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8/28/07 Stock Split Report
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Stock Split Report Subscribers:
MARKET ALERTS
Targets hit alerts: None issued
Buy alerts: CAT; SPY
Trailing stops: Protected some gain: FCN; GME; HRS; TRMB
Stop alerts issued: FLIR; OII; SRCL; TRMB
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SUMMARY:
- Test of the August low picks up speed.
- Consumer confidence decline 'startling' according to the uninformed.
- Now the test is in full swing: how do the leaders react at near support and the indices at the prior lows.
Monday's afternoon fade is Tuesday's run toward the prior lows.
The session was set to start soft on Tuesday, continuing the Monday momentum lower. The sub-prime news reared its head again as stories circulated speculating on STT's exposure to sub-prime issues. It has a lot of asset backed paper and questions are arising as to what is linked to the sub-prime paper. Even OPEC got in on the action, blaming the weakness in oil and the lack of visibility in prices ahead to the US sub-prime mortgage market, saying the issues caused the "murky" view of supply and demand. Wow. I hear some Indian tribes in the Amazon basin are selling timber futures short due to the US housing scene.
A half hour into the session the consumer confidence report was released and it was in line at 105; that bounced the indices higher for about 12 minutes in a 'weaker is better' philosophy given the desire for Fed intervention. That didn't last and the indices fell into a midday lateral consolidation. Not a rally, but a good consolidation as NASDAQ laterally above the 50 day EMA.
That held until the next report hit, the FOMC minutes. It struck another hawkish stand with respect to inflation. No surprise given this was ahead of the real issues that started to unfold rapidly after the meeting, but it had more effect than anticipated, primarily because the Fed was so hawkish and then had to change its direction so rapidly. Left investors wondering if the Fed has a clue. The Fed always looks stupid and wrong; that is what is so right about it. Nonetheless, that upset investors and the market slumped. It was not an explosion of downside volume as sellers swarmed the market. No, it was a lack of bids. Bids were pulled as no one wanted to buy, and when that happens, even when there are no sellers, stocks fall.
Technically you could not hide in many places. The point losses were large even though trade, though higher, was well below average. Breadth was very negative (-6:1 NYSE). The indices turned back from resistance at the 50 day EMA and SP500 crashed below its 200 day SMA while NASDAQ closed below its 200 day as well. NASDAQ held some support at 2500 and could even set a reverse head and shoulders as discussed in prior reports, but the likelihood, given the selling seen Tuesday, is that it tests lower. The small caps collapsed, giving up the double bottom with handle breakout as worries about US growth torpedoed them; they are tied more to the US economy (not that global reach as they are small).
Leadership was lower as well, but it was also holding near support for the most part. Again, it is key if they can ride out 'the test.' The test is definitely on for the indices, and as noted before, if the leaders can hold up reasonably well, then the test is likely to be quite successful.
THE ECONOMY
Consumer confidence labeled 'startling,' but market seemed to think the Fed's minutes were more so.
Confidence was in line at 105.00, down from 111.9 in July. A CNBC journalism major noted the 'startling' decline in sentiment. The point with sentiment, as fortunately one guest pointed out, was that this was a strong number. Confidence indicates recession when it is near 60 or in the fifties. Indeed, the August number was off of the July six year high. The 'startling' aspect of this is that confidence remains high given the mortgage, credit issues, and market plunge.
This goes to show: jobs and the fear of the pink slip is what drives confidence and thus consumption. When someone is worried they are going to lose their job they cut back on spending. May have a few more favorite beverages, but spending is cut. This economy, despite the bad press it is getting, continues to throw off jobs with increasing pay. That means good feelings regarding jobs and thus consumption continues. It may not be top of the cycle, spend all you can consumption, but it is still well above levels that would start making one ponder recession.
Not that recession is not on the lips of many. We even discussed it over the weekend, but we are talking those that are concerned with recession right now. If the contagion fears continue unabated and the freeze out lingers, then the US and world economies could lapse. That makes it important the Fed continues to apply liquidity to try and break the logjam.
