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world stock market, us stock market
SUMMARY:
- It went that way. No, that way. Market volatility remains much too high.
- Does he or doesn't he? Only Bernanke knows.
- Despite the recovery, ultimately this market has to test lower unless something quells the credit worries.
Down again, up again market driving many to drink.
Down 281 points Friday then up 286 points Monday. Just another couple of average days lately on the Dow. SP500 showed similar action taking back 34 of the 39 points lost Friday. Volatility has been the constant over the past 9 weeks. Prices rose and prices have declined, but volatility remains high. We are not talking as much about the VIX measure, though it has been on the rise since June as well and that is something of a corollary to the day to day ups and downs. Specifically we are talking about that back and forth day to day action with massive point swings accompanied by high volume. After such a long run this kind of tempest shows major reallocation of assets. Spread out the rising VIX as the market made higher peaks on this last part of the run and you have a more unpleasant brew.
As for the specifics of the day, futures were way up in the wee hours of the morning, then got knocked back some when MER came out with a prognostication that the market would decline another 15% from current levels with housing down another 5%. Futures bounced right back as you would expect after such a call. You could say that marked the bottom when a big brokerage house came out and marked the market for another big move lower. In fairness to MER, all of this up and down action is symptomatic of a market that wants to move lower, and it just happened to catch it on Monday when the market rebounded ahead of the FOMC meeting.
Speaking of the FOMC, there was no word from it, and that was just as well. If the Fed had done something like issue a statement or cut rates the shockwaves would not have yet begun to dissipate. The dollar would still be falling as we speak and likely the market with it. That, however, did not occur and stocks managed to shake off a midmorning selling bout that took a positive gain lower. We have to admit we were looking for a run lower after that initial failed early rally, but the market showed resilience once more and streaked higher in the afternoon to close at session highs, posting anywhere from 1.3% to 2.4% gains on the indices.
It did not hurt that oil plummeted $3.42/bbl to $72.06, cratering after its new unadjusted price high at $78.77 hit just last week. Energy tumbled but financials rebounded furiously on S&P's comment that the BSC reaction was way overblown. They led higher and pushed SP500 to the market leading gain for the session.
Technically it was a solid session with the exception of breadth. In the bigger picture, that is a pretty big exception. Volume surged on the way back up just as it did on the way down. You can take consolation in the rising volume on the rebound, but it is a false comfort. As seen in early 2000, big up and down sessions on strong upside volume did not withstand the issues that confronted the market at that time.
That breadth is very indicative of short covering. The run in the financials? That was short covering from the slaughter suffered the past month. No breadth means the shorts were covering what they had sold. Very typical. 51M derivatives traded on the CME Monday. That is a huge surge in volume and it shows the shorts were frantically covering as the market reversed from Friday's losses.
As for the charts, there was some constructive action. NASDAQ tapped the 200 day SMA on the low and rebounded sharply, just what you want to see on a test of such key support. SP500 recaptured the 200 day SMA as well though it slammed into the July 2006/March 2007 trendline on the close and stopped there. DJ30 again moved up toward its 50 day EMA, doggedly trying to take that level back, but thus far unable to do so.
As noted above, you can find really strong technical features to the action, but when put into context with high volatility, high downside volume, rising volatility as the market struggles near the prior tops, and still less than 10% corrections in the indices, those upside indicators are not so strong, at least not in the sense they indicate any accumulation that will redeem the market from this selling, at least not overnight. It can be part of a bigger basing pattern that ultimately yields a new breakout if the world liquidity returns and the economic underpinnings hold up, but nearer term it is more a sign of the market still in the process of reallocating assets.
THE ECONOMY
The Fed finds itself in a tough position once again.
The rumors continued Monday with some speculating the Fed would take some sort of pre-emptive action regarding the contagion, some expecting the Fed to remove the wording in its statement regarding inflation being the primary threat, and others suggesting anyone thinking the former would be sorely disappointed.
