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5/31/07 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Targets hit alerts: WNR; SAF
Buy alerts: CMI; GME; PCLN; TSO
Trailing stops: None issued
Stop alerts issued: None issued
SUMMARY:
- Wednesday momentum continues but stocks get cold feet ahead of jobs, PCE.
- GDP scrapes bottom while Chicago PMI sprouts wings.
- SP500 still trying to breakout to a new channel as P/E ratios hardly suggest an imminent meltdown.
Stocks struggle to hold early gains ahead of a jobs report.
The solid upside momentum from Wednesday held over to Thursday even in light of a weaker GDP that came in about half of the prior read. As is often the case, however, after the initial surge stocks peaked out and pretty much spent the session wandering laterally. DJ30 even closed fractionally lower while SP500 was basically flat. As usual, when the NYSE large caps rested NASDAQ and SOX moved higher. So did the small caps, but they are moving higher right now regardless of what the other indices do.
It was not just a jump and fade with no intervening news. It never is. In addition to the GDP clinker, M&A was active once more with WB and AGE linking up to form another big brokerage. CIEN beat on earnings and guided higher, sparking upside in all of the telecom equipment companies (and thus much of the leadership in NASDAQ for the session). The Chicago PMI was much stronger than expected. The market sank after the release. Oil inventories were much lower than expected, but gasoline was higher. Stocks rallied back. Oil was lower then higher (closed at 64.01, +0.52). Stocks were the same: up and down, with a hard drop just after lunch that pushed the indices flat to negative. It took an afternoon rebound to close them mostly positive, but even that run did not take them back to the prior session highs.
Technically it was interesting what with the bifurcation. Volume surged on both NASDAQ and NYSE. Good for NASDAQ and the small to mid-caps, but for the large caps that move the market it was a day of churn, i.e. high volume turnover after a run higher. In short, the sellers and the buyers are evenly matched, passing shares like hot potatoes. We were looking for perhaps SP500 to establish a new higher channel along the lines of DJ30, but just as it did last week, it showed a doji at the channel line, unable to crack through even with the high volume. As for NASDAQ, SP600 and SP400, they set new closing highs though they too (at least for NASDAQ and SP600) stalled at the at an upper channel line.
As noted, volume surged. Big volume. Volume on par or topping last Thursdays selling volume. Only problem is, sure wish there were stronger upside price moves to go with it. NASDAQ, SP600, SP400 were solids; DJ30, SP500 were the question marks with their action, but as we have noted before, it is a hard bet to get in their way. Breadth was another issue. At 1.4:1 a lot of the troops were not following higher, and with the small and mid-cap gains you would expect to see it a bit better.
So, the action was not a steady extension of the Wednesday gains. As has been seemingly the case with each move there are some issues. This time the large cap NYSE indices struggled, but at the same time we saw a similar theme: the techs picked up some steam and the small caps continued higher. SOX, the laggard Wednesday, was the leader Thursday. Similar to the 'Even Steven' Seinfeld episode, the market, similar to Jerry, evens out.
THE ECONOMY
Second Q1 GDP iteration pretty much stinks.
The 0.6 showing was half the 1.3% originally reported. Some inventory issues and what was called an export 'aberration' were blamed, but even if it hit 1.3% that is pretty slim pickings.
Of course it was not as bad as the 5 year low suggests. Personal spending was stronger at 4.4% over the 4.2% in Q4. Business investment popped 2.9%; equipment and software rose 2%. The trade gap dropped GDP by 1%; the weak -0.6% showing after an 11% gain in Q4. Inventory dragged down growth another 1%. Add them back in and presto, 2.6% growth!
Okay, back to reality. The report was slow. It follows a slower second half to 2006, and though there were some aberrations that won't be there in Q2, it was still a weak quarter. On the bright side there were indications within the report that the economy is moving in the right direction for a recovery. Everyone knew it was going to be weak, it was weak, and the contemporaneous reports are already showing a turn.
Chi-town PMI surges, one of the best leading indicators
Case in point. Chicago PMI rose to 61.7% from 52.9, easily topping the 54.0 expected. This is the second such reading in 3 months; up and down a bit but it is showing an excellent trend, and Chicago is a leader in the ISM ratings. Just last February it posted a 47.9 contraction.
