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world stock market, us stock market
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6/07/07 Stock Split Report
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Stock Split Report Subscribers:
MARKET ALERTS
Targets hit alerts: None issued
Buy alerts: None issued
Trailing stops: BIIB; ESV; MA; SWN; YUM
Stop alerts issued: DRI; PXP; STLD; TSO; VCLK
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/alertssr.html
SUMMARY:
- Market suffers a third downside session as indices break trendlines on some hefty trade.
- Interest rates are telling a good story, not a bad one.
- Wholesale inventory sales show demand is ramping up.
- Retail sales weak miss the mark again but stronger than April.
- No sign of the selling slowing, but shorts likely to cover some ahead of the weekend.
The selling intensity grows along with the economic recovery.
Last night we said the market tends to overreact in the near term, and with the Thursday action that point was only underscored. Interest rates were once again used as an excuse to sell as the 10 and 2 year treasury yields moved over 5% (closed at 5.02% and 5.12% respectively). Interest rates, however, are not indicating any negatives at all. They are telegraphing economic improvement as the yield curve reverts and starts pricing in economic growth in the future. Indeed, interest rates are doing the Fed's job for it. There is no rate hike ahead because of rising rates. Thus the market has overreacted to the interest rate story, or as we said last night, it has used the rate story to sell following a long run higher.
You could not see the whole story if you watched some of the financial stations, however. You can flip the channels and see the level of market understanding among the reporters. Some stations today were breathless about the action. Others were calm and giving orderly analysis. You find yourself gravitating toward the latter simply because they are less like listening to a punk rock group. In any event it was all rates and no substance for much of the day, outside of some typically solid commentary from a few who see the big picture. The impression anyone would get from viewing the commentary was that higher interest rates were ipso facto bad for the economy. More on interest rates later.
On top of the rising US rates, New Zealand announced a surprise rate hike, and investors around the world took that as an indication the central banks were indeed colluding to slow economic growth and snatch economic stagnation from the jaws of prosperity. Same store sales failed to pass muster for a second month with 50% missing their estimates. That was better than April where 80% missed, but no one was in the mood to look at facts. The data only worked to add to the angst though if you follow their line of logic, weaker sales should be positive as they would counteract indications of stronger economic improvement.
Whatever the story, the market was viewing it negatively once more and using it to sell back some gains. Stocks gapped lower and sold all morning. There was a lunchtime double bottom attempt that tried to break upside. Sellers sold it. The ensuing run lower doubled the morning's losses and then another double bottom in the afternoon. It broke higher and started to really cut into the losses. Sellers sold it. That pushed the indices to session lows on the close.
Technically the action was about as grim as it gets. The indices popped trendlines on the way lower though NASDAQ and SP600 held their 50 day EMA on the close while SP500 is trying. Volume was sharply higher on both NASDAQ and NYSE. Breadth was massively negative at -11:1 on NYSE. After three days of selling leadership started to buckle under the strain. The selling intensity has accelerated and nothing is indicating any slowdown, particularly with the Dow and SP500 breaking key levels the past couple of sessions and the jump in selling volume.
Other indications suggest the pessimism is extreme such as the extreme breadth and the huge short interest. The put/call ratio has jumped back above 1.0 for three straight sessions. The sentiment indicators are jumping, but after such a solid move higher can these really be indicative of a turn back up after 3 downside days and roughly 3% losses on the major large cap indices? The other tests in the run lasted 3 days or less, but this one has more teeth to it, more along the lines of March.
That doesn't mean they won't find some support soon. NASDAQ lagged and it is already near its February high. SP500 still has a way to go, but not a massive decline to get there (about 30 points). That is a logical bounce point, to at least start the base. There are also many stocks that are still holding up nicely after three days of selling, and if they continue to do so that is another indication a bottom is near. You typically don't wipe away this kind of selling in one session as it requires a base similar to March. Those stocks that hold up, however, will start higher ahead of the rest of the market and thus we continue to watch for those that hold their patterns during this selling.
THE ECONOMY
Interest rates are not the boogey man.
After refusing to respond to Fed rate hikes all during the rate hiking (when doing so would have taken the heat off), when rates finally start to rise on their own due to economic growth prospects and thus doing the Fed's job for it, that is viewed as some sort of end to the economy as we know it. Some argue that higher rates will squelch the private equity buying due to a lack of cheap money. Well, if the economy is still expanding as all indicators show, then it will be worth to pay up with a little more interest expense.
