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money investment, investment help
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4/19/07 Investment House Daily
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Stop alerts issued: PAAS; SMSI
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SUMMARY:
- China once again adds to the selling pressure, but once again stocks hang tough.
- Another batch of so-so economic data underscores the cycle slowdown.
- Can the candidates elevate the tax debate?
- Hedge fund funds surge in Q1.
- Another session of trying to hold the line without much help from tech earnings, but indices are sticky with their gains.
More fears China is too prosperous for its own good spark some more selling.
Early Thursday morning China released its latest GDP report sporting an 11.1% gain (10% expected) and a 3.3% inflation rate. In a market obsessed with economic indications of any sort, that was viewed as negative. Too much prosperity in China could force its central bank to tighten money and credit and potentially choke off the expansion meaning less demand for metals, materials, oil, and basically all other indicia of an expanding economy. Better go sell your holdings.
Earnings did not provide a lot of help. UNH missed, MRK was in line, MO missed but raised its guidance, FCS and NVLS (both chips) guided lower. That was on top of an EBAY report that was good but only good enough for a $1.26 loss. Jobless claims jumped again, the LEI was flat, and the Philly Fed was well shy of expectations. Good news all around.
Stocks predictably started weak after some weak futures. Almost immediately, however, they started to recover in a slow steady build up through mid-afternoon. Indeed, the indices turned positive despite another down day in energy. Alas, it could not hold to the close as stocks weakened in the last hour. Once more semiconductors posted a gain as did DJ30. DJ20 just missed closing at a new high to confirm the Dow's move. NASDAQ posted a modest loss as did SP500. Despite the China redux, so-so economic data, and uninspired earnings, the indices at the very least held their ground.
Technically, the volume was up as the indices basically held their position, and after a run higher that means churn. Churn is where the buyers and sellers are evenly matched; it can occur at the top of a run (as is the situation now) or at the bottom of a pullback. On the top it suggests the buyers have lost control and the inability to move higher coupled with stronger volume tells us that investors are unloading some shares. Wednesday and Thursday were both churn (on NASDAQ some distribution) sessions. Not heavy selling, but steady churn or distribution erodes the move higher and sets up a fall. It is always a warning flag that something could be up, but we also have to realize it is expiration week and volume tends to rise midweek as positions are rolled out. Thus the modestly higher volume is really not that big of an issue. Not great to see but not as negative as at first blush.
On the other hand the indices continue to hang in there, holding their gains in the face of less than savory news and a pullback in one of the leading sectors, namely energy. That is the backbone the market grew recently as discussed the past couple of sessions. Further, NASDAQ's intraday action was not bad as it tested lower, filled the Monday gap higher, and then bounced off the 10 day EMA. It just missed holding onto a positive close after that rebound, so once again it is more difficult to call the session out and out distribution.
Thus there are some good points in the market such as its resiliency in the face of what was devastating news in February, and some bad points such as the continued churn near the prior highs. For now it is hanging in, but if it cannot make the next upside break soon the higher volume running in place suggests a move lower to test before another surge higher. You always have to worry about a major blow down in these situations, but thus far nothing indicates that is in the offing. Indeed, the market had the kind of news that would trigger a bigger selling bout, but it simply did not materialize.
THE ECONOMY
Economic data continues the mid-cycle slowdown pace.
The data remained uninspired as the mid-cycle slowdown continues. Jobless claims were higher than expected once more, clocking in at 339K, lower than the 343K the prior week but well above the 320K expected. Notice how the week in and week out expectation is 320K? It is the middle of the road, 'go to' number when economists don't have a clue. In the final analysis, however, claims were up significantly for the second straight week, and that had some talking about an employment slowdown. Jobs are a trailing indicator, and with all of the other economic indicators slowing already, it is only natural that jobless claims would start to follow.
Philly Fed posts a rather pathetic showing.
The 0.2% showing for April was well below the rather anemic 3.0% expected. New orders, shipments and employment remained positive. Inventories, order backlogs, and delivery times remained in contraction. It did, however, manage to match March's showing. Verily the Philadelphia region is a pillar of economic strength. It has struggled since Rita and Katrina. Sure it posted an 8.3 reading in January, but that was the Lone Ranger, coming in after a 2.3 drop in December. The 3 month average is 0.3; again, hardly the stuff expansions are made of.
