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3/17/08 Technical Traders Report
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MARKET ALERTS
Targets hit alerts: Took some interim gain on QID
Buy alerts: None issued
Trailing stops: None issued
Stop alerts issued: IMO
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SUMMARY:
- Tons of news buries futures and the market, but again it shows cork-like resilience as it bobs back up.
- Fed handles BSC in line with the season: sacrificial lamb
- NY manufacturing dives lower again.
- VIX makes its best move since January.
- Oh yes, the Fed meets Tuesday. One can only hope it doesn't cut 100BP as some suggest. It should cut . . . the discount rate again, but not the Fed Funds rate.
The opening from hell. Well, it could have been.
Some shorts covered late Friday given the Fed told the bankers to get with BSC and other brokers and solve the issue. There was a school of thought that could cause some glee on Monday and a bounce in the market. There was some glee Monday morning, but it was pretty much limited to the shorts as the futures were suggesting an S&P 500 test of the January lows and even beyond.
The cause? A slug of bad news. Sunday the FOMC cut the discount rate 25BP to 3.25% from 3.50%. The question seemed to be whether this was a bad thing in cutting with an emergency cut or whether at 25BP it was not enough. If you want to get banks to loosen up, lower their cost of capital. There was more that was clearly negative.
Investors were shocked that the outcome of the Fed's 'though shalt solve this problem' edict to the banks and brokers was BSC selling out to JPM for $2/share. Greenspan couldn't resist getting into the action, calling the current credit crisis potentially the worst since WWII. I was sick a few weeks back. It was potentially my worst sickness since I was 20. It wasn't, but it could have been, just as any other time could have been bad as well. This is not good at all, but what good does it do to talk about these kinds of potentialities? As with many things Greenspan said during his tenure on the Fed, only Greenspan knows.
There was also a continued lack of optimism in the New York area for manufacturing. The Empire State PMI flopped to -22, almost double the prior month's weak showing and tripling expectations. Industrial production fell 0.5% (-0.1% expected). The nails of recession keep getting pounded in.
Futures were negative but they were not as negative as they were back in January when the market dove to those lows after the Fed produced an emergency cut. The market does not like emergency cuts as you can tell. Similar to that session the indices sold off quickly. They quickly rebounded, however, with DJ30 turning modestly positive. Of course it gave up the gains and sold to new session lows, only to recover, however, and climb positive again, at least on the Dow. NASDAQ came within 10 points of green, but a late slump took the other indices lower.
TECHNICALLY the action was negative yet positive. A gap lower but then a recovery. A yo-yo back down to new session lows but then a recovery again, taking the Dow back to positive. The market had every reason to break down bit it did not. Again.
INTERNALS: Breadth was ugly as it has been on the downside with -4:1 NYSE and -2.8:1 NASDAQ. Volume was interesting. It was lower on NASDAQ that was lower all session, but it rose on the NYSE where you had DJ30 turning positive and the NYSE indices holding up quite nicely at the early March lows and rebounding. Very resilient, showing the right kind of action. New lows were worth watching as well. They spiked up to 635 on NYSE and 535 on NASDAQ. Watching closely to see how they hold up as this test is made. Another showing where new lows are lower than in January is a positive as it shows less stocks selling to lows, holding that prior level as support.
CHARTS: As noted, the NYSE charts look pretty decent, even resilient. SP500 finally undercut the January low, but it bounced right back. SP600 did not undercut its March low. Neither did DJ30. Every reason to give it up but refused to do so. NYSE looks like a potentially nifty double bottom is setting up. NASDAQ is the worst; it undercut the March low on the gap lower, but it did recover above that level; barely.
LEADERSHIP: The recent leaders got dinged as energy and commodities too the hits. There were some reasons. At first there was selling to raise cash for other areas investors had that were getting hammered and some Fed and margin calls were in place. After that however some speculative money fled the scene. Many of these bounced of support but it was not a convincing bounce. Interestingly some transports snapped right back; still an interesting commentary on the economy. All in all the leaders took their lumps as they are a bit extended compared to the rest of the market that is either flat or down enough to make them appear somewhat extended to the downside.
