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money investment, investment help
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9/05/07 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Targets hit alerts: NVDA (took some interim gain)
Buy alerts: ARTC
Trailing stops: None issued
Stop alerts issued: None issued
SUMMARY:
- Stocks were ripe for a pause and the news gave the excuse to do so.
- Fed guessing continues its up one day, down the next cycle.
- Rate cuts bad for the market?
- Looking for opportunity as we let this pullback run its course.
Stocks take a powder after a week of upside.
When you expect the next shoe to fall it is hard to be objective about market moves. You tend to see everything skewed through the prism of preconceived notions. That is why we always say it is hard but imperative that you put aside your preconceived notions about where you think the market will go and be open to when it shows you opportunity. Sometimes it will head fake you; most great traders are wrong as much as they are right, but they act when the market tells them to.
What does that have to do with Wednesday? Well, after a week of gains stocks were going lower. We expected they would run into some headwinds as SP500, DJ30 and NASDAQ all bumped into some resistance Tuesday and faded back. After a week of gains on a low volume rebound, that is begging for a bit of profit taking. The overall market seemed to take it as more than just a typical technical pause after a rally. There was more news about the housing market (pending home sales thudded 12.2% month/month) and the jobs market (ADP posted another dire prediction that may some day prove true; Challenger Gray reported an 85% increase in layoffs in August over July), both negative, not to mention more downgrades from analysts back from holiday. There was an expectation that the rally might roll over, and the session was viewed by many in that prism.
It certainly was not an exciting upside session, but it also was not a slaughter as the -143 points on DJ30 seemed to indicate to many television journalists. The Fed did not help things either with its 'things are still strong despite the housing slowdown' Beige Book. That helped keep a lunchtime downturn fresh, pushing the indices to new session lows by mid-afternoon. A short double bottom there and then a rebound into the close took back some of the afternoon slump.
Techs 'led' again though it was a show of relative strength more than any gains. Energy sold back some, but as with technology it was relatively stronger, making just a modest, orderly move lower. AAPL and its kin (those that feed off AAPL's success) did sell harder as AAPL's new products announcement did not surpass expectations. More to the point, AAPL is lowering the price of its iPhone and that raised speculation that it was not selling well. Having to use AT&T as the carrier is keeping a lot of businesses from buying any as well as many individuals who just don't want to incur the high cancellation charges to obtain a talking iPod. I know Cingular is now AT&T and supposedly has a very low call dropped rate. That is not enough for many, especially those that had Cingular before: you have to be able to make a connection to drop one, and my experience with Cingular left me with connection envy. I would have loved to had the problem of dropped calls; just couldn't get to that stage.
Once more I digress. Techs showed relative strength along with energy, and of course both of those were leaders on the upside move. If they can hold at near support on this test then the rebound has more possibilities and we can also look at some new positions as the leaders in those sectors rebound or breakout after the test.
Technically there was that gloom present as noted simply because stocks could not continue the move higher. That is fine; you want to see continued healthy skepticism after all of that bullishness in June the preceded the selling. As for the actual price movement, the losses were more than you would want with both DJ30 and SP500 dropping over 1%.
When you look at the charts, however, the action did not leave them in bad shape. NASDAQ tapped the 50 day SMA on the low and rebounded to cut not quite a third off its losses; the chart looks rather tame. SP500 was not so moderate, recovering little of its session loss and undercutting the 50 day EMA as it tapped the 10 day EMA on the low. DJ30 fell back from its 90 day SMA (as did SP500), also closing below the 50 day EMA but holding above the 10 day EMA on the close with a rebound off support at 13,250. They are all in position to make a higher low, but this was just the first day of selling so the market has now shown its hand on this test; one day typically does not tell the story.
As noted, the leading sectors did quite well with their rather modest pullbacks, most coming back on lower trade. That indicates no heavy selling as they backfill some after a pretty solid week's move higher. A lot of energy looks as if it simply paused in mid-run; energy was a bit late coming to the party on the rebound, but when it did it showed better strength than the rest of the market.
Volume was up on both NYSE and NASDAQ, and that indicates the selling took things up a notch. You can call it distribution and it was; it was also still below average when compared to pre-credit selling times. Of course it was well below the current level of average trade that was elevated by that high volume redemption selling at the height of the credit fears. Something to keep an eye on of course; higher volume selling after a low volume rise is always an issue. Thus the volume rising is a negative, but thus far the leadership is shrugging it off, treating this as a rather normal pullback.
