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world stock market, us stock market
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2/06/08 Investment House Alerts
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IH Alert Subscribers:
MARKET ALERTS:
Targets hit alerts: CVX
Buy alerts: IBM; PCLN; VLO; XLF
Trailing stops: None issued
Stop alerts issued: MLNM; NUVA
SUMMARY:
- Stocks rebound nicely from the tail kicking, but then give it all up for Lent.
- Q4 Productivity rises nicely ahead of expectations as unit labor costs gains show restraint for the year.
- CSCO earnings ignite the sellers as Chambers once again talks of 'challenging' conditions ahead.
Market doesn't know what to do with a gain, tosses it out with lunch.
The news to start Wednesday was not great, just decent. After the flogging stocks received Tuesday, a little good news looked to try and go a long way. The first read of Q4 productivity was better than expected at 1.8 versus 0.5; that is always good for a few upside points when inflation is still a threat, at least according to the Fed. Even more so when the Fed has blown off inflation threats to focus exclusively on economic slowing alone. Can't really blame it; the hand of cards it was dealt by the predecessor was deuce high. There were some solid earnings as well with Disney posting excellent results and JDSU on the tech side beating and guiding higher.
That helped the market bounce from the selling, often the case after such a thrashing is administered in a single session. Whenever you have a rebound from some sharp selling the initial worry centers around longevity, i.e. can the bounce survive the opening bell? There was an attempt to sell out of the gates, but stocks bounced and even got a boost from oil inventories that bubbled up much higher than expected (87.14, -1.38) as oil settles in comfortably below 90 on fears of a world recession.
The gains held on into lunch. Then the buyers left the building. The bid left, the sellers entered, and the market started a long slide into the afternoon. They turned negative shortly thereafter, tried to bounce just ahead of the last hour, but that was just a speed bump. Stocks rolled back down to close at session lows. The losses were not huge; compared to Tuesday they were rather puny. It was the sizeable intraday reversal that was the problem, making the session a lot worse than the price losses indicated.
TECHNICALLY, the intraday action was the worst kind you can have, though there were other factors that mitigated the reversal action. In short, stocks started higher, rallied further, then reversed and gave it back with the Dow shedding 190 from high to close, 26 points on SP500, and 59 points on NASDAQ. Those are more impressive numbers than the ultimate point losses indicated.
INTERNALS: Much tamer after really ugly readings Tuesday. Volumes were lower though still above average on NASDAQ. Breadth was negative, but anything below 2:1 right now seems a positive (-1.8:1 on NASDAQ, -1.7:1 NYSE). That volume showed less dumping, but that above average trade on NASDAQ still shows more aggressive selling.
CHARTS: There was no new ground plowed to the downside as the losses were not that great just looking at where stocks closed with respect to the zero line. Again, it was the intraday action that was the problem. The indices all tapped toward the 10 day EMA on the high and then reversed to close negative, giving back some respectable early gains. Still a lot of room to the downside even before the indices test the January low, and we still believe it is going to do just that at some point. The longer it holds out, or another way, the longer it refuses to give in, that shows there is a better chance it will try to make a stand at that level.
LEADERSHIP: About all that is holding gains is airlines. Some leadership indeed and hardly comforting. Two reasons they are holding up well: oil prices continue to decline, and the belief that consolidation deals are imminent. Outside of that things continue to erode as stocks that held out are sagging lower and sectors that bounced on the Fed rate cuts, e.g. retailers, turn back down. Overall patterns continue to look like an auto junkyard and in need of more work. As for market indicators, there is little question there is serious economic weakness still in store.
THE ECONOMY
After last week's market-impacting economic data, things have slowed considerably. Wednesday saw the first run at Q4 productivity, and it topped expectations with a 1.8 showing versus the 0.5 expected. Always nice to see better than expected productivity rates as that boosts the so-called economic speed limit the economy can have without engendering inflation.
