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us stock market, trade stock
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11/13/07 Investment House Daily
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MARKET ALERTS:
Targets hit alerts: None issued
Buy alerts: HMSY; NKE
Trailing stops: None issued
Stop alerts issued: None issued
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SUMMARY:
- Relief rebound finally shows up and it is massive.
- WMT tops earnings so the consumer must be okay, right? No.
- Strong surge indeed, but at this stage it just reinforces the massive volatility in the market and does not change the gameplan.
Powerful rebound as upside finally matches the downside distribution.
We were looking for a move back up, a relief bounce of sorts, ahead of expiration given the hard selling in a very short period. The very high volatility component in index put options as well as put options on large cap stocks indicated the rebound would be rather strong. It as, but it was even stronger than we expected. Financials had tried to lead a relief bounce for two sessions, but the selling in the former leaders in technology, China, metals, etc. blunted those attempts, and the market sold off even more. Tuesday the entire market was finally sold out enough to bounce, and it really bounced with NASDAQ putting in its strongest individual gain in 4 years.
There was no real news catalyst to get things going. There were news items that made the headlines, but the reality is that the market was throttled and fell hard for 4 sessions and it was ready to bounce. That was the catalyst. As for the news stories, WMT beat expectations on its earnings and its guidance was better. That was decent news, but as discussed below it is not very good news for the economy overall. During the session the rally was goosed along by GS stating it had no write-downs from the sub-prime decline and the JPM CEO said his company was just "fine" in that regard and that the sub-prime issue is not that big of a deal. Nothing like laughing in the face of danger on a strong day to further buoy the gains. As noted, it was enough to push NASDAQ to its best gain in 4 years. After 8.8% to the downside in four sessions and then a 3.5% surge back up in one session, they were handing out cervical collars at many of the brokerages.
Technically it was a very strong session with solid but lower trade, strong breadth, strong price gains, and a bullish high to higher finish. There was a dip over lunch, but it was a blip; stocks held and surged to close at session highs.
Internals: Breadth was strong, finally matching A/D line on the downside sessions (4.5:1 NYSE, 2.5:1 NASDAQ). Volume was down and thus it was not a clear win for the upside. Volume was still quite strong, however, as it held well above average. Nonetheless it was lower than all of the recent selling, and that indicates the selling, despite the strong upside move, is still stronger, particularly when you factor in it is expiration week and volume typically rises midweek.
Charts: There was some solid action on the indices with NASDAQ bouncing off of its 200 day SMA and DJ30 moving back above its 200 day. SP500 rallied right back up to that level. Good moves but overall they remain somewhat beleaguered. It is hard for one day to change the selling the transpired over the past two weeks. About all you can about the session is there was a strong rebound with NASDAQ bouncing where it had to and the others following the move.
Leadership: Many rebounds as you would expect, but as with the indices it did not rescue all stocks from there selloffs over the past week. There are stocks that remain in solid shape even through the selling and they performed just fine as you would expect. There are those that were whacked hard and they did what the indices did, i.e. they bounced from the heavy selling but they did not turn their patterns around in just this one session. Leadership remains thinner and under pressure; how it responds in the sessions ahead will give better insight into what this bounce meant for the market overall.
Yes the upside finally moved into the league of the downside distribution moves of late in terms of the size of the move, the volume, and the breadth. It was not a one for one correlation, but there was definite improvement. Alas it was just one session thus far and the history of such moves given all of the other factors we see suggests it will have a hard time turning the tide. The volatility day to day as well as the rising VIX at the peaks typically add up to something that just is not that promising, at least for the upside. We can, however, use the rebound to our advantage, playing some upside bouncers, buying some stocks that held up well regardless of the selling that led to this bounce, selling some laggards as they rebound, and then look to play the downside if the bounce fizzles or more upside if it finds new legs and quality stocks break higher once more.
THE ECONOMY
Some consider Wal-Mart's better earnings a harbinger for the economy. They are right but not in the manner they think.
WMT beat expectations with its Q3 earnings report, and better yet, it has a positive outlook for the holiday season. Katy bar the door, we have a great holiday ahead and an economy that is, despite a lot of concern, just fine after all.
Maybe not. WMT's earnings made many feel all is right in the US economy. After all, it is the largest retailer in the states and thus if its sales are moving higher even as many of the retailers are suffering slowing sales. Look at October same store sales; 70% of the stores reporting missed expectations. BID (Sotheby's) held an auction sporting some very high level art and there were no bidders on some of the biggest names. Department store sales are heading lower. COST, another discounter similar to WMT and its Sam's stores, is one of the only decent looking charts in retail.
That is the theme we are seeing. When discounters start to outperform the rest of retail that is something to take note of. WMT is not a bellwether of prosperity. It is a recession stock. People tend to shop at WMT to get staples such as paper products and groceries then go elsewhere to get just about everything else. When the consumer get shaky WMT sales improve because people start buying more than just staples.
