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money investment, investment help
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8/07/07 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Targets hit alerts: VDSI
Buy alerts: BCSI; CELG; JCI; MR
Trailing stops: None issued
Stop alerts issued: CMTL
SUMMARY:
- Fed plays mediator, tossing a bone to both sides of the rate issue. Will they throw that out as well?
- Fed gets it right for the day as market holds the Monday gains even with the cold shoulder statement.
- So the Fed noticed the worsening credit. Now it is back to trying to find a bottom.
Market hangs onto modest gains following the Fed edict.
After the rush higher Monday on that short covering fear the futures reversed and were significantly weaker heading into the open. Seems that after the scare to the shorts that the Fed was going to cut rates or significantly change its statement due to the credit issues on top of the housing problem, the realization came that there was no way the Fed would cut rates nor would it even move to a neutral bias. Thus the manic short covering that drove the market Monday gave way to some early selling.
It did not help that the economic data was again not high quality in terms of meeting or surpassing expectations. Productivity rose 1.8% for Q2 versus the 2.0% expected, but that was above the downwardly revised Q1 reading of 0.7%. Unit labor costs rose 2.1% versus the 1.8% expected; sounds bad but it was still lower than the Q1 reading so there was some improvement. Earnings were again for the most part solid, but the reactions to earnings remained narrow and specific given the overriding concerns about housing and credit. Earnings had their shot to provide more upside, and they bobbled the ball, letting the credit issue slip in while investors wondered if earnings would live up to their expectations of better than expected earnings.
The market started softer but quickly tried to rebound. Despite the change in attitude regarding the Fed there was still short covering moving toward the meeting and thus a slow rise in the indices. There was also some buying of some stocks in solid patterns and making tests of a prior break higher; you know that is the case because they are not shorted and they have shown great strength in the selling. It was not much of a bump higher, but the indices were modestly positive as the Fed announced its decision.
At the announcement the market did the usual, i.e. it was volatile. It jumped modestly higher, but after few minutes it turned lower, looking as if the announcement was the disappointment we anticipated. The statement was basically the same as prior statements and that was the disappointing part. In other words, the bias was still toward inflation in the bigger picture but the Fed did note that there were some credit issues for households and businesses. With that nod to the credit issues the market got something. Given it was just a nod and the Fed kept its bias toward inflation, the inflation watchers got theirs as well.
After an initial sell off the market recovered. Somewhat surprisingly, the financials continued their rebound from Monday, the one that was short covering driven. The fact that the financials continued higher with the Fed indicating it as not going to step in anytime soon shows there was some upside buying on the heels of the short covering Monday. There is some life in the market still.
There was upside, but it was rather anemic. The Fed left both sides wanting and thus there was not much of a move after the FOMC. Well there was. First down, then up over 100 on the Dow, then back down. Movement, but in the end just enough to crack positive. It was either the right medicine to stem the selling or it simply kept investors confused enough for the market to limp home with modest gains as they thought through the Fed's wording. The Fed acted as mediator between the two sides: it gave them something but left them both wanting. That was enough for the day, but there is still a lot to be done.
Technically the day did not accomplish any changes. The result may have been a positive given the market did not sell off after the Fed failed to deliver any real promise of relief, but if you strip that away and look just at the moves there was not any significant change in the indices. SP500 and NASDAQ bounced a bit more off their 200 day SMA but they also retreated from some near resistance levels after that initial recovery following the FOMC decision. Breadth was weak once more and volume was mixed. There was a bright spot, and that was the continuing leadership that is coming to the forefront. The leaders are not as plentiful as before but there were more showing up Tuesday, coming back up from tests of prior moves where they used the market selling to set back up or out of bases that formed during the selling. That shows continued strength, something that thus far has not let the market down. It got a bit thin at the height of the selling, but leadership is re-emerging right on the heels of that sharp Friday sell off. It won't in itself cure all of the ills, but it has to have leadership to advance.
THE ECONOMY
Fed skates by once more with the right mix of wording.
