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us stock market, understanding the stock market
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5/03/08 Investment House Alerts
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IH Alert Subscribers:
MARKET ALERTS:
Targets hit alerts: AAPL; DRS; ITU; RIMM
Buy alerts: VMI
Trailing stops: None issued
Stop alerts issued: None issued
SUMMARY:
- Jobs report, additional Fed action rev up stocks, but the stronger start doesn't last.
- Stock market still looking for some power in its move higher.
- Commodities continue their recovery despite that rising dollar.
- Jobs report provides encouragement, and economic data improved, but with energy and food prices surging, can robins be on the economy's yard.
- Watching the commodities, tech, financials, and transportation as indicators of the rally's health.
Stocks sprint out of the gate, but it was Friday, and that was used to sell.
The jobs report was better than expected with a 20K loss (-75K expected) and a lower unemployment rate (5.0%, 5.2% expected) was a nice bonus. The Fed was active as well, showing it meant what it said about using its facilities to continue adding liquidity as needed. It increased its auction amount to $150B from the $100B it bumped it to in March, it included triple A asset back securities as acceptable collateral, it jumped its ECB swap volume to $50B from $20B, and it doubled the swap amount with Switzerland to $12B.
The combination had futures bouncing, the dollar running, and bond yields rising. Basically the same action seen in the several markets of late as the understanding of the Fed's liquidity steps grows. Of course, after a good move Thursday, a strong open on a Friday begged some sellers to come in, and indeed the stock market was already peeling back in the first hour. First half-hour for that matter.
A better than expected factory orders report (1.4% versus 0.2%) reinvigorated stocks with a caffeine injection and they rallied higher, moving to new session highs after that quick pullback. The caffeine high did not last long; less than an hour into the session stocks were turning over again.
We used the move higher to take some gain off the table. We were not buying on the move. As noted in Thursdays report, it was Friday after a pretty good week, and that left the market vulnerable to some profit taking. We noted that any decent jobs report would be a head fake as we know that report lags other economic data, and despite some modest improvement in some reports (e.g. the ISM, factory orders) it would be a head fake as we know jobs lag all other economic data and the other data has not indicated any economic bottom.
The surprise on the day was the strength in commodities. They rallied back sharply Thursday afternoon post-FOMC even as the dollar ran higher. Same on Friday: dollar up, so were commodities. Is it a situation where there is such demand that a rising dollar won't blunt the commodity advance? Could be. We will know more about that this coming week when the end of month/beginning of month trade is over and things 'settle down' into a more normal routine.
TECHNICAL. Well, it was the old high/low routine: high at the start, lower at the close. A little too much excitement that we lost 20K jobs, and when you factor in that the numbers likely don't reflect reality, it didn't take too long for the early surge to start to purge. Within in an hour as it turned out. Not great action, but when you see futures that strong on data that conflicts with reality, you typically get this response.
INTERNALS: Modest. That is about it: modest. Breadth was slightly positive on NYSE (1.3:1), slightly negative on NASDAQ (-1.3:1). Volume faded on both exchanges, remaining below average on NYSE while remaining above average on NASDAQ. Now NYSE volume never did break above average on this move other than back in mid-March when it was putting together the bottom. That means it hasn't been there through a month and one-half of gains. Not the best price/volume action though volume was mostly up on upside sessions and lower on downside sessions, which is what you want to see. As discussed Thursday, however, you want to see some power in the moves and that means volume. Below average volume means that not everyone is participating, and if things turn it doesn't take much for the sellers to send a rally packing. As SP500 is heavy into financials and investors remain pensive about them, even though they are rallying there is not much support.
On the other hand, NASDAQ is showing above average trade on key sessions, i.e. when it breaks higher. That shows significant accumulation and the market needs growth stocks to grow in price if it is going to continue rallying. Financials are also key and they have low volume; definitely a tension here as the market really needs financials to be successful. NASDAQ's increased trade is very good. It needs to spill over into the financials, however, for a rally to be really successful.
