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8/25/07 Stock Split Report
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Stock Split Report Subscribers:
MARKET ALERTS
Targets hit alerts: None issued
Buy alerts: TJX
Trailing stops: None issued
Stop alerts issued: None issued
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:
- A Fed in the shadows keeps the sellers away, allowing stocks to sprint higher for another day.
- Recession or Inflation? Eco data remains solid with some spectacular and some rather unspectacular results as recession talk ratchets up
- Letting this rebound run as far as it will though low volume climbs tend to lead to lower.
Stocks continue the low volume rebound as the Fed watches their back.
Futures were so-so early in wee hours Friday. Finally, a session that might start a bit mushy and build into the day. Then came the durable goods orders and some stray earnings reports. Durable goods were much better than expected rising 5.9% versus the 1.4% expected. Earnings this week have been a very pleasant surprise with GME and ZUMZ highlighting earnings activity, showing the specialty retailers are still very much in the game in this economy. Friday was more mundane the likes of age and see and AAN and reporting some solid earnings that beat estimates. The interesting surprise was MRVL, a chip stock data reported in below expected earnings. In a time when technology is outperforming the rest of the market, and earnings in this voile specialty retailers posted stronger-than-expected gains is rather ironic.
On top of that decent news, the New York Fed intimated that it would allow commercial paper to be exchanged at the discount window. While this was not widely covered by the financial stations, it was a very big shift for the Fed and the financial markets. There is a lot of commercial paper floating around with no takers right now. That is part of the liquidity squeeze the financial markets are experiencing. Member banks may be able to go to the discount window and exchange some mortgage backed securities and other AAA securities, but for the rest of the world, we are stuck, unable to trade or sell commercial paper and other private backed securities. With the New York Fed suggesting it would take commercial paper as collateral, then opened up a huge section of the market. That was dammed up to the private sector, and has done as much as the 50 basis point cut in the discount rate. The market seemed to understand this, and after a flat to slightly lower open, it rallied steadily for the rest of the day.
Even with this good news to start, however, the market was soft at the open. After five straight upside sessions including the prior Thursday's reversal session, the large-cap NYSE indices showed doji's on Thursday. The soft open suggested they were going to continued their weakness and potentially rollover at this point, but after stocks paused at the open, they rallied and never looked back for the session.
Technically, it was more of the same, i.e. the market melting higher on low volume. With the Fed in the background, sellers stayed home once more, and that let the buyers that were in the market push stocks higher. Indeed, with the sellers afraid to step in once more, all that was in the market were buyers. This action is very much like a vacuum. There was massive selling on massive volume during the height of the credit crunch fears. NYSE new lows hit 1100 on the Thursday plunge lower. Then the Federal Reserve stepped in two Friday's back and changed the lay of the land. While that Thursday massive selloff and intraday reversal appeared to a set the bottom for this selloff (remember the spikes in sentiment indicators and NYSE new lows?), even before the Fed action, the Fed move pretty much sealed the deal. Even though the Fed was able to shut down the selling, there was no rush to buy, just a vacuum left when the sellers vacated the building. With the selling pressure off thanks to the Fed, that left a vacuum for just a few sellers to come in and push the market higher.
When you look at the technical indicators, they are not impressive. The internals are poor with breadth mostly flat to modestly positive on this week's bounce though Friday breadth kicked into gear with a 3.4:1 reading on NYSE. Volume has been basically nonexistent on the bounce, though you can attribute that to it being honest. Still, though that may be getting back to normal for the time of year, it does not absolve the market from the heavy volume distribution it suffered. We will know more about this when we see whether or not the hedge funds resume the heavy redemptions selling near the end of the month. In addition, much of the upside experienced this week were rebounds from broken trends and not new bases. Such sharp selling can suddenly dissipate in stocks resume the trends they were in prior to the breakdowns, but that is not typically the case. More often than not, stocks have to re group and base once more after such a violent trend breaks. Given that the trends were broken as result of a financial stress as opposed to any fundamental issues with the stocks, where, it may be that they can resume their trends without further detrimental selling.
