* * * *
1/30/08 Technical Traders Report
* * *
MARKET ALERTS
Targets hit alerts: BLK
Buy alerts: DIA; FLR
Trailing stops: None issued
Stop alerts issued: IMA
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:
- GDP weak, ADP jobs solid, Fed cuts 50BP, market surges then purges.
- FOMC follows through on its promise, to remain vigilant, but it feels it now is ahead of the game.
- First iteration of Q4 GDP is weaker than expected and a gnat's butt from negative.
- After hours news is pounding stocks lower.
Fed tries to rescue market from weak GDP report, and it succeeded . . . for an hour.
Earnings are coming up everywhere and on Wednesday they were so-so. So much so that the futures were quite sluggish. MRK beat but its outlook was unimpressive. CTX (homebuilders) missed huge, BA beat but its cash flow is down. UPS and KFT were in line. Just not a lot there to excite anyone; kind of like the stimulus package.
The real story for the day, however, was the economic data. The first iteration of Q4 GDP came out with a stellar 0.6% showing, down from the blistering 4.9% in Q3 and halving the 1.2% expected. That was a wet blanket on the early action, but it was countered somewhat by the monthly ADP employment estimate of 130K jobs versus the 40K expected. I say somewhat because ADP is typically widely divergent from reality, though it is hard to call the government's monthly report 'reality.' It does, however, get the overall trend right, and thus investors viewed the ADP data as a positive. Nonetheless, the news on balance was not enough to enthuse investors and helped keep a lid on stocks what with the impending Fed decision.
When the Fed announcement time came stocks were trading modestly lower. The Fed announced a 50BP cut was widely anticipated, and importantly, it did not say that it was done with the cuts as it had implied after its second cut, that 25BP jobber that sent the financial markets reeling. It did remove some of the more dire language contained in the statement accompanying the 75BP hike (e.g. the 'appreciable' description regarding the downside economic risks) and it was still worried about inflation, but it said downside risks were still the focus and left the door open to further cuts as needed. Basically that statement had the flavor that the Fed feels it is out in front now but it would still stay focused on the economy at the expense of inflation and the dollar (at least near term), and that was what the market wanted.
Stocks gapped higher on the release, reversing the losses and rallying into the start of the last hour. The Dow was up nearly 200 points after the announcement. Then the market reversed and it reversed sharply. Some blame downgrades of bond insurers as the cause. It was the trigger, but not the cause. We were expecting this reversal off of the cut, and all the sellers were waiting for was the right time to move in. The downgrades in the same old sector that has dogged the market was the sign the sellers were looking for. They used it as signal to step in and they effectively scuttled the rally. The losses on the close were nothing major, and indeed SOX and NASDAQ 100 managed to post modest gains. The key, however, was the rapid and complete dismantling of the post-Fed bounce. There wasn't any second-guessing. The gains were plowed under.
TECHNICALLY the intraday action started out more bullish with a sluggish negative start, a slow climb and then a surge after the FOMC decision. Then it took a nasty turn for the bulls as that surge was sold off and the indices closed lower. Low to high back to low. that last hour was a killer for the bulls.
INTERNALS: Breadth was solidly 2:1 on or better on NYSE after the FOMC rate cut. The last hour reversal took care of that and breadth finished modestly lower though we know it has a lag to the point moves. Volume jumped 23% on NASDAQ and 13% on NYSE on the session, and that is not that good to see with that last hour reversal as it shows us sellers gutted the post-Fed rally on high volume when they had the chance.
CHARTS: Right after the FOMC decision the market rally pushed the indices through near resistance with DJ30 heading toward 12,750, SP500 moving through the 18 day EMA and to the early January interim bottom, and NASDAQ tapping at 2400 resistance. Then the reversal and close lower. That left big, clearly visible tombstone dojis on the candlestick charts of each index, and after a rebound or relief rally from nasty selling that took the indices to resistance, that is a signal to prepare for a return to the selling. Throw in the higher volume on the reversal and that almost seals the deal. As cousin Eddy said in 'Christmas Vacation,' if the rally had 9 lives it just spent them all.
