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5/09/07 Technical Traders Report
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Technical Traders Report Subscribers:
MARKET ALERTS
Target hit alerts: None issued. Letting many positions continue their runs higher
Buy alerts: ICE; SU
Trailing stops: None issued
Stop alerts: None issued
The market alert service is a premium level service where we issue intraday alerts relating to the general market conditions, when stocks hit action points (buy, stop, target, etc.), and when we see other information impacting the market or our stocks. To subscribe to the SSR alert service you can sign up at the following link:
http://www.investmenthouse.com/alertttr.html
SUMMARY:
- Stocks start weak, drift up to FOMC decision, then spark up new gains.
- FOMC talks tough but once more takes away some of the hawkish language.
- 'It's different this time' surfaces Wednesday, indicating sentiment getting extreme in some areas.
- FOMC rally cuts short the brief attempt at consolidating last week's gains.
New money uses FOMC statement to swoop in.
Wednesday was more of the same, at least when the market has consolidated its several runs during this last rally. Stocks started lower after the earnings reports, dominated by CSCO's disappointing outlook, failed to bring in more money and a new merger in the copper industry (BHP/RTP) failed to stoke the buyers. That was just fine. After all, the market surged last week and it needed its beauty rest in order to avoid that haggard, partied too hard look that often leads to stumbling back down.
As is typical on FOMC decision days, however, after that lower open stocks started drifting higher. An hour into the session the oil inventory report topped expectations with 5.6M new barrels of crude versus the half million expected. Gasoline rose 400K over the 200K anticipated, and distillates surged 1.7M, easily topping the 300K expected. Refinery runs notched up 0.7%, and that was below the 1.0% expected. That overall report, despite mediocre gains in gasoline and refinery runs, sparked stocks higher, getting them out of that morning funk that saw NASDAQ shed 17 points. It held at the 10 day EMA once more, however, as it and the rest of the indices started another slow, steady rise.
The drift higher continued up to the FOMC announcement with the indices returning basically to the flat line before getting some cold feet just ahead of the news. When the Fed basically left the statement the same and rates at 5.25% the market stumbled around for a half hour then figured it was good news. Money that sat out the morning action swooped in once the Fed confirmed what everyone appeared to know. That pushed the indices sharply higher with just over an hour left with a big spike. After that it was a slower but steady climb into the close.
Technically, the action was also more of the same. The market moved lower to higher with more money coming in and pushing the action once the FOMC decision was etched in the Federal Reserve annals. That pushed volume higher as the market rallied back from negative to positive, similar to the Tuesday action, but with much more force Wednesday.
Breadth was mediocre to crappy at 1.7:1 on NYSE and 1.2:1 on NASDAQ. That has some tongues wagging about the lack of strength, but they are viewing breadth in the wrong sense. Overall breadth is solid and trending higher. What you look for day to day with breadth readings are strong readings at key inflection points such as when the market makes a follow through move, a breakout, or resumes a run after a pullback (with the first two the more critical to see good breadth). The rest of the time market kind of coasts on that momentum until the next key point comes around. As A/D was solid on the breakouts and the resumptions of the moves, the breadth Wednesday, and indeed the past week, is not something to get worked up about.
The Wednesday move did extend the recent run without much of a breather other than the wide spot in the road on Tuesday and the two-day rest on NASDAQ (Monday and Tuesday). It simply did not have enough time take a proper breather even as compared to the other consolidations on this move. Thus it is more extended without much rest. Leadership, however, still looks pretty solid as the money wanting to get in the market lasers in on different groups. Wednesday saw some metals breakout from bases (e.g. CNX), some energy make good moves (e.g. BTU, SU, HAL), and some big equipment break higher from new bases (e.g. CAT, DE, JOYG). Extended, but finding good patterns to move into, not just chasing stocks that are way too extended. That is action you have to like even in the backdrop of the extended move. It does not trump the run without a rest, but it shows how these runs can continue beyond what you would reasonably expect out of an upside run before a consolidation.
