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us stock market, stock tip
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2/20/08 Investment House Daily
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SUMMARY:
- Another opposite day, i.e. opposite action from Tuesday.
- Lots of pessimism but market is starting to show better action.
- Consumer prices heating back up, but Fed appears to remain steadfast to spur growth.
- Market trying to set up another near term bounce, but longer term remains a very big question.
Market is down and up again, but this time there is more purpose.
Tuesday started higher then closed lower so it was time for a lower open and higher close Wednesday. Over the past week every upside session encores with a downside session and then the process repeats. The result is a lateral move that, despite some intraday volatility, is rather flat as measured by the close. Combined with some other attributes of the move as discussed below, this is not bad action.
As noted, the market opened lower, weighed down by a hotter CPI that poses the foil to the Fed's interest rate cutting plans to spur the economy. Futures were already lower ahead of the number and headed lower on the news. After that lower open and a flat first 2.5 hours a bid hit the market and jumped it higher. Another lateral move through the afternoon, then a second surge into the last hour reversed the losses to solid gains that survived a last hour pullback. Solid though not really impressive gains. The price turn was more impressive, however, as DJ30 swung 200 points from low to close. All indices rebounded from that weaker open to close positive, fighting off a last hour selling attempt to hold the gains.
The key point for the day, or one of the key points, was that despite some news that really had many worried and the market lower, news that could have hammered the market even lower than the pre-market losses, could not bring out the sellers en masse to put an end to this bounce off the January lows. The inflation data was reason enough, but the market figured the Fed was more focused on growth issues than inflation, oil prices, food prices and the like. Despite all of this investors put their money on the Fed and bought in, pushing the market positive and on rising volume.
TECHNICALLY there were other keys to the day as well. The intraday action flip-flopped again and it was down to up on Wednesday, obviously the more bullish scenario. It is even more impressive when the sellers had an opening that they would have exploited anytime over the past four months but didn't.
INTERNALS: Volume was up on both NASDAQ and NYSE as the indices recovered from early selling and posted gains. Similar action last Friday, though that was expiration so you don't want to assign too much to it but at the same time don't ignore it. While the breadth has been strong in both directions or flat as a board, and volume has been low overall, the quiet during a lateral consolidation as seen this past week is what the bulls want to see.
CHARTS: As described above, the indices have been up and down and down and up over the past several sessions, but the end result is a lateral move at the 10 day EMA and 18 day EMA. It is really starting to stretch the move out laterally in an overall tighter range despite the intraday volatility, really making this a consolidation. It is starting to show some better price/volume action now (up on higher volume sessions, down on lower volume sessions), and trying to form another higher low, at least with respect to NASDAQ. The more it stretches out on this quieter action, the more of a foundation it is putting in after bouncing up off that January selloff and recovery.
LEADERSHIP: There was more leadership from the same groups, e.g. metals, energy and agriculture, but with HPQ's earnings there were some techs perking up as well. RIMM really caught our eye as a potentially good mover on Thursday. Leadership is still concentrated, but it is trying to spread out.
Pessimism yet positive action: the age old market paradox.
Add these technical keys together and you get a nicely improving picture, something the market showed no indication of just a couple of weeks back. At the same time there are a lot of non-believers on the financial stations, as many as the ever-present perma-bulls. The bull/bear investment advisor survey is a dead heat at 36% on each side. A crossover would be excellent for the upside recovery. As noted, just as this negative sentiment jumps the indices are firming and leaders are shaping up.
This happened in early 2003 after the market double bottomed off the 2000 to October 2002 bear market. Great surge up off of the lows then the start of 2003 say the market drift back on low volume. Negative sentiment shot back up and the October bounce was called just another bear market bounce. We saw very good price/volume action and very importantly, leadership setting up good bases, ready to breakout. That something lacking from every prior recovery attempt. Lots of negative sentiment, good set ups in the indices and in growth stocks. March led into a big break higher and a great 2003.
This recent lateral move is slowly tipping toward the upside, at least for the near term. Better price/volume action, nice lateral flat move shaping up, solid growth leaders setting up and break higher from good bases. Looks decent.