The Fed had no easy task, trying to appease those fearing a credit meltdown as well as supporting the already Bush-beleaguered dollar. If it scoffed and asked what the credit worriers were all worked up over there would have been uproar in the credit markets. If it caved and said it stood ready to step in or even worse cut rates then the dollar would have turned into a black hole, sucking our wealth down with it. As it was the Fed played it cool, tipping its hat to the credit issues by noting that credit conditions were tighter for households and businesses and that downside risks to growth had increased modestly, but also acting as if there was nothing to panic about as it pointed out the positives with respect to strong income growth, jobs growth, and a bustling world economy. With that the Fed was able to maintain its official policy of worrying more about inflation and thus was able to remain stoic and go about business as usual.
It was a step, however, to moving toward a neutral bias. The Fed could not go neutral all at once, not with the continuing strong underpinnings in the economy. That would let everyone know with certainty what we have all speculated, i.e. that the Fed is really not all that concerned with inflation. That would have likely rattled the market as fears would arise that the Fed was holding out on us all along and could not be trusted. As it is the Fed found a way to placate both sides and escape for yet another meeting and hope in the interim that the credit contagion will subside along with inflation pressures so that Bernanke and company can go fly fishing before the first frost hits.
For now it was enough to placate the market. Heck, maybe it was only enough for the day. As noted above, the market may have just made it through the session in a state of confusion over what the Fed had done, though typically when the market is uncertain and there is a selling bias the move is to the downside. In any event, the Fed skated through another meeting without doing damage as measured by the first reaction, and thus it has bought itself that extra time . . . unless the credit issues explode once more and the Fed is forced to step in.
THE MARKET
MARKET SENTIMENT
VIX: 21.56; -1.38
VXN: 21.08; -1.35
VXO: 21.33; -0.18
Put/Call Ratio (CBOE): 1.05; -0.24. Twelve consecutive sessions above 1.0 on the close. This has done its job at this point as has the VIX spike to 26.47 intraday on Monday.
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: +14.27 points (+0.56%) to close at 2561.6
Volume: 2.748B (+0.21%). Modest bump higher in volume, but trade is very strong this week. There was some buying in technology ahead of CSCO, but it is hard to equate this upside trade with accumulation as we discussed the past few reports given the volatility in the market. Big money is shoving stocks up and down and when that happens near market peaks that is not a good sign.
Up Volume: 1.535B (-288.243M)
Down Volume: 1.187B (+202.551M)
A/D and Hi/Lo: Advancers led 1.32 to 1. Breadth was again rather pathetic though more expected today given the gains were modest. The action Monday was short covering given the flat breadth and the 36 point advance.
Previous Session: Decliners led 1.12 to 1
New Highs: 108 (+71)
New Lows: 439 (-82). Sizeable as was Monday, and these levels show extremes in the downside action as well. Extreme enough with the other indicators to suggest a bottom is forming.
NASDAQ CHART: http://investmenthouse.com/ihmedia/NASDAQ.jpeg
Gapped lower but then rebounded, holding the March double bottom trendline on the low. It rallied to the 90 day SMA on the high, matching last week's high but then it faded into the close. It is in the heart of the May and June consolidation range, a pretty thick piece of ice it has to break back through. Tall but not an impossible order. It is, however, likely to turn back down at the 2600ish level and test again unless investors decide the Fed's inaction was the right 'action.'
SOX (-0.33%) was the black sheep, unable to move higher after way back in its base yet again. Surprising lack of traction, but with the strong CSCO earnings, the communications chip makers may see some buying again.
SP500/NYSE
Stats: +0.94 points (+0.62%) to close at 1476.71
NYSE Volume: 2.147B (-6.43%). Trade backed off but it was still way above average as SP500 reached higher, faded, but managed to hold some gain. As with NASDAQ, hard to call this accumulation given the continued day to day and intraday volatility.
Up Volume: 1.444B (-189.817M)
Down Volume: 770.654M (+124.439M)
A/D and Hi/Lo: Advancers led 1.33 to 1. Pretty weak breadth for the market leading mover among the big three indices. Still rather anemic breadth and that still indicates more short covering than buying.
Previous Session: Advancers led 1.11 to 1
New Highs: 63 (+25)
New Lows: 524 (-114). As with NASDAQ, the new lows are at a level that is associated with hammering out a bottom. Another test can still come, but that is part of bottoming.
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
Rallied to the 18 day EMA on the high, and that matched the June lows from the May to June range. This is might thick ice for SP500 to crack, and after a run perhaps to 1500 it will likely test the early August low and try to set a bottom at that point. As noted above, the sentiment and other internal indications suggest the stuff bottoms are made of though it will likely take that second dip to cement it.
