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money investment, investment help
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4/16/08 Technical Traders Report
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MARKET ALERTS
Targets hit alerts: CSX; PQ; XTO
Buy alerts: APC; CHL; CY; ICO; OTEX; PCU; RIMM; SCHN
Trailing stops: None issued
Stop alerts issued: None issued
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http://www.investmenthouse.com/alertttr.html
SUMMARY:
- A brace of earnings springs the market for its next leg higher.
- Nice point gains but volume remains a question mark
- Consumer prices rise in line as producer prices run hotter: that means profit squeeze but Intel, IBM not talking that tune.
- Taxing issues now that April 15 has taken its toll.
- Despite all of the economic issues, stocks set for more gains following IBM earnings with the key test still ahead.
A turn in earnings triggers some upside.
INTC, JPM, and KO posted much better earnings than the initial round of results, and with some halfway positive views about the future, investors took some heart. Consumer prices were up yet again (2.4% annual core), housing starts plunged again (-11.9%), and production, though up for March, remained flat the past three months. Earnings trumped, however, as they are the latest news with respect to the future (guidance) and the market has heard all of this economic news before. Indeed, it is hard to distinguish one day's economic news from the next: slower, weaker, record low. Just add the heading.
Moreover, after a weeklong pullback from the last rally leg (and one that almost fully tested that prior move), it was time for the indices to either make the next upside move or fold the hand. As leadership and price/volume action hung in during the test, the upside looked promising. The better than expected results then triggered the bounce.
Tech stocks were revved after the INTC results Tuesday night, and the addition of the JPM and KO results helped charge up the rest of the market. Stocks started higher and never gave up gains in any significant number, even with a midday pause that spanned roughly 3 hours. Mid-afternoon brought the buyers/short coverers back in and rallied the indices to close right at their highs. Volume was up, but it was not blowout; nonetheless the bias was to the upside, and stocks had no trouble holding and indeed extending their gains into the close. A solid session with the market bouncing where it had to. Beyond that, well, it was not a clear ring of the bell, but then again, this entire move has been maligned, and that bell never does ring no matter how hard you listen for it. When stocks show you it is time to buy, that is when you buy. Thus we were buying quite a bit over the past several weeks, and Wednesday those paid off with some nice gain as well as some new positions.
TECHNICALLY the action improved, but as noted, it was not a blowout session. The first break higher in the second half of March was on more volume. The second break higher to start April was on lower but still rising volume. This move was on a solid volume increase day over day, but it was the lowest of the three moves on NYSE. In any event, the intraday action was positive with the higher start, rally, midday pause, then the run to the close and session highs.
INTERNALS: Solid breadth at 5:1 on NYSE and 2.7:1 NASDAQ (large caps were the clear tech leaders). That is quite solid, quite 'follow through-esque' breadth. Volume was up rather impressively, rising 13% on NASDAQ and 17% on NYSE. That, however, still left them shy of average and on NYSE, the lightest volume of the upside legs on the rally. Doesn't mean it is a dead rally or doomed to failure, just that volume is not clear and convincing. It has definitely improved as it should on a move higher. Once more, however, the trade is just not the caliber you find in long range runs. Definitely playable, but it keeps you on your toes as the indices rally up to key resistance.
CHARTS: Solid price gains with the indices moving through some near resistance at the 50 day EMA and the late March peak. Needed to get that out of the way so they can now make a run at the last highs in April that roughly matched the February peaks where the indices recovered after the sharp January selloff. Keyed up to make that test, and the IBM news is going to help them make that run.
LEADERSHIP: The breadth shows that many stocks were moving higher, and the recent leaders in metals, energy and agriculture did not dip at all even with the rest of the market moving higher. Money did not leave these areas at all; it just entered into other sectors as well. Financials were up, but they are not really leaders. Large cap tech was solid, a leader in the prior leg and as expected, coming back into leadership mode as the next leg got underway. Good to see money spreading out; that is always a positive for any move higher as it shows new interest and vigor in stocks.
