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us stock market, trade stock
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3/21/07 Stock Split Report Update
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Stock Split Report Subscribers:
Full report issues Thursday
MARKET ALERTS
Targets hit alerts: CYTC; SYK
Buy alerts: CMC; GLDN; VSEA
Trailing stops: SONC
Stop alerts issued: ABB
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:
- Fed starts another bias shift, gives the market a character-changing gift
- NASDAQ provides a follow through session but NYSE volume lags.
- Bond curve reverts to positive on FOMC result.
- Watershed turn for market or will sellers take it apart?
Another low volume bounce to the FOMC meeting turns into a mad rush higher.
The market was setting up according to plan with another low volume bounce up into the FOMC meeting. That was pretty much the scenario we had anticipated and we were ready to play the downside after the Fed disappointed the market. Then something happened that has the potential to change the market character: the Fed arguably removed its tightening bias. The market read it that way and it surged as shorts covered and some longs moved in on solid, well positioned stocks.
At first blush we saw the statement as more hawkish than dovish. The Fed did note that economic signals were 'mixed' and that there was an 'adjustment' in the housing market. At the same time, however, it inserted language noting that core inflation readings were now 'elevated' versus 'moderating' as in the prior statement. It further altered its inflation expectations: "the Committee's predominant policy concern remains the risk that inflation WILL FAIL TO MODERATE AS EXPECTED (emphasis ours)." This was in place of surer language that inflation would in fact moderate.
Seems pretty hawkish but the market has the last word, and on Wednesday it viewed the acknowledgement of mixed economic indications, a housing market adjustment, and the deletion of the admonishment that 'additional firming' may be needed as a move to neutral. It was definitely a change, but neutral? It clearly says the policy concern remains with the risk of inflation continuing. But this is the Fed; it takes with one hand and gives with the other. These kind of changes are rather landmark, and the market certainly viewed them as dovish. Particularly when you know the Fed has to transition slowly lest it look as if it is chasing the bus. Thus the subtle changes in language that the market knew meant things were indeed changing at the Fed.
This was the type of sea change occurrence we opined about over the past couple of days that could alter the market's lethargic, low volume climb off last week's reversal session. When you have an overriding authority that always holds the trump card, markets are at risk (that can be good and that can be bad). The IRS is the same way; the protections of the United States Constitution are suspended when it comes to the government's secret revenue police. After all, when the government's money is at stake who needs a silly thing like a Constitution or Bill of Rights? It is justified by rationalizing but for the suspension of rights in these areas there would be no rights because the union would fail. Right. The only thing that would fail would be big government. But I digress (once again).
Technically the techs were great, breaking through near resistance on strong, above average volume. Of course volume was a bit higher on NASDAQ to start given the earnings from ORCL and ADBE. Leading chips were stronger (WFR, VSEA) even before the FOMC. When the result came out they were even stronger. NYSE volume was rather anemic, however, failing to hit average. Perhaps it was just late to the party since it did join in until after the FOMC while NASDAQ was stronger from the open. Maybe. Breadth was certainly strong enough at 4.5:1 on NYSE and 3:1 on NASDAQ. Leadership was for the most part breaking higher. Some even on strong volume though many, surprisingly many, could still not muster any solid trade as they rallied.
That leaves something of a mixed picture. NASDAQ with its 1.98% gain, rising volume, 3:1 breadth, and decent leadership (NASDAQ 100 rose 2.21%) touched all of the bases for a follow through session. That gives it a follow through on the sixth day of the rally, and that qualifies it for a stronger follow through. A follow through means there is a return to buying after the initial surge. That initial surge was last Wednesday when the market sold off and reversed to close positive. When the market shows a lot of strength a week or so later it shows us that the buyers have returned for more after a cooling off period. That shows commitment. It is not a total blessing of a rally to come, but all major rallies have started with this kind of action.
The fact that NASDAQ led the way with a follow through suggests that techs will assume the leadership role. That would be the case if the economy is going to resume growth in the future because techs are growth stocks. As you recall, ECRI suggests the economy returns to expansion after the summer; that is about the right timing for the market to start anticipating a recovery and rallying. We were looking for more of a correction to set up a better base to carry the next rally, but maybe 8% on NASDAQ and 7% on SP500 was enough.
In any event and regardless of our gut feelings, you have to let the market point the way. That is why we are in so many good upside stock positions even as we suspected the rally might fail: many stocks were flashing the 'buy me' signal with good patterns and strong volume; these are not just rebound rallies from a blistering sell off. These are strong patterns for strong stocks that broke higher. You have to follow that lead with buys. Thus we enjoyed a nice ride higher Wednesday despite our personal misgivings. We also bought into some strong stocks we were eyeing as they put in the good move as well.
