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4/11/07 Technical Traders Report
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Technical Traders Report Subscribers:
MARKET ALERTS
Target hit alerts: None issued
Buy alerts: CROX; ISE
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SUMMARY:
- Selling starts to take back the recent gains as the Fed provides no comfort for investors.
- Fed minutes puzzle over rising inflation with a slowing economy, but the two are not related.
- Higher selling volume, lack of help from after hours earnings put pressure on the indices as they test near support.
Low volume rise meets its inevitable match.
Stocks started flat to lower. There was no real bad news, just lagging a bit after a week and one-half of gains. TGT announced a 12% gain in sales but forecast much lower ahead. TSCO (catering to urban as well as real farmers and ranchers) said it would crush estimates. CHS is on the comeback trail, announcing strong same store sales. That pretty decent news was countered some by lower mortgage application rates and a forecast from NAR that home sales would fall 0.7% in 2007. That would be the first drop in 40 years.
Stocks sold into the oil inventories number. Inventories came in worse than expected with a 0.7M bbl rise in crude (1.7M expected) and a colossal 5.5M drop in gasoline (-1.7M expected). Refinery runs were up 1.4% to 88.4%, but there are obviously problems even with higher refinery output. Q1 demand for gasoline hit a record for that period. The latter part of Q1 on into the first part of Q2 are also a transition time for refineries as they move from heating oil to gasoline production. It takes about 3 weeks to retool and set up for the other product, so you have some refinery downtime because of the switchover. Add to that other events causing downtime, e.g. fires, explosions, broken equipment from being run too hard and too long without maintenance, and you get behind with product. Indeed, 6 refineries were down during the period for these various reasons.
Oil is not the problem. Oil is oozing from every storage container in the US. The problem is converting the black sticky barrels into amber gallons of gasoline; with the refineries down the oil is sitting there, waiting to be converted. As we touched upon last night, regulation kept new refinery construction at basically 0% for 20 years. There has been existing refinery expansion that has increased capacity, but that only goes so far. We have regulated our way into this mess and we need some expedited help to get us out of it, and that means the government needs to provide some incentives to way increase gasoline production while we look at alternatives to get us weaned from the gas can.
After inventories stocks sold again but managed a rebound into the early afternoon. Bernanke was middle of the road as expected, but when the FOMC minutes from the last 'no more tightening bias' meeting were released the market found a Fed still very much leaning toward inflation worries. It took out the 'further firming' language in recognition that some of the economic data was softer, but it was still worried about inflation risks. Indeed, so much so that many members puzzled over the continued rise in inflation pressures even as the economy slowed. That instilled a world of confidence in the financial markets and they sold to new session lows over the next hour.
Stocks bottomed mid-afternoon and bounced modestly to the close, but the sellers were clearly in control. In one session they took back the ground scratched out over the prior three to four sessions. Thus is the life of a low volume rally: scratching and clawing higher, and when the engine sputters the backsliding comes quickly.
Technically there was no breakdown as the indices managed to hold above the 10 day EMA on the close. Most of the leaders managed to do the same but as always there were some breaking ranks. With volume higher (the first above average session on NASDAQ since the follow through) and negative breadth springing back after a narrow rise higher, there were some serious issues confronting the market. A day of distribution does not kill a rally, but after a low volume move higher in a correction and ahead of earnings, it takes on more significance.
Thus far this move has found extra lives to push it higher, coming back from the dead so to speak. It looks to be ready to make an important test of the prior advance where we will see more of the stripes of this move. It has fended off selling nicely, but it has not converted us to believers that the short double bottom in the first half of March is the foundation for a sustained rally. We were taking money off the table early, some midday, and some in the last hour, sticking to our plan of not letting positions come back on us very far given the coalescence of some potentially negative events (low volume rise, earnings hopes a bit high, soaring energy prices, pesky inflation, and the correction that is not officially dead though some act as if it is). Given the selling started with a boost in volume, above average volume at that, all the more reason to lean toward caution than bravado.
THE ECONOMY
Fed puzzles over rising inflation in a slowing economy. Hint to Fed: there is no link.
Back when the Fed first paused in August 2006 it said something in its statement that we though queer, and we noted it at the time. The Fed commented that though inflation pressures remained elevated, a slowing economy would ameliorate those pressures. We noted that the statement was odd because history shows there is no relationship between inflation and the strength or weakness of the economy. If that were true then inflation would have overrun the economy in the 1980's and then again in the 1990's. The Greenspan became so obsessed with the phantom of inflation that it fenced with the shadow (that no one else saw) constantly. You cannot beat a shadow, but the Fed kept at it and until it wrecked the expansion. There was no inflation, but there was also no longer an expansion thanks to high rates and zero money supply growth.
