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money investment, investment help
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8/11/07 Investment House Daily
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MARKET ALERTS:
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Buy alerts: ALTR; GTIV; SNDK
Trailing stops: None issued
Stop alerts issued: None issued
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SUMMARY:
- Market was heading for another plunge before the Fed provides a floor for the week. Stocks end mixed.
- Fed officially comes to the rescue, doing what it does everyday but on a bigger scale.
- Fed action versus dollar survival: another view.
- Lots of stocks in good position to bounce, but is it just a siren song?
Fed does some carpentry work, helps build a floor in stocks for the week.
Stocks were melting again early Friday morning on more credit worries something we noted in the morning alert that was not necessarily a bad thing as the market needs to get this out of its system, and once way to do that is to get rid of all the sellers such as the hedge funds liquidating positions to prepare for August 15 redemption demands. Futures were a long way down when the Federal Reserve announced it was purchasing $19B of mortgage backed securities. Now there was only $3.9B offered, the usual amount on any given Friday, but the Fed wanted $19B to buy. And it only wanted mortgage backed securities as opposed to Treasuries. It also said it was going to stand at the ready to make sure there was sufficient liquidity for the financial markets to function in an orderly manner.
That stopped the bleeding, or at least it slowed the flow. Stocks started very weak and headed lower, reaching toward the prior August lows, and in the case of DJ30, undercutting it. Still trouble in the financial markets because banks were still not lending back and forth, unable to value each others' portfolios and therefore hesitant to lend. So the Fed came in with another $16B, again wanting mortgage backed, triple A securities. The Fed was buying because it wanted to loosen the market and drop the rate banks were charging each other down to the Fed Funds rate (5.25%) or lower. The banks had to have incentive to loosen up and help out.
Stocks started to recover. Gold, the dollar, stocks, foreign markets, basically everything, was down in the morning and that was troubling. You would expect gold to rise as other assets fell in fear. There was some real nervousness early on and thus the Fed's second step. Stocks rebounded into lunch with the Dow actually turning positive. The sellers returned and sent stocks lower once more. The Fed stepped in a third time with $3B. Finally that seemed to do the trick. In the last hour of trade the rates between banks fell to the Fed Funds rate and the market loosened. Stocks rebounded, closing off their session highs but also well off their lows, indeed turning mixed around the flat line.
Ironically the techs were the weakest of the lot with the large cap techs down 0.6% (NASDAQ -0.45%). After showing the relative strength in the teeth of the selling, the techs were taking a back seat Friday. The small caps, on the back of an energy rebound, led the session with a 1% gain. Financials 'rebounded,' meaning they were not slaughtered again on the session. That helped the SP500 buck up and close flat with DJ30 and even NASDAQ not too far back.
The Fed did its part but the shorts were also active, covering some before the weekend now that this was the Fed's war and its statements about standing at the ready to ensure liquidity for orderly trade. The past few weeks the general consensus was you didn't want to be long heading into the weekend; Friday you didn't want to be short. The Fed could cut 50 BP over the weekend. That is the scuttlebutt we are hearing, though we doubt it will come to pass. The Fed is more likely to try the liquidity injection route again before it resorts to a cut. If it does cut we suspect it would do so during the trading week, likely intraday to allow the market time to adjust. Regardless, investors didn't want to be on the wrong side of the Fed and some weekend announcement of a cut or some bailout action. Thus the stabilization in the afternoon dip and the rise into the close.
Despite the market ups and downs this is pretty fascinating stuff of the likes not seen since 1998. Most of the hedge fund and mutual fund managers today were not around to understand what happened back then. With many relying on those black box program trading methods we discussed Thursday night it is no wonder that when those no longer work as they are not working now that the fund managers don't know what to do. They are losing a lot of money and thus the compulsion to liquidate in order to raise cash to have available for any redemptions. If they do not have the money then they go under (remember 'It's a Wonderful Life' and the need for the Bailey Building and Loan to stay open and liquid? Same thing.). Thus the heavy selling last week that would not likely have been nearly that heavy but for the magnification through the use of those program trading methods.
