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money investment, Breakout test
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5/08/07 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Targets hit alerts: SBUX
Buy alerts: RIG (new buy)
Trailing stops: RIG
Stop alerts issued: OO; VTIV
SUMMARY:
- Stocks sell early then bottom midmorning as the money moves in on a dip.
- Real estate agent group joins the crowd, predicts a negative 2007 new homes market.
- Cisco results not enough to satisfy investors as market keeps one eye on the earnings, one on the Fed
Stocks try to pullback but money moves in again and holds them steady.
There was more of the same in the way of news: M&A (MT buying AK in the steel sector), earnings (AQNT, CVS and WYNN beat while LAZ, DUK, EP, HET; MMC missed), intrigue (HPQ had to reveal its guidance early given the disclosure of an internal memo discussing the same), and housing worries. All were considered, all seemed to have little impact as the market seemed bent on selling regardless of the news.
Indeed the sellers were in control to start, sending DJ30 down 75 points, SP500 9 points and NASDAQ 20 points. In an early alert we indicated we were watching to see if another midmorning bottom occurred, and sure enough an hour into the session the market did turn and started a steady climb back up. Energy stocks were weak once again, continuing their recent slide back, but oil bottomed as well in the morning (closed at 62.26, +0.79, ending a 7 day slide), and when it started back up the energy sector went with it.
The rest of the market recovered as well, bouncing above near support and marching higher into the close with the indices closing mixed but all near flat. There was a test, but not much of one before the money circling and looking for an opening moved in. What looked to be the start of a more traditional pullback after another run higher bounced right back up with an intraday shakeout, i.e. a quick dip lower and then a recovery.
This action is similar to other moves on this run where the market consolidates 'in place,' meaning instead of a steady pullback to support with declines over several sessions it moves up and down in a range intraday with the closes grouped rather tightly. The chart pattern is a lateral move with intraday reaches lower. Think of it as picking up a dirty rug and giving it a quick shake each day. The top dirt comes off each day along with a bit of the more embedded dirt. After a few days the rug is clean enough to leave alone for awhile longer. In market terms the dips lower induce some selling and the more committed buyers move in after the selling to buy. After a few sessions the short term profit takers are gone and when that happens near term demand exceeds supply and you have the next upside run.
That is what the market has more or less done on this entire move though the last pullback a week ago was rather sharp on Monday and again on intraday Tuesday before the buyers just could not stand it anymore and jumped back in with both feet. That is reminiscent of 1998 and 1999 when the market and market leading stocks would rally then sidestep for three to four sessions, then rally again. The money was there, ready, willing and able to buy and it did until the Fed dried up the money supply. No money meant no bids and that meant no buyers. Open bomb bay doors.
So, on Tuesday the market sold but recovered, suggesting another attempt at a consolidation in place. It is not a done deal, of course. The sharper selling a week ago indicates a little more unrest among the longer term players than the previous consolidations. CSCO was definitely not wowing investors after hours even with John 'gosh yes' Chambers beating the enthusiasm drum. At the least it looks like a couple more days of this kind of action, but the likelihood is still more pullback before this is done.
Technically it was a churn session, i.e. where the market is at a peak, volume increases, and the indices basically run in place. At the stop of a run that shows buyers and sellers evenly matched after the buyers were in charge on way up. As much of the volume came on the march back up after the early selling, however, it is not a classic negative price/volume session. There was some buying pushing the volume after the early first hour selling, and that drove volumes up. There is no doubt the indices are still extended here after 5 up weeks, but after another 3 to 4 day lateral move (NASDAQ is already on its second consolidation session) with some up and down intraday action to shake out the loose dirt, the market will be in place to move up again if the money is still at the ready to buy.
There is risk here that should not be totally discounted. The market is extended with DJ30 about 10% above its 200 day SMA, a point where it has struggled. Five weeks of upside with little testing since the early April breakout, and only one real test in the past 8 weeks since bottoming in mid-March. The market has to prove it has the strength to consolidate in place and then continue the next bounce, but the action of stocks on Tuesday suggested that for now the strength is there. Once more it is a day to day event, however, as earnings season winds down, the FOMC makes its next policy iteration, and we move into the May to September season.
