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money investment, day trading
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5/24/07 Investment House Daily
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SUMMARY:
- Market initially likes the economic data, but worries re rising interest rates and a China trade war give sellers an opening they can use.
- Durable goods positive but lower while business investment posts a second straight upside month.
- April new home sales surge 16.2%.
- Selling had to come at some point, and the fade will set up more buy side.
Sellers finally get enough ammunition to knock the market down.
The first real economic data for the week was solid. Durable goods orders were less than expected, but saw business investment improve for the second straight month. March was higher revised higher. Sweet. The economic recovery continues. Jobless claims were back above 300K, but at 311K not bad at all. New home sales jumped 16.2%, a 14 year high in growth rate.
The market initially reacted positive to the data, posting modest gains to start the session. We were not buyers, however, because we wanted to see how the morning bounce shook out. After showing signs of stalling on DJ30 and SP500 this week we were not ready to jump right in at the open on some pre-Memorial Day cheer. As it turns out, there was not much cheer at all after this session.
The economic news was well received, but after the new home sales were strong once again, the good cheer turned to worry. The economic data has improved week after week the past two months. The Fed is still talking tough on inflation. Bond rates are rising (4.84% close on both the 2 and 10 year). Ergo the Fed might raise rates versus hold pat. Worried selling started.
Also, there was tough talk on capitol hill regarding Chinese trade and currency levels. Bush was parroting the same old tired arguments we hear about unfair currency levels, lack of consumption, etc. Schumer hit the microphones threatening trade sanctions once more as done last fall. This is one of the three potential screw-ups we wrote about in the spring when we discussed the mid-cycle economic slowdown and how we could derail the recovery to come. Thursday the market apparently had the same view. At least enough that the sellers had an angle to attack and drive a wedge between buyers and their favorite stocks.
After hinting at selling back the past week these two details were enough to seal the deal. SP500 gapped lower in the second hour and there was never an attempt to recover. Steady downside all session. This time the sellers did not let up.
Technically the session was as ugly as the point loss suggests. High to low into the close with no attempt at a bounce. Volume surged to the highest level in a month. We thought it would remain light into the weekend given Memorial Day and the M&A activity, but that was not the case. The sellers came out of hiding in a big way. Breadth was extremely weak (-4.3:1 NYSE); there were few places that were not hit. Even utilities were worked over. Energy is pulling back as well though to different degrees; some were dry holes while others are just fading to test recent moves. That will likely take more than just a session to work through.
The indices were down as well, though as with many sectors, the degree of selling varied. DJ30 and SP500 sold off on volume as they too underwent distribution, but even with a 1% tail kicking SP500 was still in its uptrend channel, holding its 18 day EMA on the close. NASDAQ fell through its up trendline and the 18 day EMA, busting near support. SOX crashed back into its old trading range though SMH, the semiconductor ETF, is still holding that level. The small caps did not escape either, but both that index and NASDAQ managed to hold above the February high, the last major high preceding this last run. Small victory. Small indeed.
This was the pullback that was setting up on SP500 and DJ30 the past week; it had to happen at some point. As for NASDAQ, well, another attempt at leadership gone awry. We knew this was coming but thought the market would make it to the weekend without pulling down given the M&A activity to start the week. As it turns out we had to start taking some positions off the table to protect some gains; we have been taking gains on the upswings all along and were protecting some gain Thursday. This will lead to the pullbacks we want, and indeed many look surprisingly good today, continuing pullbacks they started earlier in the week, basically ignoring the market mugging. Hat tells us not all of the money was running from the market.
THE ECONOMY
Durable goods upswing shows some durability.
Durable orders posted their third consecutive gain making it 5 out of the 6 last months. The 0.6% was less than the 0.9% expected, but March was revised higher to 5% from the 4.3% originally reported. Ex-transportation the sales rose 1.5%. If you take out transportation in March that month gained 1.5% as well. Pretty consistent if you remove the inconsistencies.
Metals gained 3.5% along with electrical equipment while computers fell 7.8%, another month lower. Communications equipment was also fell, dropping 5%. The bright spot once more was a second straight month of gains in business investment. The 1.2% April gain was a shadow of March's 4+% advance, but it was a second straight gain after 4 months of decline. Business is starting to invest again as the economy improves; no inconsistency in that given that business was what drove the economy out of the recession and was the element lacking again as the economy slowed in its mid-cycle slowdown.
New home sales post a surprisingly strong gain.
April sales rose 16.2%, but of course March (-1.4%) was revised lower to 844K from 858K, so part of the gain was the government juggling its figures once more. Nonetheless, the 981K far outpaced the 860K anticipated, and after 3 downside months any gain was welcome.
Inventories fell 1.5% to 538K, a 6.5 month supply that is well below the 8.1 months the prior month. Median prices tumbled 11%, however, reversing the 8% annualized gain in March. The south held the gains, rising 89%.
