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world stock market, us stock market
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9/22/07 Technical Traders Report
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MARKET ALERTS
Targets hit alerts: CPHD; GOOG; NILE. Interim: DO; MOS; NOV; POT
Buy alerts: GILD; NE; TRAK; TRMB
Trailing stops: None issued
Stop alerts: 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/alertttr.html
SUMMARY:
- Expiration pumps up the volume, pumps up prices.
- Gold surging. May be inflation, may be as surprised as equity investors.
- The week after: financial markets adjust to life after a surprising rate cut.
- Market leaders are running in waves. Looking to catch the next one as well.
Market doesn't sell off, forcing shorts into action again on expiration Friday.
After a day where the market paused to take stock after the surprise 50BP rate cut on Tuesday and the ensuing 2-day spring higher, stocks faced a rubber match of sorts. As noted Thursday night, there were many that considered the modest downside on Thursday as the resumption of the selling (one termed it a bear market rally). The market answered those characterizations, at least somewhat, on Friday with a higher start and a decent rebound. It was no affirmation in itself as far as the prior rally continuing, but Thursday and Friday were nowhere near approaching a resumption of the selling seen prior to the mid-August low after that hard selloff.
There was some good news to boost the futures early on. ORCL and NKE both announced solid earnings after the Thursday close, indicating, at least thus far, that the credit and mortgage issues were not spreading to technology and retail though NKE has substantial ties to the world economy as 60% of its sales now occur overseas. Moreover, Texas instruments announced an increase in its dividend as well as its share buyback program.
There was some bad news to go along with the good, however. Gold continued its move higher, indicating to some that inflation is baked into the market equation moving ahead, and inflation is always bad for the market. And the oil, while selling back modestly ($81.62, -0.16), is still very strong, and that is considered that it drags on stocks as well.
Nonetheless, stocks opened higher on expiration Friday, and continued to move higher through midmorning after some early choppy range trading. They peaked over lunch and sold as the afternoon session got underway. A late rebound attempt had some promise, but it fizzled as stocks approached the bell. At the close the indices held some pretty solid to bare minimum gains on some strong expiration volume.
Expiration had a lot to do with the Friday action. Part of the reason the market rallied so sharply Tuesday and Wednesday after the FOMC rate cut decision is that there was a large short interest in the market anticipating another selloff after this low-volume rebound from the August selling. Sure, there was some long-side buying as well; there were too many solid, leadership caliber stocks breaking higher up bases or continuing solid runs that were already in progress for the entire move to be the result of short covering. With a 50 basis point rate cut, however, it became very clear to the shorts that the Fed was in the game to make certain the US economy does not slide into recession. After the prior or cut in the discount rate, the massive liquidity injections, the willingness to accept non-typical collateral at the discount window, and the statement that it stood ready to do whatever was necessary, the cut in the Fed funds rate was the last straw. With expiration on Friday, the shorts had to cover and rollover positions.
After two hard days of rallying, the market took a breather on Thursday as both long-side and short-side market players took stock of the situation. The shorts waited to see if the upside party following the rate cut would collapse. When it did not, they had no choice but to cover further on Friday, particularly with the market gapping higher at the open. That led to another upside session, and while it was not any sort of new breakout session, it showed that the sellers were back on their heels, ready to capitulate.
The technical action remains solid. Over the past three weeks there were higher lows made on all of the indices as the market moved into the FOMC decision. NASDAQ and the Dow were in a bit better shape than S&P 500, but all were making higher lows and pressing up against resistance. It was a make or break point, and the Fed decision helped make the break higher. Up to that point, things improved and there was some very good leadership in the market that we were making some good money off of, but it was still a tossup as to whether the market would breakout to the upside or break down for a test of the August lows.
There was better breadth and volume with the FOMC decision, and both are solid on Friday, though the volume was driven by expiration as opposed to a lot of new accumulation. That is not entirely true, however, given that once more, many leadership stocks broke higher on solid trade. When leaders run, it is not expiration volume due in the driving, but buyers desiring these strong stocks. So with respect to individual stocks in certain sectors that showed good volume, it was accumulation. That was not true, whoever, with respect to the market in general.
