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6/27/07 Technical Traders Report
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Technical Traders Report Subscribers:
MARKET ALERTS
Target hit alerts: None issued
Buy alerts: CPHD; ICE; ININ; SNDA
Trailing stops: None issued
Stop alerts: None issued
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/alertttr.html
SUMMARY:
- Stocks open down for a change and manage to reverse into and hold a rally.
- Durable goods down after 3 up months as business investment fades.
- Fed planning a surprise (and not a happy one) in the statement?
- Stocks bounce when needed though at this stage it is still just a rebound move.
Stocks try a down open and fare much better.
There were deals once again with a trio of acquisitions stirring up the M&A excitement once again. Oil was lower to start (though it ended the session with a sharp jump ($68.97, +1.20) and bond yields were the lowest in three weeks after the negative durable goods report. In short, some of the worst market fears of late (a deal dry-up, higher interest rates) abated some.
That was not enough to offset other issues stirring the pot. Citigroup downgraded all refineries; didn't matter which one, just felt they were all too high. Pimco's Bill Gross, the bond man who completely flipped his view on bonds and the economy a month back, issued a statement saying the sub-prime market was not going to be contained and that it would take a toll on the US economy. A leveraged buyout deal did not go through because the buyer could not find enough financing to place the deal. Whew. Scary stuff.
It was scary enough to send futures down in the -10 range. Instead of trying to rally as they did Monday and Tuesday and then crapping out, stocks skipped the intro and went right to the selling. The gloom was pretty high with talk of the VIX spiking, deals crumbling, etc. After a week of downside our brokers were dispirited (and that means their clients were as well) and there was a palpable 'I give up' feel in the air. Stocks dove lower with SP500 undercutting its early June low while NASDAQ tapped the 50 day EMA for the first time this trip.
As we suspected, that downside open was enough to bring the shorts in to cover after a week of losses. Stocks started sharply lower but almost immediately started to rebound. It took much of the morning, but a slow steady recovery through lunch turned the market positive. Then when the bounce did not crap out as the prior two sessions did, the market started higher in the afternoon as more shorts covered and some buyers entered. The afternoon gains almost doubled the early session recovery and the trajectory was higher as the gains came faster. This is what we wanted to see and what we expected. There was enough gloom after a week of selling to turn things back to the upside . . . for now.
Technically the action flipped from the prior two sessions as you would expect on an upside session after a week of downside. There was the low to high movement that this time held into the close. Breadth was solid at 3:1 on NYSE, 2:1 on NASDAQ. Volume was better though not great. NASDAQ trade was up but it was still below average. NYSE trade was again above average but it just clipped the prior sessions by 1.6%; good but not a complete and decisive turn.
The moves were up but the quality varied based upon the index. NASDAQ bounced nicely off its 50 day EMA and its up trendline, surging back up into the middle of its channel. SP500 undercut its early June low and rebounded as well, but though it did recover the 50 day EMA it closed below the 50 day SMA. The large caps held where they had to and bounced, but the move did not change the index' character.
As we anticipated as well, the leaders were moving well as the market bounced with the likes of CMI, ICE, FCX and GRMN surging higher. After a week of pullbacks when they unleashed they sprinted. It remains to be seen if this move can continue. The leaders and NASDAQ look solid, but thus far given the strength of the move Wednesday all you can do is label it a relief bounce from a week of selling.
THE ECONOMY
Durable goods flip back to negative in May.
After three upside months durable goods sales fell 2.8%, almost triple of the -1% expected. On the plus side, April was revised up to 1.1% from 0.6%. This is a volatile report and you can expect it to bounce up and down from month to month. The trend this year has been back up after a weak 2006 sent orders sharply lower. Indeed, this 3-month rebound hardly recouped any of that prior loss.
Nonetheless, when a recovery from a rebound begins you have to start at the bottom of the last sell off. The rebound in durables prior to May was that start. Those months saw the key non-defense capital goods ex-aircraft return to gains as well. After a hiatus in business investing that was critical for the rebound. With the decline in the overall report, however, business investment fell as well, dropping 3% after two months of solid rebounds.
