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7/18/07 Technical Traders Report
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Technical Traders Report Subscribers:
MARKET ALERTS
Target hit alerts: None issued
Buy alerts: CVX; SID
Trailing stops: None issued
Stop alerts: None issued
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SUMMARY:
- Tech earnings give market the trigger to take the pullback it needed to test the breakout.
- Bernanke clarifies some points, maintains the same theme.
- Fed's inflation range is unrealistic given history.
- IBM helps spark up the earnings season yet again (after INTC rained on it yet again).
- Seeing some excellent pullbacks once more as stocks show a floor, set up some buys yet again.
Tech earnings bring about the breakout test.
There were some good and bad earnings, the CPI was in line, housing starts were up while permits were lower, and Bernanke, while not helping the market, didn't do anything to impale it. Oil was up (75.05, +1.03) on a dive in gasoline inventories (-2.3M bbl), but bonds were lower (4.85% 2 year, 5.03% 10 year). A lot of news with arguably more good news than bad, but it was not enough to overcome the need to pullback and test that breakout. The Intel numbers were the trigger: tech had built its hopes on Intel finally breaking its long string of bottom rung earnings as some sign tech was back in vogue. It didn't, and frankly Intel is no harbinger of tech at all. It manufactures a commodity that goes into a commodity (the PC). Growth days are over. Intel is old tech and its earnings are old tech, but hope got ahead of reality for this stock, and after NASDAQ's rally into earnings, that was a disappointment.
Stocks ignored all of the other data and sold on the open with the SOX diving over 2% on its low. NASDAQ was down more than 1% and SP500 continued its rather weak action, similar to a cyclist in Le Tour de France that has cracked and is trying to hang with the peloton, hoping to get home without falling out of contention.
None, however, were in danger. They all tested toward near support, some getting there (SP500, SP600, NASDAQ), some just tapping in that direction (DJ30, SOX). They all rebounded after the lunchtime low, surging higher in the last hour to push to a session high or at least match the opening price. The bottom was found just about the time Bernanke closed out his Q&A session before the House of Representatives, something of a typical reaction once the market figures out the Fed chief is not going to throw a wrench into the works.
Technically the action was encouraging as out of the gloom from the tech earnings that knifed the market lower stocks found a bid and reversed off of near support for a strong finish. They did not close positive, but they shaved significant losses in the strong rebound. A/D was weak () and volume was up, but A/D lags on a reversal, and higher volume as indices test support and then rebound sharply is what you want to see. A positive close is better, but that was not in the cards given the very negative mood that took things significantly lower on the first thud downside.
That thud sent the recent leaders sharply lower, particularly in technology and semiconductors (technically technology as well). At the same time energy, after a month-long slumber, started coming back to life. It was not an en masse breakout, but stocks started to move up on some of the best volume in a few weeks. Transports climbed as did agriculture and metals. As we discussed Tuesday night, money was rotating back into these early leaders as it left the most recent market leaders, and indeed that gave us some buys just as we planned.
In sum the action was not as bad as the final tape suggests. Down early on news, a hold of support, and then a rebound on some solid volume. Leaders started to break higher again ahead of the rest of the market. That is the action you want to see as the market overall tests and starts to come back: money moving into leaders that have tested or consolidated and are ready to go again on another attack as on the Alp Galibier in stage 9 of the Tour. CVX, FCX and friends were heading higher Wednesday as the overall market struggled. Even when sellers were taking their shot some leaders that rested earlier were making their moves again. As noted, that shows a bid still exists under the market, and of course that remains a positive for the market.
THE ECONOMY
Bernanke keeps to the company line.
Bernanke appeared before the House to give our leaders a summary of the state of the economy and monetary policy. His address offered a branch to both sides of the inflation and economic equation. He emphasized the sub-prime issues a bit more, saying it had "eroded significantly" but stopped short of saying sub-prime was bleeding into the rest of the economy. He appeased the inflation hawks, noting that "recent inflation was clearly too high" in talking about the rise in food and energy prices, but then said that core inflation was the "preferred gauge" in setting monetary policy and that core had moderated in recent months. He concluded with inflation was the biggest threat to the economy and the energy was the biggest risk to trigger inflation while the sub-prime and housing market could not be ignored.
