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money investment, investment help
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12/08/07 Investment House Daily
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Investment House Daily Subscribers:
MARKET ALERTS:
Targets hit alerts: None issued. Plenty of stocks are up, and if they continue higher ahead of the FOMC we will look to take some gain off the table.
Buy alerts: CLR; CY; ESLR; SGR; STP
Trailing stops: ASIA
Stop alerts issued: FLIR; TDG
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SUMMARY:
- Jobs report splits the baby, sort of, and stocks find no reason to rally or sell.
- Interesting and positive features in the jobs report, but nonetheless it ensures a Fed cut
- Funds Futures contract predicts 25BP, at least according to the 'old' Fed.
- A new bottom, highs by year end, or a bouncing in a larger selloff. Take your pick, but be prepared for either.
Bland session as jobs report fails to stir investors one way or the other.
We stated Thursday that the jobs report was going to set the tone heading into the Tuesday FOMC meeting. Given that stocks did nothing Friday but lay around on light trade, the tone was rather sleepy. The indices finished basically flat, bracketing the flat line on light volume and flat breadth. They ran up and down all day long, but the range was much narrower than anything seen of late.
The jobs report boosted futures to flat from modestly negative levels as it was stronger than expected but, surprise, surprise, well off the ADP forecast level. It provided very little catalyst, however, as the market slumbered after two solid upside sessions resumed the holiday rally. There were earnings warnings from PALM and SWHC (Dirty Harry handguns) and NSM (semiconductors) guided lower. Michigan sentiment hit a level not seen since 1992 at 74.5. Oil gave back some of the mid-week spike, falling almost $2 on the session (88.24, -1.99/bbl).
All of this basically had no impact. With the Fed's next edict from the mount coming on Tuesday, ample debate as to just how aggressive the central bank will be in helping the credit markets, and two solid upside sessions in the bag thanks to the renewed rally, the market was content to rest. Thus the up and down, slow slog through the session that closed basically where it started.
Technically there were some positives even in the mediocrity that permeated the session. The intraday action was mush; up and down in a uniform trading range all session. If the bell was delayed a half hour the indices would likely have rolled back upside a bit more. A grand stall for the session.
Internals: Breadth was flat. Volume was lower and well below average. No excitement at all. Not a whole lot of interest either.
Charts: No movement, so there was not much change in the outlook. SP500 held above the 1490 to 1500 range that so many institutions were watching as the fulcrum with respect to the next move in the market. Thursday the break over this level led to short covering and a further advance. Friday it seemed that no one was interested in covering shorts, buying long, or selling. SP500 thus sits over its former resistance while NASDAQ and DJ30 pause just below their July and June peaks, respectively. Big test for those two indices in the coming week.
Leadership: The technical strength of this second upside leg in the rally has failed to impress, at least from a volume aspect, but the leadership is solid. Metals emerged the past week, coming to the aid of large cap tech and agriculture. Energy also re-emerged, both oil related and alternative as well. Once more there is plenty of leadership in the market as all of those stocks that held their 50 day EMA during the selling that ended two weeks back are rebounding and pushing the indices higher. As long as leadership continues to set up and move higher, the indices will hold up as well.
THE ECONOMY
Jobs so-so with the same negatives in homebuilding but some positive twists as well.
There is so much ink and breath spent on the jobs report, but as we perpetually note, it is the most lagging of indicators. It really tells nothing about the future because the data reflects opinions that, at the earliest, were held 3 months prior. You can look at the trend and glean some information, but if the economic landscape is undergoing quakes as it has since the fall, the data basically tells you nothing about the future of anything, jobs or otherwise.
That said the 94K jobs were more than the 70K expected but well off the ADP 189K. Moreover, September and October revisions netted out a 48K subtraction from the original reports. Wages rose 0.5% while the unemployment rate was a steady 4.7%.
As you would expect, finance was weak, dropping 20K when ADP showed finance posting a gain. Who is right? Impossible to tell. The government data is viewed as the final word, but many doubt the numbers that are compiled. It is not really a conspiracy theory issue, just incompetence at compiling accurate data. Construction was also in the toilet. No surprises there.