The 'internals' were excellent. Production was 69.8, the third month it was above 62. New orders surged past 70 following sub-50 readings in January and February. Employment hit 57.3, well above 50. Prices paid rose to 70.2, easily topping April's 64.9 showing, but it was all energy. Outside of that prices were flat, showing little ability to 'pass through' costs.
Back in 2002 and early 2003 we saw the regional manufacturing reports firming long before the economy turned positive, but it was that changing trend that further solidified our view the economy had turned the corner. Right now there was no collapse, just a slowdown, but as we noted the past two months, the trend is turning back up after that mid-cycle slowing. Once more the regional manufacturing reports are showing what indicators such as ECRI forecast: a turn back up in the economy, and it is doing so in Q2, well ahead of the late Q2, early Q3 we were looking for.
THE MARKET
MARKET SENTIMENT
VIX: 13.05; +0.22
VXN: 16.86; +0.02
VXO: 12.76; +0.43
Put/Call Ratio (CBOE): 0.93; 0
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: +11.93 points (+0.46%) to close at 2604.52
Volume: 2.472B (+18.9%). Volume surged to match last Thursday's distribution volume. This time NASDAQ posted a gain as opposed to the loss that session. In addition, NASDAQ posted a new post-2002 high on the run, always a very good indication of buying by big money.
Up Volume: 1.591B (+165M)
Down Volume: 813M (+180M)
A/D and Hi/Lo: Advancers led 1.45 to 1. Pretty sub-par breadth for the move, especially considering the weak breadth on the Wednesday price surge. The large cap NASDAQ 100 was the leader (+0.53%) and thus the rather narrow A/D line.
Previous Session: Advancers led 1.27 to 1
New Highs: 220 (+69)
New Lows: 37 (-20)
NASDAQ CHART: http://www.investmenthouse.com/ihmedia/NASDAQ.jpeg
NASDAQ gapped higher on the heels of the Wednesday gains. Three tries at the upper channel line, however, and it was unable to make the break. As with SP500 NASDAQ could pull out the stops and break into a new channel. Of course, SP500 failed to do the same as well. In any event there was some strong upside volume as NASDAQ pushed to a new high and that is always good news even with the bump into the upper channel line.
SOX (+1.42%) was the market leader for the session, trying to get back its breakout from its six month range. Solid surge that cleared the 50 day EMA, but it is still the laggard for now, and with all of the false starts, the failed breakout, and summer, it is definitely in the Missouri 'show me' category.
SP500/NYSE
Stats: +0.39 points (+0.03%) to close at 1530.62
NYSE Volume: 1.856B (+18.71%). Volume jumped past even last Thursday's distribution trade, pushing well above average. Good for the small and mid-caps as they posted solid gains, some churn for the large caps as they struggled to hold the advance after the strong Wednesday action.
Up Volume: 1.017B (-206.406M)
Down Volume: 803.307M (+486.243M)
A/D and Hi/Lo: Advancers led 1.4 to 1. Very light considering the small and mid-cap leadership.
Previous Session: Advancers led 2.26 to 1
New Highs: 348 (+158)
New Lows: 28 (-10)
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
SP500 surged through its upper channel line to a new high but it gave the move up, closing right at that channel line. Strong volume as it showed a tombstone doji, and as noted that indicates some churn, particularly as SP500 once again bumps into the channel line that stalled it last week. It made a higher low in the channel before this move, and thus we are still looking for a breakout over the channel though it may test back some before it makes that move.
SP600 (+0.47%) broke to a new all-time high but it also stalled at some resistance at one of its upper channel lines. Solid action on the week by the small caps following last Thursday's selling. You have to like the rising volume on NYSE backing the move as well. May find a bit of resistance here after 4 upside sessions, but very solid underpinnings.
DJ30
The blue chips were out to another new high but had no inclination to hold it, fading twice into negative territory, the second in last hour. Volume was up as well, topping average as the blue chips showed a doji. As with SP500, that can indicate some churn preceding a pullback, but thus far each pullback has met with new buying. With many industrials remaining in solid shape to run higher, this continuing pattern remains.
Stats: -5.44 points (-0.04%) to close at 13627.64
Volume: 243M shares Thursday versus 224M shares Wednesday. A bit of churn as volume jumped but DJ30 ran in place. Some shares were unloaded, but there does not appear to be heavy turnover.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
FRIDAY
The jobs report, personal income and spending, and the April PCE are all on tap, topping off a week of important data. The week also saw the indices rebound from last week's distribution, hitting new highs in the process. You can pick at the move all you want (and heaven knows we have), but with positive inflation data, a Fed at least on hold, and an improving economy, the underpinnings remain strong.
