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us stock market, trade stock
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4/03/07 Investment House Daily
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MARKET ALERTS:
Targets hit alerts: None issued
Buy alerts: AAPL; IVN; UA; ZUMZ
Trailing stops: WNR (letting it test and will get in when done)
Stop alerts issued: ACAS; DIA
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SUMMARY:
- Tuesday answers the Monday technical signal with a solid accumulation session.
- Pending home sales, weekly chain store sales fuel further debate on economic surge versus implosion.
- Eyeing February highs but then what.
Stocks beat the odds, continue the break higher off the double bottom.
Monday set up the swing session with the inside day, leaving the door open for the market to make its move and continue the rebound rally or continue to fade. Some distribution in the pullback made the outcome problematical. On the other hand, leadership remained solid with energy, metals, chemicals, medical, retail among others positioning up nicely even with the pullback.
Even with that the market still needed a catalyst, and after almost two weeks of pullback there was an odd mix of data that helped spring stocks higher. Rising oil prices on the back of the Iran/UK dispute eased as the tensions subsided a bit. The yen fell and the carry trade was back on. Foreign markets jumped. That is always good for a bump higher, and the market opened higher out of the gates and rallied a bit further. But as a catalyst for a sustained rally it was still pretty meager. After all oil was lower (closed at 64.50, -1.44), but it is still above the levels that prompted that big surge in prices paid in the ISM released Monday.
Just as the initial surge was slowing, however, the most recent pending existing home sales report came out and posted a 0.7% gain. Despite the 8.5% annual decline this report sparked a lot of interest. On top of that, Redbook chain store sales rose 4.7% year/year for the same week. Forgetting that this is the period right before Easter and thus sales are typically higher (as the market seemed to do), it was a solid gain. The market certainly took it as such. It sparked the next leg in the rally and took the indices up to the March closing highs on SP500 and NASDAQ, while DJ30 and SP600 punched on through.
This was not the kind of data that you would expect to provide a market catalyst. Pending home sales? That is reaching deep into the bag of catalysts. Weekly chain store sales jibed with the personal income and spending figures from February, but again, it is just before Easter. However, flimsy, the indices rallied well in the first hour and one-half, hitting the March closing highs on that move. They then spent the entire session working laterally, bracketing that high on the close. Volume was up, breadth was strong. Importantly, the indices did not give the move back. In somewhat of another twist of irony, the techs led the rebound move. As you recall, NASDAQ was the sole index that provided a follow through. It was the index that almost gave away the farm in the subsequent selling. Tuesday it was back in the lead.
Technically it was not a blowout but it was a solid session. Volume bounced back up to average on NASDAQ, but did not make it that far on NYSE. It is Easter week and Passover has started, so volume is typically lower. Thus rising trade, average on NASDAQ, was not bad at all. There were not a lot of individual moves on surging volume, but there were breakouts as leadership, as noted above, remained solid. There was even some new leaders as the NASDAQ large caps were stirring as well. Energy took a much needed break, but metals, materials, tech and a lot of other sectors pitched in.
This was a good move for the market, and not just because the indices recovered higher. The market is still likely to test before this is over, and when it tests from a higher level, say the February peak, it will hurt more. Doesn't sound all that much better. What it does, however, is set up a better base for the market to rally longer term. Of course it can always just keep on rising, and if it does we will be in the game then as well though at some point that will lead to a rather nasty summer slump. Similar to the car parts commercial from several years back, you can pay me now or you can pay me later. Do we care? Not really because the market will do what it will do. What we have to do is be ready for the possibilities as we were with this move and then take advantage of what the market gives.
THE ECONOMY
The recession versus expansion debate continues . . . daily.
Tuesday saw more 'heavy hitting' economic data in the form of pending existing home sales and weekly chain store sales that were better than expected. That was on top of the ISM data that, while still positive, was lower than expected.
The reports were more fuel for the debate running on whether the economy is just fine or is ready to slip into the abyss, dragged lower by mortgage issues, rising oil prices, global tensions, and global warming.
Of course, things are never as black or white as the proponents claim. According to some we have been heading for an economic meltdown just ahead . . . for twenty years. Every time an economic sector stumbles it is just the precursor to a broader meltdown that will destroy all of our wealth and leave us just this side of the dark ages. Now the last recession we had was in 2000 and 2001, but that was not the confluence of any of the horrid factors predicted. It was the result of poor monetary policy combined with higher taxes. It was not a natural result of economic processes; unnatural is one printable adjective that comes to mind.
There is a ton of data out there and you can cherry pick it and support any thesis you want. There is a lot of that going on right now. Even if you look at a lot of the data you can still miss the end result simply because there are so many variables to consider.
Recessions are not necessarily a given.
What we need to keep in mind is that, though they are talked about almost daily (particularly of late), recessions are fairly rare economic events. If the economy slows it typically does just that, slows. There can be a confluence of events that send it into recession, and ultimately this is always an issue when the problems start to arise. The housing slowdown, increase in mortgage delinquencies, rising oil and gasoline prices, slowing capital investment - - those are serious issues and you can make a sturdy case that this is leading to recession. It takes a confluence of events because in a $16T economy the sub-prime mortgage market is simply not big enough to do the damage. Throw on surging oil and gasoline prices and now the drop in business capital investment for a couple of quarters and you have a much better case.