CHARTS: Great moves . . . intraday. DJ30 cleared the 200 day SMA, its next resistance, but gave it up on the close. NASDAQ gapped to next resistance at 2500, and that was the high for the day. SP500 hit its longer term trendline and faded back as well. Great starts, mediocre finishes. Good breakouts Thursday, particularly on NASDAQ with its volume, then an unfulfilled promise at the close. They likely have a bit more upside to put in despite the Friday reversal before they rest again given the breakout was just on Thursday. Not a lot of upside, but a bit more.
LEADERSHIP: The Thursday leadership surged but then purged, though not a total reversal as stocks such as RIMM held their gains. Overall there was a definite industrial and commodities bias as the latter continued their bounce back from some harsh selling. Some were quite successful with their bounces and held their trends. Others look as if they are simply in a relief bounce after breaking their trends. Still looks as if tech is in good shape after maybe taking a breather here. Transports remain in excellent shape, and even retail continues to improve. The financials are still moving up; if they had volume they would be serious contenders for new leaders of the new year.
In sum, the market is still looking for power. NASDAQ is showing some strength though not clear power. NYSE is simply not showing power. Financials are the clear example: rising but no volume. If they get power then this rally will be a clearer indication of real market strength and thus a better indication of a rising economy not too far down the road. The light volume for NYSE and the financials makes the move suspect in the longer run, but for now the rally is working.
THE ECONOMY
Economic data shows nascent signs of bottoming. Good but don't light up just yet.
Jobs were better than expected though still negative. Factory orders for March were definitely much better than expectations at 1.4% versus the 0.2% expected and the -0.9% in February. That February number was revised higher from -1.3%; revisions are where the truth lies because it is like having more than just one good data point. Definite improvement there. The ISM as not as bad as expected either but it was still below 50.
Maybe all of this is telling us the economic dip is bottoming. If that is the case that is truly amazing given the housing bubble popping and the credit freeze from last summer. Yes the Fed has found what appears to be the magic potion and even strengthened the dosage on Friday. With a financial crisis restoring confidence is typically all it takes to get things greased and back to normal. If too much time passes, however, and damage is done as a result of the freeze up, then it can take more than just a Fed appearing in command of the situation. This recovery, or more accurately, attempted bottoming, is suggesting there was not a lot of structural damage.
Okay, maybe not. Maybe the Fed's actions were enough to sooth the savage beast of the financial markets AND soften the blow of housing burning down. What about gasoline heading to $4+/gallon this summer and food costs jumping, despite the President's protests otherwise, in large part because of added demand created by a social planning mandate courtesy of a philosophically confused administration (is it a free-market president or just a free-market until some emotional issues comes up president?), can any attempted economic bottom hold?
Food and energy (now referred to as Foodergy because their prices are now joined at the hip) are taking a larger and larger share of disposable income. It is thus no longer disposable income but monthly overhead: you have to eat and drive to work (remember, jobs are improving, right?) and it is taking more scratch to do it. Thus less for the other things in life that make our standard of living nice. We are not going to get wealthier as a nation spending our money on fuel and food, the former going to fund the anti-American activities of those selling us the fuel. This higher and higher cost of living is only going to drag the economy more just as some of the numbers are showing signs of bottoming.
The questions about the impact of surging fuel and food prices on an already weak economy remains. A look to the market shows an improvement and thus something of a confirmation of the attempts at bottoming in the economic numbers (actually it is the other way around: market bottoms, then the data improves, just as it is trying to do here).
So, bear market rally or a new bull market starting out of a very, very modest correction? As I said before, the correction sure seems too little to account for the mortgage and credit issues, and now you add surging energy and food costs on top. Robins on the yard indicating springtime for the economy and thus a new bull market? It is enough to leave you nervous and cautious about the prospects, but with growth stocks showing solid patterns and runs higher with tech gaining more strength you have to go with the market moves. You don't only play straight up bull market runs. You can play bear market rallies as well. You just have to keep alert and assume that, given the weak data and lack of NYSE volume on the rally, it is like a bear market rally. It could be very much the opposite, but if it is, it will just keep telling up to buy in and thus we miss out on nothing.