There were some interesting features. Retail jobs rose 24K. Doesn't sound like much. After all 'tis the season for shopping and the need for all of those additional Santa helpers. You have to know, however, that there are seasonal adjustments where the government estimates a set number of increases or decreases based upon the time of year. It is the holidays so the government figures presume a certain increase in retail. In other words, it will report jobs at a certain level unless they top or undercut the benchmarks. Thus to show a 24K gain in retail, retail jobs had to top what was already expected to report any gain at all. Sounds confusing and it is, but the point is that the seasonal retail jobs were much higher than expected, and that is not a bad sign for the retail season. Stores are not going to bring on a lot of help if they feel it is not needed. We have seen that in prior holiday seasons. The fact that they are bringing on a lot more help bodes well for holiday sales.
Along the same lines, leisure and hospitality posted a 27K gain. Very solid. That lower dollar has two results with respect to domestic travel. First, a lot of US citizens are staying in the states to travel. A $100 margarita in France (why would you drink a margarita in France is beyond me) is a bit more than you want to pay. I enjoy sipping some premium tequila from time to time, but have yet to find a $100 margarita that truly fits the title. Indeed, that is simply an impossibility; no margarita is worth $100 unless it fills up about 5 pitchers. In any event, the weak dollar is truncating travel plans abroad.
Second, while US citizens are staying home, foreigners are not. Canadians are all over the northeast, enjoying relatively cheaper US goods and services. I recall in my wilder youth while working in Wyoming, Montana, the Dakotas, etc., running up to Canada for the horse races and other non-US items of interest. The dollar was so strong we called the Canadian money play money. Hardly the case now. Europeans are enjoying coming to America as well, shopping in New York and other major metropolitan centers. Thus the demand for more service workers in the accommodations and retail areas.
Fed set to cut 25BP . . . by the book.
Rick Santelli noted Friday that the Fed Funds Futures contract was predicting a 100% certainty of a 25BP rate cut on Tuesday from the FOMC. He emphasized that the contract was very accurate this close to a meeting. Historically that is the case. Of course, it was not predicting a 50BP cut back in August.
This goes to show that the contract is simply human so to speak as its value is determined by all of the traders. They are still trying to get a handle on this new Federal Reserve Board and thus so is the FFF contract. As such, this old standby during the Greenspan era is indeed as fallible as Greenspan himself. Just as we are, it has to get used to the new Fed, and thus while it says 25BP, anything is possible.
As we have discussed earlier, if the Fed is going to cut at all it may as well do so with gusto. With a 150BP spread between the 90 day T-Bill and the Fed Funds rate there is a huge tax upon banks if they lend. That acts to lock up capital and thus the credit freeze remains. Credit spreads have widened in other areas as well. All this works to chill lending because there is simply not enough potential return versus the risk in this economic climate. It is the old story of rewarding risk; the Fed has rates so high compared to market rates that the potential reward is not worth the risk. Thus the credit freeze continues.
Indeed, we are hearing (yet still) that the credit conditions are worse now than they were when the Fed started its liquidity injections, cutting the discount rate, and eventually cutting the Fed Funds rate. When the Fed went from 50 BP to 25 BP, it signaled it was going to do what the old Fed would do, i.e. follow an economic decline down the tubes instead of getting ahead of it. If it wants to do something it needs to cut 50BP on Tuesday and then 50BP in January. Then it needs to hope the market rates start to rise to meet it part way or else it has to cut another 50BP to really get rates to the point they provide stimulus and can help turn the economy back up. Otherwise we go into a signification slowdown or recession just as always, then have to go through the bottoming process, fighting over what fiscal stimulus is best, etc. while our fortunes take a hit.
Right now ECRI is still not indicating a recession, but things continue to slow and with this trend there will be flat to negative growth. That is why the Fed, if it wants to, can still get out in front of the curve and forestall a recession. It won't forestall flat growth; indeed we may be in flat growth right now in this quarter. It can, however, avoid a recession if it gets aggressive enough.
What about the dollar?
Conventional wisdom is that rates cuts won't help the dollar short term. Of course when the Fed started talking tougher after that 50BP rate cut that did not help the dollar either. But notice how the past tow weeks the dollar has firmed nicely EVEN AS the consensus is the Fed will cut, and speculation mounted that it may cut 50BP.
