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investment help, day trading
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3/14/07 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Target hit alerts: BEBE; CSE; SBUX; SPY
Buy alerts: ABB; MM
Trailing stops: None issued
Stop alerts: HGT; RVSN
SUMMARY:
- Market undercuts correction lows, stages strong rebound.
- More bottom talk though this time it has a bit more backing it up.
- Q4 current account shrinks on lower oil prices, but will consumers shrink imports in Q1?
- Trying to put in a bottom but likely a visit to the 200 day SMA is in store before this is all over.
Nothing like a good undercut of the lows to bring in the shorts.
Foreign markets were in the tank after the US blow down on Tuesday, but our pre-market was not that horrific. Indeed, futures continued to improve up to the open. The current account was not as lop-sided as feared (though the low oil prices that drove the improvement are long gone) and the yen got a yen to head lower. The latter was a positive for the carry trade and as we have seen, that boosted equities. It is noteworthy that over the past week the market has almost tracked the yen's move to a yen, i.e. up when the yen was lower and lower when the yen was up. That held true Wednesday, at least into the open.
The early bounce did not hold, however, and within the first hour the indices were testing the early March lows, the prior lows in this correction. That bounced the indices up, but when they hit the session highs they tested. They tested some more, they started to sell. They really started to sell, undercutting the session low. They undercut the March lows. DJ30 fell below 12,000 (11,939). Volume was high. Then the bell rang. The indices posted a small intraday double bottom. We took some nice downside gain off the table. The indices then started back up, rallying to the morning highs and pausing. They formed a handle and broke out with just over an hour left with all closing higher on rising volume. Surely nirvana has been reached.
Technically you can make an argument it has. Technically you can make an argument is hasn't. The market will tell us, but we have a pretty good idea what today was all about.
The action was classic double bottom: sharp bounce off the initial leg, a peak, then a sharp plunge lower that undercut the prior down leg. That sharp up and down action is the old 'scare them out' the double bottom is known for, and the action the past three weeks would qualify for that though in the grand scheme of things the fear factor was not that great.
Solid volume on the sell off and it held on the rebound to a positive close. Those are always positives when looking for a reversal from selling. Further, the volume topped the Tuesday selling volume; more good indications. That shows the buyers/short coverers elbowing the sellers aside in their effort to move into stocks after the selling.
Breadth was modest, about 1.5:1 on NYSE and 1.2:1 on NASDAQ. You can explain that away as lagging on a reversal session, and that is true to a certain extent. NASDAQ 100 was the market leader, however, meaning that in tech land only the bigs were really moving. That plays into leadership. Outside of the large cap techs, not a lot of tech leadership. Indeed, the chips, the recent relative strength leaders when everything else looked like crud, lagged on the session. That makes it look like a tech day that saw the beaten up large caps rebounding. Energy was solid and the financials finally posted an upside day, but while the former have good bases to move out of the latter bounced modestly from a harsh butt kicking. As with the large cap techs, more of a gasp after being smothered for a week of downside.
As you can see, there are positives to the session and there are other attributes that are also indicative of some short covering within the selling. When you are in a sell off and you undercut a prior low there is almost invariably an immediate reversal as the shorts cover. It is a herd-like movement that you see again and again. They press the downside, driving stocks through their prior lows and then it is as if some one says, 'damn, we are below the prior lows.' Before you know it they are all covering. The breadth was so-so while the volume was high. More attributes of short covering during a selling event.
Bottom or not?
As you can see there are attributes of both a turn back up and just a bounce in a continuing selling event. The indices undercut the prior March low so technically they scuttled that rally attempt. They also recovered to close positive on strong volume, so you can basically put that first point in the trash can. You are left with an undercut of the prior March low, a rebound to close positive and at the session highs, and strong volume driving the recovery. Pretty strong stuff.
