|
|
world stock market, us stock market
* * * *
2/28/07 Investment House Alerts Report
* * *
IH Alert Subscribers:
MARKET ALERTS:
Target hit alerts: None issued
Buy alerts: BEBE; RVSN; SONC
Trailing stops: HLTH
Stop alerts: None issued
SUMMARY:
- Bernanke applies salve to market wounds.
- Economic data comes back into line with the leading indicators
- Wednesday bounce relieves some steam from the selling, but likely another down thrust lurks ahead.
Market turns early selling into a rebound.
Futures were higher but modestly so as the world awaited the US open. Foreign markets were generally lower but US futures traded higher ahead of the open. GDP was written sharply lower, the deflator (an inflation gauge) was higher, and the Chicago PMI posted a second month below 50. Seemed rather incongruous that futures were higher, and thus it had the real flavor of a relief move.
Indeed the gain in futures evaporated on the open and stocks started lower, the downside momentum from Tuesday's close taking over again. New home sales came out down 20% year/year, and that did not help. At the same, time, however, the Bernanke testimony hit the wires. It said little about the Tuesday sell off but it maintained a calm, steady view of the economy. That stalled the selling. Then when the Q&A started the initial question was whether the Tuesday sell off had anything to do with liquidity issues. Bernanke said simply 'no.' Instant gratification. The market bounced. Bernanke went on. The sub-prime mortgage market was under scrutiny, but it was not causing issues with the rest of the economy. To top it off, Bernanke said that if the housing market stabilized the economy would see strengthening midyear.
That pushed the indices positive with gains across the board. The financial stations were gushing about the rebound; after the thumping that is expected. Breadth was solid, at least on NYSE, and volume was lower but still strong. That gave the appearance that things were on the mend. And they were. This is all part of the process, and the upside with some breadth showed there are still some ready to move.
Digging a bit deeper into the technical aspects, it was not a return to the upside. Solid volume and some decent breadth, yes, but the advance, though broad, was not that deep. Lots of stocks moved higher (after 90% of the SP500 moved lower Tuesday), but they were small moves and did not reverse what Tuesday set in motion.
The indices did reverse the early selling but stalled at the 90 day MA (NASDAQ, SP500, DJ30). Indeed, they made three runs at that resistance and could push on through. Again, broad advance but not deep. The higher volume as they repeatedly bumped resistance, unable to break through, is not necessarily a good thing, indicating a bit of churn. There was also a defensive flavor with energy and utilities showing a bit more strength though there were decent moves scattered about the market as well as many stocks that held the selling in check Tuesday holding up again Wednesday. Notably the financials, though posting some gains, remained weak.
In short the bounce was part of the recovery process, but it did not change the character from the shift it underwent Tuesday. There are stocks still in good shape, holding at support, and those are the ones we focus on for upside as they hold, improve and set up the next move. Nonetheless, there was overall technical damage suffered Tuesday, and as noted last night, after so much upside with no correction or even real selling, that kind of advance is not consolidated in just one, ugly drop. Historically there is another sharp downside session that seals the deal for a correction, and after that surge lower finds its floor, that is when a correction typically ends.
We are viewing this as a correction. As noted in last night's video report, there is simply not the confluence of negatives that suggest the economy is going to fade and thus the market selling off into a bear market-like funk ahead of that fade. There was a lot of negative talk about the economy that helped set the stage for the selling, e.g. Greenspan's horribly misquoted 'prediction' of a recession (of course he could have been much clearer as could the reporters). After the Q4 initial GDP reading investors were hit with reality of a currently contracting manufacturing sector, and that helped prime the selling. The long-leading indicators still suggest an acceleration later in 2007, just as Bernanke suggested Wednesday. With the economy set to improve, that is not the recipe for any market decline.
Thus we are looking for this to be a correction that sets up new buy points on the strong stocks that weather it. There is likely another sharp downside move to come; that is historically how these things are resolved as noted above. Many stocks will have to base out before they are ready to buy once more. We will let them, giving them their time. There will be leaders that are ready to move higher ahead of the market, and we will be ready when they make their moves after a fairly quick test of support.
THE ECONOMY
Q4 GDP written down sharply on inventory declines.