This past weekend we looked at the issue of contagion (yet again) and the Fed's unenviable position. Some readers concluded we believed the Fed should act and cut rates or at least take a more ameliorative position. If that was the way it came across that was not the intent. We have tremendous misgivings about a rate cut and what it will do to the dollar. On the other hand the Fed has ignored problems in the past and fought inflation right to the shores of recession and even depression. It is an extremely tough problem for the Fed to confront because either way it acts there is the potential for a very negative reaction in addition to the positive response it can achieve.
If you look just at the market decline you have to opt for holding steady with respect to policy. The Dow was down roughly 6% off its all-time high hit just 3 weeks back. Can the Fed justify a rate cut to save the market when it has not even had what is considered a 'normal' correction for the first time since the bear market ended? It may not want to toot the inflation horn quite as much, but to run in with a rate cut with this kind of pullback would seem to many world central bankers as a rather amateurish move.
Of course, who cares about the rest of the world's central bankers? They were part of the late 1990's and 2000 push to hobble the US economy under the guise of preventing inflation. At that time the US was far and away the strongest world economy and pulling away in the technology sector. The fear was the US would be so strong economically and politically (given the end of the cold war) that we would dominate the world. That was in part the reason for the Fed's inflation fight when there was no inflation. It was fighting the market and the gap in economies. We see the result today: success. Success in sending the US economy back, success in stopping all investment in the US for 3 years, eliminating our technological advantage, and thus opening the door for all of those technology jobs moving overseas. The timing was impeccable as well. Just as the US was graying and reaching the peak of the Baby Boomer cycle and China, India, and Russia were starting industrial revolutions, we gave away the one thing that would still bring them to our shores when our baby boomers were no longer huge consumers: our technological lead. Now that is gone and we are faced with being second runner up to China and maybe another economy or two as we continue to age yet have a declining number of products to offer for sale to the rest of the world.
Thus the weak dollar policy of the Bush administration in an effort to open export routes. At the same time the Fed has to find ways to shore up the dollar so it does not freefall due to a lack of support by the second Bush administration (James Baker orchestrated a weak dollar policy in Bush I as well). History shows you cannot devalue your way to prosperity, but that does not keep some from trying to show it is different this time.
That takes us back to the Fed's dilemma. It really has a tough call here because it simply does not know to what extent the credit issue can reach. It has a good idea because it is talking with the heads of the big financial institutions and other central banks, but the Fed has shown throughout history that it has no more accurate information than anyone with some snap and some contacts on the street.
Because of its lack of knowledge as to just how far this can go and given that the major indices are just coming off new highs and have not even fallen 10%, the Fed is not going to do anything. It might take a softer stance against inflation as some suggest, and that would be warranted given the potential pitfalls that history shows are out there with this kind of credit concern. If things are a bit worse right now the Fed would react differently. With things still very much in what is considered a normal correction after 4 years of upside, however, it is highly unlikely that the Fed will cut rates, and that sets the stage for some upset Tuesday afternoon when the Fed announces its decision. No one really expects a rate cut, but there could definitely be some disappointment in that the Fed likely won't alter its position much. Monday we saw some massive short covering as shorts pondered a kinder and gentler Fed. With the Fed likely to show the same stripes, the disappointment could turn to more selling.
THE MARKET
MARKET SENTIMENT
VIX: 22.94; -2.22. VIX hit a new high (26.47) on this run even though it was intraday. No matter; many prior selling bouts have hit their limit when the VIX made a new intraday high but did not hold it to the close. Bottom here? Not likely just yet.
VXN: 22.43; -1.99
VXO: 21.51; -4.91
Put/Call Ratio (CBOE): 1.29; -0.18. Eleven sessions in a row with a close above 1.0. Lots of downside speculation remains.
Bulls: 47.2%. Quite a plunge from 53.9% last week, just short of the peak of the recent run higher in positive sentiment 56.7% hit two months back). Getting there but still needs to drop below 40% to really show the kind of dent in optimism that stronger runs are built upon. 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: 26.4%. The bears came out bawling, blasting higher from 18.0% last week and just over 1 point off of the 27.5% in April and the quickly closing in on the 30% hit in March. Amazing what contagion fears will do to investors. 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: +36.08 points (+1.44%) to close at 2547.33
Volume: 2.742B (+8.17%). Volume surged as the techs rallied off the 200 day SMA. That is exactly the kind of volume you like to see on a test and rebound of such a key support level. If not for the massive volatility surrounding this move this would be considered a very good sign. Indeed, it can lead to a nice bounce in NASDAQ near term so we are not discounting it, particularly given the strength in some key technology stocks as discussed the past weekend.
