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us stock market, trade stock
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1/12/08 Technical Traders Report
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MARKET ALERTS
Targets hit alerts: None issued Friday. Took some solid gains this week on GME, HUM; SMH, CMED, PZE, SDS
Buy alerts: CHTT; TRA; CVS; SDS; SPY
Trailing stops: None issued
Stop alerts: FWLT; SLB
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 SSR alert service you can sign up at the following link:
http://www.investmenthouse.com/alertttr.html
SUMMARY:
- Promise of future rate cuts cannot trump harsh reality as relief rally rolls over.
- Improvement in the issues that brought about the economic downturn, but the intervening 4 months from their onset is the problem.
- With financial deals showing up in the hopper midweek there is potential for more on Monday, the traditional day of merger, and market needs the financials to start their recovery.
Two days and out: market rolls back down Friday as recession fears get a boost again.
Wednesday and Thursday the market rallied in relief, aided by Bernanke's promise of substantive, decisive and timely action as well a rumor and reality with respect to mergers and buyouts in the beleaguered financial sector. That pushed the indices back up toward near resistance. Friday there was the rumor of a new deal with JPM shopping for MW. Could this indicate a bottom forming in the downward financial spiral?
It might be. Unfortunately the market was unimpressed Friday. Those Bernanke promises and analyst opining about financial deals that may or may not arise anytime soon (gee, sounds like the Bernanke rate cuts) were no match for harsh reality, however. That AXP warning of a slowing business and individual consumer along with TIF (relatively high end jewelry) lowering the top of its expectation range trumped the 'maybe, possibly, some day' issues circling financial deals and Fed rate cuts (not to mention the even more fugacious hints of fiscal stimulus).
That pushed futures lower and the market opened lower and fell sharply in the first 5 minutes. It never made any real attempt at recovering. There were attempts at bouncing about every hour or two, but each one failed as the indices slid lower all session long. Managed a late, better cover some ahead of the weekend bounce, but that did little to change the 1.3% to 2% losses on the indices.
TECHNICALLY the action was as weak as the point losses suggest. A lower open and continued selling through the close. After a couple of lower starts, higher close sessions on the relief rally, the turn back down after the bounce resumed the weak, bearish intraday action.
INTERNALS: After mediocre breadth on the move higher, particularly on NASDAQ, the advance/decline ratio jumped as the market sold once more. Volume faded some so there was no renewed spike of selling, but it was still strong and well above average. All in all it was potent enough to show that the selling is still trumping the buying; no great revelation there.
CHARTS: After a two-day relief bounce on wobbly knees pushed the indices close to near resistance, some guidance relating to consumer strength (or the weakening thereof) turned the selling switch back on. SP500 turned over and gave up the November low and the 2003/2004 trendline. The other indices turned over as well and contributed to the losses as well, led by the small caps and NASDAQ. A modest bounce up toward near resistance (some did not even make it that far, e.g. NASDAQ) then a rollover once more. Volume was lighter and it was not a dive to new lows, but it was a clear turn back down after a couple of shaky upside sessions.
LEADERSHIP: It was not a day for a lot of leadership breakouts, though there were some. Several Chinese stocks rose as a for instance. Nonetheless it was a week that saw more leaders struggle and fade on top of the dive the prior week. There was more of a shift to defensive stocks in the consumer staples and in the medical/healthcare sectors. At the same time other leading sectors held up well, riding out the downside at support (energy is a classic example). Bigger picture leadership in terms of growth areas was heading in two directions with some continuing areas of impressive strength, but overall the leadership ranks thinned as the gravitational pull from the rest of the market took some former solid stocks lower.
In sum, it was kind of a fitting end to a week that saw selling return after a short respite, brought on by a chronic lack of action versus words from our monetary and fiscal policy leaders as well as just plain old negative news about the economy. There was talk from Bernanke and Bush but it was just cheap talk. Moreover, the 'stimulus' Bush hinted at is not stimulus at all as history shows us (tax rebates). Thus the market did nothing more than provide a cursory bounce in response. Promises of maybe something in the future have a present value of zero, particularly when the market needed action in four months ago and our leaders still have nothing concrete.
THE ECONOMY
Some improvement in key indicators.
Not that the economic landscape was totally bleak. One of the big complaints about the Fed's 'TAF' program (swaps and auctions) was the lack of impact on the issues confronting the credit markets, namely the surge in LIBOR rates versus the Fed Funds rate that was locking up any borrowing and the inability to place any commercial paper and thus provide companies with desperately needed funds.