In sum the Fed is basically on hold unless energy prices spill over into the economy (prompting a hike) or the housing/sub-prime market impacts the rest of the economy (prompting a cut).
Is the company line realistic?
We have heard for years and years how the Fed's 'comfort zone' for inflation is 1% to 2%. Sounds reasonable, i.e. keeping inflation lower is part of the Fed's mandate. Problem is, when you look back in history at just what inflation rates run both in good economic times and bad, the Fed's comfort zone is simply unrealistic.
We have always believed the Fed operates in fantasy land, and the facts bear that out. Though the Fed has 2% as its top limit, we have often heard from FOMC members how inflation at 2% or even the 1.9% on the core PCE is too high. Yet inflation has been at 1.25% or lower only 2% of the time over the past 50 years. The average inflation lows for that same period run in a range from 1.8% to 2.0%.
This data indicates that the Fed's 'target' for lack of a better word simply does not track history. If the Fed tries to get inflation below 1.5% it is chasing something that the economy and indeed the Fed has been unable to produce. Indeed, when the Fed tries to fend off inflation, real or imaginary (as in 1999), it tends to wreck an otherwise perfectly healthy economy as it strives to get inflation down to a level that historically has occurred only 2% of the time. Despite that very low amount of time at an 'ideal' inflation rate, we have somehow muddled through with the best economy on earth. Just think how strong we would be now if the Fed did not periodically purposefully send the economy into recession in order to get inflation down into its target zone or 'prevent' inflation from arising.
It is enough to make you sick to think of all the opportunity lost and retirements ruined as the Fed tries for unattainable and frankly, unhealthy, levels of inflation. It is always good to try to do better at whatever you do, but in terms of the Fed, that doesn't mean trying to get inflation lower and lower. It should try to help facilitate the best stage for the economy to flourish with stable prices, not some artificial 'comfort zone' that in the harsh light of reality does not fit the real world.
So, as Bernanke sits in front of the Senate Thursday, we hope that some senator will take him to task over this comfort zone and why it is necessary to try and hobble the economy to obtain a rate of inflation that is symptomatic of Fed overreaction. There is nothing wrong with low or no inflation at all; we have had that before in times of economic expansion. Indeed, economic expansion leads to lower inflation due to improved supply (talk with former FOMC member Bob McTeer). The problem arises when the Fed tries to prevent inflation it feels has to be coming due to the strong economy. It then tightens to slow the economy, but if it is successful in doing so it often results (13 out of the last 15 attempts) in a recession or flat economic growth. That slower growth is where the inflation is spawned as supply shuts down and demand picks up before supply (just look at the last recession and recovery). In the greatest economic irony of all, the Fed tends to cause inflation by the very means it uses to try and avoid it.
THE MARKET
MARKET SENTIMENT
VIX: 16; +0.37
VXN: 16.77; -0.18
VXO: 15.84; +0.37
Put/Call Ratio (CBOE): 1.11; +0.18. Jumped right back up over 1.0 on the close at the first sign of selling. Like that continued high anxiety and those that stand ready to try and push the downside when they can. Thus far it has only helped drive things higher.
Bulls: 49.5%. Basically flat from last week's 49.4%. Still high but well off the 53.8% three weeks back and the 56.7% five weeks back. 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: 21.3%. Nice jump from 18.0% after hanging in that 18% range for three weeks. After hitting near 30% in March it has faded back in the subsequent rebound and this current selling is not jumping it higher. Still is holding lower and did not rise as it did in March. 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: -12.8 points (-0.47%) to close at 2699.49
Volume: 2.147B (+0.08%). Volume was higher again, this time as NASDAQ posted a loss. But NASDAQ shaved 25 points off its low and closed higher than the open. That is not bad volume but volume on a rebound as buyers stepped back in.
