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money investment, financial investment
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4/08/08 Investment House Daily
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Investment House Daily Subscribers:
MARKET ALERTS:
Targets hit alerts: None issued
Buy alerts: KOP; UPL; ZOLL
Trailing stops: None issued
Stop alerts issued: None issued
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SUMMARY:
- Still pensive ahead of earnings, still in the test.
- Pending home sales fall 1.9%, doubling the 1% anticipated decline.
- FOMC members saw a coming US recession at last meeting.
- Market remains set up to try a breakout though earnings warnings are wearing on investors.
Market continues the backwash from test of resistance, but just backfilling for now.
After DJ30 tapped at 12,750 on Monday the market fell back. Tuesday it fell back a bit more, but no real damage was done.
There was some reason to fade. AMD guided lower (again), AA missed its earnings (again), NVLS warned, and Goldman dissed the entire chip equipment group. Seeing how NVLS warned, seems once again GS is on the money. On the positive side FRE and FNM received LEH upgrades and WM got its money, even more than expected at $7B, basically an $8.75/share deal for the private equity investors. Not a bad deal if you can get it . . . and WM doesn't continue to swirl down the toilet.
Stocks started lower with techs taking the biggest hit as the chips dragged them lower. The large cap techs led the decline but that was due to AAPL and some other big names giving up some ground. AAPL has surged higher for us the past month; it deserves something of a test and it was anticipated after the run and the Monday doji (that is why we took some gain Monday). It is pulling back, but look at that 200 day SMA right there to give it support. A test of that and it looks as if AAPL is going to give us another buy.
The market started to bounce almost immediately after the open. Pending home sales a half hour into the session momentarily slowed things (-1.9% versus the -1.0% expected), but that gave way to a rebound that turned NASDAQ positive and brought DJ30 and SP500 to the brink of green. Then a long, steady afternoon slide did away with that, aided by a mid-afternoon gloom report from the FOMC where many members predicted a recession in the first half of the year. Big revelation that, but it always hits home a bit more when the powers that regulate our financial lives admit that they once again could not act timely enough to prevent a slowdown.
Not that there is anything wrong with a recession; an economy that goes through its life cycles is healthy. Think of a giant river such as the Mississippi, hemmed in from avulsing as it wants to do. Without the flooding that is part of the natural cycle the rest of the land subsides and is starved for the freshwater to wash out the saltwater intruding and entire ecosystems such as the Atchafalaya basin are choked. It does the entire system good to flood every once in awhile, revive the hinterlands, and then rebuild. It sucks for those living there as it does for all of us when the economy slows to recession, but in the long run the positives are much stronger than the typically shorter slow periods.
So much for the biology, climatology, etc. lecture for the night. The market sold off but then bottomed mid-afternoon after the FOMC release and recouped some losses. Indeed the NYSE indices did just fine with nominal losses, bouncing up off their lows. NASDAQ fared a bit worse with its gap lower and the chips dragging on it. All in all, however, not bad, just unable to gather any strength.
TECHNICALLY the intraday action was up and down and was mostly negative, but there was a late bounce that put a better spin on the session. Just a sloppy day on the intraday chart.
INTERNALS: Modestly lower breadth. Lower and lower volume, well below average. No dumping that is for sure. Barely a pulse from the looks of it, but as long as the market is testing back that is exactly what you want.
CHARTS: A tap at the 10 day EMA on DJ30 and more or less that on SP500 and then a rebound off the lows. NASDAQ gapped lower but it showed a doji after tapping the 50 day EMA on the low. SP600 is very similar to the other NYSE indices, but it still is in the best shape. All are working on handles to their double bottoms on low volume. Very good action, indicating a breakout to the upside is coming.
LEADERSHIP: When most of the market is mulling over what to do the usual cadre of leaders are at work. Once more it was steel, copper, ag, energy leading the way. AKS is crazy. UPL gave us a great entry as it cleared its base. AKS and its friends cannot go up forever; they will have to test similar to AAPL. It is good, however, that investors keep putting money to work in the market even as other sectors continue to set up for their next surges. As noted last week, that is a sign of health even as the headlines are gloomy.
THE ECONOMY
Pending home sales are less pending in February.
Pending home sales, those where the contract is signed and closing awaits, fell 1.9% versus the 1% decline anticipated. That is a 2.2% swing from January's 0.3% gain, revised up from 0.0.
This is hardly breaking news. Looking at 10+ month inventories in existing and new homes it is no surprise that sales are on the decline. As they fall prices are falling as well, and they are finally starting to reach a level where they almost seem to be a bargain. They are not there yet, but the size of the price drops is rising rapidly, and that is what is needed to get the market to reverse. The holdouts have to give up and just slash the price to get what they can. It is no different than a severe bear market: when the majority give up and sell out then the market can bottom and start to rise as the long term value investors take over. No different in housing.
