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trading system, money investment
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12/06/07 Investment House Daily
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Investment House Daily Subscribers:
MARKET ALERTS:
Targets hit alerts: TKC
Buy alerts: BGC; MSFT; PFWD; WFR
Trailing stops: None issued
Stop alerts issued: NETL
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SUMMARY:
- Second day of second half of rally starts soft, closes strong.
- ECB's Trichet scoffs at rate cuts, warns on inflation as Europe ready to throttle another expansion attempt.
- President and Treasury Secretary trot out their mortgage bailout plan.
- Jobs report will set the tone heading into next week's FOMC rate cut.
Stocks start soft but then surge as the second rally leg makes important strides.
Futures were lower as the market paused after the Wednesday rush higher that resumed the rally. There was not much to excite investors Thursday morning. Retail sales, even with the extra week in November thanks to the calendar this year, were better but still lackluster as only 40% beat expectations. Department stores and discounters were the best with respect to groups; the latter is not that great an indication as discounters perform better when the consumer feels stressed. Analysts were active again as LEH jumped on the downgrade train with respect to brokers; nothing really new there, just more of a reminder of the financial issues in the economy. EBAY, AAPL, and INTC were all upped ahead of the holidays; they are holiday names and they are starting to perform in their charts. Jobless claims were lower, but still more than expected at 338K; still a pretty high number and definitely trending higher after the lows of the past year. As for interest rates, the UK central bank followed Canada and cut. The ECB and its head banker did not, however, and Mr. Trichet was talking trash about inflation. More on this recurring theme later.
This was all enough weight to keep stocks under wraps early as they caught their breath from the Wednesday surge. After the open they started higher, tested midmorning, and then drifted higher through lunch. Not a lot of strength there, just drifting higher with SP500 bumping against that important 1490 level. Moving higher but somewhat unsure.
Before Bush came out with his mortgage bailout plan SP500 moved up through 1490, up to 1495. It was pushed back to 1490 not once, but twice. It held both times, and when that second test held and SP500 bounced, the shorts started to cover. When that occurred the market took off in the afternoon. Some said it was the Bush bailout plan in the afternoon that did the trick, but the financial stations and pundits always like to play 'pin the tail on the reason' for market moves, and the Bush plan was the most obvious. Never mind that the market bottomed two weeks back and is coming off a nice, low volume test of that initial leg. It is easier to pick the news of the day as the cause.
But why did the shorts feel the need to cover as some subscribers have queried. SP500 1490 is an important support and resistance level because many large institutional investors view it as such. The market has bounced up from that level after testing it and it has bounced down from that level after rising to it, and it has done so on several occasions. The fact that they were viewing it as a sort of fulcrum or pivot point as you may, when it became clear that the index was going to hold the move over that level these institutions started to close some short positions. Many had short positions on given their view that the market will fall again after this bounce. Indeed we had short positions as well, but we saw the rally coming and cleared out of most of our positions when stocks started to show their upside. When this key level was cracked and held the test in the early afternoon, these institutions automatically started closing positions, i.e. covered. When they start doing so the covering tends to snowball. Thus the 29 point move in NASDAQ in the afternoon, the 17 point move in SP500 in the afternoon, and the 130 point afternoon move in DJ30.
Technically the action was, for the most part, a carbon of Wednesday's strong upside move. Stocks started soft (unlike Wednesday), moved higher, gathered themselves, then surged in the afternoon to close at session highs. Once more after the two days of high to low action on the test following the low to high action seen in the first leg of the rally, the market showed that bullish low to high move. Really liked this action as stocks started lower, rallied, broke through resistance, and closed at the session highs.
Internals: Breadth was excellent at 3.82:1 on NYSE and 2.6:1 on NASDAQ. Very solid upside breadth the entire rally, easily swamping the downside breadth on the downside sessions. The missing link was volume. It dropped off from Wednesdays average levels on both NYSE and NASDAQ. Not the same kind of strength seen on the first leg and an indication that this is, alas, just a holiday relief bounce after some ugly selling, and once the FOMC makes its pronouncement and we get a bit closer to Christmas it will likely say farewell. Until then, 'tis the season to be jolly.
Charts: The big deal was the key resistance broken by SP500. It failed to take it out early in the session, broke through midmorning, tested it, bounced, then came back and tested it twice through lunch. Then it took off and moved through 1500 as well. NASDAQ cleared the 50 day EMA and the March 2007 trendline and is now looking at the July peak, a very important level for the index, to see if it can put the moves on it. DJ30 blasted through 13,500, the 50 day EMA, and, similar to NASDAQ, is looking at the June twin peaks as its next key resistance level. So we have one key level broken just to see other indices facing their own nemesis.
