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us stock market, trade stock
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1/19/08 Investment House Alerts
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IH Alert Subscribers:
MARKET ALERTS:
Targets hit alerts: GRA; MS; SDS; SPY
Buy alerts: None issued
Trailing stops: NILE; PCLN
Stop alerts issued: None issued
SUMMARY:
- GE, IBM prevent early selloff, but cannot turn the tide.
- Leading indicators remains weak while consumer sentiment bumps higher.
- Stimulus proposal stimulating the usual debate.
- Hard to stay long this market outside the relief moves as even defensive sectors come under pressure.
- Earnings start in earnest and may trigger the rebound, either by good news or bad.
'Stimulating' session to end a very ugly weak.
At the Thursday close the natives were restless, scanning the market for the exit doors. Volatility was jumping higher, indices diving to lows toward the close, new lows for the year lighting up the board. A continued dive lower early Friday could have turned this second leg into the next sizeable upside rally.
Then IBM reported earnings and raised its 2008 guidance. It had already pre-announced, but then it beat. There was more gas left in its tank and it was taking at least part of the market with it. GE then announced its earnings, and while it didn't beat any expectations it did reiterate its full year 2008 earnings. GE took some more of the market with it as investors were impressed that it did not miss its results and that there was still some hope with the overseas economies that both IBM and GE are greatly profiting from. If they are doing it, the others must be as well. That got futures up, and the market started higher. Moreover, it didn't immediately turn over and dive lower again. Not immediately.
Thus there was no capitulation on the open. The fear at the Thursday close dissipated. Investors even got a bit cheery as the January Michigan sentiment report popped off a 90 reading (90.49). DJ30 rallied 180 points shortly after the sentiment report hit the wire. The fear was being replaced by some cheer.
No good piece of news goes unpunished by this market of late, and when the President started his news conference regarding his stimulus package principles, the market started to ease back. When the President did not provide any specifics it sold off, turning negative in a 320 point Dow reversal. All the President's men held their own news conference a half hour later, trying to put more meat on the bones. They didn't provide much more information, but the market did get over its disappointment, though even on Thursday the White House was clear that there would be only big picture ideas versus specifics. Stocks came back and even turned positive, but the IBM/GE momentum spell was broken. So, no fear to take the market spiking down early, no afternoon carryover of the early momentum, just a market limping home on expiration Friday after a week that saw the market take its worst beating to start a new year ever. Ever. That's a mighty long time as the artist formerly known as Prince once said before he started calling himself the artist formerly known as Prince.
TECHNICALLY the action Friday was nothing special, other than a disappointment. Disappointing because the market didn't complete this second leg of selling with one more scary push lower. Disappointing because the bounce on some good earnings news had the saying power of and eighty year old who lost his Viagra. Thus the higher open was sold off and the market never could regain its mojo.
INTERNALS: Breadth was modest but lower (1.75:1 on both NYSE, NASDAQ). Volume was up but you would expect that on expiration Friday, but it was still in line with the volume of the past two weeks as the market careened lower. Basically most of the fireworks for expiration week were already over by Friday. It was anticlimactic, a day after Christmas kind of session.
CHARTS: The index charts did not change a whole lot. Oh they show dojis on the candlestick chart and we all know that after a selloff that can (can) indicate a rebound, but it has to be confirmed. It tells us to get ready, but frankly we already were after that Thursday selloff and it still didn't come. The indices remain heavily oversold with their selloffs now surpassing the length of the first downside leg in this bear market. Of course, oversold can become more oversold; eventually the rubber band snaps back, but it needs the right setting, the right trigger. Another sharp selloff will likely do that, and we anticipate the return from the long weekend will bring that out of the market.
