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us stock market, top stock pick
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3/10/07 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Target hit alerts: Again took some interim gain on recent purchases given some good moves and the continuing correction can reverse directions overnight: CYTC; GAP
Buy alerts: SBUX; SPY
Trailing stops: None issued
Stop alerts: None issued
SUMMARY:
- Jobs report continues the rally . . . for the morning.
- Upward revisions keep the jobs report in decent shape.
- Who, or more precisely what, benefits from higher taxes.
- Still some great looking upside plays, but the market looks heavy heading into next week.
Jobs report gives the market what it wants but even that doesn't satisfy it.
After the Monday dump lower stocks fought back all week, rising to next resistance at the bottom of the November/December lateral range. It stalled at that point, but it was just waiting on the jobs report to either send it higher or choke off the rally. As it turns out the market pretty much got what it wanted when jobs came in at 97K (100K expected) with an upward revision to December and January. Lower yet higher. Weaker, but stronger as well. In a market still pondering the Fed's next move the dichotomy was nirvana-like.
The overseas markets were lower, but unlike the prior sessions when the US financial markets deferred to foreign direction, US stock futures surged on the jobs report, running 10 to 15 points above fair value. Looked promising, looked as if the jobs report was the juice to continue the rebound move and perhaps deliver a follow through to the Tuesday reversal.
Of course you always have to view a very strong open with skepticism, and the fact that the market has started a correction underlines the need for caution. On top of that the market spent the week rebounding from the spanking it took the prior week, a low volume rebound that indicated fewer and fewer upside participants. With the correction you knew the sellers were going to take a shot at the early bounce. It was just a matter of time.
That turned out to be at the open. Stocks opened higher but that was the high. Indeed the first leg lower was the sharpest of the day. The indices managed to hold onto positive ground and put in a midday bounce. When the sellers finished lunch they had dessert on the market, driving stocks into negative territory. It took a late session rebound to turn the indices back to positive, and even with that NASDAQ and NASDAQ 100 could not pull it off.
Problem is, they lost their strength after that first move. Volume was low and the indices could not hold the move through near resistance as leadership was scattered and sporadic. If you were looking for a follow through or at least a jobs-induced rally continuation you were disappointed with the marginal, low volume moves higher. As they say on the streets, all show and no blow (or vice versa; I don't know the streets too well).
In the end it was a day where neither the buyers nor the sellers could take the advantage. The market pitched back and forth a few times, but after a week that started sharply lower and then fought back on low volume, a low volume, flat on the close session was about all they had left.
The Technical Picture: Does it make sense this would be a bottom?
In the glow of the jobs-induced higher futures, some financial station journalist majors crowed how they had called the bottom on Tuesday. The resumption of the upside move on Thursday after the Wednesday stall combined with the Friday futures surge was enough proof for them. Of course the week itself in no way proved that hypothesis. Volume was lower each session as the indices climbed back up from the initial thumping. The rebound stalled at the first possible resistance, the 10 day EMA. Though the weekend influence can slow the Friday trade, the fact that the market could not make anything of the 'just right' jobs report other than a weak test of near resistance suggests a dearth of remaining buying interest.
That likely means the next phase of the down leg starts sometime this week given the indices are already struggling below resistance. Monday could still prove to be the bottom if the indices hold at that level and make a double bottom, but this is likely not any knifepoint turn or 'V' bottom. Indeed, there is likely two more pretty sharp downside legs before this correction finds its bottom.
Think of it this way: after a 7 month rally, is a week of sharp selling and a lower volume rebound enough to wring out the froth and set up another 7 month move? In the correction of '06 it took 10 weeks and 3 down legs to find the bottom before the indices found the bottom and started the final phase of the bottoming process. That rally that preceded that correction was 6 months (5 months from the breakout) and covered roughly 150 SP500 points.
The current rally lasted 7 months and covered 225 SP500 points in a much sharper ascent. Now the market doesn't make a habit of acting logically, but it is somewhat consistent in what it needs to decompress after long runs and set up for the next move. If it took 10+ weeks to shakeout a shorter and flatter rally, one week of selling is not going to do the trick on a longer and stronger run.
