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7/24/07 Technical Traders Report Update
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Technical Traders Report Subscribers:
Full report issues Wednesday
MARKET ALERTS
Targets hit alerts: None issued
Buy alerts: STP
Trailing stops: ARRS; ININ
Stop alerts: OEH
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SUMMARY:
- With earnings hopes waning after early results, market turns back to mortgage worries and sells.
- High gloom even as the economy continues higher.
- After a series of weaker than expected earnings surprises , AMZN tries to turn the tide.
As earnings fail to surprise, mortgage issues reassert themselves, market sells.
Heading into earnings season the market moved higher, anticipating better than expected earnings similar to what happened in Q1 when expectations of 3.8% earnings growth turned into almost 10% earnings growth. In other words, this seasons the expectations were higher than the published expectations.
While some stocks have handily exceeded the street and have provided very nice guidance ahead, a number of key misses are hamstringing the market. INTC got the ball rolling as it missed expected earnings improvement. Then CAT shocked everyone with its miss due to slow US business, followed quickly by GOOG's miss. IBM and a few others managed to prop things up in between the selling, but then TXN delivered another tech chop with its crappy guidance, and AT&T's earnings indicated iPhone sales may just not be all that great. Just too many earnings, particularly tech, not beating expectations as expected.
Without the earnings to support the run higher ahead of the season, the ever-present worries about the housing market and credit markets in general pushed to the front again. It didn't help that the WSJ reported GM could not sell its Allison engine unit due to financing issues and Bill Gross of Pimco said the contagion had not even begun. When CFC (mortgages) announced its weak results (though new mortgages hit a year high) in the household sector, that only fueled the worry that some kind of debt contagion was ready to swarm the market. Lower oil didn't help (73.56, -1.33) nor did continued low bond yields (4.74% 2 year, 4.91% 10 year).
The market gapped lower, tried a decent recovery into lunch, cutting the early losses more than in half. Then the afternoon dogs started barking and they took several bites out of the rebound as sell programs hit the market as many times as Alberto Contador hit Rasmussen on the hills of the Pyrenees on Monday. Unlike Rasmussen, however, the market was not game. CFC held a 3 hour conference call and the market just went lower and lower as they talked about how crappy their business was. It could not get out from under the sellers and closed just off the session lows. More leaders buckled on the session, further thinning their ranks as the market breadth ballooned to the downside.
Technically here was some damage done. SP500 broke its 50 day EMA and gave up its breakout from not quite two weeks back. SP600 (small caps) plunged through the 90 day SMA in a move that took it through its 50 day EMA as well. That accounts for the -8.8:1 breadth on NYSE (it was -9.9:1 intraday ). Man. NASDAQ and DJ30 took hits as well, but they did not give up their breakouts over the June highs. It is a tug of war of sorts as to whether NASDAQ and DJ30 can hold the other indices up or slide back below the breakout as well. They are holding the others up by their climbing rope, but DJ30 and NASDAQ are slipping as well as they try to anchor the market and hold their trendlines (as they are thus far doing).
That breadth is interesting. At -10:1 intraday that was as bad as you saw it at the bottom of the 2002 sell off. No kidding. I remember writing that at the time, noting that it was officially at an extreme level. This is a bit different, however, as the indices are coming off of highs and not new lows. Vastly negative breadth tends to indicate a sold out condition, and that means you are looking at a bottom. Coming off of a top showing a significant amount of volatility, this spike in negative breadth is not necessarily a plus.
At the same time we know that sharp and steep corrections are hallmarks of continuing bull rallies. You cannot argue about the sharp and steep nature of the move. Volume surged. Breadth careened to the downside. Stocks turned orderly pullbacks in to breaks of support, though not outright collapses. The market was in a 'throw it all out' mood in the afternoon. Everything was hit, even stocks that were in excellent shape all day and broke higher after great tests (e.g. STP). When you have that kind of mentality with the negative internals things are typically overdone already, at least on a short term basis. That typically means we get a rebound to test the move, and what it does from there tells the story for the next few weeks. After a beating such as this there is still likely to be quite a bit more work to be done before another steady upside advance sets in.
THE ECONOMY
No scheduled economic reports for Tuesday either, just a lot of earnings and worry about credit, both individual and corporate. CFC said it was seeing defaults in its prime lending business in addition to the sub-prime, and that has the street ducking into doorways to avoid the falling sky. Predictions out Tuesday indicated the housing market would be down and out in Beverly Hills and most other places into 2009. Hard to get too upbeat about that.
