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trading system, money investment
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3/05/07 Investment House Daily
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Investment House Daily Subscribers:
MARKET ALERTS:
Targets hit alerts: MSFT
Buy alerts: BRCD; HGT
Trailing stops: None issued
Stop alerts issued: None issued
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SUMMARY:
- Market continues the blow down, tries the quick rebound, but Monday was not the day.
- ISM services doesn't assuage all worries about the market presaging some economic decline.
- Sentiment still too bullish to end the correction, but not the current leg lower.
Blow off continues as first rebound effort uncovers more sellers.
There was more bad news Monday as mortgage news dominated early as one sub-prime lender faced some criminal charges and claimed it needed new sources of financing (NEW) while another was downgraded (CFC). Foreign markets were in the downside lane again with Japan -3.3%, Hong Kong -4%, and Europe down 2+% as well. The US futures were lower as well, but they were recovering into the open.
Indeed the indices gapped lower but almost immediately they started recovering. NASDAQ opened at 2344 but 34 points in the first hour. The other indices showed similar action. Continued blow down on the open that tested the prior lows and then a recovery. Looked positive to start things off.
Then the sellers moved in once more and challenged the rebound. They used the recovery to sell into and they were successful. It didn't help that the ISM Services was less than expectations; economic fears have stirred this selling and thus the ISM service side added a bit of fuel. NASDAQ gave back 20 points and tried to hold midday. It rebounded to start the afternoon but once more it could not withstand the sellers. The late selling was enough to push the indices to close at session lows.
Technically it was more negative action, pushing the market a bit more oversold as the early rebound attempt failed. Low to high and back to low, closing at the session lows. The sellers just are not washed out yet, or looking at it another way, there is still too much bullishness to be flushed out.
The selling was broad-based once again with NYSE losers approaching a -5:1 bulge. The small caps took the flogging; they had held the line well and were the next choices for the hit parade. It was not just the small caps heading lower, however. Some of the same tunes from last week were spinning again with the financials getting worked over for whatever they have left in them. GS was down another 5+, slimming up 30 points in the past two weeks (14%). Energy was hit again as oil fell (60.07, -1.57/bbl); the decline in energy stocks is congruent with the idea of a slowing economy, but though lower we are not seeing a major meltdown in energy or in the price of oil. It is still above $60, and that says plenty about the views regarding the need for oil ahead.
Volume was higher on NYSE and a shade lower on NASDAQ. Either way it was still strong and there was selling on the NYSE what with the small and mid-caps falling in the 1.8% range. Breadth was pathetic with that -4.7:1 on NYSE and NASDAQ falling apart late and showing -4.1:1. Leadership was weak again, but we also note that many of the stocks we put on the report the past few sessions continue to hold up and bide their time, waiting for the selling to abate to give them some room to bounce.
Basically the market is still too bullish overall as most believe this is a short term correction, and once it has worked through the system stocks are off and running again. That is part of the complacency problem you hear every half hour on the financial stations. People are too upbeat to really get things fully washed out just yet. Not for the current leg, however; it can still rebound near term as the correction process continues. Indeed, we heard a lot more bearishness today when the rebound attempt failed and the October/November ranges started to fail. That is injecting the kind of concern that will get the correction process into its next phase, i.e. the relief rebound or rally that sets up the next fall.
THE ECONOMY
ISM Services weaker, and that fuels more worry about the economy
Worries re the economy are swirling around even after the stronger ISM manufacturing report last week. It was solid but investors are wondering whether this fall in the indices is presaging some bigger, unforeseen economic swoon later in the year that is not showing up in the leading indicators. When the ISM services came in at 54.3 versus the 57.5 expected (and 59.0 prior) that fed into the worry about the economy.
That is a positive for the market. This worry always swirls around on any correction, particularly after a 7 month run that level many feeling bulletproof about the market's future. Once the flow of good moves turns into a sharp cascade lower, investors start looking for a reason.
The market is often a forecaster of the economic future, but look at the sell off thus far. There is a lot of talk about the expansion being over. If some in Congress get their way it could very well be. A lot of words fired over the past couple of months about the need for change and we are not talking just with the Iraq war. Candidates calling for confiscating profits for use as they see fit and limiting investment in US securities. That is crazy talk that can, if it gets serious enough, cause the market to factor in some slower growth ahead. No one is going to put as much money in the US if we start talking confiscating profits a la our friend Chavez. Thus there is some credence to this selling reflecting the economic future given some of the election politics hyperbole.
The expansion overall, however, is in its middle age prime in terms of the two prior expansions. If we can just realize what got us here and remember to dance with who brung us this expansion still has a bright future.
Indeed, thus far in this first leg lower SP500 is off 6% after a 19% run off the July low. That is still well within the normal correction range after a rather extended run. It is likely to go lower before this is over, but that is a good blow down for a first leg, starting to match the declines in the corrections that preceded this one since the market rally started in late 2002. That suggests we are getting closer to the bottom of this first pullback; the Monday rebound failed, but it was the start.