That suggests it is more important to the dollar to have a strong economy with good future prospects than a declining economy but no rate cuts. Ultimately it takes a strong economy to warrant a strong currency, and the US economy has not been heading in the right direction of late. The weakness while the US economy expanded only underscores the folly of the Bush administration pursuing a weak dollar policy. It says now thank goodness for the stronger exports due to a weaker dollar or else we would already be in a serious slowdown. Yes, but if it had not pursued a weak dollar policy perhaps we would be attracting more and more investment that would fuel more and more US business and industry.
THE MARKET
MARKET SENTIMENT
VIX: 20.85; -0.11
VXN: 23.75; -1.14
VXO: 22.48; -0.14
Put/Call Ratio (CBOE): 1; +0.12
Bulls: 49.4%. Right back up after the rally started two weeks back, rising over 2 points from 47.3%. Never got below 45% as we wanted (hit 40.6% on the low for the last round of selling). It spent 5 weeks above the threshold 55% on the last spike higher. 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: 27.6%. Down from 29.0% after one week at a higher level, jumping from 26.6% the week prior. Up from 22.2% 5 weeks back after bouncing up and down over 20 for several weeks. Still 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: -2.87 points (-0.11%) to close at 2706.16
Volume: 1.943B (-3.08%). No volume for the second straight session as trade left the market following the Wednesday resumption of the holiday rally. Stalling out on the volume side just as NASDAQ reaches the July peak; not necessarily the best action.
Up Volume: 899.274M (-693.629M)
Down Volume: 971.377M (+583.912M)
A/D and Hi/Lo: Decliners led 1.04 to 1. Flat, flat, flat following a week that showed some solid upside breadth.
Previous Session: Advancers led 2.63 to 1
New Highs: 97 (-5)
New Lows: 128 (-29)
NASDAQ CHART: http://investmenthouse.com/ihmedia/NASDAQ.jpeg
Gapped slightly higher but then spent the session mostly in the red, ranging up and down around the flat line in an 11-point spread. Volatile but in a very narrow range as NASDAQ tapped its March 2007 trendline on the low and held back from the July high at 2725. That is the key level for NASDAQ after it pauses here and tried to resume this second leg of the holiday rally. As noted before, that July high on up to 2750 is likely to put the lid on this leg of the rally, and if volumes don't improve, it may do in the rally.
NASDAQ 100 paused on the session as well, scratching out a gain thanks to AAPL and its outsized gain as rumors of new products to come continue. The large cap techs remain in the best shape overall of the major indices, holding over the 50 day SMA and clearing the late November high on the move this week.
NASDAQ 100 CHART: http://investmenthouse.com/ihmedia/NASDAQ100.jpeg
SOX CHART: http://investmenthouse.com/ihmedia/SOX.jpeg
SP500/NYSE
Stats: -2.68 points (-0.18%) to close at 1504.66
NYSE Volume: 1.205B (-12.04%). Lowest trade in three weeks as the NYSE indices to the day off after two nice upside gains.
Up Volume: 624.712M (-537.072M)
Down Volume: 550.951M (+348.365M)
A/D and Hi/Lo: Advancers led 1.02 to 1. As with NASDAQ, very flat breadth after some very strong upside breadth readings on the resumption of the upside move. That is basically bullish action though not definitive.
Previous Session: Advancers led 3.82 to 1
New Highs: 117 (+5)
New Lows: 84 (-19)
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
After two solid upside sessions off the test of the first leg of the holiday rally, the large caps took the day off, trading flat on no volume. Like how the index held above the 50 day SMA (1502) on the low as well as the 1490 to 1500 range that acted as resistance and is viewed by big institutional traders as important. SP500 needs to hold this 1500 level on a test and then make the next break higher to keep the rally alive. It has resistance up to 1535 (the June peaks and the September consolidation range), and that is the level we are looking for it to hit on this leg of the rally, and we will see if that stalls it out.
