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money investment, investment help
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11/07/07 Investment House Alerts
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IH Alert Subscribers:
MARKET ALERTS:
Targets hit alerts: AMR; CNQ; CTRP; IMO; LRCX; SU
Buy alerts: None issued
Trailing stops: BIDU
Stop alerts issued: AMT; GILD; GRMN; XTO
SUMMARY:
- Market cannot hang onto Tuesday gains; more than that it collapses support.
- Productivity surges to 4.9% growth rate, but most focus on the wrong part of the report.
- CSCO earnings could be a real problem for NASDAQ and thus the market, and Bernanke is not going to try and help things out in his testimony.
Another gain thrown aside and this one breaks some support levels.
There was nothing terribly bad on the news front, indeed you could say it was pretty good with the strong productivity readings (surging 4.9%). There were some negatives, however, and the market is in the mood to focus on those. Sometimes it ignores negatives in favor of positives, other times it sees only roses. Monday it saw cow pies. China said it would diversify beyond the dollar; we knew that, but reality is always tough to swallow. GM took the second largest loss in S&P 500 history, though much of it was an accounting issue. Washington Mutual said mortgage originations would be down 35% in 2008. All of this further pressured the dollar and increased worries about the housing market. With oil surely to run to $100 there was despair; how could the economy survive such an onslaught? Lions, tigers and bears, oh my. We don't want to make light of the session; it was ugly. You have to step back, however, and realize that the Armageddon scenarios you hear on the financial stations are just that; reality lies quite a long way away from those Mordor-like predictions.
The market was not in the mood to figure it out on Wednesday. It started lower without much of a fight. Nonetheless China stocks and agriculture were strong even with the gloom. Energy stocks were strong with the energy inventories out an hour into the session and speculation oil would hit $100/bbl. It didn't. Inventories fell 821K, much less than the 2M expected (it has been the opposite the prior two weeks), and the market, as well as energy stocks, peaked for the day on that news.
When energy broke for the session that was pretty much the bowed and bent backbone of the market for the session. It was as if the surrender flat was raised. SP500 broke below 1490 and DJ30 slumped through its longer term trendline. The selling continued through lunch and after a 44 point drop from the high on NASDAQ, the indices bounced. SP500 recaptured 1490 over the next hour and one-half. It looked pretty decent, but when the Fed's Poole came out and stated the Fed would cut if needed at the next FOMC meeting, but then predicted it wouldn't be needed given the recovery in the financial sector after the prior rate cuts.
That killed the rebound attempt. Out came the blowtorch and the sharpest selloff of the session began. The sell on close orders swamped the buys and the late session panic hit where everything that could be found was thrown out. Basically the opposite of Tuesday when the melt higher brought out the buy orders.
Technically it was as bad or maybe worse than it looked. The intraday action was weak and turned even weaker into the close. Again, the flipside of the Tuesday action.
Internals: The breadth was pathetic. -10:1 on NYSE and -4:1 on NASDAQ. That is the kind of extreme reading we saw as a sign of the bottom in the fall of 2002. Unfortunately, the market is coming off of highs, not bumping along the bottom after an almost 3 year decline. In the market, indicators always depend upon where you are in the lifecycle. Big negative extremes at the bottom shows excessive fear. At the top, particularly coupled with this big day to day volatility, it is not an indication of a bottom being put in. It can lead to big bounces in response, but it is not an indication of a bottoming process. Volume was mixed; it was actually lower on NASDAQ as it sold, but it was a difference with no distinction as trade was just a whisker lighter. On the other hand NYSE volume jumped significantly as the NYSE indices collapsed lower. More of a bad thing as once more high volume selling exploded the session after some high volume buying. Every positive is met with a strong negative of late.
Charts: You know the big news in SP500 breaking below 1490 and the 200 day SMA on the close while DJ30 shattered its up trendline from the summer of 2006. NASDAQ closed below its recent November lows. It is still holding above the October lows quite easily, but it did itself no favors.
