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trading system, money investment
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8/09/07 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Targets hit alerts: None issued
Buy alerts: None issued
Trailing stops: None issued
Stop alerts issued: RESP
SUMMARY:
- 3-day bounce reverses on fear of even wider mortgage issues
- July same store sales show strength at the high end and low end, and that is not a sign of strength
- Big issue in the mortgage market is just how much trouble there actually is.
- Starting lower on a voyage to find the bottom of the sea (or at least the correction)
Fear returns as mortgage contagion anxiety ratchets higher.
The indices rallied up to resistance Monday through Wednesday with a nice gain on strong volume. Of course that was a prelude to a further downside, the only question being whether it started immediately or struggled for a session or two before the rollover. It might have been the latter . . . but for a new crisis of sorts in the mortgage sector triggered the downside.
The trigger was actually several triggers. The first was the French bank BNP Paribas freezing the assets of three funds having ties to the US mortgage market. It froze the funds to withdrawals because it said, just two weeks after flatly stating there were no problems, it could not accurately value the assets. The ECB, Europe's central bank, stepped in and offered up 131B in euros to shore up any worries. It originally proffered $91B with the US Fed kicking in $12B over here for European banks needing the cash. Some were calling this a sage reaction and it may have been. It was not all calm and collected, however. The ECB put 65B euros into the system on 9-12-01, the day after the attacks on the US. To inject twice that amount into the system when 'just' $2.2B was at risk indicates either the ECB overreacted or it knows there is a lot more to worry about.
The latter is really the issue with respect to the mortgage/credit dynamic duo. We know how many mortgages are out there. We know that 70M will be up for refinancing from August through the end of 2007. The problem is just how far the tentacles will reach into the rest of the economy. With July same store sales released Thursday showing mostly misses, the fear ratcheted higher as it was taken as evidence that the consumer was broken.
There was another trigger, however. There are many hedge funds out there trading on what is called a 'black box' methodology where computers have analyzed the market, economy, and financial trends and spit out investment game plans to follow. These so-called 'quant' funds are, from what we hear, getting killed the past few weeks. Seems the programs don't understand the high volume volatility and they have been directing shorts just before the market turned higher, and then longs just before the market turns down. Thus the worry that some big meltdowns such as Long Term Capital in 1998 are brewing.
Beyond that, and somewhat related to it, is another factor. Those funds that have been hit are desperate for cash, and some that have not been hit are still trying to raise cash. Why? Because with this continued market volatility and the drop in bulls and the rise in bears, many hedge funds are anticipating receiving heavy redemption demands on 8-15-07, the next time investors can request them. Thus they were selling stocks furiously Thursday, and they were focusing on the high volume, highly liquid large cap holdings as they can get rid of large quantities fast, and they cost a lot so they were raising capital faster by selling these holdings. You know that is true by watching the block trades today as well as the massive 'sell on close' orders that shoved the indices lower into the bell and jacked up NYSE volume to a record high. That put tremendous pressure on the market and drove it into the dust at the close.
Thus you had a weak open, a modest but decent recovery attempt, and then a steady, depressing sell off all the way through the close. The techs, chips and small caps were relative strength leaders; not surprising as the hedges were dumping the large cap names and going short on the financials once more. That gave the market no breather and thus it closed weak. On the bright side, once this liquidation is over there will be some great buys as long as the dive lower does not lead to the consumer and business purchasers going turtle and sending the economy in a tailspin. Valuations are not bad and they are only getting better, if . . . the economy does not go slip-sliding away.
Technically it was an ugly session. Volume hit a record on NYSE (2.8+B shares) and it was no piker on NASDAQ (3.6B shares). Breadth was -3:1 NYSE, -2:1 NASDAQ. The indices rolled over from resistance shut them down, and they buried themselves at the lows of the session on the closing bell. That 3-day rebound was nice and it was pretty solid, but as we saw Wednesday with that rumor re GS, investors were looking over their shoulder, still scared of what they did not know. The mortgage and central bank news sent them right back down with SP500 back to the 200 day SMA, DJ30 back to the bottom of its range, and NASDAQ in the lower half of its range. All above the prior lows, but as noted in the headlines above, they are now on a voyage to see what's on the bottom (or at least to try and find bottom) of this correction. The prior lows are a good point to shoot for but they are not that far down and the summer 2006 correction required to legs lower before the bottom was found (and then a subsequent test of that low followed).
The main worry for us is the high volume volatility that showed up as the indices hit new highs. That is something we wrote our concern about way back when the VIX was very low and many were saying (for a year or more) that the low volatility was a problem. We noted the worries would start when volatility rose as the indices hit highs. That is what has been ongoing for the past few months, and the market is not performing well. The effects of this higher volatility on highs, however, is more nefarious than just causing a run of the mill correction. It often means something more nefarious is setting in. In 1998 it preceded that quick, fast bear market. The market recovered and the economy never really slowed, but over the next couple of years volatility still climbed as the indices climbed and ultimately the market cracked. The point: rising volatility as the market hits highs is a sign of erosion and while not an absolute when it comes to timing, it indicates that there are long term issues building that the market will at some point have to face.
