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money investment, investment help
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11/05/07 Investment House Daily
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Investment House Daily Subscribers:
MARKET ALERTS:
Targets hit alerts: None issued
Buy alerts: GSOL; ININ
Trailing stops: None issued
Stop alerts issued: None issued
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 Daily alert service you can sign up at the following link:
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SUMMARY:
- Another mortgage and credit-based sell off to start the week sees a decent rebound that just misses a positive close.
- VIX creeping higher but still 12 points off August high.
- Leaders holding up nicely, but the market continues a bifurcation that will be resolved at some point.
Weak start, decent recovery not pretty, but keeps the ball in play for now.
Asia was down on word China was not going to allow as much foreign investment in Hong Kong, and that spread overseas into the US futures. There are certain market eaters that are circling, raising their heads every once in awhile and sending the market cowering in fear. Trade protectionism is one of those. When a couple of these team up as they did Monday, the market struggles. In addition to China, there was more mortgage concern. C had its much anticipated meeting and announced that it had $11B in write-offs versus $8B. The continued 'it will be X, no it is Y' is not instilling any confidence that the financials are near bottom. Accordingly they continue to sell off, still seeking that bottom.
Oil was lower (93.98, -1.95 on the close) as the Turk/Kurdish tensions eased as the Kurds released some Turkish soldiers, but that did not help the market. $94 oil is $94 oil; a couple of bucks at this level is similar to swatting a few mosquitoes when a cloud is buzzing over your head. Any benefit was off-set by some Fed-speak from governor Mishkin to the effect that the rate cuts had "significantly reduced" the effects of the credit crunch and that inflation was still a real concern. If he was trying to bolster the markets and assure them that the credit issues are now well in hand, he failed. It sounded to us as if he was defending the Fed's insufficient 25BP rate cut in the face of a renewed financial sector selloff and a tanking short end in the treasury market. As we have discussed, the short end treasuries are well below the Fed Funds rate, and historically that indicates overly restrictive monetary policy, and if not rectified, a significant economic slowing. With that history, it was a tough road to defend the Fed's smaller rate cut, and indeed the market appeared to view it as indefensible.
It was all a bad combination for the market as it gapped lower. Stocks immediately bounced with NASDAQ moving within 3 points of positive and SP500 within 2 by midmorning. That was met with a new wave of selling, and at mid-afternoon the indices all scored new session lows. SP500 even undercut the 1490 level after waiving at it on the opening downside salvo. That, however, brought about a rebound as the index did not push sharply through that level and the shorts started to cover as a result. A 35 point run on NASDAQ pushed it positive along with the SP500 and DJ30 with just 20 minutes left in the session. Alas, they could not hold, fading back to losses on the close, albeit finishing much better than you would have anticipated given all of the negatives at the open.
Technically it was more of the same with a new twist or two. Another day of volatile action with three big swings on the day, once more managing to close much higher than the open even if it did just miss holding a positive close. A positive close would have been the best action, but we weren't complaining much given the way the indices recovered after an ugly open.
Internals: Another session where the downside internals showed more strength on a downside day than they show to the upside on an upside session. Breadth was lousy on NSYE (-3:1) and pretty terrible on NASDAQ (-2:1). It was clearly another large cap session, at least with respect to the rebound and the relative strength shown. GOOG, RIMM, BIDU closed positive, and many big names just missed holding positive on the close. The drag was in the small cap arena with a 1.02% decline; as noted before, this does not say much good about the economy's prospects for a strong recovery. Indeed, ECRI is suggesting things are set to slow ahead after enjoying this Q3 bounce it projected at the start of the year. Volume was somewhat consoling. It was sharply lower on both NYSE and NASDAQ; good to see some declining trade as SP500 tests key support and bounced. Maybe getting a bit sold out with the volume falling? At least there was no dumping on Monday, and that can help this develop into something a bit more interesting if some other chips can fall in place.
Charts: As noted, the big technical move on the session was SP500's test of 1490 (twice) and the rebound from that level. DJ30 did the same with its longer term trendline from 2006, tapping at it as it did last month and then rebounding into the close. SP600 dove lower; it is getting oversold but it is in a real breakdown and has to regroup before it can get serious. Near term, holding the support was good, but as noted last week, they are right back to where they started from two weeks back, having to overcome that near term negative momentum. Bigger picture DJ30 continues working on an improving base, and you can argue SP500 is doing the same thing. They will have to pull the chestnuts out of the fire near term, but if they do and make a higher low here that bodes well for a run to year end.
