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8/14/07 Technical Traders Report Update
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Technical Traders Report Subscribers:
Full report issues Wednesday
MARKET ALERTS
Targets hit alerts: None issued
Buy alerts: AEO; DIA; SIRF
Trailing stops: VDSI
Stop alerts: BDX; LRCX
The market alert service is a premium level service where we issue intraday alerts relating to the general market conditions, when stocks hit action points (buy, stop, target, etc.), and when we see other information impacting the market or our stocks. To subscribe to the SSR alert service you can sign up at the following link:
http://www.investmenthouse.com/alertttr.html
SUMMARY:
- Market again tries a bounce, but credit issues and their ripple effects once more take it lower.
- PPI jumps on energy costs, but the core slips lower again.
- WMT reports weak earnings and guides lower, but is that a bad thing for the economy?
- Market has more work to do as the Fed bid has left the building.
Another bounce attempt bites the dust.
Monday we mentioned how some were saying the market did just what it needed to do that day, but it sure looked weak to us given the market gave back early gains, unable to make anything more of the Fed liquidity injection to end last week. Well, Tuesday stocks once more showed a stiff upper lip early on, shaking off some weak WMT earnings and rather pitiful guidance, rallying the futures ahead of the open. It didn't hurt that the trade gap narrowed more than expected and PPI, while high overall on a jump in gasoline and energy costs (0.6% versus 0.2% expected), was lower than expected on the core (0.1% versus 0.2% expected). The Fed didn't feel it was necessary to inject any more funds into the market, and that had a soothing effect as well.
Stocks started higher but after the first half hour it was more of the same story. The gains started to erode. There was no massive sell off but a steady decline into midmorning. SP500 hit its early August low and that helped trigger a rebound into lunch. That was tested for almost two hours, but we noted midday it looked pretty sluggish in its attempt to recover lost ground. Stories were circulating in the mortgage and credit circles again, with Sentinel requesting permission to halt redemptions. That started to tip the financial sector over once more and as it fell it gained momentum and that started to take out all of the other sectors as well. Late in the session another mortgage company was in the headlines as it was halted pending news. The speculation ran wild and stocks ran lower. A late bounce failed and the indices closed on their lows. Energy tried to keep things afloat, but it was a thimbleful of water against the tide of selling.
Technically the action was quite telling. NYSE, DJ30 and SP500 broke to new correction lows, i.e. undercutting the prior lows on this sell off. Typically that means the low is not set, that it will take a bounce and a test of that new correction low before a sustained recovery can take hold. Typically, but not always. In summer of 2006, yes. SP500 rallied back up after a second bottom on that sell off, and then it tested in July, not undercutting that prior low. In March SP500 undercut the early March low intraday and rebounded. It did not come back to test, waving goodbye at that point.
With those new lows volume faded on NASDAQ and barely perked up on NYSE. It did not expand. Another piece of the puzzle, and this one is a bigger one. One of the problems for the market is the massive selling by hedge funds anticipating a nasty redemption season starting 8-15-07. Thus they were unloading positions en masse, driving volume through the roof. They had to raise money to avoid the fate of the three BSC funds that found themselves without money and unable to sell their assets in the credit freeze. That means you have to close the doors and go into liquidation. Thus the selling to raise cash and meet all of the demands of those heading to higher ground. This volume shows that the pre-redemption selling is winding down, and as that selling was one of if not the major source of selling in late July and early August, that at least gives the market a breather.
The other important aspect of the declining volume other than no out and out dumping is the 'wimpy' bottom factor. Investors and pundits are always looking for a big, cathartic sell off to announce the end of selling. On more than a few occasions, however, the market bottoms not with a massive sell off and reversal, but by simply trailing off on lower volume. SP500 broke below its early August low, but just by a gnat's butt. NASDAQ fell back to its 200 day SMA to close, but volume was even further below average than Monday. DJ30 sold on rising trade as it undercut, but it was still below average trade. Volume is dying off as the selling continues. That does not mean the selling stops: if there are no buyers the bid drops until some step up. It does mean, however, that the market can start to heal itself and again try and find a bottom.
Breadth was way crappy once more and the market still could not move higher even with the lower volume, but while everyone was wailing about how bad the session was, the lower volume this week does tell us that at least one of the downside pressures is waning for now, and that is a positive. It is hidden under all of the piles of garbage, and it is a guarantee of nothing, but it is one of those things that stands out given all of the moaning and whining about the selling. Now we see if the market can do anything with it, but with the negatives still streaming out of the financial session there is still work to do to dig out of this correction.
THE ECONOMY
So WMT missed its earnings? What's new?
Man you would have thought that every consumer in the US suddenly stopped shopping last quarter because WMT missed its earnings. It also guided lower, but that is the second chapter of this story. Retail sales for July as reported Monday were not that bad. They were not 'robust' showing signs of Greenspan's 'runaway consumer', but they were decent. So, what gives with Wal-Mart's earnings then?
