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world stock market, us stock market
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3/20/07 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Target hit alerts: None issued
Buy alerts: GIGM; GLW (bonus); SSYS
Trailing stops: None issued
Stop alerts: None issued
SUMMARY:
- Market continues its rise off the double bottom but on continued low volume.
- February housing starts rise 9%, adding to inventory.
- Doom and gloom stories are fun, but how do they make you money?
- Some solid after hours tech earnings will try to fuel additional Wednesday gains.
Another upside bounce lacks volume.
Housing starts rose an unexpected 9% and that actually helped turned some so-so futures positive in the aftermath. The market started modestly higher and built up its gains on through lunch, avoiding the obligatory midmorning sell off. That pushed NASDAQ and SP500 through the recent March peak. Low volume, but it continued pushing our upside further so no real complaints, at least not short term. The sellers took their shot after lunch, stripping 10 points off NASDAQ's high. Volume moved up as the selling picked up. They were not strong enough, however, to turn things negative, and the indices managed a rebound to close just off session highs, holding the move through the 'hump' made two weeks back on the rebound off the initial sell off.
There is a lot of talk about the Fed tossing the market a bone Wednesday in its statement given the weakness in housing and the more recent issues with the sub-prime market. True, Bernanke has cited housing on several occasions as a primary concern of the Fed as it sets policy, but with year over year core inflation at 2.7%, this Fed is not going to alter its stance significantly if at all. Nonetheless the market has apparently priced in a more lenient statement. Quite the conundrum. The low volume rally may find its apex after the Fed's statement.
Technically it was not bad action with that one flaw. As noted, NASDAQ and SP500 cleared the recent rebound highs on some solid breadth (3:1 NYSE, 2:1 NASDAQ), and leadership was still solid in several sectors as some internet, metals, energy, and even tech had great sessions on solid volume. Overall that is not the case, however. Buyers are in control, but there are not that many participating. When they back off or when the sellers come back in it is easy to push the move back down. Prior to that (and the FOMC announcement) NASDAQ and SP500 may make it close to our original target we were looking for on the first leg, i.e. 1420 to 1425ish on SP500. Hey, maybe even the Fed will say something favorable regarding its outlook and send stocks rampaging. That is the problem when you have an entity with so much control over markets. To this point, however, Bernanke has been pretty clear in his moves and thus far nothing said indicates a variance from the current course.
We have let our upside positions run with the market; cannot really complain about that. With a low likelihood the Fed will issue a statement in line with the hopes of this week's buyers and thus the real chance selling could result after the announcement, however, we are going to look at taking some gain off the table on positions that have built in some solid gain during this last rebound. That way we book some gain if the Fed does as we expect and disappoints the buyers in the recent rally. Again, if the Fed gives the market the nod and it shoots higher we still have some solid positions to ride it higher.
THE ECONOMY
February housing starts stronger, but then again they are coming off a 9 year low.
Housing starts rose 9% to 1.525M, topping the 1.45M expected. Yee ha. Of course starts had also hit a 9 year low as the builders finally stopped building houses as fast as the could. Well, they have not stopped. A drive around your community will no doubt reveal more subdivisions going in, though more and more of those houses are having their contracts cancelled.
Inventories are at roughly six month levels and the last thing the market needs is more inventory. Thus the climb in housing starts is not a herald of the housing market recovery. Housing still has to find bottom and that is not going to happen until the last projects currently under construction are completed.
Doom and gloom scenarios rise with arrival of mortgage issues.
We often read and many of you forward articles regarding the housing market in specific and economic conditions in general. It is interesting that a lot of these commentaries deal with gloom and doom scenarios, i.e. how the world as we know it is going to more or less come to an end. It seems that every time there is an economic issue, whether it be housing, consumer credit, the debt (trade or the federal deficit), the carry trade, etc., the common media thrives on hyping the potential problems. That is all well and good and makes for interesting reading and sells more newsletters and magazines. Portraying current events as the end of the world is sexy stuff. But as in most cases of doom and gloom, it significantly overshoots the mark with respect to reality.