THE ECONOMY
FOMC continues to whittle away at its hawkish statement while still talking tough.
The FOMC kept the Fed Funds rate at 5.25% as expected, and it kept its statement basically the same, worrying that capacity utilization levels would keep inflation pressures up and thus the need to fear inflation more than economic slowing. That was the last line of the statement, the catch-all that it uses to color everything it said up to that point. It was there the prior FOMC decision after the Fed removed the 'additional firming' language, trying to mitigate that deletion in a somewhat awkward attempt at a slight of hand move.
That catch-all phrase tried remained in the current statement as noted, but it was further eroded by another change in the front end of the text. The Fed said the economy had weakened. Not mixed as in the last statement, not improved as in the statement before that. No, it had weakened. Thus though the Fed's official stance is that inflation is the major threat to the US economy, it is changing the statement word by word, showing it is indeed changing its position despite the hawkish Phillips Curve sweeper at the end of each policy missive. It is concerned the housing market will have deeper effects than it is currently showing and that $4/gallon gasoline will undermine the consumer (despite the Fed's public commentary that higher gasoline prices are inflationary). Thus it is subtly but clearly showing a shift in its hard inflation stance in preparation for the day it may have to lower rates.
Why should the Fed worry about lowering rates versus the status quo no change or a hike? Some say the economy is strengthening or ready to strengthen again (me for one) and that will raise inflation pressures. No, that is not the case. A stronger economy is aids disinflation by producing the goods and services needed to satisfy demand. The amount of money injected into the system determines if there is inflation or not, and it does not matter whether the economy is surging or slogging: if you get too much money you get inflation. Thus the stagflation in the 1970's even with the pathetically weak economy.
First, with the Fed's primary directives as controlling price fluctuations while maximizing economic potential, the current conditions allow it to maximize growth a bit more. The core CPI is at 2.1% annually, and it is trending lower and will be firmly below 2.0% in short order if this trend continues. Inflation peaked in October 2005. It took awhile to break down the CPI, but it always does because it is lagging. Thus even this lagging indicator has already peaked and is trending lower. It will keep trending lower unless we manage to forestall growth by raising taxes, inhibiting trade (as many in Congress were harping about once again on Wednesday), or spending way too much in federal programs. The Fed has one the war and it needs to stop fighting the battles. Similar to the Battle of New Orleans that was fought after the end of the War of 1812, someone needs to get a telegram to the Fed and let them know this war is over.
Second, the 3 month treasury is saying the Fed needs to come back a bit with rates to give the economy enough of the lifeblood it needs to continue the expansion. Sure money supply in the aggregate has grown at 8% on an annualized basis and is still injecting liquidity into the economy, but you have to look at what bonds are doing, particularly the 90 day. It is the canary of the economy. Not long back it was at 5.20% while the Fed Funds rate was at 5.25%. In short order it dropped to 4.88%, or 32 basis points. A cut to 5% would be the right thing to do according to the bond market, and as history shows, the Fed should follow the bond market and not try to lead the bond market up or down. Efforts to do so typically lead to very bad results.
Will the Fed do it? No it won't. It may be changing its statement so it can cut rates if it has to, but after its tough stance it cannot justify to the rest of the world cutting rates 25BP because the 90 day treasury has dipped. Most of the world's central banks follow the Phillips curve (one of the reasons our economy performs better) and they would think the Fed and Bernanke had gone nuts. No, the Fed won't cut rates unless something pretty ugly happens. Of course, as always, that will be too late. Maybe Bernanke will surprise us again and show he is truly a renaissance Fed chairman and follow the bond market while artfully explaining why. As things stand right now with the economy, that has a very low likelihood of happening.
THE MARKET
MARKET SENTIMENT
Wednesday we hear the 'it is different this time' phrase raise its head. That is always a warning sign that sentiment is getting extreme either upside or downside. We heard it in October 2002 when Bob Pisani reported on CNBC that the traders were saying the old indicators did not work anymore, that the market was just going down despite extreme sentiment, etc. When we heard that we were pretty surge the bottom was near, particularly given the extremes we were seeing in other areas.