SP600 stalled as well after hitting the 50 day EMA on Thursday. Big bounce and something of a reverse head and shoulders breakout this week so we will see if it can put more upside together. It is right at 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
Rallied modestly after a slow start, but the largest gain was a rather meager 48 points. It too traded up and down, holding positive much of the session but without any volume to drive it. With the June peaks spanning 13,640 to13,676 immediately overhead, it had no reason to try to climb on Friday. This coming week those levels will be the key test for the Dow. If it can clear those, 13,750 is what we anticipate to be the high on this run.
Stats: +5.69 points (+0.04%) to close at 13625.58
Volume: 179M shares Friday versus 197M shares Thursday. Volume was very light Thursday after a good showing to start the next leg on Wednesday. Will have to improve as DJ30 takes on the June highs to indicate something more than a relief rally.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
MONDAY
Pending home sales and wholesale inventories are out Monday, but they are simply warm-ups for the Tuesday FOMC decision, the final Fed edict of the year. The rally has built up to this announcement, starting with the turn from hawkish to more pragmatic two weeks back. The question this week is whether the Fed will do what is necessary to get in front of the economic slowdown and whether the market, regardless of what the Fed does, will continue to move higher after its decision.
We have taken positions into the rally and continued to do so on through Friday as solid stocks continue to break higher from good buy positions. We have also taken some gain off the table as those early leaders posted nice runs; in this environment we can take some nice gain and roll into new solid positions simultaneously.
Heading into this week we are still going to look for opportunity as anticipation of the FOMC meeting can spark a further move higher and make us some rather quick gains. We can use any further solid upside into the decision Monday and Tuesday to bank some more gain as well. What we have to decide is how we want to go into the FOMC announcement itself.
If a position is lagging into the announcement, consider closing it out. If a position has solid gains into the meeting, consider taking some of the gain. Also consider letting part of such strong plays move into the announcement; the Fed can at times push the market's buttons with its statement and give the market a further goose and thus more upside. Even if it does not, with solid gains built in we have some cushion to exit in good shape in the even the Fed fails to instill confidence. The market can still make a continued run up into Christmas, it is just not showing the kind of volume that leads you to believe it will sustain the move on into the new year.
That is why we will continue taking gain when it is there; it may not be there in the new year. If the market shows some more volume on top of the breadth and leadership, however, we won't shy away from new positions in strong stocks. Remember, SP500 broke over a key level last week, and if it proves it can hold it at the start of this week, that will result in more short covering, and that can push the market violently higher. After all, a little violence can be good.
Support and Resistance
NASDAQ: Closed at 2706.16
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 2695
The 50 day EMA at 2676
2673 is the early July high
2634.60 is the June peak is bending
The 200 day SMA at 2592
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 1504.66
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 50 day EMA at 1485
The 200 day SMA at 1484
1475 from peaks in December 1999 and January 2000
The 18 day EMA at 1473
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 13,625.58
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:
13,605 is the July 2006/March 2007 up trendline
The 90 day SMA at 13,477
The 50 day EMA at 13,416
The 200 day SMA at 13,268
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 10
Pending home sales, October (10:00): 0.2% prior
December 11
Wholesale inventories, October (10:00): 0.5% expected, 0.8% prior
FOMC policy decision (2:15): FFF say 25BP
December 12
Export prices, November (8:30): 0.5% prior
Import prices, November (8:30): 0.5% prior
Trade balance, October (8:30): -$57.0B expected, -$56.5B prior
Crude Oil inventories (10:30): -7.9M prior
Treasury Budget, November (2:00): -$75.0B expected, -$75.6B prior
December 13
Retail sales, November (8:30): 0.5% expected, 0.2% prior
Retail ex auto (8:30): 0.6% expected, 0.2% prior
PPI, November (8:30): 1.5% expected, 0.1% prior
Core PPI, November (8:30): 0.2% expected, 0.0% prior
Initial jobless claims (8:30): 335K expected, 338K prior
Business inventories, October (10:00): 0.3% expected, 0.4% prior
December 14
CPI, November (8:30): 0.6% expected, 0.3% prior
Core CPI (8:30): 0.2% expected, 0.2% prior
Industrial Production, November (9:15): 0.1% expected, -0.5% prior
Capacity Utilization, November (9:150); 81.7% expected, 81.7% prior
End part 1 of 3
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