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us stock market, trade stock
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11/01/07 Stock Split Report
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Stock Split Report Subscribers:
MARKET ALERTS
Targets hit alerts: RIG
Buy alerts: XTO
Trailing stops: BBBB; BHP
Stop alerts issued: BTU; MT; SRDX
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/alertssr.html
SUMMARY:
- Melt up? How about a financial-led meltdown?
- Hello, Federal Reserve? Did you mean to say 50BP?
- Economic data was not bad but market reaction shows the old data means nothing at this stage other than statistics.
- After jobs report we see if NASDAQ can play its stronger hand and rebound as it did after the October expiration Friday selloff.
Market reflects on FOMC decision, more financial issues, rolls over.
The Thursday action was sadly more along the lines of what we expected Wednesday after just a 25BP Fed Funds rate cut. A very strong GDP report and some end of month tape painting helped the market past the less than needed 25BP cut on Wednesday, but when Thursday morning started out with more questions about the viability of some big financial names (namely, Citigroup), the market revealed its true view of the Fed action. More to the point, the Fed's insufficient action. Stocks started lower, traded in a range for 4 hours with little rebound, then sold some more. That was just the warm up, however. In the last hour the sellers really got with it and even NASDAQ started to feel the pressure as it ticked over 2% to the downside. At first it was financials, small caps and XOM (not the rest of energy, however). In the last hour it was a fire sale where everything had to go. NASDAQ booked almost half its losses in the last hour.
The thing is, a day after a strong run to the close it took very little to get the market focused on the negatives again and turn all of the gains over. Speculation about C dropping its dividend sparked up a flash fire in the financials just a day after the Fed 'rescued' them with another rate cut. XOM said oil was too high for it to make money, i.e. its input costs for its chemical business - - crude oil - - was cutting into its margins. Both of these hurt their sectors or in their kin (in XOM's case), but by the close they had infected most of the market to the tune of -2.2% to a whopping -4.12% on the SP600 small cap index. Again, it took very little to turn the attention back to the real issues for the market: the mortgage and credit issues and their bigger brother, the economic future given the state of the leading indicators (the real ones).
The action was a clear and unequivocal response to the Fed's rice cake 25BP cut when the economy needs a big juicy cheeseburger . . . with fries. There is a major unknown in the economy, yet the Fed on Wednesday said it had done enough. How is that possible when the companies with all of these mortgage and derivative assets have not yet priced them to a point where the market is ready to buy? It is the SAME as the housing market right now: it is not at the bottom because prices are still way too high as sellers are in denial that their homes just don't command nearly the price the sellers think they should. Until that occurs there is simply no way of knowing where the bottom is.
In that respect there is a long way to go to resolve this issue, and the Fed's 'call us when its over' statement turned into a market realization that the economy was going to go lower as the Federal Reserve, after a great start, is reverting to its old ways and is following the economy lower rather than getting out in front and standing in the way of the decline.
Technically the action was as bad as it looked though the leadership that has held up all along continued to do just that. The intraday action, however, was crappy. The market gapped lower, made a few feeble attempts at rebounding, never threatened positive at all, and was slaughtered into the close, giving up the solid Wednesday break higher. That is about as weak as it gets.
In addition, that volatility returned, and volatility, despite what some of the trading shows on television say, is not a good thing as indices bump at new highs. On the way higher the buyers are obviously in control as the volume is on the upside and a series of gains are logged. Now we are seeing once more the up big on volume and down big on volume sessions return JUST as it looked as if the corner was turned with NASDAQ moving to a new post-2002 high. That works to undermine the move and makes it harder to continue higher longer term. You can still get spurts higher such as a run to the year end, but longer term it is like a fighter getting too many gut punches early in a fight: by the later rounds he is weak from those hits and gets taken down.
The internals were heavily negative, much more so than on the upside sessions as the market recovered the past 2 weeks, including Wednesday. -6.5:1 breadth on NYSE almost made NASDAQ's -4:1 downside look good. Not really; they both were atrocious. Volume was up though NASDAQ trade was roughly equal, so no clear dominance over the Wednesday upside. That was clarified, however, looking at the NYSE volume that spiked over 11% and was the highest since the October expiration Friday bludgeoning. Clear dumping ongoing.