Given the textbook action, i.e. the high-volume selling followed by the low volume rebounds, the more likely result is a test of the prior lows, that would allow the stocks to base once more and set up for further extended upside moves. That does not mean however that the bottom has not been hit. As noted in the previous two weeks, the bottom is typically set on that initial panic lower that sees the sentiment indicators spiked to extreme us. After that the market goes about the business of filling in the bottom and packing down the foundation that it can rally off of. That typically entails the test of the initial low. In the interim, the indices are bouncing higher and no own low-volume they have moved into the next range of resistance after piercing the lower levels earlier in the week.
Even with the overall low volume, it was a very good week in many ways. We were able to buy some great stocks at good prices and pick them up and good entry point. Indeed, we were able to take some gain on positions we just took as they rocketed higher. We also let some current positions that were hit hard in the selling recover, and they kept rising and rising even though it was on low volume. We also had to let a lot of potential buys him go because they were moving on very light volume, and that leaves them subject to rapid reversals once some new story hits the market. As with buying a car, when you don't get the deal you want, you have to be willing to walk away. That is okay, because there are still some great stocks setting up in the market. We will look to those to provide us additional opportunity as the market completes its bottoming process.
THE ECONOMY
July looks pretty good as durable goods orders and new home sales blow past expectations.
The economic data to end the week cruised past expectations. Durables orders jumped 5.9% from 1.9% (1.0% expected). Ex-autos was not bad at all at 3.7. The nicest part of the report: broad strength, solid capital spending, and sustained growth.
Durable goods orders get a bad rap each month because they are 'highly volatile.' No matter what the number is, someone is on the tube downplaying it for that reason. Thus on Friday, even though it hit a new all-time high, many were still saying recession was in the wings. It may be, but the durable goods orders, volatile or not, are not indicating that.
Sure one month of numbers is not necessarily a game changer, but the trend on durables is impressive. You don't get to a new high out of a string of failures, and sure enough that is the case here. Durables are rising, up 5 of the past 6 months, and the prior months are revised higher and higher. Non-transportation was strong at 3.7%; take out defense and they were up 4.9%. Strong. And widespread too: many areas scores gains in excess of 5%, e.g. vehicles (9.8%), aircraft, computers/electronics (strongest since 11-06), machinery, metals. None defense capital goods less transportation (business investment) rose 2.2%.
All that puts annual durables growth at 9% with business investment at 16% for the past 12 months. Those are some huge numbers, and they certainly don't portend recession as the short slowdown has definitely ended. It remains to be seen what the recent credit turmoil does, but if the Fed has taken sufficient action the financial issues should not become economic issues similar to 1998.
New home sales show some life.
New home sales are not out of the woods, but the trees have thinned the past few months despite all of the gloom you here from the likes of CFC's 'tan in the bottle' CEO. There is something you have to remember about industry corrections: those in the industry always style the correction as Armageddon, telling us if the government doesn't act things will be ruined forever. Thus the continued screaming even as things improved is to be taken with a grain of salt.
July was stronger than expected with its 2.8% gain, and June, while still negative, was revised higher to -4%. Wow, what a move. No doubt housing is still in a slump and the recent market and financial turmoil will not help as lenders batten down the hatches even more, but it is showing the faint traces of improvement after a seven year low in March. The data is still very mixed with April and June annual declines in excess of 5% while May and July showed gains. Inventories are down to 7.5 months from 8.3 months in March. The industry bigwigs are saying that all of 2007 will 'suck,' but things always 'suck' as they hit start the bottoming process.
Many claim the current mortgage issues will only lengthen the process. That is true if Congress starts slapping on new regulations that will only slow the return to lending. Better to let the market recover before instituting any regulation. After all, no one, but NO ONE, is going to go and make the kind of hair-brained loans made in the last year and one-half in the industry as the recovery starts. Thus wait, let things recover, then before the next froth hits, institute some modest, sane regulations if any are still deemed necessary.
Recession ahead?
Toward the end of the week we heard more and more pundits saying recession was inevitable. Anything is possible; if our Congress drops a load of new lending regulations, trade barriers, and higher taxes (or any one of the group), we can pretty much start writing about recession.