THE MARKET
MARKET SENTIMENT
Heard it again on Friday, that is, a pundit on the financial stations talking about how VIX has broke lower and is at levels that mean the market is in for a decline. WRONG! VIX is tricky; depending upon the market it can mean different things. When the market struggles it often will set up a correlation with VIX and move in opposing 'S' patterns forming something of a figure 8 when charted together. It was doing that from October to March.
Then the correlation will get broken for some reason, such as a new bull run, and VIX can decline for months and months. Does that mean the market is about to tank? No; there are other factors that trump VIX. It is just a secondary sentiment indicator; that means it is never your primary indicator. If it is you are going to be wrong more than right. Indeed, when a bull run is underway you look for RISING volatility after a long decline to indicate the move is peaking. This happened in the second half of 2007 as it crept up as the market rallied to the October peak. We wrote about how this was a more sinister indication, the same thing as happened in early 2000. From that the market sold again in to bear market status.
Now that the Fed has entered the game with its credit facilities that actually work, the correlation with VIX that set up during the correction is broken. Volatility and hence VIX can decline and hold at low levels for a very long time and have no bearing on any continued rally.
VIX: 18.18; -0.7
VXN: 21.39; -1.33
VXO: 18.23; -1.1
Put/Call Ratio (CBOE): 0.9; -0.04
Bulls versus Bears:
This is a reading of the number of bullish investment advisors versus bearish advisors. The reason you look at this is that it gives you an idea of how bullish investors are. If they are too bullish then everyone is in the market and it is heading for a top: if everyone wants to be in the market then all the money is in and there is no more new cash to drive it higher. On the other side of the spectrum if there are a lot of bears then there is a lot of cash on the sideline, and as the market rallies it drags that cash in as the bears give in. That cash provides the market the fuel to move higher. If bears are low it is the same as a lot of bulls: everyone is in and the market doesn't have the cash to drive it higher.
Bulls: 40.9%. The rally is having its impact, pushing bulls higher, up from 39.1% last week and 37.8% where it held for a few weeks. Crossed back above bears last week, the usual positioning of the two. Fell to 30.9% in mid-March as the low. The indicator did its job with the dive below 35% and the crossover with the 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: 31.8%. Bears are tailing off quickly, down from 35.6% the prior week and 38.9% the week before. 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: -3.72 points (-0.15%) to close at 2476.99
Volume: 2.273B (-3.74%). Still above average but lower on the pullback, and that is what you want to see. Great volume Thursday as it broke higher, definitely showing action that indicates accumulation.
Up Volume: 1.167B (-740.184M)
Down Volume: 1.08B (+639.341M)
A/D and Hi/Lo: Decliners led 1.31 to 1
Previous Session: Advancers led 2.14 to 1
New Highs: 30 (-38)
New Lows: 49 (-38)
NASDAQ CHART: http://investmenthouse.com/ihmedia/NASDAQ.jpeg
Gapped higher in a continuation of the Thursday breakout but could not hold the move, posting a slight loss Friday. Volume was lower so no major selling. Hit near resistance at 2500 on the gap; never tried to move through it. Still has room to challenge the 200 day SMA (2563) and even break through similar to NASDAQ 100.
NASDAQ 100 (+0.07%) actually broke through its 200 day SMA on Thursday. Tested that on the Friday low and then bounced to close flat. Like the lower volume test. May test it for another session or two, and if it holds we look for a resumed move higher on strong trade.
SP500/NYSE
Stats: +4.56 points (+0.32%) to close at 1413.99
NYSE Volume: 1.271B (-9.11%). Volume never made it to average on the break higher Thursday and it was lower on Fridays gains. No power, just no sellers wanting to take it down.
Up Volume: 743.548M (-328.851M)
Down Volume: 511.2M (+189.845M)
A/D and Hi/Lo: Advancers led 1.34 to 1
Previous Session: Advancers led 2.37 to 1
New Highs: 27 (-45)
New Lows: 11 (-66)
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
Rallied early as well, moving up to the old 2003/2004 up trendline at 1424 and fading back. Even lower trade so there was nothing to really push it higher, at least to make the gains stick. SP500 continues its trend higher with higher lows and higher highs, clearing the early February high on the week. There is more significant resistance at the 200 day SMA (1456) on up to 1450; digging out of a hole is never easy.