THE ECONOMY
Fed sacrifices BSC to save the rest.
This was a deal that was going to get done at any price. The Fed was not going to let BSC fail on its own. A deal was going to be made to take it out so it would not have the chance to fail. Of course at $2 takeout price was hard viewed with confidence. We heard estimates that BSC's office space was worth a lot more than $2/share. Lots of questions about whether BSC was treated legally, but the Fed was not going to give it another chance to fail what with the CEO playing golf as its hedge funds collapsed last summer and was playing bridge when things went to hell last week. The Fed wasn't going to be the one blamed. Hence a weekend, take it or leave it deal.
The BSC issues underscore what we talked about as far back as last summer: the need for the Fed to get out in front of a financial crisis before it led to the kind of runs seen on BSC. It failed to get on in front, refusing to see the bigger picture as it looked at balance sheets but did not factor in what a collapse in confidence could do to those balance sheets in just a week's time.
BSC was in decent liquid condition just a week back. Rumors were circulating and the company had suffered since the summer, but it was comfortable with its cash position. As the market sold off again and more tough issues hit the financial sectors, more rumors swirled. It got to the point that no one would do any business with BSC, i.e. they would not be on the other side of any transaction BSC was on. BSC became effectively bankrupt because it could not do business.
It finally took the Fed stepping in and having JPM take on the risk, but only after the Fed (a.k.a. you and me) assume the liability for the first $30B of any losses on the riskiest of BSC's assets. Basically everyone is still guessing as to what the assets are worth at BSC and any of dozens of other financial institutions. No one is willing to step in. The Fed needed to restore confidence, and letting BSC fail would not do that. Thus it forced the JPM deal. No more BSC, but the hope that confidence will start to recover.
Again, not sure this will do the trick because it is viewed as a strong-arm tactic to get a deal done to avoid a failure. In keeping with the Christian season, BSC became the lamb for slaughter so that the others could live.
THE MARKET
MARKET SENTIMENT
VIX: 32.24; +1.08. VIX hit 36.50 on the session high. That is still below the 73.50 level hit intraday in January and August and was thus disappointing in its lack of intensity. Of course the market sold as well but it lacked intensity early on, at least the kind seen in January. VIX jumped more than it has, posting a strong 8.40ish gain the past two sessions (intraday). A big relative move, but would like to see a bigger individual move as well.
VXN: 32.99; +0.98
VXO: 34.3; +0.16
Put/Call Ratio (CBOE): 1.48; +0.08. 14 sessions straight above 1.0 on the close.
Bulls: 31.1%. Massive decline from 41.9%, one of the largest declines we have ever seen. The bulls and bears were eye to eye in mid-February. A move into the lower 40's is a decline of significance. A move to 35% is a bullish indicator. This is smashing that. 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: 43.3%. Another massive move, up from an already high 36.6%. Up sharply from a low of 19.6% on the last rally. It is over 30% and indeed over 35% the prior week, meaning it has blown past 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: -35.48 points (-1.6%) to close at 2177.01
Volume: 2.379B (-6.91%). Volume faded to just above average as NASDAQ gapped lower and finished negative. Selling yes, but no heavy dumping of shares when you would think there should be.
Up Volume: 530.354M (+290.885M)
Down Volume: 1.819B (-451.81M)
A/D and Hi/Lo: Decliners led 2.85 to 1
Previous Session: Decliners led 3.49 to 1
New Highs: 29 (-14)
New Lows: 535 (+257). Surging on the break to a new low for 2008. You would expect more new lows but now we see if it makes any more, i.e. can put in fewer than in January.
NASDAQ CHART: http://investmenthouse.com/ihmedia/NASDAQ.jpeg
Gapped lower on the negatives, undercut the March lows as it did, but then rallied decently up to the January low at 2200. Excellent recovery to a new high on the session. Then in the last half hour of trade it peaked and dropped 23 points to the close. That was unfortunate given the nice recovery, but as noted, the volume was lower and thus it was not a major selloff. Even managed to hold the prior March low on the close as well.
