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world stock market, us stock market
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4/30/07 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Targets hit alerts: BEAV
Buy alerts: ESV; CROX
Trailing stops: EDU; OIH
Stop alerts issued: ALJ; NIHD; SWN
SUMMARY:
- Inflation data is favorable but market ready to test the strong April move on the last day of the month.
- Core PCE heading in the right direction, but many fear at the economy's expense
- Pessimism rising nicely.
- Looking at the next stocks to rise as the leaders, overall market tests.
Money cannot push a tired market and take advantage of better than expected inflation data.
So much for the ability to consolidate the gains in place as the market has done after the prior three surges. There was some better inflation data as the core CPI came in flat and dropped the year over year rate to 2.1% from 2.4%. Futures bounced modestly positive on the news, but it was not going to be any rip-roaring start as those gains slipped away in NASDAQ ahead of the bell. After all, China raised its bank reserve requirements to 11%, insider sales jumped up last week, and the Wall Street Journal declared the rally to be just a liquidity bubble. None of those would be enough to stop the market when it was bent on rallying, but after the month-long run in April, the end of the month was at hand, and this kind of news was a good enough excuse to hit the sell button a few times.
A sluggish open met some selling, but stocks rebounded decently in the morning and held their own through lunch with a modest pullback. After 2.5 hours of flat-lining in consolidation mode the market made the break . . . this time to the downside. Through lunch everything was modest; modest breadth, modest volume, modest price changes. By the close and about 30 NASDAQ points to the downside, modest was not exactly the adjective describing the action. Spanking comes to mind. Recognizing that some might like a spanking, however, we will instead use the trite 'drubbing' to describe the action.
After a significant run the market is testing the gains as expected in the weekend report. The 'drubbing' was more than expected, however, at least in terms of volume and initial virulence. Of course that is how the late April pullback shaped up in its first week and it held the line just fine. Still, you don't like to see such strong starts to pullbacks as it gives little room for error. The indices managed to hold near support in one form or another despite the strong volume, but after a month (actually 6 weeks) of gains and the fourth test of near support, the market is primed for this test.
Technically the action was negative from about every angle you looked. The intraday action was high to low; the market tried to recover from early weakness and did rally back to recover lost ground and trade positive, but that obviously failed in the afternoon collapse. As noted, trade was higher with a clear distribution session. Breadth was pathetic at over -2:1. As for leadership, there were quite a few reversals from early surges higher (e.g. PCU, MA, GSF, ESV, OIH) as sellers uses another push higher to close out some positions at the month end. That was not all-inclusive, e.g. VLO and RS showed rather controlled pullbacks. Nonetheless when some leaders post sharp reversals you take note.
It was the end of the month, however, and a month that saw 75 points for the SP500 and 135 for NASDAQ. Some selling ahead of the month helps bolster the monthly investor reports and thus after a run there is always some profit-taking (that is why we took a lot off the table last week), and it snowballed Monday. Moreover, the indices held near support on the test, always a positive though it was just the first serious downside move following last Wednesday's sharp break higher. Indeed, NASDAQ gave back all of the Wednesday, Thursday and Friday moves in this one session. There are some mitigating circumstances to consider, but you cannot ignore the jump in volume on the fourth test of near support following a breakout such as that in early April. After such a run an index or a stock is ripe for a deeper test than the prior pullbacks.
THE ECONOMY
Core PCE closer to Fed's comfort range after a substantial decline.
The 0.0% reading for the month (0.1% expected and 0.3% prior) pushed the year over year rate to 2.1%, just on the high side of the Fed's comfort range (1% to 2%). A good indication but Monday investors were not ready to conduct any premature celebration (in anticipation of a 2% or lower reading). First, some were saying the number has been volatile, coming down from 2.4% in February. Of course that was up from 2.2% in January and 2.1% in both November and December. Thus despite worries of a 'fluke', it appears as if the fluke was the February reading as the 4 months surrounding the February number average just over 2.1%. Moreover, the chain-weighted reading of prices was a -0.2% for the month.
Second, the economic data is still coming in soft. Chicago PMI fell to 52.9 (55.0 expected) from 61.7. Well off the pace, but still well above the January and February sub-50 readings. After a couple of contraction months, two solid expansions are not bad. Still, after a long growth period the marked change is the two months of contraction. That is, however, not bad for a mid-cycle slowing.