Wednesday Pisani was trying to say that this rally was not like other rallies that would top out anytime soon because it was driven in large part by the M&A activity that was unprecedented in the history of US business. No doubt that M&A activity is helping keep the market higher as investors speculate on the next takeout, but this is not really different. M&A is just a reason for money to enter the market. Money is money. It seeks returns by whatever vehicle is present, and M&A is one of the ways money is seeking to make more money. There are also buy backs and there is an economic expansion. The money seeking returns uses whatever is available whether it is internet stocks in the late 1990's or M&A speculation in 2007.
Thus you have to be a bit concerned when you hear this kind of talk because things are not different, they hardly ever are. Lots of money out there wants to maximize returns. Speculation on M&A and talk of things being different is always an indication things are getting a bit overheated. Sentiment is a warning, but it is not a timing device. If we hear more of this kind of talk there is reason for concern.
VIX: 12.88; -0.33
VXN: 16.29; -0.77
VXO: 12.48; -0.48
Put/Call Ratio (CBOE): 0.74; -0.26
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: +4.59 points (+0.18%) to close at 2576.34
Volume: 2.183B (+8.2%). Volume jumped back above average as NASDAQ held the 10 day EMA and rebounded to a new post-2002 closing high. Once more there was buying, and once more it was stronger than on NYSE. Trying to take some leadership with this continued improvement in volume.
Up Volume: 1.241B (+95M)
Down Volume: 918M (-739M)
A/D and Hi/Lo: Advancers led 1.23 to 1. Pretty crappy as noted, but again, it was solid when it needed to be when NASDAQ made its breaks higher.
Previous Session: Decliners led 1.42 to 1
New Highs: 172 (+28)
New Lows: 54 (-10)
NASDAQ CHART: http://www.investmenthouse.com/ihmedia/NASDAQ.jpeg
NASDAQ had the best 'pullback' of the indices, tapping at its 10 day EMA on the Tuesday low and again on the Wednesday low, both following a soft Monday session. I guess you would call that 2 days and some change worth of a pullback and then a break higher Wednesday on rising trade. Not much rest but NASDAQ is just feeling its oats some after its late break to a new post-2002 high. It is still trying to assume more leadership, managing this upside even with CSCO heading south. It has yet to really take over, and it likely won't given the strength in the rest of the world economies that is demanding more of our industrial goods (remember we said the 'old economy' stocks from the 1990's are the new economy stocks of 2000 for the rest of the world). If the techs flex some muscle, however, that really energizes the market.
SOX (+1.69%) was the percent leader all session. It made a key move, putting that strength to good use as it broke above the late April and early May twin peaks. That clears the way for a much stronger upside move, and it also is playing a roll in NASDAQ's attempt at assuming some leadership.
SP500/NYSE
Stats: +4.86 points (+0.32%) to close at 1512.58
NYSE Volume: 1.558B (+3.7%). Volume moved back up and pushed at average, but unlike NASDAQ it could not break over that key point. Volume was low most of last week though it started decently on that reversal session. Trade has still not shown up in the same caliber as the gains would indicate, and that remains a concern for the NYSE indices. Perhaps it is just NASDAQ getting more of the trade as it tries some leadership and though lower, the NYSE indices follow along despite the mediocre volume.
Up Volume: 1.066B (+483.733M)
Down Volume: 477.218M (-426.506M)
A/D and Hi/Lo: Advancers led 1.71 to 1. Not bad. Not great but not bad.
Previous Session: Decliners led 1.44 to 1
New Highs: 278 (+115)
New Lows: 18 (-7)
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
After breaking over the late April consolidation to start May, SP500 continued the move Wednesday with just a day off Tuesday. Even that session was just an intraday shakeout as SP500 tested 1500 on the low and rebounded to recover most of the move by the close. Still trending up the 10 day EMA without much of a hitch in the get along, but it is also just about to bump into the top of its uptrend channel. Will it follow the Dow and breakout of the channel or won't it? Only the massive liquidity knows. This will be the first real test of the top of that channel since moving back in with the kids in mid-April. Even if it blows on through it will likely come back to test, but thus far it keeps moving up though that volume has us concerned.
