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money investment, investment help
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10/31/07 Technical Traders Report
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MARKET ALERTS
Targets hit alerts: Took some gain ahead of the Fed: NDAQ; NYX; SLT
Buy alerts: GLDN; HOLX; LRCX; SNP; TLM
Trailing stops: None issued
Stop alerts: AMX
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:
- Fed disappoints but a strong GDP report acts as a salve for the market.
- Fed doesn't go far enough, but strong GDP, continued liquidity trowel over the missing 25 more basis points needed.
- Chicago PMI versus Q3 GDP: leading indicator is down, lagging is strong. You make the call.
- Economy may be at risk in 2008, but market has the look and feel of a run to year end.
Market looks past Fed's shortcomings and rallies after just 25BP.
We could make some schmarmy and trite comment about the Fed giving the market a treat or a trick, but we will instead simply say its 25BP rate cut versus a 50BP cut did not spook the market. The Fed has some big news going its way in the form of a much stronger than expected Q3 GDP report (3.9% actual versus 3.1% expected and 3.8% in Q2). That was with a 20% decline in housing that took a full 1% off of the output. Wow. We commented in the morning alert that this strength might provide the market a salve if the Fed cut just 25BP. Turns out it did.
With that kind of momentum and gushing all morning, the Fed found it even worth putting in its statement. Of course it did because it was going to cut just 25BP when it knew, at least in Bernanke, that it really needed to do more. Politics and worries about doing more harm than good again hamstrung the most powerful economic controller in the US and likely the world economy. Bernanke had been so solid in his goal of acting well ahead of problems and using history as a reminder. Wednesday he cheesed up even with the leading indicators showing another big issue on the very day of the announcement (the Chicago PMI went into contraction mode). There are too many issues for a 25BP cut to get in front of, and thus in our book, despite the near term reaction of the market to the upside, did us no favors Wednesday, at least in the longer term.
As for the action, the market rose ahead of the announcement as expected, but there was a goose to the move: energy was in the lead as oil exploded higher (closed at $94.30, +4.15) on some low inventories (-3.9M versus the +600K expected), and it was over $95/bbl after the close. Gasoline was higher as were distillates, but that did not matter; oil took off and energy was soaring as well. Remind you of anything? A lot of day to day volatility, and at a high that typically means some type of top is setting up. If oil runs to $100 in a quick move, and it may very well do that because of that 90 to 100 magnet, we are likely to see that as the top for awhile. Anyway, stocks rallied then gave some back right before the result. On the news they sold some more but then most of the market (and that is a key 'most') rallied back and moved to new session highs.
Okay, what about the 'most.' Just about everything was up after the cut except financials, e.g. banks, lenders, mortgage companies, insurers. These are the very stocks that should have cheered the rate cut. They should have been up big with large cap techs, energy, the metals. Instead they scratched out 20 cent gains or worse. CFC was lower. The very stocks that should have been helped were lower. That is the clear, loud, flag-waving indication that the Fed did not do what it needed to do in order to solve the credit issues and stave off a significant economic slowdown. That is a clear warning to the Fed that the risks are NOT ROUGHLY BALANCED between inflation and slower growth as the Fed stated on Wednesday. That is going to hurt in the longer run, but it is not hurting near term, at least out of the financial sector.
Technically it is hard to complain about the day. Started higher, hung on into the FOMC meeting, gave it all away afterward, but then the buyers swarmed and turned a potential disaster into a strong upside close. It was all Fed influenced of course, but the cause is not really the issue; it is what the market does with the catalyst.
Internals were strong. Breadth was much improved (2.7:1 NYSE, 2:1 NASDAQ) and volume surged as NASDAQ blew to a new post-2002 high. You have to like that. It would have been better if the financials were somewhere, anywhere, in the green. Looks as if they are going to sit this one out for now, but at some point you have to wonder when some will move in and trip the tripwire with respect to all of the shorts in the play. When that baby turns it is going to be a tidal wave. Not showing it is time yet given the reaction to the rate cut, but keep that tidbit tucked away.
The charts we already gave away. NASDAQ surged to a new post-2002 high on volume. Clear and convincing. SP500 and DJ30, however, are still struggling to get past the July peak. Doesn't mean they are slugs or weaklings, just that they are lagging NASDAQ because they have those financial components around their necks. It also does not mean their patterns are bad. They are still building some decent longer term patterns, and this action, while in NASDAQ's shadow, kept that going quite nicely.