SOX (-0.45%) was ready to sell off and it did, cutting to a new low for the year, but it too recovered to win back most of the losses. It made a new closing low but did manage a bounce off the intraday lows.
NASDAQ 100 CHART: http://investmenthouse.com/ihmedia/NASDAQ100.jpeg
SOX CHART: http://investmenthouse.com/ihmedia/SOX.jpeg
SP500/NYSE
Stats: -11.54 points (-0.9%) to close at 1276.6
NYSE Volume: 1.996B (+7.47%). Volume hit its highest level since the end of January as SP500 sold off then rebounded for a more modest decline. Viewing this as leaning toward favorable trade on a session that could have been a lot uglier.
Up Volume: 440.728M (+295.844M)
Down Volume: 1.531B (-170.414M)
A/D and Hi/Lo: Decliners led 4.29 to 1. Still heavily downside.
Previous Session: Decliners led 5.25 to 1
New Highs: 27 (-21)
New Lows: 635 (+402). Same as NASDAQ, i.e. a strong jump as SP500 tested a new low out of the NYSE indices.
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
SP500 undercut the January low, reaching down to 1257 on the low (1270 is the January intraday low) then recovering to hold above the January and early March lows. Good recovery on volume, that managed to finally test and hold the January low. It has the potential to put in a bottom of some kind here as it has refused to give up when it has had every reason to do so, one being the continuing decline of the financials. Maybe the BSC takeout is producing some kind of floor.
SP600 (-1.73%) sold and it did not rebound as well as the large cap indices, but it also held above the early March low and thus the January low and did recover some lost ground. Made a lower high last week but we will see if this test and rebound can deliver something to the upside that breaks up that higher low at the 18 day EMA (360).
SP600 CHART: http://investmenthouse.com/ihmedia/SP600.jpeg
DJ30
Reached lower but held above the March low and the January lows (11,634) and rebounded to positive, not once but twice. As with the other NYSE indices, the Dow is a tough out, refusing to give up the prior lows. Indeed, it refuses to test them. It may not do so now that SP500 has joined NASDAQ in making the test. That remains to be seen, but again, DJ30 is showing a lot of resilience at this prior low.
Stats: +21.16 points (+0.18%) to close at 11972.25
Volume: 382M shares Monday versus 380M shares Friday. Of course a lot of volume from JPM boosted the Dow trade. It has to come from somewhere and you have to like the higher trade on the upside.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
TUESDAY
Housing starts and permits, PPI and the FOMC at 2:15ET. There is a lot of speculation as to what the Fed will do. There is also a lot of commentary as to what it should not do. We are going to add to both.
The speculation is the Fed will 100BP. At this stage of the game we believe that would be close to disastrous. Thus it may cut 75BP or 'back off' and cut 'just' 50. More disaster and disaster but not quite as bad. The financial markets don't need useless liquidity. They need banks to lend what the Fed is making available. Thus the Fed's treatment of BSC is a shot across the bow of all major financial institutions: play ball or get axed. The irony is, it was BSC that could not get others to play nice and thus its butt was the one on the block.
What it should do. The Fed needs instead to cut the discount rate another 50 or so BP. That is all. No cut in the Fed Funds rate. The dollar is already gutted. It needs stitching back up and the Fed may be angling toward that with this tough stance with Bear. It needs help from the Feds as well, however, i.e. the Bush administration okaying the step to support the currency. The combination with the Fed action and affirmative steps for the dollar could cause a screaming short covering rally and put a floor in finally as the shorts would no longer have a free lunch.
It would also help keep the US dollar from becoming the weak currency in the carry trade. The yen is surging versus the dollar and the carry tray using the yen as the weaker currency is over. As the US dollar dives daily, it is in the uncomfortable position of being the butt of the trade. I said it last week, and it is nothing new, but it seems each administration, or at least Bush administration, has to learn it: you cannot debase your currency in order to achieve economic prosperity.