The market is in the process of factoring all of this in (not just the sub-prime and the credit issues) during this current spasm. If it fails to bottom off of this last run lower in August and the 10+% corrections that resulted, then it is telling us there is a recession ahead. If it bottoms and continues higher as it did in 1998 during the last financial crisis, then it is giving an 'all clear' for the economy. Sounds simple, but every recession had the 'market indicator' flashing ahead of time.
What about the 'human' indicators other than the old gut reaction one? ECRI's leading US index continues to weaken, down for the fifth straight week. The 4-week annualized growth rate fell from 4.1% to 2.6% week/week. June peaked at 6.9%, and this latest reading is the worst in 2007. Even with these declines, ECRI is saying that "the longer term outlook has dulled a bit, but the economy is not in a recessionary tailspin."
That makes sense when you look at the entirety of the economic data and don't obsess over the weak mortgages that are less than 1% of the entire mortgage market. And while the mortgage market is an important part of the economy, it is not the economy. This recent turmoil has everyone rattled what with the headlines in the news and in the rags (Fortune's last cover shrieked "Market Shock 2007"). A 10% correction has been a long time coming, and it has rattled a lot of investors that finally returned to the market after the 2000 to 2002 plunge.
Most of the latter is purely financial in nature as a result of escalating fears, i.e. contagion worries. The mortgage issue is real; interest rates were too low for too long and we are paying the price. Again, the rest of the economy is proving impressively resilient, however. If the Fed acts to save the markets and bail out poor investments . . . wait, that is the mantra of those wanting a recession. If the Fed continues to fulfill its mandate of stable prices at the fastest rate of growth and acts to hem in the contagion, we can avoid recession. Again, the market is going to give us the quickest heads up on this as to how it reacts to this 10% correction.
THE MARKET
MARKET SENTIMENT
Man, what a low volume bounce for the week does for market sentiment. By the end of the week, many pundits and analysts were touting the onward and upward mantra. Who cares if volume was barely measurable, Brett was pathetic, and stocks were rebounding from massive breaks in uptrends. It will be interesting to see what the Bulls/Bears reading comes in at given this bounce in the market.
There is some validity to the idea that the market may have put in its bottom and not test that level again. The event and driving the selling was a contagion, which is in itself a fear. That fear exacerbated the credit tightening and turned it into a freeze. When the Fed stepped in, it alleviated much of the worry and many now view the Fed as taking the position it will support the financial markets. As we have discussed before, whoever, and other financial crises that the Fed has intervened in, it's still required a test of the prior low before moving higher. Indeed, this cavalier view of the plunge lower provides further evidence that the selling is not entirely finished.
VIX: 20.72; -1.9. After spiking to 37.5 on the Thursday intraday high just over a week back, volatility has taken a nose dive down to the 50 day moving average. No matter, because that massive spike higher did the job with respect to you the fear level.
VXN: 20.69; -1.34
VXO: 20.4; -2.27
Put/Call Ratio (CBOE): 1.07; -0.09. A third straight close above 1.0 makes it 23 of the past 25 sessions with a close above that key level. As with volatility, this indicator has done its job with respect to indicating fear levels in the market.
Bulls: 40.6%, down from 43.8% where it sat for two weeks. Nice drop from 53.9% just a month back. It is well below the March level on that market decline, hitting the low for the year. Getting toward that sub-40 move we were looking for. Hit 56.7% hit two months back 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: 37.4%. Sharp jump resumed, bouncing from and up from 18% just a month back. This tops the June 2006 peak. 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: +34.99 points (+1.38%) to close at 2576.69
Volume: 1.659B (+0.36%). Volume was up, volume was up, praise be, volume was up. But up from what? From absolutely no trade. The entire week was on extremely low volume, and that simply shows a lack of serious conviction. It may be typical low-volume for the end of August, but that still doesn't make it good volume for move higher. Juxtaposed against the massive selling volume, it looks even more anemic.
Up Volume: 1.361B (+677M)
Down Volume: 299M (-608M)
A/D and Hi/Lo: Advancers led 2.23 to 1. After some ugly breadth during the selling pushed the A/D line further to the downside and consummated the top that formed in June and July, the A/D/the line made a nice recovery last week. It is still off the prior highs but improving.
