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world stock market, us stock market
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12/11/07 Investment House Alerts
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IH Alert Subscribers:
MARKET ALERTS:
Targets hit alerts: MA; WFR
Buy alerts: None issued
Trailing stops: GRMN; NKE; SOHU; STP
Stop alerts issued: OTEX; PFWD; SOHU
SUMMARY:
- Market rallied into FOMC decision then plummets.
- Fed more afraid of inflation than a slowdown.
- After the damage is done, Fed tries to calm markets with 'other means' to address the liquidity problems.
- Will see if stocks can muster a relief bounce off near support.
Fed drives a stake into the holiday rally.
Ho, ho, humbug. We can talk about KR (groceries) guiding higher, HPQ affirming its 2009 guidance, T upping its dividend and buying back more stock, or TXN providing better than expected guidance. We can contrast how weekly gasoline prices fell below $3/gallon on average but Manpower's survey indicates employers are pulling back for Q1 hiring. We can even note that DJ30 reached up to 13,750 the past two sessions, a point we felt could stall it on its second leg, and NASDAQ moved through the July peak, closing in on 2750 and its resistance as well.
Talk is cheap, and it means little when you have the Fed in the game as it can change the rules of the game at any point. Just look at Kohn's and Bernanke's last speeches heading up to the Tuesday FOMC meeting. After the prior 25BP cut and a hawkish statement they had to come off that tough love stance in order to keep the financial markets from plunging over the cliff. They succeeded but then fumbled the ball again with a 25BP cut on the Fed Funds rate, a wimpy 25BP on the discount rate (still at a major penalty level to borrow from that window), and an absurdly muddled statement.
The Fed really left the market reeling. From the Kohn and Bernanke rational comments about the economy and the commercial paper market just two weeks ago the Fed went back to its prior inflation worried stance. As noted, it did not cut much on either end, and the statement was a lumpy blend of conflicting comments. The most prominent was the deletion of the word 'forestall' as in the Fed cutting rates and taking other actions to 'forestall an economic slowdown.' Tuesday the Fed still noted the economic slowing, trouble in the financial markets (three mentions of this), etc., but it also was again worried about inflation, inflation, inflation.
With the removal of the language about trying to forestall an economic slowdown and its continued harping on inflation the Fed appears to have punted with respect to preventing an economic slowdown. It seems to have concluded that in order to prevent an economic flop it would have to inject so much liquidity that inflation would ignite out of control. Thus it is willing to let the economy sink into stagnation or recession to avoid further inflation.
That is why the market sold. The Fed is focused more on the possibility of inflation around the corner as was the 1929 central bank and the 2000 Greenspan Fed versus what is going on in the real world. With the credit spreads now worse than they were when the Fed first cut 50BP, with more than a 125BP spread between the 90 day T-Bill and the Fed Funds rate, commercial paper stuck in a quagmire that no one wants to enter, and the stock market rolling back over, the greater issue is not inflation, but in economic survival, at least near term (over the next couple of years).
The Fed sees construction cranes working, solid jobs reports, and almost 4% GDP and is buying off on the old Phillips Curve argument that inflation is an issue even as the credit markets freeze up. When the credit spreads become this wide and commercial paper turns stagnant, economic stagnation is imminent. The cranes, jobs, and GDP are all very backward looking. The Bernanke Fed is, unfortunately, doing what all Feds have done, i.e. playing it cautiously and in line with the Phillips Curve. That ensures it will be behind the curve and thus an economic slowdown and even recession as a result. That is why the market sold: if the economy is going to slow, stock prices are too high. With the Fed clearly not doing what is necessary to unfreeze and unclog the credit markets, investors are concluding an economic slowdown greater than the Fed forecasts is coming.
Market technicals: not pretty.
The market started soft and then rallied up into the FOMC result. Not a big rally, but the typical rise into the result as some shorts cover and positions are squared. Then the news high and there was a reversal. High to way low on the close. That is a reversal. With the major indices bumping up close to what we thought might be some key resistance on the second leg of the holiday rally, that may spell the end of the holiday move.
Internals: From relatively flat ahead of the FOMC to a belly flop. Breadth plunged to -5:1 on NYSE, -3.6:1 on NASDAQ. Volume was a bit better but still well below an average volume pace until the Fed decision. The sellers moved in and volume moved up, clearing average on NYSE and average on NASDAQ. Not a huge surge, but definitely distribution.
Charts: NASDAQ moved up through its July peak and was looking good. DJ30 moved through 13,750. SP500 made it to 1525. Basically all hit levels we indicated could top out the move. The Fed looks to have given the trigger to do so.