As for leadership, I refer to the above paragraphs regarding the lack of leadership from financials on a rate cut day. Outside of that, energy, metals, technology, China, chemicals, agriculture were all working again. They look as if they are going to continue leading into the year end now given this reaction to a 25BP rate cut and oil near $95/bbl. If it reacts to that with a run higher, there is just money begging to go to work on the upside, particularly given all the short interest in the market and all of the protection purchased (no we are not talking about condoms) over the past couple of months.
THE ECONOMY
Fed plays it safe near term and writes the ticket for recession longer term.
The Fed cut rates by 25BP (discount rate by 25BP as well), noted the strong Q3 GDP, warned about high oil prices being inflationary, said the risks of inflation and economic slowing were roughly equal, and basically said that combined with the 50BP cut in September, this action put it on pause. From being a rennesaince Fed chairman looking at the past mistakes to determine his policy decisions, Bernanke let the strong GDP report get the best of him and he split the baby. Unfortunately for our economic future he raised the chances of recession significantly.
Where do you start with the decision? It was widely expected, but that means little. Greenspan's moves were widely expected as well but that did not keep him from sending us into recessions with too many hikes and then too few and too little rate cuts after things got out of control. Bernanke looked as if he was learning from the mistakes of the past and taking pre-emptive measures in advance so the impacts of the cuts could be felt when the slowdown occurred, not making the cuts when the slowdown was here and thus deferring any recovery. We hoped Bernanke would cut aggressively again and get ahead of the curve, what the 3 month T-bill is telling us all. Instead he adopted the 'go slowly into recession' policy of his predecessor.
Why is this such a big deal you ask? Because anyone who has studied the US economic history to any extent has seen this scenario unfold before. Everything looks great based upon the backward looking indicators, but there is a real problem in the credit markets, one that has not disappeared but is simply covered less in the papers. Indeed, as pointed out Tuesday, it is worse now than it was at the time of the 50BP rate cut. After five years of economic growth, the forward looking indicators are all pointing to a serious slowdown ahead. It doesn't look like that in the data such as the GDP report, but then, it NEVER does look bad as the bottom is eroding. It looks bad when it is bad and that is too late to act.
Wednesday was a classic case of denial. The GDP was strong, stronger than expected at 3.9%. The Chicago PMI report came out shortly after the open, however, and it showed CONTRACTION with its 49.7 reading. From great readings to contraction. It is a leading indicator or at least more real time, certainly more so than GDP. Yet it was ignored by most and indeed the Fed talked about Q3 growth in its statement, ignoring another red flag waving in its face. ECRI is pointing to a global slowdown due to overly restrictive foreign banks, the short term bond yields are well below the Fed Funds rate, consumers are starting to worry about their job stability, the credit crisis is worse today than it was in September when the Fed cut 50BP and said its job was to stave off an economic slowdown. ALL of the leading indicators are pointing to at least a serious slowdown just as they have in past cycles. Bernanke and the Fed took a cup of water and tossed it on the smoldering pile of leaves and sticks. It should have taken a 5 gallon bucket and drowned it out right now. What will happen is it will keep smoldering and then burst into flames in the spring. Then it will take a lot of 5 gallon buckets to put it out, and before it is out it will have spread and burned a lot of the economy.
Did the Fed let loose the hounds of hell by cutting just 25BP? No. It did, however, blow a great opportunity to get ahead of the developing economic slowdown. Instead it kept monetary policy higher than even neutral. In other words, the Treasury market shows us that Fed Funds rates are still restrictive, not the 'roughly equal' the Fed is suggesting exists in the economy today. The Fed did in fact cut when many said it should not, and that is a plus, but it really won't do the job in getting ahead of the economic slowdown and forestalling it. Right now the Treasury market shows us that the Fed is pulling a Greenspan, i.e. following the economy lower instead of getting out in front and injecting real stimulus to keep it from a significant slowdown. Basically Bernanke knows he should have cut 50BP as the most sage market and economic commentators of the day said he should to, but he pulled back in fear of inflation, the weak dollar, credibility, etc. We have said it before, however: if you want credibility, earn it by showing you took the right action and got the right results. Wednesday the Fed heightened the risk of a more significant economic slowdown by failing to take the action history tells us it should have taken. Now we have to live with that and make the best of it that we can.
Leading versus lagging: PMI versus GDP
I am not saying the GDP report was a throwaway. 3.9% growth is big. It was the biggest since Q1 2006, and the 3.8% from Q2 plus 3.9% in Q3 is the biggest 1-2 punch in 4 years, back in 2003 when the economy exploded out of the recession.
