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us stock market, trade stock
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3/19/07 Stock Split Report Update
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Stock Split Report Subscribers:
Full report issues Tuesday.
MARKET ALERTS
Targets hit alerts: None issued
Buy alerts: ATW; HNT; ROCM
Trailing stops: None issued
Stop alerts issued: None issued
The market alert service is a premium level service where we issue intraday alerts relating to the general market conditions, when stocks hit action points (buy, stop, target, etc.), and when we see other information impacting the market or our stocks. To subscribe to the SSR alert service you can sign up at the following link:
http://www.investmenthouse.com/alertssr.html
SUMMARY:
- Market bounces again from the Wednesday reversal, but once again volume is disappointing.
- Day of mergers is here.
- Foreclosure and ARM adjustment projections not pretty, but it is no eighties redux.
- Some sectors are surging with money moving in but most are not.
Price bounces are nice but it was no follow through on Monday.
We have seen follow through sessions. We know follow through sessions. Monday, despite the price gains and the breadth, was not a follow through session. SP500, SP600, SP400 closed with 1+% gains. NASDAQ and DJ30 closed just below 1% gains. Breadth was 3:1 on NYSE, 2:1 on NASDAQ. The former are passable for a follow through. The breadth was definitely good enough. The volume was not. Sure volume was higher Friday due to expiration, but that doesn't give trade a bye on the following Monday. Definitely not when trade on both NASDAQ and NYSE was below average as the indices bounced higher. Volume was lower the entire rebound from the initial selling and that fell into last Tuesdays sell off. Thursday recovered, continuing the Wednesday reversal, but trade was lower. Trade jumped on expiration so we can more or less scratch that session. It dropped below Thursday levels Monday as the indices rose. Once more lower trade on the upside, and unless something big comes in to change this pattern it usually ends up with some more selling.
That is a downer on a day many were touting the recovery. That Wednesday reversal continues holding out a candle for recovery, i.e. a double bottom formed the first couple weeks of March, and the market has not rolled over yet despite low trade. As seen a couple weeks back, however, it takes time for the low volume bounce to run out of momentum. Again, there may be something that changes the cycle, some bit of very good news (the Fed and its comments after the FOMC meeting adjourns Wednesday?) that transforms a low volume into a high volume follow through to that Wednesday reversal. Outside of that, the near term market action still remains toppy, bearish, or whatever downside name you want to pin on it.
One of the big drivers Monday, M&A, is also something to worry about in some respects. Not that companies are buying other companies; that occurs all the time. It is the number of deals that are hitting the market. As with too much of anything, when everyone is doing it something is about to end. Some say CEO's are confident about the future and thus are buying other companies. They suggest that the CEO's know what they are doing and if they are comfortable with taking on the debt then it must be a good decision and thus bodes well for the economy.
Case in point is the M&A activity that really took it up a notch Monday. All of that action managed to turn a down US pre-market market into a solidly upside market on the open despite lower foreign trade. Sure it helped that the yen was lower as some posited that the BOJ would not raise rates near term after China did. That lower yen has been a very good market indicator for the last week or so, and it was on the money again Monday. Nonetheless, even with that news and the M&A swarm the market could only post gains on 'yawner' volume. There were no buyers scooping up stocks across the board. Sure the energy sector enjoyed price gains coupled with strong volume, but that was not repeated across many sectors. The move in the market was broad, but it was not deep so to speak because there were not that many heavy buyers.
But what about the M&A?
Some were touting all of the merger activity as indicative that things are great and only going to get better. After all, who better knows the economy than the businesses in it, right?
Right. CEO's are as much renowned as lemmings as are investors. When the economy was bottoming in late 2002 and early 2003 we wrote about how the CEO's were still negative but they always were negative at the bottoms. They are also too optimistic at the tops (recall the homebuilder CEO's in spring 2005; they were ebullient about the '10 year demographic' that was going to drive prices higher and higher. That was the top of the market).
When mergers heat up, CEO's fear they are getting left behind if they don't start acquiring as well, so they look for whatever combination they can make in order to keep up with the Joneses, or in a business' case, the Acmes. Thus we see, after months of announced deals, a Monday with ten deals announced. Just as with dozens of stock splits, too many deals signal an extreme as money is recklessly thrown about, seeking a better return.
