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money investment, day trading
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10/15/07 Investment House Daily
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Stop alerts issued: EGOV; NILE
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SUMMARY:
- High oil, earnings giving investors reason to pause.
- New York region joins the game.
- Bernanke continues to indicate more rate cuts are ahead.
- Market in need of some strong earnings guidance to avoid the downside that is setting up.
Second session in three sees stocks struggle.
Thursday stocks started higher then reversed on strong volume. Friday a bit of a rebound, then Monday a stronger start, at least on NASDAQ, was pushed back down to a negative close on some volume that ticked higher on NASDAQ, more so on NYSE. There weren't any breakdowns in the indices, but they were selling and testing the next rung of support on the NYSE indices.
You could say they had some reason to sell back. Earnings are starting to flow, and they were not that great. MAT sales fell short, C beat but had weak guidance, while SCHW (brokerage) beat. Yes, they were not that great to start things out, but these are not the kind of stocks that make or break the market, yes even C doesn't qualify for that status any longer. No, investors are more concerned regarding what is to come with the waves of earnings this week after a run higher into the results. Thursday the market started to buck, and Monday it continued to do so.
There was some good news, and once again that was found in the economic numbers, particularly manufacturing. During the scare regarding the housing industry the manufacturing indices have shown excellent action. Even Philly started to show some improvement the past few months. Monday it was revealed that the New York region was deep in the game with its 28.74 reading, swamping the 14.70 expected, and it was the highest since July 2004.
Of course seriously solid economic expansion was not enough for stocks. The indices all started modestly higher but they quickly turned negative. After a morning down leg they tried the obligatory midmorning rebound, and there was some moderate success. Moderate. After a bounce into lunch the sellers returned and sold off into the last hour. Modest last hour bounce helped made things look better. Basically a repeat of Thursday without the initial surge higher. Not a breakdown, but the indices were definitely struggling again.
Just a look at the technical picture shows that struggle. Breadth was weak at better than -2:1. Volume ticked higher on NASDAQ but bumped substantially on NYSE. Some more distribution (higher volume selling) creeping in after that Thursday reversal. Leaders were upside early with large cap tech, metals and energy forging higher, but it seems half of those upside lost their drive, and as they did the indices slipped lower and lower on the session. Some certainly held their gains; anything related to China seemed to be up, and some energy basked in the glow of $86/bbl oil.
The charts show there was no breakdown as the indices continue to test near support. NASDAQ the 10 day EMA, but SP500 and DJ30 a bit lower, moving down to the 18 day EMA. No major plunge, but those latter two gave up their breakouts and they did so on a second session of higher volume selling in less than a week. After a run up through traditionally weak September and through the first half of October, the indices have the look of setting up a near term peak and a pullback as the earnings results crank up to full speed. After all, energy had a hard time holding gains even as oil moved over $86/bbl. Leadership is holding up about as well as the indices, but Monday we saw some starting to crack.
THE ECONOMY
Bernanke speech Monday night indicates the Fed is still going to cut despite stronger economic data.
Bernanke spoke Monday, and nothing he said altered the Fed's statements to date that indicate the Fed is going to cut unless the credit markets and the weakness potential it sees from the housing market subsides.
Some have pointed to the strengthening economic data such as Monday's New York Empire report that posted a 39 month high as indicating the Fed will not cut again after the 50 BP cut in September. Without a doubt Bernanke welcomes that economic activity because he and the Fed are concerned that the US economy will grow below trend for the rest of 2007 and all of 2008.
What Bernanke has told us is that even with improving data as the US economic cycle again picks up after an aborted rebound in the summer due to the sub-prime and credit scares, he remains worried that the housing market and credit issues will negatively impact the economy. Monday night he stated that the housing market had weakened even since the September meeting when the Fed cut rates. Huge observation with respect to future Fed action. He also note that the labor market is showing tentative cooling. Again he reiterated that the recovery would take time (referencing the 2007 through 2008 issues). With respect to prices he noted "moderate price increases" continue, but the way he couched the statement shows they are not the primary concern, particularly with the core PCE declining at a faster and faster rate.
In sum, Bernanke told us Monday night that not only had things not changed with respect to a further Fed rate cut, that indeed the economic climate had taken a turn for the worse since September, and thus when he stated again that the Fed will "act as needed to support efficient market function" he was even more adamant than the Fed was in September. Accordingly we are still looking for a second Fed rate cut on Halloween; that means treat and not a trick.