The technical picture.
Technically it was not a great day on its face as the indices straggled in with some modest gains trading on both sides of flat. A bit deeper there were some positives as NASDAQ tested at its 200 day SMA again on the low and bounced once more. SP500 visited its prior lows as well and rebounded to close at its 200 day SMA. Not bad action at all. DJ30 was a bit different, falling below its prior lows on this selling, but it also rebounded to hold above those lows. There was also continued leadership Many solid stocks tested and rebounded holding their own this week in a weak market. Many quality stocks that sold formed short double bottoms this week. Others continued their nice action with either short tests or plain old fashioned base building. If the market can muster a rebound there are some very good stocks in position to move higher.
That said it is hard to buy that this is 'the' bottom in this selling. There is typically more of a downside move, but typically the Fed does not get involved. It does tend to be the 800 pound gorilla in the room; kind of a game changer. With the Fed providing the floor, perhaps an 8.2% SP500 drop, 8.5% on NASDAQ, and 6.8% on DJ30 is enough. As noted, there are certainly many quality stocks in position to move higher if they get some breathing room, and the Fed's purpose in stepping in is to unfreeze the liquidity lockup. That may be all they need to make the break higher. There are still the hedge funds liquidating their positions and that pressure can reassert itself this week. There are still other bombshells that could drop in the credit markets. Again, however, the Fed stands ready to enter if necessary. We will watch, see how these good stocks perform, and act accordingly. We have misgivings about a bottom right here, but what your gut tells you and what the market does are often divergent.
THE ECONOMY
Save the economy? Save the dollar? Both?
The Fed, similar to Hamlet, is conflicted. To cut, or not to cut, that is the question. Whether it is nobler in the eyes of the financial markets to suffer the slings and arrows of lowering rates to prevent a crash, thus rescuing the economy from potential recession, yet most certainly crashing the dollar by so doing.
A bit dramatic, but the Fed has to make some very tough choices, and the road it took Friday has put the Fed on the path of a rate cut in the event this liquidity gambit does not work. If it does not do what is necessary to unfreeze the credit market the economy could freeze up as well with no money available. If it cuts it could cripple the already weak dollar.
The reason the dollar would fall is that there would be even less reason to hold the dollar. A foreign holder gets less of a return for holding dollars or as is the usual case, US treasuries, because the return falls as rates are cut. The Bush administration, despite the declarations of various Treasury Secretaries, has pursued a weak dollar policy in an effort to increase US exports and US business overseas. It has always said it pursued a strong dollar policy, but no one has believed it. Just as Bush I, Bush II talks a strong dollar but winks and nods at the same time. Thus the dollar has had no real support even as the Fed hiked rates. An already weakened dollar would be severely impaired if the Fed started to cut rates once more.
That is why you simply don't tamper with the dollar or the economy, trying to affect some end. There is ALWAYS something that you cannot control that upsets the best plans. Greenspan learned this (or should have) when he tampered with hiking rates to slow the economy and thus narrow the gap with other countries. That failed as he sent the economy into recession and worse. Now that we could use a stronger dollar in order to better effectuate a means out of this credit crunch, we risk severely undercutting its remaining strength and sending inflation through the rough as we import it due to the weaker dollar making oil and other imports jump. That would severely cripple the economy.
That also, however, leads to an alternate theory as to the effect of rate cutting on the dollar. It states the a currency's worth is set by the economic growth differentials of the various countries. In other words, countries with stronger growth enjoy a stronger currency vis- -vis other currencies. Why would China's currency rise if it was not held lower? Growth. Why is the euro strengthening versus the dollar? Growth. Not greater than the US, but rising rapidly. Eastern Europe? Lots of growth. The US is still suffering from the last Greenspan recession, the one that gave away our technological lead and thus our chance at strong growth even as our population aged. That combined with the Bush administration's weaker dollar policy has kept the dollar low.