The National Association of Realtors has stated its belief that new home sales bottomed in Q1. This surge certainly gives some weight to that theory, but as we noted last month, there is still a lot of pending construction to hit the market, and this one month is not likely the bottom. The bottom is coming, but it will be later in the year. Of course bottoms start forming when you start seeing some volatility in the trend. April's results are starting to show that volatility.
THE MARKET
MARKET SENTIMENT
That record 7.48% short interest level on NYSE did not trigger any further upside, but it did prove profitable to those shorts on Thursday. The market was at highs so the short interest was not a clear harbinger of further gains. It does show, however, a respectable level of concern about the rally, and after some pullback this high level helps set the next move.
VIX: 14.08; +0.84
VXN: 18.02; +1.09
VXO: 13.81; +1.02
Put/Call Ratio (CBOE): 1.15; +0.15. Third consecutive session above 1.0. Similar to the short interest, the high levels indicate a belief the market will fall, and it did on Thursday. Bigger picture the high levels indicate anxiety, and a pullback will be ripe for upside.
Bulls versus Bears:
Bulls: 54.3% for the second straight week. Still bumping up against the 55% level considered bearish. It remains too high, but as noted above, there are other indications that say that there are potential investors out there that are still apprehensive. Nonetheless, it is where you would expect when the indices are hitting new all-time or multiyear highs. It was 45.5% eight weeks back, making a steady climb higher. It has not topped its recent high at 53.3% but is well off the 60% hit in December 2006. For reference it bottomed in the summer 2006 near 36%.
Bears: 20.7%. After a month below the 20% level considered bearish (19.6% last week), bears are on the rise. Well, they are stirring; the level hardly indicates they are ready to charge. A big plunge the past three weeks from 24.7%. Quite a drop from the 27.5% hit 6 weeks back. The rally has taken the bears down from the recent highs near 29 (28.4% and 28.9%). It is now matching its January and February lows. For reference, 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: -39.13 points (-1.52%) to close at 2537.92
Volume: 2.431B (+14.32%). Volume hit the highest since the first of May reversal that saw new money come in. After trying to wash out that prior distribution with last week's rally, the sellers were in and pretty much wiped out a week's upside work in one session.
Up Volume: 307M (-447M)
Down Volume: 1.993B (+756M). Very lop-sided downside at -6.5:1. Second day of selling and already hitting toward an extreme level.
A/D and Hi/Lo: Decliners led 3.15 to 1. Heavy.
Previous Session: Decliners led 1.38 to 1
New Highs: 104 (-87)
New Lows: 60 (+14)
NASDAQ CHART: http://www.investmenthouse.com/ihmedia/NASDAQ.jpeg
The techs broke sharply lower, giving back most of last week's move as once more the NASDAQ failed to hang onto a leadership attempt. Money moved toward the techs as the SP500 started to struggle. On Thursday the techs were not getting any money. Indeed, money was on the way out as volume shot higher and prices dove. NASDAQ undercut the 10 and 18 day EMA. On the low it tapped the February high and managed a feeble recovery. Two days of selling and NASDAQ is at a key support level that runs down to 2525. The 50 day EMA (2516) is close as well. All are in play.
SOX (-1.60%) completed the undercut of the 50 day MA and landed on the 90 day MA. That pretty much wiped out the breakout over 493 that marked the top of the 6 month range it broke out from in mid-April. Parabolic and now in the middle of its prior range. SMH sold as well but managed to hold its breakout, closing right at the 50 day EMA.
SP500/NYSE
Stats: -14.77 points (-0.97%) to close at 1507.51
NYSE Volume: 1.771B (+10.37%). Volume jumped to the highest of the month as SP500 and SP600 fell back from the upper channel trendlines. Distribution for sure as many wanted out. Holding support for now, but if this higher volume continues they too will be trying to pop this support.
Up Volume: 322.581M (-446.605M)
Down Volume: 1.437B (+619.283M). At -4.4:1 not as bad as NYSE, but hardly a show of relative strength.
A/D and Hi/Lo: Decliners led 4.32 to 1. Man what a drubbing.
Previous Session: Decliners led 1.44 to 1
New Highs: 127 (-165)
New Lows: 44 (+19)
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
After three dojis that failed to take out the prior high on a closing basis SP500 turned to the downside. So many were anticipating an easy break over the old high that it simply could not make the move stick. After three tries (three strikes?) the right news came along to send it lower. It held the 18 day EMA and remained above the up trendline, still in the channel. Volume was up; they were being sold. Technically showing a crack after failing to take out an old high, and that is not a great signal as it shows buyers jumping in. The key, however, is how it responds in the following sessions after that initial blood letting.
SP600 (-1.44%) was hammered along the lines of NASDAQ, but its selling was not as complete. It managed to hold its October/January up trendline on the close, but let's face it, SP600 made that level in two sessions. There is considerable downside momentum after the small caps showed some leadership once more. Key test range for the small caps from here down to 425 or the 50 day EMA at 423.