A third problem that not many are citing is that a slower economy as currently in place does not necessarily mean slower inflation growth. Now we have seen inflation pressures ticking lower, at least as measured by the feds, and that has coincided with the economic slowing that started mid-2006. There is still enough inflation, however, to occasion talk of stagflation on the financial stations. Of course those who recall the 1970's almost have to laugh at what some are terming or are proselytizing as stagflation. It might get worse and worse if we continue down the path to importing inflation with a weak dollar policy, but for now and the present view of the future, talk of stagflation is rather preposterous.
They are correct, however, in that a slowing economy can lead to inflation as opposed to decreasing inflationary pressures as Fed rhetoric and Phillips Curve economics would have you believe. As former Dallas Fed president McTeer noted a few months back, expanding economic activity tends to alleviate inflation issues as the economy grows, meets demand, and thus works its way out of bottlenecks and shortages. Indeed, he is more concerned about inflation right now given the economic slowdown. That is the Fed's Pandora's Box, i.e. the fear of rising inflation in a slower growth or modestly contracting economy. If it tries to help the economy it may further fan inflation. If it cuts liquidity with rate hikes and lower money supply it can stall an already weak economy.
In the end, however, the key to problems is usually growth, and you can tell by the Fed's actions under Bernanke that it knows that, but it has to let the rest of the world and its Phillips Curve view of monetary policy know it is tough on inflation while at the same time trying to buy time to let the economy come back up and the inflation numbers to cool. The latter is working and the economy's slowdown is still shows signs of just mid-cycle type cooling. With housing still a drag past the end of the summer, an overall recovery is still well in the future.
THE MARKET
MARKET SENTIMENT
The Wall Street Journal lead story pushed the theme the recent gains were the result of an 'overleveraged bubble' that was bound to collapse. There is no doubt that the world is flush with liquidity from the economic boom and that money has to be put to work somewhere. The US financial markets are always a safe haven, but we are not the only country receiving the money. Emerging markets were the 2006 rage, but after the February and March short but hot scorching, investor appetite has cooled for them a bit. That has made the US markets a bit more lucrative, and indeed the April run was impressive off of that second leg of the short double bottom.
Thus there is some substance to the WSJ's claims. We have said similar things as well, i.e. despite a typically insufficient base the market has raced higher driven by the world liquidity, goosed by the better than expected Q1 earnings results. As for bubbles, they are very hard to quantify and to call. Sure the economy is slowing, but as we have said before, it is not the first stages of a recession but a mid-cycle slowdown. It is ours to screw up, i.e. if we implement trade restrictions, raise taxes back up, spend more, etc. If we are smart and dance with who brought us, then the economy can pause and move up again. Recall it was President Clinton's capital gains tax cuts that spurred the economy out of the mid-1990's malaise. Those who so staunchly supported him and his cuts are now trying to do away with similar tax cuts on dividends and capital gains. Yes, it is ours to screw up, and we usually do it by means of politics and government controls on money (the Federal Reserve).
Back the WSJ story. What does it have to do with sentiment? It is in the papers, it is a prominent headline, and that often means the opposite is true or is about to happen. Of course the market is primed for a bit more of a pullback here after a month-plus of gains, but not the bubble-busting category. The WSJ story underscores some continued negative views of the economy that started to take hold in the February/March selling and have hung on in the background since. The story looks a lot like a 'valuation downgrade' where a stock is cut to sell or hold because it is a strong stock and had outperformed the market. Now THAT is a great reason to cut a stock. If I had listened to that talk in the 1990's I would have sold DELL several times instead of riding it up through four splits.
Back in May 2006 the WSJ ran a story that there was a manufacturing boom in place and that the bull market was set in stone for a long time to come. Within a week the Dow started on an almost 500 point meltdown over the next two weeks.
The point: There is some value to a contrarian view with respect to very negative or very positive views of the economic and market future. When these type of stories hit the papers and magazines it is typically expressing a view that has been brewing for some time and is old news. Thus a contrary indicator though as noted, the market is due for more of a test than it has shown during this run.