Previous Session: Decliners led 1.53 to 1
New Highs: 58 (+4)
New Lows: 71 (+3)
NASDAQ CHART: http://investmenthouse.com/ihmedia/NASDAQ.jpeg
NASDAQ did an impressive job shaking off the Thursday pullback, holding the 18 day EMA in bouncing to close above the 50 day EMA. That puts the tech index in the middle of the May to June consolidation range and still trying to move higher on this bounce. There is some resistance at 2600, and again at 2626 to 2632. Though volume is low, NASDAQ has significant momentum and could rally to those peaks even if volume remains below average. Still low-volume, but many of momentum that is lifting it higher. There is still a lot of talk on the financial stations about technology leading into the fall and indeed the new year. This is been an impressive rebound from the selling, and it is always possible that when volume returns after Labor Day it will push technology higher. We will play it whichever way it takes us. We are not sure any technology, and we are picking up positions in leaders as the opportunity presents itself. As I've said before, you can feel that you have a pretty good take on what the market is going to do, but then the market does what it's going to do anyway. Thus if the market shows you solid tech stocks making good moves at good entry points, you do what the market is telling it.
SOX (+0.59%) was again the market laggard, moving up modestly but holding below the same resistance at the 18 day EMA and well within the range of resistance from 490 to 510. Not a lot of life here, and its inability to make any headway is a negative undercurrent to the current move higher.
SOX CHART: http://investmenthouse.com/ihmedia/SOX.jpeg
SP500/NYSE
Stats: +16.87 points (+1.15%) to close at 1479.37
NYSE Volume: 1.178B (-5.02%). Volume was even further below average as the NYSE indices moved higher. Still a rebound from the volume, late summer low trade or not.
Up Volume: 1.003B (+467.507M)
Down Volume: 168.952M (-464.173M)
A/D and Hi/Lo: Advancers led 3.43 to 1. Very nice breadth as energy recovered late in the week and started to play catch up to the rest of the market. As with NASDAQ, the Advance/Decline line rebounded nicely on the week as the small cap index kicked back into the mix. It is still below its prior high.
Previous Session: Advancers led 1.01 to 1
New Highs: 29 (+4)
New Lows: 55 (-3)
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
As with the other indices, the large caps continued their bounce higher though volume continued to move lower and lower as the bounce moved higher. Friday SP500 banged into the confluence of the 50 day EMA (1480) and the July 2006/March 2007 up trendline. A first key test for the large caps in this rebound. Well, actually the second; it shook off that Thursday doji as if it was not there. The power of the Fed: it has scared off the sellers. They buyers have not returned en masse, but the sellers have stepped back for now. Next test is 1490, the two June lows.
SP600 banged into its 50 day EMA on the high as well, the third time for the week. It made the break higher from its double bottom but could not advance the ball much this week. With energy recovering, however, it was in much better position, and while it lagged the last move higher and was hammered in the selling, it is the first index to set up a base and start the breakout to boot. It still, however, has not moved past the February high at 423, and without any volume that is a key test for this index.
SP600 CHART: http://investmenthouse.com/ihmedia/SP600.jpeg
DJ30
The blue chips extended their rebound as well, ignoring the Thursday doji on the candlestick chart and moving to the 50 day EMA as well, just eclipsing it on the close. The move pushed it above the June lows and into the next resistance range up to 13,655-76. There are 4 interim peaks at that higher end of the range; lots of resistance. With the lower and lower trade on the way up this move is begging for some heavier buying to keep it moving through that level, but history is not on its side. Thus far it has denied that history and has continued the rebound. Not fighting it, just waiting for it to see how the low volume bounce pans out.