Of course that is rubbish. Economic history no doubt shows that productivity is a good thing; when it is high we are producing well and employing a lot of people. In other words, it is good indicia of prosperity. History also shows that it does not matter what the GDP growth rate is in determining inflation rates. Growth does not cause inflation. It is faulty monetary policy that does, i.e. too much money for the level of growth. If too much money is pushed into a system that does not have the production to support the influx of money, then prices will rise.
That is why there is such an inflation fear in economic slowdowns. The Fed always pushes money into the system, but money alone doesn't cure the ills. Entrepreneurs, companies, and other producers have to use the money to increase supply to avoid demand incited by the excess money from outstripping supply and thus igniting inflation. It takes investment incentives to get the supply rekindled when there is no incentive to do so. In other words, if there is an economic slowdown there is no reason for producers to produce more, but the money shoved into the system eventually pushes demand higher. If producers don't meet that demand by ramping up production, you have more money chasing a stagnant or declining amount of goods, and that is the textbook definition of the cause of inflation.
That is the danger the Fed is facing right now; every Fed does when there is an economic recession. At some point growth and inflation have to shift order of priority as far as the Fed is concerned because all it has is monetary policy. Fiscal policy is what cures the ills because it is what provides the framework for that easier money the Fed puts into the system to be utilized. It is a symbiotic relationship, a 1-2 punch, or any other clich you want to apply. Growth is the ultimate cure to the problems. The Fed pushes the money in, the government provides reasons, a.k.a. stimulus, to put the money to work. If you don't get the businesses to produce when there is no reason to do so, then you will get inflation as the consumers use the new money to buy from a shrinking pool of goods and services. That is why this 'stimulus' package currently debated in the Senate is fundamentally flawed because it does not provide real stimulus, i.e. that incentive for producers to produce more when there is no economic reason to do so.
THE MARKET
MARKET SENTIMENT
VIX: 28.97; +0.73. Trying higher, moving up toward the November levels but not really getting the surge higher just yet that shows the bottom is nearing. Likely because the bottom is not right at hand. Remember, VIX spikes on more than one occasion before the market bottoms, it gets higher than the thirties when it does, and the bottom comes several weeks later.
VXN: 32.68; +0.24
VXO: 31.23; +1.13
Put/Call Ratio (CBOE): 1.06; -0.08. Another session above 1.0, now two back to back after a week's hiatus. Starting to pile them up again as it needs to do in order to set another bottom when the selling crescendos once more.
Bulls: 40.2%. Down yes, but the steep drop seen the previous weeks slowed (41.6% last week). Before this past week there were sharp decline from 45.6% the week before and 56.50 on the high (48.4%, 52.2%, 54.9% and 56.50%). Has surpassed 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: 32.2%. Up, but as with bulls, the strength slowed some as it managed less than a point gain from 31.5% after the massive jump higher from 26.7% the prior week. It is over 30%, meaning it is in 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: -30.82 points (-1.33%) to close at 2278.75
Volume: 2.424B (-3.47%). Volume was lower but it was still above average as the techs sold off for a third session. CSCO is going to get the volume up on Thursday.
Up Volume: 592.189M (+406.78M)
Down Volume: 1.807B (-495.696M)
A/D and Hi/Lo: Decliners led 1.8 to 1. Pretty mild compared to the gouging from Tuesday.
Previous Session: Decliners led 3.71 to 1
New Highs: 41 (0)
New Lows: 129 (+25)
NASDAQ CHART: http://investmenthouse.com/ihmedia/NASDAQ.jpeg
Gapped higher, then crapped out. NASDAQ and its progeny, NASDAQ 100 and SOX, were the downside leaders on the session, far outpacing the NYSE indices. NASDAQ is approaching its 2004/2006 up trendline, but we expect it to move on through that level and at least test the prior January low at 2200. We suspect it is heading further below that level versus holding at it, but as always, we will let it show us just what it is going to do. For now there is more downside and before it is over it is going to test that January low.
NASDAQ 100 (-1.83%) thumped lower once more, heading toward the March 2007 lows again as well as the January low near 1700. CSCO is only going to send it lower with Chambers' worries about the economic conditions ahead.