VIX: 14.22; +1.77
VXN: 17.26; +1.8
VXO: 13.34; +1.29
Put/Call Ratio (CBOE): 0.95; -0.06
Bulls versus Bears:
Bulls: 51.1%. Down from 52.7% the prior week in somewhat of a surprise downturn given the market run higher. Of course that week saw the energy sector test and the market struggled as it did. Thus the decline. Up from 49.5% and 45.5% just a month back. It hit 50.5% level a couple of months ago though below 53.3% on the recent high. Bulls bottomed last summer near 36%. That is the lowest level since September 2006.
Bears: 26.1%. That fade in energy brought some bears in as well as they rose from 25.3%. That is still down from 27.5% three weeks back. 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 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).
NASDAQ
Stats: -32.12 points (-1.26%) to close at 2525.09
Volume: 2.13B (-0.91%). Volume was basically flat as techs whooshed lower, giving back the entirety of last week's move (as judged by NASDAQ). Volume was lower than last weeks upside volume so there is a bit of a silver lining.
Up Volume: 369.435M (-493.565M)
Down Volume: 1.753B (+595.569M)
A/D and Hi/Lo: Decliners led 2.33 to 1. Pretty ugly, matching the sharp decline. NASDAQ 100 (-1.23%) held up a hair better than NASDAQ overall, and that was the case on the upside as well.
Previous Session: Decliners led 1.59 to 1
New Highs: 147 (-16)
New Lows: 101 (+32)
NASDAQ CHART: http://www.investmenthouse.com/ihmedia/NASDAQ.jpeg
NASDAQ was thumped, giving back all of last week's gains in one session on sharply negative breadth and above average though lower trade than Friday and versus the other upside trade last week. It fell back through the November to February trendline (2448) and the 10 day EMA, landing right on top of the February closing high (2525). Good point to try and find support if this is going to be a shallow dip, but that initial dump lower suggests it could be more down toward 2500ish. Not that is where it gapped higher in April after gapping lower from there in late February. As noted before, that is an island reversal, and if it is going to hold that would be the point.
NASDAQ 100 faded as well, but it was much better off and held above the 10 day EMA on the close as well as the January and February peaks. The large cap techs have led this move and they are in good position here to test toward 1850ish and then resume.
SOX (-1.15%) was surprisingly resilient, showing decent relative strength and holding above the 10 day EMA as it tests the breakout from its 6 month range. It is still holding that breakout after the Monday close and as it was selling ahead of the rest of the market, if the market is going to find support with a relatively short pullback we will likely see SOX and SMH leading back up ahead of the others and after not much more pullback. Important to watch these two the next couple of sessions.
SP500/NYSE
Stats: -11.7 points (-0.78%) to close at 1482.37
NYSE Volume: 1.71B (+14.02%). Jumping volume as the NYSE indices, the leaders in the move, sold the hardest in a volume sense. Both SP500 and SP600 distributed, but the small caps were hit harder technically as they broke below near support while SP500 held it.
Up Volume: 343.938M (-205.178M)
Down Volume: 1.35B (+439.071M)
A/D and Hi/Lo: Decliners led 2.58 to 1. With the small caps getting peppered the breadth was not going to be good.
Previous Session: Decliners led 1.31 to 1
New Highs: 253 (+43)
New Lows: 36 (+12)
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
The large caps faded before hitting the upper channel line and fell back to hold just above near support at the 10 day EMA and the November/February trendline just below that level. The two-day lateral move with little lost ground changed on Monday as most of last week's move was lost as volume jumped. It is right over the near support, and it is going to give that break back over the trendline a real test. The 18 day EMA is at 1469; a full test of the breakout would take it back to 1460ish.
SP600 (-1.73%) was hardest hit when the energy stocks turned on it after sporting a stronger open. Fell through the 10 and 18 day EMA and the late February highs (422 closing). The small caps were a leader on the way up and now they have turned sour faster than the others. Downside leader as well? Outside the small caps, however, the other indices are still in very solid patterns.
DJ30
The blue chips tapped at the top of the channel on the early high (13,162) and then reversed to close lower on lower but still solidly above average volume. Still easily in the uptrend channel retaken last week but destined to test that trendline (13,020) from the look of it. That is typical after a recovery such as this and given the low odds of breaking to the upside as it did, the test is all the more important.
Stats: -58.03 points (-0.44%) to close at 13062.91
Volume: 264M shares Monday versus 271M shares Friday.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
TUESDAY
The leaders of late are still in pullback mode, e.g. the refiners, industrial machinery and manufacturing, etc. The overall market is a victim of its success of late what with the WSJ article and the sharper pullback Monday to end the month. There was some quarter end profit taking at work and when that got rolling it snowballed into some high volume selling that no one could or wanted to try and stop.
