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money investment, day trading
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6/06/07 Investment House Daily
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SUMMARY:
- Data gives no reason to buy so market continues its pullback from the trendlines.
- Productivity revised lower, raising fears of an end to an era.
- The pullback is getting to the point where it has to begin making a stand as DJ30 shows its first real weakness on this latest uptrend.
Market continues its test with some ugly internals and mixed volume.
There were enough negatives early to continue the pessimism from Tuesday. Morgan Stanley gave Europe in general a triple sell rating, expecting a 14% correction over the next six months. Of course the European markets held to continental history, i.e. fleeing in the face when faced with adversity. Productivity was lower, but though it was in line, unit labor costs tripled the number originally reported, and on the heels of Bernanke's robotic-like speech Tuesday (must . . . fight . . . inflation . . .), the ECB 25 basis point rate hike, and some additional hawkish Fed-speak, the fear of more Fed action versus less Fed action gained a greater following. Specifically, Dallas Fed president Fisher was turning his views, now saying world capacity could be a headwind versus a tailwind as he previously believed (in other words, world capacity is getting stretched). Clearly the world central banks are talking, getting their various acts in line.
Gasoline inventories jumped to 3.5M versus the 1.5M expected, and that impacted gasoline, but oil rose anyway (65.92, +0.31). Lower gasoline was not enough to offset all of the perceived negatives; the market is in pullback mode and gasoline was last week's story (as prices fall on rising inventory) even though refinery runs fell 1.5% from last week. Stocks sold off on the open and were down through lunch, sporting some hefty 1%ish losses and some massively weak breadth (-5:1 on NYSE; honey, that's weak breadth). That is almost getting extreme. A few bounce attempts were kicked around; no one wanted to get in.
Once lunch was over the buyers tried their hand and managed to coalesce a rebound. Slow and steady, but moving higher. Similar to Tuesday, however, it was unable to reverse the damage, and though NASDAQ did again recover better than its brethren, it still closed well into the red. The bell left the indices all significantly lower, but also in their uptrends. Importantly, volume was lower on NASDAQ, but it was higher once more on NYSE, this time popping above average late in the session. That could be classified as some late buying volume, but that is a tough call. Something of a mixed picture, eh?
Technically it was indeed a bit mixed. The price action was not mixed, it was just bad. When the indices lose a percent in a day that is a pretty solid knock, particularly in this rally. As noted, breadth was atrocious, but it did come off the -5:1 shown on NYSE midday (closed -4:1; quite a recovery, huh?). The volume was the key. It was lower on NASDAQ though still above average, but the lower volume on the selling was super. NYSE trade was the worry. It was running lower but picked up speed late and closed higher, making for 2 consecutive days of distribution. Tuesday was not much given volume was below average. Wednesday it moved to average, and NYSE trade was one of our watch points for the move. Thus we go on alert and if positions cannot hold near support we start calling them in.
Overall, the indices are still well within their uptrend channels despite two sessions to the downside. In addition, many of the leaders on the way higher are still in good shape, and are in the process of setting up new buys just as we have been looking for. It may not be over yet, but there is still some room to test and maintain the uptrend. Further, NASDAQ still looks quite solid despite selling as well. It has slipped some punches the past two days, managing to rebound a bit better than the others, demonstrating that relative strength. We have seen this movie before, however, and thus you have to be wary of NASDAQ taking the reins and trying to carry drive the market. It gets some more money when the NYSE indices struggle, but it has been unable to take the clear lead. Thus we still have to be wary of that NYSE higher volume as this pullback progresses.
THE ECONOMY
Productivity slips to 1% growth rates, sparking the Greenspan debate.
During the Greenspan era the Fed often took refuge behind the best historical productivity rates in the economy's history. There was the technology build out, and while many technology companies did not make it through the downturn that started in 2000, their products did, and many businesses are now reaping the reward of all that hardware and software they bought. That jumped productivity growth to impressive and consistent 2+% levels.
Now the productivity curve is not as steep. Indeed, productivity has trended lower since 2005. That raises the worry that the economic 'speed limit' many Phillip's Curve enthusiasts hold dear has to be lowered. The theory is that if productivity falls while costs rise, businesses cannot overcome the rising employment costs with productivity fixes and thus have to pass the costs off to customers. Lions, tigers, and bears, oh my!
Even if you buy into this theory that prosperity engenders inflation, the facts from the report get in the way. Though Q1 unit labor costs rose more than expected at 1.8% (1.0% expected and 0.6% originally reported), the annual growth rate is the lowest in five quarters. This just goes to show that when the market is in distress (euphemism for this pullback) it tends to fixate on any data close at hand that supports its self-flagellation desires. Thus a bump higher for the month and suddenly the productivity gains are for naught.