Now if the Fed does nothing and the economy seizes up, then this theory suggests the dollar will fall even further. If, however, the Fed acts and is able to prevent a recession by cutting rates, ultimately the dollar will benefit because the economy will strengthen. Short term it could get hammered on the news of a cut, but as the economy rebounds it would regain strength. Some will point to the current weak dollar even as the economy grew at 3+% in Q2, but again you have the Bush dollar bashing policy in addition to the relative strength of other economies' growth rates versus our own. If the Fed lets the economy slip into recession that would only exacerbate the current weakness.
THE MARKET
MARKET SENTIMENT
VIX: 28.3; +1.82. New high on this run, moving into the middle of the 1999 to 2002 range. Of course that is the average range; there were some huge spikes in there. It is now in what used to be considered, back in that same time range, the high end of the 'normal' range.
VXN: 26.84; +0.61
VXO: 29.08; +1.13
Put/Call Ratio (CBOE): 1.1; -0.06. Fifteen consecutive sessions above 1.0 on the close. As stated last week, that is extreme.
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: -11.6 points (-0.45%) to close at 2544.89
Volume: 3.105B (-13.23%). Volume backed off but it was still massive as it has been for the past month as the index has gyrated up and down in that volatility.
Up Volume: 1.251B (+368M)
Down Volume: 1.986B (-707M)
A/D and Hi/Lo: Decliners led 1.37 to 1. Not bad at all considering what it has been.
Previous Session: Decliners led 1.84 to 1
New Highs: 27 (-84)
New Lows: 204 (-70)
NASDAQ CHART: http://investmenthouse.com/ihmedia/NASDAQ.jpeg
Gapped lower, continuing the decline from the three day bounce to start last week. That move took NASDAQ up to the 50 day SMA and the mid-June high where it rolled back down, aided by that Thursday scare out of Europe. Friday techs gapped lower but held above the 200 day SMA and rebounded into the close. They did not wipe away all of the gains, and indeed NASDAQ lagged the other indices on the session, somewhat out of character with its recent strength. Though short, this action has the makings of a neat little double bottom here, and with NASDAQ's relative strength prior to Friday it could be a surprise mover to the upside this week if the Fed's mojo is still working.
SOX (+0.42%) was again a market leader though the gains were modest. It continues a lateral move over the 90 day SMA, trying to set up for a break higher. For showing relative strength it certainly has not moved much, though with the other indices falling just holding your ground is considered strength.
SP500/NYSE
Stats: +0.55 points (+0.04%) to close at 1453.64
NYSE Volume: 2.531B (-9.61%). Similar story to NASDAQ with lower trade but still very strong volume on the heels of that Thursday record volume.
Up Volume: 1.143B (+735.784M)
Down Volume: 1.375B (-993.384M)
A/D and Hi/Lo: Decliners led 1.59 to 1. After some incredibly negative breadth the past week things kind of settled down on Friday, helped by the strength (+1.01%) in the small caps.
Previous Session: Decliners led 3.6 to 1
New Highs: 30 (-53)
New Lows: 258 (-71)
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
SP500 with its financial vanguard plunged lower yet again, reaching down to the August low and the low in this selling that was hit Monday before that intraday reversal. Once more SP500 managed to reverse off of this level where there are some peaks from December 2006 and January 2007. After that duck lower, SP500 recovered and closed at the 200 day SMA, showing a doji. Despite its massive weakness induced by the financials and their swoon, SP500 has the makings of a neat little double bottom just as NASDAQ. As noted with NASDAQ, it does not seem intuitively likely that this is the bottom of this selling round, but we see good stocks in good position that can lead higher, and if the Fed is dead serious about allaying the credit freeze that is ultimately good for the market and it would start to move higher in anticipation of better times.
SP600 (+1.01%) enjoyed the best day of the indices as the energy stocks, after a long dormancy (a.k.a. a butt kicking), started to rebound. The index gave back some gains and still closed below the 200 day SMA, but it is making an attempt. It is still in a big 7 month topping pattern, however.
DJ30
DJ30 plowed some new ground Friday, undercutting its prior lows on this decline as it reached some minor support at a late April lateral move. That was not the test of the deeper support we were looking for, but DJ30 has not sold as much as the other indices and thus when they bounced the Dow went with them without making that test. We debated entering the downside play Friday on the index, in the end deciding we would wait and see just how strong this bid is the Fed put in the market.