LEADERSHIP: Leadership continues to fall apart as fast as the end of the Dallas Cowboys' season. Energy and agriculture were taken out last week along with many other foreign plays as the worries of a worldwide slowdown soured investors on these in addition to US-bound stocks. Thursday and Friday saw the unraveling of many healthcare issues that had to that point acted as safer havens from the selling. Even traditional stocks such as MO took on some water late in the week. Whether that was expiration alone or something quite sinister ongoing, it underscored how weak leadership has turned. A market without leadership doesn't go higher, and with the collapse in many leaders the past three weeks it is going to take some basing to get things back on track for a sustained rally. In the interim many of these short term oversold leaders can rebound similar to late November, but longer term many were gutted and are going to need a longer base.
THE ECONOMY
Sentiment holds up in January.
Michigan sentiment was expected to decline, albeit modestly, to 74.5 from 75.5 in December. Instead it jumped to 80.5. An improvement but no reversal of trend. Sentiment peaked to start 2007 and trended lower since. That makes the bump higher in January nice, but it also makes it somewhat of an aberration.
In December sentiment hit its low, down 22% from that last peak. That 74.5 reading just topped the post-Katrina levels (74.2). Feeling good indeed. On the positive side, despite home value declines, high energy prices, and credit worries, sentiment posted its first gain since they all merged just after the July reading of sentiment.
Though sentiment rose for the first time since July, the reading was still below the 81.8 LOW hit in the 2001 recession. That was a mild recession from the consumer standpoint. Recall how consumers continued to buy new homes, remodel, stock and furnish the homes, etc. in the wake of 9-11. Thus the consumer never slowed. It was business that folded the tent in that recession as investment capital died off after Greenspan drained the liquidity pool. Right now it is a confidence crisis in the financial markets that has not been adequately met over 5 months since it arose. That is taking its toll on the business side once again, and it is also starting to spread to the consumer by virtue of all of the added hype the consumer is bombarded with daily in addition to the high gasoline prices, higher food prices (thanks, ethanol), weaker jobs market, and weaker housing market.
And the rush for the stimulus begins.
Of course we have the President, Congress and even Mr. Bernanke all on the same page, agreeing that some short term economic stimulus is needed. Of course, whenever there is money to be given away, the interest groups rush the Hill and the parties start squabbling about who should get what. First the size: $150B, 1% of GDP, was the number set. That in itself was pretty disappointing, maybe worth 30 days of stimulus. Bold move. There are to be tax rebates, but the republicans want to give tax rebates to those actually paying taxes. Leading democrats are already mad because that supposedly leaves 50M people who are not going to benefit of the tax rebates because they don't pay taxes. Hey, if you want to give someone a tax rebate, it is a prerequisite they pay taxes. Otherwise call it a gift or redistribution of wealth or something more accurate. If they feel they will spend it in a way that will create investment in the US and jobs for them to work at, go for it. Just don't call it a tax rebate and otherwise play games with us.
The republicans can go along with 'rebates' if they can get something on the business side as well. And to be fair, many democrats are staunchly supporting tax incentives for business, particularly small businesses, as well. There is a problem, however. You can call a stimulus package a small business package or say they are included in it, but if it fails to provide stimulus, then is it really stimulus?
What is being pushed is accelerated depreciation and/or expensing. This would allow businesses to write off costs faster than usual, thus making buying big ticket items more alluring. Problem is, there are already liberal expensing provisions still in place from the 2003 Bush tax cuts. Businesses can expense $125K in capital goods per year. That is a pretty big nut of expenses for a small business. In other words, most small businesses won't hit that amount in a year. Thus if you bump the expensing up higher that really won't incent small businesses to buy more. If you can afford only $75K of goods, raising the expensing to $200K won't make you buy $125K more of goods. You still have to have the cash or the credit to buy. Oh yes, credit. It is still tight as a tick on a hound dog. That's out. Accelerated depreciation is also being discussed, but that has the same problem: if you can already expense it you don't need accelerated depreciation.