While there is no doubt that 2% productivity growth is great for an economy, a 1% growth rate is historically excellent. Moreover, productivity is just one piece of the puzzle. If you establish an economic environment that provides businesses and individuals with reasonable tax rates and capital access you get non-inflationary growth. That is the real lesson of the past 50 years, not some abnormal advance in productivity that was part of, not the cause of, the strong yet low inflation advance since the early 1980's.
THE MARKET
MARKET SENTIMENT
VIX: 14.87; +1.24. Volatility broke past the 2 month range. That is about all you can say about it. It is not challenging the March highs (21.25) by any stretch at this point, and indeed we don't want it to just yet.
VXN: 17.2; +0.76
VXO: 14.58; +1.46
Put/Call Ratio (CBOE): 1.13; +0.18. Jumped back over 1.0 on the close with just a bit of selling. It pumped out 4 consecutive 1.0+ closes on the last round of market lethargy (a.k.a. a pullback from another run higher) before it was ready to resume the move.
Bulls versus Bears:
Bulls: 53.8%. Down from two weeks at 54.3%. A modest dent in the bullish sentiment but not much. Still very close to the 55% considered bearish. As we have noted before, there are other indications that the 'average Joe' as CNBC termed them is still not in the market. It is where you would expect when the indices are hitting new all-time or multiyear highs. It was 45.5% nine weeks back, making a steady climb higher. Still well off the 60% hit in December 2006. For reference it bottomed in the summer 2006 near 36%.
Bears: 21.5%. Moving higher off 20.7% hit last week after spending some time below the 20% level considered bearish (19.6% the prior week). A quick plunge from 24.7% over the past month. A significant drop from the 27.5% hit 7 weeks back. The rally has taken the bears down from the recent highs near 29 (28.4% and 28.9%), 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: -24.05 points (-0.92%) to close at 2587.18
Volume: 2.163B (-3.02%). Volume was still above average but was lower on the session. That makes the Tuesday higher volume selling and subsequent rebound look even a bit better. Unfortunately NYSE did not fare as well, but at least NASDAQ is giving the appearance of attempting to make a stand. For what is another question.
Up Volume: 526M (-201M)
Down Volume: 1.609B (+149M)
A/D and Hi/Lo: Decliners led 2.15 to 1. Not that great, but much better than the almost -3:1 during the session and the -5:1 NYSE stocks sported midday.
Previous Session: Decliners led 1.76 to 1
New Highs: 91 (-55)
New Lows: 68 (+19)
NASDAQ CHART: http://www.investmenthouse.com/ihmedia/NASDAQ.jpeg
NASDAQ was not immune from the selling. With almost a 1% decline it was hacking like a 2-pack a day smoker. That was the day, however, not the overall pattern. On the low it held the 18 day EMA and it rebounded to close near the November/February trendline. Volume was still above average but it was lower. The sellers were not gaining a lot of strength. NASDAQ rallied to the top of the channel last week, broke through but showed a doji, then started to test back. Thus far the volume is a bit higher but it is still under control, and it is still holding near support and its trend. So far an orderly pullback, showing some relative strength. As noted above, however, we have seen this before, and the last time NASDAQ started to crumble after its attempt at valor, and it took the NYSE indices to get the move started again.
SOX (-1.13%) is doing what it was famous for over the prior 6 months, i.e. showing some signs of strength but then totally folding up the tent. It stalled at the top of the trading range at 493 last week and it has totally given up the breakout, having failed an attempt to retake the breakout. It still has the 90 day SMA at 480 to try and hold it up, but we are not looking for SOX to be the leader it was trying to morph into back in late April and early May.
SP500/NYSE
Stats: -13.57 points (-0.89%) to close at 1517.18
NYSE Volume: 1.548B (+2.34%). Volume was up for the second day with no rebound from the NYSE indices. Of course, trade was only up to average on the session, so it was no climatic changing, icecap melting event. It was not good; volume has not been stellar on NYSE though it did improve over the past couple of weeks. The NYSE indices have a very important test in the very near future.
Up Volume: 213.923M (-131.042M)
Down Volume: 131.953M (-1.02B)
A/D and Hi/Lo: Decliners led 4.1 to 1. Rebounded from -5:1; what a move. This was a level that you would be calling extreme after a more sizeable move lower.
Previous Session: Decliners led 2.85 to 1
New Highs: 65 (-108)
New Lows: 53 (+13)
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
SP500 sold for the second session on rising trade, and unlike NASDAQ there was very little late rebounding action. More of a high to low session Wednesday that the sellers were not willing to step in front of. It cracked the 18 day EMA and closed just below that level, breaking two rungs of near support (the 10 and 18 day EMA) though still in the channel as it is above the November/January trendline. It has held the 18 day EMA on the prior tests lower, and given the rising trade, this is, as noted, an important test for SP500.
