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7/26/07 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Targets hit alerts: None issued
Buy alerts: VSEA
Trailing stops: None issued
Stop alerts issued: BID; MTL
SUMMARY:
- Credit contagion fears trump strong tech earnings and send market reeling.
- Housing data continues to stink, durables not bad.
- Earnings profits continue to jump.
- Waiting for the eye of the storm for a relief bounce. GDP could provide the trigger.
Market gets a second case of monetary indigestion.
Strong earnings results from all across technology (AAPL, QCOM, BIDU, WFR, SYMC, etc.) may have helped individual stocks, but they were not enough to withstand the second wave of monetary worries for the week. Mortgages hit early this week, pushing back to the fore as earnings up to that point had simply failed to show a steady stream of better than expected earnings. When the expectation of better than expected earnings failed to materialize the market did not have much reason for its rally ahead of the results, and it turned back to worrying about the mortgage market. Result: a 19 point SP500 decline. Then word of credit issues started to filter through. Tuesday SP500 fell 30 points as more earnings disappointments and word that some deals were not going to fly due to funding issues. Thursday there were plenty of good earnings, but the rise of credit worries had already taken hold and the market was rocked.
Yes, contagion was the word for the day. Contagion raises a rather visceral response from the market, i.e. deep and fearful selling. It wasn't just worry of a US crunch resulting from the housing market, but a world-wide drying out as a couple of deals failed to fund and one company pulled an additional stock offering from the market. New Zealand raised its interest rates in an attack on the carry trade. The result was a massive rearrangement of financial assets as the carry trade was unwound. How do you know? Because the yen jumped, gold slumped, and the dollar fell further in response.
This led to a massive intraday sell off on the heels of the prior declines. On the lows the indices were down 6% each from their recent highs. SP500 undercut its June low that marked the bottom of its May to July range. Then NASDAQ tapped the 90 day SMA on the low and Treasury Secretary Paulson came out and said there were mechanisms for controlling the mortgage issues. The indices reversed and rebounded into the close. They did not turn positive but they took back some good chunks of real estate: 140 points on the Dow, 33 points on NASDAQ, and 17 points on SP500. Of course they were still massively in the red for the session, but there were life signs as the shorts figured 6% and a week of selling was enough to cover some positions.
The key from our perspective is that this is an event driven sell off similar to the one seen in February to March when the Chinese government tried to slow its economy and the sub-prime issues started to emerge. That is not a great thing, but when you look at the continued strong underpinnings in the US and global economy it looks more like the same kind of shorter term worry. Not that it is an illusion: there is something of a near term credit lock up. Look at the mortgage market; not even prime mortgages are getting a bid. There are definitely some issues there, and if the Fed remains in the 'inflation is our main worry' camp they could fester and cause some problems.
Technically it was an ugly day with some silver in the lining. The indices gapped lower along with stocks as they rounded out a week of selling, taking out many near support levels in a steady scream lower. The did, however, hold support on the lows and then put in a rebound as the shorts covered following that week of downside. SP500 broke the 90 day SMA and support at 1484 (the June low) but then rebounded off the longer term up trendline from the summer of 2006. NASDAQ hit the 90 day SMA and bounced, closing on the trendline formed in Q1 2007.
Volume exploded to record levels (3.5M NASDAQ) as the market sold off and investors played hot potato with shares. Breadth, which had flattened for a month has really tanked this week. Thursday NYSE breadth hit -13.5:1. We saw -10:1 at the lows in the 2002 bottom. 10:1 is an extreme level; 13.5:1 is more so. VIX (the volatility index) hit the June 2006 highs, surpassing the early 2007 spike.
In sum, the technical action was very downside biased. You could say extremely so. The rebounds off of support levels suggest that it is near term oversold, and you would expect after a week of selling, a 6% decline, and some extremely negative internal readings that the interim rebound is just about ready to begin.
THE ECONOMY
Housing market remains down for the count.
The news in housing gets worse and worse, or at least the rhetoric surrounding it does. Thursday the new home sales report showed a 6.6% decline in June, an acceleration from May's 2.2% decline. Prices fell to $237.9K from $241K. Inventories jumped to 7.8 months from 7.1 months. Hard to be very happy about that. Indeed, it shows that there is still no bottom in housing with respect to the most recent sales. There is some life in new mortgages as CFC reported in its marathon conference call, but not nearly enough to make a dent just yet.
Durables order up but not as much as anticipated.
It is always called a volatile report and it proved it once again in June as orders rose 1.4% after May's 2.3% drop. Of course, expectations were for a 2% gain, and with the worries about the mortgage and housing market, it was easy to get all bunched up over the miss on fears the consumer was heading for the barn.
Computers were lower (-5%), communications were down (-13%), but this was a give back from that strong May reading. The item that was the most bothersome was the 0.7% decline in business investment. No question the consumer is getting worn down some by high gasoline prices and falling home prices. Thus the need for a strong business sector. Thus far it has posted a good comeback this second quarter after falling off in the mid-cycle slowdown. Not too worried about it falling off sharply near term, however.
Companies may not have blown out each earnings report, but earnings are no slouch.