Moreover, the guts of the report were impressive. Consumer consumption rose 3.0%. Exports surged 16.2%. Business expenditures, after a long lag, finally came to life with a 7.9% gain. All of this with housing down 20.1%. Without that housing drag GDP would have been 4.9%. Smoking. On top of that, the price component was up just 0.8%, the lowest since the 1960's, and most of those folks burned out those brain cells that would have remembered that at the time. Strong stuff.
On the other hand, the Chicago PMI, the most important regional manufacturing report and the one that hits just before the national ISM, fell below 50 last month (49.7 versus 53.0 expected and 54.2 prior). That may not translate into a sub-50 ISM on Thursday because it takes a couple of months for the regional reports to show up in the national, and we know that Philly came to life last month after lagging everyone since Katrina. Still, the massively weak report underscores the other leading reports and indicators (e.g. ECRI, job worries) showing the past few weeks that things are not copasetic when you get past this near term momentum in the economy.
The Fed did not do enough to help out the slowdown that is ahead as the action in the financials shows. Maybe it can make it up if say the ISM tanks as well, but it will still be awhile before the Fed would act because it just said that the risks were back to equal between inflation and the downside. Big mistake but not an uncommon one (sadly) for the Fed. It is always too concerned about how it looks and this mythical credibility issue that always arises. The Fed has credibility because it controls the money supply; that is built in credibility. If it makes the right moves that result in a solid currency and economy, then what does it matter whether they were popular or not. Thought Bernanke had it in him when he paused while others screamed inflation was still rising. Oh well.
THE MARKET
MARKET SENTIMENT
VIX: 18.53; -2.54
VXN: 23.11; -3.25
VXO: 18.34; -3.07
Put/Call Ratio (CBOE): 0.77; -0.38
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: +42.41 points (+1.51%) to close at 2859.12
Volume: 2.531B (+17.87%). Nice, massive volume surge as NASDAQ hit a new post-2002 high.
Up Volume: 89 (-956.76M)
Down Volume: 63 (-1.191B)
A/D and Hi/Lo: Advancers led 1.98 to 1. Not bad. Not great, but most of the action is still in the large caps.
Previous Session: Decliners led 1.63 to 1
New Highs: 89 (+34)
New Lows: 63 (-17)
NASDAQ CHART: http://investmenthouse.com/ihmedia/NASDAQ.jpeg
Gapped higher, filled the gap after the FOMC announcement, then surged to close at the high and a new post-2002 high. Strongest volume since . . . last week . . . as volume continues to improve. Lots more money being put to work and despite all of the gains it looks as if it wants to spring to the end of the year, and this two-week sidestep gave it the rest it needed to start the move. Great start.
SOX CHART: http://investmenthouse.com/ihmedia/SOX.jpeg
SP500/NYSE
Stats: +18.36 points (+1.2%) to close at 1549.38
NYSE Volume: 1.565B (+28.13%). Solid volume. Nice above average showing as the NYSE indices moved off of near support, making a nice higher low. Good to see it come in when needed.
Up Volume: 187 (-382.201M)
Down Volume: 22 (-826.362M)
A/D and Hi/Lo: Advancers led 2.75 to 1. Very solid. Not great, but very solid. Without the financials in the game it was not bad at all.
Previous Session: Decliners led 1.67 to 1
New Highs: 187 (+137)
New Lows: 22 (-12)
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
Nice volume and price surge as the large caps broke higher off the 18 day EMA test. It did not clear the July high right at 1556, but SP500 made a second higher low in the past two weeks and that gives it a nice launch pad to take on that level as well as the October high. You would think it would need the financials to do that so we will see if it can continue this break higher. Financials are a big drag and will continue to be if the response to the Fed cut remains as it did on Wednesday afternoon, but for now it is moving without them.
SP600 (+1.31%) bounced as well as the small caps enjoyed an upside session off a higher low at the 90 day SMA. Still has a lot of work to do, the first is getting past this 435 level and breaking up a head and shoulders formation. Then it can worry about the 440 to 445 range that marks the old high. Lots of work to do, and frankly with the Fed missing an opportunity to cut enough to forestall a slowdown, it will still be hard for the small caps to make serious headway other than just tagging along with the other indices.