Quietly, behind the cover and muted excitement of the financial sector deals, these key areas are improving dramatically. Commercial paper was piling up in the hands of the issuers because no one wanted it. That is swinging rather quickly back to more normal levels. Two weeks back it was $13.5B, a nice jump. Last week it was up again, rising to $14.5B. Its not to the point where all is right in the world, but CP is changing hands again.
LIBOR rates have plummeted. When all of the credit issues hit the fan in late summer, LIBOR rates were over 100 BP above the Fed Funds rate. Wednesday they were 12BP higher. Friday they were a gnat's butt over that rate.
A lot of angst transpired over the past couple of months as the Fed changed its tune on rate cuts (for those keeping score, this was the aggressive cutting to hawkish Fed) but started up the TAF program designed to attack liquidity issues directly. At the time we said it was a good idea just for that reason, but as the market continued to sell it was clear the Fed needed to bolster more confidence via rate cuts. The problem with TAF is that no one, not even those who know and trade the stock market, understood what it could do to alleviate the credit crunch. Even through Wednesday there were still comments that the TAF program was plain goofy, that it was a joke. Looking at the results, if it is a joke we cannot wait until the Fed really engages.
In retrospect, the Fed cut 50BP with the intention of getting everyone's attention and restoring confidence given it was a financial crisis and the need to take aggressive action with a confidence injection. Its only mistake was misjudging how much confidence needed to be injected immediately. The 50BP was great, but the market wanted more given the impacts it saw as a result of the mortgage and credit issues. Another 50BP AND the TAF program just may have done the trick.
Instead, the confidence that was first engendered with that initial 50BP cut stalled and then slipped away. CP and money are moving again thanks to the dramatic improvements in the credit markets, but the issue, the reason the market continues to sell, is the intervening months between the initial problem and the improvement in the credit markets. In other words, the damage may have already been done as credit remained locked up as confidence restoration kept financial institutions from doing what they do best.
Think of it this way. There are pressures that lead to inflation. They can rise while inflation is tame. Inflation finally starts up if the pressures remain high enough for long enough. By the time inflation shows up, however, the pressures causing it can be on the wane or have dissipated entirely. That means inflation will eventually fall again, but it is a lag effect. With the credit issues, the lack of confidence, despite the Fed acting to remedy the credit lock up via its TAF procedures, kept credit frozen even though the actions the Fed took were starting to work. The stock market certainly is saying the delay was too long and that there was serious damage done by the credit freeze and that lack of credit shut down business, and we are going to feel that lack of business activity and thus economic output as the year progresses. In other words, the market is forecasting the economic slowing that was caused by that lack of credit that slowed economic activity.
About the only thing the Fed could have done was what some very smart folks said it needed to do given the nature of the crisis: cut rates fast and hard and show no wavering of resolve in its goal of restoring confidence and thawing credit. It started well but then waffled under pressure from the inflation hawks. That will likely be the mistake that puts this Fed action in the filing cabinet with all of the other Fed responses that simply were inadequate. The right idea, timing was good at first, but a lack of conviction doomed it. So close, so close but yet so far (that is a song from the seventies; yikes, yet with the hints of stagflation some are talking about, strangely appropriate).
THE MARKET
MARKET SENTIMENT
VIX: 23.68; +0.23
VXN: 28.82; +1.04
VXO: 26.71; +1.77
Put/Call Ratio (CBOE): 0.93; -0.05. Surprisingly meek, below 1.0 on the close for the second session, despite the rather ugly turn to the downside. Indicates there is still some more to do.
Bulls: 48.4%. Hefty drop from 52.2% the prior week and 54.9% before that. Down from 56.50%. Didn't make it below 45% (it hit 40.6% on the low for the prior round of selling), a key indication, but on this run it may just do that. 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: 25.8%. Not bad, up from 24.5%. Bears continue rising as you would expect as the market continues falling. After a rather quick drop near 20% from 29.0% in late November. Significantly above the threshold 20% considered bearish but needs to get over 30% to really show the kind of washout fear needed. 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: -49.58 points (-1.95%) to close at 2439.94
Volume: 2.382B (-10.33%). Lower but still above average volume as NASDAQ turned back down. No new surge in selling but still a significant level of trade indicates there were a lot of sellers out in the market again on Friday.