The capper had to be Blackstone, the famous 'take private' acquisition company, announcing it was officially considering going public. When the money boys start cashing in to take advantage of the hot market, you can pretty much bet the game of mergers and expansion is at or near the top.
What does that mean? Well, M&A has driven a lot of market investment as speculators try to pick the next company that will be acquired. More money seeking greater returns and thus willing to take more risk. It is another sign of the froth in the market and thus whey we are in the current correction. Sure it drove the action on Monday, but can it sustain the action? No. Problem is, it is not a timing tool so if you step aside you may end up missing 6 months of continued gains because you worried about things getting too hot. As we have seen many times before, if a market gets too hot it can get even hotter. Meltdown occurs at some point, but each rally has a different temperature at which it combusts.
Technically, the action left something to be desired, the main issue being the volume that is simply not that strong on the upside. In addition, the indices did manage to move through the lowest rung of resistance, the 10 day EMA, but they stalled at the next lowest level, the 18 day EMA. If they fail at these levels (as they did the prior bounce) that is a sign of weakness that has yet to be flushed out. A low volume move up to these levels bespeaks that weakness though you can see a low volume bounce squeeze out more upside during a correction. Again, unless the low volume gains convert into higher volume gains, the handwriting is scrawled on the walls: 'another correction coming.'
Thus while we see some good sectors and good stocks getting some money and volume, most are not, and without any change we are going to see another sharp downside move to test the recent lower low. At the same time there are those strong stocks and sectors that are holding up, and as noted over the weekend, that is a good indication of some underlying strength and thus an indication we are still in 'just' a correction other than the precursor to a bear market meltdown. We will see more leadership fall into the 'has been' category as the correction continues, but there will be a core that continues basing and setting up for the next move. Many won't recognize it and after some more correcting many simply won't be looking because they incur nausea when they look at the market. If you know a correction and keep your head on, however, you will be ready when the leaders and then the market start that 'buy me, buy me' chant.
THE ECONOMY
Mortgage foreclosure forecasts, ARM readjustments further stirring the mortgage pot.
A new report from a mortgage industry group forecasts 1.1M foreclosures over the next 6 to 7 years with 13% of the ARMS (adjustable rate mortgages) written in 2004 to 2006 heading into default. The estimated foreclosures total $326B in default debt and a loss of $112B in mortgage lender equity.
Another study is looking at the bulk of the ARM's as their adjustment periods start to hit. The 3 year ARM's adjustment period will peak in April. The 5 year ARM's start hitting their adjustments this summer and runs for roughly four years. Some attribute the recent rise in mortgage delinquencies to a large number of 3 year ARM's coming into their adjustment period.
The concern over the ARM's is that buyers who entered the market when rates were at their lowest levels (April 2004 was the lowest point) are seeing major pain when they face readjustment with rates rising 100% or more on their loans. Sure you say that the smart ones got out of their ARM's and moved into fixed notes, but the reality we are hearing more and more is that many looked at refinancing to a fixed rate, but interest rates were already so much higher than their current rate that they did not do so. Thus they will face even more pain at the mandatory adjustment period, and if they could not scrape together the funds to refinance before, they are going to have an even harder time meeting the nut now. That means they end up walking or trying some kind of workout, leaving the lenders holding the properties of considerably lower value than what they loaned on.
This is a familiar scenario, one that was seen in the 1980's real estate bust where many owners walking away and later taking bankruptcy while the savings and loans held basically worthless collateral in the form of the foreclosed properties. It took hundreds of billions of federal dollars to forge the buyouts and get things back on track. I recall the legal fees generated by virtue of this calamity were in excess of $500B. The lawyers won on both sides of the deal, writing up the documents and titles on the buy side and then issuing the advice, writing the foreclosure documents, and handling the bankruptcies when the collapse came. As Eddie Murphy noted in 'Trading Places' with respect to the commodities brokers, the lawyers are like bookies, getting paid no matter what the outcome. No wonder they are so loved in our society.
It is hard to estimate the overall ripple impact of this type of event. We do note that this 'bubble' is nowhere near as extensive as it was in the 1980's. There was a real mania ongoing at that time that consumed both the residential and the commercial side of the market. Almost any commercial property in what is loosely termed 'oil country' was somehow tied to oil and gas and thus was a 'no lose' loan. Oil was screaming higher and was projected to hit $100/bbl. Hey, why not loan to the hilt? Residential was tied to the oil boom as well as companies hired workers by the thousands and bought homes for them or aided in buying homes as the workers relocated.