There still may be some price to pay the piper. NASDAQ was strong and the small and mid-caps were blistering while the large caps could not muster much trade. In short, it was not unanimous amore or nirvana as a result of the Fed action. That may just be our guts talking, but we are telling ourselves that we do see some weakness despite the supposedly wonderful news from the Fed. You can bet some Fed officials will be out over the next week saying the market got too excited about what the Fed considered a hawkish statement. Indeed, we may get some blow back Thursday after such a strong move. We will see how the market reacts, but until then we did have a follow through and we are going to be looking for more strong upside plays to take advantage of it.
THE ECONOMY
Bond curve reverts as Fed changes its statement.
Way back in August 2006 when the Fed paused (and the end of year rally took off) we noted that the Fed's action caused a disturbance in the bond market. A positive disturbance. The yield curve returned to positive. It did so only briefly, however, because the Fed governors swarmed to the attack thereafter, swearing the Fed would attack inflation like a pack of junkyard dogs if it moved any higher. With that tough front the curve reverted to negative. With each positive statement from Bernanke coupled with some weakening economic data, the curve started closing the gap once more. We noted that if the Fed would back off from its rate hiking stance that the curve would revert to normal.
Wednesday the curve did indeed revert to positive. The short end rallied like banshees while the 30 year bond barely budged. Heading into the FOMC statement the 2 year treasury yield was 4.67% and the 10 year was 4.60%. At the close the 2 year was down to 4.53% and the 10 year was 4.54%. The 30 year remained at 4.71% before and after. That move on the short end is the equivalent of bond investors pricing in some rate cuts nearer term. It also suggests that the economy will benefit from this stance as opposed to a Fed hamstringing it as it tries to continue the expansion.
That is definitely a positive; nothing speaks louder than how markets react. Of course, markets ALWAYS overreact in the short term. Thus we have to see how this sudden swing in both the equity and the debt markets plays out over the next few sessions.
THE MARKET
MARKET SENTIMENT
VIX: 12.19; -1.08. The rally pushed volatility lower, but note it was down only a point while other moves of less strength than Wednesday saw larger declines. It is getting pancaked at the old lows and does not want to go lower. This is another factor we are going to watch play out over the next few sessions to see if this move really has the juice.
VXN: 17.2; -0.4
VXO: 11.45; -1.55
Put/Call Ratio (CBOE): 1.12; +0.19. Back over 1.0 on the close after a two day respite on the prior gains. The action Wednesday was due to a lot of covering those short positions that were bought by the big money funds as protection from further downside.
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: +47.71 points (+1.98%) to close at 2445.92
Volume: 2.25B (+29.81%). Volume jumped above average, hitting the best levels since last Wednesdays reversal session. Fitting that the Wednesdays rule the move.
Up Volume: 1.951B (+665M)
Down Volume: 269M (-188M)
A/D and Hi/Lo: Advancers led 2.95 to 1. Solid breadth as the large cap NASDAQ 100 (+2.21%) led the entire market.
Previous Session: Advancers led 1.92 to 1
New Highs: 133 (+38)
New Lows: 50 (-14)
NASDAQ CHART: http://www.investmenthouse.com/ihmedia/NASDAQ.jpeg
NASDAQ provided the follow through for the market with its triumvirate of volume, breadth, and price gain. Leadership was solid as well with chips and large cap techs moving higher. Still, many stocks moved without a lot of volume as NASDAQ rallied to the middle of the November through February lateral range. That is immediate resistance, but there is always resistance as an index recovers.
SOX (+1.86%) jumped off the 50 day EMA as the chips did much of the leading for the techs (e.g. WFR, VSEA). If chips and NASDAQ join into leadership that is a solid positive for the economy.
SP500/NYSE
Stats: +24.1 points (+1.71%) to close at 1435.04
NYSE Volume: 1.627B (+11.82%). Volume was up but remained below average on NYSE. NASDAQ was leading out of the gate on the ORCL earnings and thus it had a running start ahead of the FOMC result. Nonetheless, volume was not what you would anticipate for such a strong move.
Up Volume: 1.476B (+417.624M)
Down Volume: 143.559M (-235.309M)
A/D and Hi/Lo: Advancers led 4.57 to 1. Powerful breadth as the small and mid-caps surged as well.