Leadership: As the breadth figures show, the move spread out quite a bit. Indeed, NASDAQ 100, the home of the large cap techs, was a relative laggard on the session, only beating out DJ30 in terms of percentage gain. Leadership is emerging in metals, materials and energy once more, complementing the early lead from technology. The leadership in those other areas is shown with the gains in SP600 as it led the market higher with a 2.78% gain. This is on top of continuing solid moves in agriculture and those large cap techs.
THE ECONOMY
Europe intent on hamstringing another expansion.
Thursday morning we woke up to the news the BOE, England's central bank, was the latest to cut interest rates. Good news as a bit of preventive action as it slows some will help keep the ball rolling down the road. The ECB, the European Union's central bank, however, did not. More than that, the head of the EU's 'Fed', Mr. Trichet of France, was his usual tough-talker against inflation. He was, as usual, quite hawkish even as his own country's president pleads with him to lighten up some. While Europe is still solid economically, it is also showing similar signs of slowing as with the US, and the leaders want a it of flexibility to keep things going.
Once more, however, it seems that 'old Europe', as it has done many times in the past, is set to snatch defeat from the jaws of victory. Europe has a history of fearing inflation more than it desires prosperity. All during the 1980's and 1990's the European central banks condemned their economies to mediocrity, hiking rates each time the economies actually started to show some serious growth intentions. They are definitely old school, and no the good kind of old school. They keep a copy of the Phillips Curve in their breast pockets and cover it with their right hands each time there is the 'threat' of economic growth. Trichet is keeping this tradition alive with his anti-inflation (a.k.a. anti-prosperity) rhetoric and refusal to budge on rates. Being French that likely comes easier to him given his country has an even richer tradition of ducking and running rather than taking on the touch assignments (that is a joke, right?). The one constant in the past was betting against Europe just when it looked as if it was turning the corner because its central banks would cut the expansion off at the knees with overly restrictive monetary policy. New Europe is leading the way; will Trichet relent?
The administration unveils its bailout plan a day after Clinton's one-up announcement.
The political process in an election year is in full swing and thus we are seeing several plans at righting wrongs and fixing excesses in the economy. Bush and Paulson presented their plan on Thursday, and as with Clinton's, it involves quite simply a bailout. Once more the federal government is going to intercede in private contracts, this time involving mortgages. How that squares with the Constitution has our Founding Fathers spinning in their graves. Nonetheless, it is going to happen. In the interest of supporting the economy (a laudable goal) and in the spirit of a parent helping its children, the government is basically going to freeze foreclosures and allow a class of both current and delinquent borrowers to refinance to lower fixed rates.
One question a lot of people we talked to are asking is 'why stop there'? Why not allow everyone to abrogate their contracts and enjoy a freeze or get to lower their interest rates a couple or more percentage points? Nothing sticks in the throats of responsible, contract-abiding citizens more than preferential treatment, especially preferential treatment for those who act irresponsibly. Time and again when the government intervenes with programs, it either creates a reverse incentive program where it encourages and fosters bad actions or it outright rewards the bad actors. This is the case once more no matter how altruistic the intentions are.
It is not that we don't have sympathy for their plight and want to help, it is just that we are forced to do so because the federal government is involved in extra-constitutional activities that indeed created a lot of these issues. The involvement in the mortgage market and the failure to oversea it despite hundreds of millions of tax dollars and a large, unwieldy bureaucracy foretell a bailout that will be rife with abuse and fraud just as was the Katrina and Rita relief efforts (remember the credit card fiasco?). The end result is hundreds of millions of dollars on the front end to create, run, and mismanage the agencies, then billions of dollars on the back side to clean up the mess that they caused or had a large role in perpetuating.
It is not that we don't have a system of recourse. If there was fraud or misrepresentation, the court system is designed to provide redress. Political pressure is such, however, that the feds are stepping in and are going to flood the problem with our tax dollars, again, to get us past this patch. There won't be any recriminations against the wrongdoers on either side of the transaction as the court system would provide, and thus there won't be any lessons learned from this other than if you get in trouble, Uncle Sam will bail you out . . . with our tax dollars, of course. Again you have to ask the question 'why cannot we all do this as well?' After all it seems we have turned from Kennedy's 'ask not what your country can do for you but what you can do for your country' to 'how can I get what I can from the country without paying for it?'