Up Volume: 1.823B (+1.549B)
Down Volume: 984M (-1.162B)
A/D and Hi/Lo: Decliners led 1.12 to 1. Really pathetic breadth as NASDAQ 100 bounced 1.87%, indicating that the strength remained in the fewer large caps.
Previous Session: Decliners led 4.26 to 1
New Highs: 37 (-41)
New Lows: 521 (+127)
NASDAQ CHART: http://investmenthouse.com/ihmedia/NASDAQ.jpeg
Gapped higher and then rolled over in what looked to be a massive belly roll. It sold to the 200 day SMA (2493) and then rallied 55 points to close. This volatility is out of control, but this far NASDAQ has tested and held the 200 day SMA with just one close below its March 2007 trendline. Now we see how well it bounces from way down here in the crater after an 8.5% correction on the Monday intraday low. 2635, the mid-July high, is a key point on that bounce.
SOX (+1.55%) remains just over the 200 day SMA, bouncing Monday but still below the 90 day SMA and well below the Apri, May, and June highs. From strength to trying to put humpty dumpty back together.
SP500/NYSE
Stats: +34.61 points (+2.42%) to close at 1467.67
NYSE Volume: 2.295B (+11.57%). Volume blasted higher again for the tenth session of above average trade. Third highest in the past month. Looks good, but as noted above, the back and forth action has all been on strong volume.
Up Volume: 1.634B (+1.517B)
Down Volume: 646.215M (-1.29B)
A/D and Hi/Lo: Advancers led 1.11 to 1. Pathetic breadth as the small caps lagged the market and the financials rebounded in a massive short covering effort. Thus no breadth and the market continues the plague of a declining A/D line.
Previous Session: Decliners led 4.97 to 1
New Highs: 38 (-12)
New Lows: 638 (+248)
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
The large caps recovered the 200 day SMA (1451) after a one-session stint below that key level. The rebound took them up to the July 2006/March 2007 trendline on the close, and that move also cleared the February peak right before that round of selling. Decent action but with the weak breadth and continued high upside and downside volume, there is no clear resolution to the ongoing fight. Overall this kind of high volume up and down action usually needs a serious shakeout and some quiet time to set up its next move, but with all of this liquidity in the world we will stay open to strong stocks in good position that show good moves.
The small caps tapped toward the March low a t 390 (394.83 on the Monday low) and then rebounded into the midst of the November to January consolidation range. A start but hardly anything to suggest it is ready to make a run again as it is still well off its 200 day SMA.
DJ30
DJ30 turned right back up after it failed at the 50 day EMA last week and looked ready to run toward the 200 day down at 12,791. Not happening Monday as the blue chips jumped back up to the 50 day (13,490) to tray that level once more. As noted over the weekend the pattern is a head and shoulders, and it breached the neckline Friday. It answered with the strong upside Monday, but it is still not out of the pattern yet as the left shoulder is up at 13,692. Of all the indices the Dow remains the best positioned for upside, but the fact that it is fighting a head and shoulders top speaks volumes for the market's strength in general.
Stats: +286.87 points (+2.18%) to close at 13468.78
Volume: 311M shares Monday versus 301M shares Friday.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
TUESDAY
Tuesday all the focus is on the Fed what with all the rumors about what it might or might not do (and of course we have played our role in the rumor mongering). Monday saw some massive short covering as the speculation started to gel that the Fed might do something more than say you all are scared about nothing; nothing. Thus the rush upside for the best point gain in 4 years on the Dow, countering the downside collapse Friday afternoon.
The speculation could continue to drive some short covering Tuesday, and indeed we often see the market move higher just ahead of the announcement as positions are squared. That has occurred when the market was running higher, however; with this current selling and a big swoosh higher Tuesday the market may not give us that obligatory rise into the news. If it does (and even if it doesn't), there could be some disappointment when the Fed doesn't make that much of a change to its statement. It may mitigate its stance somewhat, a prudent thing to do when there is a credit fear spreading out, but it is likely not going to make that wholesale position change many would like to see.
