|
|
money investment, investment help
* * * *
10/30/07 Investment House Alerts
* * *
IH Alert Subscribers:
MARKET ALERTS:
Targets hit alerts: BIDU, EDU, EJ
Buy alerts: BEAV
Trailing stops: DSX
Stop alerts issued: CMC
SUMMARY:
- Market gets some pre-Fed jitters on predictions of no rate cut or not enough of a cut.
- Consumer confidence is not the best indicator, but the jobs component is a red flag for the Fed.
- Credit issues improved for a bit but are now worse than where they were before the 50BP cut.
- Fed is on tap and that is the market mover leading out to the year end.
Cold feet and worries as the 'to cut or not to cut' debate reaches absurdity on top of the recent bounce work to stall the market on Tuesday.
The market bounced last week after an upset on expiration Friday relating to earnings, rising on the back of some better earnings as well as the idea that the Fed would hack away at rates again given the economy was still heading lower and seems to be picking up speed, particularly with the rest of the world starting to show a slowdown as well. Tuesday a WSJ story discussed that it was 'very possible' there would be no cut at the conclusion of the current 2-day meeting. It is very possible, as we have detailed in recent reports, that this logic is absolutely wrong; we view the discussion is 25BP or 50BP given the lack of improvement in the economy, the much clearer slowing in the world economies, and the return of credit problems no less severe than before the 50BP Fed Funds cut at the last FOMC meeting.
Of course the market didn't heed sage arguments for a cut. It is nervous and it reacts to such possibilities accordingly. It knows things are slowing down economically, and it knows another aggressive move is required. That thought that not only an aggressive move would come but perhaps no move at all was a bit unsettling and the market struggled from the open.
Oil dropped significantly on the session (90.38, -3.15), and it was weighing on the energy stocks early on and well before it suffered the full loss for the session. That had the energy leaders under pressure from the start. Some more steel earnings were quite rusty, and the metals were under pressure again as well. At 10:00ET consumer confidence came out and it was lower than expected with some worries in the jobs market. A modest bounce after the open failed on the release of that sentiment data.
Despite those obstacles, the market bottomed and climbed steadily into the last hour. No major surge, just a steady recovery that sent NASDAQ positive along with the SOX. DJ30 and SP500 were just a few minutes away from turning green themselves as the indices broke higher with just under an hour of trade left. Then a rumor hit that the bulk shipping rates would drop in 2008 and the shippers (DSX, DRYS, EXM) that have provided strong leadership for the market imploded. Falling rates mean either too many ships or slowing demand. We know there are not enough of these ships so the worry for investors was slowing world demand. When the shippers sank their wake knocked the rest of the market off its feet. Steel and energy were already down, so when this news hit there was not much to hold things up though large cap tech in the form of AAPL, GOOG and BIDU continued to hold the tech end up. The indices fell to negative on the close, though frankly the move was not really severe, just indicative of nervous feet ahead of a critical FOMC meeting.
Technically the action was not great but not really bad. Kind of your middle of the road action ahead of an important Fed decision date. The start was softer on the weaker earnings and the WSJ story, stumbled more on lower consumer confidence, but recovered through lunch and into the afternoon. Good low to high action, but by the close, that late selling cheated them out of a positive close and thus just some mediocre price action.
The internals were rather mediocre as well. Volume was up on some selling, but very little on NYSE. NASDAQ volume was higher and as NASDAQ could not push higher through its earlier October high there was some churn (high volume running in place). That can indicate some laying off of shares, but nothing major in the bigger picture, just nervous trade ahead of that important Fed decision.
The charts showed no real change in position. NASDAQ pushed higher intraday but it again could not clear the October intraday high and faded back. SP500 and DJ30 are testing the September highs with this modest pullback and are in position to make a higher low that would set them up to take on the early October high. Not bad positioning as DJ30 continues to set up a larger ascending base. Thus it could be lower near term if the Fed only cuts 25BP and still keep the overall pattern alive.
Leadership was more of the same and less of the same. Technology was solid yet again, but it was once more narrowly so as AAPL, GOOG, and BIDU scored nice gains. Outside of tech things got a bit shaky. Steel had another bad session as more companies disappointed, and by the end of the session they were pulling copper and other metals lower with them though to a lesser degree. Energy was weak as well as predictions of a price collapse near term persist, and of course the $3/bbl decline did nothing to dissuade that view. As noted, the shippers were torpedoed late in the session on a rumor. Leadership took some big hits Tuesday. It is not wiped out but it shows it is not bulletproof, particularly ahead of the FOMC.