What gives businesses with no incentive to buy an incentive to buy? Art Cashin knows. Friday morning he said that if the President's proposals included tax credits that would get the market in a better mood. No mention of tax credits, and at $150B, the package did not excite investors. Why are credits best? Because if a business is worried about the future, it is not going to spend money just because it can get a deduction for expensing or depreciating something it buys. The pass through is not bad, it just typically doesn't provide enough compensation in tax savings versus the risk in parting with dear dollars in times of uncertainty. A tax credit, however, is a dollar for dollar benefit. If you spend $1,000 and get a $1,000 credit for it then you will spend the money. Why? Because if you don't spend the $1,000 you still have to spend it later when you pay Uncle Same your taxes. If you spend $1,000 on something you need for business you get something for your business and you reduce your taxes by that $1,000. Beats the heck out of just sending the $1,000 to the government never to be seen again.
Credits worked great in the early 1980's with the Regan tax cuts. I remember buying a new-fangled device known as a personal computer. It was unproven, had as much memory as a small lizard, and was as slow as a tree sloth, but that tax credit made it worth investing in. A lot of businesses did that. Boom. Start of the personal computing boom. We already have liberal expensing. We need tax credits to pry the money out of the wallets now. Call your senators and representatives and tell them to get small business on board and spending money again you need tax credits. With CEO sentiment at a 7 month low, this would boost the outlook because it would get billions of dollars moving back into buying capital goods and equipment.
THE MARKET
MARKET SENTIMENT
VIX: 27.18; -1.28. Backed off after edging a bit higher to 29.30 on the Friday high when the market sold midmorning. A move into the thirties will be enough to trigger the rebound form the second leg lower in this selling. Before the selling ultimately bottoms, however, it will need to be in the 40's to 50's.
VXN: 30.23; -0.93
VXO: 29.99; -2.11
Put/Call Ratio (CBOE): 1.33; -0.2. Steady week of closes above 1.0 is putting the put/call ratio at the right level.
Bulls: 45.6%. Down further, falling steadily from 48.4%, 52.2%, 54.9% and 56.50% on the high. On the last trip down selling lane bulls did not fall below 45% (hit 40.6% on the low for the prior round of selling), a key. It is 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. 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: 26.7%. Climbing yes, but would like to see it climbing faster. Up from 25.8% and 24.5% the week before. Needs to get over 30% to really show the kind of washout fear to help start a run. Fell to a low of 19.6% on this round. Bearishness peaked at 37.4% in September 2007. It topped the June 2006 peak (36%) on that 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: -6.88 points (-0.29%) to close at 2340.02
Volume: 2.986B (+5.38%). Expiration saw higher volume on a week of high volume distribution as the NASDAQ large caps and small caps sold off.
Up Volume: 1.066B (+487.015M)
Down Volume: 1.877B (-351.847M)
A/D and Hi/Lo: Decliners led 1.75 to 1. Bland on a bland end to expiration week. Prior to Friday it was a wild week of breadth with the downside pretty much blowing things out.
Previous Session: Decliners led 3.33 to 1
New Highs: 35 (-17)
New Lows: 559 (+190). Ramping back up to significant levels and piling up enough to start putting this indicator on the bounce higher side of the ledger.
NASDAQ CHART: http://investmenthouse.com/ihmedia/NASDAQ.jpeg
Was up 37 points on the morning high and then reversed to negative. It was then up and down in a narrow range for the rest of the session, closing with a loss. Big deal. On the week NASDAQ started stronger, looking ready to continue the relief bounce, and then collapsed over 100 points, taking out the August low. It managed to hold the March 2007 lows on the Friday close. Big drop, surpassing that of the first leg. Sitting on March lows. Good point to bounce, but it has been in this position before and did not. As noted, one more tug lower that looks as if it means business (unlike Friday) and we likely finally get the reversal for a relief move of a week to three weeks.
NASDAQ 100 (+0.11%) is still holding at the August 2007 closing low. The large cap techs, after getting hammered down from leadership status, tried to put in a bounce Friday but couldn't quite get there. AAPL and company announce earnings this coming week and there could be a split thrown in there that could help pave the upside for the large cap techs sorely in need of a relief bounce.