THE ECONOMY
Fed guessing continues.
The daily game now is the 'what is the Fed going to do to next?' It is not a rational game. It is played with emotion. Economic data holding its ground? Fed is not going to cut. More housing numbers come out as well as some stories on credit issues? Fed has to cut before the next meeting. Fed Beige Book notes that economic conditions are still pretty solid; has to mean no rate cuts at all. It is fast, it changes daily, and it is often babble. This segment could be classified in the same vein I suppose.
Problem is, everyone is looking from story to story as they try to glean what the Fed is thinking. What history shows, particularly the Bernanke Fed, is that it keeps to the company line in public, but in its actions it anticipates what is coming. If not so, why on earth would the Fed have gone on hold in July 2006? Inflation was still ticking higher and everyone assumed the Fed had to keep hiking because inflation was 'not contained.' Yet Bernanke staid pat and it turned out to be the right move. Bernanke anticipated the 2006 slowdown and held off hiking. It did not wait for the data to confirm anything. He used the data along with history to extrapolate as to the future.
Right now the data says the economy is decently strong and still expanding. That lagging data does not take into account the impacts of credit issues down the road. It does not factor in history and how these credit issues have infected the rest of the economy. Sure growth potential still looks decent based on these indicators, but you also feel pretty good in the first stages of the flu. If you based you decisions on how you feel at that moment without anticipating what the symptoms said about what is coming down the road, a lot of flu sufferers would be dead.
Thus the game is not what the data says about the economic health. The game is knowing that Bernanke is a history fanatic and has conducted extensive studies on the Fed's missteps in the past. That is why he held off hiking even as inflation itself rose; the pressures had peaked and history told him to back off or risk turning a moderately expanding economy into a declining economy. Even now the outcome of that pause is uncertain.
That is why we are looking at history and the need for the Fed to act to stave off any slowdowns that turn a moderate expansion into a contraction. Typically the Fed is too late to the game, and Bernanke has written about this in the past. Despite the Fed's rhetoric about inflation fighting, Bernanke wants to avoid recession and deal with any vestiges of inflation (though it is trending lower even with the Fed on pause) after the fact. He does not want to be too late, and that is why he jumped on the credit freeze quickly, but he did so delicately with liquidity injections and a discount rate cut versus the Greenspan 'cut first and don't ask questions later' policy. Of course Greenspan may have not even stopped hiking in the first place and we would already be in recession with this housing and credit combo being the straws that pushed the economy over the edge.
Don't want to sound like a Bernanke groupie, but I am not too sure I would be doing things differently if I were Fed chairman (high praise indeed; ha!). You have to allow the markets to work out their issues without guiding them. It is the same as refereeing a playoff game in basketball: you don't want to be the determinative factor in who wins but instead let the players play to determine the outcome. Bernanke is attempting to keep the markets functioning and is making the right moves. The question is, just how much needs to be done. Right now it looks like more, and thus Bernanke, after changing the bias, is ready to cut by the September 18 meeting, sooner if things go south. He is not anticipating that, and thus we anticipate a rate cut at that meeting if the mortgage, commercial paper, and credit markets have not improved rather dramatically.
Rate cuts bad for the market?
Someone did some research and correlated rate cuts to market action. He concluded that rate cuts are bad for the market. Of course it is more than that.
Timing is everything. Rate cuts typically come after the slowing has started and thus they are way too late to be effective for the slowdown they were designed to prevent or at least assist in recovering from. Fed chairmen, and Greenspan was a classic one in this respect, wait too long to cut rates but are quick to hike them. That was a main issue we had with Greenspan: he always said if you waited to see inflation it was too late. Problem with that was he would hike when there was no inflation, choke off money, and send a healthy economy into recession. Then he would not anticipate the economic collapse and wait until the numbers imploded before cutting. Look at his disaster in 2000; GDP plummeted from 11% growth to flat in three quarters (inclusive). He could have cut in December 2000 when things were really bad, but he waited to get the data that showed how bad everyone knew conditions were. Then he cut on 1-03-01, but it was hopelessly too late. His campaign to drain money supply, restrict bank loans, and basically bottle up the economy had worked and the economy was bottled up for three years where trillions of dollars in retirement wealth was lost.