This was a down month, a pause after the rebound in the economic re-start. It is not the end of the recovery. Durables are up and down month to month. The key ahead is whether the continue the rebound that started this year.
Is the Fed changing horses in the middle of the race?
The Fed is officially on pause though it continues to view inflation as the primary threat to the economy in its writings and statements. That pause has kept the Fed inactive since June 2006, its longest period of inactivity since 1997-98. That in itself is kind of sad; it shows a meddling Fed.
In any event, the Greenspan Fed viewed certain indicators as more important in reading the inflation tea leaves. The core PCE and to a less extent the core CPI were major components of the Greenspan inflation divining kit. The Bernanke Fed has carried on that tradition, looking at a 1% to 2% annual growth rate in the core as an acceptable level of inflation. And hallelujah, the last reading on the core annualized PCE was 2%. Not at 1.7% or so that would really lull the Fed into exile, but after a 2.8% reading less than a year ago, that is pretty darn exciting.
Well, it was. There are reports that the Fed might drop something of a bombshell in the FOMC statement. May not show up until the minutes in thirty days, but there is a story growing that the Fed is now worried about the overall rate of inflation and not just the core. It has always groused that higher energy would lead to inflation 'pass through,' but seems that during all of the energy spike episodes in the past (outside of the 1970's when there were other serious issues at hand) it never did pass through. It is now worried that higher food prices on top of energy are going to spark inflation, at least that is what we hear.
It would be a massive mistake to come out with this for several reasons. First, the market and the world for that matter are not ready for this. If this comes out the market will suffer a heavy sell off. The Fed should not be in the business of picking when a market is too hot or too cold. Not its mandate though Greenspan, as the federal courts, thought his jurisdiction crossed all barriers.
Second, food is not higher because of any more demand for food or any massive famine. It is higher because of another hair-brained idea out of Washington that would use the major component of our diet (corn) as fuel. Of course it won't resolve our energy problem any more than passing economic crippling legislation regarding emissions would change global warming (haven't you heard? The SUN got hotter and that is why the earth got hotter. Check out the NASA reports). What it is doing is raising food prices because large chunks of our food supply are being diverted into ethanol. This is not inflation; this is government intervention in the market, the same kind of intervention OPEC uses to keep oil prices higher. When OPEC cuts production and prices rise $10/bbl, raising interest rates won't cause those prices to fall, unless of course the Fed raises prices so high the economy vapor locks and we don't need any more oil because we are all sitting around playing Tiddly Winks.
Third, it would be insane to factor these in because they are so variable. You cannot make policy on widely variable data. You have to look at the underlying trend, the one unpolluted by government or non-market influences. Energy and food, as we have seen, are highly susceptible to tinkering.
The problem is this is still a relatively new Fed under Bernanke and there is still jockeying for power. It is widely reported that the Fed staffers are in disagreement with the FOMC members as to the ability of productivity to resume its stronger gains. Productivity rates have dropped to about half their levels of the five years through 2005 (1.5% versus 3.1%) and the staffers say that the FOMC regulars are too optimistic about productivity recovering.
Seems the issues are not just limited to productivity. In any event and whatever the reason or cause, if this is true the Fed is playing with fire. Bernanke was known as an inflation targeter before he became chairman, and he has operated thus far without any official target and he has done very well. As we have seen with other Chairmen, however, a little success breeds supreme confidence (a.k.a. arrogance). That arrog-, err, confidence, emboldens the Fed and that is when the meddling starts in earnest. That is when the markets really pay a price.
We hope the stories and rumors we are hearing are wrong. If they are not there is not a whole lot you can do about it. The Fed is not a natural market force and if it acts foolishly and moves down this road it means the market is going to struggle, and the initial shock could be severe.
THE MARKET
MARKET SENTIMENT
VIX: 15.53; -3.36. Tanked on the rebound after testing the March lows.
