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10/17/07 Technical Traders Report
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MARKET ALERTS
Targets hit alerts: EDU
Buy alerts: WB
Trailing stops: CMI; MON
Stop alerts: RESP
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SUMMARY:
- Stocks roar higher on strong earnings, give it all back and more, then salvage a gain on the Fed's weaker view of the economy. Makes your head hurt.
- CPI comes in line, housing starts hit a 14 year low, Beige book reiterates recent Fed comments. It all means another cut on Halloween.
- Tech earnings are strong but are they enough to end the consolidation right here.
Stocks post a big gain, lose a big gain, salvage some upside.
Intel's and Yahoo's better than expected earnings after the Tuesday close were joined by sold beats from JPM, UTX, KO, MO and STX. The CPI was in line and housing starts fell to a 14 year low. There were plenty of reasons for stocks to show some life and they did. NASDAQ surged on the open and the NYSE indices were higher along with NASDAQ.
At 10:30ET the oil inventories report showed a surprise build in crude (1.8M), gasoline (2.8M), and distillates (1M). Oil topped 89 intraday but after the report price faded, but on the close it lost little ground from the previous session (87.40, -0.21). Even with that 'icing' on top of the good data, stocks weakened on the heels of the report. They rebounded into lunch but made a lower high and then tumbled lower into the afternoon session. NASDAQ swung 45 points from lunch to afternoon low. When it turned negative after sporting a 39 point gain it looked as if the distribution that started last Thursday has indeed taken its toll and the market was again heading lower.
At 2:00ET the Fed Beige Book was released and it cited an even slower economy, with the pace of growth decelerating since August. Still moving higher, but the pace was slowing. The Fed noted that business contacts in a variety of sectors noted a "higher than usual degree of uncertainty about the outlook for economic activity". There was a lot of other commentary, but the gist was quite clear: the Fed already viewed the economy operating below potential in 2007 and through 2008, and the activity since August did nothing to change that view.
The market took that as an indication that a rate cut was more likely on Halloween and indeed the Fed Funds Futures contract took it the same way. Stocks bottomed on the session and started higher for the next two hours right into the close. That brought all but DJ30 and SP600 back to positive, and those two just missed the mark. Up, down, back up. Market seems a bit flighty at the moment, eh?
Technically you can view the action as negative (losing a big gain and having to scratch to get some back) or positive (coming back from an intraday selling attempt and closing positive). There was definitely some shakeout action as stocks sold but then recovered nicely with SP500 recovering the 18 day EMA and NASDAQ the 10 day EMA. At the same time, some good news was met with stiff selling that completely gutted the early rally. There are still plenty of sellers out there in this current correction and they showed Wednesday they were not all sold out. Of course they could not hold the day entirely as techs led the rebound.
What that action shows is that the pullback is likely not over. The buyers and sellers, bulls and bears if you like, are still fighting it out with some vigor, and that usually means a consolidation or pullback is not over.
As for the internals, volume was up on both NYSE and NASDAQ. As NASDAQ posted a solid gain after overcoming a selling attempt, that is not a bad thing. NYSE trade was still below average so it was no landslide of sentiment, but SP500 did recover off a test of 1525 support to hold the 18 day EMA; not that bad either. Breadth was pathetic for the indices posting some gain, just cracking positive.
The charts show that good shakeout action on NASDAQ and SP500, testing lower and indeed negative, but then rebounding to close in the top quadrant of the session range and over near support. That is a good shakeout session. DJ30 posted similar action, but it closed negative and could not recapture its 18 day EMA a la SP500. Overall this continues to be good consolidation action.
Leadership was still dominated by techs and the other same old leaders on the run to this point. It was not, however, complete domination by those sectors. China, energy and metals were strong, but it was not across the board at all. Some Chinese stocks surged, some languished. Some metals gains, some sold. Energy gushed higher in some sectors while it went dry in others. It was not an affirmation of any reversal that ended the current choppy pullback.
Again, the case is whether this action signals a continuation of the current correction or signals the end with a reversal. As noted above, the sum of the parts suggests more consolidation as opposed to a reversal brought about by the Wednesday session. The good thing is, leaders are still holding up nicely, and that will give us more good buys as this correction comes to an end.
THE ECONOMY
More evidence of a rate cut ahead whether the dollar needs it or not.