That is history that Bernanke knows well. He is trying to avoid the Fed's play book SOP of hiking too much then waiting too long when things turn bad to cut and provide liquidity. If he does it right, this could be an instance where a rate hike is good for the market without first going through the recession cycle due to a hesitant Fed.
THE MARKET
MARKET SENTIMENT
VIX: 24.58; +1.8
VXN: 27.15; +2.64
VXO: 24.61; +2.49
Put/Call Ratio (CBOE): 1.15; +0.12. And holding above 1.0 on the close as the market sold. This is more of what you would expect. The shorts covered their puts as the market rallied just in time to see it turn back down.
Bulls: 41.7%. A rebound in the market, a rebound in bullishness, up from 40.6%. Looks as if 40.6% is the low barring a plunge back down to test the prior August low. Wanted to see it crack into the thirties on this leg to really show some negativity. Still a good drop from 53.9% 6 weeks back. Hit 56.7% hit in June. The 55% level is considered bearish, and it topped that level on this last run. 60% in December 2006. For reference it bottomed in the summer 2006 near 36%, and 35% is considered bullish.
Bears: 37.4%. Held steady at this level for the second week after a strong run from 18% just 6 weeks 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: -24.29 points (-0.92%) to close at 2605.95
Volume: 1.957B (+3.59%). Volume was up again, pushing at the pre-July average volume levels, but still coming in a bit shy. Technically distribution, i.e. high volume selling of stocks in the index. Definitely don't want to see it ramp higher, but with the action we see it was not any out and out rush to get out of technology.
Up Volume: 563.39M (-1.036B)
Down Volume: 1.358B (+1.084B)
A/D and Hi/Lo: Decliners led 2.15 to 1. Picked up the pace; flip-flops more than a politician since July came around.
Previous Session: Advancers led 1.85 to 1
New Highs: 67 (-36)
New Lows: 60 (+12)
NASDAQ CHART: http://investmenthouse.com/ihmedia/NASDAQ.jpeg
Gapped lower and then looked weak in the afternoon as it undercut a morning double bottom. It managed to hold the 50 day SMA (2595) and rebounded into the close. Not a bullish move, but not a major reversal. From here down to the 90 day SMA (2586) is a good area for NASDAQ to hold and make a higher low to keep this upside move going. May take 2 to 3 days to do it; as long as the selling is contained and the leaders (HPQ, CSCO, AAPL, VSEA, etc.) keep it under control it is a positive for a continued move. More high volume selling that punches down through 2575ish is of concern.
SOX (-1.23%) is still rather schizoid, but after that strong Friday and Tuesday move it did managed to hold near the 50 day EMA on the Wednesday low and rebound to recoup some losses. Needs to hold in this range and then take out 510 on a closing basis to signal the rebound continues. It could move laterally here for a few days and form a handle to its double bottom and really give it a launch pad to break higher.
SOX CHART: http://investmenthouse.com/ihmedia/SOX.jpeg
SP500/NYSE
Stats: -17.13 points (-1.15%) to close at 1472.29
NYSE Volume: 1.393B (+1.63%). Volume edged higher but it was still no better than the highest sessions of the past three weeks, unlike NASDAQ that is seeing volume climb the past week. That tells us no heavy selling in NYSE as they make this test.
Up Volume: 256.668M (-816.696M)
Down Volume: 1.124B (+832.401M)
A/D and Hi/Lo: Decliners led 3.01 to 1. Same story: as the market goes so does the breadth, and typically pretty big. Vestiges of that volatility still lingering.
Previous Session: Advancers led 2.28 to 1
New Highs: 33 (-28)
New Lows: 69 (+16)
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
After tapping at the 90 day SMA and 1495 where it failed in early August, SP500 faded back Wednesday. Pretty much expected, but the size of the drop was more than you want to see on a first session of selling. It did manage to hold and bounce off of the 10 day EMA (1466), showing some strength at near support. Want to see it hold in this range, even down to the 200 day SMA (1459) where it can make a higher low and continue the move. Still in the reverse head and shoulders it has formed at the bottom of the sell off as it tries to avoid another sell off to test that first mid-August decline.
SP600 (-3.76%) sold as well and also tapped the 10 day EMA on the low, but it rebounded and closed over its 200 day SMA. Has support in this 415 range and really needs to make a stand in this range.
