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money investment, investment help
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8/22/07 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Targets hit alerts: BCSI; GME
Buy alerts: AAPL; NVDA; TRMB
Trailing stops: None issued
Stop alerts issued: AEO; XLNX
SUMMARY:
- Upside bounce picks up some momentum as SP500 recovers the 200 day SMA.
- What the decline in short term treasuries tells us.
- Trying to change its stripes, but still a bounce
Some better action lifts the street's spirits.
There was some good news after a long draught. M&A talked renewed with AMTD & ETFC talking about linking up, NYX looking for a mate, and Dubai World, once rebuffed on the US ports deal, is trying again, putting $5B into MGM. M&A is back baby! Or so they would have you believe on the financial stations. Talk of rate cuts was rampant after the Dodd meeting, and that was credited with bolstering the upbeat mood. Of course that is likely to lead to disappointment because the Fed is not going to cut right after such a meeting; the political implications are too great. Nonetheless Wednesday it was a reason for good cheer. Oil was lower once more closing below 70 again as inventories rose 1.9M bbl versus the -3.2M decline expected.
The session started stronger with solid gaps higher. The nice thing was, they held. They had to withstand a strong bout of selling at lunch, and they did. The did more than that as they rallied in the afternoon and to session highs into the close.
Technically it was a nice gap and importantly a hold after the gap. Volume was up, breadth was great, and leadership was scoring big points. As for volume, well, it was still well, well below average even though it was up. So the move higher just doesn't have all of the juice whether you compare it to the massive downside volume, or to just ordinary volume for the 7 months prior. There was some great leadership and that is always important. We took part in picking up some of that as these leaders that used the prior selling to test good moves rebounded (NVDA, AAPL, TRMB). On top of that, SP500 broke back above its 200 day SMA and held it to the close. It had stalled below that level, and Wednesday it broke up through it.
Hard to complain about that action with respect to the upside, and indeed, as for the bigger picture of setting the bottom in this correction, this is good action as well. This is turning into a good relief bounce, picking up a bit of steam as it rises. As noted above, that leads to a lot of chipper feelings on the trading desks, but the technical picture is that this is a relief bounce. Low, low volume on the indices and in stocks in general, particularly compared to the selling that came before it. Typically this fails and there is more selling, particularly when we have the events such as the hedge fund redemption selling that is likely to continue near the end of August. Again, that is not a bad thing. The move higher, even if it falls into more selling, gives that decline more room to fall and still hold the prior low. This is thus far going to plan. Another good aspect is that the leaders that used the last round of selling to test good moves are now rebounding sharply again, and that will give them a good cushion once more as the market tests. Something like survival of the fittest.
THE ECONOMY
This last run to US treasuries was history making.
Over the past couple of weeks we have detailed the fall in the bond yields as investors from all around the world rushed to the safety of US treasuries. The short end was the largest benefactor of this flight to safety as foreign investors and US investors looked to the short-term US treasury market as a safe haven to place their funds. On Tuesday, the two-year treasury hit 3.99% on the yield while the 90 day or three month treasury bill fell to near 3.7%. This decline in the 90 day treasury bill is the largest drop since 1997.
While most welcome the fall in interest rates as a general gut reaction to any decline in, there are issues related to any fall in rates, particularly declines that occur this rapidly. The sharp decline is brought about mainly by flight to safety as investors grew very cautious regarding world growth rates given the credit contagion and the sub-prime housing issues that confronted financial markets. There's nothing wrong with an occasional rush to safety as long as there are no serious underlying problems that could lead to further declines. When interest rates fall sharply, particularly when the 90 day bill falls well below the Fed Funds rate, the specter of deflation always arises. Inflation may be a concern, but deflation is by far worse. Ironically, recall that it was just over a month ago when US 10 year bond yields hit 5.33% that fears of inflation helped spark some of the initial market selling. As the credit situation worsened, the spike turned to a dive, and the result has stirred the concerns of deflation even as the Fed talks of the inflation threat.