It is not epidemic at this point but there is a shift taking place, one that started earlier in the year when WMT reported improved sales but no one seemed to care with respect to the stock. The stock is still languishing, but sales in the discounters are improving as sales at the retailers and specialty retailers are struggling. CHS, AEO, ZUMZ, JWN, JCP, etc. A long list of retailers in the tank.
Thus far jobs are still solid, and that is the key with respect to consumers, much more so than the sentiment reports, at least until sentiment tanks. It has trended lower over the past six months, but it is not at levels that you worry about a weak consumer. As long as jobs remain strong the consumer will spend. The last Conference Board report on sentiment showed some increasing jobs worries. Bears watching to see if it continues to trend lower and discounters continue to improve.
THE MARKET
MARKET SENTIMENT
VIX: 24.1; -6.99. After closing at 31.09 Monday, the highest close since 2003. It gapped lower Tuesday and continued to sell back below the range in September. Spiked on fear then reversed just as quickly.
VXN: 29.71; -5.23
VXO: 24.23; -6.16
Put/Call Ratio (CBOE): 1.21; +0.28. Back above 1.0 as a lot of downside positions were closed out as the market gapped higher.
Bulls: 54.5%. Bulls bounced last week, rising from 53.8% the week before and that was a decline back below the 55% threshold. It will likely be down for this week. It is still way too high for this market. Five weeks above 55% and now dipping. 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: 22.2%. Fell as well, down from 23.1% and 22.9% the week before. Three weeks back above the 20% threshold between bullish and bearish conditions. Fell to a low of 19.6% four 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: +89.52 points (+3.46%) to close at 2673.65
Volume: 2.706B (-3.94%). Volume remained well above average on the rebound though it was lower than the prior three sessions where the index sold off hard. Solid trade but still not as strong as those three recent sessions.
Up Volume: 2.45B (+1.701B). 10 to 1 up to down volume. Very strong.
Down Volume: 236.417M (-1.809B)
A/D and Hi/Lo: Advancers led 2.49 to 1. Upside breadth finally got to the point where it matched the downside breadth to a degree. This even with the large cap NASDAQ 100 easily outpacing the overall index (+4.23%).
Previous Session: Decliners led 1.42 to 1
New Highs: 65 (+7)
New Lows: 185 (-82)
NASDAQ CHART: http://investmenthouse.com/ihmedia/NASDAQ.jpeg
NASDAQ gapped higher off the 200 day SMA and rallied on through the close, taking out the 90 day SMA as it did and a minor trendline from March 2007. Starting to take back some of that 8+% lost the prior four sessions. Maybe it makes a knifepoint turn here and never looks back. With the strength in the big name techs you could make that argument. A lot of damage was done on the selling, not only in price but with heavy distribution as well, and that typically means more work than a quick turn and recovery. Resistance at 2700 and at the 50 day EMA at 2717 to 2720 (the July peak), then 2750. We will watch and see how it handles those levels.
SOX CHART: http://investmenthouse.com/ihmedia/SOX.jpeg
SP500/NYSE
Stats: +41.87 points (+2.91%) to close at 1481.05
NYSE Volume: 1.656B (-2.95%). Volume remained above average but as with NASDAQ it was lower than the selling volume. Sellers, despite the Tuesday rebound, are still stronger at this juncture, but that can change.
Up Volume: 1.54B (+967.109M). Better than 10 to 1, similar to NASDAQ.
Down Volume: 107.513M (-993.165M)
A/D and Hi/Lo: Advancers led 4.58 to 1. Very strong upside breadth, finally on par with the harsh selling volume.
Previous Session: Decliners led 2.04 to 1
New Highs: 29 (+8)
New Lows: 214 (-61)
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
Strong surge as the financials finally had the day they have wanted since Friday. GS said "what sub-prime problem?" and JPM scoffed at its impact. That juiced the financials a bit more and they enjoyed a strong session, along with many other stocks. SP500 rallied up off the selling that just undercut some support at 1450 and held easily above the August closing low. It now sits just below the 200 day SMA (1484) and the twin June lows. Nice initial session of a rebound but it still leaves SP500 deep down in a steep hole. Some resistance at the 200 day as well as 1500 and 1505. SP500 has the strength to rally further if the financials continue to provide the impetus. Once they die off, and with the Fed on the sidelines we believe they will, SP500 will have a very hard time continuing this move.
SP600 (+2.83%) bounced higher as well but it is so far down in the hole it cannot see the lip. It made it up to the 10 day EMA and stopped on the session, just below some resistance at 410 on up to 415. Lots of work for the small caps to do in order to set up and make a new run.
SP600 CHART: http://investmenthouse.com/ihmedia/SP600.jpeg
DJ30
The blue chips surged up off support at 13,000, moving up from there as opposed to heading lower to test the August closing low (12,845) or the February peak at 12,786. Cleared the 200 day SMA (13,225) on the move but below the 10 day EMA and the July 2006/March 2007 trendline at 13,450. A move up near 13,500 is likely its first real test on this rebound, but we don't think it is going to make a run anywhere near a new all-time high on this move.