Ultimately this correction may turn into a bear market. Everyone seems to think it won't right now, and that is when you worry. As noted above, however, likely it gets worse before it is over and convinces many it is the real thing. That is when it finds bottom. There is likely a rebound ahead of that with another down leg, maybe two. Ultimately we watch, make the downside plays when they set up, play the rebounds when they set up, but doing so sparingly as we wait out this move and see what the market shows us ultimately.
THE MARKET
MARKET SENTIMENT
VIX: 19.63; +1.02. Gapped higher to 20.40. Would like to see it at 25ish on this move to really help set up a bottom a few weeks down the road.
VXN: 24.61; +0.95
VXO: 20.5; +1.38
Put/Call Ratio (CBOE): 1.67; +0.37. Nine straight days above 1.0. As noted the past few sessions, this is starting to get extreme and we are starting to see the other indicators in sentiment line up with it. That is key; one does not tell the story.
Bulls versus Bears:
Bulls: 50.5%, up modestly from 50.0%. Ticking higher after falling from 51.1% two weeks back and 53.3% just over a month ago. Not a lot of movement, but we can make book on it being lower next week. 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: 24.2%. Definitely more angst as bears rose from 22.2% and 21.1% before that. Held in the low twenties for 2 months but starting to come to life and will surge next week. Hit a 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: -27.32 points (-1.15%) to close at 2340.68
Volume: 2.378B (-2.77%). Volume was lower but when you look at a chart you have to squint to see the difference from Friday. Still, though above average, both sessions were well off the prior three days where downside volume exploded. All things considered, however, this is high volume as NASDAQ noses lower after trying to bounce last Thursday.
Up Volume: 426M (+6M)
Down Volume: 1.924B (-84.47M). Still impressively negative at -4.5:1 over up volume.
A/D and Hi/Lo: Decliners led 4.21 to 1. Decliners ramped up big time once more. This is about as high as they have been during this decline, indicating the selling has not lost a whole lot of intensity.
Previous Session: Decliners led 2.99 to 1
New Highs: 42 (-16)
New Lows: 182 (+87)
NASDAQ CHART: http://www.themarketbeat.com/videonewslettercharts/NASDAQ.jpeg
If the link does not open, cut and paste the link into your browser.
NASDAQ continued to sell after a weak open, a recovery to positive, and then a midday sag that turned into late dumping. It closed at the session low and pierced into the lower reaches of the October/November range. It is rapidly approaching some prior highs from early 2006, but when the index sells like this you just use those potential support levels as markers, kind of like gauges as to how hard the selling is. Thus far it has yet to find one that has some backbone. Tried on Monday, but not quite there.
SOX (-0.75%) gapped lower as well and it also failed a rebound attempt that took it up toward the 50 day EMA on the high. It is coming back down to test the January low at 450 after roughly matching the November and December highs in the range. Its selling has been milder; the benefit of a laggard index. It is getting close to a bounce point (the 200 day SMA is just four points away) and it could be an early indicator of a tech bounce.
SP500/NYSE
Stats: -13.05 points (-0.94%) to close at 1374.12
NYSE Volume: 1.99B (+6.78%). Volume surged higher once more (Friday, the low volume session of the week but was above average as well) as the large caps, helped by the financials, dove through the October high. Still no relief yet for them. The small caps were pounded lower as well.
Up Volume: 170.004M (-59.838M)
Down Volume: 1.815B (+188.705M)
A/D and Hi/Lo: Decliners led 4.71 to 1. With the small and mid-caps selling close to 2% the breadth was bad. It was worse than NASDAQ, but still well off the -10:1 that started this dive lower.
Previous Session: Decliners led 3.11 to 1
New Highs: 56 (-18)
New Lows: 107 (+62)
SP500 CHART: http://www.themarketbeat.com/videonewslettercharts/SP500.jpeg
If the link does not open, cut and paste the link into your browser.
SP500 action mirrored NASDAQ: lower open, run lower, recovery to positive, and then a meltdown to close at the session low. SP500 tried to hold 1380, but did the next best, holding near 1375 support. It is in the range of congestion from late October to early November 2006, and that is still an excellent place for it to make a stand on this first leg lower.
SP600 (-1.84%) has undergone a pretty ugly blood letting the past week with an 8% decline. Hey, a market leader! Monday it closed right at some support at 390ish. If that fails, and it likely will even if it rebounds from here, the next support is near 380. Just above that is the 200 day SMA (383.43). The small caps ran well in the rally; they were leaders. They are being sold hard because they had put in a solid gain.
DJ30
The inside day was resolved to the downside, but DJ30 just barely undercut its Thursday low, and it still holds above some support at 12,000ish from mid-October and early November. The large cap consumer and pharma stocks are trying to hold up (e.g. PG, MRK), and that is giving support to the Dow.
Stats: -63.69 points (-0.53%) to close at 12050.41
Volume: 278M shares Monday versus 315M shares Friday. The selling intensity is fading as the Dow attempts to hold the line.
DJ30 CHART: http://www.themarketbeat.com/videonewslettercharts/DJ30.jpeg
If the link does not open, cut and paste the link into your browser.