SP600 (+0.53%) recovered from the Tuesday test of the 18 day EMA and broke to a new all-time high, extending the recovery after a couple of pretty shaky sessions to end April and begin May. It struggled Tuesday as energy struggled, and came back as energy rebounded that session. Wednesday it broke higher as energy and metals found their strength again.
DJ30
The blue chips simply continued higher. No real issue, just a modestly low open and then a reversal and rally to a new high. One day Tuesday that saw a test lower intraday and then a rebound, then back off to the races. Volume was up, moving toward average but still unable to take it out. It is now 9.9% above its 200 day SMA (12,155), but it is not showing any signs of struggle. It is closing in on 1000 points of gain since the mid-April test of the breakout move. That is a lot of ground in 4 weeks.
Stats: +53.8 points (+0.4%) to close at 13362.87
Volume: 237M shares Wednesday versus 226M shares Tuesday. Volume was up as the blue chips chugged higher once more. Volume was iffy on the move this week but getting back into shape now that the move is extended.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
THURSDAY
Back to the more mundane on Thursday with no Fed statement and earnings starting to wind down. That does not mean the news flow stops. Retailers will report their same store sales ahead of the retail sales release Friday. Those sales are expected to be weaker given that Easter came in March this year and pushed forward sales as seen in the strong March results. The results are expected to be weaker, though the luxury end has leaked out its results are strong. Accordingly stocks such as SKS have moved higher ahead of the results. Whether the results overall will be better and draw the retail sector higher as with earnings remains to be seen. With all of the money still wanting in the market, an upside surprise will likely pull more in.
Despite the gains in the indices without much of a breather, we continue to see solid stocks setting up and emerging from good bases or testing their recent breakouts. This even as we have many positions that are well into their moves, not at a buy point, but continuing to trend higher for us. We don't want to cut those moves off before their time, and on many we have already banked some gain so letting them run is a bit easier without that itch to take gains while the trend continues. We will continue to look at those stocks in good position to run higher as our new buys as the money comes in and pushes new sectors higher or starts leaders on another run after a breakout test.
The Wednesday action did not alleviate a somewhat overbought condition one bit, and thus the market remains stretched after last week's and this week's run. It tried to test to start the week but the FOMC got in the way. It may try to revert to the mean after the Fed-induced afternoon surge, but again, there are still good patterns that have set up while the market has rallied, i.e. those early leaders that lead the way and have tested back for their next move. Even if the market tests back those will be set to take off once more, moving ahead of the rest of the market.
Support and Resistance
NASDAQ: Closed at 2576.34
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:
2560 is the November/February up trendline
The 10 day EMA at 2558
The 18 day EMA at 2539
The July/August trendline at 2537
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 2494
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 1512.58
Resistance:
The upper trendline of the channel at 1516
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.
The 10 day EMA at 1499
1496 is a peak from July 2000
The 18 day EMA at 1488
1486 is the late November to February up trendline
1475 from peaks in December 1999 and January 2000
1461.57 is the February 2007 high.
The 50 day EMA at 1460
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 13,362.87
Resistance:
Another new high. Now 9.9% above the 200 day SMA where it started to struggle in late 2006 but no struggle yet.
Support:
13,245 is the upper channel line in the November/February channel
The 10 day EMA at 13,207
13,090 is the former up trendline that marks the lower channel.
The 18 day EMA at 13,072
12,796 at the February 2007
The 50 day EMA at 12,774
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): 5.6M actual versus 500K expected and 1.17M prior. Gasoline 400K actual versus 200K expected.
FOMC policy statement (2:15): Rates left at 5.25%, economy weaker replaces economy mixed language.
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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