VXN: 17.36; -2.23
VXO: 15.52; -2.71
Put/Call Ratio (CBOE): 0.84; -0.27
Bulls versus Bears:
Bulls: 53.3%. Back below 55% after spiking to 56.7% last week. Even with this decline they are historically too high, but then again, they have been in this range since last October. The 55% level is considered bearish, and is thus another factor along with the lower volume on this recovery bounce that suggests the market is still overbought here. Still off the 60% hit in December 2006 but getting closer. For reference it bottomed in the summer 2006 near 36%.
Bears: 18.9%. Dumping back below the 20% level considered bearish after 21.1% last week. It held in the 22 range more or less after bouncing back up from 20.7% a month ago, but it tumbled right back down. 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: +31.19 points (+1.21%) to close at 2605.35
Volume: 2.066B (+0.56%). Volume edged higher but it was still below average as NASDAQ bounced off the 50 day EMA. Volume was not high on the selling and it was not high on this upside. In short, the Wednesday trade did not match the price move.
Up Volume: 1.708B (+916.989M)
Down Volume: 339.135M (-906.131M). 5:1 up to down volume is not bad.
A/D and Hi/Lo: Advancers led 2.22 to 1. Very solid.
Previous Session: Decliners led 1.22 to 1
New Highs: 63 (-26)
New Lows: 43 (-53)
NASDAQ CHART: http://www.investmenthouse.com/ihmedia/NASDAQ.jpeg
NASDAQ gapped lower and tested its 50 day EMA on the opening selling. That triggered a rebound and sent NASDAQ back into the middle of its uptrend channel. Unlike SP500 NASDAQ has held its channel, finding some strength at the right time for itself as well as the rest of the market. With SP500 on the ropes, the market needs some leadership and NASDAQ along with SOX is trying to provide some. Volume was not there so it was not powerful move, but it was enough to help lead the market in a bounce.
SOX (+2.19%) bounced as well after making a higher low at the 50 day SMA. It has had a rough go, breaking out in late April, giving it up, setting up a double bottom and breaking out again, then fading once more. The Wednesday move pushed it past the original breakout point in the double bottom so we will see if the third time is the charm. There are quite a few solid chip patterns out there.
SP500/NYSE
Stats: +13.45 points (+0.9%) to close at 1506.34
NYSE Volume: 1.761B (+1.66%). Volume remained well above average on the session and it did expand more than NASDAQ on the gain. That suggests some accumulation in addition to what we saw Tuesday as SP500 held the June low on rising trade, showing that buyers were stepping in at that prior low. That is a start given the sell off to the early June low.
Up Volume: 1.386B (+851.927M)
Down Volume: 365.207M (-802.278M)
A/D and Hi/Lo: Advancers led 3.02 to 1. Solid upside breadth returned as most of the market rallied.
Previous Session: Decliners led 1.73 to 1
New Highs: 40 (-14)
New Lows: 32 (-96)
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
SP500 started lower and quickly undercut the early June low. It checked up before hitting 1475ish where there is some minor support from late April and early May. Not bad and the volume was encouraging. It recovered the 50 day EMA (1501) but stalled just below the 50 day SMA (1508). It is still well out of the channel as well. In short, SP500 dug itself a deep hole and it will take a lot more work to get out of it. This move was a start but it was just a start after several sessions of distribution, and SP500 still remains top heavy with the June twin peaks.
SP600 (+1.43%) held that layer of support at 425 and rebounded as well, moving back up through its trendline and 50 day MA's. It closed right at the 18 day EMA, but that puts it back in its uptrend channel. Moral victory at this point. It still has its own toppy pattern to deal with as it has its own twin peaks here in June to overcome. Next key move to the upside for it is over 435.
DJ30
The Dow bounced as well as it too was at its 50 day EMA and up trendline. A decent bounce where it should have tried to hold and it did what it should have. Volume was up to average; that was better than lower, but average is just average. DJ30 is in better shape than SP500, but it has its own twin peaks from June to deal with, making its pattern still top-heavy as well. It did, however, make a higher low, and that sets it up to at least make a run at the prior highs.