DJ30
The blue chips finally cracked some. A run to a new all-time high and then a rollover on rising, above average volume. Not the heaviest trade of the month, but not a slacker. It closed just below the 10 day EMA, still not in any full flight lower. It still has the 18 day EMA and the upper channel line below it. DJ30 was indeed abnormally extended for one run. A test lower to the channel line looks likely, and a move down to the trendline at 13,250ish would not be out of the ordinary or all that bad considering the run higher.
Stats: -84.52 points (-0.62%) to close at 13441.13
Volume: 240M shares Thursday versus the below average 208M shares Wednesday. Volume came back in big and it drove the blue chips lower.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
FRIDAY
The selling had to come eventually, and after better than expected earnings and better than expected economic data the past month, the market was looking over its shoulder to see if something was coming up behind it. The solid housing starts made many realize that, golly gee, the economy is not about to roll into the abyss because of housing. The record gains even suggested the economy was going to expand. After rallying on better news the market finally got enough positive data, so much it finally conjured up a Fed rate hike as a possible result. If the US kicks up some trade dust with China that only adds to the troubles. While both of those are less than likely, with the indices hitting new highs after more than two months of gains this finally was heavy enough data to keep the selling alive to the close.
As noted above, we have seen one to two day hiccups in this rally that gave way to more upside as the ready money made its way in. This was an uglier day than the downside two weeks back (at least on DJ30 and SP500; NASDAQ was about the same), and after rising higher the market has farther to fall. We are starting to see virulent downside sessions in the run, and that shows there is money moving out of positions, Thursday included.
After a big run when you start to see money coming out you have to start protecting positions. We were doing that Thursday, closing down the remaining parts of some plays we had already taken gain, preserving some gain on those. With the increasing struggles and higher volume selling the past few weeks you cannot tell exactly where the selling will stop. Thus we will continue to protect positions and see how the market shakes out. Many strong stocks were back on Thursday and still have some ways to go. That is okay because we will get new buys on them once they are through and then we move back in when they start back up.
Friday the market starts with some downside momentum given the close at the lows and the high volume off of the highs. It also brings the existing home sales numbers at 10ET. We will see if that works to offset some of the concerns the Thursday data churned up. Ahead of the weekend there may be a rebound attempt before another potential round of merger news. This rally certainly has more lives than a cat, but after the periodic higher volume selling sessions you have to give deference to the Thursday move and see how it plays out. If NASDAQ and the other indices bounce back on some lower trade with big name stocks rising on lower trade we are going to use that to move on out of some positions. If stocks start lower and then reverse as they did two weeks back we are not going to be too fast to move into new positions as the action, particularly on NASDAQ the past few weeks (distribution, a rebound, then the Wednesday and Thursday selling), suggests it is not just a one-day event.
After the solid gains it is better to back off from a lot of new upside and let the market get through the turbulence. Won't hurt to look at some downside, however, and as unlikely as it seems, we already see some good stocks moving into position, stocks that started to correct some on their own ahead of this last selling. Those will be tempting, but we need to see good moves for us to draw some good money for them.
Support and Resistance
NASDAQ: Closed at 2537.92
Resistance:
The July/August trendline at 2565
2580 is the November/February up trendline
2580 is the May high
2590-95 from an April 1999 interim peaks
2605 is the top of the November/February channel
2778 from a July 1999 peak
2887 from a September 1999 peak
2920 from an October 1999 peak
Support:
2531.42 is the February high (post-2002 high); 2525 intraday
2523 is price resistance November 2000
The 50 day EMA at 2515
2509 is the January 2007 high
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 1507.51
Resistance:
The 10 day EMA at 1514
1520 from the September 2000 peak
The upper trendline of the channel at 1529
1528 close, 1553 intraday from March 2000 all-time index peak
Support:
1500 from April 2000 peak
The 18 day EMA at 1506
1500 is the late November to February up trendline
1496 is a peak from July 2000
The 50 day EMA at 1478
1475 from peaks in December 1999 and January 2000
1461.57 is the February 2007 high.
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 13,525.65
Resistance:
The 10 day EMA at 13,449
Now just 9.5% after the selling (hit 10.7% on the prior sessions) above its 200 day SMA
Support:
The 18 day EMA at 13,339
13,318 is the upper channel line in the November/February channel
13,245 is the former up trendline that marks the lower channel.
The 50 day EMA at 13,015
12,796 at the February 2007 high
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 23
Crude oil inventories (10:30): 2.0M actual versus 1.2M expected, 1.061M prior
May 24
Durable goods orders, April (8:30): 0.6% actual versus 0.9% expected, 5% prior (revised from 3.7%)
Initial jobless claims (8:30): 311K actual versus 300K expected, 296K prior
New home sales, April (10:00): 981K actual versus 860K expected, 858K prior
May 25
Existing home sales, April (10:00): 6.10M expected, 6.12 M prior
End part 1 of 3
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money investment
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