As for the charts themselves, action was also very solid. After breaking higher on rising volume they paused and are now working laterally. Indeed, they look to be forming handles to their bases, i.e. moving laterally as they consolidate the first break higher. I handle is where the undecided or short-term players sellouts as the initial move stalls. In uncertain times when a strong upside move peaks and then appears to stall, you start to see the "gloom and doomers" come out and start citing the litany of issues facing the market. Surging gold prices, rising interest rates, record oil prices, a week in uncertain consumer. And of course you are hearing the "Fed blew it, the rally is over, and the bear market resumes" mantra from the short-sellers as they try to recapture some downside momentum. That is good. As long as the market action remains healthy, you want to hear the gloom because that shakes out the shorts-timers, lets the leaders come back and test their breakouts or the last runs, and that sets up the next move higher.
In this instance, it's going to allow the indices to make a run at the prior highs. It will likely take a few more sessions to complete the process, and during that time, we will hear more about how the market has stalled and is ready to sell again. Again, as long as the market action remains positive (low-volume on downside days, relatively narrow trading ranges, holding above the June highs on both the NASDAQ and DJ 30) is setting up for the next run higher. We see several leadership groups appear to be setting up in ways, i.e., they move higher in groups after setting up. In other words, those that broke out early will come back to test a while another group makes its breakout. This kind of rotation is a very healthy and indicates a very healthy market. Obviously we want to see that continue.
In sum, we really liked the technical positioning even if it was aided by the Fed acting as backstop for the market. That may very well be the case, but should we not invest in the moves that occur as result? Tell that to our brokerage accounts; during this period of indecision we bought into many stocks as they screamed "buy me." They moved up ahead of the FOMC decision, and after the decision they continued to surge. We have banked a lot of solid gain, and it looks as if we're going to bank a lot more on this move. Thus we are excited about the prospect of the indices forming handles here and the gloom reemerging. That will give some leaders a good chance to test and set up for the next move higher, and you know how we love to move in after the first test of a breakout.
THE ECONOMY
What is gold actually telling us?
We have discussed this issue all week given the Fed's decision to cut the Fed funds rate by 50 basis points. Recall that going in to the decision there were many who said there may be no cut in the Fed funds rate, but just the discount rate cut given the overall strength of the economy and high commodity prices, e.g. oil, copper, steel, et cetera. There is no doubt in history that a high commodity prices are an indication of potential inflation. As with the perversion of the US inflation argument, the global inflation picture falls victim to the same flawed understanding of economic history.
In the old days of the Federal Reserve (i.e. Greenspan and before), there was this view that strong economic growth axiomatically lead to inflation. This is the old "demand driven economy" argument, i.e. demand is what drives investment. In other words, there's no investment made until there is demand, and in the suppliers rush to fulfill that demand. That is why many of our politicians still believe that the way to solve a recession is to provide demand-side incentives. As we saw in the most recent recession, the demand-side incentives failed to ignite a recovery. It was not until tax incentives were passed that once again made it lucrative for supply providers to invest that the economy recovered.
With respect to the global picture, these same people see oil prices running higher, copper prices soaring, steel prices running and jumping, and of course all petrochemical prices ramping higher thanks to the higher price of their feedstock, i.e. oil. The knee-jerk response is that all of this demand is driving prices higher, and therefore we will have inflation.
While this argument has some end to it that is valued, it does not reflect history. There are with out a doubt instances in history where poor policy decisions lead to bottlenecks that resulted in demand exceeding supply. This is usually in the form of regulation that stymies the ability to efficiently move into a supply area and us the high demand. In a world economy that sees fewer and fewer boundaries, particularly with many former East-bloc countries adopting low tax rates and free enterprise forms of commerce, the ability for supply to meet demand has surged. The desire for new bridges, buildings, automobiles, personal products, etc. all over the world is being fueled by the fact that more and more economies are creating economic engines that can supply these products to their citizens. In that situation, it is very difficult to label the price increases as inflationary.
