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2/21/07 Investment House Daily
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SUMMARY:
- Hotter CPI stalls market early, but stocks make a game comeback.
- CPI bounces back for a month on medical and tobacco costs
- NASDAQ still has something to prove and not likely to get much help from DJ30 or SP500 just yet.
Soft start, modest recovery.
Futures were lower early, even before the CPI data hit. With CPI running hotter both at the core and overall, stocks lost even more ground heading into the bell. HPQ did not help as that Dow component gapped lower and undercut its 50 day EMA on earnings that did not show enough growth for investors.
Stocks opened lower, lacking a catalyst to drive them higher yet again. SP500 and DJ30 already had issues as they bumped into the tops of their channels starting late last week. The news did not help them break through that level. Oil did not help either as it jumped through $60/bbl on the close (60.07, +1.22). With the renewed whiff of inflation gold enjoyed a big day, surging $23 after losing $11 Tuesday. Metals and materials rallied in general as did medical stocks after the CPI showed that sector posting its largest gain since 1991.
Despite the lower start and the headwinds, all of the indices bounced off those morning lows and mounted unspectacular albeit steady recoveries into the close. NASDAQ along with the small and mid-caps turned positive. SP500 and DJ30 did not make it back, but they did close off their lows, particularly on SP500. Given that they are struggling at their upper channel line, that is not abnormal. The overall recovery in the face of some ostensibly bad news shows continued upside bias and underlying strength.
Even with that, however, there was not much technical strength Wednesday. NASDAQ and SP600 closed positive, but volume flip-flopped from Tuesday with NASDAQ trade lower and NYSE trade higher. The large caps suffered some distribution at their upper channel lines held them in check again. They are still trending higher, riding up just below that resistance, but Wednesday they started to show some wear and tear at that level. Each time they have hit that level in the past they have slid upside for a few sessions and then fade to the bottom of the channel. The distribution Wednesday suggests they are likely to repeat that action again on this leg.
NASDAQ continued its move to another post-2002 high after a gap lower, but as noted the volume was lighter. Good recovery to positive after a negative open, but not enough trade to drag the large cap indices with it. More money moved into NASDAQ again but with the CPI weighing on things it was not enough to drag the large cap NYSE indices with it, particularly with those indices distributing on the session. While NASDAQ posted a gain with its solid recovery, it still did not answer the question as to whether NASDAQ is going to hold the breakout to the new post-2002 high. Every day it holds is a plus, but you want to see another strong upside session on this breakout as opposed to an immediate turnover again. As noted, Wednesday NASDAQ showed some decent action with its low to high intraday range.
THE ECONOMY
CPI hits smokers the hardest.
Tobacco rose 3.1% and medical costs 0.8%, the fastest climb in 17 years. Your smokes cost more and then the treatment for the associated diseases is higher as well. Mark Twain said you need some vices so you can bargain with God on your deathbed, but he didn't say anything about how much you should be willing to pony up for that option.
With overall CPI at 0.2% (0.1% expected) and the core at 0.3% (0.2% expected), core year/year 2.7% (up from 2.6% the prior two months), inflation concerns nipped at the market all session. Again, tobacco and medical were two of the main drivers, and they were up mainly because of regulation. Many states raised taxes on tobacco while regulation of healthcare is driving costs as well (regulation typically does have the opposite effect of what was desired by the do-gooders).
Nonetheless, the inflation sniping started again with many raising the inflation flag. Hmmm. Back in October when the core slid to 0.1% they were quick to say it was just one data point and meant nothing. Then another 0.1 followed by another. Definite softening in the trend, and that is congruent with what the leading inflation pressure indicators have shown. Now with a bump back up for a month they are clucking that inflation is back and getting away from the Fed. Cannot have it both ways, but they get away with it all the time because no one calls them on it.
When a trend changes there is volatility, i.e. up a couple of weeks, down a couple, up, down, etc. until the current trend gives way to the change. Thus we are not feeling inflation queasiness based on this number; as noted, the softening occurring jibes with what the leading indicators show. If it continues higher it is a problem, but again, it was a single upside data point after three lower than expected readings.
The FOMC minutes came out in the afternoon, however, and it was sprinkled with commentary from those that voiced a couple of weeks back their unease as to whether inflation had peaked. That fueled the inflation fire burning around the edge of the market Wednesday, but notably it did not stop stocks cold. Indeed they continued their rebound even following the release. Why? Because the Bernanke Fed does what Bernanke thinks it should. He opted for pause when all you heard from the majority of FOMC members was inflation was getting out of hand. Thus we would not read too much into those FOMC minutes just as it was incorrect to read last summer's minutes as indicating the Fed was going to keep hiking.
THE MARKET
MARKET SENTIMENT
VIX: 10.2; -0.04
VXN: 15.38; -0.39
VXO: 9.94; -0.01
Put/Call Ratio (CBOE): 1.13; +0.17. Second reading above 1.0 in the past week and one-half. It rose on a mixed market. Lots of downside puts in the NYSE large cap indices and their derivations. The bet is the fade from here, not a bad bet given the past action.
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: +5.38 points (+0.21%) to close at 2518.42
Volume: 2.059B (-4.07%). Volume backed off as NASDAQ gapped lower but recovered to add to its Tuesday breakout to a new post-2002 high. Trade remained above average as the techs try to garner more volume to extend this move.