Which is right? How about neither? What this likely is telling us is that in the short term the market is having a hard time processing all of the data from around the world. There is still very strong global growth, though there are growth issues, e.g. the sub-prime housing market, that have led to a financial situation, i.e. the current, yet likely temporary, credit squeeze. Financial markets have sold hard, but after 10% corrections they are trying to find a bottom. Of course that bottoming attempt received a big boost with the Fed assist, and that added another layer of uncertainty (if, when, how much?). With uncertainty as to what the Fed will do in the future, uncertainty with respect to the credit and sub-prime issues, and questions about the status of the financial markets, investors have made the run to US treasuries and thus the decline in yields. That makes this more of a technical move than one grounded in actual problems with the world economies and markets.
What about that short term rate plunge?
The fact that the 90 day treasury bill has suffered its largest and most rapid decline since 1987, the time of initial caps Black Monday, cannot help but conjure up images of another massive selloff in the financial markets. Indeed, there are those who are once again foretelling a massive, bloody decline in financial markets, but this time the focus is specifically on the US markets. According to these pundits, the US is going to suffer a massive currency devaluation as part of an ongoing series of financial bubbles in the US economy. You may recall that back in the early 1990s, the entire world was going to suffer such calamities as a result of the policies of central banks. Some say the crash in 2000 through the bottoming in 2002 was in fact the result or the calamity that was predicted. If that is the case, it was certainly late in coming, and surprise, somehow the US and the world economies survived the 'tidal wave' as some called it.
The point: it is very easy to view each problem that we face as THE problem of the generation that will result in financial ruin. Many like to point to statistics that are the 'highest in all of history.' Problem is, as with stocks, high is not always on the brink of disaster. Indeed, outside of the Great Depression there is only one other major economic swoon in US history since 1900. That was during the 1970s when the US inflation, unemployment and lack of business investment and activity was seen as signaling the failure of our free enterprise experiment.
That period of malaise, however, was brought about by massive amounts of new regulation and new Great Society spending programs that suffocated the economy. Marginal tax rates and taxes on capital were so high that large amounts of investment capital were locked up in tax shelters. Thus when the bill for all of the new regulation and spending hit there was no where to turn to pay for it. It was not until the 1980s, when marginal tax rates were slashed and tax credits enacted to provide investment incentive once again, that massive amounts of investment capital that was formerly in tax shelters was released into the economy. It was again okay to be an entrepreneur and American. We have enjoyed the fruits of that ever since with strong economic growth and vitality. Of course we have tried time and again to disrupt the prosperity with various tax and spending policies. Fortunately, it is been strong enough to withstand those assaults without another major slump of the depression magnitude.
Unfortunately, there is a new breed of protectionism and tax hiking in hungry politicians running for political office. With an unpopular war costing billions of dollars it is easy to target the so-called "massive" deficit and the purported unequal impact of tax policy on the socio-economic sectors of society as reasons to renew protectionism and initiate more 1970s-like programs. Of course no one wants to mention that the number of millionaires has more than doubled in the US. No, instead those that fought hard and are living the American dream are told they make too much on the backs of others. Last time I checked, they are giving the money away; it was earned through hard work and intelligence. The only giveaways are from the Federal government. Nonetheless, success is being vilified once again and if we go down this road, the dire predictions of the negative pundits may prove closer to home. As noted, we have made two great economic blunders in our nation since 1900 that are what the 'crash and burn' pundits use as models for their predictions. Today we understand quite well the policy blunders and the resulting carnage they caused. Hopefully we will once again be smart enough and wake up once again before we head down the road predicted by the naysaying pundits. If we do wake up, the likelihood of these dire crashes is the same as it has been over the course of history: slim.
THE MARKET
MARKET SENTIMENT
VIX: 22.89; -2.36
VXN: 22; -1.67
VXO: 22.68; -2.69
Put/Call Ratio (CBOE): 1.09; +0.18. Back above 1.0 as the market bounced further. Some covering ongoing.
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: +31.5 points (+1.25%) to close at 2552.8
Volume: 1.821B (+6.16%). Volume rose but even by standards from earlier in the year prior to the massive selling it was still below average. Improving, drawing in more buyers, but overall they are few in number.