THE MARKET
MARKET SENTIMENT
VIX: 19.25; +1.52
VXN: 23.46; +2.26
VXO: 19.44; +2.02
Put/Call Ratio (CBOE): 0.8; +0.03
Bulls: 60.2%. Streaking higher and now well above the 55% level considered bearish. Third week above that level, indicating that the market is getting overdone. The Thursday sharp selling is an indication of that. The theory is that when too many investors or advisors are bullish then most of the money is in the market and there is nothing ready to come in off the sidelines to drive prices higher. On a steady climb from a low of 40.6%, the low for this round. Never made the thirties. Hit 56.7% in June and now it has blown past that. The market peaked about a month later. For reference it bottomed in the summer 2006 near 36%, and 35% is considered bullish.
Bears: 21.5%. Tanked from 25.0% the prior week as bears slide steadily lower toward the 20% level considered bearish. It peaked at 37.4% on this move. Closer to the 18% hit in August, 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: -25.63 points (-0.91%) to close at 2780.05
Volume: 2.026B (+0.85%). Volume edged higher though remained below average as NASDAQ started higher then sold back. A second distribution session in three, indicating the techs are under some selling pressure. Not strange given the run through September and into Thursday of last week, typically weaker months for the market.
Up Volume: 569.02M (-909.675M)
Down Volume: 1.445B (+933.159M)
A/D and Hi/Lo: Decliners led 2.38 to 1. Negative breadth jumped up again. The large caps led the move higher, but when they sell they do so broader than the buying sessions.
Previous Session: Advancers led 1.65 to 1
New Highs: 50 (-51)
New Lows: 58 (+4)
NASDAQ CHART: http://investmenthouse.com/ihmedia/NASDAQ.jpeg
Gapped higher then closed negative, taking back two-thirds of the Friday rebound gain. Volume edged higher as NASDAQ rolled and sold, but it roughly held the 10 day EMA on the session low and rebounded to the close to cut some losses. That helped, but it did not save it from the current choppiness. It has run well into earnings and there is some selling ahead of some big names and big results. If they are good enough it likely continues on higher after some more chop. Even if they are good we still anticipate more of a test of this solid move higher; the distribution indicates there is something under the surface and a pullback to test the breakout over the July high (2725) would do that nicely.
SOX CHART: http://investmenthouse.com/ihmedia/SOX.jpeg
Still in the toilet, showing a doji below the 200 day SMA after undercutting that level Thursday and rebounding to it Friday.
SP500/NYSE
Stats: -13.09 points (-0.84%) to close at 1548.71
NYSE Volume: 1.287B (+17.15%). Volume hit the third highest level of the month, and although still well below average, it was up for the second distribution session in three just as on NASDAQ.
Up Volume: 308.313M (-363.195M)
Down Volume: 968.027M (+552.251M)
A/D and Hi/Lo: Decliners led 2.62 to 1
Previous Session: Advancers led 1.59 to 1
New Highs: 53 (-127)
New Lows: 39 (+17)
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
This time SP500 could not rebound off the 10 day EMA as it did on Thursday. It fell to the 18 day EMA on the low and bounced nicely into the close, coming close to recapturing the 10 day EMA on the close. Not bad as there was some buying of the test of the 18 day EMA. The move saw SP500 undercut its breakout over the July high (1556), but as noted earlier, it was not a breakdown. Indeed, even with the higher volume on the selling sessions Thursday and Monday it is still quite orderly, quite typical. It has run well along with NASDAQ, but not as far and thus any test need not be as deep.
SP600 CHART: http://investmenthouse.com/ihmedia/SP600.jpeg
SP600 (-1.34%) was the whipping boy for the session and the small caps fell to and closed on the 18 day EMA. Never made the breakout move on this leg and if it is going to, this is about the area you want to see it hold (also right on top of the September peak) to consolidate and then make the next push back up to take on those highs.
DJ30
DJ30 again struggled much as it has done the entire month as NASDAQ and SP500 broke to new highs. It broke to a new high itself, but it worked laterally in an up and down range for the month, unable to really push ahead. Monday it tapped the 18 day EMA on the low and rebounded to cut its loses, but as with SP500, it closed below the 10 day EMA as well, but it was close to recovering it. Still in good shape overall as it is perched near the all-time high, working laterally in a relatively narrow range. It can consolidate more here and continue higher. We will see what IBM and friends on Tuesday can do for the blue chips.
Stats: -8.28 points (-0.77%) to close at 13984.8
Volume: 220M shares Monday versus 178M shares Friday. Volume was below average but it was trading up near that level again on a downside session, just as on Thursday. Some distribution even on the Dow.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
TUESDAY
Bernanke reaffirmed the Fed's position to do what it can to ensure fluid markets, there is some more economic data Tuesday (industrial production and capacity utilization), but the focus now is earnings. Tuesday they start in earnest after DNA kicked off the week Monday night with a decent though once again uninspiring report. It is a victim of its own success in the past when it used to blow away numbers by 40% or so.