Up Volume: 1.034B (-708.471M)
Down Volume: 871.398M (+380.651M)
A/D and Hi/Lo: Advancers led 1.03 to 1. Pretty anemic breadth. It was stronger in the last hour before slipping late in the session as NASDAQ 100 jumped ahead of overall NASDAQ.
Previous Session: Advancers led 1.9 to 1
New Highs: 125 (-78)
New Lows: 12 (-4)
The Chart: http://www.investmenthouse.com/cd/^ixic.html
NASDAQ gapped lower then recovered the rest of the session to close at the session high (a new post-2002 high as well). Good low to high action even if the gains were modest. Indeed, the intraday point swing was 18 points; not shabby. Like the recovery given the weak opening as yet another breakout attempt tries to fight off distribution and hold onto the gains. Not a breakaway to the upside yet but trying to cement the move.
SOX (-0.27%) milled around all session, giving back some ground and showing a doji at the 10 day EMA, still trying to bounce off the 50 day and clear key resistance at 475. That resistance continues to hold SOX in check for now, but it is trying to put in a higher low for at least another bounce attempt.
SP500/NYSE
Stats: -2.05 points (-0.14%) to close at 1457.63
NYSE Volume: 1.429B (+7.73%). Volume was up as SP500 churned some but SP600 posted a new all-time high. The bad and the good. SP500 is showing a bit of churn at the top of its channel, and that is the overriding price/volume action at this point.
Up Volume: 667.652M (-110.854M)
Down Volume: 737.54M (+233.402M)
A/D and Hi/Lo: Decliners led 1.17 to 1. Even with the small and mid-cap gains most NYSE stocks sold on the session.
Previous Session: Advancers led 1.62 to 1
New Highs: 189 (-182)
New Lows: 8 (+3)
http://investmenthouse.com/cd/^gspc.html
SP500 started lower, fell to the 10 day EMA again on the low, and then rebounded to cut most of its losses on the session. Not all of them as it ran in place on some higher volume at the top of its channel. It has had a hard time pushing past this channel during this trend. It is in its fourth session at this level, and typically it fades back after a few sessions of bump and grind at that resistance point.
SP600 (0.31%) posted another new all-time high, continuing the breakout and the run up the 10 day EMA. It broke out and tested the 10 day EMA, then rallied again off that level this week. Typical action as a breakout stretches the gains: rally, test near support, rally off that support, etc. Volume was up on the action, showing a bit of accumulation as the small caps continued higher.
DJ30
The blue chips suffered some HPQ issues, fading back from the upper channel line but also managing to hold the 10 day EMA on the intraday low. Typically tries to hold at this level as it tests back down in its channel but ultimately fades to the up trendline, now at 12,600. It has made higher lows at the 10 day EMA and rebounded from there to test the upper channel, but even with that it has held the channel.
Stats: -48.23 points (-0.38%) to close at 12738.41
Volume: 213M shares Wednesday versus 205M shares Tuesday. Some more volume on the blue chip average as HPQ took a header. Some distribution but rather mild as it comes off the top of its upper channel line.
The chart: http://www.investmenthouse.com/cd/^dji.html
THURSDAY
The heavy duty economic data is over for the week and it did not sink the market Wednesday. That is a start. NASDAQ still has to show it can hold its liquor and maintain the breakout. Again, that recovery during the session was a positive in the face of the inflation issues and the lagging NYSE large caps. The large cap NYSE indices still have to deal with their upside channels and that has meant a pullback to the trendline. The Wednesday modest distribution indicates that is once again likely. Does not mean the overall move is dead; they have both made many rotations up the channel and nothing has seriously changed thus far on this rotation.
The buying Wednesday had a bit of inflation bias behind it what with the success in metals, particularly gold. That is not really a new trend, however, as we know from stocks such as TIE. At this juncture, many of the steel, aluminum, and other metals are a bit extended.
There are still stocks ready to move higher as NASDAQ tries to hit its stride on this breakout move. Some tech and medical are still in position as money rotates from the large cap NYSE as they fade back in their channels to fight another day. That has freed up money in NASDAQ stocks (and not just tech), and continues to give us some good buys. We will continue to look for those as NASDAQ tries to stretch its breakout move.
Support and Resistance
NASDAQ: Closed at 2518.42
Resistance:
2523 is price resistance November 2000
Support:
2509 is the January 2007 high
The 18 day EMA at 2480
2471 is the December 2006 high
2468.42 is the November 2006 high
The 50 day EMA at 2452
2450 is minor support
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 1457.63
Resistance:
1461 is the upper band of the current channel
1475 from peaks in December 1999 and January 2000
Support:
The 10 day EMA at 1451
1444 from February 2000
1440 is the mid-January high
1438 is the late November to February up trendline
1432 is the December 2006 high
The 50 day EMA at 1428
1425 is an interim high from November 1999
1408 is the November high
Dow: Closed at 12,738.41
Resistance:
12,797 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 12,706
The 18 day EMA at 12,662
12,600 is the up trendline connecting the November and January intraday lows.
The 50 day EMA at 12,515
12,499 is the December intraday high.
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): 0.2% actual versus 0.1% expected, 0.4% prior
Core CPI (8:30): 0.3% actual versus 0.2% expected, 0.1% prior
Leading Economic Indicators, January (10:00): 0.1% actual versus 0.2% expected, 0.6% prior (revised from 0.3%)
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
Crude oil inventories (10:30): -589K prior
End part 1 of 3
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