DJ30
The Dow tested the 90 day SMA on the low then broke above the 50 day SMA on the high, tapping the bottom trendline of its former channel. It settled back to close, just managing to hold above the 50 day EMA. Not great action as the Dow, as with the other indices, only made it back into the middle of the May/June range. It managed to hold off a test down toward the 200 day SMA, something we really wish it had gone ahead and done on that first trip lower. Now it will likely undercut the August low on the next selling and test toward 12,880 or so. That won't be a tragedy; classic double bottom action.
Stats: +35.52 points (+0.26%) to close at 13504.3
Volume: 273M shares Tuesday versus 311M shares Monday. Volume backed off as the blue chips bumped the former channel. Not a great endorsement of this bounce.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
WEDNESDAY
The Fed meeting is in the book, and it sure was a well-watched meeting. Bernanke once again skated very well under the big lights, getting a few 6.0's from the East European judges. It was enough to make it through the session. Now the market goes about its ongoing attempt to hammer out a bottom.
The response to the Fed's tough love approach on Tuesday was encouraging. Some are calling it the rebirth of the bull market. Perhaps, though that is likely early. We were buying into some great stocks today but we are under no illusion that the market is likely to test again. Good stocks were moving from good entry points so we bought them. Perhaps they are foreshadowing a continued move higher from here, but in this environment you have to remain ready to act based on what the market does. It is still very volatile out there, but from the moves in the strong leaders on the report, you would not necessarily notice it.
There were also some good recovery moves from stocks that had pulled back to support during the recent selling. That was very encouraging as stocks such as GME and STP jumped higher on rising volume. Those are not stocks with heavy short positions, and thus that shows there is money seeking quality even in all of this turmoil. That either means this pullback is near its end or there is a lot more work to do, i.e. more stocks are going to have to be taken out and shot. This has the fell now of another test lower and then all done. That is just the feel; it will have to be borne out but return of leadership is quite promising.
DJ30 and SP500 are at the crossroads right now. A bit more upside would establish a good test point to fall back from and that would mean after another week or so of selling the market would try to find a bottom. After all the market would be reacting after the Fed issued its last proclamation, and if the market dove lower to test on continued credit worries that would open the door for some sort of Fed action; not a cut, but the old 'we stand ready to provide liquidity' statements from Bernanke's henchmen. That would likely do the trick.
Thus we are still going to look at downside as it tries to set up, but there are also many good upside stocks still setting up to move higher and actually doing so. If they are strong, set up, and making the move, we are not going to shun them. We will stick with quality on the upside, and we feel we are going to find some real winners emerging from this sell off. The Fed has not cut; it has not said it is going to cut. Thus there will still be the sticks and stones hurled from the credit issues, and they will take their toll on the market. We will buy selectively as we have been doing, take advantage of the downside as it presents itself, and also look beyond this current down spike, something we think (and I emphasize think) showed the end is significantly nearer. As always, however, we have to watch what the market says and take what it gives.
Support and Resistance
NASDAQ: Closed at 2561.60
Resistance:
The 90 day SMA at 2575
2601 is the mid-May intraday peak.
2607 is the October/December trendline
The 50 day EMA at 2601
2634.60 is the June peak
2665 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 2494
2470 to 2467 are price peaks from November and December 2006
2400 is price support
S&P 500: Closed at 1476.71
Resistance:
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:
1472 is the July 2006/March 2007 up trendline
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 13,504.30
Resistance:
The mid-May peak at 13,556
13,596 is the November/February up trendline that marks the lower channel.
13,640 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 50 day EMA at 13,490
The 90 day SMA at 13,330
13,121 is minor support from the April peak
12,885 is the July 2006/March 2007 up trendline
The 200 day SMA at 12,798
12,796 at the February 2007 high
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
August 7
Preliminary productivity, Q2 (8:30): 1.8% actual versus 2.0% expected, 0.7% prior (revised from 1.0%)
FOMC policy statement (2:15)
Consumer Credit, June (3:00): $13.2B actual versus $6.0B expected, $15.9B prior (revised from $12.9B)
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): 310K expected, 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): -$33.0B expected, -$33.2B prior
End part 1 of 3
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