The market rebounded in the face of bad news ahead of the FOMC meeting, and after hours the capital requirements for FNM and FRE were lowered, thus allowing them to carry more loans. That was boosting the market a bit further.
Will have to see if this rebound can carry through the open. The market likes to try and bounce ahead of the FOMC decision, and the rebound Monday afternoon suggests that can continue early. After that, however, with all of the undercurrents and the potential for the Fed to take two widely divergent actions, it could go either way.
What we see, however, is SP500 undercutting the January low, finally joining NASDAQ, and that had a positive impact Monday. With that it is not really necessary for DJ30 to fully test those lows. The rally attempt will be starting over on Tuesday, at least for NASDAQ and SP500, but there is a bit more behind the move this time around.
We are also watching the energy and commodity stocks to see how they respond. They were roughed up Monday and still need some backing to push them back up. After such a session, a quick recovery is best. The market needs them because there are still not a whole lot of stocks with the kind of bases backing them to really provide the foundation for a new break to the upside off of this bottom attempt. If we see the speculative money cease its flight that it was showing Monday, it would be worth moving into some of the stronger, such as XTO and company.
Support and Resistance
NASDAQ: Closed at 2212.49
Resistance:
2216 from August 2005 peak
2221 is March low
The 10 day EMA at 2246
2252 is the early February low
The 18 day EMA at 2273
2282 is the trendline from the summer 2004/July 2006 lows, Q4 2005 consolidation
2340 from the March 2007 low
The 50 day EMA at 2353
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
2451 is the August closing low
Some modest resistance at 2500 from interim August lows.
Support:
2202 is the January intraday low
2175 from the December 2004 peak
2168 is the March 2008 low
2158 from May 2006
2164 From August 2006
2134 from August, September 2006
2100 from June 2006
S&P 500: Closed at 1288.14
Resistance:
1294 from the January 2006 peak
1305 to 1302 from an August 2006 peak and matches a range of support from March and April 2006.
1317 is the early February low
The 10 day EMA at 1312
1320 is an ancient trendline
The 18 day EMA at 1324
1325 from May 2006 peak prior to the summer 2006 correction
The 50 day EMA at 1359
1368 is the high in this recent lateral consolidation
1370 is the August 2007 intraday low
1374 is the March 2007 closing low
1396 is the January 2008 peak
1406 is the August and November 2007 closing low
1417 is a longer term trendline from the August 2003/September 2004 lows
Support:
1288 from June 2006
1280 from June and August 2006
1272.66 is the March 2008 low
1270 is the January intraday low
1260 from July 2006
1258 to 1255 from May and June 2006 lows
Dow: Closed at 11,951.09
Resistance:
12,050 from the March 2007
12,070 from the early February 2008 lows
The 10 day EMA at 12,106
The 18 day EMA at 12,190
The 50 day EMA at 12,448
12,250 from late March 2007 lows is stretching
12,518 is the August intraday low
12,573 is the mid-February high
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
Support:
11,731 is the March 2008 low
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.
March 17
New York Empire Index, March (8:30): -22.0 actual versus -5.0 expected, -11.7 prior
Net Foreign Purchases, January (9:00): $62.0B actual versus $60.0B expected, $56.5B prior
Industrial production, February (9:15): -0.5% actual versus -0.1% expected, 0.1% prior
Capacity utilization, February (9:15): 80.9% actual versus 81.3% expected, 81.5% prior
March 18
Housing starts, February (8:30): 995K expected, 1.012M prior
Building permits, February (8:30): 1.02M expected, 1.06M prior
PPI, February (8:30): 0.3% expected, 1.0% prior
Core PPI (8:30): 0.2% expected, 0.4% prior
FOMC policy statement (2:15)
March 19
Crude oil inventories (10:30): 6.177M prior
March 20
Initial jobless claims (8:30): 360K expected, 353K prior
Leading economic indicators, February (10:00): -0.3% expected, -0.1% prior
Philly Fed, March (12:00): -18.0 expected, -24.0 prior
End part 1 of 3
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