At the same you have to peg this market's life cycle, i.e. where it is in the cycle. The 2002 market had really come down hard for over 2.5 years before that October second bottom. The economy went through the wringer after the stock market collapsed as Greenspan tried to engineer a soft landing yet pumped billions into the system just ahead of taking out all liquidity. This economic cycle slowdown is not over yet. Debt spreads are still wide. Commercial paper market is still a shadow of what it was, down to $750B from $1.2T, and this is the money the big boys operate with. Even with this aggressive Fed action and 'stimulus' package, spreads are not improving. There is still something gnawing at the financial markets.
That leads you to believe that this firming here is not the end of the selling, just a rally in response to the first serious leg of selling that pushed several of the indices into what is called bear market territory. That is followed by a more significant rebound before another serious selloff. We have looked for another selloff from here without a recovery; it may just be satisfied with two legs here and then try a bounce. Hasn't done it yet, but as noted above, it is trying to tip toward the upside. This housing and credit twin issues may not be as potent as the tech and Y2K issues Greenspan helped create, but they are not chopped liver. A Four month sell off is hardly the kind of wringing out of the excesses of the housing boom and the abuses discovered from that run. Thus we could get a near term run higher here just as the market recovered in the summer of 2000 after that initial screaming dive lower. After that we see what comes home to roost.
THE ECONOMY
CPI hotter and oil bubbles over $100/bbl while gold hits an all-time high.
0.4% on the headline (0.3%) expected. Year over year 4.3%, closing in on the cycle high at 4.7% hit in September 2005. The core was 0.3%, topping the 0.2% expected, putting the annual core at 2.5%. Still lower than the 2.9% at the peak in September 2006, but after fading to 2.1% it is climbing.
And while the Fed cannot do anything with respect to controlling oil other than engineering a worldwide recession, it is worried about oil. It was worried about oil when it was in the 80's. That was when the US economy stumbled, albeit under the weight of the housing, credit, and oil burdens, not just any one of them. As noted Tuesday, however, those same items are still present even as oil crosses into new territory.
With all three of these issues still confronting the economy it is hard to see it ready to advance with a new recovery that lasts another 5 years. Or at least doing so without some inflation. Gold is out of control, rising to $948 and a new all-time high. Platinum is at a new all-time high as well. The Fed is certainly in an impossible position, a position that was dropped in its lap by its predecessor. Doesn't really matter what the cause; it is here and we have to deal with it.
For now the Fed is dealing with it on the growth side as the FOMC minutes released Wednesday showed. The Fed does not like what it is seeing in the inflation data, but it is now focused on the growth side and it is not going to let anything turn it from that even though it knows it has to deal with inflation later.
Or so you would expect, but in the minutes it said that slower economic growth would mitigate inflation. Really? History shows slower growth exacerbates inflation because supply contracts. Despite the populist model the Fed promulgates (growth leads to inflation due to excess demand), growth lessens inflation because supply is able to ramp up and keep ahead of demand. Thus the Fed's reasoning is dubious, but it needs reasons to push liquidity into the markets, and little things such as history cannot get in its way.
THE MARKET
MARKET SENTIMENT
VIX: 24.4; -1.19
VXN: 27.09; -0.9
VXO: 25.96; -1.59
Put/Call Ratio (CBOE): 0.86; -0.15. Fell below 1.0 as the market bottomed and rallied back from the early losses.
Bulls: 36.7%. Big plunge, the larges of this run lower, falling from 41.6% the prior week. Not a straight decline, but It has finally turned serious, approaching the 35% considered bullish. Down 20 points from the 56.5 nine weeks back. A move into the lower 40's is a decline of significance, but it needs a bigger move is to 35% which is a big bullish indication. It is just about there. Moreover, with bears surging over 35%, they are making that 'kiss' that is quite bullish (even more so if they cross over one another). 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: 35.6%. Nice surge from 32.6%, moving nicely from a low of 19.6% on the last rally. It is over 30% and indeed 35%, 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).
NASDAQ
Stats: +20.9 points (+0.91%) to close at 2327.1
Volume: 2.288B (+16.12%). Volume jumped up close to average for the first time in two weeks as NASDAQ bounced off the lows and closed with a gain. Trying to show some accumulation.
Up Volume: 1.457B (+841.418M)
Down Volume: 828.425M (-501.554M)
A/D and Hi/Lo: Advancers led 1.3 to 1. Large caps were leading the advance.