Despite the gains and the bullish investment advisor sentiment, there is another fundamental reason for the solid market underpinnings: P/E ratios remain very conducive to further gains even after four and one-half years of rallying. Back when the market started to get out of control and topped in early 2000, the SP500 P/E ration was 32 times earnings. Right now it stands at 18 times earnings. There is still a lot of upside room to grow, and with earnings results set to improve as the economy again expands, they won't catch those 2000 levels anytime soon.
Thus when we see the negative views espoused on many of the financial stations we like what we hear. The logic is rather simple: DJ30, SP500, SP600, SP400, DJ20, etc. are at new highs, just topping those old highs. Ergo the market is overpriced and ready to collapse. Again, stocks simply are nowhere near the P/E ratios they were at that point. Indeed, the old economy now new economy stocks may sustain even higher P/E ratios this time around. That remains to be seen and you don't want to get caught saying this time things are different, but as noted earlier this week, it is just a different group of stocks enjoying the apple of the market's eye.
Thus while we can spot problems with the indices and indeed we have openly voiced our discomfort and doubts as the move unfolded, we can also find a lot of leadership stocks that are not extended and are still ready to move higher. As we often say, you have to go with what the market tells you as opposed to your guts. Thus we see SP500 bumping against its channel line on higher volume, but we also see a lot of large caps stocks that are in solid position to move higher. Maybe it is due for a pullback, but if we see them break higher we won't stay out just because SP500 appears extended. Indeed, we are looking for a break above the old channel line to follow DJ30's lead. Of course, we still have to follow the leaders versus what we think to be the case. Reconciling what the market does versus what you think it should do is the hardest part of stock investing. If you are going to be successful you have to quickly learn that humble pie doesn't taste that bad if you eat it fast.
Support and Resistance
NASDAQ: Closed at 2604.52
Resistance:
2609 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:
2590-95 from an April 1999 interim peaks
2580 is the November/February up trendline
2580 is the May high
The July/August trendline at 2575
2548 is a newer trendline from December/January that has propped up NASDAQ in April and twice in May. Interesting.
2531.42 is the February high (post-2002 high); 2525 intraday
The 50 day EMA at 2525
2523 is price resistance November 2000
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 1530.62
Resistance:
The upper trendline of the channel at 1532
1528 close, 1553 intraday from March 2000 all-time index peak
Support:
1520 from the September 2000 peak
The 18 day EMA at 1513
1505 is the late November to February up trendline
1500 from April 2000 peak
1496 is a peak from July 2000
The 50 day EMA at 1485
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 13,627.64
Resistance:
Now just 9.7% after the selling (hit 10.7% on the prior sessions) above its 200 day SMA
Support:
The 10 day EMA at 13,523
The 18 day EMA at 13,432
13,365 is the upper channel line in the November/February channel
13,250 is the November/February up trendline that marks the lower channel.
The 50 day EMA at 13,098
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.
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
May 29
Consumer confidence, May (10:00): 108.0 actual versus 104.5 expected, 106.3 prior (revised from 104.0)
May 30
FOMC minutes (2:00)
May 31
Q1 GDP preliminary (8:30): 0.6% actual versus 0.8% expected, 1.3% first reading
Initial jobless claims (8:30): 310K actual 315K expected, 314K prior (revised from 311K)
Chicago PMI, May (9:45): 61.7 actual versus 54.0 expected, 52.9 prior
Construction spending, April (10:00): 0.1% actual 0.1% expected, 0.6% prior (revised from 0.2%)
Crude oil inventories (10:30): -2M actual versus 300K expected and 1.9M prior
June 1
Non-farm payrolls, May (8:30): 135K expected, 88K prior
Unemployment rate, May (8:30): 4.5% expected, 4.5% prior
Hourly earnings (8:30): 0.3% expected, 0.2% prior
Average workweek, May (8:30): 33.8 expected, 33.8 prior
Personal income, April (8:30): 0.3% expected, 0.7% prior
Personal spending, April (8:30): 0.4% expected, 0.3% prior
Core PCE inflation, April (8:30): 0.2% expected, 0.0% prior
ISM index, May (10:00): 54.0 expected, 54.7 prior
Michigan sentiment, May final (10:00): 88.0 expected, 88.7 prior
End part 1 of 3
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