SP600 CHART: http://investmenthouse.com/ihmedia/SP600.jpeg
DJ30
Access denied at the 90 day SMA (13,440) and the blue chips turned lower and closed near session lows. The index bounced off support at 13,250 on the low; as with SP500 it did at least show some fight at near support. Of the indices it has more of a limp with a pattern that is listing off to the side as it makes lower highs. Made a higher low in late August, and while SP500 is not a picture of strength it has a bit more strength to it than the Dow right now. This is an important range for DJ30 to hold because it did not leave itself much wiggle room with its pattern.
Stats: -143.39 points (-1.07%) to close at 13305.47
Volume: 231M shares Wednesday versus 262M shares Tuesday. Without a Home Depot to skew the trade level, volume fell back to its recent range as the blue chips faded as C and JPM sold.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
THURSDAY
Jobless claims (on the rise of late), productivity revisions, ISM services and crude oil inventories are scheduled. Of course the usual game of 'what will the Fed do?' will continue as well. Wednesday the market used more less than sympathetic data as a trigger for some selling that was due after a week of gains. As the rest of the week unfolds the key is how the indices and leading stocks hold the current test back. The market is ripe for the sellers to try and take it down again after the low volume rebound following the Fed intervention, thus placing a premium on this test. With the jobs report due Friday and a lot of stir made by ADP and Challenger on Wednesday, the market will likely be in another testing mode Thursday ahead of that employment data.
We don't want to let any positions get out of hand if the selling continues, but we are going to be looking for more opportunity on this test of the last move, even low volume as it was. Strong stocks have shown few ill effects and indeed have made us some nice money on this last run higher. On further weakness that sees them hold at or above near support, we are going to look to enter some more positions as many made nice breaks higher from good bases, particularly in energy, and this pullback is making a very nice test of that move. You know how we love to use the first test of a breakout as an entry point, and after this pullback if we see them starting back up we will look to add positions for the next run higher.
Again, that is what we think will happen, but the market will do what it will do. We were pessimistic about the rebound's ability to make us some money, but the leaders were solid and gave us good entries and they moved on up. We are going to look for more opportunity in them but we also have to be ready in the event the sellers rush in, with 'Fed be damned' as their battle cry.
Support and Resistance
NASDAQ: Closed at 2605.95
Resistance:
2634.60 is the June peak
2639 is the October/December trendline
2673 is the early July high
2678 is the November/December/February up trendline
2706 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:
2601 is the mid-May intraday peak.
The 50 day SMA at 2596 held Wednesday
The 90 day SMA at 2586
The 50 day EMA at 2573
2531.42 is the February high (post-2002 high); 2525 intraday
2509 is the January 2007 high
The 200 day SMA at 2511
2450 is some price support from November and December 2006
2407 is that old trendline from August 2004 to May 2005
2400 is price support
2386 is the August intraday low
S&P 500: Closed at 1472.29
Resistance:
1475 from peaks in December 1999 and January 2000
The 50 day EMA at 1477
1488 is the July 2006/March 2007 up trendline
The 50 day SMA at 1487
1490.72 is the early June closing low and early August peak.
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 1459
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 13,305.47
Resistance:
The 50 day EMA at 13,344
The 90 day SMA at 13,440
The mid-May peak at 13,556
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 August high at 13,696
The July high at 14,022
Support:
13,121 is minor support from the April peak
13,060 is the July 2006/March 2007 up trendline
The 200 day SMA at 12,909
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.
September 4
Construction spending, July (10:00): -0.4% actual versus -0.1% expected, 0.1% prior (revised from -0.3%)
ISM Index, August (10:00): 52.9 actual versus 53.0 expected, 53.8 prior
September 5
Pending home sales, July (10:00): -12.2% actual, 5.0% prior
Fed Beige Book (2:00)
September 6
Initial jobless claims (8:30): 330K expected, 334K prior
Productivity revised, Q2 (8:30): 2.4% expected, 1.8% prior
ISM Services, August (10:00): 54.5 expected, 55.8 prior
Crude oil inventories (10:30): -3.48M prior
September 7
Non-farm payrolls, August (8:30): 110K expected, 92K prior
Unemployment rate, August (8:30): 4.6% expected, 4.6% prior
Hourly earnings, August (8:30): 0.3% expected, 0.3% prior
Average workweek, August (8:30): 33.8 expected, 33.8 prior
Wholesale inventories, July (10:00): 0.5% expected, 0.5% prior
End part 1 of 3
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