Previous Session: Decliners led 1.09 to 1
New Highs: 45 (+1)
New Lows: 158 (+10)
NASDAQ CHART: http://investmenthouse.com/ihmedia/NASDAQ.jpeg
The buyers and sellers continue to slug it out, or more like play patty-cake, with up and down moves as the index works laterally. After making a lower high last week and looking week Tuesday, NASDAQ is fighting back, trying to make a higher low. The volume helps the upside and it was no doubt spurred by the HPQ news. Now we see if it holds up. As noted, we saw stocks such as RIMM looking good. NASDAQ still needs to find leadership. RIMM would be a big help to it as names such as AAPL remain under pressure.
NASDAQ 100 CHART: http://investmenthouse.com/ihmedia/NASDAQ100.jpeg
SOX CHART: http://investmenthouse.com/ihmedia/SOX.jpeg
SP500/NYSE
Stats: +11.25 points (+0.83%) to close at 1360.03
NYSE Volume: 1.471B (+3.03%). Volume was up but still in the same range of the past two weeks, and that is well below average. Not the volume increase seen on NASDAQ and not the kind of accumulation.
Up Volume: 1.04B (+321.021M)
Down Volume: 422.404M (-277.965M)
A/D and Hi/Lo: Advancers led 1.6 to 1. Not bad but nothing stellar. Matched the session.
Previous Session: Advancers led 1.32 to 1
New Highs: 55 (-1)
New Lows: 96 (+9)
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
Sold off but then came right back to hold its lateral range of the past week as it slides along the 10 and 18 day EMA. Still quiet volume, still in a narrowing range, still holding up and trying to consolidate despite all of the negativity and pessimism. Now that said, it is hardly a picture of perfection. It has been clubbed and is struggling every session to hang on and add to the rebound off of the January low. As it stretches out this pattern on low volume it is increasing the odds it can do that, but unless there is a new surge of volume, the 1390 to 1400 level will be difficult to get past.
SP600 (+1.20%) held near the 10 and 18 day EMA as well and bounced, trying to make its own higher low and return to the 50 day EMA for the third time this month. Its persistence is similar to that of the other indices, starting to tip the balance toward adding to the move off the January low.
SP600 CHART: http://investmenthouse.com/ihmedia/SP600.jpeg
DJ30
DJ30 saw its volume climb above average for the first time in two weeks, driven by the HPQ earnings trade. A large 230 point swing from low to high on the Dow pushed it back through the 10 and 18 day EMA near resistance on the close. Trying to make a higher low and take on the recent high. Interestingly it has not tested the 50 day EMA (12,679) yet on this recovery; a higher low will try to make that level. As with the other indices, the Dow is tilting toward another attempt higher, but it is still tenuous, still feeling its way along in this lateral move. Near term the upside outlook improves; longer term it is still in trouble.
Stats: +90.04 points (+0.73%) to close at 12427.26
Volume: 297M shares Wednesday versus 257M shares on Tuesday. Volume clipped average for the first time in two weeks. Looks like accumulation, but that HPQ volume was a big part.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
THURSDAY
Initial jobless claims are out on Thursday and they are always a hot button issue when the economy is slowing or perceived to be recovering. They are more real time than the monthly jobs report and as jobs are near and dear to everyone, it is closely watched. While many wonder if the economy is recovering, the jobless claims have started to climb just recently in the bigger picture, indicating that the economic slowdown is not ending. Whether it is in its mid-life is still unknown. Philly Fed is also out; after the New York report collapsed this will be closely watched but these two tend to move in tandem while the Chicago tends to go its own way. Thus, expect a low Philly.
Oil inventories are out Thursday given the Monday holiday. There is also quite a bit of Fed-speak on Thursday. Another full calendar for investors to chew on.
As discussed at length above, the nearer term is tilting from negative to start February to modestly positive the past week, trying to set up another move higher off the January lows. A bit better price/volume action, high pessimism, refusing to give in on negative news, tightening lateral range, some good bases and some leadership emerging. Those are tipping the scales slightly, and if the market breaks higher any further we will have to look at closing some index downside plays.
We addressed the bigger picture some earlier, but it bears pondering a bit further. If the market does continue higher here, this is very likely the rise after the initial selloff, the move that gets everyone confident once more. Yes it skipped a step it normally takes, and that might be another indication that this economic and market contraction may not be as severe, something discussed last month and early this month, Even with that it will still test after a further rally. In 2000 there was the initial selloff and then a nice summer rally where stocks looked and acted great. When it ended, however, it ended big. This move thus far has been on a smaller scale than 2000; that may mean all parts of the correction will be more contained.