THE ECONOMY
July same store sales bifurcate.
The June sales were crappy, but after a string of good months that one month could have been an outrider. The sales figures coming in Thursday suggested it was not just a one-month affair. High end retail such as TIF, SKS (+14.9%), JWN (+9.6%) did great. Big discounters such as WMT and TGT did just fine. The middle of the market was lousy. Teen retailers were weak, indicating the parents were cutting off some funds. Some department stores were great (e.g. JCP) while many struggled.
Basically if it was mid-market it was down. This is the kind of market split that indicates something brewing with consumers. The high end is always the last to go down and the first to come back. People with money spend when they want. The rise in WMT sales that we have noted the past few months suggests that the middle consumers are turning back to discounters, feeling the pinch of gasoline prices and higher prices elsewhere. The last time WMT enjoyed stronger than expected sales was in the 2000 - 2002 recession. It was indeed a retail leaders along with other discounters; when the recession ended, so did its corner on the market because consumers had more money to spend and they were tired of spending it on WMT-quality items.
Thus this bifurcation to the poles of the retail spectrum and the evacuation of the middle is not a good sign for the economy or the market. We will see how it shakes out over the next few months; a couple of months here and there is never a trend. The fact that it has showed up after a 4.5 year absence, however, is notable.
The mortgage issue just won't die.
We have discussed in the past how the mortgage market, particularly the sub-prime, is just a small sliver of the mortgage pie. Problem is, it is showing up in Australia, New Zealand, and now gay Paris. It is a US issue, but it is spread out over the globe and thus the tendrils keep pulling in new areas. The fear is it will spread beyond just mortgages and strain other areas. The word is right now that no one in the big firms will answer the phone calls of any of the big mortgage players because they don't want to take on these dogs.
We know that there are 70M mortgages with terms requiring refinancing between August 2007 and January 1, 2008. After that there are at least that many more through 2008. That is quantifiable. The problem, again, is how hard it hits other areas when these people refuse to pony up.
The silver lining thus far, if it can hold, is the strong economy that is producing low jobless claims and job security. If someone bought a house and got in over their heads they can let it go and suffer rather minimal consequences as long as they have a job. They are not going to work less if they cannot refinance. Problem is, we have a Congress that, while it chides the mortgage lenders and others for short-sightedness with their lending policies, is ready to pass major spending increases, protectionist measures, and hike taxes even as these economic issues swell. Talk about short-sighted. Let's socialize everything, requiring trillions in payments right at the top. Unfortunately that is the history of our leadership: bad ideas at bad times. About the only good ideas in the past 10 years were President Clinton's decision to cut capital gains taxes, and President Bush's second round of tax cuts that provided incentives just when they were needed. Outside of that, Washington, D.C. could have closed down and we would all have been better off for it.
THE MARKET
MARKET SENTIMENT
VIX: 26.48; +5.03. Volatility has not been this high since 2003. For reference, it hit 56.74 intraday in July 2002 and that set the high mark for that run to the bottom in October 2002. If it gets to the 40's that will get very interesting. When the fear gets going, volatility can surge. It could be at 40 in 2 to 3 market sessions.
VXN: 26.23; +5.26
VXO: 27.95; +6.22
Put/Call Ratio (CBOE): 1.16; +0.15. Fourteen straight sessions above 1.0 on the close. That is a lot. A lot.
Bulls: 43.8%. Still on the downside run, falling from 47.2% last week and 53.9% the week before. Already below the March level on that market decline, hitting the low for the year. Would not complain about a move below 40, and this kind of continued selling can do the trick. Hit 56.7% hit two months back and moving toward that 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. Hit 60% in December 2006. For reference it bottomed in the summer 2006 near 36%, and 35% is considered bullish.
Bears: 31.5%. Juggernaut rising from 26.4% and 18% just the week before. That is a strong jump. Hit 27.5% in April. 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: -56.49 points (-2.16%) to close at 2556.49
Volume: 3.578B (-2.61%). Volume dropped but just a fraction. At these levels 2% doesn't mean much.
Up Volume: 883M (-1.872B)
Down Volume: 2.693B (+1.867B)
A/D and Hi/Lo: Decliners led 1.84 to 1. Bad but not horrid.
Previous Session: Advancers led 2.19 to 1
New Highs: 111 (-102)
New Lows: 274 (-112)
NASDAQ CHART: http://investmenthouse.com/ihmedia/NASDAQ.jpeg
Gapped below the 90 day SMA but then rebounded to post a gain midmorning. Then the sellers took over and though NASDAQ showed relative strength, it was drummed lower as the large cap techs were sold off (e.g. AAPL) to raise capital for those potential redemption requests at hedge funds. That took NASDAQ back down and closed it at the session lows, holding roughly 29 points above some support at the February high and 64 points above the low on this selling. Made the test of resistance and started back down. That is about the size of it, though many techs are showing very good (and indeed positive) relative strength.