THE MARKET
MARKET SENTIMENT
VIX: 20.96; -1.57
VXN: 24.89; -2.02
VXO: 22.62; -1.19
Put/Call Ratio (CBOE): 0.88; -0.01
Bulls: 47.3%, up slightly from last week's 47.9%. Really wanted a push down below 45% as it was 40.6% on the low for the last round of selling. Still it is well off the prior levels: 51.1%, 54.5%, 5 weeks above 55%. 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. 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: 29.0%. Strong jump finally, up from 26.6%. It lagged the decline in bulls, but is now making significant progress. Up from 22.2% 4 weeks back after bouncing up and down over 20 for several weeks. Now significantly above the threshold 20% considered bearish. Fell to a low of 19.6% on this round. 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: +42.67 points (+1.6%) to close at 2709.03
Volume: 2.005B (-11.78%). Volume was disappointing, coming in well below average as NASDAQ rallied through near resistance. That indicates this is a relief move still as it is not, as of yet, morphing into something stronger.
Up Volume: 1.593B (+39.095M)
Down Volume: 387.465M (-316.522M)
A/D and Hi/Lo: Advancers led 2.63 to 1. Nice upside breadth. Note that NASDAQ 100 did not outperform overall NASDAQ.
Previous Session: Advancers led 2.06 to 1
New Highs: 102 (+23)
New Lows: 157 (-13)
NASDAQ CHART: http://investmenthouse.com/ihmedia/NASDAQ.jpeg
NASDAQ cleared the 50 day EMA and the March 2007 up trendline and is now moving in on the July peak at 2725. That is the point that we saw as the initial tough resistance for this holiday rally. Looks as if it is going to give it a run and when it gets there it is likely to struggle a bit. If the jobs report is palatable and the FOMC is anticipated to cut 50BP, then it can continue up to 2750 on this run. At that point we would expect at least another test similar to that shown to start the week. How it tests then is key to the continuation of the rally.
NASDAQ 100 looks great as it has cleared the early October peak and is ready to take on some more serious resistance at 2145-50 (closed at 2127.65). At that point it could run into some trouble in advancing similar to NASDAQ at 2750.
SOX (+1.7%) continues to recover, moving through the 18 day EMA on the close. It has a clear shot toward 445 to 450 if the rally holds up.
NASDAQ 100 CHART: http://investmenthouse.com/ihmedia/NASDAQ100.jpeg
SOX CHART: http://investmenthouse.com/ihmedia/SOX.jpeg
SP500/NYSE
Stats: +22.33 points (+1.5%) to close at 1507.34
NYSE Volume: 1.37B (-4.24%). Disappointing volume on the surge, coming below average as on NASDAQ. It was stronger than the downside volume on Monday and Tuesday, but it still shows a lack of serious upside conviction to keep a sustained rally moving, i.e. beyond the holiday rally.
Up Volume: 1.162B (+13.979M)
Down Volume: 202.586M (-75.384M)
A/D and Hi/Lo: Advancers led 3.82 to 1. Very strong breadth as the move spread out beyond just the large caps.
Previous Session: Advancers led 2.9 to 1
New Highs: 112 (+17)
New Lows: 103 (-33)
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
As noted, SP500 plowed under 1490 to 1500 in a strong price move. That was the key move for the index near term. Now it is in a range of resistance in the from of the summer trading range up to 1535 (the June peaks and the September consolidation range). That is the level we are looking for it to hit on this leg of the rally, and then it could face some serious difficulty.
Big bounce on the small cap SP600 (2.78%) that pushed the index up to the 50 day EMA and near some resistance at 409 - 410. The top of the range of late summer resistance is at 420.
SP600 CHART: http://investmenthouse.com/ihmedia/SP600.jpeg
DJ30
The blue chips continued the run off the 200 day SMA test, clearing the July 2006/March 2007 trendline in the process. Nice run and now it is bumping up against the June peaks spanning 13,640 to13,676. Those will slow it some but the momentum is strong and as noted Wednesday, it can run to 13,750 on this second leg.