Still just a mid-cycle slowdown that could change with the wrong, or the right, moves.
Of course, it is also not the stuff recessions are made of. Despite the weaker readings, it is not a contraction reading. It is a slowdown reading. Yes, there we go again with that mid-cycle slowdown talk, but when you look at the economic data and even project a weaker housing market still to come the data is not pointing to economic collapse as some continue to argue. There can always be the unexpected jolt that does in fact tip us and others into recession, but you cannot build your analysis around wild card events. There is an ongoing slowdown. Congress, the Fed, or a combination of the two could undermine the economy further and really cause problems, but for now any tax actions and the like will be vetoed. That means more status quo, and right now the status quo is a slowdown after a nice expansion, that is gearing up for some more modest growth.
Now if our leaders (or leader wannabes) want to really get our economy moving again, they could start talking seriously about tax reform. Giuliani has Steve Forbes as his economic advisor, and everyone is expecting Giuliani to come out with a flat tax proposal. The question is whether the other candidates, republican and even democratic, come out with one first or try to one-up him with something different but still dramatic (e.g. a sales tax, or 'fair' tax). We are hearing a lot of talk from the inside of the campaigns that this is going to be a serious issue for the candidates.
The time is certainly ripe with millions more Americans hit with the AMT this year and the realization that if we truly reformed the tax process along the lines of the newly capitalist former eastern European countries (not to mention Ireland, Australia, and New Zealand) we would unlock billions spent on tax compliance each year for investment in the US economy, not to mention flushing out the last tax shelters and dodges simply because it would no longer be worth the money to try to avoid taxes. That ends the so-called 'tax gap' as it is cheaper to pay up than hide it. The Feds get more money and the economy gets a big injection of capital that is freed up, throwing off more revenues and more jobs as well. Some rather conservative predictions suggest a 10 year economic boom based on the money saved from compliance, the additional taxes collected, and the capital returned to productive use in the economy.
That is a grand pallet to paint. It doesn't have to be so grand to do the job. Eliminate completely the tax on capital gains (Bill Clinton lowered the cap gains tax after his tax hikes and the Fed slowed the economy, and that re-energized the expansion) and cut corporate taxes in half or eliminate them as well. The economic surge those two moves would set off would be equally impressive. Then after that is done it would be easy to sell the major tax reform as you could point to how well the prior baby steps worked. We can only hope that this talk of change actually turns into real change and a competition on the campaign trail to put forth real change . . . for a change.
THE MARKET
MARKET SENTIMENT
$60B flowed into hedge funds in Q1. Compared with the $120B for the entirety of 2006 you can see the number is impressive. More than that, the number starts to suggest things are getting a bit frothy in the investment market. Lots of money is being pushed into the market, and at an increasing pace as more and more chase returns.
That is always a warning sign, but with all sentiment indicators, it is not a timing device. Moreover, hedge funds are relatively new, at least in terms of accessibility to the masses. Thus it is more difficult to determine if this spike is a sign of a top or is just a sign of a natural growth in popularity. It is definitely something to log in the overall analysis, however, along with watching how the market behaves.
VIX: 12.54; +0.12
VXN: 16.3; +0.01
VXO: 12.26; +0.53
Put/Call Ratio (CBOE): 0.94; +0.04. Starting to creep back up after a hiatus that took it down near 0.7
Bulls versus Bears:
Bulls: 52.7%. Well this is hardly good news with the bulls spiking back up over 50 and well on the way to 55% that is considered bearish. Up from 49.5% and 45.5% just a month back. It hit 50.5% level a couple of months back though below 53.3% on the recent high. Bulls bottomed last summer near 36%. That is the lowest level since September 2006.
Bears: 25.3%. Heading the wrong direction as well, falling from 27.5%. Fairly volatile of late as it bounced from 25.8% the week before but down from 28.4% and 28.9% immediately before that. Still 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).
NASDAQ
Stats: -5.15 points (-0.21%) to close at 2505.35
Volume: 2.158B (+1.69%). Higher volume again as NASDAQ was down, positive, then slightly lower. That says distribution given the negative close, but if it had closed positive it would have been classified as a great recovery. Thus we are not going to get too critical of the volume, particularly as it is expiration week and volume rises midweek.