It is funny listening to the analysts talk of recession. Nearly everyone on the tube is asked about the prospects of recession. Most all say that is more of a probability now. If I was asked that I would say the same thing: more of a probability now . . . as compared with 5 years ago, 3 years ago, two years ago. The longer an expansion runs the more chance of a recession. It is not like flipping a coin where the odds stay 50-50 each time. Eventually you have recession because the economy slows and then the wrong policy decisions are made, and that fosters the recession.
That is the problem. You get to a critical point and the wrong decisions are made or they are made too late and the die is cast. Right now the die is still forming. This test will tell us the outcome from the market's perspective, and that is right in the vast majority of the cases. Thus how the leaders hold up during the selling and how the indices hold up around the prior lows is key to the economic future.
THE MARKET
MARKET SENTIMENT
VIX: 26.3; +3.58. VIX is bouncing off the 50 day EMA, making a higher low and looking to run toward the August high at 37.50 as the market fades back.
VXN: 25.9; +3.27
VXO: 26.41; +4.46
Put/Call Ratio (CBOE): 1.3; +0.32. Back above 1.0 on the close. 24 of 27 above 1.0. That is a strong indication of downside worries 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: -60.61 points (-2.37%) to close at 2500.64
Volume: 1.582B (+17.87%). Volume climbed but remained well below average as the selling resumed. Shows a slight kick up in sellers but still no massive dumping of stocks.
Up Volume: 152.943M (-329.744M)
Down Volume: 1.384B (+538.22M). 9:1 downside to upside volume. Pretty extreme for so early in the turn.
A/D and Hi/Lo: Decliners led 3.79 to 1. Pretty ugly downside breadth as breadth picks back up as the selling resumes.
Previous Session: Decliners led 1.76 to 1
New Highs: 41 (-27)
New Lows: 75 (+8)
NASDAQ CHART: http://investmenthouse.com/ihmedia/NASDAQ.jpeg
After a test of the 50 day EMA to end last week, NASDAQ gapped lower Tuesday and plunked down to 2500 on the close where there is some support. It broke the 200 day SMA (2507) as it did, but that does not take it out of the support range at this level. Still in the realm of a potential reverse head and shoulders as it is at the early August 'right shoulder' level. Not expecting any heroics here, just some more selling to test the August low near 2400.
SOX (-2.35%) dove below the 200 day SMA and is on the way to test the August low at 465. Not much strength that we can glean from this pattern.
SOX CHART: http://investmenthouse.com/ihmedia/SOX.jpeg
SP500/NYSE
Stats: -34.43 points (-2.35%) to close at 1432.36
NYSE Volume: 1.398B (+26.6%). Volume was the best in four sessions as the NYSE indices broke lower after testing resistance. Ready for more downside.
Up Volume: 63.055M (-189.071M)
Down Volume: 1.331B (+490.331M). 20:1 negative volume. Surreal extreme.
A/D and Hi/Lo: Decliners led 6.38 to 1. Hey, if down volume can be that lop-sided, why not breadth? Not the worst it has been during this correction (-11:1) but hardly a sign of strength.
Previous Session: Decliners led 2.44 to 1
New Highs: 17 (-24)
New Lows: 75 (+12)
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
Faded from the 50 day EMA Monday and then dove off the 200 day SMA Tuesday on some rising though below average volume. Not a good-looking move, at least from the upside perspective. Has a date toward the August low near 1375, but may try to hold at 1415ish on the move lower; it isn't often a straight line lower.
SP600 (-2.70%) fell hard from the 200 day SMA as it gave up its double bottom with handle attempt. Already at the December peak and looking for a test of 400 if not 395 to 390.
SP600 CHART: http://investmenthouse.com/ihmedia/SP600.jpeg
DJ30
The Dow turned from the 50 day EMA as well, falling hard on rising volume, the strongest trade in over a week. Fine time for the volume to show up. It closed at the July 2006/March 2007 up trendline, still holding above its 200 day SMA (12,880). It can conceivably hold the 200 day (that is where it held on the close during the August drop though it tested much lower intraday). Looks at least ready to hit the 200 day on this test, particularly getting the increase in volume it had on Tuesday.