Stats: +319.54 points (+2.46%) to close at 13307.09
Volume: 298M shares Tuesday versus 291M shares Monday. The only index showing improved volume on the gain.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
WEDNESDAY
Okay, starting to get the reversal action after the selling just piled up high and deep enough to slingshot the indices back up. As noted above, we still don't see this as a turn to the upside for new highs, at least at this juncture with just one day, albeit a strong one, under its belt. What it does show us is a reinforcement of that sharp volatility plaguing the market. Huge downside, huge upside, all on strong volume. The upside sessions tend to trowel in the salve and make everyone feel better, that the buyers are back and that the market is back on track. Maybe it is, but historically this kind of violent action does not lead to anything positive, at least for the longer term upside.
As for us here in the office we are still looking at solid upside stocks that did not breakdown in the selling or that used the selling for nice, orderly tests of prior strong moves. If they survived that selling they are somewhat fire tested and we can look to buy into them as they move higher on solid trade. They can be taken out too if the selling gets severe, so we have to stay somewhat nimble with them even with that strength. There are also stocks that can bounce for us over the short term that we can buy into and then sell when the move starts to wane. Again that requires a bit of nimble footwork, but if you can carve out several points on a move in this market it is worth taking it. At the same time we look at the rebound to unload positions that struggled in the selling and make something of a comeback. When they stall they need be buttoned up.
Moreover, that is when we look at the downside plays as well. These roaring recoveries look strong and they are, but in the context of a market that is distributing overall, the strong upside is just another indication of the violent battle between buyers and sellers. With high volatility as the indices high new highs and then the rollover, the overall picture is a market under distribution. Perhaps this is the start of a new recovery that rallies right back up and continues on. If so we will be able to carve out a nice chunk of that. That is not likely, however, and thus after some more upside we need to be ready to take advantage of the downside by buying some put options on stocks and indices that have rallied up to resistance and turn back over.
We still have to watch for a Treasury announcement about the dollar that changes the standard dogma. That could change the entire picture, though it would likely need something from the Fed as well, and thus far the Fed is not forthcoming with anything softening its position despite the nasty sell off in the financial markets after its 25BP too little too late rate cut. Nonetheless, that kind of announcement would have a positive near term effect on the market overall. The dollar has moved higher already, and when it runs out of some steam on this move it would be a perfect time to goose it a la Robert Ruben back in the Clinton days. Not sure there is that much creativity in the administration though Paulson certainly appears to have the knack to do just that if he can get the okay from his boss.
Support and Resistance
NASDAQ: Closed at 2673.65
Resistance:
2673 is the early July high
The 50 day EMA at 2717
2729 is the November/December/February up trendline
2725 is the July high
2778 from a July 1999 peak
2795 is the November/February up trendline
2834 is the October interim peak
2861.51 is the October peak
Support:
The 90 day SMA at 2660
2634.60 is the June peak
2600 is some minor support.
The 200 day SMA at 2580
2550 to 2540 from May/June consolidation
2525 is the February closing high
2451 is the August closing low
2386 is the August intraday low
S&P 500: Closed at 1481.05
Resistance:
The 200 day SMA at 1484
1490.72 is the early June closing low and early August peak.
The 90 day SMA at 1500
The 50 day EMA at 1508
1529 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
1440 - 1437 from January and March peaks
1425 is some minor support.
1406 is the August closing low
1375 is the March closing low
1370 is the August intraday low
Dow: Closed at 13,307.09
Resistance:
13,450 is the July 2006/March 2007 up trendline
The 90 day SMA at 13,571
The 50 day EMA at 13,604
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 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 13,225
12,845 is the August closing low
12,786 is the February peak
12,518 is the August low
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
November 13
Pending home sales, September (10:00): -2.0% expected, -6.5% prior
November 14
Retail sales, October (8:30): -$53.0B expected, -$49.3B prior
PPI, October (8:30): 0.2% expected, 1.1% prior
Core PPI, October (8:30): 0.2% expected, 0.1% prior
Business inventories, September (10:00): 0.3% expected, 0.1% prior
Crude oil inventories (10:30): -821K prior
November 15
CPI, October (8:30): 0.3% expected, 0.3% prior
Core CPI, October (8:30): 0.2% expected, 0.2% prior
Initial jobless claims (8:30): 317K prior
NY Empire State PMI, November (8:30): 21.0 expected, 28.8 prior
Philly Fed, November (12:00): 6.0 expected, 6.8 prior
November 16
Net foreign purchases, September (9:00): $-69.3B prior
Industrial production, October (9:15): 0.1% expected, 0.1% prior
Capacity utilization, October (9:15): 82.1% expected, 82.1% prior
End part 1 of 3
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