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7/09/07 Investment House Daily
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Investment House Daily Subscribers:
MARKET ALERTS:
Targets hit alerts: None issued
Buy alerts: CAT
Trailing stops: None issued
Stop alerts issued: MVSN
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SUMMARY:
- SP500, DJ30 turn back from the June highs using earnings warnings, sub-prime worries, and lack of Bernanke gift as reasons to sell.
- Bernanke argues for the core, stating energy and food prices won't impact overall prices.
- China still shows it is a cold communist country.
- Leaders will try and hold the line after market hits a big pothole.
Rally into earnings season is met with early disappointment.
Last week we pondered the rally into earnings as investors anticipated some better than expected earnings (if they are anticipated is it then really better than expected?), and whether the low volume advance could hold once earnings releases began. Of course the surface has hardly been scratched thus far, but the early results are not supporting any pre-earnings advance. Alcoa was lukewarm and Tuesday HD and SHLD warned, sparking worries about a consumer meltdown. I will tell you one thing about HD: it has new management now, but that team has a lot of damage to repair. Many contractors will not go to Home Depot anymore because they are continually out of stock. Inventory management is atrocious. With gasoline prices at these levels contractors are going to vendors they know have the products they need in stock. Thus HD's woes are not necessarily reflecting its market demand. Moreover, CAKE, a causal restaurant, announced that Q2 looks very good. People don't go out to eat if things are bad for the consumer.
Of course those finer details are lost when the market gets a mood to head in a certain direction. After SP500 and DJ30 made their low volume ascents to within striking distance of the June highs the negative vibes from these warnings choked off the advanced that was really fueled by moves in the market leaders we have been buying into versus any broad market surge higher. Thus it did not take much to turn to selling with the run higher, the near resistance, and some warnings from big names.
That was not enough, however, to drive in the nails. The market did rebound after that first dip and it held up into the Bernanke speech. He did not throw the market a bone and the market rattled a bit lower. Then Standard & Poors indicated it was going to downgrade the sub-prime sector and that triggered some more selling, pushing SP500 to its 50 day SMA. It held and bounced, but then it undercut that support, gapping lower in the last half hour of trade.
It was not all a washout as some energy sub-sectors posted gains after oil, down early, reversed (72.81, +0.62). Bonds enjoyed a strong session, pushing yields sharply lower again as the rollercoaster ride of rates continued. Once more the 10 year is flirting with 5%, closing at 5.03%. The 2 year fell to 4.85%. As the dollar fell sharply investors moved into bonds; thus the lower interest rates.
Technically the action was plenty weak. High to low, closing at the session low across the indices. Breadth was heavily downside (-3.3:1 NYSE). Volume surged higher to the strongest in two weeks. Basically the typical attributes of the selling we have seen hit this rally the past 5 weeks. That strong volume surge following a low volume ascent shows a lot more sellers entering the market than buyers on the upside. That has the potential to short out any rally. It certainly blasted SP500 out of its advance on the June highs, making a lower high yet again. That is trouble for the index as it has retreated from each attempt at a high on a jump in volume as large caps shares are unloaded. After leading higher in the first part of the rally the SP500 is really struggling.
NASDAQ was down as well but the recent market leader that took over from SP500 managed to its 10 day EMA. Volume jumped as well for the techs but its pattern is still solid as it held the 10 day EMA on the close. Not immune from the selling but it had a better pad built in to handle it; recall we said NASDAQ would be testing from a position of strength as it came back. Now we see how strong it is. DJ30 was roughed up as well on strong volume but it managed to hold its upper channel line on the close, still in a relatively decent pattern. All in all a strong volume rollover is never a good market event, but for now NASDAQ and DJ30 are holding up and leadership is still above near support.
THE ECONOMY
Bernanke speech provides an academic exercise with some pro-Fed bolstering.
The market was all breathless for Bernanke's latest missive on the economy, but he didn't go where the market felt he should dwell. The speech was more an academic analysis of inflation and the Fed's role with monetary policy. Very dry with no hints about what the Fed thought of that lower PCE.
Still he was not totally against some discussion of the current Fed, particularly with regard to defending the Fed's use of the core PCE and CPI. Specifically Bernanke simply reiterated a fundamental reason for using the core, i.e. his belief that food and energy would not impact inflation as long as inflation expectations held steady. Thus he was saying there would be no pass through as long as the Fed remained tough on inflation. Wow. Groundbreaking stuff.