LEADERSHIP: Basically non-existent for the session. Sure stocks surged higher in the continued recovery bounce off of the mid-month selloff but as soon as the sellers moved in they were cut back down. That is what happens when you have distributive selling where big money moves out of positions. They rebound nicely when they get oversold, but there is no teeth in the rebound due to the foundation eroded away by the distribution, and the bounce is used to lighten positions further. They fall back and eventually the sellers are sated, and the stocks start to base and build the foundation for the next rally. Right now they are still in the initial phase of basing, trying to find that bottom they can build off of.
THE ECONOMY
Q4 GDP decline is obviously significant in size though there are some positives if you look.
A drop from 4.9% to 0.6%, no matter how you spin it, is a big drop. It is also down from the 4.4% average for the last half of 2007. Yes inventories dropped GDP by 1.3% and housing (-23.9% for the quarter) dragged it down another 1.2%. Add them back in and you get a very nice 3.1%.
But . . . you can't do that. Certainly not with housing though inventories are more subjective given they can show different things depending upon what stage the economy is in. With housing there is no fudging the numbers. The decline is the biggest since 1981 when the country was at the bottom of the Carter-era recession, the worst in the US since the Great Depression. It is a very real and very large drag on GDP more so than just declines in building and values. Those both impact US citizens in terms of jobs and in wealth, and that is about as direct an impact on GDP as you can have.
Inventories are a bit different animal. After all, inventory declines ultimately lead to inventory rebuilding, but that occurs when the economy is on the upswing side of the dip, not on the initial downturn. At least, thank goodness, inventories are not ballooning higher as they did in 2000 when the economy fell off the cliff thanks to the Fed draining liquidity overnight, leaving companies holding billions of dollars of inventories that they ultimately had to write off. This time around inventories are leaner and that is another reason that this recession, slowdown, or whatever you want to call it, is not going to be as severe as many make it out to be. Housing will be in the dumpster as the Q4 figures and new home sales show, but much of the economy remains in good shape, and businesses are leaner and more prepared for this, having learned their lessons from 2000 to 2003. That is why they never really went whole hog with their hiring and investments despite a solid economic climate. In short, the practiced good business, planning for the future.
Again, the drop was significant, but also there are those factors that will make this recession and bear market shorter: lower inventory levels, relatively low P/E ratios heading in, and the speed of the action to get things under control. The Fed typically does not get involved as soon as the Bernanke Fed did. He was chastised for dilatory action, but he started early, just didn't keep up the pace. With this 125BP cut in less than two weeks, the Fed is far ahead of where it has been in past slowdowns.
THE MARKET
MARKET SENTIMENT
VIX: 27.62; +0.3
VXN: 31.8; -1.05
VXO: 28.96; -0.35
Put/Call Ratio (CBOE): 0.82; -0.08. Third straight session below 1.0 on the close, but that is likely to change as this bounce over the past week fades.
Bulls: 41.6%. Sharp decline from 45.6% as it continues its plunge from 56.50 on the high (48.4%, 52.2%, 54.9% and 56.50%). Very close to the 40.6% hit on the last significant round of selling. A move into the lower 40's is a decline of significance. A bigger move is to 35% which is a big bullish indication. If bulls and bears kiss or better yet cross, that is very bullish. For reference it bottomed in the summer 2006, the last major round of selling ahead of this 2007 top, near 36%, and 35% is considered bullish.
Bears: 31.5%. Massive jump higher from 26.7% as it finally kicked into gear. It has made it over 30%, meaning it is getting into the range that means business. Big move after falling 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). Still a bit more work to do to really set a bottom, and that means more selling before it gets there.
NASDAQ
Stats: -9.06 points (-0.38%) to close at 2349
Volume: 2.632B (+23.7%). Volume spiked back above average on Wednesday as NASDAQ spiked higher and then reversed to close lower. Reversal volume as the sellers overran the buyers. That is an indication the sellers are starting to take back control after this relief bounce.
Up Volume: 1.123B (-262.531M)
Down Volume: 1.459B (+678.012M)
A/D and Hi/Lo: Decliners led 1.32 to 1
Previous Session: Advancers led 1.34 to 1
New Highs: 39 (-4)
New Lows: 123 (+34)
NASDAQ CHART: http://investmenthouse.com/ihmedia/NASDAQ.jpeg
As noted above, NASDAQ rallied higher then reversed, showing a tombstone doji on the candlestick chart. The name says it all: it is not a sign of more upside strength. NASDAQ rallied through the 10 day EMA (2365) and tapped near 2400 on the peak, moving 52 points from low to high. Then it chucked it all back and closed negative, below the April 2006 peaks. High volume reversal that indicates the rally has spent most of its ammunition.