The tension right now is what the data are showing versus what the data might show. Many were donning sackcloth and ashes last year as the economy slowed in the mid-cycle downturn, pointing and shouting 'aha!!' at the downturn as the supposed signal the housing crunch was finally taking the consumer out of the picture. Of course Q2 re-accelerated and it looks to be a 2.5% to 3% GDP growth spurt even with the housing crunch.
Okay, so the economy recovered anyway. What about the future spread of the contagion? Maybe it does fan out, but as we have reported the past several weeks, the jobs picture is very strong, incomes are up based upon what the government is reporting with respect to tax receipts (+6%), and confidence remains solid.
Now we also have oil prices coming off a peak near $75/bbl and gasoline prices did not surge higher with them on this last run. Yes they moved up a dime or so but they did not spike higher as more refineries came on line. The further decline in oil from that recent peak is only going to feed into the downside pressure on gasoline prices. That is another positive for the consumer outside of the mortgage market, not to mention the issues in real estate are nowhere, but nowhere near as bad as they were in the 1980's. It's just that not many remember that time and the issues that led up to it. High interest rates, high valuations (stocks and real estate), a massively speculative climate.
The point? Sure looks gloomy right now, especially on the heels of a 226 point spanking on DJ30 and 51 points on NASDAQ. The underpinnings of the economy, however, mortgage issues or no mortgage issues, are very solid. Sharp corrections are normal in strong uptrends, and the market is in one right now. It has some more work to do on this choppy period of the past two months, but the longer term economic trends still look solid.
THE MARKET
MARKET SENTIMENT
VIX: 18.55; +1.74. Matching the late June peaks and gunning for the 21+ level hit intraday in March during that selling.
VXN: 19.31; +1.46
VXO: 19.03; +2.48
Put/Call Ratio (CBOE): 1.48; +0.66. Exploded over 1.0 as downside speculation, whether playing the downside or buying downside protection. Either way it measures a high level of anxiety as stocks turn lower.
Bulls: 52.3%. Up from 49.5% and 49.4%. Moving back up toward that 53.8% hit a month back and 56.7% six 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: 19.3%. Back down under the 20% threshold level, down from 21.3% after jumping up from 18%. Spent a month at 18%, well off the 30% hit 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: -50.72 points (-1.89%) to close at 2639.86
Volume: 2.469B (+18.74%). Volume surged to the highest in over a month, topping expiration volume. Definitely some sharp distribution on NASDAQ.
Up Volume: 324.812M (-839.453M)
Down Volume: 2.144B (+1.248B). Close to 7:1 in favor of the downside.
A/D and Hi/Lo: Decliners led 4.83 to 1. Ugly. Even the large caps, after holding up into the afternoon, lost as much ground.
Previous Session: Decliners led 1.17 to 1
New Highs: 17 (-43)
New Lows: 219 (+140)
NASDAQ CHART: http://www.investmenthouse.com/ihmedia/NASDAQ.jpeg
As noted above, NASDAQ was not spared from the selling and indeed it was a target given that TXN posted the miss. Even so its losses were less than SP500, but little consolation. It fell to its mid-June peak and the confluence of the old upper channel line and the July/August 2006 up trendline. Natural spot for it to hold if it is going to move higher, but we expect it to test lower at least intraday down toward the 50 day MA and even the lower trendline at 2590 before it rebounds.
SOX (-1.91%) was hammered as well, falling to the 18 day EMA. Still well above the May and June peaks but it is falling hard right now and needs some good earnings to offset the INTC and TXN debacles.
SP500/NYSE
Stats: -30.53 points (-1.98%) to close at 1511.04
NYSE Volume: 1.989B (+30.76%). Volume surged, just topping expiration volume as the large caps continued to struggle, knifing through the 50 day EMA on the close.
Up Volume: 132.818M (-719.141M)
Down Volume: 1.849B (+1.194B). 14:1 downside volume to upside volume. As with breadth, that's extreme.
A/D and Hi/Lo: Decliners led 8.86 to 1. Extreme at the close and even more so intraday with a 9.9:1 downside gap.