More data, more reasons for the Fed to cut. There is a big debate in the market as to what the Fed's next step will be. What we are seeing is smart people mixing what they think the Fed should do with what the Fed is telling us it is going to do.
What I mean is that many people don't want another rate cut for any number of reasons, one being the impact of a cut on an already weak dollar. As discussed last night there are significant reasons for getting dollar on a bit stronger footing as opposed to further eroding its strength. Others fear inflation and view any further rate cut as sealing the deal for price increases.
The Fed, however, is being very clear in what it is going to do. While many fret over economic strength leading to inflation (it doesn't do that; too much money for a current set of economic conditions is what causes inflation, no economic growth by itself), the Fed is looking at the falling PCE inflation gauge as well as inflation pressures that give insight as to future inflation. Those are not showing inflation, at least at the core level. That is the big sticking point for many, and we have our issues with that as well as discussed below.
Despite what people think the Fed should do, the Bernanke Fed, that indeed has a very good track record in reading where inflation and the economy is going, is telling us it is going to continue with another rate cut. Every speech since the rate cut, every piece of economic data, and every official announcement from the Fed since has indicated that the Fed sees economic activity weakening due to the housing and credit issues. Even before this cut the Fed viewed economic activity below trend for 2007 and 2008. It sees further slowing since then. It cut 50 BP, not because of jobs as some thought, but because it wanted to stave off recession. Housing and credit issues are not resolved and are indeed slowing things further. It is an absolute no brainer the Fed is going to cut rates on Halloween. The only issue is 25BP or 50BP.
The CPI and the folly of why our food prices are rising.
The CPI did not show any further slowing in inflation growth, just a lack of acceleration as the core rose in line at 0.2% and the annual core matched the prior month at 2.1% growth. Unlike the more accurate PCE, the core CPI is not showing as rapid a slowdown in the rate of inflation. Be that as it may, it also shows inflation, at least at the core level, is not running away even by the CPI that overstates inflation rates.
The salient point to take away from the CPI is the fact that our food prices rose yet again, up another 0.5% in September. That follows 0.4%, 0.3%, 0.5% and 0.3% for the past five months. Not running higher at the rate of energy or medical care, but a steady climb that is keeping the pressure on overall prices.
Why is price rising? Because most of our food products in the US are based upon corn either in their base or as a feedstock for the animals we consume. As we all know, President Bush decided he had to cave in on the global warming issue and he did so by deciding to mandate ethanol use and introduced subsidies to make what an uneconomical fuel a bit more economical. Corn is a rather poor feedstock for ethanol, coming in well below sugar cane and sugar beets in its yield. Nonetheless, after the announcement corn prices immediately jumped even before millions and millions of bushels of corn are diverted to ethanol production.
Thus the decision was made to raise everyone's food costs in some weak and what will be ultimately a failed attempt to wean us off of foreign oil. Every time I write about this a lot of commentary comes in about how ethanol is a good choice, it works, etc. It is a bad economic choice for a multitude of reasons, one being it artificially inflates our food prices, making it harder for many to make ends meet each month. Of course some would say the government should pay extra to cover that, etc., but we won't go into that morass.
There are other very important and barely discussed reasons that ethanol is a bad choice versus say spending the subsidy money on developing hydrogen vehicles. In the WSJ today more startling facts were brought out about 'environmentally friendly' ethanol. For each gallon of ethanol produced in a processing plant, 4 gallons of water are consumed. Factor in the amount of water used to raise the corn and producing just one gallon of ethanol consumes 1700 gallons of water. We already have water shortages in the entire western US and with the prolonged drought in the southeast, water is an issue as well.
Moreover, if we are to meet just 10% conversion of gasoline and diesel to ethanol (Bush wants 20%) we have to convert 43% of the land under cultivation for food to cultivation for ethanol or deforest the equivalent amount of land to make up the difference. Gee, go ahead and cut down the trees right now or let pollution from burning hydrocarbons take them down? Ultimately we either pay huge increases in food prices or see our green spaces we are trying to preserve turned into corn rows.
Finally, ethanol is just a poor choice for fuel all around. If you compare the energy it provides versus the surface area of the earth used to create that energy it is 1000 times less efficient than oil (we drill for oil, requiring little use of surface area). That doesn't really answer the problem of weaning off of foreign supply or the pollution caused by burning hydrocarbons. Okay, so compare it to solar. Certainly ethanol is more efficient than solar. No, even though solar requires large usage of the earth's surface as well due to its large arrays, it is still 10 times more efficient in producing the same amount of power than ethanol.
