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money investment, investment help
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12/10/07 Investment House Daily
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Investment House Daily Subscribers:
MARKET ALERTS:
Targets hit alerts: VIP. Took some interim gain: MR
Buy alerts: BIDU; DRYS; RESP
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:
- Market posts some unspectacular but steady gains.
- FOMC: the amount of the cut and the statement are both key.
- TXN (chips) posts a positive mid-quarter update while WM (financial) set to cut its dividend.
- Stocks holding a bullish bias into the FOMC meeting and we intend on sticking to the game plan.
Steady rise ahead of FOMC though more of a drift higher than rally.
Stocks ended positive again, showing the characteristic softer start, stronger finish action exhibited when investors are more bullish. The futures were dragging very early, but some news shots from various sectors perked them up. MCD again showed its vitality with another excellent sales month (8.2% growth versus the 4.7% expected). What a recovery story that one is from the woeful years to an actual innovator in fast food. UBS (Swiss bank) announced an $11.5B cash injection from a Singapore sovereign fund and another unnamed investor. Then there was some M&A activity with a purchase of MOGN by a Japanese drug maker. As discussed a few weeks ago, just as in the early 1980's with Japan, we are going to see massive amounts of foreign investment in our hard assets here in the US if we don't get the dollar higher through solid economic growth and fiscal policy.
Those stories perked up the futures and the market started soft but upside. They picked up speed after pending home sales showed a second consecutive gain (0.6% versus the -1.0% expected) and rallied on into lunch. At that point NASDAQ had pierced its July peak, but it could not hold the move. It tried twice but in the end faded back. There was never any real risk of turning negative, and a modest late bounce finished all of the indices in solid shape. Volume was light, but there were some strong individual moves leading the way. Still, there was nothing to change the character to an out and out rally, and thus Monday was basically a drift higher on the positive overall bias as the FOMC policy decision moves close.
Technically the market performed decently though not spectacularly. There was that soft start, stronger finish action that fought off some afternoon selling, showing the continuing underlying bullishness since this rally started. In short, in the absence of any influences, stocks drift higher. That is what occurred Monday.
Internals: Breadth was modest compared to the past few months with a 1.8:1 spread on NYSE, and a meager 1.2:1 on NASDAQ. Volume was even lighter than the light trade to end last week. The internals reflect just a drift higher as indicated above. There was nothing to change the character of this move on Monday from a relief bounce from the hard selling, even if this is the second leg of the holiday rally (i.e. it was no one-week wonder). There is some great leadership, but this second leg has seen lower and lower volume as the market moves higher and higher. That was a recipe for trouble in October ahead of the November selling.
Charts: NASDAQ and DJ30 were involved in the most important moves of the session. Last week it was SP500 with its move through 1490 and 1500; now the others had to show their own moves. NASDAQ moved through the July peak twice during the session, but by the close it was unable to take it out. With the light volume that was really no surprise. Key level the NASDAQ has to crack to keep this leg higher alive. DJ30 cleared its June twin peaks and bumped 13,750 on the high. That is important because 13,750 is the level is the one we pointed out as the likely cap on this move. There is some resistance there and there is not a lot of volume pushing right now. We will see; DJ30 has some momentum still. SP500 did its job as well as it extended its move past 1500, now up to 1515, putting some distance on that old resistance level. That continues to help stoke the upside as it keeps the shorts at bay.
Leadership: The financials were in rebound mode again and thus SP500 was stronger. Hard to call financials leaders as their patterns are mostly quite crappy, but on a daily basis they were a leadership group. Large cap techs took a breather but some chips were on the move. China was strong as well along with foreign telecom once again (e.g. VIP). Metals held up and industrial equipment and materials were strong as well. The 'rest of the world' story continues to enjoy a resurrection.
THE ECONOMY
The question is not to cut or not, but by how much.
There was a debate for awhile about whether there should be a cut at all, but that has died out given the inevitability that the Fed is going to cut. As always, now that the meeting is a day away the question is how much will it be. As outlined over the weekend, the financial markets are again, just as in August with the 50 BP cut, signaling another big cut is needed. The credit spreads are wider now than then. If the Fed felt it necessary to cut 50BP then, it should be even more inclined to do so now because the credit freeze has not improved, and indeed it has worsened.