If the relationship held true then the 1970's would have experienced no inflation. The economy was the worst since the Great Depression. Writers talked of the US' greatness in the past tense, saying we had a good 200 year roll but had finally crapped out. Unemployment soared, businesses faded away, economic growth was stagnant at best for years on end. Yet inflation was double digit. It was so bad that the phrase 'misery index' was coined to describe the pernicious bite of the sum of the inflation and unemployment rates. Economic growth was in the crapper. But inflation grew like a weed.
Neither scenario fits the Fed's 'slower economy, lower inflation' thesis. That thesis is derived from the Phillips Curve and its basic premise that if unemployment gets too low (meaning the economy is so strong it gets near full employment), inflation shows up. Conversely, if the economy goes slack, inflation lightens up. As noted, it doesn't work. When the Fed puzzles as to why a bad theory does not work, that does not instill much investor confidence. The Fed gambled some when it paused, biding some time to see if the inflation pressures that started at the end of the Greenspan era abated. It was a good gamble, but there are factors working against it and now it has some tough decisions to make.
Those decisions should not include raising rates, however. As some sage economic historians are suggesting, raising rates as the economy slows along with business investment and housing would potentially sew seeds to a credit crunch with effects much worse than any inflation experienced short term. Bernanke is certainly in a pickle, but it is not one of his own creation. Unfortunately for him, being Fed chairman is similar to being President: you get all of the blame for someone else's mistakes as they tend to crop up after the 'other guy' left office.
The end result is the market received less love than it wanted from the Fed. At the time of the prior statement we frankly read it as the Fed giving with one hand and taking with the other, i.e. removing the 'further policy firming' language but adding language that inflation was still the clear problem. Perhaps the former does trump the latter in the long run, but the Fed is not backing up that position with its commentary. The end result was the market had to price in the Fed not lowering rates anytime soon, something the bond market has been working hard at for the past couple of weeks.
THE MARKET
MARKET SENTIMENT
VIX: 13.49; +0.81. Starting to rise after touching down at the 200 day SMA, roughly in the range it hit when the market started its last pullback the last part of March. That suggests there is some correlation building between market movements and VIX movements after a long period of disassociation. When this gets established we can play the market based on the VIX levels.
VXN: 17.74; +0.72
VXO: 12.65; +0.92
Put/Call Ratio (CBOE): 0.99; -0.12. Back below 1.0 on the close as the market sold. That is the opposite of the typical action with this indicator.
Bulls versus Bears:
Bulls: 50.6%. Big jump in bulls from 48.4%, continuing the rise from 46.6% and 45.5% before that. It has returned to the 50.5% level high a couple of months back though below 53.3% on the recent high. 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: 25.8%. Substantial drop from 27.5%, continuing the slide from 28.4% and 28.9% immediately before that. This bounce in the correction continues heartening investors and thus reducing bears. That strong jump higher from 26.9% and 24.2% last month is eroding but still well above the 20% where it held to start the year. 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: -18.3 points (-0.74%) to close at 2459.31
Volume: 2.058B (+7.61%). First above average volume session since the mid-March follow through session. Low volume rise for a week then higher volume on the start of the fade. A day of distribution does not kill a rally, but the circumstances (low volume rise, continuing correction, failure at a trendline) warrant plenty of caution.
Up Volume: 522M (-502M)
Down Volume: 1.382B (+582M)
A/D and Hi/Lo: Decliners led 1.9 to 1. Easily topped all of the upside breadth on the move up the past week.
Previous Session: Advancers led 1.23 to 1
New Highs: 109 (-30)
New Lows: 73 (+23)
NASDAQ CHART: http://www.investmenthouse.com/ihmedia/NASDAQ.jpeg
NASDAQ sold from the open though the selling did not really escalate until after the FOMC minutes release. NASDAQ sold to the 10 day EMA (2453) on that news, managing a modest bounce to close out the session. Volume jumped as NASDAQ turned back from the July/August trendline that held it in check on the upside for the prior three sessions. It was not a breakdown, but a higher volume sell off after a low volume bounce suggests using a bit of caution. NASDAQ is still above a lot of support in the form of the 90 and 50 day MA so we see how this test pans out. In doing so, however, we are not going to let positions roll over on us.
SOX (-1.11%) fell right back to the 50 day EMA on the close as it continues its lateral slog, holding midrange in its 5 month lateral move. A mixed session for chips and most of the leaders remain in good shape (e.g. WFR) as the long flat base continues.
SP500/NYSE
Stats: -9.52 points (-0.66%) to close at 1438.87
NYSE Volume: 1.569B (+17.91%). NYSE volume moved up to average for the first time since mid-March when its indices also moved higher off of that double bottom low. That indicates a return of the sellers after a dormancy period and the low volume rally to this point, but as noted before, it is just one day of distribution. Not good, but not fatal in itself.
Up Volume: 468.069M (-338.83M)
Down Volume: 1.09B (+603.142M)
A/D and Hi/Lo: Decliners led 2.03 to 1. Downside breadth is a bit stronger on the start of the pullback than it was on the upside.