Leadership: The leaders of course got pushed back. They had been motoring higher up to that point and we took some gain on stocks such as WFR and MA in addition to the prior gains taken of late. When the Fed announced, they were sold because they were easy targets. Of course the entire market was considered an easy target as breadth was massively negative. Many held near support in the form of the 10 day EMA, and we will see if they can provide some kind of relief bounce or shake off the Fed's actions. After all, many are tied to the world economy and not just the US; that is one reason they have been leaders, i.e. because the US is slowing and money was moving their way as a result. Thus we will see if they can bounce and indeed, perish the thought, get some new buys on them after this shock wears off. If they are truly worldly stocks then they should not only hold up better but actually move higher from here.
THE ECONOMY
Fed is too busy, yet again, trying to manage our daily lives.
As noted above, the Fed sees indicia of economic success and is thus looking at the credit issues through rose colored lenses and not seeing the real issues: how a credit freeze and liquidity clog is going to send the economy down in the future. It won't change what has happened in the past; that is in the book. Unfortunately it is writing the next chapter of the book and not looking at what it is doing or to keep with the metaphor, it is straying from the facts and writing fiction instead of non-fiction.
All of the recent strong indicators are lagging and they know this. Indeed, the Fed's own study indicates that when slowdowns are caused problems in the financial and credit markets, the remedy is fast and aggressive action to quickly dispel the emotional fear factors and keep the problems from spreading. We said this four months ago: the Fed had to act to contain the contagion. If you fail, it spreads everywhere. We are seeing that happen now, and the Fed's 'go slow' approach that Greenspan used in non-financial situations is simply too slow to make a difference. No confidence is instilled, no one believes there is a backstop, and thus no capital is risked or ventured. That means an economic slowdown or even a shutdown. The results of this in economic history are well documented.
Indeed, they are starting to show up again and with more ferocity. The credit situation is worse now than it was in August with wider spreads. The initial attempts at rate cutting and liquidity injection were starting to work, but the Fed did not see the job through. It backed off and started to waffle on its previously clear intention to do what was necessary. When that happened, confidence was lost, capital was withdrawn, and the credit problems worsened again. This latest 25BP cut and muddled statement was akin to saying take two more aspirin to try and cure what the first two aspirin could not.
Hot off the presses: unnamed Fed official says the Fed is ready to use 'other means' to solve the credit issues.
After seeing the carnage he had wrought, Bernanke sent out emissaries this evening to select media figures to maybe try and reassure investors that the Fed was still on top of the situation even though the statement it released showed it doesn't have a clue. Thus the calls this evening referring to 'other means' to fight the problem. Sounds a lot like Nixon's secret plan to end the Viet Nam war which turned out to be just withdrawing in the end.
The Fed was likely dismayed with the market's response to its action (or rather, inaction), but guys let's face it: you don't appear to be on top of things with your comments about inflation trumping worries of an economic slowdown. The fact that you are not addressing credit issues when companies are screaming for money, instead referencing inflation possibilities that are really nowhere near as critical as the liquidity issues shows investors you are out of touch with economic reality. As with the Greenspan, you wonder if they think they are smarter than the market even though history shows the market knows where the economy is heading much better than the Fed. It is selling ahead of a significant slowdown while the Fed worries over inflation.
So we have the promise of some, we hear, imminent 'other means' to fight the problems. Whatever it is, it needs to come quickly. As noted, credit conditions are worse than they were four months back, and after Tuesday they were even in worse shape. We do hope the Fed does something, indeed a lot, more. The almost funny aspect is how reactionary the Fed is. The market tanks on its carefully reasoned rate cut and statement, and then Fed officials are manning the phones that afternoon telling sources it is going to take further action by 'other means.' My 8 year old is wilier than that in covering his tracks.
THE MARKET
MARKET SENTIMENT
VIX: 23.59; +2.85
VXN: 26.46; +2.07
VXO: 24.47; +2.46
Put/Call Ratio (CBOE): 1.11; +0.16. No surprise as the ratio jumped up over 1.0 as the market reversed post-Fed.
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: -66.6 points (-2.45%) to close at 2652.35
Volume: 2.147B (+18.46%). Back to average as NASDAQ reversed after moving through the July peak. A reversal on volume is not a good indicator for further upside in this rally.
Up Volume: 359.176M (-799.973M)
Down Volume: 1.86B (+1.23B)
A/D and Hi/Lo: Decliners led 3.68 to 1. Heavy downside breadth returns after a lengthy hiatus.
Previous Session: Advancers led 1.26 to 1
New Highs: 96 (-9)
New Lows: 142 (+39)
NASDAQ CHART: http://investmenthouse.com/ihmedia/NASDAQ.jpeg
NASDAQ moved through the July high intraday, besting that level by close to 10 points. It of course could not hold the move and reversed, giving the entire last week's rally back. NASDAQ still holds some of the second leg gains as it sits on some support at 2650. Not much support to hold it here as it sold off on rising, average volume. The reversal was rather definitive, falling from a resistance level and on volume coupled with a price plunge. There may be a relief bounce of modest proportion, then the downside is likely to continue.