Earnings have driven this run through earnings season, and now that the song and dance is well known there could be a change of the dance step as the leaders thus far take a breather and the next sectors move up. For example, we have on the report and we are looking at more healthcare stocks that have worked quietly behind the scenes, setting up for a break higher when the market changed its focus a bit.
During April the industrials received most of the looks given the much better than expected earnings that stole the headlines. With those coming back down to work off some of the froth from those runs we could see those quiet companies in other areas make some moves. We are not going to forget about the other sectors that led higher; just be patient and let them come back to support and show us they can hold and set up a nice bounce pattern. With the end of April and the 'sell in May' mindset, this is somewhat of a transition point, and thus we want to see how those leaders hold up, i.e. if they can find support as they come back down.
That will tell us a lot more about the nature of this pullback that showed a stronger downside than the prior moves in this run. It is important not to let that first pullback throw you too much, however, and push you into a different mode, e.g. from upside to downside. Strong runs elicit strong responses. Again, let's see how these strong leaders handle the pullback and be ready for them while at the same time taking advantage of the next wave to move higher if it can get something pushing it (like more of that liquidity that the WSJ was lamenting).
Support and Resistance
NASDAQ: Closed at 2525.09
Resistance:
2531.42 is the February high (post-2002 high)
2548 is the November/February up trendline
2572ish is the top of the November/February channel
2875 from a July 1999 peak
2887 from a September 1999 peak
2920 from an October 1999 peak
Support:
The 10 day EMA at 2527
2523 is price resistance November 2000
The July/August trendline at 2521
2509 is the January 2007 high
2471 is the December 2006 high
The 50 day EMA at 2471
2468.42 is the November 2006 high
2460 is the March high
2405 is the 'hump' high
2400ish from the late November and late December 2006 lows.
S&P 500: Closed at 1482.37
Resistance:
1496 is a peak from July 2000
1500 from April 2000 peak
1520 from the September 2000 peak
1528 close, 1553 intraday from March 2000 all-time index peak
Support:
The 10 day EMA at 1480.61
1479 is the late November to February up trendline
1475 from peaks in December 1999 and January 2000
The 18 day EMA at 1469
1461.57 is the February 2007 high.
The 50 day EMA at 1445
1440 is the mid-January high
1439 is the March high
1432 is the December 2006 high
1425 is an interim high from November 1999
1410 is the 'hump' high
1408 is the November high
Dow: Closed at 13,062.91
Resistance:
13,165ish is the upper channel line in the November/February channel
Support:
13,020 is the former up trendline that marks the channel.
The 10 day EMA at 12,957
The 18 day EMA at 12,831
12,796 at the February 2007
12,700 is the early February peak intraday high
12,623 is the mid-January high
The 50 day EMA at 12,615
12,511 is the March intraday high.
12,499 is the December intraday high.
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 30
Personal Income, March (8:30): 0.7% actual versus 0.5% expected, 0.7% prior (revised from 0.6%)
Personal spending, March (8:30): 0.3% actual versus 0.5% expected, 0.7% prior (revised from 0.6%)
Core PCE, March (8:30): 0.0% actual 0.1% expected, 0.3% prior
Chicago PMI, April (9:45): 52.9 actual versus 55.0 expected, 61.7 prior
Construction Spending, March (10:00): 0.2% actual versus 0.3% expected, 1.5% prior (revised from 0.3%)
May 1
ISM Index, April (10:00): 51.0 expected, 50.9 prior
Pending home sales, March (10:00): 0.4% expected, 0.7% prior
May 2
Factory orders, March (10:00): 12.1% expected, 1.0% prior
Crude oil inventories (10:30): 2.074M prior
May 3
Initial jobless claims (8:30): 325K expected, 321K prior
Productivity, Q1 (8:30): 0.8% expected, 1.6% prior
ISM services, April (10:00): 53.0 expected, 52.4 prior
May 4
Non-farm payrolls, April (8:30): 100K expected, 180K prior
Unemployment rate (8:30): 4.5% expected, 4.4% prior
Hourly earnings (8:30): 0.3% expected, 0.3% prior
Average workweek (8:30): 33.8 expected, 33.9 prior
End part 1 of 3
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