The Fed, as have all Feds in the past, has, as Archie Bunker put it, painted itself into a corner and thrown away the key. It cut aggressively once, added a 25BP kicker, then said it was done. More than that, it said the risks between economic slowing and inflation were balanced. Pretty cocky stance to take, but apparently Bernanke felt it was enough, and given the dollar's woes, the Fed did not want to keep the cutting shears out and see the dollar fall further.
Of course it was not enough to stop the bleeding and as noted the credit markets are in worse shape now than in August. The Fed has had to change horses yet again as it tries to find the right mix to stimulate growth, keep inflation down, hold the dollar up, end world hunger, devise a better NCAA football bowl selection process, etc. The problem is the Fed misjudged the economy again as it was also worrying about other factors it has a hard time controlling, e.g. the administration's weak dollar policy.
Last time it changed horses it went all in with a 50BP rate cut. The financial markets need that as well this time along with at least 50BP on the discount rate. There is a lot of ground to cover to get the FF rate closer to the 90 day T-Bill, and 25BP increments will be too slow to solve the economy's slowdown problems. That would put the Fed following the market down just as the last cut at 25BP did. It would not prevent further slowing; it would watch over it and ensure we do slow even further.
So it needs to cut 50BP but the futures are saying 25BP. That measure guessed incorrectly with the new Fed back in August and it could very well do so on Tuesday. The question is if it does not will 25BP be fatal to the rally? The statement will have something to do with it as well. It needs to move away from the 'risks' are balanced to a larger threat of slowing. The Kohn and Bernanke speeches that triggered the second leg of the rally confirmed it is going to do this so we can look forward to a market friendly view toward the risks ahead, at least according to the Fed.
Of course that puts the ball right back into the 25 or 50 BP court. As with so many things in life, problems are not solved with sympathy alone. You have to take action that resolves the problem. That means more than less. The market may rally initially on a 25BP cut and a statement skewed toward economic weakness, but for staying power the rally needs a 50BP cut to show the Fed is back in the game and willing to do what it takes to unfreeze the credit markets and get the economy the money it needs. In other words, with just 25BP we are concerned the rally will be limited to just a holiday rally, and in January see the October and November issues rise again.
THE MARKET
MARKET SENTIMENT
VIX: 20.74; -0.11
VXN: 24.39; +0.64
VXO: 22.01; -0.47
Put/Call Ratio (CBOE): 0.95; -0.05
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: +12.79 points (+0.47%) to close at 2718.95
Volume: 1.812B (-6.72%). Volume continued its decline on this second leg of the rally, coming in well below average as NASDAQ bumps key resistance. Needs stronger trade to get through and make the move stick. As noted above, this lack of trade indicates just a holiday rally and not a strong new rally after the November selling.
Up Volume: 1.159B (+259.875M)
Down Volume: 629.445M (-341.932M)
A/D and Hi/Lo: Advancers led 1.26 to 1. Quite weak, particularly with the large cap NASDAQ 100 (+0.23%) lagging overall NASDAQ. You would expect to see breadth lower if the large caps were leading the move.
Previous Session: Decliners led 1.04 to 1
New Highs: 105 (+8)
New Lows: 103 (-25)
NASDAQ CHART: http://investmenthouse.com/ihmedia/NASDAQ.jpeg
NASDAQ rallied higher and made it to the 50 day EMA on the close. Intraday it moved to 2727, clearing the July peak at 2725, but it could not hold onto the break as did SP500 last week. It can still make it to 2750 on this move, and if the Fed comes through with the right language and 25 or 50BP it will likely give that a run. The question is whether it holds. To this point the volume has not done the job. It will thus take a change of character to turn this second leg into something more substantive. Thus on a run to that level, how NASDAQ holds up on the test is the key.
NASDAQ 100 CHART: http://investmenthouse.com/ihmedia/NASDAQ100.jpeg
SOX CHART: http://investmenthouse.com/ihmedia/SOX.jpeg
SP500/NYSE
Stats: +11.3 points (+0.75%) to close at 1515.96
NYSE Volume: 1.172B (-2.72%). Volume was again lower, making it 7 out of 8 sessions below average, basically the test and the second leg higher in the rally. Nice move but it does not have a lot of volume supporting it.
Up Volume: 841.668M (+216.956M)
Down Volume: 321.144M (-229.807M)
A/D and Hi/Lo: Advancers led 1.82 to 1. Not bad as the large and small caps moved higher together.