THE ECONOMY
More data suggest the Fed should be more aggressive than not if its intentions are still to forestall an economic slump.
You all know that the consumer confidence report is not cracked up to what many think it is. The consumer typically says one thing in a survey and does another. As Dr. House says in 'House,' patients always lie, and that certainly seems to be the case when it comes to sentiment. There does come a point, however, where sentiment reflects serious economic issues.
The Tuesday report was lower than expected (95.6 versus 100.0 expected and 99.5 prior). That put it down to a 2+ year low, the lowest at least since hurricane Katrina. Expectations fell to 80.1 even as respondents said they were going to buy some vehicles given the low prices and incentives and then take a vacation. May not be buying too many foreign models with that low dollar, however, at least those manufactured overseas versus domestic 'foreign' plants. Thus the consumer is not dead, and at these sentiment levels you would not expect him to be.
The concern in the report is the jobs view. As we have discussed, the consumer is virtually bulletproof with respect to consumption until there is a threat to employment. When you are worried about your job and thus your future income stream you tend to get pretty frugal in a hurry. Tuesday consumers indicated they were starting to worry about jobs after a long period of quiet comfort with the jobs situation. Those citing jobs as plentiful were down. Those finding jobs hard to obtain were up. Employment remains solid but there is worry entering, and worry is what impacts consumption.
The Fed is aware of this link. The question is whether the Bernanke Fed will put much weight behind it. It should. In itself it is just a small chink in the armor, but it is part of a bigger picture that shows many factors adding more weight on the economy and softening the expansion.
Credit issues are worsening again.
This one we know the Fed is watching. After the Fed cut rates 50BP in addition to the discount rate cuts and the liquidity injections the credit market improved. There was no wholesale run into commercial paper and other credit instruments, but things definitely loosened up. Paper was placed and packages of mortgages were moving albeit at substantial discounts.
In the past few weeks, however, the credit market has closed in again, and we are hearing it is tight once more. Moreover, some quantitative analyses show that the credit market is even drier than it was before the 50BP cut in the Fed Funds rate.
As we have detailed over the past week, there are many factors indicating the Fed should be more aggressive than 25BP on Wednesday. Taken together they paint a picture of an economy needing some substantial help to keep moving forward, and not the dribbles that Greenspan was famous for, i.e. the 25BP at a time until finally a year or more later the government gave out tax incentives that finally get things moving after the Fed failed its primary job and acted too slowly.
Bernanke is a student of Fed history and has stated many times he wants to avoid the mistakes of the past during his chairmanship. This is one of those times he can show he is actively attempting to do that just as he did in August 2006 and again at the last FOMC meeting.
THE MARKET
MARKET SENTIMENT
VIX: 21.07; +1.2
VXN: 26.36; +0.53
VXO: 21.41; +1.95
Put/Call Ratio (CBOE): 1.15; +0.23. Back over 1.0 on the close but this was more due to positioning ahead of the FOMC given the added uncertainty the WSJ article injected.
Bulls: 56.5%. As you would expect after a two-week pullback, bullishness declined among investment advisors, falling from a peak of 62.0% last week. This was the fifth week above the 55% level considered bearish. The action this week will likely drop the Bulls a bit further, but it won't do significant damage to the rise. If the market continues to rally that will leave the Bulls still at an elevated level. 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: 22.9%. Back above 20% level that is considered the thresholds between bullish and bearish conditions. Bears fell to a low of 19.6% last week, after falling rapidly from 25% just couple weeks ago. Bearishness peaked at 37.4% on this move and it fell to 18% in August. 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: -0.73 points (-0.03%) to close at 2816.71
Volume: 2.147B (+4.73%). Volume remained above average, bumping higher as NASDAQ sold early but recovered. Did not make any headway and the range was narrow, indicating some churn where stocks run in place. Below resistance such as the October high that can indicate some topping action, but it is too early to really tell that. More like some positioning ahead of the Fed.
Up Volume: 956.76M (-316.296M)
Down Volume: 1.191B (+464.146M)
A/D and Hi/Lo: Decliners led 1.63 to 1. If not for the large caps such as AAPL, MSFT, GOOG, BIDU the indices would have been down harder given more stocks on the index struggled Tuesday.