And the economic improvement is the crux of the matter. Just today wholesale inventories showed a very decent rise at 0.4%, but sales jumped almost three times that amount. There is a lot of demand at the wholesale level, and that translates into the same at the consumer level. It is rather clear that higher interest rates are not crimping the economic expansion, they are a symptom of it. The yield curve has reverted to positive as interest rates return to the typical pattern of pricing in longer term economic growth. Too much of the time, however, the neophytes in the financial arena who were not here to see the progression from the 1960's, the horrid 1970's, the rebirth in the 1980's, and the paradise lost due to policies in the late 1990's, view interest rates as inflation. Hardly. High interest rates are a symptom of inflation, not the cause, and not all rising rates are caused by inflation.
If you want to see if there is inflation, look at the inflation indicators. The TIPS spread (Treasury inflation protected securities) is indicating nothing of the sort. Actual inflation is trending lower. Inflation pressures, the forecasters of future inflation, continue to decline according to ECRI's indicators, and they have been dead spot on with respect to the economic slowdown and recovery, and inflation as well.
In time the market will respond to the good news as good news. It is understandably worried what the Fed will do given all the hawkish talk and world central banks still raising rates. Again, however, it has overreacted in the short term as it typically does. That creates headaches as the market works out the kinks, but longer term the market gets it right. After all, the market itself forecasted the solid improvement in economic data. As we have said, it is simply using this recent worry as the reason to sell back after some impressive gains.
THE MARKET
MARKET SENTIMENT
It is hard to say sentiment has been negative; anxious is a more accurate description. High NYSE short interest, consistently high put activity, and still pessimism on the part of the individual investor.
The indications spike higher Thursday, and if the market was not still at the tip of a long run higher they along with some other data would indicate a bottom forming up. Before the selling they kept the wall of worry above the market; it is still there, but the selling indicates it was not worry enough. Now we just want them to ramp higher and higher as the market makes this test. The faster they climb the better.
VIX: 17.06; +2.19. Strong jump but it is still off the March highs (21.25) and has more work to do. If SP500 moves down to the February high, it could to that work rather quickly.
VXN: 19.3; +2.1
VXO: 17.01; +2.43
Put/Call Ratio (CBOE): 1.24; +0.11. Another close above 1.0, the second straight.
Bulls versus Bears:
Bulls: 52.2%. Down from 53.8% last week and 54.3% the week before. That was last week, however, and the downdraft this week will likely make a significant inroads into this but it won't push it down to 40ish where it needs to be. Of course given the indices were hitting new all-time highs, bulls are at a level you would expect. Still well off the 60% hit in December 2006. For reference it bottomed in the summer 2006 near 36%.
Bears: 22.8%. Good jump higher from 21.5% as it continues off the 20.7% hit two weeks back after spending some time below the 20% level considered bearish (19.6% the prior week). It is still well off the 27.5% hit 2 months 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: -45.8 points (-1.77%) to close at 2541.38
Volume: 2.438B (+12.71%). Selling volume matched that in late May and the upside day to end that month. Clearly the sellers took control on NASDAQ as well after doing so on NYSE Wednesday. Strong enough to break through the trendlines and push NASDAQ to the 50 day EMA.
Up Volume: 321M (-205M)
Down Volume: 2.104B (+495M). 6.5:1 to the downside. Pretty heavy.
A/D and Hi/Lo: Decliners led 3.55 to 1. Ugly, but a mere pup compared to NYSE.
Previous Session: Decliners led 2.15 to 1
New Highs: 87 (-4)
New Lows: 91 (+23)
NASDAQ CHART: http://www.investmenthouse.com/ihmedia/NASDAQ.jpeg
After showing relative strength earlier in the week NASDAQ did what we somewhat expected, i.e. joining the downside. It broke the 18 day EMA as well as the remaining near trendlines, even the one from August 2006. The bell rang and stopped the selling just over the 50 day EMA (2538). NASDAQ is a bit interesting here. It has sold back as well, but it was a late comer to the new post-2002 high crowd. Thus it could legitimately find support at the February high at 2525. After hours NSM beat the street on earnings and was sharply higher though that did not pull the Q's up very much. Tough time for NASDAQ to take the lead here in early summer, so once more we are not banking on that.
SOX (-1.68%) was a dog once again, falling below the late May lows and now in the middle of the old 6 month trading range. Now it has to go back to basing once more. NSM will help, but it cannot overcome this selling alone.
SP500/NYSE
Stats: -26.66 points (-1.76%) to close at 1490.72
NYSE Volume: 1.908B (+23.23%). The highest NYSE volume in two months, and of course it came on a downside day as the NYSE stocks were pelted with rocks and garbage.