Up Volume: 1.476B (+464M)
Down Volume: 341M (-352M)
A/D and Hi/Lo: Advancers led 2.27 to 1. Nice breadth as more stocks were purchased. The large cap techs led again but the rest of the market was catching up a bit.
Previous Session: Advancers led 1.09 to 1
New Highs: 60 (+16)
New Lows: 79 (-17)
NASDAQ CHART: http://investmenthouse.com/ihmedia/NASDAQ.jpeg
Big gap higher as techs remain one of the more sought after sectors, but Wednesday the action did spread out beyond the large cap NASDAQ 100 that was head and shoulders stronger Tuesday. The move pushed NASDAQ into the middle of the May and June trading range. It is still below the 50 day EMA and a raft of resistance to 2600. Indeed it is at the threshold of that 2550 to 2600 range we talked about last night. With this kind of mo it might give 2600 a run before it runs out of gas.
SOX (+0.90%) showed a heartbeat though it was the laggard. It made it to the 18 day EMA on the close and about all that did was move it over the late February peak. That leaves it mired in the mud for now.
SOX CHART: http://investmenthouse.com/ihmedia/SOX.jpeg
SP500/NYSE
Stats: +16.95 points (+1.17%) to close at 1464.07
NYSE Volume: 1.428B (+5.74%). Volume was up on NYSE as well, but similar to NASDAQ, it is still wimpy. Indeed, trade was lower than Monday. Not a lot of buyers swarming.
Up Volume: 1.149B (+688.298M)
Down Volume: 233.161M (-107.742M)
A/D and Hi/Lo: Advancers led 3.93 to 1. Very nice breadth as the large caps finally joined the small caps, the NYSE leaders of late, in moving higher.
Previous Session: Advancers led 1.55 to 1
New Highs: 24 (+3)
New Lows: 74 (-20)
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
SP500 finally moved through the 200 day SMA (1455). Yea. It even cleared the February peak at 1462. The low volume was kind of a damper to the move, however. Nonetheless we are rooting for it to continue higher as this move sets up a better bottom. The move through the February peak is important as that is the left shoulder to a potential head and shoulders top. To mean more, however, SP500 needs to push higher on this move, up toward the 50 day EMA (1481). Even if that happens we still expect that test of the August low and that will keep things very interesting as they say because that will keep the H&S top alive even as the index tries to set a bottom. Interesting indeed.
SP600 (+1.19%) was joined in leadership Wednesday. It also broke above its 200 day SMA and that took it out of a short double bottom base. On the high it is still below the 50 day EMA and the February peak; it still has quite a bit of work to do. As noted Tuesday, that February peak is the left shoulder to a potential head and shoulders. Its test will also be interesting.
SP600 CHART: http://investmenthouse.com/ihmedia/SP600.jpeg
DJ30
The blue chips put in an triple digit upside session and in doing so ran right into the May, June and late July lows marking the neckline of that head and shoulders top that sent it lower this month. So, it has recovered to where it really started to collapse, and it has done so on low, below average volume. Technically that is a weak picture as it sits at the bottom rung of the levels of resistance that confront it (13,250 to 13,365; 13,500 to 13,676). Right now it is all a question of how much it has in it to the upside, just as with the other indices. It is a nice bounce, but it is not a strong bounce. The more upside it puts in the better chance it has to successfully test the August low when the selling resumes.
Stats: +145.27 points (+1.11%) to close at 13236.13
Volume: 205M shares Wednesday versus 203M shares Tuesday and 231M shares Monday. Still no volume and indeed even lower than the Monday trade.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
THURSDAY
Initial jobless claims and the continuing Fed watch is the only scheduled economic events for Thursday. Wednesday the market had some good news and built momentum off of that. It was able to do so because the selling pressure has abated as a result of the Fed bid placed in the market ever since Friday.