Previous Session: Advancers led 1.6 to 1
New Highs: 182 (-87)
New Lows: 28 (+7)
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
SP500 fell to the 10 day EMA as well, holding that near support that also represents the late March peak hit on the initial move out of the short double bottom. This is the general area you would want the index to hold if it is going to challenge the February high (4162). As with NASDAQ, plenty of support if buyers want to use this pullback to step in. The sellers were in control Tuesday, but as noted, it was no breakdown. SP500 is still well positioned to move even with this fade. It will still need a catalyst but it is still in the game.
SP600 (-0.73%) sold but held the 10 day EMA on the close. That keeps it right at the late March peak as well and in similar position as SP600. It will need more volume to take out the prior February high, however, as it came within 4 points of that level on very low volume before this pullback on rising trade. Needs something to kick the buyers into gear. Earnings come to mind but expectations may be too high (hoping for an upside surprise) even as expectations have lowered.
DJ30
DJ30 closed at the 10 day EMA as well after tapping the 50 day SMA on the session low. As with the other indices, volume moved above average for the first time in a month, and it came on a sharp price decline. It held the near support at the late March high, but that is a pretty big decline for just one session. You prefer to see pullbacks to support orderly and sedate. This one sports a big price drop and a jump in volume. Holding support for now and still can bounce, but it will need a catalyst as well.
Stats: -89.23 points (-0.71%) to close at 12484.62
Volume: 245M shares Wednesday versus 214M shares Tuesday. Volume was finally above average and of course it came on a downside session as blue chips suffered some distribution along with the rest of the market.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
THURSDAY
The indices posted larger declines than their gains any of the last four sessions, but they are still at near support and over a fairly thick layer of ice (support) from the December and January ranges, the March high, and the key moving averages. Even with that we are still not all that confident they will make the stand. Some strong earnings would help, but after hours earnings were not getting treated with great aplomb. It is very early in the season and it could turn out better than expected, but typically the early days are volatile.
Based on the market action we decided ahead of time we would take positions off the table if they threatened to come back at us, and we were doing that Tuesday. We will continue to do so. We are also letting some strong stocks holding their trend continue on, particularly if they are in the sectors getting the money, such as steel, energy, utilities. There is demand outside the US that is driving those sectors; thus their continued strength even as many worry about the US economy's prospects.
For the most part, we would rather see how this shakes out after a high volume sell off to end February, an initial bottom, a test, and then a low volume assent toward the prior highs. The market is still in a correction, still working on a base to set a foundation for a more sustained rise. There is likely more work to do and thus we will remain ready to protect positions as needed and keep the powder dry and be ready to move when the market gives a clearer indication how it wants to resolve this low volume rise up toward the old peaks. It is a point where we would rather miss out on a bit of move and get in at a clearer entry point than risk a lot of capital on an earnings season that will be lighter.
Support and Resistance
NASDAQ: Closed at 2459.31
Resistance:
2468.42 is the November 2006 high
2471 is the December 2006 high
The July/August trendline at 2483
2509 is the January 2007 high
2525 is the December/January up trendline
2523 is price resistance November 2000
2531 is the February high (post-2002 high)
Support:
2460 is the March high
The 10 day EMA at 2453
The 50 day SMA at 2441
The 50 day EMA at 2435
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
2331 is the March intraday low
S&P 500: Closed at 1438.87
Resistance:
1440 is the mid-January high
1444 from February 2000
1461.57 is the February 2007 high.
1467 is the late November to February up trendline
1475 from peaks in December 1999 and January 2000
Support:
1439 is the March high
The 10 day EMA at 1436
1432 is the December 2006 high
The 50 day SMA at 1427
1425 is an interim high from November 1999
The 50 day EMA at 1423
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
1364 is the March intraday low
1358 to 1362 mark a series of peaks from April 1999 to August 1999 high and the February
Dow: Closed at 12,484.62
Resistance:
12,499 is the December intraday high.
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:
The 50 day SMA at 12,453
The 90 day MA at 12,442
The 50 day EMA at 12,414
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 11
Crude oil inventories (10:30): +700K actual versus +1.7M expected, +4.3M prior. Gasoline: -5.5M actual versus -1.6M prior.
FOMC Minutes (2:00): Puzzled as to inflation continuing as the economy slows
Treasury Budget (2:00): -$96.3B actual versus -$90.0B expected, -$85.3B prior
April 12
Initial jobless claims (8:30): 320K expected, 321K prior
April 13
Trade balance, February (8:30): -$60.5B expected, -$59.1B prior
PPI, March (8:30): 0.7% expected, 1.3% prior
Core PPI, March (8:30): 0.2% expected, 0.4% prior
Michigan Sentiment, Preliminary, April (10:00): 87.5 expected, 88.4 prior
End part 1 of 3
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