The one clear exception is oil. It continues to rise on the perception that supply will peak and decline near-term given the large increase in demand worldwide. Thus far it has not impinge to growth or lead to spiking inflation, but a day of reckoning for this is in the not too distant future. With inventions such as the new solar panels that are made basically using a fancy newspaper or laser printer, however, we could see incredible technology changes in a relatively short period of time. That will obviate the need for so many barrels of oil to consume on a daily basis.
If we would also get off of this ethanol kick and focus on a real solution to fueling our vehicle fleet such as already proven hydrogen powered vehicles, the potential to raise global economic growth and standards of living to unprecedented levels would be close at hand. I'm not one who says we need to get off burning hydrocarbons for global warming sake, because there is nothing we can do to keep the sun, the primary source of the recent warming, from heating up further (NASA studies show conclusively that the sun's radiation has increased during the period of this global warming cycle). By significantly reducing our demand for hydrocarbons, however, we improve the world's living environment by reducing those own and carbon dioxide, we can shift the balance of economic power away from those countries with large petroleum deposits within their borders, and raise the world standard of living. The resulting economic boon for the entire planet is the real benefit of such a policy as opposed to tilting at the windmill of trying to control the planets temperature.
As usual, I have digressed significantly from the discussion of whether gold implies future inflation. We often say that markets in the short run, always overshoot their mark. Ahead of the FOMC meeting, the stock market moved higher, but was on low volume following the heavy volume selling. It looked to be setting up for more downside, or a least had a 50-50 possibility of doing so. There was good leadership, but overall that low-volume rise was a worry. When the Fed cut 50 basis points, however, the market was caught by surprise. Shorts of had to cover some very large, short interest positions and that helped drive the market higher. That's why the market surges, sharply when a surprise hits: positions taken in the absence of the surprise have to be reconciled with the new environment, and that is often done in the short term and us we see the sharp, violent moves.
It makes sense that the gold market was caught off guard. Along with the equities market. When the Fed cut by 50 basis points. Thus the surge higher in gold prices on the heels of the move. There are those are saying that this move shows simply that there is inflation to come. The move is so sharp, however, it is abnormal in and of itself. Therefore we need to wait and see how it adjusts back to the mean to get a better idea as to whether or not it's signaling runaway inflation ahead or just a fear, as there has been, that inflation still lurks somewhere in the future.
This debate makes this weeks PCE even more important than in the prior months. Recall that the past two months in annualized core PCE is 1.9%. Over the past six months, it is 1.5%. In other words, it is falling at a faster pace. A reading of 1.8% on an annualized basis this coming week as well as a decline in the six-month rate as well, would be a huge boost to the Feds decision to cut by 50 basis points. Not that that would signal a weaker economy, but it would signal that the Fed is in control of inflation at this point and thus has the room to maneuver and allow itself a 50 basis point cut. That of course would not please all of the inflation hawks, but it would damn sure put them at bay for at least another month. And at the same time, it buys time for all of the markets to read it just back toward the mean following the initial knee-jerk reaction to the FOMC decision.
THE MARKET
MARKET SENTIMENT
During the July and August selling, we kept close track of the jump in the sentiment indicators. The VIX surge to 37.50 at the peak of the selling, in the put/call ratio closed over 1.0 over 20 consecutive sessions. At the same time, the bull/bear's survey jumped back to levels indicating a more bullish posture for the market. Bulls came within a whisker of cracking into the 30s, just as they did back in the summer of 2006. In Bears actually surpassed their summer 2006 high. Both were very good indicators of an extreme level of bearishness, and combined with the other sentiment indicators, they showed the market is getting close to a bottom. As it turns out, that was the case.