Stats: +142.99 points (+1.08%) to close at 13378.87
Volume: 186M shares Friday versus 198M shares Thursday. Volume just gets lower and lower on this rebound, not a sign of great things, but with sellers petrified to come into the market it is working for it.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
THIS WEEK
The week before Labor Day and the end of the month, and volume was low as the indices jumped. The hedge funds that sold and sent the market diving, are standing on the sidelines, scared but still conniving. What could have caused such wanton selling to abate? The Fed and Ben Bernanke, but were they too late? Many of the pundits are talking of recession, but the '98 plunge caused by financials turned out quite refreshing. After the market dip the economy continued to fly, and it took Alan Greenspan to set things awry. Nineteen years later Bernanke is faced, with a similar situation; will he cut rates? Thus far he has handled the crisis with aplomb even though many fear the new chairman will bomb. The hedge funds needing cash will surely take another shot, but the rebound has built a cushion from which it can drop. Out of that fall a bottom should appear, unless there is recession for the economy within a year. Ben will try to keep a recession at bay, and thus the market will likely bottom and rally yet another day.
Okay enough hackneyed rip-offs of other poems. We have fretted quite a bit about the low volume bounce, but that is what we expected out of that butt cheek clinching drop as the credit issues peaked and the redemption selling surged. So we let it run its course, see if it can pick up more strength, or see if it follows a more historical path and rolls over back over for a test to set the bottom. The sentiment indicators, internals, and volume all were the stuff of bottoms, and this rebound is so familiar in historical market corrections that you are tempted to set your watch by it. Of course there could always be no test as some are saying, and if there is not, no problem; we have been buying good stocks as they turned back up and we can continue doing just that.
Volume will be low once more ahead of the Labor Day weekend unless the sellers come back in before the month end. We still suspect they are going to do some more redemption selling at the month end either before or after Labor Day. Thus we will let our upside positions that are in rebound mode from the selling continue higher and when the market starts higher but then reverses and is set to close lower on some rising trade, that is when we close out the marginal plays and move into more downside for a quick ride lower. As the market approaches the old lows we get ready to close the downside and have our next round of buys in hand, ready to pick up strong leaders when they present the opportunity.
Support and Resistance
NASDAQ: Closed at 2576.69
Resistance:
2601 is the mid-May intraday peak.
2628 is the October/December trendline
2634.60 is the June peak
2668 is the November/December/February up trendline
2673 is the early July high
2695 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:
The 50 day EMA at 2572
2531.42 is the February high (post-2002 high); 2525 intraday
2509 is the January 2007 high
The 200 day SMA at 2505
2450 is some price support from November and December 2006
2400 is price support
2399 is that old trendline from August 2004 to May 2005
2386 is the August intraday low
S&P 500: Closed at 1479.37
Resistance:
The 50 day EMA at 1481
1483 is the July 2006/March 2007 up trendline
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:
1475 from peaks in December 1999 and January 2000
1461.57 is the February 2007 high.
The 200 day SMA at 1456
1440 is the mid-January high
1427 represents some interim peaks from December 2006 and the early August low
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 13,378.87
Resistance:
The 90 day SMA at 13,417
The mid-May peak at 13,556
The early July peak at 13,671
13,685 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)
13,715 is the upper channel line in the November/February channel
The July high at 14,022
Support:
The 50 day EMA at 13,361
13,121 is minor support from the April peak
13,010 is the July 2006/March 2007 up trendline
The 200 day SMA at 12,870
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 27
Existing home sales, July (10:00): 5.70M expected, 5.75M prior
August 28
Consumer confidence, August (10:00): 105.0 expected, 112.6 prior
FOMC minutes, August (2:00)
August 29
Crude oil inventories (10:30): 1.89M PRIOR
August 30
Q2 preliminary GDP (8:30): 4.1% expected, 3.4% prior
Chain deflator, Q2 (8:30): 2.7% expected, 2.7% prior
Initial jobless claims (8:30): 320K actual, 322K prior
August 31
Personal income, July (8:30): 0.3% expected, 0.4% prior
Personal spending, July (8:30): 0.4% expected, 0.1% prior
Core PCE inflation, July (8:30): 0.2% expected, 0.1% prior
Chicago PMI, August (9:45): 53.0 actual, 53.4 prior
Factory orders, July (10:00): 0.9% expected, 0.6% prior
Michigan sentiment, revised, August (10:00): 83.0 expected, 83.3 prior
End part 1 of 3
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