The problem is that we were all sold a bill of goods without knowing the price tag. Ethanol does burn as a fuel. It can be produced from corn. But if we think we can solve our oil dependency issues and mitigate our environmental impact by plowing over most of the US to produce corn, we are fooling ourselves. And this does not even take into consideration the social impacts of higher food prices for us and the rest of the world that we provide a lot of food to.
It would be better to spend the money, and indeed we seem bent on doing so, for a real solution such as the hydrogen vehicles we have discussed on many occasions. GM has a working Yukon that runs on hydrogen. We are told it would take billions to change over the infrastructure to hydrogen from gasoline and that is a major stumbling block. Why not make it a 'hydrogen vehicle race' similar to the space race? If we want to spend the money, let's do it on something that will truly wean us off the foreign oil (and thus vastly reduce those countries' power in the world), jump us ahead in technology, and give us something the rest of the world will want? We had that with our technological advantage prior to the 2000 crash, but we gave it away when the Fed tinkered with fine tuning our economy. Oh yes, let's not forget jobs; why not turn the musty, dying US auto industry into the world leader again? Again, if we are going to spend the money, let's get something real out of it versus subsidizing a few so that the rest of us pay more for water, food, and indeed gasoline.
THE MARKET
MARKET SENTIMENT
VIX: 18.54; -1.48
VXN: 22.02; -1.54
VXO: 18.7; -1.3
Put/Call Ratio (CBOE): 0.94; 0
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: +28.76 points (+1.04%) to close at 2792.67
Volume: 2.146B (+3.47%). Volume surged, only topped by Thursday's reversal trade. But for the late rebound after the Beige Book NASDAQ would have shown another nasty reversal distribution session.
Up Volume: 1.558K (-627.011M)
Down Volume: 1.407K (-1.43B)
A/D and Hi/Lo: Advancers led 1.11 to 1
Previous Session: Decliners led 1.79 to 1
New Highs: 38 (+1)
New Lows: 69 (-8)
NASDAQ CHART: http://investmenthouse.com/ihmedia/NASDAQ.jpeg
The recovery from testing near the 18 day EMA helped put a positive spin on the session, but as noted above, without the Fed-assist (again) it would have been another ugly high to low reversal session. NASDAQ gapped higher on strong earnings and then reversed almost 50 points to negative. Then leadership held and rebounded, taking NASDAQ with it. The breadth was flat; it was all the large cap tech once again that propelled it higher. Maybe it was the reversal that ends the pullback, but this breadth shows all generals and no troops, and that suggests there is some more work to do. We will see. Overall, though there is distribution on NASDAQ since last Thursday, it is also holding its breakout quite nicely, keeping it above near support in the form of the 18 day EMA and the early October high.
SOX (+1.85%) recovered the 200 day SMA after fighting at that level after giving it up last Thursday. INTC helped; no surprise there. Now we see if it can emerge and provide some leadership.
SOX CHART: http://investmenthouse.com/ihmedia/SOX.jpeg
SP500/NYSE
Stats: +2.71 points (+0.18%) to close at 1541.24
NYSE Volume: 1.422B (+10.64%). Volume was up on NYSE as well as the indices reached lower and rebounded. Still below average but aside from last Thursday, the best volume in a month.
Up Volume: 696.676M (+402.088M)
Down Volume: 1.58K (-984.162M)
A/D and Hi/Lo: Advancers led 1.06 to 1
Previous Session: Decliners led 2.55 to 1
New Highs: 61 (+27)
New Lows: 49 (-5)
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
SP500 was up as well and it sold off as well. It hit support at 1525 on the intraday low (the late September lateral consolidation range or handle prior to the breakout), and it bounced back. Held the 18 day EMA on the close as it too continues to hold close support as it tests the breakout move. Volume was up as it rebounded; there were some sellers, there were some buyers, and the buyers enjoyed the last push. May test some more before it finishes the pullback, but this 1525 level is where it should hold and it was a positive that it did hold there Wednesday.
SP600 (-0.03%) rallied and sold as well, tapping the 50 day EMA on the low and bouncing to close flat. Kind of a steep drop from tapping at the breakout two weeks back, and more than you typically see in a handle. Nice tight doji, however, and we will see if it can make the move higher.
