channel in one week. That is the typical rotation in this current 2.5 month channel. As with SP500, this is the lower trajectory channel that formed after DJ30 got choppy in November. The move slowed Thursday after the Tuesday and Wednesday surge, and then showed a doji Friday on strong volume. That higher volume doji shows some churn at the top of the channel, another indication it is going back down as it has like clockwork. As with SP500 we don't want to see volume kick up and show distribution.
Stats: +2.56 points (+0.02%) to close at 12767.57
Volume: 243M shares Friday versus 183M shares Thursday. There was more downside volume Friday than upside as the likes of JNJ and MSFT fell on big volume spikes. Low all week, indeed all month, and then spiking at the top of the channel with a doji. Some churn as noted above.
The chart: http://www.investmenthouse.com/cd/^dji.html
THIS WEEK
Market is closed Monday for George Washington's birthday.
Some key economic data with the January CPI and to a lesser extent the FOMC minutes. After Bernanke's testimony last week, that will not add much, particularly as the last meeting showed unanimous support for the pause. Heck, even perma-hawk Moskow noted late Friday that inflation indeed appeared to be softening. Global warming? Better check instead to see if hell just froze over.
CPI will have its impact, but earnings are mostly over and the NYSE indices have bounced to their up channel trendlines. Technical powers are likely to take over at this point and then we watch to see if volume ratchets back up on the selling and tries to gut the rally.
As noted above, there are many reasons for a correction in the market after such a long run what with the length of the move itself, the distribution popping up at key points in the rally, and sentiment getting overdone (the latecomers are coming to the market). If it distributes more and breaks the channel the worry everyone has is just how far it goes.
What size of a market correction?
With housing unlikely to fall into the abyss and the economy to pick up in the summer or fall, any market correction will be just that, a correction within the overall uptrend. Given the rally has gone on farther than it should due to all of the ready, willing and able liquidity, the correction could be sharp and feel painful, particularly to those just joining in, similar to those last speculators in the housing market.
A 50% retracement of the gains from July would not be unusual. For SP500 that means 100 or so points or about 1350 to 1325. The May 2006 high at 1325 just before the summer swoon marks a near 'spot on' target for a significant correction.
That is worst case. There is a band of support from 1390 to 1375ish, and another at 1350ish. That would take back most of the last part of the rally, the part where the action turned rockier and the SP500 and DJ30 shifted their trends to a lower trajectory. Very often that marks the spot for the bottom of a pullback, i.e. where the market had to shift gears to keep the move . . . moving. That is the point where the weaker action butts up against the prior strong action, and that 'nonconformity' as they say in geology is an important marker point.
Tuesday and ahead.
As for the start of this week we anticipate SP500 and DJ30 are going to fade back in their uptrend channels after hitting the tops late last week. As noted above, some smart traders worry that this week could start something more sinister given the lack of any expiration week issues and the fact that just about all the news for quite some time is now known (e.g., earnings, the Fed's stance, economic calls). Even the political debate with the new Congress is contained given the passage of additional tax breaks along with the higher minimum wage. With most of the news already in the open and a good rally that has factored it all in, where is the new ammunition going to come from.
Thus far the bounty of new money has kept the market trending higher despite some sellers unloading positions. The low volume last week, however, shows fewer sellers. Thus we have to practice a bit of caution once more to see how the week pans out, being ready for some of those solid upside plays are in position to advance even as the market pulls back. Those are the stocks that led the move higher, and while the rest of the market caught up they started to test. Now they are ready to lead again as the rest of the market comes back from the latest leg higher in the overall rally. Given the prospect this could have been the last leg higher in this run we also have to be ready for some downside action though that has been problematical as the new money runs back in each time the market shows a bit of weakness.
Support and Resistance
NASDAQ: Closed at 2496.31
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 2446
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.
S&P 500: Closed at 1455.54
Resistance:
1458 is the upper band of the current channel
1475 from peaks in December 1999 and January 2000
Support:
1444 from February 2000
1440 is the mid-January high
1435 is the late November to February up trendline
1432 is the December 2006 high
1425 is an interim high from November 1999
The 50 day EMA at 1425
1408 is the November high
Dow: Closed at 12,767.57
Resistance:
12,785 is the upper channel line marking the November to date uptrend channel.
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:
The 10 day EMA at 12,679
The 18 day EMA at 12,637
12,585is the up trendline connecting the November and January intraday lows.
12,499 is the December intraday high.
The 50 day EMA at 12,494
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 21
CPI, January (8:30): 0.1% expected, 0.4% prior
Core CPI (8:30): 0.2% expected, 0.1% prior
Leading Economic Indicators, January (10:00): 0.2% expected, 0.3% prior
Crude oil inventories (10:30): -589K prior
FOMC minutes, January 31 (2:00)
February 22
Initial jobless claims (8:30): 325K expected, 357K prior
Help wanted index, January (10:00): 34 expected, 33 prior
End part 1 of 3
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