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money investment, investment help
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7/31/07 Investment House Daily
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Investment House Daily Subscribers:
MARKET ALERTS:
Targets hit alerts: None issued
Buy alerts: FTK; NVDA
Trailing stops: None issued
Stop alerts issued: COH; SIMO; SPSS
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SUMMARY:
- Relief rally extends . . . for another half session.
- PCE shows continued slower core inflation growth, but the market is in a deflationary scare.
- First of the month: will new money come into the market this time around?
Relief bounce sticks again, but only for half of the session.
Investors were in better humor Tuesday on the heels of the Monday bounce, pushing futures solidly higher. Some good news on the inflation from saw the core PCE grow at 01% (0.2% expected) and held at 1.9% annualized growth. Confidence was strong at 112.6 (105.0 expected) and earnings were again strong with GM, MRO, VLO, and HLT just some of the stocks that really beat earnings. That helped offset the expected 0.1% spending growth, the slowest in 9 months, and the weaker Chicago PMI (53.4 versus 58.5 expected and 60.2 in June), and surging oil prices (78.21, +1.38). There was even a deal or two with Stag's Leap Wine Cellars sold to Ste Michelle; out here that had everyone abuzz as Stag's is one of the premiere wineries in Napa Valley. Bigger picture, the $185M deal was no blockbuster.
The market was up and hanging onto the early gains better than it has the past month, but then the same issue that put the kibosh on the rally once more surfaced. AHM announced it could not get any loans and it really needs the cash. Thus it said it would have to liquidate assets. It dropped a quick, ugly 86% from just under $9 to about $1, and when it went, the budding bounce in the financial sector that was supporting the SP500 went with it. They rolled over and the rest of the market decided to chuck it and go with the financials.
Technically it was what you would call another textbook session. Monday was a relief bounce and Tuesday was a continuation bounce that met up with the reason for the selling in the first place. You don't need a program to know who won. After triple digit gains the Dow reversed triple digits, just missing that infamous 300 point intraday swing. Volume jumped back up and breadth swung from a very solid 2+:1 on NYSE to negative. DJ30 broke its 90 day SMA, and NASDAQ did as well, making an even sharper break as big tech names such as AAPL had their own demons to deal with (rumors it would cut its iPhone production based on demand, or more accurately, lack thereof). With that move the two holdouts join SP500 below that 90 day SMA level, thus displaying an unquestionably weak posture.
There is still some great leadership in the market that is either going about its own business (there are always those that make their own wake), using the selling to make a routine test, or holding up nicely after the last drop; all still look good for the upside though there is the overall market to deal with and the headwinds it throws off.
The overall action with its failed attempt to continue the bounce and intraday reversal shows that the next flush out is starting without that much of an interim bounce. That likely means this is just a continuation of leg 1 to the downside. So what, right? Well, that means another blow lower and then a more sustained bounce to come later and then another break lower to test this current selling. Just keeping the lifecycle in mind as the market makes its moves, and that allows you to have a better idea of what to expect and that means keeping those emotions under control better. That is the same move we saw in the spring and again last summer. Indeed it repeats often. The main question this time is whether this is the end of the long rally and significantly deeper correction or just another rather small basing process in a continued run higher. At this juncture the market has not tipped its hand.
Inflation or deflation?
The 1.9% annual PCE and 0.1% growth for the third month was a bonus for inflation watchers, but it had no lasting impact on the market Tuesday. Why? Because, despite rising prices in several sectors the market is worried about deflation right now due to the sub-prime weakness and the perceived credit problems. Those credit problems are the basis of the contagion worries that really started this selling. Credit issues suggest lower prices and the fear is that if there is a credit crunch prices for hard assets will tumble. Housing prices are lower, but the fear of contagion is that the problems spread to other areas of the economy.
Our fearless leaders tell us that there is nothing to fear, that they can keep the credit and sub-prime issues from spreading. Bernanke is on record saying it won't spread. Yet, the markets are suggesting otherwise as stocks fall and bond yields plummet from recent highs (remember the high interest rate scare and how that would quell deals?) as investors run to safety. Bernanke has still not suggested that there is a credit problem, and the market is worried about that as well. After Greenspan bailed the market out of each crisis, Bernanke is not talking the same, and that raises the fear that he either won't help out because he has a different policy with respect to financial markets, or worse, he doesn't see a problem. In reality, he has said that the Fed would provide liquidity so that markets can function. To me that suggests he will be ready to adjust the controls to make sure the right mix is available to smooth over the rough spots.