The 2.2% was even lower than the downward revision expectation of 2.3%, and of course well off the 3.5% originally reported. That was worth some moaning, but it simply brings the number back into reality's realm. The economy went through a slowdown in the second half of 2006, particularly the third quarter, and as this second iteration of Q4 shows, it was not ready to just roar right back. Indeed, ECRI suggested it did not and was not ready to do so just yet. That is just fine. After 4 years of advancing the economy, just like the market, can use a few quarters of slower growth to recuperate and set up for the next move higher.
Interestingly, spending rose 4.2%, the second strongest quarterly growth in 2 years. The drag on the number was weak inventory growth; that put a 1.4% drag on the number. So you add that back in and you get 3.7%. That is kind of cheating, but inventories are strange because the lack of inventory is a good thing for the economy because with consumer spending still strong there is a need for producing more goods.
Of course the inventory decline is offset by export gains that pumped the number up (by 1.5%). You say potato . . . Of concern is the slowing business spending, declining 3% with respect to equipment. Thus even with a strong consumer you have to worry about business investment that has trended lower of late. As seen in the 2000 recession, the consumer can still spend, but if businesses don't we slip into recession.
Midwest manufacturing contracts for second straight month.
47.9% was down from even the 48.8 in January. Expectations were for 50.0, a bit of hope it was going to return positive. Nope. Instead it was the lowest since February 2003 when the expansion was finally starting to gel. This suggests that this current slowdown in the economy is a bit more than any seen in the expansion thus far. As with the GDP reading, business investment was lower as well (-2.4%). The ISM is out Thursday, and it was sub-50 last month. Thus the 50.0 anticipated nationally is likely off the mark as well.
What does this mean for the market?
In sum, the economic data continues to soften as the new year starts. As noted, that puts it back into line with the overall picture the leading indicators suggest, i.e. continuing the second half 2006 slowdown on into the summer. It should start to stabilize over the next few months and then begin accelerating heading into the fall.
The market looks ahead, and not just a couple of months. The rally from summer 2006 lasted a bit too long, fueled by all of that liquidity. The market should have started to correct back due to the slowing economy, but the money kept it moving higher. That is why when it broke Tuesday it really broke hard.
Therefore we anticipate some more market consolidation to account for the economic slowdown, but the market will then start to look ahead toward the continuing expansion. With continued strong liquidity (after all, Bernanke said there were no liquidity issues), money will find its way in once more.
THE MARKET
MARKET SENTIMENT
VIX: 15.42; -2.89. Lots of talk about volatility today, and some of the microphone jockeys from journalism school happily reported that volatility was lower and how good that was for the market. Well, they complained the low volatility for the past 7 months was a bad thing for the market, indicating complacency. Of course the market rallied right back up from the summer 2006 low on that low volatility. Now that it was 'high' it was bad.
It really is not even high. Volatility typically runs in a scale from 20 to 30, near twenty indicating complacency, near 30 indicating anxiety. That is the 'normal' range for when volatility actually has a correlation to the market. It can go for months or even years without any correlation. When it sets up it can be used to time trades as we did in the bear market. When you have a long expansion as we have had or as in the mid-1990's, low volatility doesn't mean much at all.
The interesting aspect that no one mentions, and one that we need to keep in mind, is that when volatility does rise after a sustained period of low volatility during a sustained market rally, that can be a much more sinister indication that the stock market advance is topping. Volatility was low through the 1990's but rose just before the 1998 quick bear market, and again in early 2000 just as the market peaked.
Thus rising volatility from low levels during a long market run is a red flag to watch how leadership performs and how price/volume action plays out. It requires you to take another look at the truly leading economic indicators to determine if there is anything that was missed. Right now we don't see it as indicating a top. Indeed, at 19 hit on the Tuesday high it did not even crack into the 'normal' range for the late 1990's that ran from 20 to 30.
So you could argue that the microphone jockeys were right, i.e. lower volatility was good for the market. You know what? Right now we should keep it in mind but there is not a lot of correlation between volatility and market performance. It may set up, and thus we keep watching it in relation to other market indicators.
VXN: 20.53; -2.44
VXO: 15.93; -2.92
Put/Call Ratio (CBOE): 1.08; -0.62. Six consecutive closes above 1.0. Again, this is getting extreme, but the other indications have to come in line with it and they are not there yet.