Up Volume: 103.748M (-110.175M)
Down Volume: 1.791B (+1.659B). Hugely negative down to up volume at 17:1. This is considered an extreme level you look for after heavy selling.
A/D and Hi/Lo: Decliners led 11 to 1. This is also an extreme level. We saw this in August and October 2002 as the market bottomed. Indeed it was one of the indicators that put together a picture of the market bottoming. As noted above, if the market was further along with the selling this would be quite powerful. As it is, it is still very significant; this kind of reading often precedes any bottoming, but the timing is hard to pin down.
Previous Session: Decliners led 4.1 to 1
New Highs: 40 (-25)
New Lows: 104 (+51)
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
Dove lower, falling through the November/February up trendline and down to the 50 day EMA (1492) and indeed cracking just below that level on the close. Big volume, massively negative trade, plowing thorough trendlines. Moreover, the selling intensity has increased with the downside losses rising. Typically a move starts with the stronger moves and then fades. Thus far it is showing stronger and stronger selling as more and more join in. This is an interesting point for the index, because below this the next legitimate support is at the February high at 1460 on the close, and that is over 30 points from the Thursday close.
SP600 (-1.89%) was only topped by the mid-caps with respect to losses. The move took the small caps to the 50 day EMA as well, a level coincident with its September/January up trendline. That double layer of ice makes this a significant level for the small caps, and how the respond here says a lot about their more immediate future.
DJ30
DJ30 sold again and similar to SP500, on the strongest volume since April. That break and close below the 18 day EMA did indeed indicate a character change, and Thursday Mr. Hyde was rampaging, breaking through the upper channel line and landing the blue chips right in the middle of its range. It is in the channel and above the November/February trendline, but we are not going out on any limb and predict it will hold and rebound from there (13,240). It is getting closer to near term oversold that could provide that bounce, but it has also been a heck of a run and likely a bounce will set up a bit more downside.
Stats: -198.94 points (-1.48%) to close at 13266.73
Volume: 298M shares Thursday versus 236M shares Wednesday. Volume ballooned as DJ30 fell back into its old channel. It could not hold the break above its longer term trendline, and it is interesting that DJ30 started to fall when once again it hit 10.7% above its 200 day SMA.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
FRIDAY
There will likely be some more downside to start Friday given the close at the lows and the massively negative market indications. That is not always the case; we have seen ugly selling disappear by the next morning though that is the atypical case. A further blast downside would probably set a rebound for the rest of the session given the three heavy downside sessions and the weekend just ahead. The shorts will feel good about the week and will cover some positions lest the weekend and Monday reveal a return to buying strength.
Thus a bit more blow down and then we look for a rebound. That does not mean we just start buying up everything that has pulled back. This sell off is on high volume and they are typically not just a one-leg lower phenomena. This one has more teeth than the prior pullbacks in this rally since the February and March selling, and thus this leg is likely just the first. We will look for a bounce to start Friday after some further downside and see if we can ride that one up with some solid leaders that did not crack like a third rate hill climber on the back half of Alp Duez at the Tour de France.
We will also use a bounce to lighten up on any stocks that don't make a solid comeback off of support after this downdraft. As noted, most stocks on the report are holding up well given the three days of selling, and if they have the right stuff they will start to rebound or at least set up well for a bounce.
There is always the chance of a knifepoint turn as the buyers and liquidity rushes back in. That is the rarer circumstance, however, and thus we are not banking on it. We are just going to be ready to take advantage of solid upside if they are presented, and after a bounce up off of this selling we will be ready to look at some downside if the rebound leaves some stocks and indices vulnerable with a weak rebound back up below resistance.
Support and Resistance
NASDAQ: Closed at 2541.38
Resistance:
The July/August trendline at 2566
2580 is the May high
2590 is the November/February up trendline and it is trying to hold
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:
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 1490.72
Resistance:
1500 from April 2000 peak
1510 is the late November to February up trendline
The 18 day EMA at 1516
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 1539
Support:
The 50 day EMA at 1492 is cracking
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 13,266.73
Resistance:
13,325 is the upper channel line in the November/February channel
The 18 day EMA at 13,466
The 10 day EMA at 13,504
Support:
13,240 is the November/February up trendline that marks the lower channel.
The 50 day EMA at 13,175
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): 309K actual versus 312K expected, 310K prior
Wholesale inventories, April (10:00): 0.4% actual versus 0.3% expected, 0.3% prior
Consumer credit, April (3:00): $2.6B actual versus $6.0B expected, $14.0B prior (revised from $13.5B)
June 8
Trade balance, April (8:30): -$63.0B expected, -$63.9B prior
End part 1 of 3
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