THE ECONOMY
Economic news is more of the same: slowing economic activity though no collapse outside of housing.
Consumer prices still holding a low angle of ascent compared to producer prices.
Over the past year overall producer prices are up 7% while overall consumer prices are up 4%. The core is up 2.4% year/year, climbing the past six months from the 2.1% low tide mark. There is no question prices are under pressure though the core still is quite tame all things considered. The core will remain under pressure as the economy slows; contrary to Phillips Curve adherents' beliefs, inflation tends to increase in slow economies and decrease in expanding economies because of supply and its ability to meet demand. In slow economies supply lags and thus you have money chasing fewer goods and services and thus inflation.
There is another issue than just whether inflation is eroding buying power. Historically when producer prices rise faster than consumer prices, producers are obviously put under pressure in the form of profits. When your prices rise and you cannot pass them along to your customers, your bottom line gets compressed. The key is how long it lasts as to whether there is an exacerbated economic downturn as a result.
As discussed here this past week, corporate profits are declining, a sure sign of economic slowing as businesses pull in their investments as a result. The pricing is playing a role in that decline. Thus far the economic decline is shallow even with the housing issues, and if it doesn't get much worse as in say 1984 when oil prices surged but prices did not (at least not much; that was the all-time high in oil that we just surpassed), then the disparity in price levels will have minimal impact.
Of course there was something else occurring in the early 1980's, and that involved massive taxation changes in the US that were needed to jolt the economy out of its second worst malaise in the nation's history. Piles of new regulations and social programs almost crushed the life out of our economy and country; there was simply no incentive to invest with such high tax rates and such little reward for any risk taken. A massive tax change helped trigger the massive 20 year expansion we all enjoyed.
That helped jumpstart all sides of the economy. Right now there is a lot of talk about raising taxes on the 'wealthy' and cutting taxes on the 'poor' even as we are in recession. If that happens that is polar opposite of what occurred in the 1980's, and would mire us in economic malaise once more and thus we would see a serious profits issue and that means a serious lack of investment. That is an ugly cycle.
Some tax facts.
And what of the tax talk we are being fed on the campaign trail? With income tax day past (though we are still working for the government even after 'tax day') let's look at who pays what.
The top 1% of earners ($1.3M+) pay 38.8% of all income taxes
The top 20% of earners ($215K+) pay 86.3% of all income taxes. Wow.
The top 40% ($85K+) pay 99.4% of all income taxes.
Those making $58K or less pay 0.6% of all income taxes
Those making less than 40% pay no taxes and get 'refunds.'
As a result of the Bush tax cuts, several million Americans were taken off the tax roles, i.e. had no income tax liability. Contrary to popular rhetoric, EVERYONE who paid taxes benefitted. Those paying the most taxes benefitted the most because they got a percentage reduction. They still paid MORE taxes as a group after the changes, however, because so many were removed from the roles and even the lower end received tax breaks as well.
We have a system where a few pay for the many. Hiking taxes on the 'rich' as proposed would exacerbate that condition and put our economy more at risk. What we need are policies that incent investment and thus produce growth, creating good businesses and jobs that raise all of our incomes and living standards. Trying to tax the base that makes the investments and produces those businesses and jobs is historically a failure.
There is virtually no small business that employs a few workers that makes less than $85K per year, but they pay almost 100% of the income taxes. The plans trotted out on the campaign trail are talking of eliminating taxes on those making less than $75K but raising it on the others. That only works to pressure the vast middle section of American small business and threaten the very jobs of those getting the tax breaks. Tax break or a job? If it was put in those terms that would certainly change the
THE MARKET
MARKET SENTIMENT
VIX: 20.53; -2.25. Gapped lower and closed at the lows, definitively slicing below the 200 day SMA. What does that mean? Does it mean the rally is doomed as some would say? When volatility sets up a relationship with the indices then there is that predictability. That occurred for a few months. It looks as if there is a decoupling now. In short, we are not getting our panties in a wad over it, particularly given the Fed is in the game and providing a backstop.