Actually he went further and cited statistics and actual historical timeframes where higher prices have not 'passed through' to the core. Basically every event since the 1970's, and the seventies inflation was caused by massive missteps by the Fed where it fueled the price gains by adding massive amounts of liquidity. It took almost ten years and some massive economic stimulus from Ronald Reagan to work through that debacle.
He didn't discuss the most obvious issue, however, and that is simply that adding those into the equation would make setting monetary policy similar to a tennis match. We saw the past year how energy prices rise and fall and how import prices and our costs rise and fall with them. The Fed has a hard enough time trying to just factor in more stable. Relatively static data. Can you imagine it trying to hit that moving target? There would be a sudden surge in the demand for straight jackets all around the globe.
A very interesting admission.
Bernanke was queried time and again about the housing market and what the Fed could do, what it should have done, what it will do, etc. Greenspan talked around bubbles quite a bit, saying that the Fed didn't like to get involved in reining in bubbles, but then the Fed would do just that, e.g. taking on the stock market from 1996 to 2000.
Bernanke took a more direct approach. He stated flatly that monetary policy is not a good instrument for popping or controlling asset bubbles. Plain and simply, no frills. That is what we used to argue back in the 1990's: manipulating interest rates to micromanage the economy was the same as using a sledge hammer for brain surgery. In either case you kill the patient if you use your instruments. Nonetheless, Greenspan followed the footsteps of the 1929 Fed, bound and determined to reign in the stock market because in those Feds' view, higher stock prices meant higher wealth, more spending, higher demand, and thus inflation. How wrong. All they got in attacking phantom inflation was the stock market crash of '29 and the plunge from 10+% GDP growth to negative GDP readings in three short quarters that killed a 20 year expansion. Now THAT is how to manage an economy.
Bernanke rather refreshingly said that the Fed didn't have the tools to do the job (how correct) and that markets were the best resolution for imbalances. Indeed as we saw, the market reacted quickly once the problem surfaced. It is the lingering threat of congressional action that is keeping the market from trying to recovery already because no lender wants the congressional finger (and no, it is not the middle finger) pointed at it. Thus we play a version of Mexican standoff where the lenders wait to see what our fearless leaders are going to do and our leaders bluster about federalizing the process. Now show me where that is in the Constitution (along with Medicare, Social Security, county roads, the Cowgirl Hall of Fame, hog farming in Arkansas, etc.)
So you want to be the head of trade in China?
For all of the apologists for China, Tuesday brought a cold, hard lesson: despite the country's desire to be accepted as a civilized superpower, it is still ruled by an unflinching communist government that will do what it takes to stay in power. Thus when there were some missteps that allowed poisonous pet food and contaminated toothpaste into its exports and the resulting complaints jeopardized some of the open trade relationships China enjoys around the world, quick, communist action was taken: the minister of trade was executed.
Thus while China trade is good for our country we don't want to turn a total blind eye to what we are dealing with when it comes to the government. China will do what it takes, what it deems necessary in that distorted lens of government it sees things through, to get what it wants. It will execute, not dismiss, fire or otherwise humiliate, but execute, its own leaders to reach its goals.
THE MARKET
MARKET SENTIMENT
VIX: 17.57; +2.41. VIX jumped past the early June peak at 17 already, and it is not even at the lows hit on that round. Of course volatility jumped close to the March levels in the mid-June selling and that selling only matched the early June selling. Thus the increased volatility on less selling simply shows the amount of anxiety is increasing in the market.
One consideration: volatility is rising as the market has bumped against highs. It is always worth watching for volatility rises as the market makes highs, particularly after volatility has slumbered at low levels for extended periods as it has here. Volatility can remain at very low levels for very long periods during market gains (look at most of the 1990's). When volatility comes alive as the market rises that is a sign a breakdown of significance is coming. Thus we are watching this latest volatility move with its three spikes in the past month. It is still at a historically low level but we want to be aware of this aspect as things develop.
VXN: 18.61; +1.53
VXO: 17.22; +2.84
Put/Call Ratio (CBOE): 1.01; +0.2. Back over 1.0 for the first time since the last selling in late June. Takes many such closes to get it there.