Leadership: Once more leading stocks held up overall, either posting some gains or at least holding near support. There is no doubt they are under pressure as a group just as are all sectors and stocks, but we note that very few broke down. That of course is a positive. Still, it is at its best when the major indices are still holding some support of some kind, near, lower or otherwise. As noted, the NYSE indices cracked and fell back into the peleton (for those cyclers among you). That leaves the leaders on their own, trying to keep pushing forward for a win. In cycling that is often a losing proposition, and in the market the leaders can hold up even as the rest of the market fades, but if the market continues a serious decline, ultimately nothing is left alive.
THE ECONOMY
Productivity is not dead yet.
The 4.9% gain was the highest in 4 years. That pushed the year/year gain to 2.4%, much batter than the 1% or less annual reading for the prior year. Unit labor costs fell 0.2%; annually they rose at a 4.3% clip, well off the 5.1% level in Q2.
Productivity is one of the 'inflation factors' the Fed takes into consideration. The more productive your workers are the less wage gains can harm the economy and the less likely companies are to raise prices to offset wage gains. Of course you have to believe that higher wages lead to inflation. I don't. Higher wages mean the economy is strong and workers get paid more. High productivity means companies are spending money on technology, upgrading systems, becoming more efficient. Those are all attributes of a strong economy, and a strong economy, as history shows, pushes inflation down not up.
If it were the other way, why was inflation so high in the 1970's when the economy was in the worst decline since the Great Depression? Why did inflation pressures fall all through the 1980's when the economy exploded into growth? Same thing for the 1990's? Same thing now? There is no direct cause and effect. OTHER factors combine to cause the inflation problem, not growth. It's like saying the more you train and the better physical fitness you obtain the closer you are to dying. Sure you could die. You could be out running and get hit by a bus. You could have an aneurism while working out. Both results are bad, but have nothing to do with being physically fit. It reminds you of a Saturday Night Live skit where Dan Akroyd was a police officer who breaks into an apartment and finds the occupants smoking marijuana. He harasses the occupants until one of them tries to escape but accidentally falls through a window to his death. Akroyd concludes, "Another marijuana related death."
The real fear we have right now it that the economy does slip into recession given the Fed's benign neglect of the credit issues. If that happens we may indeed suffer some inflation as production falls flat while demand remains strong. That is what we have to fear, not inflation itself. Again, inflation is a side effect that comes in weak times. Thus, avoid weak times by adopting policies that promote supply and creation of goods and services. Simple, yet in politics everything gets twisted.
THE MARKET
MARKET SENTIMENT
VIX: 26.49; +5.1. Cleared the recent highs and now looking at an interim peak at 27.50. After that a run for the roses into the thirties that might see some kind of bottoming action in the market.
VXN: 27.14; +3.23
VXO: 27.87; +6.92
Put/Call Ratio (CBOE): 1.06; +0.08. Back over 1.0 after a few sessions of recovery. Nothing of real note because it is not hitting that level on many successive sessions.
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: -76.42 points (-2.7%) to close at 2748.76
Volume: 2.528B (-0.57%). Lower volume but that was illusory as it was still strong and basically matched the upside trade Tuesday. Thus it basically trumped the Tuesday upside volume strength.
Up Volume: 352.515M (-1.07B)
Down Volume: 2.168B (+1.11B)
A/D and Hi/Lo: Decliners led 4.16 to 1. Pathetic.
Previous Session: Advancers led 1.35 to 1
New Highs: 19 (-50)
New Lows: 298 (+147). Needs to get over 500 to start getting serious about an extreme level.
NASDAQ CHART: http://investmenthouse.com/ihmedia/NASDAQ.jpeg
Broke below the early November lows, closing at some modest support at 2750 that likely won't hold anything on its own. Closed at the session low and in a hard fall, but even with this decline it can still hold up at the 50 day EMA (2729) or even move lower and still make a higher low. Tech has been the strongest group and thus it is the last to fall. Now we see how strong it is as it does sell further and tests these levels. The CSCO earnings after hours are going to send it lower Thursday, and will give a reading on the strength in the index. It could be what cracks it, but again, it is still in its uptrend and has room to test and can still keep afloat.