In any event, the market has to deal with earnings and more importantly, earnings outlooks, and after the run higher in September and the move up in the first half of October, it is showing some bumps and bruises as investors are ready on the trigger just in case. Overall stocks remain in solid shape with just tests of their moves thus far. Nonetheless, we have been less willing to let them stray much as they head into earnings. If there are good gains built in after these runs, any distribution or breaking through near support and we are ready to close them down and see how earnings come out. After such strong runs they may squeeze some more out on the actual results, but if they have run a long way the odds are thinner that the will do that. They could still get some more upside after their results as noted, but we have to weigh the potential additional benefit versus the run thus far and the risk of giving a chunk back with a gap lower. Thus if they are showing some distribution and are cracking near support after a good long run, we prefer to play it more cautious.
There are stocks that have not made the run that say AAPL, BIDU or RIMM have made as they have been waiting for the money to rotate their way, or had some move their way and are waiting for it to resume. Those we can give a little more rope to make their moves as they don't have all of that froth built up that the market would be quick to take out if the earnings didn't quite measure up. We will continue to look at those, and of course we will also continue to cast an eye at the metals, materials, and energy as they set up to move higher. Many of those are still just in their first test of their breakouts, and with some more testing and a rebound on some trade we are going to look at more positions in those stocks.
In sum, the market is showing some weariness after its run higher as it suffers some distribution sessions just after breaking to new highs. Given the strong run in traditionally weak times we anticipate this distribution to lead to some more consolidation. Unless earnings are atrocious, with the Fed bid still under the market we anticipate a recovery after the pullback. In the interim we are watching for newly emerging breakouts and stocks making their first tests of their breakouts, and these are not necessarily stocks we have not heard of thus far in this run.
Support and Resistance
NASDAQ: Closed at 2789.05
Resistance:
2887 from a September 1999 peak
2920 from an October 1999 peak
Support:
2778 from a July 1999 peak
The 10 day EMA at 2770
2756 is the November/February up trendline
2725 is the July high
2711 is the November/December/February up trendline
2673 is the early July high
The 50 day EMA at 2667
2634.60 is the June peak
The 90 day SMA at 2625
The 200 day SMA at 2547
S&P 500: Closed at 1548.71
Resistance:
The 10 day EMA is at 1550
1553 intraday high from March 2000 used to be the all-time peak
1556 is the July intraday high
1576 is the Thursday intraday high.
Support:
1541 is the early June high
1539 is the mid-June intraday high
1534 is the early July high
The 50 day EMA at 1512
1511 is the July 2006/March 2007 up trendline
The 90 day SMA is at 1501
1490.72 is the early June closing low and early August peak.
1475 from peaks in December 1999 and January 2000
The 200 day SMA at 1474
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
Dow: Closed at 13,984.80
Resistance:
14,000 is the old channel line
The 10 day EMA at 14,015
The July high at 14,022
14,088 is the early October closing high
14,198 is the Thursday intraday high.
Support:
The 18 day EMA at 13,928
The August high at 13,696
The mid-June high at 13,689
The early June high at 13,676 (closing), 13,692 (intraday)
The 50 day EMA at 13,684
The early July peak at 13,671
The mid-May peak at 13,556
The 90 day SMA at 13,547
13,280 is the July 2006/March 2007 up trendline
13,121 is minor support from the April peak
The 200 day SMA at 13,110
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.
October 15
NY Empire State Index, October (8:30): 28.74 actual versus 14.0 expected, 14.7 prior
October 16
Net foreign purchases, August (9:00): $19.2B prior
Industrial production, September (9:15): 0.1% expected, 0.2% prior
Capacity utilization, September (9:15): 82.2% expected, 82.2% prior
October 17
CPI, September (8:30): 0.2% expected, -0.1% prior
Core CPI, September (8:30): 0.2% expected, 0.2% prior
Housing starts, September (8:30): 1.285M expected, 1.331M prior
Building permits, September (8:30): 1.3M expected, 1.322M prior
Crude oil inventories (10:30)
Fed Beige Book (2:00)
October 18
Initial jobless claims (8:30): 308K prior
Leading economic indicators, September (10:00): 0.4% expected, -0.6% prior
Philly Fed, October (12:00): 8.0 expected, 10.9 prior
End part 1 of 3
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