That means right now we have a much better case for a recession developing. What is the event that pushes it over the edge? A gulf storm this summer of the Katrina/Rita ilk that plows through prime production territory. That shuts down Gulf production and sends oil and gasoline up toward $80 or more per barrel and gasoline well in excess of $3/gallon. We know that is the case because gasoline is averaging $2.60/gallon nationally and is already topping $3 in many places. This is before any storm that knocks out production or refineries as Rita did in 2005. Add that and you have $4/gallon-plus gasoline. Now that hurts.
Oh wherefore art though business investment?
One of the mysteries is the decline in business investment. Companies are, as we have heard for a year now, flush with cash. Nonetheless they have invested in less capital equipment the past two quarters. Declines in capital investment for two to three quarters have preceded past recessions. Thus there is the argument brewing that this is another factor leading to an inevitable recession this year.
But not quite so fast. Why is investment declining right now? Capital investment has been strong, fueled by more favorable tax treatment and an economy coming out of recession. That recession saw 3 years of no capital investment in the US following the rather cataclysmic decline in GDP growth over less than three quarters. That left businesses with tremendous inventories to work off and a lot of idle capacity. There was no need or stomach for investment at that point, but when the expansion started businesses had to make up for 3 years of nada. The tax incentives sweetened the pot all the more.
Investment is cooling a bit after four years of excellent growth. That may indeed mean a slowdown ahead, but as noted on CNBC today, buybacks are at a point where they are rivaling capital investment. They have grown as investment has stalled. Companies are taking a breather in capital purchases and are using more cash to buy back shares to bolster their stock prices further.
The key of course is how investment responds as the summer wears on. Negative sentiment tends to build on itself, but we also know that companies tend to overshoot with their bullishness as well as their bearishness regarding the economy. They tend to be too pessimistic at the bottom and too ebullient at the top.
Thus this slowdown in investment when the economy is still rather robust is very likely another indication of a mid-cycle slowing as opposed to an inevitable recession building. Businesses are slowing down, getting the lay of the political, geopolitical, and economic landscape. There was a new Congress elected in November, and investment subsided at that juncture. That looks more like a wait and see approach to see what the new Congress tries to implement with regard to tax policy and other regulations. In the interim waiting period, companies are using the cash to buy shares. In the uncertainty regarding tax treatment, many take private deals have popped up in the interim. Already there is talk of ending the treatment of gains made by the operating company as capital gains; deals are being done in order to beat any new rules that may be dreamed up.
Thus there are good reasons for the decline in capital investment, and you cannot just look at the numbers and say 'it was this way before so it will be this way again.' We are big believers in history, but if you don't keep your eyes open you can still go astray even if you heed history. There are plenty of reasons to be pessimistic, but there is a certain mania swirling around about how bad things are going to be. New books about 'economic Armageddon,' unending stories about the mortgage and thus economic meltdown, and a healthy dose of fear about the future show a healthy amount of skepticism that you have to like in the perverse, contrary indicator way of the market.
THE MARKET
MARKET SENTIMENT
VIX: 13.46; -1.07
VXN: 17.69; -0.91
VXO: 12.68; -1.11
Put/Call Ratio (CBOE): 1.13; +0.3. Back above 1.0 on the rise. A lot of put selling and covering of downside positions taking place on the Tuesday jump higher.
Bulls versus Bears:
Bulls: 48.4%. Bullish sentiment sparked up from 46.6% and 45.5% before that. Still off the 50.5% and 53.3% two months back, but now bulls are getting too high once more on this little bounce and that harkens another downside move in the correction. Bulls 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: 27.5%, down from 28.4% and 28.9% the week before. This bounce in the correction heartened investors, but there is likely going to be more rise again in the bears before this is over. Still holding much of the strong jump higher from 26.9% and 24.2% last month. Not bad after spending the first two months of 2007 near 20%. The angst is still strong, 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: +28.07 points (+1.16%) to close at 2450.33
Volume: 2.032B (+12.22%). Volume rallied just above average as the techs moved back through the 50 day EMA.
Up Volume: 1.502B (+661M)
Down Volume: 519M (-375M)
A/D and Hi/Lo: Advancers led 2 to 1. Solid breadth even as the large cap techs led the move higher. Many stocks moved higher but there was not a lot of volume spread around; wide but not deep once again.
Previous Session: Decliners led 1 to 1
New Highs: 171 (+52)
New Lows: 61 (-13)
NASDAQ CHART: http://www.investmenthouse.com/ihmedia/NASDAQ.jpeg
NASDAQ gapped through the 50 day EMA that kept a lid on the action through last week after that gap lower below that point. Gap lower, gap back up; that is a small island reversal, and more indication along with the higher volume and solid breadth that NASDAQ will try to make it up toward the February high at 2532. Good start, but NASDAQ was unable to take out the late March high (2460), making it to 2456 before backing off modestly into the close. That is the next important point for NASDAQ to get through.