Stats: +90.07 points (+0.68%) to close at 13427.73
Volume: 246M shares Wednesday versus 241M shares Tuesday. Some higher, average trade as DJ30 moved off the 50 day EMA test.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
THURSDAY
Final GDP for Q1 is out but that is ancient history; talk of 3% to 4% growth in Q2 puts little potential 'wow' factor in the report. Of course the bigger story is the FOMC action and statement at 2:15ET. On Tuesday we discussed why the Fed won't raise rates. That was a common sense analysis. Of course if the Fed pulls the old 'gee guys, we were only kidding about the core PCE being our focus', all bets are off. The market will react rather violently as it has factored in a Fed that is not going to do anything because housing is still in the tank and core inflation is on a steady decline.
We seriously doubt the Fed would do this in a policy statement without any serious, major forewarning or foreshadowing. Thus we are looking for the same old 5.25% rates. The key point to look at is whether the Fed continues to state that inflation has moderated. With nearly all of the FOMC speakers still suggesting inflation is falling, it would be a huge shift to come out in the Thursday statement and pants investors.
Even before the FOMC there is the subject of the Wednesday bounce and whether it can continue to build off of this start. Volume was up, breadth was decent, and leadership surged back up off of its test. With NASDAQ still technically solid that has the makings for at least a 2 to 3 day bounce. At that point the weak SP500 pattern will start to weigh on the market, and that will be the next test of this bounce. As of Wednesday, the market is trading with split strength, i.e. NASDAQ looking good in an uptrend, SP500 looking weak with a double top. The NASDAQ pattern and a week of selling resulted in a bounce. There is still great leadership and we will see how this unfolds to the upside. If stocks cannot continue the move Thursday, well, that just gives us an idea of how pernicious the sellers are.
Support and Resistance
NASDAQ: Closed at 2605.35
Resistance:
2601 is the mid-May intraday peak.
2623 is the November/February up trendline
2630 is the top of the November/February channel
2634.60 is the June peak
2778 from a July 1999 peak
2887 from a September 1999 peak
2920 from an October 1999 peak
Support:
2570 is the October/December/January trendline
The 50 day EMA at 2562
2531.42 is the February high (post-2002 high); 2525 intraday
2523 was price resistance November 2000
2509 is the January 2007 high
S&P 500: Closed at 1506.34
Resistance:
The 50 day SMA at 1508
1524 is the late November to February up trendline
1528 is the March 2000 closing high
1541 is the June high.
The upper trendline of the channel at 1551
1553 intraday high from March 2000 is the all-time index peak
Support:
The 50 day EMA at 1501
1490.72 is the early June closing low
1475 from peaks in December 1999 and January 2000
1461.57 is the February 2007 high.
1440 is the mid-January high
Dow: Closed at 13,427.73
Resistance:
13,443 is the upper channel line in the November/February channel
The 18 day EMA at 13,459
The mid-May peak at 13,556
The early June high at 13,676 (closing), 13,692 (intraday)
Support:
13,365 is the November/February up trendline that marks the lower channel.
The 50 day EMA at 13,300
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 25
Existing home sales, May (10:00): 5.99M actual versus 6.00M expected, 6.01M prior (revised from 5.99M)
June 26
Consumer confidence, June (10:00): 103.9 actual versus 106.0 expected, 108.5 prior (revised from 108.0)
New home sales, May (10:00): 915K actual versus 925K expected, 981K prior
June 27
Durable goods orders, May (8:30): -2.8% actual versus -1.0% expected, 1.1% prior (revised from 0.8%)
Crude oil inventories (10:30): 1.6M actual versus 1.2M expected
June 28
GDP final, Q1 (8:30): 0.8% expected, 0.6% prior
Chain deflator, Q1 (8:30): 4.0% expected, 4.0% prior
Initial jobless claims (8:30): 324K prior
FOMC policy statement (2:15)
June 29
Personal income, May (8:30): 0.6% expected, -0.1% prior
Personal spending, May (8:30): 0.7% expected, 0.5% prior
Core PCE, May (8:30): 0.2% expected, 0.1% prior
Chicago PMI, June (9:45): 58.0 expected, 61.7 prior
Construction spending, May (10:00): 0.2% expected, 0.1% prior
Michigan sentiment revised, June (10:00): 84.0 expected, 83.7 prior
End part 1 of 3
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