SOX (-0.66%) was quite strong, though its strength was relative to a sea of weakness. It held the 90 day SMA on the low and basically maintained its position. On a day such as Thursday, that was not bad, but it did not do much for SOX unless the selling quickly dissipates.
SP500/NYSE
Stats: -44.4 points (-2.96%) to close at 1453.09
NYSE Volume: 2.8B (+8.29%). Record volume on NYSE though it was just another record in a series of records. Strong volume as the large caps turned down from resistance.
Up Volume: 407.554M (-1.556B)
Down Volume: 2.368B (+1.746B). -5.8:1 down to up volume.
A/D and Hi/Lo: Decliners led 3.6 to 1. The A/D line has rolled over and is in retreat, making a lower low the past week. Lower lows are never good as it shows a break of the trend.
Previous Session: Advancers led 2.42 to 1
New Highs: 83 (-71)
New Lows: 329 (-114)
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
SP500 with its financial contingent was doomed before the bell what with the Bank Paribas issues and the world central banks pushing money into the system. That rattled all financials and they gapped lower. We did not get many really decent entry points because of the gap. SP500 never got up, either, tanking to the 200 day SMA (1452) to close. Strong volume, weak breadth. Just ugly. It is still about 25 points above the prior low near 1425. No one we know is taking a bet that will hold at this juncture given the massively weak financial sector.
The small cap SP600 (-1.38%) again showed relative strength, but that was only because the large caps were getting sold by the hedge funds to raise money. The small caps were still weak with a turn lower from the rebound to the 200 day SMA. Pretty much a classic rollover at key resistance.
DJ30
The blue chips made it to the June highs and then put in a swan dive that took back 387 of the 476 points gained the prior three sessions. Strong rebound but stronger downside as volume surged as DJ30 broke back below its 90 day SMA and is just over the June lows at 13,250 and the lows on this decline at 13,132. Not far away at all and ready to test those levels. Some are saying the February high is now in play down at 12,796. If DJ30 falls through the prior lows it has consummated its head and shoulders pattern and 12,500 would be the textbook answer to how far it drops.
Stats: -387.18 points (-2.83%) to close at 13270.68
Volume: 362M shares Thursday versus 273M shares Tuesday. Spiking volume on the rollover, dwarfing the upside trade that was above average itself. The liquidation by the hedge funds to raise capital was indeed focused on the big, highly liquid names.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
FRIDAY
The Thursday action left no doubt about the market's strength (or lack there of). After a 3-day rally to the next resistance that was almost scuttled on a rumor Wednesday, reality trumped rumor and finished the job.
That rather definitive move started the next leg lower and now everyone is on bottom watch, i.e. looking for when a bottom might finally occur. Given the continued volatility and the expansion in the credit issues we are skeptical the prior lows will hold. A look back at the 2006 correction shows the second leg lower seriously undercutting the first and requiring a third leg to test and set the bottom. The sentiment indicators are at levels to start putting in a bottom and of course this action is building towards that. The big contention is whether the next leg will put it in.
We have to wait and see how that plays out. The rally that started last week on DJ30 and this week on SP500 and NASDAQ is still in tact even after the Thursday selling. It could conceivably hold up but that would require the indices to hold above the recent lows. However you slice it, however, the market remains very weak and while it is showing the attributes of setting a bottom, it has not done so.
Thus we will look at downside when we get the opportunity to enter and we will continue to hold strong stocks for now as many of our positions continue to show excellent strength. We will continue to monitor the action and look to buy stocks that show the strength we are looking for and give us good entry points. With leadership holding up the market still has mettle and that indicates this is indeed a correction versus a meltdown preceding an economic slowdown. The wolves are howling pretty loud on the tube, in Congress, etc., and combined with all of the sentiment indicators the bottom is gelling. It can always get blown out the bottom still and at this point the signs may indicate a bottom is trying to form, but it has not done so yet. When this hedge fund liquidation ceases that will be a big turning point, and given that 8-15 is next Wednesday that could be the day to look for.
Support and Resistance
NASDAQ: Closed at 2556.49
Resistance:
The 90 day SMA at 2579
2601 is the mid-May intraday peak.
2610 is the October/December trendline
The 50 day EMA at 2600
2634.60 is the June peak
2668 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 2496
2470 to 2467 are price peaks from November and December 2006
2400 is price support
S&P 500: Closed at 1453.09
Resistance:
1461.57 is the February 2007 high.
1473 is the July 2006/March 2007 up trendline
1475 from peaks in December 1999 and January 2000
1490.72 is the early June closing low
The 50 day EMA at 1499
1534 is the early July high
1539 is the mid-June intraday high
1541 is the early June high.
1552 is the late November to February up trendline
1553 intraday high from March 2000 is the all-time index peak
Support:
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 13,270.68
Resistance:
The 90 day SMA at 13,354
The 50 day EMA at 13,487
The mid-May peak at 13,556
13,620 is the November/February up trendline that marks the lower channel.
13,655 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
12,900 is the July 2006/March 2007 up trendline
The 200 day SMA at 12,813
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): 316K actual versus 310K expected, 309K prior (revised from 307K)
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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trading system
money investment
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