The mania spread out to the hinterlands as well. For example, Austin, not an oil and gas city by any stretch, enjoyed a huge land boom where land sporting limestone, caliche soil, junipers, scorpions and rattlesnakes and could only be used for goat grazing was flipped 5, 7, 10 or more times without ever turning a shovel of dirt, or, well . . . caliche. There was a lot of money being spread around and it was trying to find a home where it could make better returns. Thus land values surged to ridiculous levels and then collapsed back to earth. Today it is interesting to see some of that same land finally was developed in the last boom though it was not until recently much of that occurred.
There are definitely similarities here as you can surely see. The money, the liquidity trying to find a home somewhere pushed the market higher, but this time there was also this need to put everyone in a home. Loans were made that should not have been made and there is going to be a price to pay. The sticker, however, is not going to be what it was in the 1980's (and we think that is where many are drawing correlations from with respect to this last boom). The mania has not spread into the commercial sector, at least not to the extent it did in the 1980's. That doesn't mean there won't be pain; the housing market is very important and if enough consumers suffer foreclosures, even if they still have their jobs they also have credit issues. It won't stop them from spending, but it is a natural braking mechanism on their consumption if they cannot get extended out on credit again.
Do you think the special interests in Congress saw this coming and that is why the pushed so hard for the changes in the bankruptcy laws? Now unlike in the 1980's, it is going to be much harder for the individual to escape the troubles of foreclosure going the bankruptcy route. Interesting. Foster home ownership for everyone as a political tool, and then rather quietly orchestrate the change of the law that bails them out when the inevitable end comes to a market that was artificially induces higher by the Fed and federal government policies.
In sum, it is hard to determine the absolute scale of the damage to come as this mortgage slide unfolds, but those that are alarmist and suggesting it is going to topple the economy are a bit extreme. It is not of the magnitude of the 1980's mania and thus the absolute bust won't be as serious. The worries are the ripple effects if it bleeds into the middle mortgage market where most households reside. If it eats into that market then the economy starts to see a more significant fall off in consumption. The business side still looks decent, but as we saw in the last recession, it takes two sides of the economy to tango.
THE MARKET
MARKET SENTIMENT
VIX: 14.59; -2.2. Getting back toward 14 where it found bottom last time.
VXN: 18.38; -1.22
VXO: 14; -2.39
Put/Call Ratio (CBOE): 0.82; -0.41. First time in 19 sessions it did not close above 1.0. Fear abating? Yes, and this is likely a head fake as there is still reason to fear.
Bulls versus Bears:
Bulls: 45.5%, down from 46.2% and well off the 50.5% and 53.3% six weeks back. When it bottomed last summer it was near 36%. That is the lowest level since September 2006. Still a ways to go, but when it cracks it can tumble quickly. A 4.3 point drop is pretty salty.
Bears: 28.9%. Nice fat jumps in the bears, up from 26.9% and 24.2% the week before. Not bad after spending 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: +21.75 points (+0.92%) to close at 2394.41
Volume: 1.727B (-19.3%). Lower volume than last Thursday gain. Still no upside trade.
Up Volume: 1.061B (+162M)
Down Volume: 633M (-566M)
A/D and Hi/Lo: Advancers led 2 to 1. Solid breadth, improving over last week but no volume to drive it.
Previous Session: Decliners led 1.56 to 1
New Highs: 97 (+35)
New Lows: 73 (-9)
NASDAQ CHART: http://www.investmenthouse.com/ihmedia/NASDAQ.jpeg
Techs gapped higher and closed near session highs. Cleared the 10 day EMA on the gap and then tapped next resistance at the 18 day EMA (2401) and backed off some. It has matched the highs from the prior bounce after the initial correction. Problematical it can make it over this level without more trade.
SOX (-0.60%) was the laggard of the session, turning in the only negative performance. It slid to the 50 day SMA on the close. No major damage, just unable to show any buying in a market bounce. Continues working in its base.