Leadership: Basically what the market showed on Friday, i.e. leaders testing support intraday and then rebounding nicely into the close. As noted in an afternoon alert, if the pressure eases up and allows these stocks to start bouncing, then we are going to have some buying to do if they show us some volume as they move back up. As long as the leaders continue to hold support along with the indices, this market still has definite upside potential for the end of the year. After that is a question mark, but the leadership right now continues to look solid.
THE MARKET
MARKET SENTIMENT
Volatility day to day is almost breakneck whether intraday or inter-day. One session upside, the next downside, the next back up (or vice versa). Intraday there is a lower open, a run back up, back down, then back up as the market pulls a couple of roundtrippers in a single session. That kind of volatility sometimes occurs without a jump in the volatility indices, e.g. the VIX. At other times the two start to merge.
That is something that is trying to occur now. Volatility was low for years, but as the indices made the last run to new highs in June and July, volatility as measured by VIX started to move higher as well. As noted at the time and on several occasions since, rising VIX levels as the indices reach new highs is not a positive development. Historically it has accompanied market tops, and thus we have to be very aware of this as the market currently struggles. The leadership is the ace in the hole, but if it falters, the other factors confronting the market can readily influence it to the downside.
On the other hand, if volatility spikes higher on the current selling, then it can set an interim bottom to rally from similar to August. Unfortunately, even though volatility hit over 25 on Monday it is still well below the August high at 37.50 and even the September peak near 29. that would indicate that if we are waiting on volatility to drive the market higher, then there is more selling to come near term than we are willing to see or endure. Thus while we don't mind seeing VIX jump up here, if the selling gets intense enough to drive it back near 40 that likely means the indices are significantly lower.
VIX: 24.31; +1.3
VXN: 26.1; +1.27
VXO: 23.67; +0.27
Put/Call Ratio (CBOE): 1.02; -0.13. Second session close above 1.0. Want to see it over 1.0, but over the past year it has taken more and more 1.0+ closes to foster a turn in the market.
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: -15.2 points (-0.54%) to close at 2795.18
Volume: 2.124B (-13.71%). Volume was significantly lower, falling well off the levels hit to end last week and the trade the past two weeks overall. It remained above average on the session so it was not a complete collapse of trade, but the much lower volume shows no heavy selling pressure on the downside day that gave the sellers every opportunity to move in and sell.
Up Volume: 796.365M (-724.951M)
Down Volume: 1.308B (+486.396M)
A/D and Hi/Lo: Decliners led 2.07 to 1. The downside days are still stronger than the upside days.
Previous Session: Advancers led 1 to 1
New Highs: 32 (-5)
New Lows: 189 (+16)
NASDAQ CHART: http://investmenthouse.com/ihmedia/NASDAQ.jpeg
Sold off but basically held the Friday low and then rebounded. Was positive with a half hour left, but the sellers moved in again. Large caps again led the session though NASDAQ 100 was down more than NASDAQ (-0.60%). There were a few, very few, big names leading the action. With the action NASDAQ again held its trendline just as the other large cap indices did. It is easily in position to make a higher low at this level; that would be a very strong technical signal if it did, and it would also likely bolster the other indices even with their financial components providing continual roadblocks.
SOX (-1.25%) continued its turn down from last week's test of the 10 day EMA. It is trying to set up a short, 2-week double bottom at 450 where it bottomed in January. We will see; it hasn't done anything to show that it means business just yet despite some relative strength in the likes of INTC.
SOX CHART: http://investmenthouse.com/ihmedia/SOX.jpeg
SP500/NYSE
Stats: -7.48 points (-0.5%) to close at 1502.17
NYSE Volume: 1.525B (-11.13%). Volume was still easily above average but it was lower as the NYSE indices tested lower, SP500 testing key support and bouncing. No distribution on the selling, and that is a plus as noted above. It can indicate that the selling pressure is abating, but at this stage with the selling thus far, the market has to show us it is through.
Up Volume: 360.21M (-387.393M)
Down Volume: 1.144B (+202.555M)
A/D and Hi/Lo: Decliners led 3.16 to 1. Another really ugly breadth session as the small caps continue to get sold off and drag the breadth numbers lower.
Previous Session: Decliners led 1.13 to 1
New Highs: 31 (-33)
New Lows: 126 (-3)
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
Gapped lower with NASDAQ and sold down toward 1490 in the opening minutes, but held easily above that level. Rebounded to test the flat line midmorning, sold off and undercut 1490 for a moment mid-afternoon, the surged back up, turning positive in the last half hour. That was too much time left in the session, however, and the sellers managed to push SP500 back to negative at the close. As noted above, it can still make a higher low here in terms of closing prices, and continue to build its base. It has to show it, however, given the collapse that brought it down on Thursday.
SP600 (-1.02%) sold yet again, managing to hold above some support at 405 on the low before rebounding to cut some losses. Hardly a picture of strength as it continues lower after the breakdown from the short head and shoulders top.