The charts were so-so to poor. SP500 reversed its gains and tanked down toward the 1500 level and that key 1490 support that held last week after the expiration Friday implosion. Right back down to that level after a lower high. Not good action on the chart. NASDAQ was in better shape as it managed to close above the 10 day EMA. It gapped lower and it gave up the new high, however, on the day after it took that new high. That is like a football game where a team's offense scratches back into the game with a score only to have the defense let down and give back the score. Momentum swings, things take a turn for the worse.
Leadership saw some leaders get into deep trouble while other faded modestly in nice easy tests of near support. Still others basically ignored the selling, posting gains. We cut any that were in the first category, but those that are testing and are nicely above near support we pretty much left alone. If they are so nonchalant on such a bad day we want to see them perform when the 'burn everything to the ground' mentality subsides. In addition, if they do hold at near support and the market starts to bounce once more there will be some great buys in some great stocks.
In sum, it was a bad day, particularly on the heels of a strong close Wednesday. Violent reversals are typically bad medicine for the market, and it was a return to the volatility seen in the last selling. The market still has its work cut out for it if the NYSE indices are going to try for new highs themselves, especially as they have to drag the financials with them, and frankly, the financials are showing no signs of a bottom thanks to the Fed's timid action that guarantees no floor in the sector. It thus remains a big question mark for the market, and it is hard for SP500 to forge ahead until a bit more is known about the answer. We won't know the answer before they start to rally, but we will see a bottom forming, i.e. the end to the lower highs and lower lows they are still putting in as of Thursday as the Fed's 25BP and move to the sideline play insured a longer recovery period. The question is how far things go until that recovery. As we stated before, the Fed may have just guaranteed a recession in the first half of 2008.
THE ECONOMY
The Fed will have to reverse course again.
As noted above, this was a clear and unequivocal message to the Fed's rate cut and stand down was wholly insufficient. Financials imploded on simple speculation that Citigroup might have to cut its dividend. The small caps imploded on the session; their strong ties to economic expansion tell the tale of what the market, the aggregate of all thinking on the economy, thinks about the economic future with just a 25BP cut. The indices showed high volume reversals, in the NASDAQ's case from a new post-2002 high. These are all indications just from Thursday that the Fed missed its chance.
More than that, there are other indications outside the stock market indicating the Fed is even further behind the curve with the rate cut than it was before it made the cut. In other words, its lightweight cut and statement of neutrality caused more problems in that credit markets and other securities markets are worsening faster as a result of no help. The credit markets had returned to a worse position than before the 50BP cut ahead of the Fed's latest action. The Fed had to inject over $40B Thursday just to get things moving. Treasury yields plummeted as investors rushed to the safety of US treasuries, and that only exacerbated the margin between the 3 month T-bill and the Fed Funds rate. As we have noted, that is historically a signal that the Fed is too tight, and with more than 75BP between the two it shows the Fed is much too tight.
Yet, the Fed says it is done for now. As the markets are showing, it is not done at all, at least if it wants to stave off a significant economic slowdown. It took a hard line in September as well, indicating the issues were not that bad and cutting just the discount rate, prompting complaints from business leaders, calls from Robert Reuben, and rants from some bald-headed ego maniacs. It had to turn an about face and cut. More than that it cut 50BP in an unexpectedly refreshing attempt at getting ahead of the issues. Things in the credit markets are only going to get worse, and if the Fed wants to prevent recession as it stated in September, then it is going to have to turn course again and cut another 25BP over the next few weeks. If it waits to December it will be too late.
The economic data is not bad but it was not bad in early 2000 either.
The data Thursday was not bad as personal spending and income were basically in line, jobless claims fell to a bit lower than expected (327K actual versus 333K prior), and the ISM managed to hold above 50 (50.9 versus 51.5 expected).
In addition, the leading economic indicators show a slowdown coming, and the Chicago PMI from Wednesday turned negative; it typically leads the nation ISM by a couple of months. The only reason ISM was above 50 was the Philly region strength that finally showed up 2 years after Katrina. It is not going to last and next month the ISM will be sub-50 as it was early in 2007 during the mid-cycle slowdown.