There might be more upside to this current relief bounce. They can last more than a week and this one is just a week old. The action to end the week, however, suggests it is running out of steam, and it is doing so at the earliest lower resistance level. That does not speak well of the upside conviction. Thus it behooves us to keep our upside stops fairly tight and be ready to play some more downside. Indeed we dabbled in some positions Friday with another dump lower in SBUX and taking an earlier and more aggressive position in some SPY puts. There are many more stock patterns indicating some more downside ahead, and we will cherry pick those that look to be in a hurry to move lower.
THE ECONOMY
Jobs continue steady pace as revisions continue to save the day.
The 100K jobs expected were no great shakes and were in line with the 111K reported in January. Thus when the payroll report slid in at 97K the market did not wince. Indeed, it responded favorably because once more the prior months were written higher. January was pushed up to 145K while December received another 20K boost. As noted above, weaker yet stronger. On top of that, the unemployment figure fell to 4.5% from the 4.6% it was expected to hold from January. What a bonus. The Fed is perceived not to pay much mind to the unemployment rate versus non-farm payrolls, so this was viewed by some as hidden strength in the report.
As we have seen, the household survey reflected in the unemployment percentage is the more accurate indicators for this recovery given the complete bust of so many businesses in the last recession, but you can be the Fed is not overlooking it. There are still those on the FOMC who subscribe to 'Phillips Curve Quarterly', and they view higher employment as inflationary. The PC's acceptance is strange given history debunks it. It is a theory said to apply to the economy as a general overlay for all economic periods, but ironically it only correctly tracks 6 years of economic history. Talk about the exception swallowing the rule.
As for the details, it was not a banner report. Construction lost 62K jobs due to bad weather and the continued slowing (or is it 'sucking'?) housing market. That was the largest decline since a January 1991 75K decline. Hmmm. Services gained a fat 168K jobs, but with the government portion rising 39K and the loss of construction workers, that left just 58K private sector jobs created when the average has been 180K. Government jobs provide nothing to the economy, at least nothing that really pays for itself. They are created with tax dollars and as discussed below that makes them a real drain on the economy. Government does not produce as much as the private sector, it is more wasteful, and thus we get less out of a government job than we do a private sector job. And the tax money it takes to create the job adds an additional burden on the economy in that the money is taken out of the system. The disposable income provided by the marginal government job in no way offsets the economic drain the jobs creates.
Why do we say 'hmmm' about the 1991 comparison? Because that was a time of recession in the US. Recall when we were starting to come out of the last recession we made comparisons to growth rates in the early 1980's when the US came out of that nasty 1970's depression? While so many were badmouthing the economy it was throwing off growth numbers in sector after sector that had not been seen since the recovery of the 1980's. Yes, that means they were better than the 1990's that so many wistfully pine for.
Comparisons on the upside are valid as they are on the downside as well. Of course you have to factor in all of the other variables in your analysis, and so far there is still a lot more strength right now than back in 1991 (that was in the actual recession). It pays, however, not to sweep these comparisons under the rug as some are doing. That is how you get blind sided. The economic data is definitely not as strong as it was in the first half of 2006. The long leading indicators still show accelerating growth, but the apple cart can be upset if mortgage issues grow and impact expectations, causing investors and consumers (business and individual) to pull back. Surprises can happen and thus we are keeping a close eye on this. We are not bearish on the economy by any stretch but we are not as comfortable with it as we were a quarter ago.
Hey, let's raise taxes and cover all of our expenses. What a bad idea.
Despite all of the rhetoric in the election run up about tax hiking as the last resort, there has not been one dime of proposed spending cuts and already there are plans in committees to raise taxes though they are veiled behind claims of eliminating the AMT. Well, some of them are not even veiled. Seems the list of possible actions was rather short with the last resort being choice number 2 (maybe even choice number 1).
It is easy for some to rationalize raising taxes. First, they harp about the deficit, saying it is the largest ever and is going to be a burden on future generations. It is not the largest ever in real, inflation adjusted dollars. As a part of GDP it is running at to below historical averages. It is the household mortgage analogy we used last week: if you make more money you can have a bigger mortgage and it is the same or even a smaller percent of your income than a lower mortgage at a lower income level. In other words, the economy is so much larger now it can afford a higher deficit in dollar terms.