Bulls versus Bears:
Bulls: 50.0%, down from 51.1% last week and 53.3% four weeks back. Starting to head in the right direction after grazing past 55% (the 55.4%) in early January. Still quite a bit of bullishness though backing down from the 55% threshold hit to end 2006 and considered bearish as it signals pretty much everyone is in the market.
Bears: 22.2%, up from 21.1% last week though still hanging in this low twenties range (was 22.2% three weeks back). 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: +8.29 points (+0.34%) to close at 2416.15
Volume: 2.725B (-10.74%). Another strong session of volume, and that looked good early on as NASDAQ shook off the sellers and rallied. It could not break resistance all day, however, and with the doji that indicates some churn versus accumulation. Churn means a lot of turnover in shares when the index treads water. The buyers were even with the sellers Wednesday, but this along does not show us the downside has been washed out. Interestingly, while SP500 and DJ30 mangled their trendlines off the summer 2006 low, NASDAQ bounced at the July/August trendline. Something to watch in the next few sessions.
Up Volume: 1.666B (+1.52B)
Down Volume: 977.247M (-1.93B)
A/D and Hi/Lo: Advancers led 1.19 to 1. Pretty paltry breadth, another indication this was more relief action than a real floor setting in.
Previous Session: Decliners led 9.94 to 1
New Highs: 28 (+16)
New Lows: 71 (-8)
NASDAQ CHART: http://www.themarketbeat.com/videonewslettercharts/NASDAQ.jpeg
If the link does not open, cut and paste the link into your browser.
NASDAQ sold early but found support near 2400 from the late November and late December lows. It rallied and tapped the 90 day MA on the high (2432) and stalled. Three times it tried to clear that level and three times it could not clear it. Some churn below that resistance after the plunge lower. Still a lot of sellers selling, but at least Wednesday there were some buyers buying to hold things up. It held at the next support level, but Wednesday did not undo the damage from Tuesday.
SOX (+0.11%) showed a nice tight doji right on top of the 50 day EMA. It rallied to the November and December highs last week and then had issues Tuesday. It can hold here, however, and make a higher low, technically a positive. There is still life trying to germinate in the semiconductors.
SP500/NYSE
Stats: +7.78 points (+0.56%) to close at 1406.82
NYSE Volume: 2.145B (-8.19%). Volume came in just below the Tuesday slaughter volume as the NYSE indices made a stand. DJ30 and SP500 too, however, struggled below the 90 day MA, stalling at that level. Some churn, but SP600 bounced up off its 90 day MA, so not all negative.
Up Volume: 1.421B (+1.398B)
Down Volume: 772.367M (-1.541B)
A/D and Hi/Lo: Advancers led 1.76 to 1. The small and mid-caps bounced modestly and that helped the breadth. Lots of small moves that did not change the character of the break lower.
Previous Session: Decliners led 6.35 to 1
New Highs: 45 (+15)
New Lows: 31 (+2)
SP500 CHART: http://www.themarketbeat.com/videonewslettercharts/SP500.jpeg
If the link does not open, cut and paste the link into your browser.
DJ30
Posted a modest recovery on very strong trade, even stronger than Tuesday. As with the other large cap indices, the Dow tried its hand at the 90 day MA (12,383) but after three tries of its own it faded back to give up 90 points off the session high. Not a great recovery. It broke its trend in a nasty way. It could not make it through resistance. Did not change that break on the Wednesday trade.
Stats: +52.39 points (+0.43%) to close at 12268.63
Volume: 412M shares Wednesday versus 393M shares Tuesday.
DJ30 CHART: http://www.themarketbeat.com/videonewslettercharts/DJ30.jpeg
If the link does not open, cut and paste the link into your browser.
THURSDAY
Wednesday was a relief bounce. The large cap indices tried three times to clear the 90 day MA and they failed. DJ30 closed almost 100 points off the high on continued strong volume. Let's face it, Tuesday SP500 and DJ30 broke their up trends off the summer 2006 lows no matter which you slice it. Some major damage was done and it is not undone with a relief bounce below the 90 day MA. NASDAQ held one of its trendlines; we will see how the next few days play out.
The sum is that the Wednesday move was not the floor. Maybe NASDAQ can pull it off but historically there is typically another downside leg before it really tries a bounce. Even after that bounce there is likely another downside leg to set up one of the market's favorite correction patterns, the double bottom. That means we are going to see the next leg lower, a recovery that looks pretty good, but then another ugly leg lower that is the second leg of the pattern that works to shake out everyone.