One of the things we have to realize is that in modern times, markets do a much better job of handicapping the future and correcting imbalances. One of the reasons for this is that we actually let markets work more on their own versus the government trying to micromanage the outcomes. When the government tries to micromanage it invariably creates the very imbalances it wishes to avoid. A classic example is when the Federal Reserve attempts to slow the economy in order to prevent inflation. As we saw in 2000 and 2001, the Fed successfully slowed the economy (into a recession) because it feared inflation was just around the corner, but it also managed to create an inflation situation: because the economy was slower, it required fiscal and monetary stimulus to reignite growth. When the wrong type of stimulus was applied it initiated the current inflation phase that we are dealing with right now. True, the inflation we are experiencing is quite low thanks to the ability of our current markets to accommodate government intervention, but nonetheless, there is inflation that was caused due to attempts to manipulate or micromanage the markets in order to achieve a perceived positive outcome.
Thus when we hear scenarios with respect to how to carry trade, the housing market, the Federal trade deficit, and the federal budget deficit are all going to merge and cause a major catastrophe that we all must face, we are reminded of the Ronald Reagan phrase "There you go again." Back in the early 1990s, there was a group of writers who were convinced that the world was on the verge of a major collapse. Titles such as "On the crest of the tidal wave," "The Great Reckoning," and "Blood in the streets" foretold of a time to come in the near future when only the very wealthy would have a decent standard of living and the rest of us would be impoverished in another Great Depression. Of course the economy surged on into 2000 before the Federal Reserve was able to undermine its growth by completely cutting off economic money supply, and thus collapsing financial markets. Even that decline was no Great Depression. It was a very significant slowdown, however, because the quick move from peak to trough was excruciatingly painful for businesses. When you move from 10% GDP growth rates to negative growth rates with in three to four quarters you induce significant pain. That is why we had virtually no business investment in the United States for three years. Then we tried to jumpstart business investment but the only fiscal stimulus Congress was willing to pass dealt with the consumer. Unfortunately (as far as inflation is concerned), the consumer remained strong throughout the downturn. Thus the only thing stimulated by the initial stimulus package was inflation. It was not until capital investment stimulus was passed in 2001 that investment once more began in the US and the economy actually started the bottom. That is what ultimately led to the recovery from the Greenspan-induced recession though we continue to deal with these inflation pressures that recovery spawned.
That does not mean we get off Scott free from the overly extended housing run. Greenspan's Fed kept rates too low for too long, and that resulted in a housing market boom that overstayed its welcome. Typically housing booms are early economic cycle events. By keeping interest rates near the 1% level, however, Greenspan artificially prolong the housing market cycle. Thus the very pressures that Greenspan wanted to avoid when he raised interest rates and drained the money supply pool were created by his low interest rate policy. The housing boom lasted too long and too many people who should not have qualified for homes in normal interest rate times are now suffering. The fear is that we all end up suffering as well, because the sub-prime market bleeds over into the middle market and the prime market. This adds up to slowing consumer confidence as home values decline, and thus slower consumption levels. As we saw in the late 1990s and early 2000, it takes both the consumer side and the business side to make our economy run well.
The question is how long and how far this slowdown persists. The gloom and doom writers love to aggregate all of the potentially negative events in the world and conclude that they will merge and result in a major economic cataclysm. Of course there is always the chance that they will be right. The worst case scenario is always a possibility. So is the best case scenario. Problem is, the best case scenario usually doesn't happen. Similarly, the worst case scenario has a low probability of occurring.
One key consideration you must keep in mind when you read about doom and gloom scenarios is that the writer is often inserting his own gut feeling and shoot from the hip analysis with respect to his conclusions. Many will cite scientific or other studies in support of their conclusions, but one thing I learned as an attorney is you have to determine whether the study even applies to the situation at hand. We prefer real life historical evidence versus theory. As the saying goes, everyone has a theory or opinion, but very few are armed with facts.
History provides the facts that you need to analyze current events. In the economic history of the world, cataclysmic events are rare. If markets are left alone they tend to correct in a rather orderly way. When we tinker and build up imbalances, then the corrections are ugly. After looking at history, if we feel we still need to look at a man-made conclusions or theories with respect to the economic future, it is best to look at those theories or methodologies that are historically accurate. The one economic indicator that is historically accurate with respect to future economic cycles is ECRI. As we have reported for the past several months, ECRI is showing a pickup in economic activity after the summer of 2007. This past week its indicators ticked higher once more, sustaining this overall view of the economy. It correctly forecast the slowdown in the last half of 2006 and in the beginning of 2007. In addition it has accurately forecast nearly every economic cycle, both up and down, since its inception. Moreover, its indicators have been back tested and proved to be historically accurate in that respect as well. Thus, based upon our examination of historical economic events relating to the housing market, the federal deficit, the Federal trade deficit, and modest inflation rates, as well as the forecasting in ECRI, we simply cannot conclude that this worst-case scenario, or the so-called doom and gloom scenario, is going to occur. There is always the chance that the planets line up, and the worst-case event occurs. There is also the chance that this weekend if I go and buy a lottery ticket at random, I will win the jackpot. The probability of this is just not that great.