Some say it is the number one retailer, and when it sneezes the retail sector sneezes. Well that might be the case if everyone shopped there, but frankly, when times are good, people avoid WMT like the plague. In fact, look back to the last time that WMT actually was leading the sector in sales growth and was posting strong earnings? Give up? It was back in the last recession. When the economy went down and millions of companies disappeared leaving tens of millions out of work, they had to downscale and go discount. WMT sales surged along with its earnings. It was heralded as the new retail paradigm, crushing everyone in its path.
What happened when we started to emerge from recession? JCP sales shot higher and it more than tripled from 2003 to 2007. Specialty retailers exploded with sales. CWTR went up 20 times from 2003 to 2006. ARO jumped six-fold in that time. The list goes on and on. All the while WMT's sales and earnings faded. Indeed, we even used WMT's sales decline as a LEADING INDICATOR that the economy was starting to turn around, i.e. when the consumer felt good enough to step out to higher priced stores to shop. Consumer confidence was still in the toilet at that time, but confidence and actions typically do not correlate, and they definitely were not at that time.
Thus with WMT's earnings in the tank and its guidance crappy, that is a good indication for the economy for now: if people don't feel the need to shop discount then that is a good indication for the economy, at least for now. Of course a lot of that 'crappiness' depends upon management's ability to accurately project the future, and this crew at Sam's place has not been that deft.
A change in the wind?
That brings us to part 2 of the crappy WMT earnings. Are they really as bad as indicated? We see a shift ongoing, i.e. discounters' sales are on the upswing as the consumer shifts habits based on worries about this mortgage and credit issue that is getting huge amounts of play time on the local news. They remember Enron, Global Crossing, even Martha Stewart. They have hunkered down some.
How do we know? Because though WMT's earnings could be found in the plumbing department (aisles 12-14), it actually gained market share when measured as a percentage of retail spending in the economy overall. That is a mind bender right there. WMT's earnings were down but it gained share in the dollars spent. That means two things. One, there is indeed a shift ongoing into discounters. Two, it means that the rest of retail really does stink, more in line with the declining same store sales reported versus the government's retail sales figure that is adjusted and reallocated so much it represents Wonderland more than the US retail market.
We have been economic bulls, but as with the market, you cannot ignore what the facts tell you. If consumers are buying more discount they are worried. It is not enough yet to lift WMT's earnings, and likely WMT won't know things are better until it happens. This is noteworthy though not definitive. It does show, however, that there is some sense of concern building.
THE MARKET
MARKET SENTIMENT
VIX: 27.68; +1.11
VXN: 24.97; +0.4
VXO: 28.24; +1.69
Put/Call Ratio (CBOE): 1.41; +0.4. Wow (again). Seventeen sessions over 1.0. That has to be some kind of record. The overall put/call ratio (not just CBOE) has been popping 1.0+ frequently as well.
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: -43.12 points (-1.7%) to close at 2499.12
Volume: 1.999B (-9.86%). Volume was lower for the second session, well below average. After a month of huge trade this is very quiet volume as NASDAQ tests the prior lows. That is not a bad thing. Indeed, that is a good thing.
Up Volume: 312M (-798M)
Down Volume: 1.707B (+604M)
A/D and Hi/Lo: Decliners led 2.76 to 1. Bad. Not horrendous but bad as the techs were hit along with everywhere else.
Previous Session: Decliners led 1.18 to 1
New Highs: 35 (-12)
New Lows: 164 (+49)
NASDAQ CHART: http://investmenthouse.com/ihmedia/NASDAQ.jpeg
Again a gap higher to test the 10 day EMA and again a failure at that level followed by a rollover. This one took NASDAQ back down to the 200 day SMA (2471) on the close, just below the Friday intraday low but still above the early August intraday touch lower. A new closing low on this test for sure, but it has not plowed new ground. Like that it held here. It may not mean a darn thing after the AMAT earnings after hours, but it was where NASDAQ needed to hold again and continue trying to stomp out a bottom here.
SOX (-2.23%) was pretty much beaten about the head and shoulders on the session, falling through the 90 day SMA and back near the early August lows. It is at the February high for what that is worth. As you can tell by my optimistic tone, there are high hopes for SOX, especially after the AMAT earnings. By high hopes I am referring, of course, to the shorts.
SP500/NYSE
Stats: -26.38 points (-1.82%) to close at 1426.54
NYSE Volume: 1.796B (+4.65%). Volume did rise as the NYSE indices resumed their 'straight to the bottom' dance step. Volume was up but it was still below average and not the kind of other wordly volume NYSE was showing the pat three weeks. Again that shows a lot of the redemption selling is winding down thought the financial rout again on Tuesday helped push the volume modestly higher.
Up Volume: 128.26M (-750.606M)
Down Volume: 1.651B (+819.419M). -12.9:1 down to up volume. Now that is extreme.
A/D and Hi/Lo: Decliners led 6.62 to 1. What a nasty decline on all points other than volume, though outside of the past two sessions, volume was horrendous as well. Less than the -10:1 intraday we saw back in early August, but no piker.
Previous Session: Decliners led 1.04 to 1
New Highs: 19 (-2)
New Lows: 450 (+221). That pretty much defines lop-sided.