Despite the great GDP report and other backward looking data, the leading data, the financial markets, and more and more the consumer psyche are pointing to a significant slowdown if not recession. The Fed could have brought out the heavy artillery again and cut by 50. When it did not and took this asinine 'risks are roughly equal' stance, the markets know the answer months in advance. Now we have to watch to see if the leaders break apart and foretell an overall market breakdown.
Pretty harsh rhetoric, but ultimately that is what happens when an economic cycle ends and the powers that be are not prescient enough to see it and act appropriately. That does not mean the market can't rally into the year end as we anticipated Wednesday night and still do tonight as long as the leaders hold up. It just means that we have to be ready and watch to see if this rally breaks apart.
THE MARKET
MARKET SENTIMENT
VIX: 23.21; +4.68
VXN: 26.26; +3.15
VXO: 24.45; +6.11
Put/Call Ratio (CBOE): 0.97; +0.2
Bulls: 53.8%. Some more improvement, falling below the 55%, down from the 56.5% reading last week. It did fade after the pullback and is down nicely from 62.0% peak a month back. Five weeks above 55% and now dipping. The surge then purge this week may keep investors nervous, but after hitting over 55%, just falling back below it is typically insufficient. You have to go through the process of wringing out the bulls with a decline of significance, a.k.a. a move into the lower 40's. That means more selling, but that does not mean right away. The market can still rally on momentum for other reasons and then make the harder drop in the first quarter. 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: 23.1%. Up but marginally from 22.9%. That is two weeks back above the 20% threshold between bullish and bearish conditions. Fell to a low of 19.6% three weeks back 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: -64.29 points (-2.25%) to close at 2794.83
Volume: 2.584B (+2.09%). Higher but not oppressively so as the Wednesday rally was on strong volume as well. Suffice it to say it was more high volume volatility, and at a new high that is not good.
Up Volume: 407.85M (+407.85M)
Down Volume: 2.149B (+2.149B)
A/D and Hi/Lo: Decliners led 4.28 to 1. Easily drubbing the upside breadth yet again.
Previous Session: Advancers led 1.98 to 1
New Highs: 29 (-60). As one subscriber pointed out, the High/low differential on NASDAQ's move to a new high was pathetic, indicating the lack of some key strength.
New Lows: 175 (+112)
NASDAQ CHART: http://investmenthouse.com/ihmedia/NASDAQ.jpeg
Gapped sharply lower and close at the session low. Took out the 10 day EMA and the early October peak it cleared on Wednesday as it made the break to a new post-2002 high. A higher volume reversal from a high is about the worst action you can get. Overall, however, because of its nice, market-leading gains to that point, the selling left it in decent position, easily holding above the 18 day EMA.
SOX (-1.77%) was the relative strength 'leader' Thursday, but it turned down from a bounce to the 10 day EMA, suggesting it is heading even lower after this breakdown.
SOX CHART: http://investmenthouse.com/ihmedia/SOX.jpeg
SP500/NYSE
Stats: -40.94 points (-2.64%) to close at 1508.44
NYSE Volume: 1.746B (+11.56%). Volume spiked to the highest level since the October expiration sell off. When the financials get whacked hard the SP500 gets whacked. SP600 was hammered as well on high volume. Ugly.
Up Volume: 88.845M (+88.845M)
Down Volume: 1.655B (+1.655B). 19:1 downside trade. That is an extreme.
A/D and Hi/Lo: Decliners led 6.51 to 1. The small caps were gutted and thus breadth was hideous. Back to July and August levels as the Fed's rate cut 'lite' made investors figure the economy was heading lower, and thus small caps are toast.
Previous Session: Advancers led 2.75 to 1
New Highs: 29 (-158)
New Lows: 115 (+93)
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
Even after the butt kicking on Thursday SP500 can still manage a higher low if it can hold 1500. After 5 sessions playing footsy with the key 1490 support less than two weeks back it is right back at it, and another test of major importance confronts the large caps. Lower high at the July peak and below the early October new high. It is setting up a new head and shoulders within its larger ascending base. That makes this test of 1500 huge. It is going to have to pull one out of the hat because it has returned to the scene of the last battle much too quickly.
