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us stock market, trend trading stock
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6/11/07 Investment House Daily
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Investment House Daily Subscribers:
MARKET ALERTS:
Targets hit alerts: BCSI
Buy alerts: BRY; GRMN; XTO
Trailing stops: IOC
Stop alerts issued: OIH
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SUMMARY:
- Second day of relief bounce falters late.
- Lots of worried inflation talk on the trading desks.
- TXN adds some downside pressure to tech with a warning at its mid-quarter update.
Another low volume bounce struggles into the close.
It was very quiet for a Monday morning, at least of late. No M&A activity was announced and of course that led to speculation as to whether interest rates were stifling the activity. A rather preposterous line of thought at this point considering these takeover and takeout deals are not conjured overnight, but in the current fear of interest rates environment, rising rates are the scapegoat for most everything ill facing the market.
Outside the merger arena, foreign markets were up on the heels of the US Friday gains, JNJ was upgraded (all the way to neutral from sell), and AAPL was holding a developers' conference. Sometimes there just is not much to grab onto, but as interest rates faded during the pre-market, futures managed to bump position ahead of the open. Not even a warning from NUE in the steel sector, potentially a real log in the road for stocks, turned them back as the bell rang.
Stocks opened slightly higher, and with oil moving higher (closed at $65.97, +1.21) the energy stocks provided early leadership. Copper stocks were up as well despite the NUE warning on a report of a copper shortage. It was not a widespread, massive push higher by any stretch. Indeed an hour into the session stocks had retraced to the opening price levels and moved negative. At that point bond yields started to soften. Stocks started to rise. NASDAQ gained close to 20 points while SP500 added 11 from the morning lows. That run took the major indices up to their 10 and 18 day EMA, the near resistance levels. They paused there as you would expect, fading back modestly into the early afternoon, setting up a run for the afternoon. They started to bounce off the pullback to start the last hour and were doing so until the sellers took another shot with about a half hour left. They won out, pushing NASDAQ and the small and mid-caps negative while closing the NYSE large caps out flat. Some interesting gyrations and some good individual moves, but by the close stocks finished basically flat.
Technically the session was simply another relief bounce session, and given the finish, not much of a rebound at that. There was no volume (fell 15% on both NYSE and NASDAQ) and breadth was at best flat. Those both are indicative of a relief bounce: narrow and thinly traded. There was some leadership in energy as noted as well as an occasional stock from other sectors (e.g. GRMN, RIMM), but outside of that, the late selling crimped leadership advancement.
As for the price charts, the indices rallied to near resistance at the 10 and 18 day EMA and stalled. The late selling left the candlestick charts showing a series of dojis across the board. That indicates they are in jeopardy of falling back once more after a day and one-half of rallying, especially when you factor in the weak internals (breadth and volume).
In sum, the action was upside, at least for part of the session, but even the gains on the day were on light trade. The action was classic relief bounce and unless there is a catalyst to the contrary, the course with least resistance is another test lower.
THE ECONOMY
Inflation is all the rage.
We have discussed how higher interest rates are not inflation and not even necessarily a by-product of inflation. With rates moving higher and the Fed and other central banks so hawkish on inflation, many are equating higher rates as indicative of bad inflation reports at the end of the week. We heard this several times on all the financial stations Monday.
Maybe some have inside information that the CPI will come in hotter than expected, but more than likely it is just a rudimentary game of connect the dots what with the central banks raising rates and the Fed still talking tough on price increases. This even as the trend is clearly down after inflation pressures peaked in October 2005. It took a long time for the actual inflation data to follow suit, but it has done so and inflation as measured by the PCE is now at the upper limit of the Fed's comfort range. Of course, the Fed is not letting off the pressure one bit as was the case last week with Moskow's comments and Monday when the Fed's Pianalto reiterated that inflation was the primary risk and that it was simply too high.
Thus the frequent comments Monday about interest rates, inflation, and the possibility of rate hikes. That talk is negative for stocks, and thus while this inflation fear brush fire burns near term, stocks are still struggling even with the Friday and to a lesser extent Monday bounce.
This, however, leaves on the door for a positive surprise to end the week what with all the fears inflation will spike after trending lower for months. Unless we are missing something major (and believe it or not that has happened before) we are still expecting core inflation trends to continue their fade, especially with the economic activity picking up. Seems incongruous if you listen to the Fed's Phillips Curve model, but history shows that increased output lessens inflation pressures. There are always ups and downs within a trend, and thus Friday could rebound from last month's reading. That would not be a great result near term but that one data point also would not alter the trend by itself. Again, this could be setting up for a nice upside catalyst if all of this inflation talk proves to be flat wrong on Friday. Of course, we have to get to Friday first, and there is a lot of economic data along the way.