SOX (+0.68%) rallied back from the tap at some support at 460, but after hitting the 50 day EMA on the high it faded for a rather wimpy gain. It remains entrenched in the lower half of the 5 month range, not showing a lot of strength on a day when most stocks and indices showed strength.
SP500/NYSE
Stats: +13.22 points (+0.93%) to close at 1437.77
NYSE Volume: 1.56B (+3.78%). Volume was up but still below average as SP500 surged. Volume basically matched the Friday end of quarter trade; no definitive surge to show the buyers returned in strength.
Up Volume: 1.211B (+275.471M)
Down Volume: 326.367M (-222.474M)
A/D and Hi/Lo: Advancers led 2.73 to 1. Excellent breadth but the large caps were the better performers as energy took a much needed breather after leading the market higher on the last leg, indeed, rising even as the market tested.
Previous Session: Advancers led 1.68 to 1
New Highs: 298 (+99)
New Lows: 22 (-12)
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
SP500 could not take out the March intraday high (1439) on the close, but it did notch a slightly higher closing high since the pullback started. Key move but it did not smash the old high and volume was so-so. Good move all things considered, but not a definitive move that puts to rest any issues. Then again, there is rarely a move that does that.
SP600 (+0.86%) cleared the March high, an easier feat for it given it never broke below near support at the 18 day EMA and easily held above the 50 day EMA. Excellent action and definite leadership quality.
DJ30
Volume was up but so-so as DJ30 surged higher and cleared the March high on the close. Nice breakout though volume was lacking, something that is a hallmark of the move other than the mid-March intraday reversal off the correction low. A run up to the hold high at 12,796 is in the cards off of this test, higher low, and rebound.
Stats: +128 points (+1.03%) to close at 12510.3
Volume: 220M shares Tuesday versus 209M shares Monday. Still no strong volume to really show strength, but then it is Passover and a shortened, pre-holiday week.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
WEDNESDAY
Factory orders, ISM services and oil inventories are all out at 10ET. More fodder for the economic debate, but the market made a near term definitive move on Tuesday, breaking higher from the Monday inside day on some rising trade and good volume. That puts the February highs in sight on this move, subject of course to any unforeseen event. The market, however, has shown some character with its resilience in the face of slower economic news, higher oil prices, and generally pessimistic sentiment. Thus the February highs are a logical target for this move to at least approach.
What happens when we get there? Well, let's get there first. We have a lot of upside positions despite the market turbulence the past two weeks, and they are looking in good shape for a run up to those highs. We were picking up some more Tuesday and we will continue to do so as it makes the run. A straight run to the top would be great, but more than likely it will take another move, test, and then move back up to the highs. From there we will have to evaluate the strength of the move and be ready to take money off the table even before we get there. The market has a follow through session that was tested, held, and delivered some more upside, but it is also still in a correction. Another test is likely ahead, but with the Tuesday action we continue to focus primarily on the upside and the next run higher.
Support and Resistance
NASDAQ: Closed at 2450.33
Resistance:
2460 is the March high
2468.42 is the November 2006 high
The July/August trendline at 2470
2471 is the December 2006 high
2509 is the January 2007 high
2519 is the December/January up trendline
2523 is price resistance November 2000
2531 is the February high (post-2002 high)
Support:
The 50 day EMA at 2428
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
S&P 500: Closed at 1437.77
Resistance:
1439 is the March high
1440 is the mid-January high
1444 from February 2000
1461.57 is the February 2007 high.
1464 is the late November to February up trendline
1475 from peaks in December 1999 and January 2000
Support:
1432 is the December 2006 high
The 50 day SMA at 1425
1425 is an interim high from November 1999
The 50 day EMA at 1419
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
Dow: Closed at 12,510.30
Resistance:
12,511 is the March intraday high.
12,623 is the mid-January high
12,700 is the early February peak intraday high
12,796 is the February 2007 and all-time high
Support:
12,499 is the December intraday high.
The 50 day SMA at 12,451
The 90 day MA at 12,425
The 50 day EMA at 12,386
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
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
April 2
ISM Index, March (10:00): 50.9 actual versus 51.0 expected, 52.3 prior
April 4
Factory orders, February (10:00): 1.9% expected, -5.6% prior
ISM Services, march (10:00): 54.7 expected, 54.3 prior
Crude oil inventories (10:30): -846K prior
April 5
Initial jobless claims (8:30): 320K expected, 308K prior
April 6
Non-farm payrolls, March (8:30): 135K expected, 97K prior
Unemployment rate, March (8:30): 4.6% expected, 4.5% prior
Average hourly earnings (8:30): 0.3% expected, 0.4% prior
Average workweek (8:30): 33.8 expected, 33.7 prior
Wholesale inventories, February (10:00): 0.4% expected, 0.7% prior
Consumer credit, February (3:00): $5.0B expected, $6.4B prior
End part 1 of 3
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