There is another thing to consider when you read the theories about the future: how does it make me money? We often talk about the economic future in our report. The reason is because the economy is of critical importance to the stock market. By keeping tabs on what the economy is doing we are able to tailor some of our investments to fit the economic activity. The economy provides the general overriding theme with respect to the market, but it does not dictate the day-to-day actions of the market. In other words, it helps to see where the economy is going in order to tailor our long-term lifestyle and investment decisions, but it does not mean we have to follow every nuance in the economy with respect to our day to day investing. The economy can look as if it is heading down a bad road that will ultimately be bad for the stock market. The stock market, however, can continue to progress higher and give us very nice upside gains even when the economy is showing signals that it may be heading for trouble.
In short, theories about what may or may not happen in the world economy, particularly cataclysmic theories, very rarely make us any money. Maybe they can preserve some of what you have if you take action and the event does occur, but in most cases they can, and often do, scare people out of the market and keep them from participating in solid upside moves because they are always looking for the worst-case scenario to jump out from behind each market turn. Thus instead of looking for the best way to make money in the market they are sitting on the sidelines worrying about what may happen in the future. I admit that I have a bad habit to support. My family consumes a lot. Thus I need to make money in the stock market, whether it's going up, going down, or moving sideways. You have to keep an eye or in the overall economic climate in order to avoid being blind-sided by major events, but you cannot let that view of the overall economy keep you from participating in solid trades or investments for the short to medium term. As we always say, you have to take what the market gives, and that means not always in worrying about what may or may not happen well down the road in the economy.
THE MARKET
MARKET SENTIMENT
VIX: 13.27; -1.32. It is at the level that, if the correlation with the market is set up, it is going to bounce. That would mean the market is going to fade again. We think the correlation has indeed set up.
VXN: 17.6; -0.78
VXO: 13; -1
Put/Call Ratio (CBOE): 0.93; +0.11. Second session below 1.0 after 18 in a row above 1.0.
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: +13.8 points (+0.58%) to close at 2408.21
Volume: 1.733B (+0.37%). Modest gain in volume as NASDAQ continued its move off the last low in the correction, but trade is still woefully low. As we have discussed at length, these low volume rebounds are prone to failure unless something comes along to change the character. The Fed has the ability to do that but it is unlikely it will do that tomorrow.
Up Volume: 1.286B (+225M)
Down Volume: 457M (-176M)
A/D and Hi/Lo: Advancers led 1.92 to 1. Another solid breadth day as techs rebounded fairly solidly across the board.
Previous Session: Advancers led 2 to 1
New Highs: 95 (-2)
New Lows: 64 (-9)
NASDAQ CHART: http://www.investmenthouse.com/ihmedia/NASDAQ.jpeg
NASDAQ cleared the 'hump' in the correction at 2405 as it moved past the second rung of near resistance. At this juncture the move higher is similar to the prior bounce following the selling, but we could still see NASDAQ continue higher ahead of the FOMC result. Originally we had looked at 2450ish. The 50 day EMA has moved a bit lower since (2424) and the 90 day MA is at 2437. If nothing occurs to give the volume a goose, that is likely as far as it will make it.
SOX (+0.95%) rebounded off its 50 day EMA test, holding that key support again as it continues its attempt to base out and break higher from its 5 month trading range from 450 to 495.
SP500/NYSE
Stats: +8.88 points (+0.63%) to close at 1410.94
NYSE Volume: 1.455B (-0.31%). Volume was flat and still well below average as the NYSE indices advanced again. Nice price bounce continues without any volume to push it outside of the reversal last Wednesday. Prone to failure.