Previous Session: Advancers led 1.02 to 1
New Highs: 120 (+3)
New Lows: 80 (-4)
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
SP500 put some more distance on the 1490 to 1500 resistance level on Monday with a market-leading gain. It is pushing further into the entire range of resistance that runs up to 1535 and then another at 1550. Moving well, but no volume to push it, and at 1525 it will start felling heavy as that will roughly equal the ground gained on the initial leg of this holiday rally. Even if the move is going to stick, something the volume makes questionable, it would still need to test just from a technical standpoint after another jump higher on the FOMC decision. Good move to this point but we have to keep our eyes open, understanding that low volume moves can get turned over as November did to October.
SP600 (+0.72%) moved through the 50 day EMA and on toward the 90 and 50 day SMA. It fell back from the highs as it bumped into the start of some resistance at 410. Will see how it handles this level though we don't expect much from the small caps. Remember, they are an economic indicator, and while they have bounced, they are still in a very weak technical pattern and are indicating the Fed won't do what it takes to stave off a further economic slowdown.
SP600 CHART: http://investmenthouse.com/ihmedia/SP600.jpeg
DJ30
The blue chips broke through the June twin peaks (13,640 and 13,676), rallying up to 13,750 on the intraday high. That is the level we pegged as the potential top for this moved. It backed off from that level but it was no reversal. Volume was up slightly but was still well below average as with the rest of the indices. Showing plenty of momentum still, and it can of course move through 13,750, particularly with a Fed result viewed as favorable, even if just near term. The next resistance points are the late October peak before the rollover at 13,963, and the July peak at 14,022.
Stats: +101.45 points (+0.74%) to close at 13727.03
Volume: 190M shares Monday versus 179M shares Friday. Volume remains low on this move.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
TUESDAY
Wholesale inventories out early, but the FOMC is the keynote speaker for the session. Speculation will be put aside, and the market will react. Our thesis on this move is still one of a relief rally that is in its second, and maybe last, leg ahead of Christmas. We are looking for a bit more drift higher ahead of the announcement though NASDAQ will be bumping the July peak that it failed to take out Monday. On the announcement we will likely see the market bounce as it did initially the past two announcements. If the Fed cuts big and/or gets all mushy in the language the bounce could be prolonged. Maybe it can even change its character and turn into a new rally out of the selling. The burden is on the market to prove that, however. Even if it spurts higher and does so with volume, it is somewhat extended on this leg as it is just about to match the first leg and its gains. Thus technically it is going to have to come back and test at some point after the bounce even if it really likes what the Fed does.
We took some gain on Monday given that thesis, because the Fed could still disappoint. We will look to do some more of that Tuesday with some more upside ahead of the announcement. That is not all, however. We were buying some positions even on Monday and will look to do so still with our more speculative money if we see good moves from solid stocks in position to run well for us near term and even beyond.
There are solid leaders still in strong technical positions, and if they along with the current crop continue to break higher they can lead the market higher regardless what the indices are showing right now. Thus we always put some speculative money to work if we see great patterns around this kind of announcement as there is the potential it can change the character of the overall move. We can play a short term rally on the news and if the move sticks in the market, then we benefit even more.
We don't want to write too much into what the Fed will do tomorrow. The market anticipates 25BP at a minimum and though it has rallied it has not been the picture of strength with the declining volume on the move. Thus it will take something more than that for the move to stick. Maybe a really favorable statement with a 25BP cut will do it, but likely it will take 50. Thus we are willing to take more positions to play the short term and anything else we get to the upside, but we are not letting this second leg lull us into a false sense of security. We will take what it gives and if it proves something else, great.
Support and Resistance
NASDAQ: Closed at 2718.95
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 2697
The 50 day EMA at 2678
2673 is the early July high
2634.60 is the June peak is bending
The 200 day SMA at 2593
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 1515.96
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
1544 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 1486
The 200 day SMA at 1485
1475 from peaks in December 1999 and January 2000
1459 is the February peak
1440 - 1437 from January and March peaks
1438 is the November low
1435 is the June/July 2006 up trendline
1430 from the August interim lows
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 13,727.03
Resistance:
13,750
13,930 is the late October peak
The July high at 14,022
14,088 is the early October closing high
14,198 is the October intraday high.
Support:
The August high at 13,696
The mid-June high at 13,689
The early June high at 13,676 (closing), 13,692 (intraday)
The early July peak at 13,671
13,625 is the July 2006/March 2007 up trendline
The 90 day SMA at 13,480
The 50 day EMA at 13,428
The 200 day SMA at 13,274
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): +0.6% actual, 1.4% prior (revised from 0.2%)
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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