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world stock market, us stock market
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8/15/07 Stock Split Report Update
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Stock Split Report Subscribers:
Full report issues Thursday.
MARKET ALERTS
Targets hit alerts: None issued
Buy alerts: FRPT
Trailing stops: None issued
Stop alerts issued: CIEN; PCU; RIMM; SAY; VIP
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/alertssr.html
SUMMARY:
- Soft start, rebound to positive, crushed on the close as more redemption selling tosses out the good with the bad.
- Fed decision time is coming as liquidity injections not alleviating the problems.
- CPI in line, gives the Fed some breathing room.
- Liquidation likely over for now, but August expiration to provide volatility in its place.
Redemption selling torpedoes a bounce attempt.
The economic data (CPI, production and capacity, New York PMI, net foreign purchases) was not bad at all, but futures were weak. After two session of opening bounces that crapped out a weaker start was a positive. Indeed stocks reversed in the first hour and rallied to positive. Even a weak oil inventories report (crude -5.2M versus the -2.5M expected, gasoline -1.1M) did not set the rebound back.
You knew the move was going to get tested, however, and it did. The indices turned flat to slightly negative midmorning but then mounted a steady rebound through lunch into the early afternoon, matching the morning highs. The sellers tried their hand again. A pullback turned into more serious selling and then things got out of hand as the hedge fund pre-redemption selling exploded as once more they sold shares to raise cash. The Monday and Tuesday volume indicated the selling was winding down, but that was not completely the case as the volume jumped back above average Wednesday. Hedge fund selling and the August expiration combined to push volume back up.
The Fed injected another $7B in temporary reserves but that did not slow the selling. In a key move for the day, NASDAQ gave up the 200 day SMA. It had been a holdout, getting money pushed its way as the financials and NYSE stocks were sold. That did not happen Wednesday as NASDAQ became a sell target as well. Tuesday we noted the market still had a growth orientation to it. Wednesday the gainers, and they were not great movers in any event, were predominantly consumer staples and healthcare. Even with the Gulf storm off Texas upgraded to a tropical storm the energy stocks could not hold their gains (oil closed up at 73.21, +0.83).
Technically it was another session that saw new correction lows, this time with NASDAQ joining in on the breach of the 200 day SMA. All three major indices hit new lows for this round of selling, gouging out the prior low as they continued this last push to the downside. Volume was up and back above average on the start of the redemption period. Breadth was weak, really ramping up in the late dive (-5:1 NYSE, -2.3:1 NASDAQ).
There were two key attributes to the selling. First was how the indices handled the 200 day SMA. As noted, NASDAQ gave up this key support after trying to set up something of a bottom there. No more. It crashed that level and is now back in the middle of the November to February trading range. DJ30 closed with a test of its 200 day SMA and the February high. How it handles this key level tells a lot about where the market stands in this sell off. Second point: the leadership was tossed out the window as the hedge funds continued to sell stocks to raise money for redemptions. Those that were not actively sold received no bid and slid lower and lower in the selling. There are some great earnings out there that are not getting credit for their results. There is a big information gap as to just how far the financials will lead the market and the economy down. There was panic in the voices of some brokers and market makers we talked with, though the latter were not talking, somewhat unusual in itself.
When you start seeing the quality thrown out with the crap in favor of sugar water (Pepsi), toothpaste, and what keeps you or makes you healthy, the market is telling you it is getting closer to the climax because traders don't know what to keep and they are dumping it all. That is a sign, though as we know, it is not a timing indicator.
As for the size of the correction, DJ30 is down 8.4% from its recent peak as it sits on the 200 day SMA. SP500 with its financial gutting is down 9.7%, close to that 10% everyone looks to as an 'official' correction. NASDAQ, with its rip through its 200 day SMA Wednesday, has now matched the large caps, sporting a 9.7% decline of its own. What does that mean? They have sold 8.4%, 9.7%, and 9.7% respectively. It does not mean they are at a bottom just because these levels are hit, though it is a point that a lot of big money managers look at in determining if it is time to step back in or not.