NASDAQ 100 (+0.05%) showed the same action, i.e. rallying up through the 10 day EMA and tapping at the August closing low before giving it all back and closing flat.
SOX (+0.25%) was the other index closing positive as it continued its tight lateral range of the past three weeks, still looking as if it wants to try a break higher. It has faded while the others rode higher so it might try to rally while the other indices fade. The chips are a tough call as they have bucked any market trend, up or down. They do, however, look as if they are trying to move higher.
NASDAQ 100 CHART: http://investmenthouse.com/ihmedia/NASDAQ100.jpeg
SOX CHART: http://investmenthouse.com/ihmedia/SOX.jpeg
SP500/NYSE
Stats: -6.49 points (-0.48%) to close at 1355.81
NYSE Volume: 1.802B (+13.47%). Volume spiked on NYSE as well, moving back above average as the NYSE indices surged then purged.
Up Volume: 651.96M (-387.972M)
Down Volume: 1.135B (+631.077M)
A/D and Hi/Lo: Decliners led 1.35 to 1
Previous Session: Advancers led 1.97 to 1
New Highs: 29 (+1)
New Lows: 74 (+11)
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
Same story on SP500: rallied after the FOMC meeting, clearing the 18 day EMA and testing the August closing low, then reversing and closing lower on the session. Not a big point loss, but that was not the story. The defining issue was the 30 point fall from the session high and the rising volume as it fell. After a week of gains on the rebound off the low in the second leg lower, the Wednesday action strongly suggests the relief bounce has hit its end.
SP600 (-1.12%) took the brunt of the selling as the small caps often do during bear market selling given their close ties to the US economy. Nice surge higher through near resistance but then the reversal to close negative on rising trade. As with the other indices, that shows the sellers moving in to sell.
SP600 CHART: http://investmenthouse.com/ihmedia/SP600.jpeg
DJ30
Same story as the other indices. DJ30 surged higher off the 10 day EMA and through near resistance at 12,500. It continued higher toward the next resistance at 12750, the November closing low. It reached 12,681 on the high but then it reversed as well, swinging 240 points from high to close. It still held the 10 day EMA (12,398) on the close, but it showed the same tombstone doji as the other indices after a 1046 point run off the lows from the second downside leg. The first rebound was 1000 points and this one was 1000 points, and it is showing a higher volume reversal after that move, indicating the rebound move is near or at its end.
Stats: -37.47 points (-0.3%) to close at 12442.83
Volume: 334M shares Wednesday versus 285M shares Tuesday. Volume jumped back well above average as DJ30 rallied then reversed to negative.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
THURSDAY
The FOMC has spoken, but there is no shortage of more economic data and earnings ahead. Personal income and spending, core PCE inflation, jobless claims and Chicago PMI are up Thursday ahead of the Friday jobs report and ISM index. On top of that there are earnings.
Once again the after hours session was a minefield for NASDAQ stocks. AMZN reported overall solid earnings, but it was hammered down 9 clicks. Thus far these after hours earnings have not spilled over to the next session, but after the indices reversed on Wednesday they may not be so fortunate.
Wednesday there was more in the after hours session. On top of the downgrade of the bond insurers during the session, Standard & Poors put $270B in mortgage backed securities under review. It did not say which ones, but the amount represents 35% of the world's holdings of these instruments. That was hammering the futures after hours; really hammering them.
When things reverse in these bear market selloffs, they reverse. We bought some more DIA puts Wednesday and we wish we had bought more downside as the market turned back over. As discussed above, the charts look to signal the end of the relief bounce and that the third leg lower is starting. We are still going to look for downside; there will be more downside opportunity on this third leg lower and we can make some early buys as well as on the initial tests of the opening selloff.
On the third leg lower we can look for the Dow to fall toward 11,300 to 11,200. That should just about be the consummation of the selloff from the head and shoulders top that formed from the second half of 2007. As we said Tuesday, we don't want to seem negative on the market, but you have to be pragmatic and take what the market is giving. That is why we are ready to continue playing the move lower.