That remains to be borne out, but we do not believe the downside is over. There is always that next test. After such a solid run from 2003 to 2007 SP500 broke that trend this year. It also has dropped back below the 2000 peaks after a modest break through them. If you look at a multiyear chart of SP500 you see a big double top. With that pattern and this sharp selloff to break its post bear market trend, four months of a rather modest pullback historically does not do the deed with respect to more upside. The Fed is in the game and it along with the government can pump things back up; thus the response to the upside even as the market looked ready to roll over again. When it does break lower again, it is going to be big, and then we will see just what is left in the economy, i.e. whether the housing and credit issues really need to be wrung out by a much deeper selloff. As noted before, there are positives not present in 2000, one of them being overall rather reasonable P/E ratios already. That is always a strong positive.
For Thursday we are still going to look for upside; if the market breaks higher those stocks that have held back will make their moves. If we get another break upside we will look to take some gain in the energy, agriculture and metals stocks that have been running well for us; after a nice week of gains they will be ripe for some harvest. In the same vein, we don't want to be chasing new positions in them on another surge. As for other stocks, well, as noted, they have not made that same break as the early leaders and neither have the indices; thus they are still fair game if they make good breaks from bases.
We will also keep some downside plays at the ready if things fall apart rapidly once more. The market may be trying to build up for another move higher and has thus far showed some backbone by not collapsing in the face of bad news. But it has not made the break higher yet, and with the history of these kind of selloffs we have to ready in the event the recent strength craps out. Indeed, many of the index downside plays can still fall as just as easily as rise if some unexpected bad news hits. As noted, debt spreads remain wide even with this aggressive Fed action, suggesting there is still some other shoes out there to fall. The market can rally near term, but we cannot become too enamored with its success, and if it starts to distribute again, given the climate (likely recession and other troubling indicators such as the spreads) we need to be quick to liquidate the upside, hit the downside, then see where it takes us.
Support and Resistance
NASDAQ: Closed at 2327.10
Resistance:
The 10 day EMA at 2329
2340 from the March 2007 low
The 18 day EMA at 2345
2370 from the April 2006 peak
2378 is the mid-February peak
2379 from the October 2006 peak
2386 is the August intraday low
2419 is the January 2008 peak
The 50 day EMA at 2440
2451 is the August closing low
Some modest resistance at 2500 from interim August lows.
2540 is the November closing low
2550 to 2540 from May/June consolidation and the November lows
2562 is the August 2004/April 2005/October 2005/March 2007 up trendline
Support:
2315 to 2300 from old peaks
2282 is the trendline from the summer 2004/July 2006 lows, Q4 2005 consolidation
2252 is the early February low
2216 from August 2005 peak
2202 is the January intraday low
2175 from the December 2004 peak
S&P 500: Closed at 1360.03
Resistance:
1370 is the August 2007 intraday low
1374 is the March 2007 closing low
The 50 day EMA at 1392
1396 is the January 2008 peak
1406 is the August and November 2007 closing low
1414 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
1472 is the June/July 2006 up trendline
1475 from peaks in December 1999 and January 2000
The 200 day SMA at 1476
Support:
1352 is the 10 day EMA
1325 from May 2006 peak prior to the summer 2006 correction
1317 is the early February low
1315 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 12,427.26
Resistance:
12,518 is the August intraday low
12,573 is the mid-February high
The 50 day EMA at 12,680
12,743 is the November low
12,768 is the February 2008 peak
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
13,250 from price points from June through December 2007
13,320 is the 200 day SMA
Support:
The 10 day EMA at 12,378
12,250 from late March 2007 lows
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 20
CPI, January (8:30): 0.4% actual versus 0.3% expected, 0.4% prior
Core CPI, January (8:30): 0.3% actual versus 0.2% expected, 0.3% prior
Housing starts, January (8:30): 1.012M actual versus 1.015M expected, 1.004M prior
Building Permits, January (8:30): 1.048M actual versus 1.03M expected, 1.06M prior
FOMC minutes, January 30 (2:00)
February 21
Initial jobless claims (8:30): 345K expected, 348K prior
Leading economic indicators, January (10:00): -0.1% expected, -0.2% prior
Philly Fed, February (10:00): -10.0 expected, -20.9 prior
Crude oil inventories (10:30)
End part 1 of 3
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