For now, however, the market is not comfortable at all with the situation or the potential Fed or administrative response. Thus when the AHM news hit today there was the reversal in financials that truncated the attempted relief bounce. The economy has held up well, but if the market perceives trouble then in the near term it is going to do what it is doing now, i.e. re-price assets for a worst case scenario and then adjust later as more facts come out.
THE MARKET
MARKET SENTIMENT
VIX: 23.52; +2.65
VXN: 23.55; +2.79
VXO: 25.18; +3.79
Put/Call Ratio (CBOE): 1.27; +0.11. Seven consecutive closes over 1.0 suggest anxiety is getting there, but there is still work to be done on this selling.
Bulls: 53.9%. Rose last week from 52.3%, continuing the move higher from 49.5% and 49.4%, but it is going to change quite a bit after this past week. Hit 56.7% 7 seven 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: 18.0%. Right at the lows for the past two months, falling sharply from 19.3%. That is what that breakout did. Dow below the 20% threshold level considered bearish. 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: -37.01 points (-1.43%) to close at 2546.27
Volume: 2.821B (+17.21%). Volume up on a rollover. Again demonstrating dumping of shares.
Up Volume: 834M (-741.461M)
Down Volume: 1.793B (+1.048B)
A/D and Hi/Lo: Decliners led 1.45 to 1
Previous Session: Advancers led 1.25 to 1
New Highs: 91 (+22)
New Lows: 294 (-21)
NASDAQ CHART: http://www.investmenthouse.com/ihmedia/NASDAQ.jpeg
The 90 day SMA gave way on rising volume as NASDAQ is going to seek the February high (2525 closing), but with this selling that is just a possible bounce point. The 200 day SMA is not much further at 2489. With the jump in volume and renewed downside vigor, a test of those levels is not out of the question and indeed became more likely Tuesday.
SP500/NYSE
Stats: -18.64 points (-1.26%) to close at 1455.27
NYSE Volume: 2.144B (+5.59%). Volume was up again on a rollover/reversal session from high to low. Never a good sign to see the volume run in as selling resumes.
Up Volume: 497.019M (-1.025B)
Down Volume: 1.699B (+1.206B)
A/D and Hi/Lo: Decliners led 1.4 to 1. Nothing out of control, though it was a reversal session and breadth tends to lag on those days.
Previous Session: Advancers led 1.7 to 1
New Highs: 43 (+19)
New Lows: 362 (-69)
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
33 points high to low as SP500 gave up a decent rebound that took it up toward the 90 day SMA (within 10 points) and the June low (1484; actually cleared that intraday) but then crumbled like a 2-day old piece of cornbread. On the bright side it did not make any new ground, having done that on the Monday low before it revered. The 200 day SMA (1449) is right below it so it is feeling some firming soil at this level, letting NASDAQ and DJ30 play 'catch-down' with it as they break their 90 day SMA and head lower after trying to be the holdouts. SP500 will thus be something of a leading indicator on this selling, i.e. whether it can hold up near the 200 day SMA.
DJ30
The blue chips gave up the 90 day SMA and the June price lows at 13,250 that marked the bottom of its recent range. Volume was up as DJ30 tapped the 50 day EMA on the high and then rolled over almost 300 points to break the 90 day SMA. The door is open down to 13,000 as minor support, but 12,796 is the February high and if DJ30 cannot rectify Tuesday's breach, it has more chance of reaching that level. Not in one shot, but that is certainly a very realistic bottoming point for a deeper selloff. That would be an 8.8% decline.
Stats: -146.32 points (-1.1%) to close at 13211.99
Volume: 319M shares Tuesday versus 295M shares Monday. Volume was up on the rollover after failing at the 50 day EMA.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
WEDNESDAY
More earnings and economic data with the ISM and crude oil inventories. After OPEC saying it was going to up production, prices have moved steadily higher. A rather clear vote of no confidence by the market with respect to OPEC's ability to keep prices in the $60 to $65/bbl range as the OPEC minister indicated a few weeks back.
Be that as it may, the market is focusing on contagion worries and Tuesday it got another round and thus the relief bounce killing reversal. Momentum is down after the break below support for DJ30 and NASDAQ, though even sharp selling will give you the same back and forth inside the trend you get when stocks are moving higher. Thus after this break lower some shorts might cover a bit and bounce the market. Or they might just pile on more.