After this leg we will see if the all of the Fed action and stimulus is enough to start the bottoming process or if it needs to go lower. As we have said before, there are many positives despite the selling, positives that were not there in 2000. The GDP is already near zero yet the Fed was active early, cutting rates back when the economy was still throwing off solid numbers and before the market made a major plunge. Greenspan came in after the market had already sold off. Indeed, he HIKED rates 50BP AFTER the initial 40% selloff on NASDAQ in 2000. Good move Alan. As noted above, the Fed is in the game a lot earlier this time around. P/E's are also at decent levels even as the economic growth approaches zero.
Thus we could very well see the end of this bear market by the end of Q1 meaning it will have formed a bottom by then and leaders will have based and be ready to start moves off their lows. We don't think the recent lows will hold and form the bottom just yet. A deeper selloff to set the first bottom, then a more sustained recovery, and then the selling to test that low and actually set the bottom of the base. We said the market would try to form a bottom after the third leg and depending upon the depth of the recession it would either be successful or not. With this early action it may indeed be successful.
For now we play the downside for the third leg, then we pull back and see how the indices and growth stocks set up. That will tell us our next move as we, as always, strive to take what the market gives.
Support and Resistance
NASDAQ: Closed at 2349.00
Resistance:
2370 from the April 2006 peak
The 10 day EMA at 2365
2379 from the October 2006 peak
2386 is the August intraday low
The 18 day EMA at 2408
2451 is the August closing low
Some modest resistance at 2500 from interim August lows.
The 50 day EMA at 2522
2547 is the August 2004/April 2005/October 2005/March 2007 up trendline
2550 to 2540 from May/June consolidation and the November lows
Support:
2340 from the March 2007 low
2315 to 2300 is a range of support from old peaks
2277 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 1355.81
Resistance:
1357 is the 10 day EMA
1370 is the August 2007 intraday low
1374 is the March 2007 closing low
1374 is the 18 day EMA
1406 is the August and November 2007 closing low
1409 is a longer term trendline from the August 2003/September 2004 lows
The 50 day EMA at 1421
1430 from the August interim lows
1440 - 1437 from January and March peaks
1459 is the February peak
1465 is the June/July 2006 up trendline
1475 from peaks in December 1999 and January 2000
The 200 day SMA at 1485
Support:
1325 from May 2006 peak prior to the summer 2006 correction
1313 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 12,442.83
Resistance:
12,518 is the August intraday low
The 18 day EMA at 12,521
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 12,896
13,050 to 13,000 range
13,092 is the December low
Support:
The 10 day EMA at 12,398
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
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 28
New home sales, December (10:00): -4.7% (604K) actual versus 645K expected, 634K prior (revised from 647K)
January 29
Durable goods orders, December (8:30): 5.2% actual versus 1.5% expected, 0.5% prior (revised from -0.1%)
Consumer confidence, January (10:00): 87.9 actual versus 87.0 expected, 90.6 prior (revised from 88.6)
January 30
ADP employment, January (8:15): 130K actual versus 40K prior
GDP advanced, Q4 (8:30): 0.6% actual versus 1.2% expected, 4.9% prior
Deflator (8:30): 2.6% actual versus 2.6% expected, 1.0% prior
FOMC policy statement (2:15): Cut FF rate 50BP to 3.0%
January 31
Employment cost index, Q4 (8:30): 0.8% expected, 0.8% prior
Personal income, December (8:30): 0.4% expected, 0.4% prior
Personal spending, December (8:30): 0.1% expected, 1.1% prior
Core PCE, December (8:30): 0.2% expected, 0.2% prior
Initial jobless claims (8:30): 320K expected, 301K prior
Crude oil inventories (10:30): 2.29M prior
February 1
Non-farm payrolls, January (8:30): 65k expected, 18K prior
Unemployment rate, January (8:30): 5.0% expected, 5.0% prior
Hourly earnings (8:30): 0.3% expected, 0.4% prior
Average workweek, January (8:30): 33.8 expected, 33.8 prior
Construction spending, December (10:00): -0.5% expected, 0.1% prior
ISM Index, January (10:00): 47.5 expected, 47.7 prior
Michigan sentiment, January revised (10:00): 79.0 expected, 80.5 prior
End part 1 of 3
|