Let's say it does. Will the market be comforted by such a move? Not likely because the market would read that in the short term as the Fed acknowledging that there was a problem after it had consulted with the heads of Wall Street firms, etc. Nothing like the Fed confirming your worst fears.
Thus the Fed walks a tightrope to issue the Three Bears-like 'just right' statement, and that is not easy given the current conditions. Thus far Bernanke has risen to the occasion with his somewhat deft moves since taking over the post just over 1.5 years back. We doubt, however, the Fed will be able to give enough encouragement to the bulls to get them to buy wantonly and still keep the dollar from a swan dive. Thus we expect some disappointment after the announcement.
The economy remains in a highly liquid state and the economy's underpinnings are thus far still strong. The contagion has not pulled them down yet and that of course is the key to any stock market rally, i.e. better times ahead. With all of the gloom out there if there was something seminal to convince investors times were indeed going to improve, the indices would soar.
As it stands near term, there is likely more downside before a sustained upside move. The high volume, large point spread volatility is an indicator that the damage is not over yet. The market still has to find that initial bottom and sustain some sort of upside move to set up another test; doesn't have to be a full test, just find a bottom and then build on it. There are still strong stocks out there and as long as they stand up they provide the backbone for a recovery nearer term. If they get washed out then there is a lot more work to do.
Thus we are not that optimistic near term and we will look for downside positions as well as upside positions as this correction continues to unfold because the market is rewarding both right now. If the selling accelerates that may not be the case and we will have to bag the upside for awhile. This is one of those times in the market where it pays to slow down and be selective, even more so than usual for us. Thus a buy here and there while we let the market work through this high volatility and high volume. We know a lot of professional traders getting torn up on this volatility. Thus we look at several potential plays and then wait for them to show us the move. If it does not come, no worries. Better no to chase now and just let the market come to us and then take what it gives.
Support and Resistance
NASDAQ: Closed at 2547.33
Resistance:
The 90 day SMA at 2574
2601 is the mid-May intraday peak.
2605 is the October/December trendline
The 50 day EMA at 2603
2634.60 is the June peak
2664 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 2492
2470 to 2467 are price peaks from November and December 2006
2400 is price support
S&P 500: Closed at 1467.67
Resistance:
1471 is the July 2006/March 2007 up trendline
1475 from peaks in December 1999 and January 2000
The 10 day EMA at 1475
1490.72 is the early June closing low
The 50 day EMA at 1502
1534 is the early July high
1539 is the mid-June intraday high
1541 is the early June high.
1549 is the late November to February up trendline
1553 intraday high from March 2000 is the all-time index peak
1565 is the upper channel line from October/December 2006
Support:
1461.57 is the February 2007 high.
The 200 day SMA at 1451
1440 is the mid-January high
1427 represents some interim peaks from December 2006
1406 - 1407 from March 2007 and November 2006 interim peaks
1389 from October 2006 interim peak
1375 from March 2007 low
Dow: Closed at 13,468.78
Resistance:
The 50 day EMA at 13,490
The mid-May peak at 13,556
13,585 is the November/February up trendline that marks the lower channel.
13,634 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:
The 90 day SMA at 13,317
13,121 is minor support from the April peak
12,880 is the July 2006/March 2007 up trendline
12,796 at the February 2007 high
The 200 day SMA at 12,791
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
August 7
Preliminary productivity, Q2 (8:30): 2.0% expected, 1.0% prior
FOMC policy statement (1:15)
Consumer Credit, June (3:00): $7.0B expected, $12.9B prior
August 8
Wholesale inventories, June (10:00): 0.4% expected, 0.5% prior
Crude oil inventories (10:30): -6.49M prior
August 9
Initial jobless claims (8:30): 307K prior
August 10
Import prices ex-oil, July (8:30): 0.2% prior
Export prices ex-agri, July (8:30): 0.1% prior
Treasury budget, July (2:00): -$32.5B expected, -$33.2B prior
End part 1 of 3
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world stock market
us stock market
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