SOX CHART: http://investmenthouse.com/ihmedia/SOX.jpeg
SP500/NYSE
Stats: -44.65 points (-2.94%) to close at 1475.62
NYSE Volume: 1.658B (+10.58%). Strong volume, the best of the week, and of course it is on a blood-letting on the NYSE indices. Heavy selling in the financials and small caps ramped the volume.
Up Volume: 97.049M (-982.969M)
Down Volume: 1.554B (+1.151B). 16:1 down volume to up volume. That is beyond extreme.
A/D and Hi/Lo: Decliners led 9.95 to 1. This is the 2002 bottoming level. Unfortunately, it is occurring just off a high. Either this decline is going to end in a massive surge higher, or this is just the start of a selloff and consolidation of large proportion.
Previous Session: Advancers led 1.82 to 1
New Highs: 25 (-101)
New Lows: 270 (+203). As with NASDAQ, not there yet but moving toward 500+ quickly.
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
Broke 1490, tested and recovered, then gave it up. It also undercut the 200 day SMA as well. Closed at some support at 1475, but that is not strong enough to hold it up. A bit more downside toward 1450 and that is where it makes a bounce back up similar to what it did up through Tuesday. A breakdown, though this was more like a collapse, below key support will foster additional immediate selling. Then there is a short covering rebound that occurs quickly to test the breach. That typically fails when you have this kind of downside, and then another drop to try and find the near term bottom, i.e. new support after key support was crushed.
Hardly work reporting on SP600 (-3.24%) other than it was the downside leader and has sold so hard it is almost at the August closing lows (about 7 points away). It has put in a double top spanning July and October. There is some support at 400 and then down to 396 or so, and then again at 390. Given this pattern and what the financials are telling us as about the economy, it is not going to hold those levels. It won't be a straight line drop, but it is likely going to undercut them. Thus on a rebound to test this move it is a short once more.
SP600 CHART: http://investmenthouse.com/ihmedia/SP600.jpeg
DJ30
The blue chips broke the July 2006/March 2007 up trendline on rising volume. Some support at 13,250 and at the 200 day SMA (13,212) as well, and those will slow it down and give it a point to bounce off of. If it can hold there it is still in its larger pattern and on a macro view that offers some hope down the road; it would take a month or more to complete that pattern. For now it has to hold and make the bounce, and after that it will tell more of the tale. For now it has given up support and is on the defensive.
Stats: -360.92 points (-2.64%) to close at 13300.02
Volume: 273M shares Wednesday versus 252M shares Tuesday. Stronger volume and it is on the downside. The Tuesday trade on the upside move was lower. Showing the wrong price/volume action as it breaks lower.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
THURSDAY
A break of support begets more selling, and that was evident late Wednesday after SP500 and DJ30 broke the support that held them up over the past two weeks of testing. When that was gone the selling into the close was vicious. After another downside rush on Thursday then there may be some rebounding to test. A breach of support may mean more quick selling, but it also means a pretty quick short covering bounce to test the breach.
There is even more impetus for additional downside. CSCO had decent numbers after hours but they were not blowout as was expected and as AAPL and others provided. It was getting hammered after hours and dragging down other tech with it, e.g. AAPL added a dollar or so to its regular session losses. With expectations of a blowout quarter and the lack of one, this could be reason for a lot of 'have to own tech' analysts to give up on it. Well, they probably won't give up on it but their clients will. With SP500 and DJ30 plunging lower the attitude may just be 'what the heck are we in this for as well?' and it could be pitched into the pit as well. Of course, the harder the selling, the harder the relief bounce as well, so might as well have a good one. After that bounce the indices will likely sell some more if they fail at that former support level.
CSCO was not the only news after hours. Morgan Stanley announced it would write down $3.7B worth of bad assets; the street had it from $3B to $6B, so this was not that bad. That likely won't help things much. Financials are still trying to find bottom and CSCO may put technology in the same mindset.