THE ECONOMY
NAR (National Association of Realtors) throws in the towel and also calls for a down 2007.
Finally everyone is getting on the dejected, no hope side of the housing sector. The homebuilders cashed it in a month ago (surprising it took that long) and since have pushed out their recovery forecasts to late 2008 from sometime in 2007. Have to like that; let those storm clouds gather. Tuesday the NAR said that new home sales would be down in 2007 (-2.9%) for the first time since the Great Depression. As we noted in an intraday alert, it makes a nice headline, but the two economic periods can hardly be lumped together.
In any event, that was more fodder for the housing funeral that some consider the anti-Christ of the US economy. It is of course not a positive for the economy. Historically, significant slowdowns in the housing market are followed by economic downturns. We don't want to say this time it is different as that typically bites you on the behind because what seems to be different is usually just a change in the color of the varnish. In this housing run, however, the housing market started early thanks to 9-11, and it continued thanks to 9-11 even as the economy fell into recession. Housing is typically an early cycle event as consumers sate pent up demand following a recession with new digs. This time it was the 'cocooning' effect that kept it going a lot longer than normal.
Some see that as requiring an opposite reaction, i.e. a more prolonged and deeper decline. Given the relative health of all other areas of the economy, we don't view it entirely that way. Indeed, the housing market topped in summer 2005. Really. The decline only got ugly when the last mortgages made AFTER the peak (when housing became more difficult to move) got very creative. Those could not withstand any stress, and once the ball started rolling they started coming apart.
In reality then, this is not the start of the housing market fade, it is the last part of the correction where the chafe that was created late in the cycle had to be winnowed out. The fact that it is now occurring and doing so at a rapid rate is good. The way we look at it, the more gloom the better. Have to get everyone down on it for it to get over. The fact that every industry group (always the last hold outs) are down on housing prospects and are pushing out their view of the recovery date farther and farther is a very good sign it is going through its death throes at the bottom.
THE MARKET
MARKET SENTIMENT
VIX: 13.21; +0.06
VXN: 17.06; +0.08
VXO: 12.96; +0.3
Put/Call Ratio (CBOE): 1; +0.3. Didn't take much to bounce it back up to 1.0 on the close, an indication of underlying concern about the rally. Good. That is what you want to see.
Bulls versus Bears:
Bulls: 51.7%. Bearly bumped higher, but given the market's gain, the modest rise from 51.1% was something of a surprise. Moving basically laterally, down from 52.7% two weeks back though up from 49.5% and 45.5% just a month back. Hit 53.3% on the recent high. Bulls bottomed in the summer 2006 near 36%.
Bears: 24.7%. Bears predictably declined, moving down from 26.1% the week before. Hit 27.5% a month back and 25.8% the week before that. The rally has taken the bears down from the recent highs near 29 (28.4% and 28.9%), but 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: +0.8 points (+0.03%) to close at 2571.75
Volume: 2.017B (+14.97%). Volume jumped up over the Monday low trade. It was still below average, however, and below all of the prior three weeks. That is a good indication even if you don't want to give the index credit for the intraday rebound. Lower volume overall means even if you look at this negatively, there were fewer sellers or 'churners' than the recent buyers.
Up Volume: 1.146B (+376M)
Down Volume: 1.657B (+756M)
A/D and Hi/Lo: Decliners led 1.42 to 1. Was a lot worse and was recovering into the close. NASDAQ 100 (+0.20%) was leading the way back up so breadth was a bit out of whack.
Previous Session: Decliners led 1.14 to 1
New Highs: 144 (-23)
New Lows: 64 (+13)
NASDAQ CHART: http://www.investmenthouse.com/ihmedia/NASDAQ.jpeg
NASDAQ was down early, shedding 20 points from Monday's doji after that week of gains. It fell to the 10 day EMA (2553) and then reversed to close fractionally higher. Volume, though below average, improved as it rebounded off that near support. Not much of a decline, but a second day of the latest consolidation as the techs try, along with the rest of the market, to pull off another consolidation without giving up much ground. Thus far this is still a steady trend higher up the 10 day EMA.