Up Volume: 507.078M (-1.192B)
Down Volume: 1.84B (+981.862M)
A/D and Hi/Lo: Decliners led 2.53 to 1. Quickly spiking on the downside after a weak showing on the upside moves.
Previous Session: Advancers led 1.49 to 1
New Highs: 55 (-8)
New Lows: 301 (-14). Blew over 500 this week and that is a bit extreme.
NASDAQ CHART: http://investmenthouse.com/ihmedia/NASDAQ.jpeg
Gapped lower and closed near the session low. It did not undercut the prior lows on this selling, but after a two-session rally it would have taken a lot of selling. As it is the action certainly looked to be a rollover once more what with the techs leading to the downside, particularly the large cap techs.
NASDAQ 100 (-2.09%) mirrored the overall NASDAQ with its turn lower and holding near the Wednesday low. Weak technical pattern with the collapse below the 200 day SMA, further selling, the bounce to test, and now rolling back over.
NASDAQ 100 CHART: http://investmenthouse.com/ihmedia/NASDAQ100.jpeg
SOX CHART: http://investmenthouse.com/ihmedia/SOX.jpeg
SP500/NYSE
Stats: -19.31 points (-1.36%) to close at 1401.02
NYSE Volume: 1.79B (-13.18%). Volume was lower on NYSE as well but still well above average as the NYSE indices rolled back down from near resistance. Still sellers in the market though a bit fewer in number.
Up Volume: 469.621M (-1.082B)
Down Volume: 1.309B (+814.543M)
A/D and Hi/Lo: Decliners led 1.81 to 1. Pretty modest in a relative sense to what it has shown in the past month and lower then that advancing breadth Thursday.
Previous Session: Advancers led 2.09 to 1
New Highs: 41 (-7)
New Lows: 216 (0). Was over 600 early in the week. That was extreme.
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
After tapping the 10 day EMA on the Thursday high and sliding back, the AXP news sent SP500 lower from the open. It undercut the November low, the August closing low, and the old 2003/2004 trendline though not by much. Been here before, i.e. earlier in the week. The financial stocks were stronger, but frankly, they did not help the index and its weak technical pattern. Maybe this undercut of those lows triggers a new leg. The long buyers did not take up the torch Friday, however, after the short covering carried the torch right to them.
SP600 (-2.03%) did not make it up to the 10 day EMA as we wanted before it rolled over again, forging a new closing low for this selloff in just one session after two upside sessions scratched and clawed a bit higher. Whoosh. Gone in a day. Trending lower and lower below the 10 day EMA.
SP600 CHART: http://investmenthouse.com/ihmedia/SP600.jpeg
DJ30
The Dow tapped the 10 day EMA on Thursday and Friday it was in full reverse, giving back nearly all of the gains made on the 2-days of relief bounce. Still above the August intraday low near 12,500 that held Wednesday, but a the downside door remains open for the head and shoulders breakdown to continue heading lower toward 12,250 and then the March 2007 lows in the 12,000 range.
Stats: -246.79 points (-1.92%) to close at 12606.3
Volume: 301M shares Friday versus 325M Thursday. Elevated all week, upside or downside.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
MONDAY
It wasn't even Monday and deals in the financial sector were rumored and verified. Monday is the more traditional day for such announcements, and we could hear of some new deals: once someone starts buying everyone comes in for fear they will miss out on carrion feeding and pick up a good cheap buy.
That helps provide some buoyancy to the market and some impetus to go long these stocks. Financials were improved Friday, but they were up from the abyss and the action was limited as most everything else was down. These stocks have been crushed, losing as a group roughly 50% of their value from the highs. They are getting sold out and can start to recover. Everything else, however, is still in the process of correcting to get in line with future earnings expectations and thus they will lag the financials.
On the positive side, if financials have finally started to form a bottom, that is a major step for the market already taking place. We have seen indications housing was not falling as fast and even that some indications were turning positive on a year/year basis. When the deals are starting there is a sense of value at the current levels in financials. Importantly, the market needs the financials to trend higher before the market overall can hold and start entertaining visions of a sustained upside move.
Both still have a ways to go, however, and the Friday roll back down from the two-day bounce was rather emphatic. The Fed can step in and cut 50BP ahead of the meeting and that would have a stabilizing effect if not more. Hard to plan on that kind of wildcard in the deck, however, and you have to proceed recognizing that can happen but not letting it rule your investment decisions.