Now that the market has recovered off of those lows, pauses, and then broke sharply higher on the FOMC decision, the sentiment indicators are fading from anxiety levels. They clearly did their work in helping put in a bottom, but now you're hearing comments about how they are returning to low levels and how that may be a problem for the market. The VIX has fallen down to the top of the range where it traded just before the selling erupted. The put/call ratio is well below 1.0. Significantly, the Bulls have surged to 53.9%, just off the 55.0% considered bearish. Fortunately, the Bears are still at 27%, well above the 20% considered bearish, but they have humbled from 37.4% just three weeks back.
The moves are rather dramatic, but you don't want to buy in too deeply to the commentary on the financial stations. Remember, volatility remained low for a year since the summer of 2006 selling in the market still manage to perform very well. There was also a high-level bullishness in the market even as it posted gains for several consecutive months. The quick reversal in the sentiment indicators is a warning flag and something that we should keep our eye on. They are just secondary indicators, however, so it is important not to start trading or investing based solely upon their levels. It is important to also couple this with the nuts and bolts of market movements, i.e. leadership and price/volume action.
VIX: 19; -1.45
VXN: 20.71; -1.26
VXO: 18.29; -2.25
Put/Call Ratio (CBOE): 0.86; -0.15
Bulls: 53.9%. Another big jump higher, up from 48.3%. Much to bullish and much to quickly, moving toward the 55% level that is considered bearish. On a steady climb from 42.9% and 40.6%, the latter being the low for this round. Never made the thirties. Getting close to the 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: 27.0%. Big drop off from 31.0% last week and 10 points off the prior week (37.4%) where it held for 3 weeks. Still well off the very low 18% hit 8 weeks back, and it topped the June 2006 peak (36%) on this run. That June peak eclipsed 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: +16.93 points (+0.64%) to close at 2671.22
Volume: 2.113B (+18.33%). Volume surged after the Thursday pause, closing above average for the first time since the August selling. Hard to call it accumulation given it was expiration Friday, but good to see a return to higher volume on upside action. It is been a long drought.
Up Volume: 1.484B (+841.559M)
Down Volume: 750.285M (-357.439M)
A/D and Hi/Lo: Advancers led 1.2 to 1. Quite modest, Brett given a decent price move, but once more it was a large cap session with NASDAQ 100 posting a 0.83% gain.
Previous Session: Decliners led 1.66 to 1
New Highs: 60 (+17)
New Lows: 26 (+3)
NASDAQ CHART: http://investmenthouse.com/ihmedia/NASDAQ.jpeg
A brief pause on Thursday where NASDAQ taps the old up trend line on the low, and in gap tire Friday. It traded up and down a narrow range, but could not add to the morning gap. Stalling a bid at the early July interim peak, but as noted above, we like this action as it looks to be forming a handle to what is turning out to be a cup base. Not bad action, in two to three more sessions of lateral movement will give it the platform to break higher in challenge the prior peak July. Again, we wanted to hold above did GN peaks (2635) or even the September high at 2645.
SOX (+ 0.40%) tried once more to move to the 50 day SMA, matching the Tuesday peak at 504 on the high, but again it slipped back to close. It's trying to work laterally along with the other indices and set up a move higher, but once more, it has to show us the money.
SOX CHART: http://investmenthouse.com/ihmedia/SOX.jpeg
SP500/NYSE
Stats: +7 points (+0.46%) to close at 1525.75
NYSE Volume: 2.067B (+62.41%). Volume was head and shoulders above anything over the past month, clearing average for the first time in that same period. Expiration volume so cannot get excited about that.
Up Volume: 1.353B (+979.659M)
Down Volume: 683.239M (-203.575M)
A/D and Hi/Lo: Advancers led 1.66 to 1. The small caps struggled to hold flat and without them the breadth was modest.
Previous Session: Decliners led 2.37 to 1
New Highs: 89 (+32)
New Lows: 16 (+4)
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
After taking a day off from the post-Fed surge, SP 500 was back to the positive side to in the week. Volume surged, but as noted above, that was due to expiration. We really like the pattern that is setting up as the large-cap index moves laterally after the initial surge, and looks to be forming a handle to its 10 week couple pattern. Two to three more sessions of lateral movement would set up an excellent point to break higher and take on the prior peak in July. As noted Thursday, it could even pull back to 1512 on the low, it is always better is an index or a stock is stingy with its gains and works laterally rather than fading significantly.