SOX (+2.43%) was the relative strength leader on the week. While NASDAQ lost 4% last week SOX gained 1.3%. Not a huge surge, but it clamped off the bleeding despite some ugly earnings from INTC, moving laterally. The chips look sold out for now, another indication a bottom to this leg of the selling is near and ready to give way to a decent relief bounce.
NASDAQ 100 CHART: http://investmenthouse.com/ihmedia/NASDAQ100.jpeg
SOX CHART: http://investmenthouse.com/ihmedia/SOX.jpeg
SP500/NYSE
Stats: -8.06 points (-0.6%) to close at 1325.19
NYSE Volume: 2.147B (+0.13%). Volume jumped to the highest level of the week, typical for expiration Friday though it was hardly a typical volume week. Trade spiked higher as the NYSE indices folded their hand.
Up Volume: 975.595M (+768.69M)
Down Volume: 1.469B (-488.043M)
A/D and Hi/Lo: Decliners led 1.74 to 1. Same as NASDAQ. Kind of bland. You know the market is volatile and getting hammered when this level of breadth is considered insignificant.
Previous Session: Decliners led 5.36 to 1
New Highs: 13 (-13)
New Lows: 634 (+155). As with NASDAQ, the number of days new lows has surged past 500 has reached a significant level that would support a rebound move in the market.
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
SP500 sold off below the May 2006 peak at 1325 (1312 on the low) and then rebounded to hold that level. Bounced up off the low, but it was a volatile expiration session, at least in terms of the ground SP500 covered early in the session. After that things died off rather quickly. As noted Thursday, it is almost 30 points lower than the ground lost on the first leg lower from October to November. Primed for a rebound, just needs a trigger to send it back up.
The small cap SP600 (-0.78%) had an awful week as you would expect from the small caps in a market that is pricing in a recession. It is still massively oversold and is just looking for an indication from the other indices that they are ready to try a bounce so it can let off some steam to the upside. That is about all it will do. Major decline since late December (60 points or 17% on that move alone. Gut punch.
SP600 CHART: http://investmenthouse.com/ihmedia/SP600.jpeg
DJ30
Another lower finish for the blue chips in a really ugly week. It sold to the March closing low on Friday (12,050), undercutting it intraday (12,022) before rebounding for a rather modest loss. With this move DJ30 is in perfect position to bounce. But as noted Thursday night, it needs a catalyst. IBM tried, but it couldn't withstand the negative tide. GE did what it could, but it could not generate enough following either. No, it needs just another flush to complete the selling on this leg and move higher. Remember, based upon the topping pattern it formed we anticipate an ultimate selloff down to the 11,300 level. A bounce from here for 2 to 3 weeks and then another rollover to take it down to that level.
Stats: -59.91 points (-0.49%) to close at 12099.3
Volume: 483M shares Friday versus 439M shares Thursday. Big, big expiration volume, but it was still lower than Wednesday and that session's big, big volume.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
TUESDAY
Market re-opens Tuesday after the MLK holiday Monday. Many things can happen over a three-day weekend, but not likely much with respect to the economy. The indices are in very oversold conditions, as the current (second) leg of the major decline from the peaks has eclipsed the depth of the first decline. They are structurally in great position to rebound, they simply need a catalyst. Some are saying that because the January 2008 options on the indices were LEAP options that had been in existence for a long, long time and had massive open interests that have not been fully replaced with new buys in February 2008 options, when the market opens next week volatility will shoot higher because all of the put protection those old January options gave the big investors will be gone. That means they get really freaked about further heavy selling. That, some are saying, will result in the final spasm lower that ends the current selling leg and gives way to that relied bounce.
Sounds plausible. Whatever the reason is, there will be a catalyst that concludes this leg, and it will likely occur next week. Thursday the market was on the cusp but IBM and GE were the pressure relief valves that let the fear level drop. At the end of the week, however, the indices remained locked and loaded for a reversal of fortune.
As noted Thursday, we are looking to play that upside because it is going to be more sustained than that little hiccup in the selling two weeks back. These selloffs tend to consist of three legs with tradable relief moves to the upside in between.