Previous Session: Advancers led 2.43 to 1
New Highs: 247 (+95)
New Lows: 21 (+3)
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
Strong price gain as SP500 surged back up to the top of the December and January range, breaking through the 50 day SMA at 1425. SP500 cleared our original projected high on this move though it has not completely cleared this key range of resistance. Volume was up on the move but it did not crack average, coming in just shy of that mark. That shows less than a surge of buying and indicates short covering drove much of the move. Of course, short covering typically begins all recoveries, but at this stage, being the next move with force after the Wednesday reversal, you would want to see some strong buying as well.
SP600 (+1.57%) blew past the December and January range and is on its way toward the all-time high near 424. The continued below average volume on NYSE is a concern, but the strong showing by the small and mid-cap stocks is impressive.
DJ30
The blue chips broke through the mid-March hump in the short double bottom and rallied to the 50 day SMA (12,471). That takes it near the middle of the December/January range at 12,500. This is about the level we initially anticipated DJ30 to reach on a relief move. Volume was up but as with NYSE it was just below average. This will be an interesting test for the blue chips as they are still lagging the rest of the market. Likely won't torpedo a move by NASDAQ or SP500, but could provide an early indication if those other stronger moves are going to sputter.
Stats: +159.42 points (+1.3%) to close at 12477.52
Volume: 245.9M shares Wednesday versus 196.6M shares Tuesday.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
THURSDAY
Initial jobless claims and leading economic indicators will be quite anticlimactic tomorrow. The real story will be how the market handles the rush higher. Will there be buyer's remorse, a more typical modest fade after a big updraft, or will sellers take advantage of the weaker trade on NYSE and buyers rethink the Fed statement? The market is still battling out of a correction and thus it is still susceptible to attacks as it tries to hold onto the recovery attempt.
In a subtle and rather artful manner the Fed made the second step in its rate hike course change. The first was in August 2006. There were modifications heading into this meeting, but nothing that took the Fed off the tighten first, ask questions later stance. This statement does that, taking the Fed another step toward a neutral bias in the event the housing market becomes a bigger issue or is joined by other problems. In this way once again the Bernanke Fed shows it has a better grasp of history and what is occurring now. Greenspan would hike until almost to the point a crisis revealed the need to cut rates. That is one of the reasons we frequently maligned his Fed: he would dogmatically hike to stave off inflation that wasn't really there, and then suddenly we would get blind-sided by the unexpected event. We say unexpected, but there is always something that comes along during hiking when there is no real reason to hike. The result is a much worse situation because the economy is already weakened by the attacks.
In any event, when the Fed makes these types of changes they can be watershed events for the market, such as turning a correction back into a rally. That is what it tried Wednesday, and we will see the move can continue to build on this out into next week. As noted, there may be some typical near term weakness after a big surge, and that is okay as long as it resumes on stronger volume. Indeed, a bit of softness lets you get into some names that jolted higher on the move. We wanted more of an extended correction to set more of a foundation for a new rally, but as noted above, 7% to 8% may have been enough. Again, we have to watch how the stocks and the market extend this move over the next week. NYSE volume needs to improve a la NASDAQ, and leadership continue to make moves higher.
As for the near term, MOT warned after hours, fired its CFO, and announced a stock buy back. May put a bit of damper in the morning, but MOT is seen right now as a MOT problem with new products by other companies such as AAPL. Outside of that, we will continue to look at strong stocks ready to break higher or resuming moves after tests. With the NASDAQ follow through session we will also be looking at some more techs, but the energy, metals, and materials also continue to looks super.
Support and Resistance
NASDAQ: Closed at 2455.92
Resistance:
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:
The July/August trendline at 2453
The 90 day MA at 2438
The 50 day EMA at 2424
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 2299
S&P 500: Closed at 1435.04
Resistance:
1440 is the mid-January high
1444 from February 2000
1454 is the late November to February up trendline
1461.57 is the February 2007 high.
1475 from peaks in December 1999 and January 2000
Support:
1432 is the December 2006 high
1425 is an interim high from November 1999
The 90 day MA at 1416
The 50 day EMA at 1414
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 12,447.52
Resistance:
12,499 is the December intraday high.
12,796 is the February 2007 and all-time high
Support:
The 90 day MA at 12,405
12,361 is the November 2006 high
12,350 is the March 'hump' high
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 11,848
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): +4M actual versus +1.4M expected, +1.18M prior
Gasoline: -3.4M actual versus -1.6M expected. Pushed gasoline futures close to $2.
FOMC day two, policy statement (2:15): Rates steady at 5.25%, noted mixed economic signals, adjustment in housing, removed language re 'additional firming,' but said its primary concern was inflation not fading as anticipated.
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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