VXN: 25.55; -1.91
VXO: 21.94; -2.58
Put/Call Ratio (CBOE): 0; -1.06
Bulls: 37.4%. Creeping higher, up from 36.4% after falling to 30.9% in mid-March. The indicator did its job with the dive below 35% and the crossover with the bears. They remain in crossover mode even with the rise in bulls as bears edged higher again. 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: 38.5%. Up a point from 37.5% as the bears are skeptical of a potential bottom in the market. Heading back up toward the 44.7% peak, but not likely to make it there of course. Like to see the continued pessimism even as the indices form up a bottom and leadership improves. As with the bulls the jump in bears did its job after hitting 44.7% in the third week of March 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: +64.07 points (+2.8%) to close at 2350.11
Volume: 2.11B (+13.32%). Volume was up, trying to get to average but falling a 100M or so short. Some accumulation but no blowout buying.
Up Volume: 1.812B (+756.788M)
Down Volume: 269.765M (-515.063M)
A/D and Hi/Lo: Advancers led 2.76 to 1
Previous Session: Advancers led 1.17 to 1
New Highs: 61 (+25)
New Lows: 122 (-71)
NASDAQ CHART: http://investmenthouse.com/ihmedia/NASDAQ.jpeg
Gapped through the 50 day SMA and took out the 50 day EMA as well as the late March peak. It is still below the mid-February high and the key early February peak (2420) that are blocking any significant move. NASDAQ made the break higher where it had to, holding over the late March low and now moving toward that next level that it brushed in April but turned back from after a solid run. Now it has to make the next break of resistance to get it out of this 3-month range.
NASDAQ 100 (+2.91%) jumped as expected, easily clearing the late march peak and now just below the February peak. The early April high (1886) is the key move for the large cap techs.
SOX (+5.45%) is back in the game with a strong surge off the 50 day SMA and is now at the April peaks. We will see if the third time at these levels (this month) is the charm. A very impressive recovery here.
SOX CHART: http://investmenthouse.com/ihmedia/SOX.jpeg
SP500/NYSE
Stats: +30.28 points (+2.27%) to close at 1364.71
NYSE Volume: 1.442B (+16.8%). Volume was the best since the first of the month but still below average. Some accumulation but not a wave of new buying.
Up Volume: 1.245B (+460.393M)
Down Volume: 193.704M (-225.048M)
A/D and Hi/Lo: Advancers led 5.11 to 1. Impressive.
Previous Session: Advancers led 1.47 to 1
New Highs: 136 (+75)
New Lows: 79 (-6)
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
Made the higher low above the late March low, continuing the low angle uptrend off the March low. Cleared near resistance, but as noted earlier, the key is still ahead with the April peak (1387), the late February peak at 1388, and the early February peak at 1396. Clearing those breaks SP500 free of the lower highs. To do that it needs the financial stocks. They are rebounding but the overall patterns are still more of downtrends than bases. It will be a fight, but they are trying to reverse some downtrends near term.
SP600 (+3.01%) jumped off its higher low as well, clearing the 90 day SMA. As with the other indices, it has its test ahead of it at 380 to 383 where it will try to break free of the lower highs as well.
SP600 CHART: http://investmenthouse.com/ihmedia/SP600.jpeg
DJ30
A higher low by the blue chips at 12,250 support and a move up through the 90 day SMA to just about match the early April peaks. This is a pretty nice little base that has formed up with some higher lows bracketing the March bottom. It is a good set up to make another run at the key 12,750 resistance where there are at least 5 highs and lows. For the market as a whole this is a key test that is about to occur with the solid IBM earnings after hours.
Stats: +256.8 points (+2.08%) to close at 12619.27
Volume: 269M shares Wednesday versus 208M Tuesday. Volume moved up toward average on the advance but it was still not average so not the blowout you want to see.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
THURSDAY
More economic data with the Philly Fed PMI, jobless claims, and Leading Economic Indicators. The driving force will remain earnings, however, and after hours IBM reported strong results and raised its 2008 guidance even beyond its recent upside revisions. The debate after the earnings was whether this was an 'IBM thing' or could be applied to the rest of the techs.