Again, it is an awfully short selling event (3 weeks; 4 if you count the initial DJ30 pullback to its trendline before the massive break lower) to consolidate such a long and steep rally (7 months upside, 20% on SP500 and 25% on NASDAQ). In 2006 NASDAQ gained 15% and it took about 14 weeks before it hit the bottom of that correction (about 15%). SP500 gained 13.5% in its run off the October 2005 low, and it corrected 8%. From the recent highs to Wednesday low SP500 has corrected 7%, NASDAQ 8%. Given the larger gains you would anticipate a bit more downside. Even if this is where the hold the line (after all, a 10% correction is 'normal' for a continuing bull run), the indices need a bit more time to consolidate, another rally and leg lower to really shake out the complacency.
There was a similar session in the 2006 correction, i.e. a reversal to positive after a big intraday sell off that took the indices below the first low hit in the selling and an interim bounce. That looked pretty good, but the indices sold off hard the three following sessions before real terra firma was hit and the bottom of the first leg was set. That was followed by a 3 week bounce to set the middle or the 'hump' of the double bottom, and then another sell off to test the prior low. That was met with buying on rising volume on the reversal session and the next session that was an upside day as well; a big upside day at that.
Of course Wednesday had some great volume on the recovery, something lacking in 2006. And that is a big part of the equation: while corrections are similar they are also their own beasts and will react differently within the general framework. That said, the higher volume reversal (even with narrow volume and likely short covering driving it) could be the bottom of the first leg. That still does not mean, and until proven otherwise we don't believe, Wednesday was the bottom to the selling in the sense the market rallies up from here without ever looking back. It might have set the bottom for the next test that comes three or four weeks down the road to kiss and then rebound, but it is not likely that such a quick event has set a lasting rebound.
As always the market gets the last word. That is why when the lows were undercut and things started to bounce we took some downside gain off the table. The market does things the way it wants and when you are in a correction, bank good gain when you have it and look for the next opportunity as the market shows you what it wants to do. Thus as we sold some downside we dabbled in some upside, but on strong stocks that held up in the selling, not the bludgeoned stocks raising up off the gurney to see what the heck just ran over them.
THE ECONOMY
Q4 current account improves on lower imports, continued solid exports.
The $195.8B trade gap was much better than the 204B expected. Indeed, Q4 dropped to 4.8% of GDP versus 6.9% in Q3 and 7% in Q4 2005. That was the lowest reading since Q3 of 2005 ($183.4B). Strong exports continued to help the gap while fading oil prices lowered the import side of the equation. The result, a pleasant drop in the gap.
Still a high gap, however, and one that is going to worsen in Q1 because we all know that oil prices are well off the low prices hit in Q4 where oil danced around $50/bbl. As we have noted, oil has found a niche near $60/bbl it really seems to like. Inventories were in line Wednesday and prices did not do much ($58.16, +0.23/bbl), but it certainly is not heading lower at the moment and has held this level for most of the year. Thus that part of the improvement in the gap is out the door.
But is this really the big deal it is made out to be? We don't think so because in the history of the US, when our economy is strong we run a big trade imbalance because we consume tons of foreign goods. That is the way it is for us: good times equal big imports. With the US manufacturing sector in a 50 year decline, hard goods are not our future. Yet many in Congress want to limit what we take in by raising its cost (tariffs) in order to protect businesses here. All that does, however, is force us to hold onto businesses that can be more efficiently run elsewhere due to cost differences, divert funds from investment in R&D and new ventures that would create the next generation of better jobs here at home, and make us even less competitive with the foreign industries we complain about. Moreover, as we have lamented many times before, as long as we have a vehicle fleet based on hydrocarbons from fossil fuels we re going to be net importers of oil, and thus our trade gap will remain huge.
The most important factor to watch in the trade gap is the level of imports that so many fear. Not the oil imports, but imports in other areas. This gives us a clue as to what the US consumer is doing with his or her money. If imports are down due to the consumers not buying as many imports you have to be concerned regarding the economy. As noted above, when we feel good we buy goods from everywhere, i.e. here at home and from abroad. If the trade gap narrows because US consumers are not buying foreign goods, that is a bad sign for the economy. Unfortunately, this data is horribly lagging; by the time it is available the trend has typically changed.
THE MARKET
MARKET SENTIMENT
VIX: 17.27; -0.86. Hit 21.25 intraday, topping the prior March high and closing in on the June high near 24. Getting good enough to have some impact.