Fed officials finally admitting there just might be a recession.
'Severe and protracted' downturn was the catchphrase at the last FOMC meeting. That nebulous group know as Fed 'staffers' expect GDP to shrink and even recession to come about in the first half of 2008. Well, we are halfway into the first half of 2008, so that means they think Q1 was negative. Gosh, you think?
The Fed was not done with just the first half of 2008, however. It says GDP can recover in the second half of the year, but it is likely to be just a 'slow rise' and the risk is that the slump could spill into 2009. Declining asset values, credit losses, and strained financial market conditions could be quite persistent and delay any recovery.
The blunt and bleak assessment surprised a lot of professional Fed watchers (what a boring job, eh?; right up there with 'new fashions and color schemes for the clergy'). In the big picture, however, you want a pessimistic Fed because that keeps it on its toes with respect to the economy, not just whistling past the graveyard and hollowly telling us 'all is well' a la the ROTC nerd (who was Kevin Bacon) in 'Animal House' when runaway chaos swept the streets. Even with that, however, Fed Funds Futures only predict a 25BP rate cut at the end of the month. Pessimistic, but somewhat satisfied with the work it has done to this point.
THE MARKET
MARKET SENTIMENT
VIX: 22.36; -0.06
VXN: 26.03; -0.16
VXO: 22.99; +0.29
Put/Call Ratio (CBOE): 1.14; +0.17
Bulls: 36.4%. Slight drop from 36.7% after the big jump from a very low 30.9% two weeks back. Not really worried about it; the indicator did its job with the dive below 35% and the crossover with the bears. They are still in crossover mode even with the rise in bulls and the decline in bears. The bulls and bears were eye to eye in mid-February and have crossed. 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: 37.5%. Substantial decline from 41.1%, but you knew that was going to come with the recovery. As with the bulls the jump in bears did its job after hitting 44.7% that was up from an already freakishly strong 43.3% the week before. That was a surge from an already high 36.6% the prior week. 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). This is a huge turn, unlike any seen in recent history.
NASDAQ
Stats: -16.07 points (-0.68%) to close at 2348.76
Volume: 1.691B (-4.28%). Lower volume, still way below average as it tested back.
Up Volume: 563.501M (-120.427M)
Down Volume: 1.083B (+55.898M)
A/D and Hi/Lo: Decliners led 1.35 to 1
Previous Session: Decliners led 1.06 to 1
New Highs: 34 (-23)
New Lows: 87 (+8)
NASDAQ CHART: http://investmenthouse.com/ihmedia/NASDAQ.jpeg
Gapped lower and tapped the 50 day EMA (2334) on the low, rebounding to cut some losses. Showed a doji on the close for what that is worth. Volume was very low so it was not really heavy selling, just some issues with stocks such as AMD and those were perceived as personal to the company rather than sector wide. AAPL pulled back after a big run adding some more pressure. Lagged for sure but it was not really that painful overall as the large cap techs led the selling.
NASDAQ 100 (-0.79%) did lead the downside with its own gap lower, but it held above the 10 day EMA on that low trade, leaving the large cap techs still in good shape to test and then rebound once more.
SOX (-2.77%) thudded back to the 50 day EMA after failing at the 90 day SMA and basically at the early February high. Maybe it can hold here and make a higher low and make the break through that level.
SOX CHART: http://investmenthouse.com/ihmedia/SOX.jpeg
SP500/NYSE
Stats: -7 points (-0.51%) to close at 1365.54
NYSE Volume: 1.197B (-6%). Lower trade once more as the NYSE indices faded modestly once more.
Up Volume: 457.535M (-334.039M)
Down Volume: 730.37M (+259.143M)
A/D and Hi/Lo: Decliners led 1.41 to 1
Previous Session: Advancers led 1.28 to 1
New Highs: 41 (-40)
New Lows: 25 (+9)
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
Sold off toward the 10 day EMA (1355) but did not really test that level before bouncing to cut the losses on the session. Hard to say it 'sold off;' it just sagged back after tapping the 90 day SMA on Monday and fading. Still in a very nice, flat (on the close) test of last week's break higher, being stingy with its gains. Nice set up in this handle to its double bottom, and looking for the breakout move.
SP600 (-0.10%) lost just a hair on the close, tapping at the 10 day EMA intraday and rebounding to hold over the 90 day SMA. Talk about being stingy with the gains. Looks very nice for a break higher, and when the small caps break upside that, like the swallows returning to Capistrano, is a good harbinger for the economy. Yes, I know that is a weak analogy so don't bother emailing me with snide comments. I admit it in advance.