Bulls versus Bears:
Bulls: 49.4%. Now that is quite a drop from 53.8% the prior week and well off the spike to 56.7% a month back. Heading in the right direction but still needs to be lower to get to a comfort level. The 55% level is considered bearish, and it topped that level on this last run. Still off the 60% hit in December 2006 but getting closer. For reference it bottomed in the summer 2006 near 36%.
Bears: 18.0%. Bulls may be falling, but bears are as well, and that leaves the indicator mixed and thus less than an good signal. Quite a drop from 20.4%, and now at the lowest level on this cycle (hit 18.9% a month back). After hitting near 30% in March it has faded back in the subsequent rebound and this current selling is not jumping it higher. Looking only at this indication and the fact it has not risen as it did in March when the selling took hold, you would conclude that there is more selling to go. Well off the 27.5% hit in April. 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: -30.86 points (-1.16%) to close at 2639.16
Volume: 2.219B (+18.02%). Volume jumped above average for the first time this month and of course it was on the downside romp. No arguing around that there was distribution on NASDAQ as well as the other indices.
Up Volume: 562.873M (-415.69M)
Down Volume: 1.623B (+761.897M)
A/D and Hi/Lo: Decliners led 2.77 to 1. Significant downside breadth as the internals were weak.
Previous Session: Decliners led 1.03 to 1
New Highs: 45 (-88)
New Lows: 90 (+53)
NASDAQ CHART: http://www.investmenthouse.com/ihmedia/NASDAQ.jpeg
After making a string of post-2002 highs on below average volume NASDAQ got a dose of high volume selling. The downside ripped back 31 points and closed NASDAQ at the 10 day EMA and at the upper channel line of its uptrend (the older channel line formed off the November and January highs. Still in the best shape of the major indices, but as noted, it did not escape the distribution.
SOX (-0.76%) held positive much of the session even as the other indices languished. In the end, however, it could not withstand the onslaught of sellers. That is what we mean when we say that 75% of the stocks follow the overall market, and that is particularly true when a serious move sets in as it did Tuesday. Even with this selling, however, SOX still held its 're-breakout' and looks to be in good shape for a test, very similar to NASDAQ.
SP500/NYSE
Stats: -21.73 points (-1.42%) to close at 1510.12
NYSE Volume: 1.638B (+22.84%). As with NASDAQ, volume moved above average for the first time in July and it was on a pretty crushing downside session for SP500 and SP600.
Up Volume: 221.109M (-442.908M)
Down Volume: 1.399B (+746.64M)
A/D and Hi/Lo: Decliners led 3.38 to 1. With the small and mid-caps getting spanked as well, massively negative breadth was a sure thing.
Previous Session: Advancers led 1.15 to 1
New Highs: 36 (-164)
New Lows: 61 (+43)
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
SP500 moved from just points away from a new all-time high to a header through the 50 day SMA. It is still above the 50 day EMA (1506) but another lower high (the third straight) following a lower low in late June, SP500 is not exhibiting very much strength. Indeed it has transitions from leader to laggard in relatively short order (5 weeks) and the question is whether it follows the rest of the market and holds on when NASDAQ finds support or if it turns to a downside leader and knocks the legs out from under the rest of the market. Its technical pattern is crappy and the internals are woeful. The financials are getting beat about the head and shoulders as well, and they are a large part of the SP500 and its moves. SP500 is definitely the weak link right now as the market tries to consolidate the last rally without collapsing.
The small cap SP600 (-1.76%) was no pillar of strength either. It torpedoed the 18 day EMA and managed to hold over the 18 day SMA. Now it managed to make a higher closing high on this last bounce so it is not as dire as SP500. Okay, so it is not hemorrhaging from multiple wounds, but it is still in trouble after such a big blow down after poking around at the prior highs.
DJ30
DJ30 sold as well and it too suffered some high volume as it turned back from its June highs after just managing a higher high over the mid-June closing high. Sound as if we are splitting hairs? Sure does. Still, it managed to hold its upper channel line on the close and the pattern is still quite decent with its higher lows and squeaking out a higher high on this last bounce. Between NASDAQ, DJ30 and SOX, that is where it looks like the strength will come if the market is going to show some strength once more.