VXN: 19.77; -2.27
VXO: 16.39; -1.18
Put/Call Ratio (CBOE): 1.66; +0.21. Sixteen straight and counting.
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: +21.17 points (+0.9%) to close at 2371.74
Volume: 2.318B (+2.18%). Big volume jump, topping the Tuesday selling volume, as NASDAQ reversed from new correction lows and rallied positive. That is the kind of volume you want to see in a reversal session and when compared to a similar day in the 2006 correction, this volume was much stronger on a relative basis. That argues for the low on this leg versus further downside.
Up Volume: 1.687B (+1.469B)
Down Volume: 589M (-1.285B)
A/D and Hi/Lo: Advancers led 1.2 to 1. Very modest as the large cap NASDAQ 100 (+1.2%) led the way. It can be blamed on the reversal, but low breadth on this kind of rebound indicates a short covering move.
Previous Session: Decliners led 4.69 to 1
New Highs: 49 (-16)
New Lows: 174 (+26)
NASDAQ CHART: http://www.investmenthouse.com/ihmedia/NASDAQ.jpeg
An up and down session, but the key move was the midday blow down through the earlier March low (2340, 2331 on Wednesday) and then the rebound to close positive. With the volume that is a nice move though the breadth was narrow. This kind of move begets more upside, but in the bigger correction picture, this kind of move also begets another bottom test to come given the new low hit intraday on this correction. It wants to rally and 2400 is the first test. If it gets some legs it can make the 50 or 90 day MA (2429, 2435) on a bounce. After just one more downside session on the close in this selling, however, a new bounce higher is a longer shot.
SOX (+0.48%) undercut the 50 day EMA on the low, but it did not even come close to hitting its prior lows and then rebounded to close just off that level. It remains in the middle of its 5 month lateral move but we keep seeing some chip stocks improving their patterns as SOX continues its base formation as well.
SP500/NYSE
Stats: +9.22 points (+0.67%) to close at 1387.17
NYSE Volume: 2.069B (+5.55%). Strong volume was well, topping the Tuesday selling trade as the NYSE indices reversed losses to close positive. Good recovery/flush out volume that can lead to another interim bounce, but as with NASDAQ, after just one day lower in the next selling, a rebound is a bit harder to sustain.
Up Volume: 1.415B (+1.305B)
Down Volume: 626.628M (-1.22B)
A/D and Hi/Lo: Advancers led 1.53 to 1. Not bad breadth. Not great breadth. Could still use a breadth mint.
Previous Session: Decliners led 4.56 to 1
New Highs: 48 (-40)
New Lows: 94 (+17)
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
Undercut the March low as well (1374, 1364 on the low) and recovered positive with strong trade. The key for the index was when the financials turned back up after another run lower. That brought in some covering and when they were covered it spread out all across the index and led to he rebound. Big recovery but still smacks of short covering in continued selling. Of course, all rebounds start with short covering so that is a bit of a disingenuous statement.
SP600 (+0.78%) held the earlier March low on the Wednesday intraday low and recovered positive. This is a bit more interesting as the small caps tested and did not breach. Successful test of the low. That sets the small caps up as a potential leader in the next move higher. It still looks as if it needs another few sessions trading around this level to really set up a better move, but not a bad set of circumstances at all.
DJ30
Similar to the other large cap indices, the blue chips sold off on higher volume, undercutting the prior correction low and 12,000 to boot before rebounding for a gain in rising volume. As we have discussed the past two weeks, DJ30 has a bit better bottom than SP500 or NASDAQ, and it may actually be able to build a decent move off of this level. Still a very short correction to have put in a base, and that lower intraday low indicates another test to come down the road. A move higher here has to beat the confluence of the 50 and 90 day MA (12,402 and 12,395), and it could make it to 12,500 where there is price resistance.