Earnings were mixed enough to throw the market off the scent and it started to waiver, giving the sub-prime and credit issues the wedge to crack the rally. Despite that mixed start to earnings, with the SP500 half-way through reporting, profits are up 15.4%, about 3 times consensus.
That is not bad, but the question for the market is always 'what about the next quarter . . . or two . . . or three?' They are running ahead of consensus as well, but with the credit and sub-prime issues in the fore right now investors are not in the mood to believe just yet. They are still looking for the dead bodies to surface in the mortgage and hedge fund world, and until they do or the investor becomes convinced they won't surface they are not ready to buy into those projections, at least not on a market-wide basis.
THE MARKET
MARKET SENTIMENT
VIX: 20.74; +2.64. Volatility hit 23.36 on the intraday high, just missing the June 2006 high at 23.81. It peeled back as the market rebounded in the last hour. Back in June 2006 the SP500 had declined 8% from its May high when volatility spiked. The current 6% decline is getting close, particularly as it has taken less than a couple of weeks to get there.
VXN: 19.5; +0.58
VXO: 21.77; +3.5
Put/Call Ratio (CBOE): 1.53; +0.48. A third session above 1.0 on the close and another one beating 1.0 by a long shot. Getting ripe along with volatility.
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: -48.83 points (-1.84%) to close at 2599.34
Volume: 3.502B (+39.45%). Volume hit a record as NASDAQ gapped lower and sold off, managing to rebound in the last hour. Plenty of distribution as noted earlier this week and Thursday was no exception.
Up Volume: 434M (-885.161M)
Down Volume: 3.056B (+1.9B)
A/D and Hi/Lo: Decliners led 4.69 to 1. Bad but not the -6+:1 intraday thanks to the rebound.
Previous Session: Decliners led 1.24 to 1
New Highs: 64 (+32)
New Lows: 373 (+259)
NASDAQ CHART: http://www.investmenthouse.com/ihmedia/NASDAQ.jpeg
Since the breakout, NASDAQ has gapped at the open eight consecutive sessions. After a gap higher Wednesday it gapped lower Thursday and sold off to the 90 day SMA in a breakneck decline that gave up the breakout and put it in the lower reaches of the May and June ascending range. It found purchase at the key 90 day and rebounded to hold the October/December up trendline on the close. Nice recovery off the lows, and with a week of selling NASDAQ may be a bit oversold. The pattern suggests, however, that there is more downside to come though in the interim an oversold bounce is a possibility given the string of selling sessions and the steep decline. Not expecting a major rebound on this leg and 2650 may be pushing it.
SOX (-2.22%) tanked as well, unable to make anything off of that doji at the 18 day EMA on Wednesday. It managed to bounce modestly and hold above the 50 day EMA on the close, but SOX still has some groundwork to complete before it resumes that breakout.
SP500/NYSE
Stats: -35.43 points (-2.33%) to close at 1482.66
NYSE Volume: 2.785B (+37.17%). Big volume as SP500 undercut its May to June trading range. Just not a lot of good news from the large caps thanks to the massively weak financials.
Up Volume: 105.863M (-803.161M)
Down Volume: 2.038B (+954.826M). Almost 20:1 downside to upside volume. As with the other internals, massively weak.
A/D and Hi/Lo: Decliners led 9.33 to 1. Very weak on the close and -13.5:1 intraday. These are levels not seen since the bottom in 2002. That they are occurring just off a high and preceded by a jump in volatility raises the concern that this is not just another hiccup in the continued rally but something more nefarious. It is something that time will tell as the sell off tries to form a consolidation to set up another attempt at a move higher.
Previous Session: Decliners led 1.5 to 1
New Highs: 41 (+14)
New Lows: 743 (+542). This is also at a level associated with bottoms.
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
SP500 had the weakest action, tanking to an old trendline from June and July 2006, rebounding to close near the June intraday low (1484). As noted above, the internals are all at levels you would expect to see at the bottom of an extended sell off. They have occurred after a 6% decline in the SP500 as have the secondary indicators such as volatility and the put/call ratio. They are all falling 'in line' in the sense their levels suggest a bottom. As noted above, we will have to see if they pan out, i.e. that the reach lower Thursday is the bottom more or less of the next consolidation phase. As of the close Thursday, SP500 has a lot of work to do to set up another move higher.
SP600 (-2.46%) continued its swan dive, undercutting the 200 day SMA on the low and then rebounding to hold above that level on the close. A rebound, but minute compared to the 30 point decline and 7.8% drop from the all-time high hit just over a week back. That is some serious selling as the small caps are unloaded and investors look more to large caps. Definite sign the economic expansion is middle aged.
DJ30
The Dow was not immune though it started in better position than the other NYSE indices. It did break its uptrend channel lines and the 50 day EMA on the selling, managing to recoup some losses off the low that tapped toward but still fell well short of the June lows at 13,250 marking the bottom of its last consolidation range. It has given up the breakout but it is not a breakdown yet. Looking for an oversold bounce soon, but it has yet to make it down to the 90 day SMA (13,245) that is a natural support level.
