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world stock market, us stock market
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1/22/08 Technical Traders Report Update
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Full report issues Wednesday
MARKET ALERTS
Targets hit alerts: CVS; SBUX
Buy alerts: DIA; FWLT; SPY; VIVO
Trailing stops: None issued
Stop alerts: 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 SSR alert service you can sign up at the following link:
http://www.investmenthouse.com/alertttr.html
SUMMARY:
- Fed slashes rates to offset market freefall but market explodes lower nonetheless.
- Bond yields fall further, anticipating even more from the Fed.
- Dollar holds some strength despite the cut given worries rest of world will fall after US.
- Bernanke Fed struggling in its first crisis, similar to Greenspan's first, second, third, . . .
- Rebound from second leg lower set to start, but AAPL earnings guidance trying to slow down the techs after hours.
Fed forced to cut, market not happy, but manages to rebound from the abyss.
As the US enjoyed a holiday everyone was watching a couple of key events. First, ABK, a major mortgage insurer, had its credit rating reduced by Moody's. All of that insurance supposedly covering all of those mortgages held by other financial institutions is now officially questionable. Everyone knew this was a big issue coming down the pipe, but as we often say, reality is always a slap in the face. Second, that ABK story on top of the US market weakness triggered a massive selloff overseas. It was just a matter of time before the US opened and the selling would continue.
On Monday rumor started circulating the Fed was holding a meeting for an emergency cut. That did not help foreign markets nor the US on Tuesday morning. Then the Fed cut rates 75BP pre-market in the largest intermeeting moved since 1984. Stock futures recovered, but then they rolled over just as hard. Even with the good news it was not enough to rally the troops and the market gapped lower as panic took over. You heard it: 'does the Fed know something we don't?' No, the Fed is just playing catch up to a market that shows the economy is heading lower and the Fed is behind the curve. 'The overseas economies, including China, are going to collapse!' No, they are going to struggle some similar to the US, but China will grow at maybe 9% to 10% versus 15%; slow for China, but that will still suck up all kinds of materials, goods and services. Remember, China, India and Brazil are just discovering they have buying power, and even if the US consumer buys less for a couple of quarters the base of newly wealthy in those countries will still buy goods and those goods will need our tools, machines, and expertise to come about. The overseas worries are getting hyper-inflated right now and there is a correction there as well.
Stocks opened down and sold hard. VIX spiked to 37.57, topping the August intraday. After dropping like stones on this second leg, that jump in VIX helped turn the market. It rebounded with some indices (e.g. SP600) turning positive in the afternoon. DJ30 got to within 25 points of even. SP500 within 4 points. Close but just missed getting there on the close. Big panic selling, fear spiking the VIX, then a recovery almost to positive on the close. If not for the rate cut it could have been really, really ugly on into the close.
TECHNICALLY the action Tuesday gave us the washout on the second down leg that we wanted to see: a big downside open, spiking volatility, and then a reversal, just missing positive on the close. Financials made it to positive and many overseas stocks made it back as well.
INTERNALS: Not that bad, at least on the close. Breadth was sharply lower intraday on the selling but recovered to relative modest levels by the close. Volume not surprisingly surged as the market sold off and then reversed.
CHARTS: Big dojis on the candlestick charts for the indices, and while you often have to take that with a grain of salt on the indices, given the hard selling in this second leg of the market decline it looks as if there is something to this signal. The end of this leg can give us 2 to 3 weeks upside, though trying to put an exact time period on it is folly. What typically happens is a bounce more than a couple of sessions as seen a week back, then the third leg lower. That is followed by a more significant rally before a dive lower where the market tries to put in a bottom or continues to sell further as in 2000.
LEADERSHIP: Leadership is hard to find in the market of late as most of the leaders in the prior rally finally gave in over the past two weeks. Healthcare is still trying to hold up, but it was not immune from the selling either, with most gapping lower, some recovering, some not. Retail and financials were leaders for the day, but they tend to bounce when the Fed cuts and they were also some of the worst whipping boys for the market. Still, some financials looks actually interesting. For many other former leaders or leader wannabes, however, there is more work to be done before they are ready to sustain a move other than a relief bounce as the market recovers.
THE ECONOMY
Bond yields still tumble, pricing in more Fed cuts next week.