That of course begs the question as to whether this is really just a bounce or whether it was a knifepoint turn that will never look back. It could be, but that is awfully damn rare. Of course the Fed coming to the rescue is not an every day occurrence, though it has happened more often in history than you would think or want. When the Fed comes to the rescue it is usually cleaning up its own messes, and this one is no exception. Bernanke has had to clean up Greenspan's last excess, his last bubble brought about by effectively 0% interest rates. You want to mess up something? Bring a ton of money into it. Anywhere there is money the sharks show up eventually and they feed on it until they kill it. Exhibit A: the mortgage market. When legitimate borrowers had all bought and refinanced the sharks went looking for more. Thus the no down payment, interest only, no document, etc. loans. The worm had to turn. It did. Here we are.
Be that as it may, the Fed is in the game and it is conceivable that it has put in a floor that won't be tested. Historically that is not the case, even with the Fed involved. The last big financial-caused sell off was in 1998, and that double bottomed as well. Of course this sell off is nowhere near the magnitude of that baby, but that does not change the picture much (unless this bottom attempt fails as well).
The action on the rebound has been decent, but when you look at the selling strength versus the buying strength on the rebound, it is massively lopsided. Add into the equation there is likely to be some more hedge fund redemption selling near month end and you have the makings of that test. Another factor: the bounce gets many feeling comfortable, even ebullient once more. Even tonight we were hearing a lot of upside aggressiveness on the financial shows with statements that last Thursday was the bottom. It may be; if this is the bottom being built is or is close to the bottom. Problem is, the Dow is now 700 points off that bottom and likely to put more distance on it before it turns. That means there could be a lot of pain once more before the correction actually does cement the bottom.
We are following the indices higher with some put plays, raising the buy points as they rise. We are also buying leaders as they rebound as they showed strength in the last selling and we expect the same or even better on the test. We have seen some big rebounds in metals and the like, yet the stocks are still below support; we are not talking about those as those stocks are a threat to plunge lower once more. We are talking about the NVDA, TRMB, ZUMZ and the like that rebounded from nice tests and were never really in distress. They too could come under pressure, but if they do we will sell out our options, sell some calls against our stock, then buy back in when they bottom and start to rebound.
Support and Resistance
NASDAQ: Closed at 2552.80
Resistance:
The 50 day EMA at 2573
2601 is the mid-May intraday peak.
2627 is the October/December trendline
2634.60 is the June peak
2667 is the November/December/February up trendline
2673 is the early July high
2688 is the November/February up trendline
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
2509 is the January 2007 high
The 200 day SMA at 2503
2450 is some price support from November and December 2006
2400 is price support
2395 is that old trendline from August 2004 to May 2005
2386 is the August intraday low
S&P 500: Closed at 1464.07
Resistance:
1475 from peaks in December 1999 and January 2000
1481 is the July 2006/March 2007 up trendline
The 50 day EMA at 1481
1490.72 is the early June closing low
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
Support:
1461.57 is the February 2007 high.
The 200 day SMA at 1455
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 - 70 from March 2007 low
1370 is the August intraday low
Dow: Closed at 13,236.13
Resistance:
The 50 day EMA at 13,365
The 90 day SMA at 13,406
The mid-May peak at 13,556
The early July peak at 13,671
13,675 is the November/February up trendline that marks the lower channel.
The mid-June high at 13,689
The early June high at 13,676 (closing), 13,692 (intraday)
13,705 is the upper channel line in the November/February channel
The July high at 14,022
Support:
13,121 is minor support from the April peak
13,000 is the July 2006/March 2007 up trendline
The 200 day SMA at 12,858
12,796 at the February 2007 high
12,518 is the August intraday low
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 20
Leading Economic Indicators, July (10:00): 0.4 versus 0.4% expected, -0.3% prior
August 22
Crude oil inventories (10:30): +1.9M actual versus -3.2M expected, -5.1M prior
August 23
Initial jobless claims (8:30): 320K expected, 322K prior
August 24
Durable goods orders, July (8:30): 1.0% expected, 1.4% prior
New Home Sales, July (10:00): 825K expected, 834K prior
End part 1 of 3
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