SP 600 (+ 0.9%) and barely scratched on the session, working laterally after breaking above the 90 day SMA on Wednesday. Similar to the other indices, it looks to be forming a handle to its base that formed during the July and August selling. A good lateral move for a few days would raise the fear level in the market and said S&P 600 up for breakout along with the other indices.
SP600 CHART: http://investmenthouse.com/ihmedia/SP600.jpeg
DJ30
The Dow was the laggard among the big three, but it put together a decent session. They managed to reach up to the Wednesday intraday high bounded by the old channel lines from its prior uptrend before the July and August selling broke it below those levels. Volume exploded on the session, but again it was expiration Friday so we don't want to read too much into the volume spike. More important is the lateral movement after the big gain after the Fed decision. As noted with the other indices, this looks to be forming a handle to its base from which it can make a run at the prior peak hit in July up at 14,000. Similar to NASDAQ, we wanted to hold above the June peaks (13,692 to 13,688) as it forms a handle to the base.
Stats: +53.59 points (+0.39%) to close at 13820.19
Volume: 419M shares Friday versus a measly 200M shares Thursday.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
MONDAY
This week is no stranger to economic data with consumer confidence, new and existing home sales, durable goods orders, final GDP, the core PCE, Chicago PMI, and Michigan sentiment. Given the worry about whether the feds move will ignite inflation, each piece of data takes on new significance, particularly the PCE. The market wants to see continued economic strength, but it also wants to see inflation under control. Ever since Bernanke took over from Greenspan, he's done a pretty darn good job of reining in what inflation was left and converting it into falling inflation rates, while maintaining a pretty decent economy. He anticipated the fall in inflation and a slowing economy, and paused the rate hikes over year ago. Unfortunately, the credit mortgage issues intervened and caused the potential for more economic slowing, thus giving the feds somewhat behind the curve. Now the Fed had to act more aggressively, and when ever an aggressive action is taking and it tends to oil the markets.
Three trading sessions in a weekend under the belt, and now the markets will have the chance to show us moral of what they have in mind as far as direction. As indicated above, we really like what we see in the stock indices, and a few more days of lateral movement will jack up the anxiety that the Fed-induced breakout has run out of gas, and that will set up the next break higher. It won't hurt, whatever, to see a moderation in the price gains of commodities such as gold and see the dollar firm up again. As we noted on Thursday, it is reached a level of parity with the Canadian dollar, something that hasn't occurred since Jimmy Carter was president. That pretty much speaks for itself. He said the markets tend to overshoot in the short term, and now we see if they can adjust back somewhat. The stock indices look to be doing that already with their nice easy lateral move. Now it's up to the gold market as well as the dollar markets shows and stabilization.
Looking at the specifics of the market, however, we still like what we see quite a bit. As noted above, we bought into many stocks ahead of the FOMC meeting as they were showing us it was time to buy them. One of the traitors in the office was reminding me today that about three weeks ago I told everyone here that they energy stocks, after that strong run higher in 2006 in early 2007, had put in some very solid bases and looked good for the breakout. Indeed, I told them I was salivating over these patterns given the nice base and the continued strength in the global economy. Same thing for the metals stocks. We put these on the report and they have performed very well indeed.
Their success is now left many of them over extended, and they will likely start pulling back over the next week to test that move. No problem with that because it will provide us knew by points on the strong early leaders, and we love buying into the first test of a breakout.
At the same time, the overall move is trying to broaden out some. Technology stocks have lagged behind on this move, but now we're seeing some set up better. Medical and healthcare stocks have performed admirably, and many are still setting up to move higher. Furthermore, there are stocks with in the energy sector and other commodities and industrial sectors that are setting up to breakout as well and follow the other members of their sectors higher.