Stats: +57.44 points (+0.48%) to close at 12133.4
Volume: 333M shares Wednesday versus 312M shares Tuesday. Stronger reversal volume than the Tuesday selling volume. As with the other indices that is always a good indication as it shows the buyers coming in and pushing the sellers aside.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
THURSDAY
PPI and some regional PMI reports set the plate for the Friday CPI. Don't forget the net foreign purchases; of late they have been slipping. There is still a lot of concern about the economy after the mortgage issues, and thus investors are weighing the economic data to see if it jibes with or refutes the mortgage worries. As we saw Tuesday, the weaker retail sales snowballed onto the mortgage worries and the result was a massive downside day. Wednesday things were not much better on the economic front, but there was not much news. Thursday, and especially Friday with the CPI, things get a bit more interesting from this perspective.
That said, the market tried to post a reversal Wednesday on the heels of that nasty sell off. It has the attributes of a short covering rally in the midst of selling, and history suggests it may be a one-day wonder before more selling to set the bottom. You have to give it some credence, however, given the strength of the volume. We did and we banked some downside gain accordingly. We also see some continued solid stocks in position to move or making some good moves. Others are setting up still, ignoring the selling and building bases (e.g., FORM and other chips). Those provide some upside potential given their continued solid bases, but if this market really starts selling, even those will have issues similar to how all stocks had issues in summer 2006. Upside moves at this stage have a short term view, i.e. riding the next upside leg along with an outside notion they could also last with us for the longer term if they hold up during the next selling bout. For options in particular, upside right now means playing the next upside leg.
We will have to see what the market does with this Wednesday session as it comes on the heels of the first day of a new sell off in the correction. History says its timing is not the best for more sustained upside bounces in an overall correction, but the strength of the move is enough to drive some upside. We see some upside that we would like to buy into on a solid break higher, but we are not going all in on a bounce. If it is the bottom it will test it and give us a nice buying opportunity. If it is just another pretty bounce (or more likely not so pretty) in the continued correction then we can use the bounce to reload on some downside positions again. After all we have played SPY a couple of times and SBUX three times during the selling, and we know stocks make as many downside runs as they do upside.
Thus we still need to stay rather nimble, know where we are in the correction, and keep in control by looking at the bigger picture. The indices have not even tested their 200 day SMA on this selling though they are in the neighborhood. They will likely stop by for a visit before leaving on the next leg of the upside vacation.
Support and Resistance
NASDAQ: Closed at 2371.74
Resistance:
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 50 day EMA at 2429
The 90 day MA at 2435
The July/August trendline at 2440
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:
2368 is the early October handle high.
2340 is the March low
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
The 200 day SMA at 2294
S&P 500: Closed at 1387.17
Resistance:
1389 is the October peak.
The 10 day EMA at 1408
1408 is the November high
The 90 day MA at 1415
The 50 day EMA at 1417
1425 is an interim high from November 1999
1432 is the December 2006 high
1440 is the mid-January high
1444 from February 2000
1452 is the late November to February up trendline
1475 from peaks in December 1999 and January 2000
Support:
1374 is the March low
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
The 200 day SMA at 1349
Dow: Closed at 12,133.40
Resistance:
12,361 is the November 2006 high
The 90 day MA at 12,395
The 50 day EMA at 12,402
12,499 is the December intraday high.
12,715 is the up trendline connecting the November and January intraday lows.
Support:
12,039 is the March low.
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
The 200 day SMA at 11,822
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): -$120.0B actual versus -$123.0B expected, -$119.2b prior
March 13
Retail sales, February (8:30): 0.1% actual versus 0.3% expected, 0.0% prior
Retail ex-auto (8:30): -0.1% actual versus 0.3% expected, 0.2% prior (revised from 0.3%)
Business Inventories, January (10:00): 0.2% actual versus 0.2% expected, 0.0% prior
March 14
Current Account, Q4 (8:30): -$195.8B versus -$203.5B expected, -$225.6B prior
Crude oil inventories (10:30): +1.1M actual versus +1.6M expected, -4.848M prior
March 15
PPI, February (8:30): 0.5% actual, -0.6% prior
Core PPI (8:30): 0.2% expected, 0.2% prior
Initial jobless claims (8:30): 325K expected versus 328K prior
NY Empire State Index, March (8:30): 17.0 expected, 24.4 prior
Net foreign purchases, January (9:00): $60.0B expected, $15.6B prior
Philly Fed, March (12:00): 3.5 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): 89.0 expected, 91.3 prior
End part 1 of 3
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