Stats: -311.5 points (-2.26%) to close at 13474.57
Volume: 426M shares Thursday versus 266M shares Wednesday. Massive volume on the blue chip index as well. Lots of heavy selling after enjoying a strong run. The downside is not likely over here, though we may see a bounce after a week of selling before another test.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
FRIDAY
GDP a relief bounce catalyst? All the President's men are assembled.
The market bounced during the last session, taking some of the sting out of the sell off, but not much. It is typically better for the market to close at the low, sell off further to start the next session, and then recover intraday. Better, but things don't always go according to the industry standard script. There is going to be a rebound from the selling. 6% in a week is a lot of selling. It may be tomorrow or it may be on Monday. That will likely not be the end of this episode just as the initial recovery was not in February and March. That means a bounce, a test of the low, then a recovery. Kind of like a hurricane with its front wall, the eye, and the back side. You get hit with the front wall and knocked down. The eye lets you get up and try and patch things up, and then the backside comes along and knocks things back down. In theory it does not destroy everything and the market can then recover.
We will look to use the bounce to get rid of laggards that gapped lower on us and need some help. If they rebound and start to stall out then we button them up. As for those that held up we will see if we can take some gain on the rebound move. For the really strong we may look at keeping some positions around to ride on through. We also will look at some of those really strong boys to ride up in a recovery. There are still many of those that held up as if there was no major sell off underway. After that upside move we will have to ready for the test of the low hit on this leg, kind of like getting things battened down during the eye passage ahead of the backside of the storm.
Will there be a rebound Friday? After such a quick and sharp decline the market is in prime condition to bounce. As noted, it would have been better if it closed on the low Thursday and then dropped again Friday morning; that would really put the fear into investors of all ages. As it is we have to deal with a rebound in the last hour and whether that can hold over to Friday.
The first iteration of Q2 GDP is released before the open and it is expected to reflect a strong Q2 and big recovery from Q1's 0.7% showing (3.2% expected). After this selling a strong number could allay some fears, though it is back-dated a bit. It is interesting to note that the President's four top economic advisors and cabinet members are gathering to give an interview with CNBC tomorrow morning. Gee, think the GDP report is going to be a big one? They are not supposed to know in advance but the odds are 2:1 they already know the result and are ready to talk it up and try to calm the markets. Might be good for that relief bounce that we are looking for to set up the next test.
Whether it happens tomorrow or early next week, however, the market will provide a relief move and we will gauge its strength as well as the test lower. This time around there is a worry that the liquidity that fueled the prior market gains is running low, and that is leading many to question if this is just a hiccup in a continued run higher. That makes it a tougher call, but at this stage it is still just a worry of contagion with the credit markets a bit tight but not crashing. Bernanke has said all along (not in response to this current situation, however) that the Fed is ready to inject liquidity if needed in order to facilitate an orderly market, whether that is up or down. He doesn't want to bail out bad investments in mortgages and the like, but he knows a market cannot function without liquidity. Thus if this credit squeezed turns into a crunch we can expect the Fed to make a symbolic move in lower rates. It will take more than what we are seeing now, however, for the Fed to jettison its fear of inflation and push some money into the system. In the interim, the market is bleeding off the 'takeover premium' that pushed stocks higher when credit was easier.
Support and Resistance
NASDAQ: Closed at 2599.34
Resistance:
2601 is the mid-May intraday peak.
The 50 day EMA at 2619
2634.60 is the June peak
2655 is the November/February up trendline
The 10 day EMA at 2660
2673 is the early July high
2725 is the July high
2778 from a July 1999 peak
2887 from a September 1999 peak
2920 from an October 1999 peak
Support:
2600 is the October/December trendline
2564 is the 90 day SMA.
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 1482.66
Resistance:
1490.72 is the early June closing low
The 50 day EMA at 1516
The 10 day EMA at 1522
1534 is the early July high
1539 is the mid-June intraday high
1541 is the early June high.
1542 is the late November to February up trendline
1553 intraday high from March 2000 is the all-time index peak
1562 is the upper channel line from October/December 2006
Support:
1475 from peaks in December 1999 and January 2000
1461.57 is the February 2007 high.
1460 is the July 2006/March 2007 up trendline
1440 is the mid-January high
Dow: Closed at 13,473.57
Resistance:
13,540 is the November/February up trendline that marks the lower channel.
The 50 day EMA at 13,540
13,585 is the upper channel line in the November/February channel
The mid-May peak at 13,556
The early July peak at 13,671
The mid-June high at 13,689
The early June high at 13,676 (closing), 13,692 (intraday)
The 10 day EMA at 13,819
The July high at 14,022
Support:
The 90 day SMA at 13,245
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): 5.75M actual versus 5.9M expected, 5.98M prior
Crude oil inventories (10:30): -1.1M actual versus -1.9M expected
Fed Beige Book (2:00)
July 26
Durable Goods Orders, June, (8:30): 1.4% actual versus 2.0% expected, -2.3% prior (revised from -2.4%)
Initial jobless claims (8:30): 301K actual versus 310K expected, 303K prior
New home sales, June (10:00): -6.6% (834K) versus 900K expected, 893K prior (revised from 915K)
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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