Stats: -280.28 points (-2.1%) to close at 13041.85
Volume: 230M shares Tuesday versus 152M shares Monday. As noted above, fine time for that volume to start climbing.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
WEDNESDAY
So the Fed minutes are out and they were, surprise, hawkish. Wednesday all that's on tap are oil inventories, and though OPEC sees the US housing market muddying up the oil so to speak, oil remains at $70. It is hardly hurting despite all of the US issues.
The financial markets are another issue. Bond yields fell further Tuesday as investors around the world jumped to the safety of the US paper. The 2 year closed at 4.09% after starting the session at 4.21%. Unreal moves in the short end. The 10 year closed at 4.52% after a 4.58% open. When the fear moves higher, yields move lower as US paper is snapped up. Of course the downside is it is driven by concerns regarding economic activity.
That brings us to the market, and how this test is critical not only for the current rally, but as an indictor of the economic health down the road as well. The test thus far looks pretty normal, i.e. failing at the 50 day EMA after the low volume bounce. How it holds up as it hits near the prior lows tells the story.
That means we are in test-watch mode, riding our current and new downside plays lower, minding our current upside that they don't break near support, and looking for opportunity as those leaders hold support and rebound higher. Of course we would prefer to enter the rebounding stocks as the market is approaching the bottom; leaders often turn higher ahead of the rest of the market, particularly if they hold at higher support while the rest of the market sells. Thus it is a time to be a bit patient, take some downside as it is presented as we did today, and watch how the market handles the prior August low and if it can set a second low near the first and bounce.
That will likely signal the turn back up, but it will need a follow through session 4 or so sessions later to show that the buyers and not just short sellers are back in the game. The interesting thing is, another dip lower will at some point get the Fed further involved. The key is whether it occurs as the selling continues or after the fact similar to the last Fed action. Odds are it will be the latter as that is the Fed's MO as it does not want to jump in as the selling is ongoing as that looks reactionary.
Whenever it does occur, the market is anticipating the action, stronger economic data or not. Many say no action is forthcoming given the solid economic data, but that does not really apply to contagion issues such as this. The threat is down the road not to what has already transpired. Then again, that is always the issue with the Fed: it uses the rearview mirror to drive the car because that is the way it has conditioned the world to think about its actions, i.e. we won't act until the data turns bad. That is often too late, and in cases of credit crunches that freeze up investment, the investment gap is what causes the economy to drop when it hits that air pocket. That is what happened in 2000 when the Fed drained the liquidity pool. It was the same result but for a different reason. Didn't matter that the economy was termed as 'white hot' and the like even into early 2000; the damage was done and it was coming, not looking at the last economic reports. Yes, this is indeed a critical test, and on many fronts as well.
Support and Resistance
NASDAQ: Closed at 2500.64
Resistance:
2509 is the January 2007 high
2531.42 is the February high (post-2002 high); 2525 intraday
The 50 day EMA at 2569
2601 is the mid-May intraday peak.
2634 is the October/December trendline
2634.60 is the June peak
2672 is the November/December/February up trendline
2673 is the early July high
2700 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 200 day SMA at 2507 is trying to hold.
2450 is some price support from November and December 2006
2400 is price support
2400 is that old trendline from August 2004 to May 2005
2386 is the August intraday low
S&P 500: Closed at 1432.36
Resistance:
1440 is the mid-January high
The 200 day SMA at 1457
1461.57 is the February 2007 high.
1475 from peaks in December 1999 and January 2000
The 50 day EMA at 1478
1488 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:
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 13,041.85
Resistance:
The 50 day EMA at 13,347
The 90 day SMA at 13,424
The mid-May peak at 13,556
The early July peak at 13,671
13,695 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)
13,725 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
13,035 is the July 2006/March 2007 up trendline
The 200 day SMA at 12,880
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): 5.75M actual versus 5.70M expected, 5.76M prior (revised from 5.75%)
August 28
Consumer confidence, August (10:00): 105.0 actual versus 105.0 expected, and 111.9 prior (revised from 112.6)
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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