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us stock market, trade stock
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1/17/08 Technical Traders Report Update
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MARKET ALERTS
Targets hit alerts: GRA; PCLN
Buy alerts: FDP; MLNM
Trailing stops: None issued
Stop alerts: AGU; TRA
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:
- Philly Fed breaks the camel's back & Bernanke testimony, President Bush promise of Friday stimulus package cannot fix it.
- Only in Washington, D.C. do tax cuts equal costs to taxpayers
- Volatility starts its run.
- Second leg lower has matched the first. Market is ready to bounce, just needs a catharsis.
Market finally starts to get a bit panicky.
The dreary news continued Thursday. MER announced its earnings and added another $14B to its write-downs, running the current total to $22B. More to come? Market wasn't too sure there just won't be a few more billion here or there MER has to knuckle on. On top of MER the housing market continued its amazing implosion that has not yet, but very well could, match the amazing run it enjoyed out of the prior recession and 9-11. Housing starts fell 14% in December, a 16 year low. Permits fell 8.1%. It took a long time, but starts are finally tanking as builders finally complete those developments they had in progress when the fat really hit the fan in early 2007. The Cleveland Fed president chimed in noting there is a 'freefall in housing' and that the economy was 'shifting to a lower growth track.' Nice leave, babe.
The market started higher anyway, trying to build off of Wednesdays semi-reversal. There was not a lot of strength, but there was green on the boards and that made folks feel better. Bernanke's speech to the House budget committee was released and he endorsed some fiscal stimulus as long as it would be timely, limited, paid for the usual litany of disclaimers attached to any semi-concrete statement by a public official. The market didn't like his comments about temporary stimulus versus longer term, etc, and to top it off he was quite downbeat. As he spoke the modest market gains slipped away.
As he was speaking and Congress was posturing, the Philly Fed PMI was released. It stunk the place up (-20.9 versus -1.5 expected and -1.6 prior). The market faltered again and then rolled over with wave after wave of selling into the close. There were a couple of token bounces, but they were used for target practice by the sellers as the indices closed 2% lower.
TECHNICALLY the action was again as bad as the point losses looked. A higher start solid into, and the selling only increased as the session wore on. Big solid bars to the downside on the candlestick chart as the indices closed at session lows with big point losses.
INTERNALS: Breadth was massively negative (-5:1 NYSE, -3.3:1 NASD) as the selling ran right into the closing bell. Volume was mixed, lower on NASDAQ, higher on NYSE, but it was still distribution trade as NASDAQ's trade was still a strong 2.8B shares. It's just that Wednesday was over 3B.
CHARTS: SP500 left its March lows behind and is right on top of the May 2006 peak. There is some support from 1325 down to 1300; not too far. NASDAQ is right at its March lows after taking out the April 2006 peaks. DJ30 is in the middle of its March consolidation range, moving toward the lows at 12,000 without much slowing it down. Heavy selling on Thursday, part of continued heavy selling since December. The indices have now put in legs equaling or topping the initial leg lower from October. Coupled with the violence of the selling and the rising fear levels, this indicates the market is approaching the end of this second down leg in its selloff.
LEADERSHIP: Defense was the name of the game and that is where money was running to, but it wasn't sprinting there. Even stocks such as MO struggled while the money was reserved for the purest of consumer staples stocks, e.g. FDP. There were not many pure consumer plays, however, at least based upon the red that was all over this sector as well.
THE ECONOMY
Bernanke trip to Congress to talk fiscal stimulus evokes some incredible statements.
It would be easy to poke fun at the congresswoman from Ohio who was spitting fire and itching for a fight over corporate pay packages. Okay, so we will do it. She led in with several statements about corporate pay, corporate losses, corporate punishment. Then she started to ask Bernanke as question, prefaced by 'when you were CEO of Goldman Sachs . . .' Huh? Bernanke quickly corrected the record, and you would have thought this reputedly educated US leader would have snapped to it, but she then asked 'which company were you with?' Bernanke quipped 'The CEO of Princeton Economics.' The congresswoman responded, 'oh, that was the other one.'
The exchange drew guffaws from the crowd, but it underscores why we cannot rely upon our elected representatives to adequately represent us unless we constantly monitor them. She didn't even know who she was questioning. Nice show Ohio.