SP600 (-1.07%) is struggling as well as energy and metals took some hits Wednesday. Unlike SP500, however, it managed to rebound and hold its 18 day EMA. It is back inside of its channel after breaking through it. The fade back is often a result, though we were looking for the other indices to follow the DJ30 lead. Despite the selling, SP600 is still easily within its channel.
DJ30
The blue chips sold in rising, above average volume, cracking the 18 day EMA for the first time since late March. Indeed, this is the first time the index touched the 18 day EMA since early April. A change of character and likely to come back to test the break from the upper channel line. With the likes of IBM selling off on strong volume the index was heading lower for the session. A change of character is always noteworthy, and as DJ30 has been the clear leader, it is even more so. With SP500 selling on stronger volume, the two main money leaders are weighing on the market.
Stats: -129.79 points (-0.95%) to close at 13465.67
Volume: 236M shares Wednesday versus 223M shares Tuesday. Above average volume as it breaks the 18 day EMA is not the best action.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
THURSDAY
Not much on the economic calendar that is market moving with jobless claims, wholesale inventories and consumer credit, but the retailers start to report their same store sales and there are more retail earnings coming out. We are not expecting any major weakness in the numbers even with the BBBY warning on Tuesday.
This data is not likely market moving because the market is moving on what it wants to move on right now, and that entails looking at the negatives. Just as it had its head down and surged higher on whatever the news was, now it is taking the negative view. That is nothing abnormal; the market rises and falls not on the day to day news (at least with respect to its trends) but on its outlook for the future. The indices have put in stellar moves, particularly DJ30 and SP500, and those are starting to show cracks even as the economic news continues improving. That doesn't mean the economy is heading downhill, it simply means the market rallied on the expectation of solid news and now it is doing the backfilling.
The main question this time around is whether the indices once more pull out of the selling and rally once more or if this time the legs are too tired to pull it off and need another rest to freshen up a bit. DJ30 broke through the 18 day EMA on rising volume after not even touching it on this latest run. Mr. Hyde is trying to make an appearance, and with the downside volume on the blue chips, a test to the upper channel (another 125 points or so) is not much of a further run.
All of this selling is providing the pullback in many leaders that we have looked for, and several on the report are coming back to near support. We want to see them hold there and of course make the rebound. There may be some intraday undercutting of the support and then a recovery; given the higher volume on DJ30 and SP500 this is a bit trickier. If in doubt, take the rest off the table and then see what happens. We banked a lot of nice gain on the way higher and thus we have some leeway to see how the leaders test back. Indeed, we are going to have plays for these stocks for when they hold and start the rebound. After all, NASDAQ is still holding up well though as discussed above, it has let us down before.
Support and Resistance
NASDAQ: Closed at 2587.18
Resistance:
2590-95 from an April 1999 interim peaks
2612 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:
2588 is the November/February up trendline and it is trying to hold
2580 is the May high
The July/August trendline at 2564
2549 is a newer trendline from December/January that has propped up NASDAQ in April and twice in May.
The 50 day EMA at 2538
2531.42 is the February high (post-2002 high); 2525 intraday
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
S&P 500: Closed at 1517.38
Resistance:
1520 from the September 2000 peak
1528 is the March 2000 closing high
1553 high intraday from March 2000 all-time index peak
The upper trendline of the channel at 1538
Support:
The 18 day EMA at 1519 is trying to hold
1509 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 1492
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
Dow: Closed at 13,465.67
Resistance:
10.7% above its 200 day SMA where it struggled the third week of May.
The 18 day EMA at 13,489
The 10 day EMA at 13,556
Support:
13,360 is the upper channel line in the November/February channel
13,240 is the November/February up trendline that marks the lower channel.
The 50 day EMA at 13,172
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.
June 4
Factory orders, April (10:00): 0.3% actual versus 0.6% expected, 4.1% prior (revised from 3.5%)
June 5
ISM Services, May (10:00): 55.5 expected, 56.0 prior
June 6
Productivity, Q1 (8:30): 1.0% actual, 1.0% expected, 1.7% prior
Crude oil inventories (10:30): Gasoline inventories jumped 3.5M versus the 1.5M expected
June 7
Initial jobless claims (8:30): 312K expected, 310K prior
Wholesale inventories, April (10:00): 0.3% expected, 0.3% prior
Consumer credit, April (3:00): $6.0B expected, $13.5B prior
June 8
Trade balance, April (8:30): -$63.0B expected, -$63.9B prior
End part 1 of 3
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money investment
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