There is also the idea that if you have a $50B shortfall you can simply raise taxes by $50B and solve your problems. Without even considering how Congress will squander most of any gain on pork barrel projects or new useless programs, the reality behind the impact of tax hikes on citizens and how much is actually collected undermines this simpleton belief.
An oft-cited recent report on the effects of tax cuts and tax hikes is being used to purportedly debunk the benefits of tax cuts. Those using it, however, fail to read the entire report that shows tax hikes are much more damaging to the economy and to US citizens. If you raise taxes on dividends by $1 the Treasury gets just $0.50. At the same time it costs the average citizen $2 in lost income plus the additional tax paid. If you raise taxes on all forms of income the Treasury does better with $0.77 per $1 tax increase.
So if you want to raise $50B in tax revenue you have to increase the tax even more, and the net cost to the US citizen is $2.25 to $5.00 in taxes and lost income as a result of decreased economic activity due to the tax. Sure the government gets its $50B, but you and I lose in the form of lower wages, no job creation, or worse the loss of jobs. In other words, there is a loss to citizens above the tax paid in the form of simply lost income through lost wages, salaries and other income. The kicker is this additional burden does not fall on just the rich as the tax proponents claim. It hits the middle and low income the hardest because it is their incomes that fail to rise or fall, it is their jobs that are lost or are not created at all. That means even the lowest end who pay no income taxes are hurt as well because their job may simply disappear or not even be created due to slower economic activity.
The only beneficiary of such a tax is a growing, bloated federal government that gets another huge chunk of money to spend. They sell it by saying they are taxing only the rich, but that money they collect comes at the cost to all citizens far in excess of the extra tax paid. Sure you may not be hit with the direct tax, but is that much comfort if you don't have a job because the additional tax money kept a business from creating another position? How about if you don't get a raise because of the tax?
It is easy to sell a tax hike on the 'rich' because most can understandably only see what appear to be the direct links: raise taxes on the higher incomes and those higher incomes pay the tax and they bear the burden. The empirical evidence, however, shows that the cost of the tax is passed down to all members of society through slower economic growth, fewer jobs, lower wages, etc. Higher taxes divert money to tax shelters, taking it out of the economy. That makes it harder for government to collect and results in more taxes to try and cover the 'tax gap.' It gets worse and worse as we saw in the 1970's, and the result is an incredibly convoluted and inefficient tax code that costs the economy $500B per year just in determining what tax is owed.
If they want to get serious about helping the economy and all citizens, then congress should seriously consider scrapping the IRS and going to a flat tax or a national sales tax. While both have their limitations (they are, after all taxes) they are infinitely better than what we have IF we totally scrap the income tax AND IF the rate is reasonable and not the absolutely absurd 24% to 35% levels we heard from the 'blue ribbon' tax commission. Let's face it, with people such as Heinz-Kerry worth hundreds of millions paying a net tax rate of just 12.5%, there is no way a flat tax will receive any support unless it is at that level. Given the absolute economic boom such a tax rate would create, however, the Treasury would be in the green inside 10 years, not just eliminating the yearly deficit, but the accumulated deficit as well.
THE MARKET
MARKET SENTIMENT
VIX: 14.09; -0.2. Holding the line at the 18 day EMA and at 14. Might go a bit lower but not much more than 13 we would think.
VXN: 18.94; -0.85
VXO: 14.25; -0.76
Put/Call Ratio (CBOE): 1.16; +0.14. Thirteen consecutive sessions above 1.0 on the close. Wow.
Bulls versus Bears:
Bulls: 46.2%, down nicely from 50.5% and 53.3% just over a month ago. When it bottomed last summer it was about 10 points lower near 36%. Still a ways to go, but when it cracks it can tumble quickly. A 4.3 point drop is pretty salty.
Bears: 26.9%. Solid jump from 24.2% last week and a good move up from the 20%ish the first two months of 2007. The angst is rising, and as with bulls, it is not all that far from levels that sparked prior rallies. It hit a post-2002 high in that late June 2006 move (hit near 36%), 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). It is not far from those 2005 levels.