Previous Session: Decliners led 1.06 to 1
New Highs: 20 (-78)
New Lows: 249 (+164)
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
The large caps have a problem, and it is called the financial sector. The market is beating the crap out of these stocks even with the solid underpinnings in the economy. The market is banking that they have nothing good ahead of them from this credit issue, and Tuesday more of the large caps followed them. SP500 gave up its breakout on the way to breaking below its 50 day EMA (1517). It is still above the early July interim low and the late July low (1484 intraday) and thus can still make a higher low. It is also easily within its year trendline, though it has to fall near 1465 to get to it. Very much under pressure here as the large caps have lagged the move, and its future depends upon when the large cap financials finally bottom. Looking at JPM, MS, GS, and company, they are not at that point yet.
The small cap SP600 (-2.46%) was the downside leader as it popped the 50 day EMA and the 90 day SMA as it found the June twin lows. This is an important level as it has set up a twin peak as well. Small caps are clearly in distress and have something to prove here at 425.
DJ30
The Dow sold as well and undercut its 18 day EMA, but it also held onto its breakout, tapping at the June highs on the close. It likely has more downside testing to take care of before it is done as it has the 50 day SMA and the upper and lower channel trendlines from its former trend to test. Under pressure but in much better position than SP500.
Stats: -226.47 points (-1.62%) to close at 13716.95
Volume: 296M shares Tuesday versus 237M shares Monday. Volume was up but not matching three prior sessions this month that saw higher trade. Thus not out and out selling on the Dow.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
WEDNESDAY
Some economic data comes back into the picture, but existing home sales, crude oil inventories, and the Fed Beige Book is not likely to sway the market. It is in a mid-summer selling mode to set up another run now that the earnings failed to come through and pump up expectations this time around. Those higher prices into earnings are now being taken out. This is one of the reasons we took quite a bit of gain on the way up as stocks surged higher ahead of the results.
There are still issues ahead, the foremost being the continued downside momentum the Tuesday move spawned. Now after hours AMZN provided the kind of earnings surprise the market was looking for from most big names, and that sent its shares surging 15% higher, dragging some of the beaten down tech stocks back up with it albeit modestly. There is always the possibility that AMZN ignites the earnings run again, though with all of the tech disappointments to this point it will likely take more than that to turn the tide.
The worry continues that the deal money has dried up, and it is likely to be slower for the deal market until Labor Day. It will be up to earnings to try and salvage the uptrends in the indices.
As for Wednesday, after such a sharp trade lower the momentum is downside but AMZN is trying to spark up some interest already, and there were stocks moving modestly higher after hours. Ideally, another blow down on the open would give the buyers an opportunity to buy in light of the AMZN earnings. We are looking for a rebound to test the breaks lower the indices made (e.g. SP500 below the 50 day EMA). From there the market shows us what it has in mind near term. If there is a stall we will use it to lighten up more on positions and then look for another decline to try and find a bottom, looking to play some breakdown tests to ride lower. Overall the market's underpinnings remain strong, but near term it has to work through the earnings disappointments and the rise, once more, of the mortgage fears.
Support and Resistance
NASDAQ: Closed at 2639.86
Resistance:
2673 is the early July high
The 10 day EMA at 2679
2725 is the July high
2778 from a July 1999 peak
2887 from a September 1999 peak
2920 from an October 1999 peak
Support:
2653 is the November/February up trendline
2634.60 is the June peak
The 50 day EMA at 2619
2601 is the mid-May intraday peak.
2599 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 1511.04
Resistance:
The 50 day EMA at 1517
1534 is the early July high
1540 is the late November to February up trendline
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
1561 is the upper channel line from October/December 2006
Support:
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 13,716.95
Resistance:
The 10 day EMA at 13,826
The July high at 14,022
Support:
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
13,575 is the upper channel line in the November/February channel
The 50 day SMA at 13,576
The 50 day EMA at 13,533
13,515 is the November/February up trendline that marks the lower channel.
The 90 day SMA at 13,213
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 25
Existing home sales, June, (10:00): 5.9M expected, 5.99M prior
Crude oil inventories (10:30)
Fed Beige Book (2:00)
July 26
Durable Goods Orders, June, (8:30): 2.0% expected, -2.4% prior
Initial jobless claims (8:30): 310K expected, 301K prior
New home sales, June (10:00): 900K expected, 915K prior
July 27
GDP advance Q2 (8:30): 3.2% expected, 0.7% prior
Chain Deflator, Q2 (8:30): 3.4% expected, 4.2% prior
Michigan sentiment, final July (10:00): 91.5 expected, 92.4 prior
End part 1 of 3
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