Stats: -148.27 points (-1.09%) to close at 13501.7
Volume: 274M shares Tuesday versus a measly 192M shares Monday. First heavy volume in two weeks and of course it was on a downside spanking.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
WEDNESDAY
In the last hour alert today we said it looked as if the only thing that was going to stock the selling was the bell. That was wrong. All of the sell on close orders were executed at the close and volume exploded higher as a lot of shares were cut loose. That leaves Wednesday in a very negative climate to start the session.
Oil inventories are the only scheduled data point on Wednesday, but as seen Tuesday, the market is looking at earnings right now, not the economic data that it had a fill off over the prior two weeks. Thus even the sharp drop in bond yields that sent the 10 year back to 5.03% had no impact on the market.
No, it is now earnings season and the market needs some strong guidance to warrant breaking out of this 7 week consolidation and continuing the advance. The economy is expanding nicely again, but stocks rallied the second half of 2006 and early 2007 even as the economy was slowing. Thus a bit of guidance for Q3 and Q4 would help launch more of a build toward the year end.
As we noted in June, it is a tough time for NASDAQ to take leadership, at least to the upside. Late summer and early Q3 are historically tough for the techs, but that is just a general rule of thumb. What we have seen on this rally prior to the past month is NASDAQ lagging the entire move. Thus some leadership here is not atypical as money moves around the market while the SP500 large caps shift from leaders to consolidation. Of course we want to see the money stay in the market, and that means NASDAQ holding up here at near support and then resuming the move higher.
Wednesday may not be that day as these selling events during this lateral move the past couple of months have lasted a week. SP500, however, does not have a week of selling it can put in without a breakdown. Indeed, you don't want to see NASDAQ crashing its breakout, at least not all of it. Thus there is still some selling room, but the market will have to find its footing rather soon without much more downside if it is going to salvage another upside move. NASDAQ looks solid but SP500 and its three descending tops looks very weak.
Thus Wednesday we are going to look for some more downside early. Futures were up late, but the last thing you want is an upside open that provides the sellers more fodder to sell into. Better to start lower and then see if the sellers start to cover some after SP500 breaks its 50 day MA. We will be watching the leaders such as CMI, CLF, SLB, DO, CTRP, FCX, DO, etc. and monitor their reaction to any further downside. They remain in excellent shape for the most part, and as long as they hold the line the market is in good hands. With SP500 struggling severely after three tops and NASDAQ making a nice test, how these leaders fare will tell the story. As usual in this rally, thus far they are in good shape.
Support and Resistance
NASDAQ: Closed at 2639.16
Resistance:
2778 from a July 1999 peak
2887 from a September 1999 peak
2920 from an October 1999 peak
Support:
2638 is the top of the November/February channel
2634.60 is the June peak
2634 is the November/February up trendline
The 18 day EMA at 2622
2601 is the mid-May intraday peak.
The 50 day EMA at 2584
2580 is the October/December/January trendline
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 1510.12
Resistance:
1529 is the late November to February up trendline
1528 is the March 2000 closing high
1539 is the mid-June intraday high
1541 is the early June high.
1553 intraday high from March 2000 is the all-time index peak
Support:
The 18 day EMA at 1517
The 50 day EMA at 1506
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 13,501.70
Resistance:
The mid-May peak at 13,556
The mid-June high at 13,689
The early June high at 13,676 (closing), 13,692 (intraday)
Support:
13,500 is the upper channel line in the November/February channel
13,442 is the November/February up trendline that marks the lower channel.
The 50 day EMA at 13,451
The 90 day SMA at 13,025
12,796 at the February 2007 high
12,700 is the early February peak intraday high
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
July 9
Consumer Credit, May (3:00): $12.9B actual versus $6.5B expected, $2.3B prior (revised from $2.6B)
July 10
Wholesale Inventories, May (10:00): 0.5% actual versus 0.4% expected, 0.3% prior
July 11
Oil inventories (10:30): 315K prior
July 12
Initial jobless claims (8:30): 315K expected, 318K prior
July 13
Import prices, June (8:30): 0.5% prior
Export Prices, June (8:30): 0.2% prior
Retail sales, June (8:30): 0.0% expected, 1.4% prior
Retail sales ex-autos, June (8:30): 0.2% expected, 1.3% prior
Business inventories, May (10:00): 0.3% expected, 0.4% prior
Michigan sentiment, preliminary, July (10:00): 86.0 expected, 85.3 prior
End part 1 of 3
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