SP600 (-4.12%) staged its worst single session loss of the year as it rolled over at the September peak and crashed all near term support. The next is just over 3 points away at 410, but the small caps have spoken with respect to the Fed's failure to act decisively enough. A continued break lower starts to indicate a recession in maybe second quarter of 2008.
SP600 CHART: http://investmenthouse.com/ihmedia/SP600.jpeg
DJ30
Turned down before hitting the July peak at 14,000, undercutting the 50 day EMA and closing above the 13,500 level that supported it two weeks back. As with SP500, it is back to this level much too quickly.
Stats: -362.14 points (-2.6%) to close at 13567.87
Volume: 335M shares Thursday versus 277M shares Wednesday. Volume surged to the highest level since late September on the rate cut, topping even the October expiration selling volume.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
FRIDAY
The jobs report is the next economic data out, and talk about a lagging indicator. It takes some importance, however, as the consumer confidence survey started to show that jobs were a growing concern among consumers, and when they worry about their employment then consumption suffers. Not at that level yet, but if things continue it won't be long. Thus if the jobs report shows weakness, even if it is lagging, after two strong GDP quarters that will not help the consumer's attitude.
Not only does it need to be strong to bolster some flagging jobs sentiment, with the Fed taking a 'you are on your own' attitude for now it needs to be stronger to give investors something to hang onto and forestall a complete collapse. There was a lot of technical damage done on the NYSE indices Thursday, though even with the selling, SP500 and DJ30 can still make a higher low and continued their larger ascending base patterns. Problem is, they don't have a whole lot of rope left to work with after the Thursday bombs lower.
Thus it is up to NASDAQ, the market leader, to hold the line above the 18 day EMA and again provide leadership for the rest of the market. We also want to see the leaders we are playing in the report hold at near support as well and start piecing things back together just as they did a couple of weeks back. Again, the rapid revisit to support by SP500 and DJ30 don't make things easier, but the leaders outside of financials made their own wake even as SP500 struggled due to the financial components.
As noted earlier, if the leaders can hold onto near support and put in another nice and easy pullback they will be in prime position for us to ride them higher again. That remains to be seen, but as they held the line rather nicely given the severity of the butt kicking in the market, that makes them very interesting. As long as they hold up, the market can make that rally through the end of the year and make us money. After that, well, we can only hope the Fed steps up in a couple of weeks after it gets another earful and does the right thing. Not going to hold my breath waiting for that, but if it wants to forestall a bad slowdown it is going to have to change course again and do it sooner than later.
Support and Resistance
NASDAQ: Closed at 2794.83
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
The 18 day EMA at 2783
2778 is the November/February up trendline
2725 is the July high
The 50 day EMA at 2718
2716 is the November/December/February up trendline
2673 is the early July high
2634.60 is the June peak
S&P 500: Closed at 1508.44
Resistance:
The 50 day EMA at 1518
1523 is the July 2006/March 2007 up trendline
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 October intraday high.
Support:
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 13,567.87
Resistance:
The 90 day SMA at 13,588
The early July peak at 13,671
The early June high at 13,676 (closing), 13,692 (intraday)
The mid-June high at 13,689
The August high at 13,696
The 50 day EMA at 13,711
The July high at 14,022
14,050 is the old channel line
14,088 is the early October closing high
14,198 is the Thursday intraday high.
Support:
13,390 is the July 2006/March 2007 up trendline
The 200 day SMA at 13,192
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% actual versus 0.4% expected, 0.4% prior (revised from 0.3%)
Personal Spending, September (8:30): 0.3% actual versus 0.4% expected, 0.5% prior (revised from 0.6%)
Core PCE Inflation, September (8:30): 0.2% actual versus 0.2% expected, 0.1% prior
Initial Jobless Claims (8:30): 327K actual versus 330K expected, 333K prior (revised from 331K)
ISM Index, October (10:00): 50.9 actual versus 51.5 expected, the 52.0 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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