Up Volume: 971M (-64.17M)
Down Volume: 1.162B (+120.841M)
A/D and Hi/Lo: Decliners led 1.77 to 1. Not great but also hard bad given all of the negatives that could take NASDAQ lower.
Previous Session: Decliners led 1.44 to 1
New Highs: 110 (-19)
New Lows: 60 (+14)
NASDAQ CHART: http://www.investmenthouse.com/ihmedia/NASDAQ.jpeg
Finished lower but it put up a fight. More than that, it tapped the 10 day EMA on the low, filling the gap higher from Monday, and then rebounded. As noted above, if it had hung onto that gain the session would be heralded as a great comeback. As it is we still view it more or less as such. It had some less than great earnings news, sold off, but held near support and recovered on rising trade. This is exactly the kind of test NASDAQ needed to set up another and more serious run at the February highs. It is setting up nicely. Just needs a wave of good earnings to push it.
SOX (+0.62%) was up once more as chips again showed relative strength. SOX did not break from its range but SMH (the semiconductor ETF) did. It may not hold for now, but it has cracked the ice as semiconductors performed decently even with a downgrade of NVLS that sent it gapping lower.
SP500/NYSE
Stats: -1.77 points (-0.12%) to close at 1470.73
NYSE Volume: 1.636B (+1.59%). Volume was stronger than Wednesday, again coming in above average as the NYSE indices sold lower and then recovered. This stronger volume is characteristic of expiration week, but given SP500 is bumping its post-2002 high we have to maintain some caution.
Up Volume: 657.447M (-96.408M)
Down Volume: 958.779M (+124.644M)
A/D and Hi/Lo: Decliners led 1.75 to 1. Not out of hand, but with the energy sector lower again the small caps were down, putting a drag on the breadth.
Previous Session: Decliners led 1.22 to 1
New Highs: 177 (-48)
New Lows: 24 (+9)
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
The large caps spun their wheels right at the post-2002 high hit this week. Volume was higher, suggesting some churn, but as with NASDAQ, SP500 recovered off the session lows for a modest loss by the close. SP500 has made the new high and the action suggests it is still likely to come back some more to test before it can try to extend it. The volume means we have to stay vigilant that the recent buying does not turn to selling, but overall not bad action. It is worth noting that once more SP500 banged against the November/February trendline (the bottom of the old channel).
SP600 (-0.39%) and its twin SP400 (-0.39%) struggled once more as energy languished again. It is hardly a struggle, just a fade after running to new highs to start the week. SP600 recovered from the intraday low and closed above the 10 day EMA in a continued show of underlying strength. Small caps have resumed a leadership roll after giving it up to end 2006. Looking solid on this pullback, and once energy completes its test SP600 will likely be back in the game.
DJ30
New closing high on DJ30, new closing high on DJ30. That was the graphic on CNBC, changing out with index prices, oil, etc. By the slimmest of margins, but a new high. DJ30 showed a doji on the candlestick chart, indicating the nice surge the past week is out of gas. The price gains have compressed as volume has increased, and with the move to the new high (but no massive break above it), there is likely some backfilling ahead. That will get some rattled on the television shows ('why is the market stalling?!!'), but as with anything, no move continues indefinitely. A pullback toward the 10 day EMA to test would be normal and would give DJ30 a better shot to run even higher. Acting well, and not showing a lot of signs of fatigue.
Stats: +4.79 points (+0.04%) to close at 12808.63
Volume: 262M shares again Thursday versus 262M shares Wednesday. Rising volume for three sessions. As with the other indices, expiration is playing its role.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
FRIDAY
Expiration Friday and more earnings results. Expiration has pushed volume up a bit, but thus far not much volatility. Earnings have been up and down, but thus far the indices have held their gains despite some tech disappointment. GOOG posted good results and was up around $12 points after an up and down after hours session. AMD's earnings were horrid, worse than its latest warning, but it talked of private equity and was up after hours after the initial sell off. Not really what you want to bank on, but in this market private equity has investors frothed up; it was working for AMD.