The Fed cut rates to try and get the Fed Funds rate down closer to the 10 year and 2 year yields on treasuries. As long as the Fed Funds rate lags these levels and in reality the 90 day treasury, there is no stimulus in the financial arena. Right now the Fed Funds rate stands at 3.50%, down from 4.25% just on Monday. The 10 year US bond closed at 3.48%; the 2 year closed at 2.04%. By that measure, and it is the key one as it is set by the market versus the Fed Funds Rate, the Fed is still behind the curve.
Thus the bond market and the Fed Fund futures contract are pricing in more action at next week's FOMC meeting, the one the lone dissenter (Poole) waned to wait for to cut rates. If Bernanke is serious about doing what is necessary with significant and timely action, then more cuts will be needed. The Fed could not drop a 125BP cut on the market at once; that would have raised more questions than wanted about just what the Fed may or may not see in the numbers we are not privy to. Thus the 75, a big individual cut, to be followed by more next week. Indeed, the market currently has priced in a 76% chance of another 50BP in cuts at that meeting.
May the Fed find sanctuary if it does not cut significantly again next week. After starting down this road once and getting sidetracked, it fell behind the curve and then had to make another 'do what it takes' speech after backing off on rate cuts even though it had implemented its Taffy system. Now that it is back in the game of 'doing what it takes,' it has to get out in front of the bond yields to create money in the system. When the FF rate is less than the short term rates, banks can borrow money from the Fed and then buy Treasuries or lend, etc. That creates money. As it is now, even with the rate cuts banks are still not in the lending game because it is not profitable to be in the game. The key to monetary policy, the key that so many in the Fed lose sight of when worrying about appearances and inflation, is that once you decide there needs to be stimulus, you have to get rates down quickly to that level so there is stimulus. Otherwise you 'push on a string' all the way down to the bottom as was the case with the Greenspan Fed time after time after time after time . . .
Bernanke is not nearly as bad as his predecessor.
Bernanke is getting called everything in the book of late, being blamed for this mess we are currently in. Certainly he did not act fast enough, but his entire tenure, if you care to look back, has had to deal with a problem that the 'maestro,' his legendary (and infamous) predecessor left him.
Recall it was Greenspan who pushed rates to 1% and left them there for not months but quarter after quarter after quarter. That cheap money created the housing bubble and the inflation issues Bernanke had to deal with from day one. Greenspan was hiking rates when he turned over the keys to the Federal Reserve executive restroom, but he was still expanding money supply. Thus inflation was growing even as he hike rates. Bernanke had to cut money supply to reign it in. He had good success. Then while inflation readings were still moving higher he saw he had to pause the hikes. Many screamed. Then he moved to cut rates, cutting 50 BP. The inflation hawks screamed again, but Bernanke, as we wrote at the time, was doing the right think. Then he turned into an ordinary, run of the mill Chairman; he got scared by the inflation talk and started to back off even as credit issues became a painful reality. That was his mistake, and he has been playing 'catch-up' ever since, just like every Fed chairman who has preceded him, even when the position was not called Fed chairman.
Greenspan had not only a rocky start, he also had rocky middle and end. He was famous (infamous?) for 'pushing on a string.' The economy would languish with too little, too late rate cuts after he hiked rates up and choked off an expansion. He did it when he first took office (1987 and Black Monday), fearing inflation that was not there and jacking up rates in big 50BP chunks until the market choked and collapsed. Hundreds of billions lost in two days. More as the reverberations bounced the market around afterwards. Greenspan again fought the market from 1996 to 2000, fearing inflation from bubbles his loose money policies caused (though again, his mandate was to do just that). He hiked rates all through 1999 EVEN as he flooded the economy with billions and billions of pre-Y2K dollars. Talk about working at opposite causes. After saturating the economy with excess liquidity he yanked it all back cold turkey in February 2000. We know the history. The market seized up and dove 40% off the bat. Greenspan kept hiking, however, all the way through May 2000, adding a 50BP zinger at the end. Then after the economy collapsed he waited until January 2001 to realize his folly and started cutting. Of course he followed the market and economy lower, with much too little too late in his 'gradualist' approach. That cost us a boom and it gave away our technological lead as no investment was made in the US for three years, giving China, India, Pakistan, etc. the edge to take our jobs overseas. Great job maestro.