THE MARKET
MARKET SENTIMENT
VIX: 14.71; -0.13
VXN: 16.29; -0.83
VXO: 14.61; -0.12
Put/Call Ratio (CBOE): 1.08; -0.04. Another session above 1.0 on the close, making it 6 in a row even with the rebounds the past two sessions. This is starting to get to the point where it is piling enough sessions to start tipping toward the recovery side, but it is secondary and just tells us to watch price and volume action on the indices and how leading stocks are faring to see if they are showing recovery. As of Monday that was not the case.
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: -1.39 points (-0.05%) to close at 2572.15
Volume: 1.688B (-15.07%). You had to look hard to see the volume bar on the chart as trade was the lowest since the Friday preceding Memorial Day. It is easy to see the rebound attempt lacked any real mustard.
Up Volume: 705M (-926M)
Down Volume: 959M (+628M)
A/D and Hi/Lo: Decliners led 1.18 to 1. NASDAQ 100 (-0.23%) struggled more than overall NASDAQ. Very modest upside breadth even when techs were up intraday. Very symptomatic of a relief bounce.
Previous Session: Advancers led 2.12 to 1
New Highs: 106 (+34)
New Lows: 51 (-10)
NASDAQ CHART: http://www.investmenthouse.com/ihmedia/NASDAQ.jpeg
NASDAQ continued the Friday bounce, clearing the 10 day EMA and approaching the November/February trendline on its intraday high. It could not make it to that trendline and it could not hold the move over the 10 day EMA or the 18 day EMA by the close. It basically tried the move out for size and then faded as it lacked volume and leadership. By the close it showed a tombstone doji on the candlestick chart, and the name says it all with respect to what this pattern shows with respect to momentum. If the bounce was higher it would mean more, but we don't want to discount it, particularly with the very weak breadth and volume. NASDAQ remains in its channel or at least above the 50 day EMA, but it looks as if it is heading back that direction given the low volume relief bounce after finding that level on high volume last week.
SOX (-0.41%) struggled all session, tapping at 493 on the high (491) and then peeling back. TXN is not going to help the chips tomorrow as it lowered its upper range limit in its after hours mid-quarter update and tanked.
SP500/NYSE
Stats: +1.45 points (+0.1%) to close at 1509.12
NYSE Volume: 1.322B (-15.49%). Impressively weak volume on the NYSE as well after a decent showing on the Friday rebound. This action revealed more of the guts behind this bounce, and they were not very solid.
Up Volume: 685.364M (-656.407M). Dead heat, matching the price action.
Down Volume: 621.796M (+425.241M)
A/D and Hi/Lo: Decliners led 1 to 1. Again, matching the action to a 'T.' My what a change from that -11:1 last Thursday.
Previous Session: Advancers led 2.28 to 1
New Highs: 66 (+29)
New Lows: 74 (-23)
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
The large caps continued the Friday move as well, moving up to the 10 and 18 day EMA over lunch after a mid-morning test of the early session move. Very positive: a test and then recovery. Without much trade and with no breadth backing the move, however, all it could do was tap that near resistance and then fade back. It closed positive, but that close was right below the November/January trendline that marks the bottom of the channel. As with NASDAQ, SP500 showed a doji on the candlestick chart, indicating that the momentum from the Friday bounce is already dissipating. Not an auspicious session, and the path of least resistance appears downside. It has been hard to count the large caps out, however, so we remain open to a continued run higher. We are not expecting it, but you always have to be ready for that ball flying out of right field.
SP600 (-0.14%) was nicked up a bit after it too tapped at the 10 and 18 day EMA and faded back slightly to post a candlestick doji. Last week it bounced off the 50 day EMA and the bottom of its channel, leaving it in better shape than most of the major indices. It is hanging out at the bottom of the channel, a good place to find some buyers if they are going to come in. We will keep an eye on this index because if there is life left in the market near term, it is set up well to be a canary in reverse.
DJ30
Very similar action on the blue chip index: a modest gain, bargain basement volume, a tap at the 10 and 18 day EMA on the high, and a tight doji on the close. DJ30 is sitting right on top of its upper channel line, tapping near that level on the session low (13,381) before the rebound. Similar to SP600, it is still in position to hold this support and bounce though the early vigorous selling that broke it lower suggests a further test down toward the 50 day EMA (13,194) as a starter.