SP600 CHART: http://investmenthouse.com/ihmedia/SP600.jpeg
DJ30
Excellent volume as the blue chips bounced off the 18 day EMA, making their second higher low in two weeks just as with SP500. The Dow is still below the July high at 14K, and that is going to be a very important test point for the index in the next day or so. If it can blow on through that then it is heading for a new high on this run.
Stats: +137.54 points (+1%) to close at 13930.01
Volume: 277M shares Wednesday versus 189M shares Tuesday. Strong trade as it resumed the bounce.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
THURSDAY
It is unfortunate the Fed did not cut enough to save the economy longer term, and we will pay for that down the road. Fortunately for the present, the market looks ready to say 'what the hell' and move higher to the year end. If the 25BP and $95/bbl oil didn't kill it, with all of the short positions and protective puts bought, if this market continues higher with SP500 and DJ30 breaking toward new highs, when the cork pops we are going to see a rush higher.
We were kicking that hypothesis around the offices Wednesday after the FOMC announcement when the market turned higher anyway. We were buying as we talked, and then after hours Barton Biggs, one of the greats at calling tops and bottoms, came out and said that he sees a 1999-like melt higher that may even see the financials turn up as well. The 1999 reference carries different connotations, but they are unmistakable. 1999 saw NASDAQ run up 74% in the second half of the year. It topped in March 2000 and crashed, but we made an incredible amount of money on that run and then were smart enough to take most of it off the table as the market topped out. Barton Biggs made a great call about 1 month before the market bottomed in the fall of 2002 when he basically said things were close to turning. He was right. We saw the double bottom form up and were buyers in late October and made a ton on the semiconductors as they ran higher into early December. Then we caught TSCO, EBAY and others as they lead higher in March out of the test of the bottom.
We have a lot of respect for Barton, and when we heard him talk in the same vein we liked what we heard. We were buyers in the morning and then again in the afternoon. We also took some nice gain on current positions, and as the market runs higher we will continue to take some nice gain. We will also continue looking for great buys and moving in when they show themselves. There are more in position even after the afternoon surge; that burst did not play out all of the good potential plays. Hardly. It revealed more as they came off nice tests and started to break higher from nice bases. We are going to continue looking for those buys to ride into the end of the year.
It won't be straight up because it never is. But by sticking with strong stocks in good position to make us money we will ride the wave to some impressive gains for the year. Our trading accounts are up huge thus far this year, but we are looking for a bunch more by year end if this 'melt higher' move takes hold. We will pay the piper for this; it is coming. But that does not mean that we don't take advantage of this wave. Catch it, ride it, love it. When it runs out we will pick up our board and then look to see if the weakening leading indicators we see now are turning into actually weak economic reports. Then we look to play the other side, taking, as always, what the market gives us.
Support and Resistance
NASDAQ: Closed at 2859.12
Resistance:
2887 from a September 1999 peak
2920 from an October 1999 peak
Support:
2834 is the October intraday peak
2778 from a July 1999 peak
2776 is the November/February up trendline
2725 is the July high
2716 is the November/December/February up trendline
The 50 day EMA at 2715
2673 is the early July high
2634.60 is the June peak
S&P 500: Closed at 1549.38
Resistance:
1553 intraday high from March 2000 used to be the all-time peak
1556 is the July intraday high
1576 is the October intraday high.
Support:
1541 is the early June high
1539 is the mid-June intraday high
1534 is the early July high
1523 is the July 2006/March 2007 up trendline
The 50 day EMA at 1518
The 90 day SMA at 1503
1490.72 is the early June closing low and early August peak.
The 200 day SMA at 1481
1475 from peaks in December 1999 and January 2000
Dow: Closed at 13,930.01
Resistance:
The July high at 14,022
14,045 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 13,716
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 13,585
13,385 is the July 2006/March 2007 up trendline
The 200 day SMA at 13,187
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): 3.9% actual versus 3.1% expected, 3.8% prior
Chain Deflator, Q3 (8:30): 0.8% actual versus 2.0% Expected, 2.6% Prior
Employment Cost Index, Q3 (8:30): 0.8% actual versus 0.9% expected, 0.9% prior
Chicago PMI, October (9:45): 49.7 actual versus 53.0 expected, 54.2 prior
Construction Spending, September (10:00): 0.3% actual versus -0.4% expected, -0.2% prior (revised from 0.2%)
FOMC policy statement (2:15): Cut 25BP and 25BP on discount rate. Sees inflation and downside risks roughly equal. Basically said on pause.
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
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