Even more incredible, however, were statements from another congressman who was clearly positing questions in order to have fodder to fight whatever stimulus package the other side proposes. He asked Bernanke if he wanted to 'withdraw' any of his earlier testimony about a stimulus package being temporary, etc. Bernanke was onto him and reiterated his statements, noting there was more to the issue than just specific phrases taken out of context.
That questioning was annoyingly tunnel-visioned, but the comments that came next were truly amazing. This congressman went on a monologue about the Bush tax cuts and started citing figures as to how much those tax cuts 'cost' US taxpayers on out to 2017, coming up with something like $7T.
Truly amazing statements. When finished, the next congressman, Mr. Lungren from California, pointed out the obvious (why Bernanke did not no one knows). He noted that after four years of college, three years of law school, and years of private practice, he had to go to congressional hearings to learn that tax cuts 'cost' taxpayers money. A tax cut costs a taxpayer money. Wow.
Now if you enact legislation that some want to pass that keep some of the tax cuts on some income groups and remove them from others you could argue a tax cut cost taxpayers money because those who had the lower rate now have a higher rate by virtue of the 'tax cut.' But that is not what this congressman was saying. He was trying to make a sympathetic argument that all of us citizens would lose if tax cuts in place were extended because we wouldn't have money for services provided by our dear old inefficient Uncle Sam.
First, we know that the right kind of tax cuts (e.g. marginal tax rates, tax rates on capital and investment) generate additional economic activity that produces more tax revenues than before the cuts. If this was not the case then tax revenues would be lower after the last round of tax cuts. That is not the case. Tax revenues have soared to record levels. The tax cuts didn't take anything away from anyone, even Congress. Congress has more tax revenue coming in than ever. It just spends it faster than ever just as it did in the 1980's when tax receipts boomed. What was the difference in the 1990's when tax receipts boomed and we had surpluses? We had no more cold war and let our defenses weaken. With the cold war expenditures gone of course surpluses resulted.
Second, the only people who lose tax revenues if tax cuts are extended are congressmen and congresswomen. They won't have as much money to spend and thus cannot control our lives as much. If you get them out of your pocket they don't need to see everything you do. If you give them less money they cannot create as many programs to make more citizens beholden to the federal government. It drives them crazy when citizens actually say 'hey, this is MY money NOT yours.'
THE MARKET
MARKET SENTIMENT
VIX started to make a move on Thursday, finally getting off the dime and clearing the range of the past two months and ready to breakout over November and its peek into the low thirties. It posted a 17% gain Thursday, and those are the kind of gains that start the ball rolling. You want to see big spikes and you want to see the right levels. VIX is heading in the right direction, and the big spike in size is what you want. It needs to get into the forties on this run to really show the right level of fear that would fall in line with the put/call ratio.
As noted earlier in the week, however, just because volatility spikes into the forties does not mean the market bottoms and we are all planning exotic vacations for the summer. It takes several weeks after the highs are hit (and it can be a series of highs in a single event) before the market bottoms.
Of course, you also have to consider what kind of bottom. The market is still heading lower on this selling, and that means that it has a lot of basing ahead of it even after it does find the bottom. It is rarely a knifepoint turn in the economy and the market, and thus after the VIX spikes up for a couple of weeks and the market bottoms, the market has to base. It may must be an interim rally in a continuing bear market. Look at 2000; it spiked as the market sold off and then the market bottomed and rallied on through the summer. That bear market rally ultimately failed and the longer bear market resumed. Thus when VIX spikes we get a signal a buying point is at hand, but it does not mean any bear market is over in and of itself.
VIX: 28.46; +4.08
VXN: 31.16; +2.29
VXO: 32.1; +4.94
Put/Call Ratio (CBOE): 1.53; +0.34. Another session over 1.0 on the close. Plenty are piling up to back up the other indicators when they get in line.
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: -47.69 points (-1.99%) to close at 2346.9
Volume: 2.834B (-19.15%). Volume was down but it was still big; Wednesday was just bigger. Techs remain under distribution, and it doesn't help it is expiration week, pumping up the volume ahead of expiration and a long weekend for the market.
Up Volume: 578.993M (-956.991M)
Down Volume: 2.229B (+277.575M)
A/D and Hi/Lo: Decliners led 3.33 to 1. Once more the downside far outstrips the upside in terms of advancers and decliners.
Previous Session: Advancers led 1.19 to 1
New Highs: 52 (-2)
New Lows: 369 (+21). Not a huge ramp up after that initial spike higher on the January selling.