Previous Session: Advancers led 1.01 to 1
New Highs: 55 (-38)
New Lows: 80 (+3)
NASDAQ CHART: http://investmenthouse.com/ihmedia/NASDAQ.jpeg
Gapped lower, held the Friday gap higher, and moved to positive in the last hour. It could not hold the move into the close as a last round of selling pushed it to flat. It is just below the October high (2834), hitting 2829 on the high Tuesday, and of course that puts it at an important point in time as it raises the specter of the double top. That is just a picture at this point, however, and given the strength of the strong large cap techs NASDAQ remains in overall decent shape.
SOX (+0.17%) tried higher as well but ended with a doji following that bounce higher from the hard selling last week. That doji is indicative of a bounce running out of steam. Chips were helped by the AAPL, INTC, MSFT earnings that showed some good PC sales and items that use chips. The move higher, however, has done nothing to change the weak character of the index.
SOX CHART: http://investmenthouse.com/ihmedia/SOX.jpeg
SP500/NYSE
Stats: -9.96 points (-0.65%) to close at 1531.02
NYSE Volume: 1.222B (+0.33%). Flat volume as the NYSE indices tested back modestly to near support. No distribution, i.e. no high volume selling.
Up Volume: 382.201M (-392.564M)
Down Volume: 826.362M (+401.36M)
A/D and Hi/Lo: Decliners led 1.67 to 1
Previous Session: Advancers led 1.4 to 1
New Highs: 50 (-128)
New Lows: 34 (+13)
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
SP500 struggled all session but it was not much of a struggle, just a fade back to the 10 and 18 day EMA on light trade. It gave up a rebound in the afternoon and really tanked in the last half hour of trade. A weak finish is never desirable, but there was no damage done on the close as SP500 still tries to make a higher low after bouncing up off the test of that 1490 level that many view as key.
The small cap SP600 (-0.57%) did not lag, just traded in step with the other NYSE indices. It closed lower but managed to hold the 50 day EMA at the bell as it attempts to hold last week's rebound at this 425 level and put in a higher low along with SP500.
SP600 CHART: http://investmenthouse.com/ihmedia/SP600.jpeg
DJ30
Faded back from the rally last week that took it off support at 13,500. No major selling at all as volume was below average again and lower than Monday and the index held near support at the 10 day EMA. As with SP500, DJ30 remains in solid position to make a higher low near the close or down at the 50 day EMA (13,708) and resume forming its ascending base. Of course, what the Fed does will have some bearing on its near term action, and after that we will have to see how it impacts the larger base that is forming.
Stats: -77.79 points (-0.56%) to close at 13792.47
Volume: 189M shares Tuesday versus 208M shares Monday. Nice low volume test after a stronger volume rise.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
WEDNESDAY
GDP, Chicago PMI, construction spending, more earnings, and of course the 2:15ET FOMC pronouncement. All are important but the Fed's decision is action versus just reporting what has happened in the economy. In other words, it can help shape what will happen and thus is of primary concern to investors and the financial markets. With so much ongoing transition, its decision will set the market up for its path into the year end.
The Fed has options of course, and we and others have spent plenty of time and print and airtime discussing them. Certainly other FOMC decisions have received similar attention, but this one is really key as it comes at an important time before the die is cast. Greenspan had such opportunities to take preemptive action and he often was too cautious. Thus this is worth the consideration based upon what we have seen occur in the past at important times.
If the Fed cuts 25BP, even though that is the expected path as predicted by the Fed funds futures, that will still be a disappointment at least near term. Recall the Fed Funds futures did not predict 50BP at the last meeting; even the futures contract has to adjust to a new Fed chairman and not apply the Greenspan template. It is still learning. In any event, 25 would likely result in a set back, but rate cut campaigns are usually good for stocks longer term, so 25 would not result in a collapse longer term. In the interim, however, the market will have to price in a slower economy as it will view the Fed action as too little to stave off slower economic times that are already coming despite the fact that Q3 GDP will be 3% or better.
50BP and the market takes heart again that the Fed is really going to do what it takes to help the credit market and thus the financial markets and economy. It will move higher near term as a result, setting up a good ending to 2007. There is good reason to cut 50BP as we have detailed the past week, but there is another one the Fed, at least the Bernanke Fed, also looks at. The 3 month T-bill is 75BP below the Fed Funds rate. Historically this indicates that money is too tight and needs to be loosened in order to keep the economy growing. Basically it is saying that the Fed can drop rates 75BP and be just neutral with effect to stimulus. Thus it can cut 50BP Wednesday and still be seen as restrictive.