NASDAQ 100 (-2.40%) was not immune, falling through its 50 day EMA on the close. 2050 is key support for this index.
NASDAQ 100 CHART: http://investmenthouse.com/ihmedia/NASDAQ100.jpeg
SOX CHART: http://investmenthouse.com/ihmedia/SOX.jpeg
SP500/NYSE
Stats: -38.31 points (-2.53%) to close at 1477.65
NYSE Volume: 1.548B (+32.06%). Volume moved above average for the first time this month, and of course it was on a reversal that closed sharply lower. As with NASDAQ, not a good indication at all for the holiday rally.
Up Volume: 101.445M (-740.223M)
Down Volume: 1.443B (+1.121B)
A/D and Hi/Lo: Decliners led 5.11 to 1. Very decisive downside breadth, matching the other indicators on the day.
Previous Session: Advancers led 1.82 to 1
New Highs: 107 (-13)
New Lows: 118 (+38)
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
All of the work to pass 1490 to 1500 was gone by the close. Volume finally showed up and it was on the downside. SP500 moved back below the 50 day EMA and the 200 day SMA, coming to rest at some support at 1475. It may try a bounce at that point in response to the harsh selling, but we don't anticipate that would hold long term as the action indicates the rally has turned back.
SP600 (-3.02%) of course was sold the hardest as its components rely on economic expansion, and the Fed's actions or lack thereof promised no relief in the form of economic growth near term. Thus it was clubbed at 410 resistance and is now threatening to break the August lows once more.
SP600 CHART: http://investmenthouse.com/ihmedia/SP600.jpeg
DJ30
The blue chips tapped 13,750 once more, indeed moving through that level ahead of the FOMC. Then they were tossed back, flopping down to the 50 day EMA on the close on the strongest volume of the month. As with SP500, it of course came on selling, showing investors dumping the blue chips. There is a band of support down to 13,250, including the 200 day SMA at 13,280. that is the next potential support point after holding Tuesday at the 50 day EMA.
Stats: -294.26 points (-2.14%) to close at 13432.77
Volume: 280M shares Tuesday versus 190M shares Monday.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
WEDNESDAY
With such a vicious down thrust we will see if the market bounces some in relief. That is often the result of such a tail kicking. A lot of leaders fell to the 10 and 18 day EMA, and if there is anything left in them they will try to put in a bounce. We note that many of the stocks we are in are tied to foreign and the global economy; they were all sold back on Tuesday, and they should attempt a bounce from near support if there is still a growth story outside the US.
If positions cannot hold near support we will go ahead and close them out to avoid a meltdown. The market will be up and down; it never goes straight down though it does appear that the Fed has triggered the end of the holiday rally. It was on low volume and suspect even with its great leadership. If we get a bounce on low volume we need to close laggards and look to some downside, using the bounce for a dual purpose.
Again, it won't all be downside. The rest of the world continues to perform rather well economically though a faltering US, despite the rise of the global economy, will be felt. Nonetheless we will look to stocks connected to the world economy to provide some upside. As noted, we already have several on the report now. The Fed decision boxed them around some and the effects were showing up as the Asian markets open up, but that won't stop them longer term. Thus we will be looking to play some upside as well with these stocks along with some holdouts among leaders tied to the US economy. As in other recessions, there are growth stocks that continue to perform very well into the teeth of the slowdown. It will definitely be, as it really always is, a market to pick individual stocks.
Near term we have to see how the market reacts to this violent jerk lower, i.e. whether it can deliver a relief bounce. There may be some more downside movement Wednesday before it tries. Either way it won't be much of a bounce unless the Fed can come out with something more definitive and quite soon, i.e. tomorrow. Overall the move will likely turn lower once more after some jousting and we will use that to lighten positions, look for the strong upside, and also move into the downside.
Support and Resistance
NASDAQ: Closed at 2652.35
Resistance:
2673 is the early July high
The 50 day EMA at 2677
The March up trendline at 2700
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:
2634.60 is the June peak
The 200 day SMA at 2594
2550 to 2540 from May/June consolidation
2525 is the February closing high
2521 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 1477.65
Resistance:
The 200 day SMA at 1485
The 50 day EMA at 1486
1490.72 is the early June closing low and early August peak.
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
1545 is the July 2006/March 2007 up trendline
Support:
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
1438 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 13,432.77
Resistance:
The 90 day SMA at 13,483
13,630 is the July 2006/March 2007 up trendline
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
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 50 day EMA at 13,428
The 200 day SMA at 13,280
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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world stock market
us stock market
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