Up Volume: 740.591M (-640.6M)
Down Volume: 1.471B (+692.911M)
A/D and Hi/Lo: Decliners led 1.67 to 1. Not nearly as bad as it was intraday with readings in excess of -2:1.
Previous Session: Advancers led 1.04 to 1
New Highs: 48 (-48)
New Lows: 103 (+43)
NASDAQ CHART: http://www.investmenthouse.com/ihmedia/NASDAQ.jpeg
NASDAQ gapped modestly lower on the Intel earnings but then fell hard, just undercutting the 10 day EMA on the low but holding above the early June high. It held and reversed with a 25 point run off the lows in the afternoon and a particularly energetic surge in the last half hour of trade as buyers moved in and some shorts covered after they realized NASDAQ was not going to be crushed on the rocks as a result of laggard Intel's laggard numbers. EBAY was a wet blanket after the Wednesday close, but IBM was sweet and techs are going to take their lead from IBM and not EBAY. May still need to backfill a bit more but this was a good insight into the fact that there are still buyers ready to push NASDAQ higher.
SOX (-1.34%) really took a licking intraday, and the close was no rose garden, but it cut its losses in half on the rebound as it shook off Intel. Its breakout was never in jeopardy and SOX remains in position to continue its rally though as with NASDAQ it could still backfill a bit more before resuming the move.
SP500/NYSE
Stats: -3.2 points (-0.21%) to close at 1546.17
NYSE Volume: 1.765B (+23.08%). Volume was the highest in a month as SP500 reached 16 points lower but then reversed for a modest loss. Ditto SP600. As with NASDAQ that is not really distribution, but buyers moving in hard on the dip.
Up Volume: 644.965M (+60.901M)
Down Volume: 1.096B (+265.042M)
A/D and Hi/Lo: Decliners led 1.8 to 1. Closed much better than intraday when reading approached -3:1.
Previous Session: Decliners led 1.38 to 1
New Highs: 78 (-12)
New Lows: 57 (+36)
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
SP500 was again weighed down by the financials as the WSJ suggested the sub-prime issues were beyond US borders, showing up in Australia and other locales. The US financials were weak on that as well as BSC's admission that both of its hedge funds were basically worthless. At first it was only one and now it is both; that keeps investors on edge as to what else lurks in the shadows, and thus their poor performance and SP500's struggles as well. Overall, however, SP500 performed very well, shaking off the financials and then rebounding for a very modest loss after testing its trendline.
SP600 (-0.36%) more or less mirrored the large cap index, reaching down to its up trendline on the low and then rebounding to post just a small loss and holding above the 10 day EMA (440.58) on the close. That puts SP600 right in the middle of its uptrend channel as the small caps, though lagging of late, keep on chugging along.
DJ30
The blue chips tested lower on their intraday test, waving at the 10 day EMA on the low and then rebounding nicely to cut its losses. Not a lot of drop off from the industrials, just testing the gain. The volume was strong and it snapped DJ30 right back up after that test lower. As with NASDAQ, there could still be more backfilling toward the 10 day (13,786) or even the June highs (13,690ish), but the action is solid. As a bonus, DJ20 hit a new all-time high on the session again. DJ30 and DJ20 have been a potent 1-2 punch on this last breakout and run.
Stats: -53.33 points (-0.38%) to close at 13918.22
Volume: 324M shares Wednesday versus 266M shares Tuesday. Lots of volume as lots of Dow earnings (e.g. INTC, JPM, UTX)
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
THURSDAY
The market survived some typically crappy Intel earnings, an in-line CPI (no continued decline), higher oil prices, Bernanke, a potential global widening of the sub-prime issues, and any other number of issues that confront it. Thursday the Philly Fed at noon and the FOMC minutes at 2:00 will provide the economic backdrop along with more Bernanke-speak.