Up Volume: 1.059B (-177.457M)
Down Volume: 378.868M (+167.157M)
A/D and Hi/Lo: Advancers led 2.43 to 1. Another strong breadth session as the large and small caps moved up in unison.
Previous Session: Advancers led 3.1 to 1
New Highs: 152 (+40)
New Lows: 18 (-5)
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
Similar to NASDAQ the large caps cleared the March high on the session (1410), closing near the session high. That puts them just below the 50 day EMA (1414) and the 90 day MA (1416); 1425ish was the ballpark figure we were looking for it to hit on the rebound from the selling. That low volume is putting the tarnish on a nice though short double bottom off of the selling. Much is hinging upon the FOMC statement; too much.
SP600 (+0.82%) cleared the 50 day EMA on its move after matching the mid-March peak Monday. It has now matched the early December high at 407, pretty much the last stopping point before it rallied to a new all-time high in February. Next resistance at 410, and if the rest of the market fades that is where it is likely going to stall as well.
DJ30
The blue chips are lagging as they have yet to hit the hump in the pattern (12,350) from two weeks back. Suffering from chronic low volume as well, and likely has more work to do before it can make the break higher stick.
Stats: +61.93 points (+0.51%) to close at 12288.1
Volume: 196.6M shares Tuesday versus 208M shares Monday. Not much there on the upside session.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
WEDNESDAY
After hours ORCL and ADBE announced some solid results and sparked the techs higher, adding onto the session gains. In addition, oil inventories, and more specifically gasoline inventories, are a highlight Wednesday, but that is the prelude to the 2:15PM FOMC statement. As noted frequently above, the market is looking for the Fed to throw it a bone with respect to its monetary policy stance. Basically an acknowledgment of growing weakness and some inkling a rate cut may be in the future. The Fed did acknowledge some slowing in its last statement and it will likely reiterate that and maybe embellish it some, but as for a rate cut hint, that is a bit more than the Fed will go with core inflation still growing well outside its stated comfort range.
There momentum is upside near term despite the low volume, and with the tech earnings we will likely see some more upside ahead of the afternoon announcement. Perfect. The market has rallied into the last two statements. It may not make it all the way to this one given the gains thus far the past week, but with any further rally ahead of the Fed we are going to take some gain off the table. The low volume move into this result has left an opening for the sellers, and they will step in if there is disappointment with what the Fed is offering.
Thus we will look to bank some profit on a run higher toward the FOMC announcement and then look at some downside if the market is disappointed with the lack of change. It typically takes a half hour or so for the results to work through the market, but with this low volume rally ahead of the decision, if the Fed holds firm the reaction is likely to the downside and there likely won't be the usual volatility following the result. That means we are going to be looking at some SPY, DIA, IWM, and even some QQQQ downside plays if the buying turns into selling as the market gives back the recent low volume upside.
All in all we still view this as a correction of the run off the summer 2006 correction. The added spice is the worry about the mortgage market that is leading to conclusions about a terminal economy. That is driving the correction and that is ultimately going to be what helps it shake out the excess and renew the expansion. Thus far the trustworthy indicators as to economic strength still point to a resumption in the expansion after the summer. That can be upset by foolish political actions, but if that occurs there will be advance warning. For now there is nothing to indicate this is more than a correction, and we are playing it as such.
Support and Resistance
NASDAQ: Closed at 2408.21
Resistance:
The 50 day EMA at 2424
The 90 day MA at 2437
The July/August trendline at 2450
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:
2405 is the 'hump' high
2400ish from the late November and late December 2006 lows.
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 2298
S&P 500: Closed at 1410.94
Resistance:
The 50 day EMA at 1414
The 90 day MA at 1416
1425 is an interim high from November 1999
1432 is the December 2006 high
1440 is the mid-January high
1444 from February 2000
1454 is the late November to February up trendline
1475 from peaks in December 1999 and January 2000
Support:
1410 is the 'hump' high
1408 is the November high
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 1352
Dow: Closed at 12,228.10
Resistance:
12,350 is the March 'hump' high
12,361 is the November 2006 high
The 50 day EMA at 12,372
The 90 day MA at 12,402
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 11,842
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): 1.525M actual versus 1.44M expected, 1.399M prior (revised from 1.408M)
Building permits, February (8:30): 1.532M actual versus 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): 6.30M expected, 6.46M prior
End part 1 of 3
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world stock market
us stock market
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