That won't satisfy the dollar hawks, and frankly we don't like a weak dollar either. The choices are not easy here for the Fed. There is the view that the exports due to the low dollar are what is keeping the economy going right now similar to the housing market during the last recession. Thus a 50BP cut would not harm that as the dollar would fall further. On the other hand, you cannot devalue to prosperity. Of course, that means all things are equal. That is not the case right now.
We have a great hypothesis as to why Bernanke should cut 50BP, and based upon what he has done to this point as well as his speeches and writings we believe he wants to cut 50BP. World politics is an issue he has to deal with, however, and in the past that has hamstrung certain Fed chairmen. With the rest of the world central banks still trying to tighten, Bernanke may only go 25 despite a belief that 50 is called for. Very hard to make that call as my link to Bernanke's brain just isn't complete.
Given that the economy needs 50 but 25 may be all that is coming, we are looking to button up and streamline a bit as best we can ahead of the announcement. We anticipate some short covering ahead of the decision given the Tuesday weakness, and we can use that to take some gain off the table on stocks that have moved nicely and shut down some positions that are lagging. We have already been doing this the past week given the run higher ahead of the meeting. We feel the Fed needs to surprise the market again with another 50BP cut, but twinning that move may be more than the world politics will allow.
Thus best to keep a bit nimble near term but also looking down the road a bit to a recovery because a 25BP cut still shows the Fed at work, and that can keep things going through the end of the year for the market after a nearer term hiccup. Thus we are going to let strong stocks that hold support continue on, particularly those we have already locked in some gain on, and we will also keep on the ready for opportunities to buy into strong stocks that suffer some selling and come back to hold near support. Those will provide opportunity as the market moves away from this meeting and toward year end. In short, whether 25 or 50 we still likely get some good movement to the end of the year, just deferred a bit if only 25BP. That means we keep looking for opportunity to take advantage of strong stocks in a test so we can push our gains further to the year end.
Support and Resistance
NASDAQ: Closed at 2816.71
Resistance:
2834 is the October intraday peak
2887 from a September 1999 peak
2920 from an October 1999 peak
Support:
2778 from a July 1999 peak
2774 is the November/February up trendline
2725 is the July high
2715 is the November/December/February up trendline
The 50 day EMA at 2709
2673 is the early July high
2634.60 is the June peak
S&P 500: Closed at 1531.02
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 used to be the all-time peak
1556 is the July intraday high
1576 is the Thursday intraday high.
Support:
1521 is the July 2006/March 2007 up trendline
The 50 day EMA at 1517
The 90 day SMA at 1502
1490.72 is the early June closing low and early August peak.
The 200 day SMA at 1480
1475 from peaks in December 1999 and January 2000
Dow: Closed at 13,792.47
Resistance:
The July high at 14,022
14,040 is the old channel line
14,088 is the early October closing high
14,198 is the Thursday intraday high.
Support:
The 50 day EMA at 13,708
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 early July peak at 13,671
The 90 day SMA at 13,578
13,340 is the July 2006/March 2007 up trendline
The 200 day SMA at 13,180
12,845 is the August closing low
12,786 is the June peak
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
October 30
Consumer Confidence, October (10:00): 95.6 actual versus 100.0 expected, 99.5 prior
October 31.
GDP, Q3 (8:30): 3.1% expected, 3.8% prior
Chain Deflator, Q3 (8:30): 2.0% Expected, 2.6% Prior
Employment Cost Index, Q3 (8:30): 0.9% expected, 0.9% prior
Chicago PMI, October (9:45): 53.0 expected, 54.2 prior
Construction Spending, September (10:00): -0.4% expected, 0.2% prior
FOMC policy statement (2:15)
November 1
Personal Income, September (8:30): 0.4% expected, 0.3% prior
Personal Spending, September (8:30): 0.4% expected, 0.6% prior
Core PCE Inflation, September (8:30): 0.2% expected, 0.1% prior
Initial Jobless Claims (8:30): 330K expected, 331K prior
ISM Index, October (10:00): 51.5 expected, the 2.0 prior
Pending Home Sales, September (10:00): -6.5% prior
Crude Oil Inventories (10:30): -5.28M prior
November 2
Nonfarm Payrolls, October (8:30): 80K expected, 110K prior
Unemployment Rate, October (8:30) 4.7% expected, 4.7% prior
Average Hourly Earnings, October (8:30): 0.3% expected, 0.4% prior
Average Work Week, October (8:30): 33.8 expected, 33.8 prior
Factory Orders, September (10:00): -0.4% expected, -3.3% prior
End part 1 of 3
|
money investment
investment help
|