Basically what I'm describing here is rotation in the market. But the Fed acting as a backstop, new money jumped into the market last week. It is going to continue to come into the market and as it does we will see a familiar pattern, i.e. waves of stocks moving higher. The early leaders will test, and while they test in some money is taken from them, that money will be put to work in other stocks that are ready to break higher. That will provide another round of upside even as some of our leaders test back some. As noted above, this is very healthy action for a market, and if we see this developing it is another indication that the market is pricing in positive economic tidings.
This is exactly what you want to see whether or not it was caused by a Fed rate cut. As we noted above, you don't want to sit out a move simply because you don't like its origins or disagree with the policies that set the move in place. The goal is to make money so we can do what we want to do with our lives. When opportunity knocks, i.e. when we see energy stocks set up so nicely it makes you salivate, you need to throw your money at the market. That is what we were doing even ahead of the FOMC meeting. A lot of people said that we crazy to put so much money to work and have so many positions open moving into that meeting. They were performing so well, however, they gave no indication that we should sell them. Thus, we held onto most of them and continued buying. It has paid off handsomely.
When these stocks pulled back and test their breakouts, we are going to be salivating once more. We will be ready to jump on them as soon as they do. We are also looking for new sectors and new emerging leaders stepping up and ready to move higher as more money hits the market. They will be the next wave of, and we want to catch that wave and ride it as far as we can as well. When the Fed enters the game in a big way. It displaces a lot of water, causing those ways. Again, we want to be riding those for all they're worth.
Support and Resistance
NASDAQ: Closed at 2671.22
Resistance:
2673 is the early July high
2690 is the November/December/February up trendline
2723 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:
2634.60 is the June peak
The 10 day EMA at 2628
The 90 day SMA at 2594
The 50 day EMA at 2590
2531.42 is the February high (post-2002 high); 2525 intraday
The 200 day SMA at 2522
2509 is the January 2007 high
2450 is some price support from November and December 2006
2422 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 1525.75
Resistance:
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:
The 90 day SMA is at 1497
1497 is the July 2006/March 2007 up trendline
1490.72 is the early June closing low and early August peak.
The 50 day EMA at 1482
1475 from peaks in December 1999 and January 2000
The 200 day SMA at 1464
1461.57 is the February 2007 high.
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 13,820.19
Resistance:
13,875 is the old channel line
The July high at 14,022
Support:
The August high at 13,696
The early June high at 13,676 (closing), 13,692 (intraday)
The mid-June high at 13,689
The early July peak at 13,671
The 10 day EMA at 13,585
The mid-May peak at 13,556
The 90 day SMA at 13,467
The 50 day EMA at 13,402
13,220 is the July 2006/March 2007 up trendline
13,121 is minor support from the April peak
The 200 day SMA at 12,982
12,845 is July closing low
12,796 at the February 2007 high
12,518 is the August intraday low
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
September 25
Consumer Confidence, September (10:00): 104.5 Expected, 105.0 prior
Existing home sales, August (10:00): 5.55m expected, 5.75M prior
September 26
Durable goods orders, August (8:30): -2.5% expected, 5.9% prior
Crude oil inventories (10:30): -3.875M prior
September 27
GDP final, Q2 (8:30): 3.9% expected, 4.0% prior
Chain deflator, Q2 (8:30): 2.7% expected, 2.7% prior
Initial jobless claims (8:30): 311K prior
New home sales, August (10:00): 830K expected, 870K prior
September 28
Personal in come, August (8:30): 0.4% expected, 0.5% prior
Persona spending, August (8:30): 0.4% expected, 0.4% prior
Core PCE, August (8:30): 0.2% expected, 0.1% prior
Chicago PMI, September (9:45): 53.5 expected, 53.8 prior
Construction spending, August (10:00): -0.1% expected, -0.4% prior
Michigan sentiment, final, September (10:00): 84.0 expected, 83.8 prior
End part 1 of 3
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