NASDAQ 100 CHART: http://investmenthouse.com/ihmedia/NASDAQ100.jpeg
SOX CHART: http://investmenthouse.com/ihmedia/SOX.jpeg
SP500/NYSE
Stats: -10.19 points (-0.76%) to close at 1326.45
NYSE Volume: 1.547B (-7.8%). Volume was lower, moving back below average on the selling, indicating the selling was not as driven as on Tuesday. A modest positive.
Up Volume: 467.802M (+343.824M)
Down Volume: 1.064B (-483.73M)
A/D and Hi/Lo: Decliners led 1.73 to 1. Much better. Anything is better after a scorched earth session as on Tuesday.
Previous Session: Decliners led 4.18 to 1
New Highs: 15 (-5)
New Lows: 80 (+5)
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
The large caps tried to make a run higher and were holding out quite nicely through lunch, moving up toward the 10 day EMA (1357) though they did fall about 5 points shy. Then they rolled over and turned negative, finishing off a three session decline. Lower volume so less selling pressure, but that is not likely to last after the CSCO results cast a pall over most of the market. As with NASDAQ we are still looking at more downside to test the January low, and that is the real telling point for this leg of the selling.
SP600 (-1.03%) split the difference between NASDAQ and the large cap NYSE indices as far as its loss. The action was the same, however, i.e. a reach higher early but then it rolled over and closed below the 10 and 18 day EMA, the near resistance as it turns back down. The index bumped the 50 day EMA on the rally just as it did in October and December (twice that month) and then faded. Heading lower, and will at least test the prior lows. That will give us a nice gain on our downside plays.
SP600 CHART: http://investmenthouse.com/ihmedia/SP600.jpeg
DJ30
The blue chips posted the tamest decline of all the indices. It did so because it rallied better than most early on, heading toward its 10 day EMA and coming within 36 points of that level before it too reversed and closed negative. Lower, slightly above average volume on the action, but we seriously doubt that DJ30 is going to pull out some kind of 'damn the rest of the market' strength and recover here. It won't be a straight decline, i.e. there will be some upside sessions along the way, but we are anticipating DJ30 to continue lower to test the January lows as the key test on this leg lower.
Stats: -65.03 points (-0.53%) to close at 12200.1
Volume: 296M shares Wednesday versus 334M shares Tuesday. Volume backed off to just about average as the blue chips posted just a modest loss.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
THURSDAY
Jobless claims will be very interesting once again what with the 301K to 375K range over the past two weeks. Funny how the experts have split the difference this time around, anticipating 340K. Interesting, but not the story for Thursday.
That was in the Wednesday after market trade. MBI reported that it was issuing $750M of convertible stock to help finance its recovery. Who on earth would want it? That was our first reaction. The market pushed MBI shares up after hours, apparently under the theory that any move was better than the death spiral it is in. Also, further talk about some kind of bailout next week boosted it. Okay, which is it going to be? This is likely a ploy to get any potential suitors off the fence to act before MBI dilutes its shares. Thus we may get a deal announced next week and that will put at least a temporary floor under the financials.
Thus we want our downside financial related plays (SPY, SDS, XLF) to come to fruition this week. We are getting a good push lower and were able to take some gain on one of our initial buys this week, i.e. CVX. CSCO's news, judging by the reaction after hours even outside NASDAQ, is going to shove stocks lower and hard in the morning.
What was the news? CSCO came out in line with expectations, but Chambers flipped his notes on his memoirs back to the pages covering 2000, and he pulled out that oldie but goodie line where he says things are 'challenging.' More than that, things are 'extremely challenging,' and they are extremely challenging for several quarters ahead. Indeed, Cisco projects 10% revenue growth versus the 13% to 16% expected by Wall Street. After closing at 23.08, CSCO was trading at 21.40 after hours. QQQQ closed at 42.81 and was trading at 42.20. SDS closed at 64.97 and was trading at 66 after hours. In short, everything was diving lower and hard after hours.