Thank goodness he retired. Now they want Bernanke to commit hari kari before his term is over. Yes he disappointed us after looking so sharp and 'right' in his initial moves, using history as his guide. Unfortunately he fell back into what all Fed-heads do. Greenspan kept doing it; he just had the luck of the Reagan through Clinton boom to manage. Bernanke has to clean up Greenspan's last mess, and he certainly made a mistake. In other words, he was your typical Fed chairman that was human and not a market and monetary policy machine, and it got the best of his training and his understanding of financial markets. That speaks to whether we should have a Fed, at least in the current form, trying to run our economy. Let's face it, that is what it does, and if they are not hardened market strategists, they lose their way in the emotions of the moment. That is what happened here, and believe, me if Greenspan were still Fed chief we would be in a lot worse shape with inflation much higher and even less action than we are getting now.
Dollar hangs tough even with a big rate cut.
The fear was the dollar, already in the tank, would split wide open if the Fed cut rates more. Even after the 75BP cut the dollar was up versus foreign currencies. How?
Two parts. First, as we have seen over the past three weeks, the idea that the rest of the world will skate by unscathed if the US experiences recession is not so certain. As the US and world economies have been 're-hitched', those stocks relating to foreign economy expansion have been sold as well. Second, the Fed as opposed to the ECB, is proactively attempting to combat the decline in the US economy. At this juncture with financial markets selling off the handwriting of recession or at least significant economic slowing is on the wall. Whatever is done that can strengthen the economic outlook and bring the US back to strong growth is viewed as a positive for the dollar. Strong economy, good for currency. Weak economy, bad for currency. Monetary and fiscal policy to ramp up economy, good for currency.
THE MARKET
MARKET SENTIMENT
VIX: 31.01; +3.83. Surged to 35.57 intraday, topping the August intraday spike. This is not the end of the rise in volatility as it is not enough to show a true market bottom has been hit. We will see prices in the 40's and even 50's before this is over, and then we have to wait for the market to rebuild after that, setting up the buys. For now, however, this is enough to spark a rebound in the second leg of selling from the peak that has started the bear market.
VXN: 35.63; +5.4
VXO: 33.24; +3.25
Put/Call Ratio (CBOE): 1.2; -0.13. Another close over 1.0 as you would expect. Plenty of backlog of 1.0+ closes the past two weeks.
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: -47.75 points (-2.04%) to close at 2292.27
Volume: 3.178B (+6.41%). Big volume as NASDAQ gapped lower and then tried to recover. It never really got close to positive, though in the big picture, 22 points was not that far down (at its high) versus the 119 it was down intraday.
Up Volume: 638.559M (-427.449M)
Down Volume: 2.516B (+638.267M)
A/D and Hi/Lo: Decliners led 2.06 to 1. Was worse, but was not able to heal itself similar to the NYSE indices by the close.
Previous Session: Decliners led 1.75 to 1
New Highs: 36 (+1)
New Lows: 982 (+423). Now THAT is a lot of new lows. That is the point of extremity where we can look for that rebound following this second leg lower.
NASDAQ CHART: http://investmenthouse.com/ihmedia/NASDAQ.jpeg
Gapped sharply lower, undercut that trendline out of 2004/2006 and found support above 2200ish. That turned it back up, but as noted, it could not find positive, coming 22 points shy before sliding back late. Still ugly, but the decline to this point is ugly and it was worth starting to nibble around. After hours AAPL put the kibosh on some of the large cap techs with its disappointing earnings. IBM still strong, TXN strong. Apple may not be the albatross around NASDAQ's neck as you would think.
SOX (-2.89%) was down on the session but it was also still in the range of the past two weeks, working laterally near 350. Again, SOX is showing relative strength, and the TXN earnings won't hurt at all. SOX looks ready to try something upside soon.
NASDAQ 100 CHART: http://investmenthouse.com/ihmedia/NASDAQ100.jpeg
SOX CHART: http://investmenthouse.com/ihmedia/SOX.jpeg
SP500/NYSE
Stats: -14.69 points (-1.11%) to close at 1310.5
NYSE Volume: 2.589B (+20.59%). Surging volume, the highest in 5 months as the NYSE indices reached way down and then reversed, coming pretty darn close to positive on the close. Good strong reversal trade.
Up Volume: 1.119B (+143.474M)
Down Volume: 1.451B (-17.494M)
A/D and Hi/Lo: Decliners led 1.39 to 1. -3.4:1 and worse intraday, but a nice recovery to a ho-hum level. Good reversal action.
Previous Session: Decliners led 1.74 to 1
New Highs: 32 (+19)
New Lows: 1100 (+466). Honey, that's a lot of lows. Massive spike in new lows. Very extreme and good enough along with the other indicators to signal a bounce up off of this second leg of selling.