SP600 CHART: http://investmenthouse.com/ihmedia/SP600.jpeg
DJ30
INTC and JPM were helps, but IBM and UTX were big drags and they weighed on the Dow all session. Very similar to SP500 it tested down to the late September handle/consolidation range on the low and then rebounded. Volume exploded above average given the earnings trade on several key issues. DJ30 could not hold the 18 day EMA on the close as did SP500 and it is below its July high. A bit of a struggle here as it continues the test of the breakout, but thus far nothing too nefarious.
Stats: -20.4 points (-0.15%) to close at 13892.54
Volume: 315M shares Wednesday versus 229M shares Tuesday. Lots of trade on the earnings results, both positive and negative.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
THURSDAY
More earnings, more economic data with initial claims, leading economic indicators, and the Philly Fed. The entire mix is important but right now as evidenced by the Wednesday action: earnings started things strong but were not strong enough. It took comments from the Fed to spark a return to the upside.
After hours Wednesday EBAY sparked some excitement again, but after the initial surge it faded back to where it closed. Kind of like Wednesday heading into the afternoon session. As noted above, this kind of action reveals there is still some push and pull between the buyers and the sellers, i.e. they have not resolved their differences on this pullback. The indices rebounded Wednesday, and that may mean the end of the pullback. We are going to continue watching for rebounding leaders and new breaks higher from bases in the event that is the case. Indeed that is the beauty of the market as it tends to tell you when a pullback is over. There were some signs it was getting on with the process Wednesday, but the volatile action and the required Fed-assist to save the day indicates there is more to do. Thus there may be some more testing of the lows touched Wednesday. As noted earlier, a hold at those levels is not a bad thing at all, and a further test won't hurt the market all that much.
Thus we continue to look for opportunity in the pullback, continue to watch the leaders of the run higher make their tests of support as well as new set up s for breaks higher. Oil is high, mortgage and credit issues remain, the dollar is weaker, and we are in the midst of earnings season. At the same time, the economy continues an expansion and the Fed is still looking to cut. That is maintaining a bid in the market, and after this pullback/correction we anticipate that bid will again push stocks higher.
Support and Resistance
NASDAQ: Closed at 2792.67
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 2773
2757 is the November/February up trendline
2725 is the July high
2712 is the November/December/February up trendline
The 50 day EMA at 2676
2673 is the early July high
2634.60 is the June peak
The 90 day SMA at 2629
The 200 day SMA at 2550
S&P 500: Closed at 1541.24
Resistance:
1541 is the early June high
The 10 day EMA is at 1547
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:
1539 is the mid-June intraday high
1534 is the early July high
The 50 day EMA at 1514
1513 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.
The 200 day SMA at 1476
1475 from peaks in December 1999 and January 2000
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 13,892.54
Resistance:
The 18 day EMA at 13,922
The 10 day EMA at 13,978
14,010 is the old channel line
The July high at 14,022
14,088 is the early October closing high
14,198 is the Thursday intraday high.
Support:
The August high at 13,696
The mid-June high at 13,689
The 50 day EMA at 13,701
The early June high at 13,676 (closing), 13,692 (intraday)
The early July peak at 13,671
The 90 day SMA at 13,558
The mid-May peak at 13,556
13,290 is the July 2006/March 2007 up trendline
The 200 day SMA at 13,125
13,121 is minor support from the April peak
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): -$63.9B, $19.2B prior
Industrial production, September (9:15): 0.1% actual versus 0.1% expected, 0.2% prior
Capacity utilization, September (9:15): 82.1% actual versus 82.1% expected, 82.2% prior
October 17
CPI, September (8:30): 0.3% actual versus 0.2% expected, -0.1% prior
Core CPI, September (8:30): 0.2% actual versus 0.2% expected, 0.2% prior
Housing starts, September (8:30): 1.191M actual versus 1.285M expected, 1.327M prior
Building permits, September (8:30): 1.226M actual versus 1.3M expected, 1.326M prior
Crude oil inventories (10:30)
Fed Beige Book (2:00)
October 18
Initial jobless claims (8:30): 315K expected, 308K prior
Leading economic indicators, September (10:00): 0.3% expected, -0.6% prior
Philly Fed, October (12:00): 7.0 expected, 10.9 prior
End part 1 of 3
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