Stats: -31.14 points (-0.23%) to close at 13239.54
Volume: 338M shares Friday versus 362M shares Thursday. Lower but still very heavy volume as DJ30 reached lower and then rebounded to hold above the July and August lows and in its range.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
MONDAY
A veritable parade of economic data next week with retail sales, inflation reports, regional manufacturing, housing starts, and consumer sentiment. That along with the ongoing mortgage soap opera (at least the way it is played on the financial stations) and the 'will he or won't he?' Fed drama will keep things spicy. Despite the heartburn this action causes it is something that occurs rarely, and the chess moves being made are rather fascinating. It would take an ex-lawyer turned investor/trader/financial writer geek to find it so, but that is why this always keeps me so energized.
With the market still in major flux, still suffering from continual bad news and doubt, the tendency is to lay low. Indeed we heard several guests on the financial stations saying this was no market for the retail investor to be in. It is precisely during those times that we should be looking for opportunity and be willing to step up to the line and make the play on what opportunities, if any, the market is showing.
Despite all the bad news we see many strong stocks with solid fundamentals growth well positioned to rebound from tests or make new breakouts. Sure the sentiment indicators are at a point that a bottom can be put in, but your rational side says a bottom is not there yet. Nonetheless, as unlikely as it seems, strong stocks are there, in position to move. We were expecting much more downside after that Thursday implosion scuttled the Monday to Wednesday bounce, but as noted above, the Fed is a game changer when it wants to be. We are going to put these stocks on the report and be ready to ride them for all they are worth if this tentative floor the Fed put in the market turns into a serious Fed-bid. There are many issues confronting the market, issues that appear daunting. The market always bottoms when things look their worst. This may not be it at all, but if the market offers up a lot of good stocks moving higher on solid trade, we are not going to pretend we know better. We will step in and take what the market gives.
Support and Resistance
NASDAQ: Closed at 2544.89
Resistance:
The 90 day SMA at 2580
2601 is the mid-May intraday peak.
2612 is the October/December trendline
The 50 day EMA at 2598
2634.60 is the June peak
The November/December/February up trendline at 2654
2669 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 2497
2470 to 2467 are price peaks from November and December 2006
2400 is price support
S&P 500: Closed at 1453.64
Resistance:
1461.57 is the February 2007 high.
1474 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 1498
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 1453
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 13,239.53
Resistance:
The 90 day SMA at 13,362
The 50 day EMA at 13,478
The mid-May peak at 13,556
13,628 is the November/February up trendline that marks the lower channel.
13,660 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
12,920 is the July 2006/March 2007 up trendline
The 200 day SMA at 12,819
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 13
Retail sales, July (8:30): 0.2% expected, -0.9% prior
Retail ex-autos (8:30): 0.3% expected, -0.4% prior
Business inventories, June, (10:00): 0.4% expected, 0.5% prior
August 14
PPI, July (8:30): 0.1% expected, -0.2% prior
Core PPI (8:30): 0.2% expected, 0.3% prior
Traded Balance, June (8?30): -$61.0B expected, -$60.0B prior
August 15
CPI, July (8:30): 0.2% expected, 0.2% prior
Core CPI (8:30): 0.2% expected, 0.2% prior
NY Empire State Index, August (8:30): 19.0 expected, 26.5 prior
Net foreign purchases, June (9:00): $126.1B prior
Industrial production, July (9:15): 0.3% expected, 0.5% prior
Capacity utilization, July (9:15): 81.8% expected, 81.7% prior
Crude oil inventories (10:30): -4.1M prior
August 16
Housing starts, July (8:30): 1.41M expected, 1.467M prior
Building permits July (8:30): 1.4M expected, 1.413M prior
Initial jobless claims (8:30): 310K expected, 316K prior
Philly Fed, August (12:00): 8.0 expected, 9.2 prior
Michigan sentiment, August preliminary (10:00): 88.5 expected, 90.4 prior
End part 1 of 3
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