That will challenge the market early, and the point we want to consider more than any is whether the early blow down, the fourth downside session (or at least at the start) in a row, is going to yield a sharp rebound response. The market is extraordinarily volatile right now. Nonetheless, the other runs lower in the second down leg were either 5 or 7 sessions in length. Thus we can get a full blown selloff all session and still have no rebound. Thus we are inclined to let our downside positions run; of course if they hit our targets we will bank some gain, but the CSCO news is the kind that really dumps on the market. It is a stalwart, and it pulled out and dusted off the lingo from 2000, and we know what kind of nasty plunge that brought about in the market.
We will thus continue looking for some more downside as the opportunity presents, but at this stage of the game it is a bit late to move into new downside positions, particularly after a gap lower in the morning based on the CSCO news. That would tend to put things toward the end of at least this mini leg inside the bigger leg lower toward their end. Thus we will be content to ride our downside positions lower for the most part, and if we have some good gain built up in stocks such as XOM on that initial dive lower then we will bank some. Then we wait for whatever modest pause there is and see if that produces any good buys.
As noted above, we don't believe that a blow down on Thursday will set any kind of bottom; there is more work to be done on this leg. After a run to the January lows we will have banked a wad of gain, and that will likely try to produce some kind of bounce or lateral move. If that occurs we will then look for more downside plays in the event it breaks lower and some upside plays that are forming up or that are in position for a good bounce in the event it breaks higher off of that key level.
Support and Resistance
NASDAQ: Closed at 2278.75
Resistance:
2315 to 2300 is a range of support from old peaks
2340 from the March 2007 low
The 10 day EMA at 2350
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 50 day EMA at 2491
Some modest resistance at 2500 from interim August lows.
2540 is the November closing low
2551 is the August 2004/April 2005/October 2005/March 2007 up trendline
2550 to 2540 from May/June consolidation and the November lows
Support:
2275 is the trendline from the summer 2004/July 2006 lows, Q4 2005 consolidation
2216 from August 2005 peak
2202 is the January intraday low
2175 from the December 2004 peak
S&P 500: Closed at 1326.45
Resistance:
1357 is the 10 day EMA
1370 is the August 2007 intraday low
1374 is the March 2007 closing low
1406 is the August and November 2007 closing low
The 50 day EMA at 1410
1411 is a longer term trendline from the August 2003/September 2004 lows
1430 from the August interim lows
1440 - 1437 from January and March peaks
1459 is the February peak
1467 is the June/July 2006 up trendline
1475 from peaks in December 1999 and January 2000
The 200 day SMA at 1482
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
1270 is the January intraday low
1255 from June 2006 lows
Dow: Closed at 12,200.10
Resistance:
12,250 from late March 2007 lows
The 10 day EMA at 12,426
12,518 is the August intraday low
12,743 is the November low
12,786 is the February 2007 peak
The 50 day EMA at 12,822
12,845 is the August closing low
13,050 to 13,000 range
13,092 is the December low
13,250 from price points from June through December 2007
13,355 is the 200 day SMA
Support:
12,050 from the March 2007 low is trying to hold.
11,670 is the May 2006 intraday high; 11,642 closing
11,634 is the January intraday low
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.
February 4
Factory Orders, December (10:00): 2.3% actual versus 2.0% expected, 1.7% prior (revised from 1.5%)
February 5
ISM Services, January (10:00): 41.9 actual versus 53.0 expected, 53.2 prior (revised from 54.4)
February 6
Productivity, Q4 preliminary (8:30): 1.8% actual versus 0.5% expected, 6.3% prior
Crude oil inventories (10:30): 7M actual versus 2.6M expected
February 7
Initial jobless claims (8:30): 340K expected, 375K prior
Pending home sales, December (10:00): -2.6% prior
Consumer Credit, December (3:00): $8.0B expected, $15.4B prior
February 8
Wholesale inventories, December (10:00): 0.3% expected, 0.6% prior
End part 1 of 3
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