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money investment, financial investment
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8/08/07 Investment House Daily
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SUMMARY:
- Stocks continue Fed bounce, crumble on afternoon rumor mongering by shorts, then salvage the day after the rumor is debunked.
- Indices have bounced back to key resistance with a Fed assist and now face the next phase of trying to put in a bottom.
Stocks show some character, come back to the table after getting rattled by the rumor mill
Earnings were solid overall with MCD, HANS, and S (Sprint) beating, though RL was a notable miss. There was also word in the mortgage world that the total outstanding paper at risk was much less than expected, at least according to Citigroup estimates. It was not all roses, however, as China, in response to the rather asinine rants of Senator Schumer and his 1930-esque tariff proposals, threatened to dump US financial instruments if any such action was taken. The interesting feature of that debate is the self-correcting mechanism at work. China is shooting its own foot with respect to trade what with dog-killing pet food, gum-rotting toothpaste, and cars that withstand crash tests about as well as my sons' soap box derby entry. While most of our Chinese imports are US products assembled in China that are 're-imported' to the US, there are still many that are Chinese from start to finish, e.g. the dog food, toothpaste, and compact cars (at least after the crash test it was a compact). US consumers are already balking some, and this kind of talk from low rung Chinese financial ministers only fan that flame.
Once more I digress. Overall the news was rosy enough, along with the good feelings following the FOMC statement on Tuesday, to boost futures nicely. The techs were the strong sector after the Cisco's earnings. Where they good? Gosh yes (as Chambers would say). Even with the futures up and the strong CSCO earnings, you have to view all early bounces with skepticism given the market is still struggling to get out of the holes dug by the major indices.
Stocks started higher and they continued higher, showing no ill effects, no serious attempts to sell though there was a midmorning dip. The market rallied out of that test and was showing 2% gains on strong volume and 3:1 breadth. The shorts were screaming; the market didn't respond negatively to the Fed's tough love; instead it was rallying.
Then with one and a half hours to go the market peaked. It slipped off highs that saw NASDAQ and DJ30 run up to their June highs and the SP500 moving up to its 50 day EMA. It slipped some more, and started to really sell. The selling snowballed as the sellers poured in. DJ30 lost a 190 point gain to turn negative. NASDAQ peeled off 37 points from a 67 point gain. SP500 fell to flat after a 27 point advance. The culprit: a rumor that a major warning would come from a financial services company after hours. A bit later we learned it was supposedly Goldman Sachs. Looked really grim, and it showed that despite the Fed's 'don't worry' statement, investors were still looking over their shoulder for any trouble trying to sneak up. When it showed up they were quick on the trigger finger.
Then GS came out and debunked the rumor. It was clear at that point the shorts had sparked the rumor to give try and stall the rally or at least give them the chance to get out on better terms. The drop to flat on SP500 and negative on DJ30 gave them that chance though NASDAQ still sported a 30 point gain. As soon as the news hit it was just a rumor, the market started to rally back. DJ30 went from negative to +153 in 30 minutes. NASD recovered 23 points to post a 2% gain. SP500 posted an impressive 17 point gain from its afternoon low. The indices did not recapture their pre-rumor highs, but they did show character as the buyers jumped right back in when they learned the weakness was rumor-induced. Nervous as cats, but still willing to get back in even after the rumor induced scare.
Technically it was another strong volume session. Unlike the prior upside sessions, breadth was solid at better than 2:1 on the close and 3:1 on NYSE pre-rumor. Moreover, buyers came back to the market after the rumor. Thus there was some actual upside buying other than the shorts in financials and the housing market. Volatility still remains as the quick down and up in the afternoon showed; even some decent buying is not really committed buying.
After their tail kicking, financials made it up to first resistance, and that is the first important test for them. If they crumble here once more, SP500, also at critical resistance with a test of its 50 and 90 day MA, will likely turn tail and sell once more. Even NASDAQ and DJ30, performing much better on a relative basis, have some key resistance to engage as they have reached the June highs. We have some long buying in good names that are performing very well and we have some short covering in sectors that have been gutted. That market may find some more upside here given the positive reaction to the Fed's tough love approach, but for now we see no reason to change our thesis that the market is still going to need another down leg before it can set a bottom for a sustainable rally. This volatility, even after the FOMC decision, is a lingering issue that has potentially more severe repercussions for the market.
THE MARKET
MARKET SENTIMENT
VIX: 21.45; -0.11
VXN: 20.97; -0.11
VXO: 21.73; +0.4
Put/Call Ratio (CBOE): 1.01; -0.04. Down again but now 13 straight sessions closing above 1.0. As noted before, this is a string that suggests anxiety is at a level that helps put in a bottom.
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: +51.38 points (+2.01%) to close at 2612.98
Volume: 3.674B (+33.71%). Volume exploded. It was high on the upside, it was high on the selling, it was high as techs rebounded. There was long buying in techs on the heels of the CSCO numbers that confirmed the strength in stocks such as . . . CSCO, as well as HPQ, NVDA, CIEN, etc.
Up Volume: 2.755B (+1.22B)
Down Volume: 826M (-360.551M)
A/D and Hi/Lo: Advancers led 2.19 to 1. Not bad at all, even off its intraday highs on the close.
Previous Session: Advancers led 1.32 to 1
New Highs: 213 (+105)
New Lows: 386 (-53). Interesting mix of new highs and new lows, both fairly high.