SOX (-0.54%) may have just made its higher low, tapping at the 10 day EMA as well and rebounding. It did not turn positive, but it did recover nicely and is trying to make a higher low at this near support to give it another good ramp to run higher from to continue the breakout over the peak in the breakout move at 507.
SP500/NYSE
Stats: -1.76 points (-0.12%) to close at 1507.72
NYSE Volume: 1.503B (+13.68%). Volume was up on NYSE as well as the indices recovered from the early selling. As with NASDAQ, it was below average as well. Thus if you view the action as negative with the modest loss on higher volume, the trade was still lower than the prior upside trade. Now NYSE has not had the same solid price/volume action as NASDAQ, and that is one of the reasons we feel there may be a transition of sorts here between NYSE and NASDAQ (though the Cisco results may put that off somewhat).
Up Volume: 582.08M (-190.953M)
Down Volume: 903.724M (+396.44M)
A/D and Hi/Lo: Decliners led 1.44 to 1
Previous Session: Advancers led 1.22 to 1
New Highs: 163 (-137)
New Lows: 25 (+10)
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
After 5 upside sessions the large caps gave back a hair. Intraday they tapped 1500, not even making it to the 10 day EMA (1496) before moving back up to close flat. As with NASDAQ, the volume improved as the index recovered from the first hour losses. That shows money moving in on the perceived opportunity. That is just one session, however, and Tuesday marks the first day of consolidation or rest for SP500 from this last break higher. It is closer to the top of its uptrend channel than the bottom, and thus the likely course of action is more consolidation either similar to Tuesday or with a bit more downside toward the 10 day EMA to try and set another move even after this 5 week breakout run.
SP600 (-0.14%) was really sucking air early on as it sported a 1+% decline. It undercut the 10 day EMA and tapped at the 18 day EMA on the low. Then oil bottomed and so did energy stocks. The small cap index bounced back up through the 10 day EMA and posted a minimal loss, easily holding its uptrend over the 10 day EMA with the recovery. Things got a bit hairy a week ago with that quick market sell off, but SP600 has recovered nicely. Indeed, SP400, the mid-cap index, made it to positive on the close.
DJ30
DJ30 sold off 75 points then recovered to close modestly lower. Similar to SP500, after 5 days of gains it stalled some, very similar to what it did in late April where it moved laterally for three sessions, let the 10 day EMA catch up to it, and then took off for another week of gains. It has risen steadily for 4 weeks without hardly a hiccup. The move took it to a new high and through its former uptrend channel. It is about 9.5% about its 200 day SMA. It is at a point it would typically start to struggle, particularly given a 4 week run higher. The Tuesday action suggested that it is going to try and work another lateral move and then move higher. You have seen the commercials about the power of cheese; in the market the cheese is money. DJ30 has enjoyed an impressive run because money keeps champing at the bit to get in. Conventional wisdom says it is overdone here, and you have to watch for signs of distribution (higher volume selling), but it will have to really show itself. Thus far no sellers of any number have wanted to step in front of it.
Stats: -3.9 points (-0.03%) to close at 13309.07
Volume: 226M shares Tuesday versus 207M shares Monday. Lower trade on the latest rise, then some churn on Tuesday. As with the other indices, there was a volume bump as the Dow recovered, so it was not necessarily selling volume. Let's call it some churn just to cover the bases, but it was still below average and below the prior sessions so it was not much in the way of churn.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
WEDNESDAY
Cisco's much anticipated earnings were out after the close and while it beat on the bottom line and really did well on the top line, investors wondered why more didn't pass through to the bottom line. For one, CSCO likes to beat by 0.01, just what it did. It has always done that and now that it is on top of its earnings it is managing them well. Guidance, however, did not help. CSCO said growth would be in the 15% range and that did not help; indeed it dumped a bit lower during the conference call. Now Chambers has managed to turn his stock's fate on the morning after television appearances. He is on CNBC first, then Bloomberg Wednesday. A lot of enthusiasm and 'gosh yes' responses may not get the job done this time.