After the bounce attempt that was thumped we are looking at some downside as the market continues leg 1 lower. We know there will be another upside recovery leg of more substance than the Monday/Tuesday day and one half episode, so when we do go downside we will have our targets in mind, and when we get close we will be looking to take at least part of the gain to avoid a reversal. Volatility is still high, and we can expect sharp moves both ways.
That volatility may die off a bit Wednesday as July is closed out and August starts up. We have seen money move in at the start of a month. Maybe there are some bargain hunting fund managers out there that will push things higher to start the month. If that happens, same drill. We will look at those that try to bounce but just don't have it and close them. We will then use the upside to get some better downside entry points if we see the move stall out again. We are pretty positive it will, but that new money injects a potential near term floor. That remains to be seen; not hearing too many fund managers we talk with all excited about putting new money into the market right now.
Thus we are going to be ready with some downside plays and our upside plays as we move into Wednesday and see if any new money comes into the picture and tries to extend the Monday bounce. It was pretty soundly rejected on Tuesday, but if some money comes in and shorts cover a bit after NASDAQ and DJ30 undercut the 90 day SMA, there could be a bounce. In sum, you can see that the market remains weak, but there is some volatility after the sharp sell off was tested. We anticipate more downside and we are ready to play it whether there is first of the month pop higher or a continuation of the Tuesday weakness.
Support and Resistance
NASDAQ: Closed at 2546.27
Resistance:
2569 is the 90 day SMA
2604 is the October/December trendline
2601 is the mid-May intraday peak.
The 50 day EMA at 2613
The 10 day EMA at 2616
2634.60 is the June peak
2659 is the November/February up trendline
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:
2531.42 is the February high (post-2002 high); 2525 intraday
2523 was price resistance November 2000
2509 is the January 2007 high
The 200 day SMA at 2489
S&P 500: Closed at 1455.27
Resistance:
1467 is the July 2006/March 2007 up trendline
1461.57 is the February 2007 high.
1475 from peaks in December 1999 and January 2000
1490.72 is the early June closing low
The 10 day EMA at 1495
The 50 day EMA at 1510
1534 is the early July high
1539 is the mid-June intraday high
1541 is the early June high.
1545 is the late November to February up trendline
1553 intraday high from March 2000 is the all-time index peak
1563 is the upper channel line from October/December 2006
Support:
The 200 day SMA at 1449
1440 is the mid-January high
1427 represents some interim peaks from December 2006
Dow: Closed at 13,211.99
Resistance:
The 90 day SMA at 13,275
The 50 day EMA at 13,510
The 10 day EMA at 13,538
The mid-May peak at 13,556
13,560 is the November/February up trendline that marks the lower channel.
13,610 is the upper channel line in the November/February channel
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 July high at 14,022
Support:
13,121 is minor support from the April peak
12,796 at the February 2007 high
The 200 day SMA at 12,773
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
July 31
Personal income, June (8:30): 0.4% actual versus 0.5% expected, 0.4% prior
Personal spending, June (8:30): 0.1% actual versus 0.1% expected, 0.6% prior (revised from 0.5%)
Core PCE, June (8:30): 0.1% actual versus 0.2% expected, 0.1% prior
Employment cost index, Q2 (8:30): 0.9% actual versus 0.9% expected, 0.8% prior
Chicago PMI, July (9:45): 58.5 expected, 60.2 prior
Construction spending, June (10:00): -0.3% actual versus 0.2% expected, 1.1% prior (revised from 0.9%)
Consumer confidence, July (10:00): 112.6 actual versus 105.0 expected, 105.3 prior (revised from 103.9)
August 1
ISM Index, July (10:00): 55.5 expected, 56.0 prior
Crude oil inventories (10:30)
August 2
Initial jobless claims (8:30): 310K expected, 301K prior
Factor orders, June (10:00): 1.0% expected, -0.5% prior
August 3
Non-farm payrolls, July (8:30): 135K expected, 132K prior
Unemployment rate, July (8:30): 4.5% expected, 4.5% prior
Hourly Earnings, July (8:30): 0.3% expected, 0.3% prior
Average workweek, July (8:30): 33.9 expected, 33.9 prior
ISM Services, July (10:00): 59.0 expected, 60.7 prior
End part 1 of 3
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