SP600 CHART: http://investmenthouse.com/ihmedia/SP600.jpeg
DJ30
Almost identical to Friday with a test down toward the July 2006/March 2007 up trendline and then a rebound into the close. It turned positive late but could not hold that into the close. Holding that support but also stuck below the 90 day SMA (13,591). It too can make a higher low here on a closing basis and continue building its base. It is trying, but it has to show something more here.
Stats: -51.7 points (-0.38%) to close at 13543.4
Volume: 259M shares Monday versus 279M shares Friday. Declining trade as the blue chips tested lower then rebounded for a modest loss. No dumping here either, and that holds out some promise.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
TUESDAY
Monday was anything but pretty, but the indices held key support and the leaders held near support, and both bounced back into the afternoon session and the close. That keeps them alive in this current let, having held the recent lows thus far. It does not look good with the two huge dumps lower over the past two weeks and the struggles to recover. With leadership still holding up, however, there remains the possibility of a continued upside move that renews the run to the end of the year.
There are plenty of obstacles, and each day you awake to see just what new problem has sprung up to hamstring the leaders' apparent intent on moving higher. They gamely fight back from early weakness, but at some point they have to make the move and make it stick or they lose their mojo and the rally folds. For now they are holding the line and still show nice buying on the lows. Again, as long as they hold up and show good action, we are looking for them to lead higher. They have absorbed a lot of bad news and remain at near support; question is, without the Fed providing the bid that was there when it cut 50BP, will the leaders continue to find that bid as well?
They need to because there is a growing bifurcation in the market. Most everything consumer related is a trending steadily lower. Of course the mortgage and finance companies are (but don't tell that to MasterCard), but the retailers are in serious trouble as well with even the 'luxury' retailers getting seriously sold (SKS is one that is a holdout, but only because it has a new bidder out for it).
As with all divergences, something's got to give, and with the economy in the fifth year of an expansion that is slowing with serious issues of a housing plunge and a credit crunch and a Fed that no longer wants to get in front of the curve, you have to start looking for where things might land if the rally cracks.
For us, that is when the leaders start breaking below and closing below near support on strong trade. That will show that the bid for them is not only gone but that the sellers are moving in to take down the cream of the crop. As noted, though the leaders have tested, thus far they are holding above near support and continue to behave quite nicely. The choice is coming soon, i.e. the lade or the tiger as discussed last week. We are ready to move in if and when the stocks show us we should do so. Indeed, we have accumulated some more shares during these turbulent times when the stocks looked right, and we are looking again for others to push our shares higher when they rush in to buy what we already own. If that happens, fantastic. If stocks turn lower and start breaking support on the close, we are glad that we took some excellent profit on the run higher and close them out with the idea that we will watch how these leaders set back up after the selling and see what stocks are going to lead higher and give us the vehicles to ride in the next rally higher if it comes. If not, we take what the market gives to the downside.
Support and Resistance
NASDAQ: Closed at 2795.18
Resistance:
2834 is the October intraday peak
2887 from a September 1999 peak
2920 from an October 1999 peak
Support:
The 18 day EMA at 2787
2783 is the November/February up trendline
2778 from a July 1999 peak
2725 is the July high
The 50 day EMA at 2724
2720 is the November/December/February up trendline
2673 is the early July high
2634.60 is the June peak
S&P 500: Closed at 1502.17
Resistance:
The 90 day SMA at 1503
The 50 day EMA at 1517
1526 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:
1490.72 is the early June closing low and early August peak. Key support.
The 200 day SMA at 1482
1475 from peaks in December 1999 and January 2000
Dow: Closed at 13,543.40
Resistance:
The 90 day SMA at 13,591
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 50 day EMA at 13,700
The August high at 13,696
The July high at 14,022
14,060 is the old channel line
14,088 is the early October closing high
14,198 is the Thursday intraday high.
Support:
13,405 is the July 2006/March 2007 up trendline
The 200 day SMA at 13,203
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.
November 5
ISM Services, October (10:00): 55.8 actual versus 54.0 expected, 54.8 prior
November 7
Productivity, prelim. Q3 (8:30): 3.1% expected, 2.6% prior
Wholesale Inventories, September, (10:00): 0.1% expected, 0.1% prior
Crude oil inventories (10:30): -3.89M prior
Consumer Credit, September (3:00): $8.5B expected, $12.2B prior
November 8
Initial jobless claims (8:30): 320K expected, 327K prior
November 9
Trade balance, September (8:30): -$58.5B expected, -$57.6B prior
Michigan sentiment, prelim November (10:00): 80.0 expected, 80.9 prior
End part 1 of 3
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