In sum, the market was again slashed wide open by the sellers after a lukewarm attempt to hold the line and bounce from the selling. There are simply too many unknowns for the market to accurately price assets right now, and we all know that when the market is uncertain it sells first then figures it out. Add to that the hedge funds getting a jump on raising redemption cash the past week and you have two powerful forces pushing stocks lower. After five downside sessions things are a bit oversold and there will likely be a reprieve from the hedge fund redemption selling . . . once expiration volatility runs its course. Then we can look for the hedges to try and hit the market again after that initial round of redemption requests is absorbed, trying to raise more cash for yet more redemptions to come. Vicious cycle.
What should the Fed do?
A vicious cycle indeed, and many are calling for the Fed to step in with more than just liquidity injections as it did last week (over $30B worth) and on Wednesday (another $7B). That would entail a rate cut in most peoples' minds.
We said last week that the Fed had a short window of opportunity to get things under control using the liquidity injection game book. It managed to bring the bank to bank rate in line with the Fed Funds rate, but that has not resolved the liquidity situation outside of the banks. Indeed, the situation is worsening with the flight from any kind of corporate paper, high quality or not, and the selling in government backed securities, not really even a notch below US treasuries since they are both guaranteed by the US government. That shows serious, real panic in the financial sector, and with that kind of panic, liquidity alone is not going to resolve the problems.
You can argue that resolving the market's valuation problems with respect to all of these assets is not in the Fed's job description. As we wrote a week ago, however, a former Fed official has said the 'tough love' program that lets the market fall and risks economic recession is not one that any Fed official is willing to chance. Two former FOMC members today stated the financial situation was critical (McTeer was one) and that the Fed should continue to act.
Okay, so the Fed should continue to act. Let's say the Fed adds more liquidity and cuts rates as well. Will that do anything for the market? Sure the mortgage and credit issues precipitated a lot of the hedge fund selling, but will cutting rates solve their problems? Not overnight. A rate cut would basically be a confidence injection to try and get trade moving once again and thus more accurate asset valuations. Eventually that would help the market as the market thawed, trades took place, and values were assigned to the assets.
That is the actual process of arriving at prices. The psychological impact is something different, and it can be immediate. If the Fed cuts when the market is screaming for it then it can have a large and positive impact. If the Fed cut when the financial community was split 50/50 on the issues then a cut would like have hurt the markets more than helped. When most are screaming that they are ready to spontaneously combust without Fed help, a rate cut can do wonders. As noted, it won't resolve the issues overnight, but it can give an immediate boost to the market. Just look at early 2001: massive gains. Of course, that was too little, too late and the recession had started; after the initial euphoria the market rolled over again. If the Fed can nip this in the bud then the market can hold its gains as it again prices in a better economic future. Right now the market has its doubts about the economy even with the good earnings and good economic reports as it fears the contagion will spread. If it does that means a slower economy. Thus if the Fed is going to act it should do so sooner than later, i.e. before any further damage to the economy is wrought.
THE ECONOMY
CPI continues its decline, providing the Fed some wiggle room.
The overall CPI rose just 0.1%, in line with expectations and lower than the 0.2% in June. The core came in at 0.2%, in line as well though a bit disappointing it did not pull another 0.1% surprise. That left the annualized core at 2.2% though the chained core is 1.8%, and that purportedly gives a more accurate reading of real inflation.
That of course did not give the market a big boost. It was a good thing, however, because today a couple of fund managers confided they were worried the number would spike and that would have driven a stake into the market. Of course with the Wednesday finish, the size of the stake would have been the only issue.
As it is, inflation continues its decline, at least as measured by the government. The PCE is now below 2% and the CPI is on its way down. All this does for now is give the Fed some wiggle room to cut rates if need be. It has always said its favorite indicator was the PCE and it can fudge all it needs to if it feels it has to cut rates.
The economic data remains rock solid for now.
The other economic data out Wednesday certainly did not show any cracks, and the Fed will certainly keep that in mind as it decides just how much it should do to assist in resolving this credit crunch. Indeed, the strong economic underpinnings are keeping things afloat during this crisis, though the boat is taking on water. If earnings and the economic data was not this strong there would be nothing out there with the potential to keep the stock market moving higher after this correction.
Wednesday the data was good yet again. There was the CPI, but the New York August manufacturing report was excellent at 25.1, clubbing the 19.0 expected and a good showing following July's 26.5 reading. There is still plenty of expansion in manufacturing as it resumes its gains after the mid-cycle slowdown in the second half of 2006.