NASDAQ
Stats: -0.18 points (-0.01%) to close at 2387.55
Volume: 1.962B (-2.6%). Volume remained below average and was lower again, capping a week of lower volume other than Monday, and that of course was a nasty downside session. Lower volume rebounds typically fail.
Up Volume: 926M (-322M)
Down Volume: 1.015B (+396M)
A/D and Hi/Lo: Advancers led 1.24 to 1. At least the breadth was positive, but it is not the piece of data that will make the difference.
Previous Session: Advancers led 1.52 to 1
New Highs: 75 (+4)
New Lows: 75 (-5)
NASDAQ CHART: http://www.investmenthouse.com/ihmedia/NASDAQ.jpeg
NASDAQ gapped higher to the 10 day EMA (2402) and the bottom of the November/December range, spending the rest of the session moving lower. It bounced off of session lows in mid-afternoon and managed to close off the lows, but that did not alter the fact that the early upside momentum fizzled quickly and left NASDAQ once more below near resistance. Hard volume decline, low volume bounce to first resistance, and then showing weakness. Not a great prognosis that the bottom was hit on Monday.
SOX (+0.70%) again showed some relative strength, but that was limited pretty much to holding the 50 day EMA again on a test and closing at some resistance at 475. It is smack dab in the middle of its 6 month lateral range. Not a bad base and it is showing signs of trying to take some leadership. It has had several false starts along the way, however, so we don't want to read too much into this, particularly with the rest of the market showing some wear and tear after this bounce.
SP500/NYSE
Stats: +0.96 points (+0.07%) to close at 1402.85
NYSE Volume: 1.435B (-13.28%). Volume plunged below average as the large and small caps struggled with the 10 day EMA once more. May just be a Friday thing and the buying volume might jump right back up. The trend, however, has been lower and lower volume on the upside move, showing a lack of buying conviction. In other words, there were more sellers than buyers over the past two weeks and the lower volume simply means some of the market is sitting this move out, waiting for the opportunity to move in. Could be sellers, could be buyers, but the pattern suggests the former.
Up Volume: 775.366M (-496.428M)
Down Volume: 611.133M (+240.738M)
A/D and Hi/Lo: Advancers led 1.47 to 1. Not bad all week.
Previous Session: Advancers led 3.02 to 1
New Highs: 79 (-27)
New Lows: 28 (+5)
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
SP500 traded above the 10 day EMA (1405) intraday, tapping at the bottom of the December/January range. It failed that move and posted a most modest gain on lower trade. The volume has declined as the index rebounded, and the gains have shrunk each session. That combination suggests a rebound running out of strength. The fact that it is occurring at the first resistance level indicates the next leg could be equally as intense as the first down draft.
SP600 (+0.41%) rallied to the 10 day EMA as well, and this move took it into the middle of its November to January lateral range. It closed right at the 90 day MA, another resistance point. It showed a bit more life than NASDAQ or SP500 in its rebound, but it is still in the heart of resistance. This relative strength may help it hold up better on the next leg lower and we could see it turn into an early leader when the correction is over. That would be nice to see again as small caps are indicators of economic expansion.
DJ30
DJ30 mirrored the other large cap indices, moving through the 10 day EMA (12, 290) but then fading to close below that level and on lower, below average volume. It is bumping the November and early December range as well. It formed a bit better bottom than NASDAQ or SP500 in its sell off, and while that is not saying much (it isn't a 10 on the bottom scale) that may help it recover better after the next leg. Indeed, we will watch to see if the next leg also holds at or above 12K given this better bottom.
Stats: +15.62 points (+0.13%) to close at 12276.32
Volume: 211M shares Friday versus 241M shares Thursday. Lower volume test of the 10 day EMA. The picture of a weakening move.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
THIS WEEK
Retail sales, Philly Fed, and the CPI highlight next week's economic data. Add onto that the mortgage worries and the yen watch and you have the potential for another market direction change. Hard week down, quiet rebound week to near resistance. That sure sounds like the recipe for the next leg lower. That is the way we are leaning based upon what we are seeing in the charts, price/volume action, and leadership, but in a correction sharp moves either way can sometimes fly in from left field.