NASDAQ CHART: http://investmenthouse.com/ihmedia/NASDAQ.jpeg
NASDAQ gapped higher on the Cisco earnings and on strong volume. It rallied through the 50 day SMA (2616) on the high but after the rumor selling it could not retake that level on the close. That puts it at that resistance as well as the June high (2637 intraday), the left shoulders in a potential head and shoulders pattern. There was no doubt real upside buying by long players, but NASDAQ still has a major resistance level to take on at the June high. It has rallied 121 points in three days to get here and now it has to take on resistance. Key level and we expect a pause at least.
SOX (+2.42%) came to life finally and led the market higher in terms of its percentage gain. It reached the 50 day EMA and the June highs on its intraday peak, so with a move it is already at a critical testing point for the index. If it gets over 513 with no problem that puts a different picture on this.
SP500/NYSE
Stats: +20.78 points (+1.41%) to close at 1497.49
NYSE Volume: 2.586B (+20.43%). Strong volume, the strongest since late June, as SP500 surged up to the 50 day EMA. Lots of short covering in the financial and homebuilding sector added to the trade. The small caps were very strong pre-rumor, and they added to the volume output.
Up Volume: 1.963B (+519.34M)
Down Volume: 622.077M (-148.577M)
A/D and Hi/Lo: Advancers led 2.42 to 1. With the small caps leading early on breadth was nice though well off the 3:1 intraday action as the small caps did not recover as well after the rumor took them lower from their 2.5% gain.
Previous Session: Advancers led 1.33 to 1
New Highs: 154 (+91)
New Lows: 443 (-81)
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
The large caps rode a continued upside move in the financials and some new short covering in the wrecked housing sector. That was enough to push SP500 up to the lower rungs of the May/June trading range from 1485 to 1533ish. Key resistance at this point after a 70 point run in three days. With many financials back up to resistance just as is SP500, it may be hard for SP500 to make much more headway here. We moved up the buy point on our SPY short play, and consider some of the financials that rebounded to the 10 or 18 day EMA as short candidates as well.
The small cap SP600 (1.52%) was the leader before the rumor hit, sporting a 2.5% gain. It traded up to the February interim peak on the high but then gave back half the move to close a gnat's rear above the 200 day SMA. As with the financials, it has the look of being just a bit tired after this rebound that brought it back to a key resistance level.
DJ30
The blue chips were up close to 200 points before the rumor, went negative, then shot higher in the last 30 minutes to overtake the 50 day SMA as well as the former channel lines in its old uptrend channel. Good, solid move on some rising volume. The gain puts it, however, at the June highs (13,690; DJ30 hit 13,696 on the session high). Key level for the blue chips, but unlike SP500, we would not be surprised to see it top this level on this move given its recovery. That does not mean this is not key; it is very important for the market overall, especially with SP500 rebounding but being driven mostly by short covering in financials and housing.
Stats: +153.56 points (+1.14%) to close at 13657.86
Volume: 288M shares Wednesday versus 273M shares Tuesday. Volume picked up as the blue chips moved through the old channel and up to the June peaks.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
THURSDAY
Oil inventories were lower (-4.1M bbl) along with gasoline (-1.7M bbl) while wholesale inventories rose, showing some increased manufacturing activity. That was the sum of the economic reports Wednesday, and they were overshadowed by the mortgage and credit stories and related rumors. Thus it just did not mean that much to the market. Thursday is the weekly jobless claims report, and it won't do much for the market either, though it has been solid, indicating there is no issue with respect to jobs despite fears from last week's job report.
That leaves the market to the more 'at hand' issues, mainly dealing with the next resistance after a 3-day recovery. This is where the rubber meets the road, where the indices either show they have newfound strength or set up for the move lower to test the prior lows on this selling and try to set the bottom that has been forming with the extreme breadth, extreme put/call ratio, and the rising VIX. The high volume volatility still has us worried about the life of the rally itself, but with the leadership we see right now, the market still has life in it. Maybe the Fed changed the lay of the land with its statement; maybe but not likely. The defensive sectors such as big pharma are still getting money heading their way even as the market rebounded.
That is why we pruned some positions on this bounce though we took some new positions on stocks showing outstanding action. After all, even in all the selling we have been taking some nice gains on those stocks that held the line in the selling and, as anticipated, were the big movers as the market recovered.
Thus we anticipate a bit more upside on this move as the indices set up for the next test. They have hit the June highs on NASDAQ and DJ30, but that does not mean an instant turn back down, but some sparring with the resistance is likely. We will still look for those strong stocks that are in position to move higher even if the market tests, but we will also have some downside plays in the pocket if those financials roll back over.
Support and Resistance
NASDAQ: Closed at 2612.98
Resistance:
2634.60 is the June peak
2666 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:
The 50 day EMA at 2602
2609 is the October/December trendline
2601 is the mid-May intraday peak.
The 90 day SMA at 2577
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 2495
2470 to 2467 are price peaks from November and December 2006
2400 is price support
S&P 500: Closed at 1497.49
Resistance:
The 50 day EMA at 1501
1534 is the early July high
1539 is the mid-June intraday high
1541 is the early June high.
1551 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:
1490.72 is the early June closing low
1475 from peaks in December 1999 and January 2000
1473 is the July 2006/March 2007 up trendline
1461.57 is the February 2007 high.
The 200 day SMA at 1452
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 13,657.86
Resistance:
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:
13,653 is the upper channel line in the November/February channel
13,618 is the November/February up trendline that marks the lower channel.
The mid-May peak at 13,556
The 50 day EMA at 13,496
The 90 day SMA at 13,344
13,121 is minor support from the April peak
12,890 is the July 2006/March 2007 up trendline
The 200 day SMA at 12,807
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): 0.5% actual versus 0.4% expected, 0.5% prior
Crude oil inventories (10:30): -4.1M versus -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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money investment
financial investment
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