Oftentimes such hard selling is met with a modest bounce attempt the next session. If we get another test up toward near support that fails on DJ30 and IWM you have a textbook entry point to the downside if the move is on some light trade. Outside of some game-changing event, however, the rollover was rather classic after a sharp sell off relief bounce to near support.
The economy is still heading south with a lot of issues still swirling around about how much each bank has to write down and whether the BAC/CFC was a shotgun marriage arranged by the Federal government.
On top of that earnings start in force this week and while the quarter may be fine, expectations are the key and as we saw this past week, many companies are lowering some aspect of their future results. As noted last week, the market has sold in advance of earnings, re-pricing shares ahead of the news. You have to think that even with the market selling off ahead of earnings and leaving room for upside, the guidance simply cannot be great given the declines in the economic data.
Man, sure sounds gloomy. The market certainly has many hurdles to jump to get back to growth and a sustained rally. It is likely simply too early to accomplish that even with the positive signals from LIBOR and the commercial paper market. Thus we anticipate further downside to come and we will continue to play it as opportunity arises. There are also upside plays as money moves to defensive areas and to growth areas that refuse to give in. Basically you size up what the market is giving and take it. Right now the bias is lower but we won't ignore the solid upside action that remains.
Support and Resistance
NASDAQ: Closed at 2439.94
Resistance:
2451 is the August closing low
Some modest resistance at 2500 from interim August lows.
The 10 day EMA at 2523
2536 is the August 2004/April 2005/October 2005/March 2007 up trendline
2550 to 2540 from May/June consolidation and the November lows
The 200 day SMA at 2615
The 50 day EMA at 2624
2634.60 is the June peak
2725 is the July high
2735 is the December intraday high
The March up trendline at 2744
2769 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:
2386 is the August intraday low
2379 from the October 2006 peak
2370 from the April 2006 peak
2340 from the March 2007 low
S&P 500: Closed at 1401.02
Resistance:
1405 is a longer term trendline from the August 2003/September 2004 lows
1406 is the August and November 2007 closing low
1430 from the August interim lows
1440 - 1437 from January and March peaks
1457 is the June/July 2006 up trendline
1459 is the February peak
The 50 day EMA at 1464
1475 from peaks in December 1999 and January 2000
The 200 day SMA at 1491
1490.72 is the early June closing low and early August peak.
1524 is the December high
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
Support:
1374 is the March 2007 closing low
1370 is the August 2007 intraday low
1325 from May 2006 peak prior to the summer 2006 correction
Dow: Closed at 12,606.30
Resistance:
12,743 is the November low
12,786 is the February 2007 peak
12,845 is the August closing low
The 10 day EMA at 12,948
13,050 to 13,000 range
13,092 is the December low
The 50 day EMA at 13,238
The 200 day SMA at 13,374
The 90 day SMA at 13,464
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 is where it stalled in early December
Support:
12,518 is the August intraday low
12,250 from late March 2007 lows
12,050 from the March 2007 low
11,670 is the May 2006 intraday high; 11,642 closing
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
January 15
Retail Sales, December (8:30): 0.1% expected, 1.2% prior
Retail ex-Auto (8:30): 0.1% expected, 1.8% prior
PPI, December (8:30): 0.2% expected, 3.2% prior
Core PPI (8:30): 0.2% expected, 0.4% prior
NY Empire State Index, January (8:30): 10.0 expected, 10.3 prior
Business inventories, November (10:00): 0.4% expected, 0.1% prior
January 16
CPI, December (8:30): 0.2% expected, 0.8% prior
Core CPI, December (8:30): 0.2% expected, 0.3% prior
Net foreign purchases, November (9:00): $114.0B prior
Industrial production, December (9:15): -0.1% expected, 0.3% prior
Capacity utilization, December (9:15): 81.3% expected, 81.5% prior
Fed Beige Book, (2:00)
January 17
Housing starts, December (8:30): 1.150M expected, 1.187M prior
Building permits, December (8:30): 1.140M expected, 1.162M prior
Initial jobless claims (8:30): 335K expected, 322K prior
Crude oil inventories (10:30): -6.7M prior
Philly Fed, January (12:00): -1.5 expected, -1.6 prior
January 18
Leading economic indicators, December (10:00): -0.1% expected, -0.4% prior
Michigan sentiment, preliminary January (10:00): 74.5 expected, 75.5 prior
End part 1 of 3
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