Whether that translates to the broader tech space is problematical. AMD's problems are pretty uniquely AMD's with its huge expansion necessary in order to be able to supply DELL and others with its chips. With margins in the thirties it is really in a dog fight with Intel, and AMD is not the big dog.
That said, it is still expiration Friday and that can always provide some intrigue. Sometimes the intrigue is no intrigue at all, i.e. a flat, slow session. The indices rallied during the week and thus you would likely posit that a pullback is in order, but NASDAQ has already filled its gap higher from early in the week and looks set up to take on the February high . . . if it can get a push. Thus far earnings have not provided that push. SP500 is ripe for a test as it has made three tries on three consecutive sessions to clear the old channel line. We always shave to be concerned about a failure at the highs, but there was as breakthrough on some decent trade by the small caps, SP500 and now DJ30. Pretty good action to be the predecessor to a melt down.
That is why we let some of the energy plays make their tests from the strong run and will be looking to pick up more positions as they hold and rebound. Other stocks that are performing well can give us new entry points. Maybe not on Friday, but they are setting up to do so again. That test of the near support by SP500 would put it in great position to make another run higher as well. You still have to watch for breakdowns that could indicate trouble; energy is a leader and is testing back first; that is always something to watch when the early leaders make their tests and how they respond. This move still has warts, but it certainly handled the latest round of China fears with aplomb.
Support and Resistance
NASDAQ: Closed at 2505.35
Resistance:
2509 is the January 2007 high
2523 is price resistance November 2000
2530 is the December/January up trendline
2531 is the February high (post-2002 high)
Support:
The July/August trendline at 2503
The 10 day EMA at 2490
2471 is the December 2006 high
2468.42 is the November 2006 high
2460 is the March high
The 50 day EMA at 2449
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 1470.73
Resistance:
1474 is the late November to February up trendline
1475 from peaks in December 1999 and January 2000
Support:
1461.57 is the February 2007 high.
The 10 day EMA at 1457
The 18 day EMA at 1447
1440 is the mid-January high
1439 is the March high
1432 is the December 2006 high
The 50 day EMA at 1432
1425 is an interim high from November 1999
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
Dow: Closed at 12,808.63
Resistance:
At a new high so not a lot standing in its way.
Support:
12,796 at the February 2007 and all-time high
12,700 is the early February peak intraday high
12,623 is the mid-January high
The 10 day EMA at 12,664
12,511 is the March intraday high.
12,499 is the December intraday high.
The 50 day EMA at 12,479
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
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
April 16
Retail sales, March (8:30): 0.7% actual versus 0.4% expected, 0.5% prior (revised from 0.1%)
Retail ex-auto (8:30): 0.8% actual versus 0.7% expected, 0.4% prior (revised from -0.1%)
NY Empire State PMI, April (8:30): 3.8 expected, 10.0 expected, 1.9 prior
Net foreign purchases, February (9:00): $58.1B actual, $80B expected, $98.8B prior (revised from $97.4B)
Business inventories, February (10:00): 0.3% actual versus 0.3% expected, 0.2% prior
April 17
CPI, March (8:30): 0.6% actual, 0.6% expected, 0.4% prior
Core CPI (8:30): 0.1% actual versus 0.2% expected, 0.2% prior
Housing starts, March (8:30): 0.8% gain; 1.518M actual versus 1.5M expected, 1.506M prior (revised from 1.525M)
Building permits, March (8:30): 0.8%; 1.544M actual versus 1.515M expected, 1.532M prior
Industrial production, March (9:15): -0.2% actual versus 0.0% expected, 0.8% prior (revised from 1.0%)
Capacity utilization, March (9:15): 81.4% actual versus 81.9% expected, 81.6% prior (revised from 82.0%)
April 18
Crude oil inventories (10:30): -1.0M actual, 678K prior
April 19
Initial jobless claims (8:30): 339K actual versus 320K expected (like the weather forecast in the summer: hot and 20% chance of rain), 343K prior
Leading economic indicators, March (10:00): 0.1% actual versus 0.1% expected, -0.5% prior
Philly Fed, April (12:00): 0.2 actual versus 3.0 expected, 0.2 prior
End part 1 of 3
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