NASDAQ CHART: http://investmenthouse.com/ihmedia/NASDAQ.jpeg
Continued dive bombing lower though it gapped higher to start the session before rolling over on the Bernanke bland comments and the horrid Philly Fed report. It blew out the August intraday low and the November 2006 high and is sitting right on the early March 2007 consolidation low. Its next level of support is in the 2300 range - - not far at all. After that there is a trendline from the summer 2004 lows to the July 2006 consolidation lows at 2260. That is a key trendline.
NASDAQ 100 CHART: http://investmenthouse.com/ihmedia/NASDAQ100.jpeg
SOX CHART: http://investmenthouse.com/ihmedia/SOX.jpeg
SP500/NYSE
Stats: -39.95 points (-2.91%) to close at 1333.25
NYSE Volume: 2.144B (+1.79%). Volume surged again as the NYSE indices, particularly the large cap SP500, dove lower. Massive distribution exacerbated by expiration week.
Up Volume: 206.905M (-788.683M)
Down Volume: 1.957B (+861.46M)
A/D and Hi/Lo: Decliners led 5.36 to 1. Really a tail kicking as decliners overran the upside yet again.
Previous Session: Advancers led 1.02 to 1
New Highs: 26 (-9)
New Lows: 479 (+95). Respectable.
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
SP500 blew through the March low (1374) with no issues. It close on the low and is heading toward the May 2006 peak at 1325 we said it would test before it could start finding a bottom on this leg. It is basically there. Moreover, this leg lower is now 20 points deeper than the first leg from the October peak. Thus SP500 is close to ending this leg, but it needs another push lower to give it an upside spasm.
SP600 (-2.62%) sold more. That is about all you can say about this other than it is down more than 20% and was thus labeled a bear market on the financial stations. Hello, McFly. We are already there everywhere. It is just over the 350 level where there is some support, and after this kind of gutting it will try to make a stand there.
SP600 CHART: http://investmenthouse.com/ihmedia/SP600.jpeg
DJ30
Nary a Dow stock was higher though after hours IBM was up thanks to a strong earnings report that upped the 2008 guidance. That will help the Dow tomorrow, but we are kind of sad about that; another good flushing to the low would set up a heck of a rebound rally. As it is, DJ30 dove toward its March lows (12,050 closing) and is just a moderate selloff from that level. With SP500 already hitting support, this level should start pushing back at DJ30. After this punishing selling on this second leg of the selling the Dow is just about set to rebound.
Stats: -306.95 points (-2.46%) to close at 12159.21
Volume: 439M shares Thursday versus 500M shares Wednesday. Another massive volume session on expiration week with some panic selling thrown in on the side.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
FRIDAY
There are several factors building toward an interim bottom shortly ahead. Not 'the' bottom as some were talking about on Thursday, but a bottom to this leg of the selling.
Some really smart traders are getting caught up in the forest, seeing only trees and not what is going on. This is the second leg down since the market peaked in October. The first leg lower ended in late November and gave us the Christmas rally. That ended in December (appropriately), and this current leg lower started just ahead of the new year. There are typically three legs in such selloffs before a longer term bottom can be put in and a base starts to build. It may still fail a time or two again, but this is the pattern.
As noted above, the indices have equaled or surpasses the losses sustained on the first leg lower. Moreover, the length of time for this leg is almost to the day the same as leg number 1. Legs are usually close to the same size. As the other indicators (e.g. VIX) swing into place along with the put/call ratio, new lows, the size of this leg, the market will be set for the next break higher. It is close and all it needs is another good push lower and then it will likely reverse, setting the bottom for the next relief rally.
It will be a relief rally because there is still more selling to do. VIX won't get to where it needs to be with just another session of selling. VIX has to get up into the 40's as discussed above. Moreover, a bottom isn't set until weeks after the VIX hits those levels. Thus we get an upside leg again, it runs dry in a few weeks to a month, then leg three. On that leg VIX runs wild as fear really sparks up. All of the indicators come into place and then the market works through several weeks of indecision before a more sustained upside move takes hold. That move can be the end of the selling or it can be a false hope as we saw when trying to get out of the last recession.
Thus while we are looking forward to the next bounce as something that is tradable and can make us some very nice money, we are not kidding ourselves thinking it is the end of the selling. We were disappointed with IBM's results after hours; they were good and may prevent a real stomach turner in the morning, the kind that would flush out this downside leg and start the rebound. May still get it, just have to go through the morning and some 'rah, rah' regarding the IBM results.