Production and capacity utilization were also solid with a 0.3% growth in production and capacity rising to 81.9%. Net foreign purchases came in at $120.9B for June after that big $107.3B May reading. We said at the time we would have to see how June came in, and it was huge. Seems there is no shortage of appetite for US financial assets, particularly treasuries. That blunts a lot of the talk about dumping US assets that you hear going around, and it provides some support for the dollar.
Speaking of the dollar, it is enjoying its best run in months, surpassing the early July highs as world investors look for safety. Despite all the talk of diversifying out of the US currency, where do they all come running in times of anxiety and fear? To the greenback. Talk about bad weather friends.
THE MARKET
MARKET SENTIMENT
VIX: 30.67; +2.99. This is getting downright impressive and if DJ30 pushes down to 12,500 without an interim bounce it could hit 40. That would be quite noteworthy.
VXN: 27.97; +3
VXO: 32.21; +3.97
Put/Call Ratio (CBOE): 1.49; +0.08. Lets see, that makes it 18 in a row over 1.0 on the close. Does it even matter at this stage? The absolute number of puts being traded right now is staggering, however, and that is another sign of a lot of fear and downside speculation. That all goes into the stew pot that cooks up a bottom.
Bulls: 43.8%. Surprisingly, and quite disappointing, bulls held steady at 43.8% for a second week. Down from 47.2% and 53.9% the week before. 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: 32.6%. Not nearly as big a run as the prior week's 5 point jump to 31.5% from 26.4% and 18% just the week before. 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: -40.29 points (-1.61%) to close at 2458.83
Volume: 2.146B (+7.35%). Volume was up though just above average as NASDAQ collapsed through the 200 day SMA. Not huge trade but the gun was aimed at techs today as well.
Up Volume: 361M (+49M)
Down Volume: 1.956B (+249M). Nearly 6:1 down to upside volume. Heavy for the techs on this selling bout.
A/D and Hi/Lo: Decliners led 2.34 to 1
Previous Session: Decliners led 2.76 to 1
New Highs: 37 (+2)
New Lows: 209 (+45)
NASDAQ CHART: http://investmenthouse.com/ihmedia/NASDAQ.jpeg
The 200 day SMA gave way after the third test, and it was an impressive dump lower with a 62 point reversal intraday. The techs started to get shot on Wednesday after holding out at the outskirts of town. They were found and taken down on Wednesday. Not all are cratering, but they were definitely getting sold as the hedge funds, in their quest for cash, started to sell whatever they had that was still holding up. Desperation selling, but it put NASDAQ back in its November to February range. There is a big band of support in the 2450 range, and it is just about there. Good place for it to make a stand.
SOX (-2.5%) dove below the 200 day SMA as well as it, being part of technology, was raided and plundered. It broke decisively below the November/December/February peaks, and is once again back in that long trading range from November 2006.
SP500/NYSE
Stats: -19.84 points (-1.39%) to close at 1406.7
NYSE Volume: 1.986B (+10.57%). Volume spiked above average as the NYSE indices spiked lower. The selling resumed, aided by hedge funds and expiration. It was pretty ugly but this volume will pass with expiration, at least until the end of August when some more redemption selling starts.
Up Volume: 255.06M (+126.8M)
Down Volume: 1.717B (+66.071M)
A/D and Hi/Lo: Decliners led 5.07 to 1. Still ugly as the financials are slaughtered, gutted, drawn & quartered, etc.
Previous Session: Decliners led 6.62 to 1
New Highs: 11 (-8)
New Lows: 703 (+253). Incredibly impressive downside here compared to the NASDAQ's relatively tame new low list. This is extreme.
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
In a full dive below the prior lows in the correction, crashing through the December 2006 peaks. This is a serious dive and it is not over. The March lows at 1375 are the likely target for this selling. There is not much more to say about this except what an impressive dive.
The small caps (-1.45%) fell below the prior closing lows but still is above the early August low. It has broken the late 2006 consolidation range, however, and it looks as if 390 is the next level. This is getting out of hand to the downside as the small caps show the brunt of the selling.
DJ30
DJ30 broke lower and is the last of the major indices to test its 200 day MA, tapping that on the low. Critical point for DJ30 as it is also at the February peak. Critical for the market as well; if DJ30 can hold here it can provide the backbone the rest of the market is lacking. We note that volume was up but still average as it made the selling. Some consolation as it tests this key level.