Wednesday is also the FOMC decision day as well as oil inventories. There is hope that a build in gasoline will finally show up now that gasoline has topped $3/gallon on the national average. When it did that the prior two times in 2005 after the Gulf storms and again in the summer of 2006 demand dropped and gasoline supplies built up. That is what some are saying, but it may be a bit early for that to occur as prices just started topping $3/gallon consistently in more than just a few regions.
The market tends to drift higher from midmorning into the FOMC decision at 2:15ET. Wednesday the CSCO results will likely give it every opportunity to do so at least with respect to what the after hours indications are showing. We always have to see what the morning brings, but CSCO certainly was not engendering a sense that all was well in techs.
What we are likely to see is another session where the market consolidates the last round of upside gains. The stage is set for a weaker open and then another midmorning rebound or drift higher into the FOMC meeting. Many sub-currents to the session, however, and we will have to watch to see if some higher volume selling sets in (distribution) that could signal a deeper sell off. It is the beginning of the May/summer season and you have to be vigilant for a change in buying habits.
Thus far the money has kept the consolidations short and shallow. In addition the indices are well above even near support so they have a bit of ground they can give. NASDAQ is worth keeping an eye on not only because of the Cisco earnings disappointment but also because NASDAQ started its consolidation move Monday, ahead of the rest of the market. Last week NASDAQ showed some indications it was trying to take some leadership. If it can continue an orderly consolidation even with the Cisco earnings that will show another leg is coming.
Support and Resistance
NASDAQ: Closed at 2571.75
Resistance:
2585ish is the top of the November/February channel
2590-95 from an April 1999 interim peaks
2778 from a July 1999 peak
2887 from a September 1999 peak
2920 from an October 1999 peak
Support:
2559 is the November/February up trendline
The 10 day EMA at 2553
The 18 day EMA at 2535
The July/August trendline at 2534
2531.42 is the February high (post-2002 high)
2523 is price resistance November 2000
2509 is the January 2007 high
The 50 day EMA at 2490
2471 is the December 2006 high
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 1507.72
Resistance:
The upper trendline of the channel at 1515
1520 from the September 2000 peak
1528 close, 1553 intraday from March 2000 all-time index peak
Support:
1500 from April 2000 peak is breaking away held Tuesday.
1496 is a peak from July 2000
The 10 day EMA at 1496
1486 is the late November to February up trendline
The 18 day EMA at 1485
1475 from peaks in December 1999 and January 2000
1461.57 is the February 2007 high.
The 50 day EMA at 1457
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 13,309.07
Resistance:
Again broke to a new high, surpassing resistance. Now 9.6% above the 200 day SMA where it started to struggle in late 2006.
Support:
13,239 is the upper channel line in the November/February channel
The 10 day EMA at 13,172
13,080 is the former up trendline that marks the lower channel.
The 18 day EMA at 13,038
12,796 at the February 2007
The 50 day EMA at 12,750
12,700 is the early February peak intraday high
12,623 is the mid-January high
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.
May 7
Consumer Credit, March (3:00): $4.5B expected, $3.0B prior
May 8
Wholesale inventories, March (10:00): 0.3% actual versus 0.4% expected, 0.4% prior (revised from 0.5%)
May 9
Crude oil inventories (10:30): 1.17M prior
FOMC policy statement (2:15)
May 10
Initial jobless claims (8:30): 315K expected, 305K prior
Trade Balance (8:30): -$60.0B, -$58.4B prior
Treasury budget, April (2:00): $143B expected, $118.8B prior
May 11
Retail sales, April (8:30): 0.4% expected, 0.7% prior
Retail Ex-autos (8:30): 0.5% expected, 0.8% prior
PPI, April (8:30): 0.6% expected, 1.0% prior
Core PPI (8:30): 0.2% expected, 0.0% prior
Business inventories, March (10:00): 0.2% expected, 0.3% prior
End part 1 of 3
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money investment
Breakout test
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