It may be that it takes until next week, but the fact that Monday the market is closed for the King holiday could cause some serious short covering ahead of the long weekend, particularly with all of the talk in DC about stimulus. There is also the possibility that in conjunction with Bush's announcement of 'broad' principles for stimulus the Fed delivers a cut. There is still that hanging out there on the trading floor, though after listening to Bernanke Thursday it certainly does not seem to be nearly as likely.
In any event, if we get that spike lower on the open we are closing out the SPY, SDS, PCLN, NILE downside positions and will see how the others react to determine if we want to close them out as well. If there is a higher open thanks to the IBM results we will see if there is a rollover after the initial round of covering that will give us some more great premium on those downside plays. In any event, the basic idea is to bank some of that great downside gain when we get a trigger that will turn the market. The IBM earnings were good, but it will take more than that to do the job. The last sellers have to be wring out of this leg; it almost happened Thursday, but it was not quite there.
What happens when the turn comes? Buy some call options on the indices and other big cap stocks that were runners but got sold off. Some are even in good position over support. SPY, DIA, DJX, QQQQ are some index possibilities. AAPL, RIMM, MON, MOS, FWLT are some stock possibilities.
Support and Resistance
NASDAQ: Closed at 2346.90
Resistance:
2370 from the April 2006 peak
2379 from the October 2006 peak
2386 is the August intraday low
2451 is the August closing low
The 10 day EMA at 2455
Some modest resistance at 2500 from interim August lows.
The 18 day EMA at 2506
2541 is the August 2004/April 2005/October 2005/March 2007 up trendline
2550 to 2540 from May/June consolidation and the November lows
The 50 day EMA at 2592
Support:
2340 from the March 2007 low
2315 to 2300 is a range of support from old peaks
2260 is the trendline from the summer 2004/July 2006 lows
S&P 500: Closed at 1333.25
Resistance:
1370 is the August 2007 intraday low
1374 is the March 2007 closing low
1406 is a longer term trendline from the August 2003/September 2004 lows
1406 is the August and November 2007 closing low
1425 is the 18 day EMA
1430 from the August interim lows
1440 - 1437 from January and March peaks
The 50 day EMA at 1456
1459 is the June/July 2006 up trendline
1459 is the February peak
1475 from peaks in December 1999 and January 2000
The 200 day SMA at 1490
Support:
1325 from May 2006 peak prior to the summer 2006 correction
Dow: Closed at 12,466.16
Resistance:
12,250 from late March 2007 lows
12,518 is the August intraday low
The 10 day EMA at 12,739
12,743 is the November low
12,786 is the February 2007 peak
12,845 is the August closing low
The 18 day EMA at 12,894
13,050 to 13,000 range
13,092 is the December low
The 50 day EMA at 13,163
Support:
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): -0.4% actual versus 0.0% expected, 1.0% prior
Retail ex-Auto (8:30): -0.4% actual versus -0.1% expected, 1.7% prior
PPI, December (8:30): -0.1% actual versus 0.2% expected, 3.2% prior
Core PPI (8:30): 0.2% actual versus 0.2% expected, 0.4% prior
NY Empire State Index, January (8:30): 9.0 actual versus 10.0 expected, 9.8 prior (revised from 10.3)
Business inventories, November (10:00): 0.4% actual versus 0.4% expected, 0.1% prior
January 16
CPI, December (8:30): 0.3% actual versus 0.2% expected, 0.8% prior
Core CPI, December (8:30): 0.2% actual versus 0.2% expected, 0.3% prior
Net foreign purchases, November (9:00): $114.0B prior
Industrial production, December (9:15): 0.0% actual versus -0.2% expected, 0.3% prior
Capacity utilization, December (9:15): 81.4% actual versus 81.2% expected, 81.6% prior
Crude oil inventories (10:30): +4.26M actual, -6.7M prior
Fed Beige Book, (2:00)
January 17
Housing starts, December (8:30): 1.006M actual versus 1.150M expected, 1.173M prior
Building permits, December (8:30): 1.068M actual versus 1.140M expected, 1.162M prior
Initial jobless claims (8:30): 301K actual versus 335K expected, 322K prior
Philly Fed, January (12:00): -20.9 actual versus -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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