Stats: +0.57 points (+0.01%) to close at 13424.96
Volume: 180M shares Monday versus 242M shares Friday. Volume fell sharply below average to start the week after a pretty solid above average response to the Thursday selling. Not enough trade was there to punch through the short term moving averages.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
TUESDAY
Not much more economic data on Tuesday as the week is heavily backend loaded. Thus it will be up to the market to find its catalysts ahead of the inflation data. After hours TXN lowered the high end of its earnings projection for the quarter, and that had the stock lower and it took the quad-Q's lower initially though they recovered later in the after hours session.
Thus far there has been no competing catalyst with the interest rate story, and thus the indices have continued to struggle as they test back from the last run higher. The selling was by far stronger than anything on the rally thus far with DJ30 breaking near support levels it had not visited since the last leg started after the February and March selling. The last couple of sessions released some of the downside pressure but with the light volume, narrow breadth, and declining leadership that was about all they did.
The indices have not imploded, they are just selling back further after another solid run higher. There is one down leg under the belt, and after this upside bounce plays out there will likely be some more downside testing just as there was in March as the indices work off or consolidate the solid gains.
We are looking at some downside now that the indices have rebounded from the initial downside leg, but we are also watching other plays as they test and set up for the next upside leg. Of course it will have to show more strength than the last two sessions that were light on volume, breadth and leadership. That just goes to show that there is still more work to be done before this next rebound holds.
It took 5 weeks for the last consolidation of any size to run its course, and it was a pretty mild one given the 7 month run out of the July low that it consolidated. This one is just a month and one-half and the selling is once again pretty virulent. As discussed over the weekend, that tells us that the market has to do some fairly serious consolidation before it is ready to mount a substantial run once again: when the frequency of selling events increases that typically means something more substantial is ahead. Given the length and size of this run that is understandable.
That does not mean the liquidity out there has dried up. Indeed we still see stocks and sectors that remain in excellent shape as they are at or are close to buy points. The money is thus far not leaving the market, at least not all sectors of it, and we will continue to look at upside opportunity in those sectors that are getting the green. Given the climate and the stronger selling volume and breadth, however, we simply pare back on how much we buy right now as we stick to quality (meaning earnings growth, technical pattern). As for the downside, it can occur quickly and we will be ready to move in quickly, ride the downside, then take the gain and see where things bounce. If the negative views of inflation continue to escalate ahead of Friday we will have to keep in mind the potential for a rebound if we get 2 to 3 days of significant downside ahead of that day and cover some downside positions ahead of that time.
Support and Resistance
NASDAQ: Closed at 2572.15
Resistance:
2580 is the May high
2594 is the November/February up trendline
2590-95 from an April 1999 interim peaks
2615 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 July/August trendline at 2570
The 50 day EMA at 2540
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 1507.64
Resistance:
1510 is the late November to February up trendline
The 18 day EMA at 1515
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 1540
Support:
1500 from April 2000 peak
The 50 day EMA at 1493
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 13,424.96
Resistance:
The 18 day EMA at 13,458
The 10 day EMA at 13,478
Support:
13,350 is the upper channel line in the November/February channel
13,255 is the November/February up trendline that marks the lower channel.
The 50 day EMA at 13,195
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 12
Treasury Budget, May (2:00): -$68B expected, -$42.9B prior
June 13
Export prices, May (8:30): 0.4% prior
Import prices, May (8:30): 0.2%
Retail sales, May (8:30): 0.6% expected, -0.2% prior
Retail sales ex-Auto (8:30): 0.7% expected, 0.0% prior
Crude oil inventories: +1.1M prior
Fed's Beige Book (2:00)
June 14
Initial jobless claims (8:30): 310K expected, 309K prior
PPI, May (8:30): 0.6% expected, 0.7% prior
Core Ppi, May (8:30): 0.2% expected, 0.2% prior
June 15
Current account, Q1 (8:30): -$202.50B expected, -$195.8B prior
CPI, May (8:30): 0.6% expected versus 0.4% prior
Core CPI (8:30): 0.2% expected, 0.2% prior
New York PMI, June (8:30): 12.0 expected, 8.0 prior
Net foreign purchases, April (9:00): $67.6B prior
Industrial production, May (9:15): 0.2% expected, 0.7% prior
Capacity utilization, May (9:15): 81.6% actual, 81.6% prior
Michigan sentiment, preliminary, June (10:00): 88.0 expected, 88.3 prior
End part 1 of 3
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us stock market
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