SP500/NYSE
Stats: +15.11 points (+1.09%) to close at 1402.06
NYSE Volume: 1.46B (-29.57%). Below average volume as well, lower than the Thursday gain as with NASDAQ. Not much power on this move as well.
Up Volume: 1.236B (+605.294M).
Down Volume: 211.711M (-1.186B)
A/D and Hi/Lo: Advancers led 3.1 to 1. Excellent breadth as most indices moved up close to 1%. Broad but not deep, however, as volume was rather pathetic.
Previous Session: Decliners led 1.6 to 1
New Highs: 112 (+26)
New Lows: 23 (-8)
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
Move through near resistance at the 10 day EMA with ease, but it too stopped at the 18 day EMA (1404) similar to NASDAQ. Low trade, nowhere near enough to drive it higher. It did not reach the prior high in this bounce (1410). Nothing happened Monday to change the character, but it also did not tank. Moral victory and it keeps the Wednesday reversal session alive.
SP600 (+1.03%) rallied to the 50 day EMA (404) on the close, matching the prior high in the rebound move. Best bottom of all thus far as it did not undercut the prior sell off low when it tested last Wednesday and recovered.
DJ30
Continued its bounce after a couple of down sessions, clearing the 10 day EMA but unlike the other indices it did not approach its 18 day EMA (12,273) or the prior high in the rebound (12,319). It is still in the rebound game as are the other indices, it just has to have something to change the character.
Stats: +115.76 points (+0.96%) to close at 12226.17
Volume: 208M shares Monday versus 388M shares Friday on expiration Friday. Not enough there right now to drive it through resistance.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
TUESDAY
The Fed starts day one of its 2-day meeting where investors hope that the Fed will mitigate its stance some due to the mortgage issues and some slower regional manufacturing reports. Before that, however, February housing starts are out and they have market moving potential given the fragile investor psyche regarding housing in specific and the economy in general. They are expected to rise and with government data it is a crap shoot as to whether it hits the mark or not.
At this stage the indices are still fighting to get back up but investors are not pushing them with much volume. That says not a lot of buyers are buying into the move. Now there are specific areas such as energy that are smoking on rising trade as higher prices and surging gasoline prices make for some impressive margins. Medical appliances have promise and metals are looking solid again. Financials are trying but are not showing much volume and have to deal with near resistance as well. In short there are bright spots but the market overall is still is lacking heavy backing.
Thus the game plan remains pretty much the same, i.e. looking at the stronger sectors and stocks within them as our upside plays and the stocks that have hit resistance on lower bounce volume and are showing weakness at that resistance. Overall the indices are weak but again, we see strong stocks that are holding up well and setting up for a move at some point, either sooner or later after the market makes its next test.
Support and Resistance
NASDAQ: Closed at 2394.41
Resistance:
2400ish from the late November and late December 2006 lows.
The 50 day EMA at 2424
The 90 day MA at 2437
The July/August trendline at 2447
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.
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 2297
S&P 500: Closed at 1402.06
Resistance:
The 18 day EMA at 1404.
1408 is the November high
The 50 day EMA at 1414
The 90 day MA at 1415
1425 is an interim high from November 1999
1432 is the December 2006 high
1440 is the mid-January high
1444 from February 2000
1453 is the late November to February up trendline
1475 from peaks in December 1999 and January 2000
Support:
1389 is the October peak.
1374 is the early 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 1351
Dow: Closed at 12,226.17
Resistance:
The 18 day EMA at 12,273
12,361 is the November 2006 high
The 50 day EMA at 12,375
The 90 day MA at 12,400
12,499 is the December intraday high.
Support:
12,039 is the early March low.
October high is 12,167
11,986 is price support from mid-October and the early November low.
11,940 is the March low
11,865 from the early October consolidation
The 200 day SMA at 11,837
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 20
Housing starts, February (8:30): 1.44M expected, 1.408M prior
Building permits, February (8:30): 1.56M expected, 1.571M prior
FOMC day 1
March 21
Crude oil inventories (10:30): +1.18M prior
FOMC day two, policy statement (2:15)
March 22
Initial jobless claims (8:30): 325K expected, 318K prior
Leading economic indicators, February (10:00): -0.3% expected, +0.1% prior
March 23
Existing home sales, February (10:00): 6.35M expected, 6.46M prior
End part 1 of 3
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