Interesting yes, but 'tis the season for earnings. After the close EBAY and IBM posted their results. EBAY was disappointing as its listings fell; EBAY says that is good because it is the result of EBAY trying to get rid of low margin re-sellers, but investors did not take it that way. It was no slaughter after hours, but it was definitely lower by about half a point. At the other end of the spectrum there was IBM. Ah, IBM. It beat on the top and bottom line and it had good things to say about the future. It was up close to $4 after the close. IBM has sparked other earnings rallies, and it was certainly spreading some cheer around the after hours ECN's.
But of course with earnings it is always a question of 'what have you done for me lately?' More earnings will hit every day, and as seen in the prior quarter, it takes a series of solid reports that set the trend to get things going. IBM is a start (along w/UTX and company), but unlike the others it is important because it gives some credence to the NASDAQ rise ahead of the season, something NASDAQ has not enjoyed much since its 2000 crash.
The test and recovery was good action, shaking out some sellers and getting rid of some of the froth after the breakout, but it may not be over. Two to three days of such testing is more typical and sets up the next leg better. Of course if the right news hits then the market does not wait for what we feel is best. It is making the pullback we said it would need, and when it did it found a cadre of buyers standing by to jump in. Thus we need to be ready to move if strong stocks start back up. We were picking some off as they did that on Wednesday, and we see more in the same position, ready to turn back up and rally more after this test. We want to be ready to pick those up as they rebound as well, thus focusing our money on winners in strong patterns or trends.
Support and Resistance
NASDAQ: Closed at 2699.49
Resistance:
2673 is the July high
2778 from a July 1999 peak
2887 from a September 1999 peak
2920 from an October 1999 peak
Support:
The 10 day EMA at 2680
The 18 day EMA at 2658
2648 is the November/February up trendline
2634.60 is the June peak
2601 is the mid-May intraday peak.
The 50 day EMA at 2608
2594 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 1546.17
Resistance:
1553 intraday high from March 2000 is the all-time index peak
1559 is the upper channel line from October/December 2006
Support:
1541 is the early June high.
1539 is the mid-June intraday high
The 10 day EMA at 1537
1534 is the early July high
1533 is the late November to February up trendline
1528 is the March 2000 closing high
The 50 day EMA at 1514
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 13,971.55
Resistance:
The July high at 14,022
Support:
The 10 day EMA at 13,786
The early June high at 13,676 (closing), 13,692 (intraday)
The mid-June high at 13,689
The early July peak at 13,671
The mid-May peak at 13,556
13,545 is the upper channel line in the November/February channel
The 50 day SMA at 13,530
13,488 is the November/February up trendline that marks the lower channel.
The 50 day EMA at 13,473
The 90 day SMA at 13,137
12,796 at the February 2007 high
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
July 16
New York PMI, July (8:30): 26.5 actual versus 16.0 expected, 25.8 prior
July 17
PPI, June (8:30): -0.2% actual versus 0.1% expected, 0.9% prior
Core PPI (8:30): 0.3% actual versus 0.2% expected, 0.2% prior
Net foreign purchases, May (9:00): $126.1B actual versus $72.0B expected, $80.3B prior
Industrial production, June (9:15): 0.5% actual versus 0.5% actual, -0.1% prior (revised from 0.0%)
Capacity utilization, June (9:15): 81.7% actual versus 81.6% expected, 81.4% prior (revised from 81.3%)
July 18
CPI, June (8:30): 0.2% actual versus 0.1% expected, 0.7% prior
Core CPI, June (8:30): 0.2% actual versus 0.2% expected, 0.1% prior
Housing starts, June (8:30): 1.467M actual versus 1.45M expected, 1.434M prior (revised from 1.474M prior)
Permits (8:30): 1.406M actual versus 1.49M expected, 1.49M, 1.52M prior
Crude oil inventories (10:30): Gasoline -2.3M bbl
July 19
Initial jobless claims (8:30): 310K expected, 308K prior
Leading economic indicators, June (10:00): -0.1% expected, 0.3% prior
Philly Fed, July (12:00): 14.0 expected, 18.0 prior
FOMC minutes, June (2:00)
End part 1 of 3
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