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
Gapped lower, plunged down to some summer 2006 consolidation peaks and valleys and then reversed with a 71 point recovery off the session low. Big doji with tail on the candlestick chart indicating, along with all of the other indicators (e.g. VIX, new lows, length of downside leg, lack of selling in financials) that this leg is ready to bounce back up for now.
SP600 (-0.02%) exploded below the June and July 2006 consolidation lows and then reversed to turn positive in the last hour. Looked as if it might sneak in with a gain on the session but was undercut at the wire. Why would small caps rebound and show such relative strength? They have been sold to the consistency of refried beans and they actually had some hope that a 75BP rate cut along with some more cuts next week and some fiscal stimulus may help the small caps if the economy bumps higher.
SP600 CHART: http://investmenthouse.com/ihmedia/SP600.jpeg
DJ30
The blue chips reached all the way down to the May 2006 peak on the low and then reversed. It was down 22 points at the high, but just missed turning positive and slid lower to close below the March lows. A truly ugly selloff this past three weeks, and DJ30 is as ripe as a melon to bounce. Thus we were buying into some DIA calls on the rebound. Has a pretty easy 500 or so points to the upside here to get it back near the neck at 12,500.
Stats: -128.11 points (-1.06%) to close at 11971.19
Volume: 506M shares Tuesday versus 483M shares Friday. More strong volume as the blue chips dove lower, but then this time they rebounded.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
WEDNESDAY
Oh yes, it is a short week. Will need the rest if the days are like Tuesday. That said, we don't think they will be. As noted, we anticipate the indices to rebound off of this spike in volatility, new lows, etc. back up to resistance over the next week or so before rolling over once more and selling off on the third leg. We took some positions upside as the market turned, and we will look at some more Wednesday. We like how some areas show strength. Some financials that are not dogs. We are looking at some chips. Some overseas stocks were strong as well along with some solid 'rest of world' stocks that are set to rebound. These are trades at this point, but you cannot fight it; you have to take what the market gives.
AAPL disappointed after hours and it has the potential to upset the apple cart, but looking overseas there are nice gains even on the heels of the AAPL results. Of course, even if they are down, the US tends to make its own wake, and after this kind of thrashing on this second leg lower the indices along with the indicators suggest it is time to rebound as noted. We should not forget: IBM reported strong results with its overseas activities, and TXN sported some good results and guidance as well.
Thus we are indeed going to continue to look for ways to play the bounce despite of, and indeed because of, all of the negatives talked about on the financial stations and the gloom in the retail investor sector. Again, most of these are trades, but there are some strong stocks that look to be more than just trades (though if you get a nice gain you are smart to take some off the table), e.g. VIVO, CMED, CPHD, FDP. It is still time to be nimble in terms of knowing that what we are looking at now is a rebound in an ongoing selling framework overall. The market is still in selling mode, pricing in the downside potential of a recession. The Fed and fiscal stimulus are jumbling the picture somewhat, but for now there is nothing to indicate the overall picture of a bear market in place for now. We play the legs both ways when they become pretty apparent a turn is in the works. Right now we are buying for rebounds to the upside and then when that starts to stall we will close them and load the downside again.
Support and Resistance
NASDAQ: Closed at 2292.27
Resistance:
2315 to 2300 is a range of support from old peaks
2340 from the March 2007 low
2370 from the April 2006 peak
2379 from the October 2006 peak
2386 is the August intraday low
The 10 day EMA at 2408
2451 is the August closing low
The 18 day EMA at 2468
Some modest resistance at 2500 from interim August lows.
2543 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 2571
Support:
2265 is the trendline from the summer 2004/July 2006 lows, Q4 2005 consolidation
2216 FROM August 2005 peak
2175 from the December 2004 peak
S&P 500: Closed at 1310.50
Resistance:
1325 from May 2006 peak prior to the summer 2006 correction
1369 is the 10 day EMA
1370 is the August 2007 intraday low
1374 is the March 2007 closing low
1396 is the 18 day EMA
1406 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
The 50 day EMA at 1440
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 1488
Support:
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
1288 from June 2006
1280 from June and August 2006
1255 from June 2006 lows
Dow: Closed at 11,971.19
Resistance:
12,050 from the March 2007 low
12,250 from late March 2007 lows
The 10 day EMA at 12,433
12,518 is the August intraday low
The 18 day EMA at 12,661
12,743 is the November low
12,786 is the February 2007 peak
12,845 is the August closing low
The 50 day EMA at 13,040
13,050 to 13,000 range
13,092 is the December low
Support:
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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