And tradable is how we have to view them. The upside for a long term perspective, i.e. breakouts that run higher is getting chewed up in the selling as new highs are considered signals to sell a stock versus buy into it. Thus we saw several breakouts get thrown back after a couple of days or even just a day of upside. For upside plays that are more than just relief bounce plays it is now best to play the first test of the breakout. If the stocks starts to move higher after that breakout and does so on solid trade that tells us that the buyers are more committed and are not going to dump it. Thus we will look for breakout tests that hold near support and then bounce from there.
As for the stocks that were leaders but were beaten about the head and shoulders with rubber hoses, we don't wait for them to set up new bases, form handles, and then breakout. We will do that when the market tells us it is time for that, i.e. when we see the selloff complete, bases are formed, and solid stocks with good earnings growth are blasting off again. For now we watch for when the market is oversold and the selling leg has ended and then step in as the market reverses in a rather violent manner. We step into the deflowered former leaders and let them scream higher, and when the move starts to lose steam after a week and a half or two weeks, then we bank them and prepare to play the downside.
You have to stay very tuned to the market and what it is doing, and that is what we are here for. We will be selling before the move is totally exhausted because we will then be entering some downside positions before the rollover starts so we don't get shut out on some plays such as the DJX last week. We bought the SP500 downside but waited one market bell too many to buy the DJX. In that same vein, we could start taking some upside ahead of the cathartic event lower, but the problem with that is the cathartic even can shave off a couple of hundred points off the Dow before reversing. Just let it sell off and reverse; then move in. Or, if it takes off to the upside without hesitating, buy into at least partial positions. Different market, different tactics. Just like turning the page of a book, however, nothing more.
Earnings may ultimately provide the trigger. They could be worse than expected and jar the market lower and give it that final washout. Or they could be better than expected and shoot the market higher without a further sharp selloff. The point is the market is at an inflection point on this selloff and is ready to find something to spring the trap on the short covering and set off the massive covering run. It could be the January options expiration noted above, it could be earnings good or bad, or it could be something about stimulus or even a surprise Fed 50BP rate cut. We closed several of our downside option plays Friday in anticipation of this and we are going to continue at the ready to move into the deflowered former leaders as they surge back up, e.g. FWLT, MON, etc.
Support and Resistance
NASDAQ: Closed at 2340.02
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 2434
The 18 day EMA at 2489
Some modest resistance at 2500 from interim August lows.
2542 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 2582
Support:
2340 from the March 2007 low
2315 to 2300 is a range of support from old peaks
2265 is the trendline from the summer 2004/July 2006 lows
S&P 500: Closed at 1325.19
Resistance:
1370 is the August 2007 intraday low
1374 is the March 2007 closing low
1382 is the 10 day EMA
1406 is a longer term trendline from the August 2003/September 2004 lows
1406 is the August and November 2007 closing low
1406 is the 18 day EMA
1430 from the August interim lows
1440 - 1437 from January and March peaks
The 50 day EMA at 1445
1460 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 1489
Support:
1325 from May 2006 peak prior to the summer 2006 correction
1310 is an ancient trendline
1305 to 1302 from an August 2006 peak and matches a range of support from March and April 2006.
1294 from the January 2006 peak
Dow: Closed at 12,099.30
Resistance:
12,250 from late March 2007 lows
12,518 is the August intraday low
The 10 day EMA at 12,537
The 18 day EMA at 12,742
12,743 is the November low
12,786 is the February 2007 peak
12,845 is the August closing low
13,050 to 13,000 range
13,092 is the December low
The 50 day EMA at 13,084
Support:
12,050 from the March 2007 low
11,670 is the May 2006 intraday high; 11,642 closing
11,317 is the March 2006 peak
11,228 from a July 2006 peak
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
January 24
Initial jobless claims (8:30): 325K expected, 301K prior
Existing home sales, December (10:00): 4.95M expected, 5.00M prior
Crude oil inventories (10:30): +4.2M prior
End part 1 of 3
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