SP600 CHART: http://investmenthouse.com/ihmedia/SP600.jpeg
DJ30
Another NYSE index that is sliding along laterally, tapping the 10 day EMA on the low and rebounding into the close, refusing to give up much ground after the last surge higher. As with the other NYSE indices, the Dow is forming a tight and low volume handle just below the peaks of its 13 week base. Textbook, and it is setting up a breakout. It still has to show it, but it is putting in the work necessary.
Stats: -35.99 points (-0.29%) to close at 12576.44
Volume: 197M shares Tuesday versus 198M shares Monday. Still very, very low volume.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
WEDNESDAY
Wholesale inventories and crude oil inventories on Wednesday. Interesting, but not really ready to change the course of the action unless oil is way out of line, but regardless is seems to have a life of its own of late and wants to get back to 110 and if so, then maybe beyond onto 120. Lovely thought.
The real story right now is the rapidly approaching earnings season and the warnings starting to pepper the market based on the weak economy. UPS (a.k.a. 'Brown') left a skid mark after hours when it lowered its guidance to $0.86-0.87 from $0.94-0.97. Transportation was on an upswing heading into this warning; it is important to see how it responds to this brown out by UPS. There are quite a few warnings, and we can expect more with this built in 'it's the economy' excuse to take advantage of.
That is okay as long as the market keeps shaking it off and basing. At some point in the not too distant future, however, it is going to have to make the next break higher. The set ups are nice, and the gloom from the Fed and the headlines, and the inability to push higher is working to push some gloom higher. Maybe it is not there yet; maybe it takes some more work. The indices, however, look ripe as a watermelon to make the break higher. As we always say, however, it is just a pretty picture until it closes the deal.
Thus we continue to watch for the 'other' leaders, those that formed up over the past few weeks and either broke higher a week back on that surge or moved up to finish their bases on that surge and are now biding time to make the breakout. They have held back the past week, letting the commodities, energy, and agriculture, as well as a few other strong stocks scattered across many sectors, move higher. They need some trigger to send them higher after these nice set ups. We will continue to look at the solid stocks ready to make breakouts or bounce off of tests as we wait for that break higher that, thus far, continues to set up nicely.
Support and Resistance
NASDAQ: Closed at 2348.76
Resistance:
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.
The 200 day SMA at 2547
Support:
2340 from the March 2007 low
The 50 day EMA at 2334
The 18 day EMA at 2317
2292 is the trendline from the summer 2004/July 2006 lows, Q4 2005 consolidation
2252 is the early February low
2221 is March low
2216 from August 2005 peak
2202 is the January intraday low
2175 from the December 2004 peak
2168 is the March 2008 low
S&P 500: Closed at 1365.54
Resistance:
1374 is the March 2007 closing low
The 90 day SMA at 1385
1396 is the January 2008 peak
1406 is the August and November 2007 closing low
1420 is a longer term trendline from the August 2003/September 2004 lows
1433 from a pair of August 2007 lows and December mid-month intraday low
Support:
1370 is the August 2007 intraday low
The 50 day EMA at 1352
The 18 day EMA at 1347
1325 from May 2006 peak prior to the summer 2006 correction
1324 is an ancient trendline
1317 is the early February low
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
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 12,576.44
Resistance:
The 90 day SMA at 12,660
12,743 is the November low
12,750 to 12,768 is the February 2008 peak and a series of lows and highs from August 2007
12,786 is the February 2007 peak
12,845 is the August closing low
13,092 is the December 2007 intraday low
The 200 day SMA at 13,135
Support:
12,573 is the mid-February high
12,518 is the August intraday low
The 50 day EMA at 12,449
The 18 day EMA at 12,439
12,250 from late March 2007 lows
12,070 from the early February 2008 lows
12,050 from the March 2007
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
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
April 7
Consumer Credit, February (3:00): $5.2B actual versus $6.0B expected, $10.3B prior (revised from $6.9B)
April 8
Pending home sales, February (10:00): -1.9% actual versus -1.0% expected and +0.3% prior (revised from 0.0%)
FOMC Minutes, March (2:00)
April 9
Wholesale inventories, February (10:00): 0.5% expected. 1.0% prior
Crude oil inventories (10:30): 7.3M prior
April 10
Initial jobless claims (8:30): 383K expected, 407K prior
Trade balance, February (8:30): -$57.4B expected, -$58.2B prior
Treasury Budget, March (2:00): -$70.3B expected, -$96.3B prior
April 11
Export prices, March (8:30): 0.5% prior
Import prices, March (8:30): 0.6% prior
Michigan sentiment, preliminary, April (10:00): 69.0 expected, 69.5 prior
End part 1 of 3
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money investment
financial investment
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