Bernanke speaks as well on Thursday, but the market likely will receive no consoling words as Poole again set the stage for the head of Fed with his comments about the need for cuts at the next meeting. After all, the economic data has continued solid overall (despite the leading indicators, the Chicago PMI, the short end of the bond curve diving, the dollar tanking), and thus the Fed feels it can play the 'tough love' game. Ironically, the falling dollar is hurting the economy with higher priced oil and fueling fears of some nefarious even to come, yet it is also propping up the economic data. Q3 GDP is likely to be 5% when it is finalized thanks to surging exports brought about by the weak dollar. Thus the data looks solid, but it has problems lurking beneath the surface.
That is the rub right now. The economic data looks to still be expanding while the financial markets are under a lot of stress. Financials are tanking, small caps are dropping off a cliff, gold is surging, the dollar is diving, oil is at $100 and gasoline is said to hit $3.00 soon even as driving season is long past us. Just as in 2000, the powers that be can be tricked by the lagging economic data and take actions that do more harm by piling onto an already waning economic expansion. We though the Bernanke Fed was wise to this game, but its last action shows it still does not have what the Greek's call guts, at least not enough to do what is necessary to forestall a significant economic slowdown.
You will hear as many say the opposite of what I am saying, and I hope I am wrong. If the market bounces and recovers into the year end maybe I will be. Of course a run into year end is what I was looking for, and even if it did materialize that does not assure the market is giving the economy a vote of confidence. There are still some major issues to deal with to start 2008, and while we thought the market might run into the year end anyway, this drop lower indicates it may be taking to the hills early. Sometimes the rally can come after Thanksgiving. There is an old saying that Thanksgiving is for the bears, Christmas for the bulls.
Whether that happens or not, this selloff has some teeth as it is doing technical damage. We were cutting positions that were closing below support on Wednesday. The Thursday open will be lower from the after hours look tonight, and thus we will see gaps lower. We likely won't sell into this open as that is a sucker's panic move. Remember, breaches of key support sell off hard then jump hard to test. That rally back will be the one to sell into. We are still going to look at the energy sector after a pullback to test that started Wednesday. With high oil they are money makers, and after this great run they had they need a test. That does not mean they won't move right back up in their solid trends. In addition the overseas plays will remain good plays as those markets are not showing the kind of action of the US that suggests some economic strife ahead. Thus they can act as an outlet. Of course, on a relief bounce we will look at some downside as well, but we need to let that develop; just as with an upside play, you don't want to move in as a move becomes extended.
Support and Resistance
NASDAQ: Closed at 2748.76
Resistance:
2778 from a July 1999 peak
2785 is the November/February up trendline
The 18 day EMA at 2787
2834 is the October interim peak
2861.51 is the October peak
2887 from a September 1999 peak
2920 from an October 1999 peak
Support:
The 50 day EMA at 2729
2725 is the July high
2724 is the November/December/February up trendline
2673 is the early July high
2634.60 is the June peak
S&P 500: Closed at 1475.62
Resistance:
The 200 day SMA at 1483
1490.72 is the early June closing low and early August peak.
The 90 day SMA at 1503
The 50 day EMA at 1516
1528 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:
1475 from peaks in December 1999 and January 2000
1459 is the February peak
1450 from February and April interim peaks
1440 - 1437 from January and March peaks
1425 is some minor support.
Dow: Closed at 13,300.02
Resistance:
13,415 is the July 2006/March 2007 up trendline
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 13,683
The August high at 13,696
The July high at 14,022
14,088 is the early October closing high
14,198 is the October intraday high.
Support:
The 200 day SMA at 13,212
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): 4.9% actual versus 3.1% expected, 2.2% prior (revised from 2.6%)
Wholesale Inventories, September, (10:00): 0.8% actual versus 0.1% expected, 0.7% prior (revised from 0.1%)
Crude oil inventories (10:30): -800K actual versus -2M expected, -3.89M prior
Consumer Credit, September (3:00): $3.7B actual versus $8.5B expected, $15.4B prior (revised from $12.2B)
November 8
Initial jobless claims (8:30): 325K 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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