Stats: +174.93 points (+1.3%) to close at 13619.89
Volume: 197M shares Thursday versus 256M shares Wednesday. Volume fell way off pace after the strong Wednesday showing. Has momentum, but a with the other indices, the lack of trade makes it look more like a relief bounce still.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
FRIDAY
Jobs, jobs, jobs. It was the ADP jobs number that helped spark the start of leg number two in the holiday rally. As noted last night, it tends to overshoot on the upside and thus there is the possibility of disappointment on Friday. That could throw a log on the road of the rally, but with the Fed set to meet early next week and cut rates, a lower number would only fuel the 50BP anticipation. In short, the jobs report could be a setback near term but we still anticipate the rally to continue up to the rate cut and likely immediately thereafter.
We have taken some great positions on this move and would love to see it rally on into 2008. The price/volume action will have to once again improve for that to take place, however, meaning there has to be more upside buying to show us the institutional players are really buying into the move and thus giving it sustainability. What we saw Thursday was short covering when SP500 broke key resistance. There was more than that as the move spread out, but the volume is the most telling indicator. As noted above, despite the solid moves across the market, the volume indicates it is still just a relief move, i.e. the holiday rally after some really hard selling.
Thus our game plan is to continue looking for vehicles that can give us some quick upside in a continuing solid rally to Tuesday and the FOMC decision and even on into Wednesday. After that the market will likely at least need to take a breather. Whether it is just a pause similar to the early week pause on Monday and Tuesday or the start of a new decline will remain to be seen. What we intend to do is ride this leg up to the next resistance level or the FOMC meeting and even the result of the meeting, whichever comes first, and take quite a bit of gain off the table. After that we will see what the Fed reaction is and act accordingly. Given the action in the market preceding this rally we would rather err on the conservative side and lock in some nice gain than try to squeeze out the last nickel and get caught in another downdraft after the euphoria of an aggressive Fed wears off. That means on new buys Friday and beyond we have to be ready to be a bit more nimble.
Support and Resistance
NASDAQ: Closed at 2709.03
Resistance:
2725 is the July high
2749 is the November/December/February up trendline
2778 from a July 1999 peak
2834 is the October interim peak
2861.51 is the October peak
Support:
The March up trendline at 2687
The 50 day EMA at 2675
2673 is the early July high
2634.60 is the June peak is bending
The 200 day SMA at 2591
2550 to 2540 from May/June consolidation
2525 is the February closing high
2520 is the August 2004/April 2005/October 2005/March 2007 up trendline
2451 is the August closing low
2386 is the August intraday low
S&P 500: Closed at 1507.34
Resistance:
1530 to 1535 are the June twin peaks
1534 is the early July high
1539 is the mid-June intraday high
1541 is the early June high
1543 is the July 2006/March 2007 up trendline
Support:
1490.72 is the early June closing low and early August peak.
The 200 day SMA at 1484
The 50 day EMA at 1484
1475 from peaks in December 1999 and January 2000
The 18 day EMA at 1470
1459 is the February peak
1440 - 1437 from January and March peaks
1438 is the November low
1430 from the August interim lows
1425 is some minor support.
1419 is the June/July 2006 up trendline
1406 is the August closing low
1375 is the March closing low
1370 is the August intraday low
Dow: Closed at 13,619.89
Resistance:
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:
13,598 is the July 2006/March 2007 up trendline
The 90 day SMA at 13,474
The 50 day EMA at 13,407
The 200 day SMA at 13,263
12,845 is the August closing low
12,786 is the February peak
12,743 is the November low
12,518 is the August low
12,250 from late March lows
12,050 from the March 2007 low
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
December 3
ISM Index, November (10:00): 50.8 actual versus 50.5 expected, 50.9 prior
December 5
Productivity, Q3 preliminary reading (8:30): 6.3% actual versus 5.8% expected, 4.9% prior
Factor Orders, October (10:00): 0.5% actual versus 0.0% expected, 0.3% prior
ISM Services, November (10:00): 54.1 actual versus 55.0 expected, 55.8 prior
Crude oil inventories (10:30): -7.9M actual, -425K prior
December 6
Initial jobless claims (8:30): 338K actual versus 335K expected, 352K prior
December 7
Non-Farm Payrolls, November (8:30): 70K expected, 166K prior
Unemployment rate, November (8:30): 4.8% expected, 4.7% prior
Hourly Earnings, November (8:30): 0.3% expected, 0.2% prior
Average workweek, November (8:30): 33.8 expected, 33.8 prior
Michigan sentiment, preliminary December (10:00): 75.0 expected, 76.1 prior
Consumer Credit, October (3:00): $6.0B expected, $3.7B prior
End part 1 of 3
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trading system
money investment
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