Stats: -167.45 points (-1.29%) to close at 12861.47
Volume: 272M shares Wednesday versus 269M shares Tuesday. Volume rose but still near average as the Dow sold off. The selling volume is lightening up, helping a bit on this critical test.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
THURSDAY
Housing starts, Philly Fed, Michigan sentiment. More economic data, more chances for the economy to show things are staying the course with respect to a continued expansion. That is a double edged sword as the Fed can use that as a reason not to take more aggressive action, but frankly, all financial markets around the world need to see continued US economic strength. If it is not there then this credit problem turns into a global crisis. Not being a reactionary, just a realist.
Right now there is not much other than a Fed intervention to brace up the market. Good economic data helps but it is dated. The market is worried about the future and what the credit crisis will do to those good economic numbers. Thus the importance of the Fed acting WHILE the numbers are good.
That said, the Fed is not going to act this week in all likelihood. That leaves expiration to work through and likely another couple of volatile sessions to this week. The key at this stage is how DJ30 handles this test of the 200 day SMA after 5 straight sessions to the downside. Getting a bit oversold, and after undercuts of key levels (SP500, NASDAQ) a rebound is typical.
Three are some stocks that held the line and we will be looking their way. We are not, however, prepared to go chasing PEP and the like where a dollar is a big move and 10% is out of the question. The risk/reward ratio is not that great. The boredom factor is. There are some solid growth stocks in medical and healthcare, and also some tech, energy and other sectors that remain in position to move higher on a market recovery. Risk levels are high as is fear. That can make for some massive recovery moves and we will be looking at those stocks for an upside pop.
There is nothing yet to indicate a bottom as far as price action, though the sentiment indicators are extreme. That means you have to be ready for a bottom. When no one expects it, look for good stocks to buy as they make strong moves. At this juncture, with the economic data still strong we don't want to chase those really defensive stocks; as soon as you do the rest of the market turns. At this point in the market you want to play the downside as we are doing, hang onto good stocks that are holding up, look for strong stocks ready to move higher, and also buy into those good stocks you hold that have held support and rebound. In that way you are best positioned to take what the market gets. That may mean only a position here and there; today we only got into FRPT to the downside, but that is okay. Take what is being offered when it is offered. That means the right play at the right price. We could chase a bunch of financials now, but the price you pay to buy a put option is much too inflated. The risk/reward is too low. That is why we are looking around the periphery for the downside as that gives the best risk/reward.
Support and Resistance
NASDAQ: Closed at 2458.83
Resistance:
The 200 day SMA at 2499
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 2587
2601 is the mid-May intraday peak.
2617 is the October/December trendline
2634.60 is the June peak
The November/December/February up trendline at 2659
2674 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:
2450 is some price support from November and December 2006
2400 is price support
S&P 500: Closed at 1406.70
Resistance:
1427 represents some interim peaks from December 2006
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
1477 is the July 2006/March 2007 up trendline
1490.72 is the early June closing low
The 50 day EMA at 1490
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
1556 is the late November to February up trendline
Support:
1406 - 1407 from March 2007 and November 2006 interim peaks
1389 from October 2006 interim peak
1375 from March 2007 low
Dow: Closed at 12,861.47
Resistance:
12,945 is the July 2006/March 2007 up trendline
13,121 is minor support from the April peak
The 10 day EMA at 13234
The 90 day SMA at 13,379
The 50 day EMA at 13,428
The mid-May peak at 13,556
13,640 is the November/February up trendline that marks the lower channel.
The early July peak at 13,671
13,675 is the upper channel line in the November/February channel
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 200 day SMA at 12,832
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% actual versus 0.1% expected, 0.2% prior
Core CPI (8:30): 0.2% actual versus 0.2% expected, 0.2% prior
NY Empire State Index, August (8:30): 25.1 actual versus 19.0 expected, 26.5 prior
Net foreign purchases, June (9:00): 120.9B actual versus 107.3 prior (revised from $126.1B)
Industrial production, July (9:15): 0.3% actual versus 0.3% expected, 0.5% prior
Capacity utilization, July (9:15): 81.9% actual versus 81.7% expected, 81.7% prior
Crude oil inventories (10:30): -5,2M actual versus -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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