The debate 'raged' more or less, but the earnings are going to push the market higher. As with the INTC results, staying power is the key. The Dow is moving toward key resistance at 12,750 and all of the indices have their own key levels they need to break through. IBM will help them get to that point and then we see what kind of guts this rally has. The improvement in earnings was the water that brought the rally back to life; is it enough to sustain it further.
There are many stocks with good patterns. The leaders in ag, energy and commodities have led the way, and transports are getting back into the game along with some large cap tech. The moves Wednesday were good price-wise, but many stocks just did not have the volume to be convincing. There is money moving into some names as the volume indicates, but a lot of the move was just broad rebounding without a lot of purpose. That purpose needs to coalesce as the indices reach that resistance. Thus we passed on more than a few stocks that moved well but didn't have a lot of volume. That does not always spell disaster in a short move, but with so many stocks moving and many showing good volume we didn't want to stray too far.
We will continue looking for the stocks in position to move well and buy as the opportunity presents itself. There is not just one buy point; lasting surges tend to rally in waves. There will still be some buys on this move as it continues, but after another good session of rallying we will need to see a test to pick up most new positions. We will continue thus looking for good opportunity to enter and to take some gain as the rally continues Thursday.
Support and Resistance
NASDAQ: Closed at 2350.11
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
2392 is the April 2008 peak
2419 is the January 2008 peak and the early February peak
2451 is the August closing low
Some modest resistance at 2500 from interim August lows.
The 200 day SMA at 2539
Support:
2340 from the March 2007 low
The 50 day EMA at 2330
2293 is the trendline from the summer 2004/July 2006 lows, Q4 2005 consolidation
2261 is late March higher low
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 1364.71
Resistance:
1370 is the August 2007 intraday low
1374 is the March 2007 closing low
The 90 day SMA at 1376
1387 is the April 2008 intraday high
1396 is the February 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:
The 50 day EMA at 1351
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 12,619.27
Resistance:
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 13,102
Support:
The 90 day SMA at 12,601
12,573 is the mid-February high
12,518 is the August intraday low
The 50 day EMA at 12,449
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 14
Retail sales, March (8:30): 0.2% actual versus 0.1% expected, -0.4% prior (revised from -0.6%)
Retail ex-autos (8:30): 0.1% actual versus 0.2% expected, -0.1% prior (revised from -0.2%)
Business inventories, February, (10:00): 0.6% actual versus 0.6% expected, 0.9 prior (revised from 0.8%)
April 15
PPI, March (8:30): 1.1% actual versus 0.6% expected, 0.3% prior
Core PPI (8:30): 0.2% actual versus 0.2% expected, 0.5% prior
NY Empire state Index, April (8:30): 0.6 actual versus -17.0 expected, -22.2 prior
Net foreign purchases, February (9:00): $72.5B actual versus $60.0B expected, $57.1B prior (revised from $62.0B)
April 16
CPI, March (8:30): 0.3% actual versus 0.3% expected, 0.0% prior
Core CPI (8:30): 0.2% actual versus 0.2% expected, 0.0% prior
Housing Starts, March (8:30): -11.9%; 947K actual versus 1.01M expected, 1.075M prior
Building permits, March (8:30): 927K actual versus 970K expected, 984K prior
Industrial production, March (9:15): 0.3% actual versus -0.1% expected, -0.7% prior
Capacity utilization, March (9:15): 80.3% actual versus 80.4% expected, 80.4% prior.
Crude oil inventories (10:30): -2.3M actual
Fed Beige Book (2:00)
April 17
Initial jobless claims (8:30): 375K expected, 357K prior
Leading economic indicators, March (10:00): 0.1% expected, -0.3% prior
Philly Fed, April (10:00): -15.0 expected, -17.4 prior
End part 2 of 3
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