The week has some important earnings reports in it as some of the big national brokerages (GS, LEH, BSC) report earnings. One of the weak links in the SP500 has been the financials. They were barnburners in the move higher and were blowing and going right up to the market correction. They are now paying for the price of success, and similar to the markets, they have crept back up to resistance this week after that hard sell off. It was not a meek recovery; there were some solid upside days on stronger volume. In short some were in there buying after that initial sell off. With the current correction, however, there is a high likelihood they will move lower once more unless their earnings are very, very strong. If they are they could literally be market moving. The odds of that are long, and with the market still needing a further correction the likelihood is they sell some more near term before making the final turn.
We still see some very good looking upside potential in the market and we will continue to look at those in the event they provide opportunity. We need to see good strength at this juncture to convince us that they are going to withstand any selling after the market has rebounded for a week. They are out there as we have seen with several plays this week. Nonetheless it behooves us to keep our stops pretty tight on the upside because the turns in a correction can come quick, and the selling is quick as well.
With the indices struggling at the lower resistance levels we will also be ready with some more downside plays. There are many good looking downside plays in addition to the upside. That in itself tells you the market is in a transition stage with the sellers and the buyers still pushing to tilt the action their way. History and the current chart patterns suggest the downside is not over, however, and that the sellers will have another leg or two to make their hay in this correction.
Thus we keep a tighter leash and be ready with the downside and upside, and then just take what the market gives us during this correction. Friday we were taking some more gain on plays that made quick 1 to 3 day moves simply because what you have today in a correction may be gone the next session as the direction changes can be quick and violent. Thus when you get a move in your direction for a few sessions, take some money to the bank. It is the nature of the beast you are riding, and you have to adjust to it, all the while watching for the sign of the next turn and the ultimate bottom of the correction. You have to love it.
Support and Resistance
NASDAQ: Closed at 2387.55
Resistance:
2400ish from the late November and late December 2006 lows.
The July/August trendline at 2431
The 90 day MA at 2435
The 50 day EMA at 2437
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:
2379 is the October high.
2376 is the April high, the former post-2002 high
2368 is the early October handle high.
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 1402.95
Resistance:
1400 is some price consolidation and has not totally broken
The 10 day EMA at 1405
1408 is the November high
The 90 day MA at 1415
The 50 day EMA at 1420
1425 is an interim high from November 1999
1432 is the December 2006 high
1440 is the mid-January high
1444 from February 2000
1449 is the late November to February up trendline
1475 from peaks in December 1999 and January 2000
Support:
1389 is the October peak.
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 12,276.32
Resistance:
The 10 day EMA at 12,289
12,361 is the November 2006 high
The 90 day MA at 12,392
The 50 day EMA at 12,432
12,499 is the December intraday high.
12,708 is the up trendline connecting the November and January intraday lows.
Support:
11,986 is price support from mid-October and the early November low.
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
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 12
Treasury Budget, February (2:00): -$118.0B expected, -$119.2b prior
March 13
Retail sales, February (8:30): 0.3% expected, 0.0% prior
Retail ex-auto (8:30): 0.3% expected, 0.3% prior
Business Inventories, January (10:00): 0.1% expected, 0.0% prior
March 14
Current Account, Q4 (8:30): -$203B expected, -$225.6B prior
Crude oil inventories (10:30): -4.848M prior
March 15
PPI, February (8:30): 0.4% actual, -0.6% prior
Core PPI (8:30): 0.2% expected, 0.2% prior
Initial jobless claims (8:30): 328K prior
NY Empire State Index, March (8:30): 17.0 expected, 24.4 prior
Net foreign purchases, January (9:00): $15.6B prior
Philly Fed, March (12:00): 4.0 expected, 0.6 prior
March 16
CPI, February (8:30): 0.3% expected, 0.2% prior
Core CPI (8:30): 0.2% expected, 0.3% prior
Industrial production, February (9:15): 0.3% expected, -0.5% prior
Capacity utilization, February (9:15): 81.3% expected, 81.2% prior
Michigan sentiment, preliminary, March (10:00): 90.5 expected, 91.3 prior
End part 1 of 3
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us stock market
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