TUESDAY
Q4 productivity is out ahead of the open and factory orders are released at 10ET. Those may or may not have an impact on the selling; when the market puts its head down and runs in one direction, the reports that come down the line after the initial ones that were used as the 'aha' reason for the move tend to have less impact. What is more important at this stage is just how far the selling has run and any signs it is running out of steam.
There was a bounce attempt Monday. It was shot down, but there was a legitimate attempt, something that has not shown itself since Thursday. DJ30 is slowing in its selling and intensity; consumer and pharma are helping stem its slide as they are showing some relative strength as defensive plays.
As for the rest of the market, as noted above, too many are still saying this is just a temporary event and will be over soon if we just sit tight and let it run its course. That is exactly right. It still will take more fear, however, to get through the correction. There will have to be more selling to get worries ratcheted up to the point there is more of an exodus induced by fear of losing everything. That is how corrections work.
That does not mean, as some seem to be implying, that this particularly jag lower is indefinite. If you watch the shows today there are statements that there is more downside ahead. Correct. They imply it is straight ahead, continuing this leg lower. There might be more downside to this leg. However, it won't likely be nearly the amount we have had thus far.
Indeed, even with sentiment still too high we can still have that initial bounce from the first dive lower. Sentiment waxes and wanes with the market moves. It will rise more with the rebound and then get crushed when the next dive lower hits. That is how you work off the excess, how you grind up the optimism. It is the hope of a recovery dashed on the rocks of a gnarly sell off that gets the average investor to utter Roberto Duran's infamous capitulatory phrase 'no mas.' Thus even though optimism is still to high at this juncture to put an end to the selling, we can get that relief move that can last a week, two or even three weeks and then another fall. The first may just be a week, then a harsh fall, then a climb back only to fade again. That was the MO in the summer of 2006.
The point is, corrections don't occur in one straight line, though with the 7 month upside run you might think that would provide balance. V-bottoms, a.k.a. knifepoint turns, are rare in the market. No, corrections run down then up, then down and up, just to roll back down harder. It is that back and forth action that either scares them out, grinds them out, or a combination of both.
Thus it is likely a bit late to be initiating a lot of new downside plays on this move. We have some plays that held up well in the selling and are in position to jump higher in a relief move. We are looking at some more as well. What we are going to do in this situation is pick the ones that are moving well, put some money their way when they show the move, ride them for what they will give, then get out, most likely before they start showing much of a stall. Why? Because a stall on a relief rally is often followed by a gap lower. In short, take the meat of the move and be happy even if you don't get to chew on the bone a bit.
Support and Resistance
NASDAQ: Closed at 2340.68
Resistance:
2368 is the early October handle high.
2376 is the April high, the former post-2002 high
2379 is the October high.
2400ish from the late November and late December 2006 lows.
The July/August trendline at 2425
The 90 day MA at 2434
The 50 day EMA at 2446
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:
2339 - 2334
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 1374.12
Resistance:
1389 is the October peak.
1400 is some price support
1408 is the November high
The 90 day MA at 1414
1425 is an interim high from November 1999
The 50 day EMA at 1426
1432 is the December 2006 high
1440 is the mid-January high
1444 from February 2000
1445 is the late November to February up trendline
1468 is the upper band of the current channel
1475 from peaks in December 1999 and January 2000
Support:
1371 to 1373 is the December 2000 peak and the January 2001 peak
1369 from early October 2006
1358 to 1362 mark a series of peaks from April 1999 to August 1999 high and the February
1353 to 1350 is the early October consolidation range
Dow: Closed at 12,050.41
Resistance:
October high is 12,167
11,986 is price support from mid-October and the early November low.
12,361 is the November 2006 high
The 90 day MA at 12,387
12,499 is the December intraday high.
The 50 day EMA at 12,483
12,672 is the up trendline connecting the November and January intraday lows.
12,820 is the upper channel line marking the November to date uptrend channel.
Support:
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
11,723 is the January 2000 closing high
11,670 is the May intraday high
11,642 is the May 2006 closing high
11,488 is the early September high.
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
March 5
ISM Services, February (10:00): 54.3 actual versus 57.5 expected, 59.0 prior
March 6
Q4 Productivity, revised (8:30): 1.7% expected, 3.0% prior
Factory orders, January (10:00): -4.0% expected, 2.4% prior
March 7
Crude oil inventories (10:30): 1.4M prior
Federal Reserve Beige Book (2:00)
Consumer Credit, January (3:00): $7.0B expected, $6.0B prior
March 8
Initial jobless claims (8:30): 335K expected, 338K prior
March 9
Non-farm payrolls, February (8:30): 100K expected, 111K prior
Unemployment rate (8:30): 4.6% expected, 4.6% prior
Average hourly earnings (8:30): 0.3% expected, 0.2% prior
Trade balance, January (8:30): -$60.0B actual, -$61.2B prior
Wholesale inventories, January (10:00): -0.1% expected, -0.5% prior.
End part 1 of 3
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trading system
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