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
As seen above, the internals were horrid though volume was just modestly higher as SP500 dove lower from the 200 day SMA, using it for a platform dive to a new low on this correction. Not a big dump lower, not enough to bring down the entire market as it just edged past the early August touch down point. It is now at the December 2006 peak and the January peaks. Likelihood of holding? Not great, but a bit improved with the rather modest volume.
SP600 (-1.88%) chipped in its part to the selling, failing the test of the 200 day SMA and diving lower. Unlike the other NYSE indices, it did not breach its prior lows on this correction but it is getting close and coming up to the lick log for the small caps on this correction. 400 would be a good place to make a stand.
DJ30
With this move below 13,180ish the blue chips 'consummated' their head and shoulders top, striking out lower to find the bottom. The 200 day SMA (12,829) and the February peak (12,786) are next in line to try and provide some support. Many are talking about 12,700 as support. That is a 10% correction. The 'typical' pullback from a head and shoulders would put DJ30 near 12,500. Given many are looking at 12,700, that makes 12,500 more appealing. It will, however, likely try a bounce at the 200 day and that February peak one-two combo.
Stats: -207.61 points (-1.57%) to close at 13028.92
Volume: 269M shares Tuesday versus 215M shares Monday. Volume rallied up to average as DJ30 undercut its prior correction lows. It was not done with the selling and it still likely is not.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
WEDNESDAY
There was not much to get excited about Tuesday as the market gave up another bounce attempt and sold off to some new correction lows. The lower volume put a little better light on it, but it did not change the character. Right now there is not a whole lot on the horizon signaling any end to the downside. Of course, once everyone is resigned to that course that will be the end of the selling.
There needs to be a series of events that work to set a bottom in place, and the market is working on that. The extreme internals, the extreme sentiment indicators, the huge volume spikes (record on NYSE), the bad news in the mortgage and credit areas. There is plenty to put a bottom in. The question is, will there be a bottom or is the future holding a recession and thus a further market decline. With the market still selling, it is not building in any economic upside just yet.
At the same time there are stocks that continue to hold up quite well though many are being tested. As long as there is a stable of strong stocks with good earnings growth rates that are not all lodged in the defensive arena the market still has an idea it is going to head back up without a recession. Thus while the market is currently selling and has not shown it is ready to set a bottom just yet, there are many indications it is going to try and do that. We have to be willing to move into positions that show the right stuff on the upside and take advantage of downside runs while they are here. Thus DIA, AEO, SIRF, etc. as the market runs lower for now.
Economic news could help, and tomorrow morning the CPI is out. It still has a ways to go to get the announce core to 2.0 or better yet, below 2.0. It likely won't be able to do the trick, but the key is a continued move lower to 2.1% or so to keep the trend lower moving in the right direction. Industrial production and capacity utilization as well as the New York PMI are also out as well. Those won't have the same impact. The Fed needs some leeway with the inflation readings. If inflation levels fall into the 'comfort zone' then the market will infer the Fed can, if it wants, cut rates and not run afoul of the inflation hawks. That would be a big boon for the market, but it is not likely to come about with the Wednesday CPI reading.
Support and Resistance
NASDAQ: Closed at 2499.12
Resistance:
2509 is the January 2007 high
2531.42 is the February high (post-2002 high); 2525 intraday
The 90 day SMA at 2581
The 50 day EMA at 2592
2601 is the mid-May intraday peak.
2615 is the October/December trendline
2634.60 is the June peak
The November/December/February up trendline at 2657
2672 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 200 day SMA at 2499
2470 to 2467 are price peaks from November and December 2006
2400 is price support
S&P 500: Closed at 1426.54
Resistance:
1440 is the mid-January high
The 200 day SMA at 1454
1461.57 is the February 2007 high.
1475 from peaks in December 1999 and January 2000
1476 is the July 2006/March 2007 up trendline
1490.72 is the early June closing low
The 50 day EMA at 1493
1534 is the early July high
1539 is the mid-June intraday high
1541 is the early June high.
1553 intraday high from March 2000 is the all-time index peak
1555 is the late November to February up trendline
Support:
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 13,028.92
Resistance:
13,121 is minor support from the April peak
The 90 day SMA at 13,376
The 50 day EMA at 13,451
The mid-May peak at 13,556
13,635 is the November/February up trendline that marks the lower channel.
13,670 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:
12,930 is the July 2006/March 2007 up trendline
The 200 day SMA at 12,829
12,796 at the February 2007 high
12,500 is the December 2006 peak
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
August 13
Retail sales, July (8:30): 0.3% actual versus 0.2% expected, -0.7% prior (revised from -0.9%)
Retail ex-autos (8:30): 0.4% actual versus 0.3% expected, -0.2% prior (revised from -0.4%)
Business inventories, June, (10:00): 0.4% actual versus 0.4% expected, 0.5% prior
August 14
PPI, July (8:30): 0.6% actual versus 0.1% expected, -0.2% prior
Core PPI (8:30): 0.1% actual versus 0.2% expected, 0.3% prior
Trade Balance, June (8?30): -$58.1B actual versus -$61.0B expected, -$59.2B prior (revised from -$60.0B)
August 15
CPI, July (8:30): 0.1% 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): 81.7% 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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