Before that we may see another attempt upside. Thursday is the start of a new month, and that has typically meant upside during the rally as more money was put to work. The Tuesday sell off may have changed that mindset a bit, but remember, a lot of hedge funds are run by fellows who were not here during the last sell bear markets. They may believe they can put more money to work on this 'dip.'
What we have to do in this scenario is be patient, let things set up, and when they move, move in quickly. When the move starts to falter, get out and then see how things set up again. When they do, move in quickly, get out quickly. Once the pattern has set up, i.e. the two down legs, we look for the break higher and are ready with the stocks that held up during the ups and downs and have set up their own bases.
Go defensive or be patient and play the leaders that can move?
You can go defensive in this environment and scratch out some gains. We will be looking at those, but we prefer to be patient, let leaders set up, and jump in when they move in the direction we want (up or down). Some upside leaders won't really correct much and we will be looking at those even in these early stages for some upside plays. We just have to know that when they start to falter we need to get out, let them make their next test, and be ready when they set back up.
We already see some of these that weathered the first round of selling and are setting back up. These relief moves can give these stocks nice upside. We will be looking at those. Again, adjust your mindset to play the leg and not a series of upside runs up a trendline. If you do the latter, one of those pullbacks might be the one that never recovers and plunges down into the next leg lower.
It is also a good plan to shrink your position size during these times. If this turns out to be a one-day event the worst that happens is we keep what we buy and add to them at natural buy points. If it is a double bottom there will be ups and downs and while we can make money upside and downside off of this correction process, the actual process won't make us rich simply because it requires shorter profit horizons. Once the consolidation is resolved upside or downside then the plays really set up for longer runs.
Thus we be patient, look for the strongest and the weakest, let them set up, move in when they make their moves, be smart with how much you put at risk, and be very ready to take gains when they are there without trying to milk a run for every nickel.
Support and Resistance
NASDAQ: Closed at 2416.15
Resistance:
The 90 day MA at 2432
The 50 day EMA at 2457
2468.42 is the November 2006 high
2471 is the December 2006 high
2509 is the January 2007 high
2523 is price resistance November 2000
Support:
2412 from June 1999 low
2400ish from the late November and late December 2006 lows.
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 1406.82
Resistance:
1408 is the November high
The 90 day MA at 1413
1425 is an interim high from November 1999
The 50 day EMA at 1429
1432 is the December 2006 high
1440 is the mid-January high
1443 is the late November to February up trendline
1444 from February 2000
1465 is the upper band of the current channel
1475 from peaks in December 1999 and January 2000
Support:
1400 is some price support trying to hold.
1389 is the October peak.
1353 is the early October consolidation range
Dow: Closed at 12,268.63
Resistance:
12,361 is the November 2006 high
The 90 day MA at 12,383
12,499 is the December intraday high.
The 50 day EMA at 12,509
12,640 is the up trendline connecting the November and January intraday lows.
12,810 is the upper channel line marking the November to date uptrend channel.
Support:
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 27
Durable goods orders, January (8:30): -8.8% actual versus -3.0% expected, 2.9% prior
Consumer confidence, February (10:00): 112.5 actual versus 109.0 expected, 110.3 prior
Existing home sales, January (10:00): +3% at 6.46M actual versus 6.24M expected, 6.22M prior
February 28
Q4 GDP 2nd iteration (8:30): 2.2% actual versus 2.3% expected, 3.5% prior
Deflator, Q4 (8:30): 1.7% actual versus 1.5% expected, 1.5% prior
Chicago PMI, February (9:45): 47.9 actual versus 50.0 expected, 48.8 prior
New home sales, January (10:00): -20% at 937K actual versus 1.08M expected, 1.12M prior
Crude oil inventories (10:30): 1.4M bbl, 3.694M bbl prior
March 1
Personal income, January (8:30): 0.3% expected, 0.5% prior
Personal spending, January (8:30): 0.4% expected, 0.7% prior
Initial jobless claims (8:30): 325K expected, 332K prior
Construction spending, January (10:00): -0.4% expected, -0.4% prior
ISM Index, February (10:00): 50.0 expected, 49.3 prior
March 2
Michigan sentiment (final), February (10:00): 93.3 expected, 93.3 prior
End part 1 of 3
|
world stock market
us stock market
|