The small cap SP600 (-0.37%) rallied higher as well but then reversed to close slightly lower, giving up the Thursday break over the February high. Still following, not leading as it has run into resistance at the November and December lows. Needs to show more pop to be convincing that there is some economic recovery working right now.
SP600 CHART: http://investmenthouse.com/ihmedia/SP600.jpeg
DJ30
Rallied past the 200 day SMA (13,189) on the high (13,132) then sold off to give that move back. Finished with a gain but as there was no volume it simply could not hold the move over the 200 day resistance. Good looking pattern and a nice breakout once more, but volume remained light overall on that breakout last week. As with SP500, it is moving well but lacks any real power. Only one session above average since mid-March; where's the power?
Stats: +48.2 points (+0.37%) to close at 13058.2
Volume: 205M shares Friday versus 245M shares Thursday. Very low trade as DJ30 posted a small gain.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
MONDAY
As expected, Friday rallied but could not hold the move. We were not buyers in that move but instead banked some nice gain, opting to wait for the coming week to show just what the FOMC decision and economic data mean to the market. There were many undercurrents with the dollar rising but the commodities rising as well even with the stronger dollar along with the end of month shuffling and the new month money coming in Thursday.
Thus we are watching to see how the market responds following the first of the month new month move, particularly whether the techs continue to show leadership, if financials can gain volume, and whether commodities continue higher with a stronger dollar or if the late week rise was just position squaring. We will also watch established leaders such as transportation and whether they continue higher; very economically sensitive, and their rise is significant.
The indices, particularly NASDAQ, broke higher on Thursday, and we want to see how that break continues. The NASDAQ move was strong on solid volume; SP500 and DJ30 did not have the good trade and thus have suspect moves. With the solid tech leadership we want to say that move is the controlling move, but after the new money fades the picture will clear up as to who is in charge.
Thus we held off any significant buys on Friday, but that does not mean we won't continue looking for them as the new week starts. Still some solid patterns that can yield buys, but we note that many stocks have rallied and need a consolidation to give us an entry point. Another reason we were taking some gain Friday: a good rip in need of a test for some of the leaders such as AAPL (though RIMM just broke out anew).
We will be ready with some plays for various sectors, and when the market shows what is getting the money, we will gladly follow it and not over think the moves.
Support and Resistance
NASDAQ: Closed at 2476.99
Resistance:
Some modest resistance at 2500 from interim August lows.
The 200 day SMA at 2524
2599 is an old trendline from summer 2004/summer 2005
Support:
2451 is the August closing low
The 10 day EMA at 2426
2419 is the January 2008 peak and the early February peak
2392 is the April 2008 peak
2386 is the August intraday low
2379 from the October 2006 peak
2378 is the mid-February peak
2370 from the April 2006 peak
The 90 day SMA at 2365
The 50 day EMA at 2365
2340 from the March 2007 low
2300 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 1413.90
Resistance:
1424 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
The 200 day SMA at 1433
1446 from the December low
Support:
1406 is the August and November 2007 closing low
1396 is the February 2008 peak
1392 is the 10 day EMA
1387 is the April 2008 intraday high
The 90 day SMA at 1364
1374 is the March 2007 closing low
1370 is the August 2007 intraday low
The 50 day EMA at 1366
1330 is an ancient trendline
1325 from May 2006 peak prior to the summer 2006 correction
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
Dow: Closed at 13,058.20
Resistance:
The 200 day SMA at 13,049
13,092 is the December 2007 intraday low
13,250 from price points in second half of 2007
13,563 is the late December peak
13,780 is the early December 2007 peak
Support:
The 10 day EMA at 12,863
12,845 is the August closing low
12,786 is the February 2007 peak
12,750 to 12,768 is the February 2008 peak and a series of lows and highs from August 2007
12,743 is the November low
The 50 day EMA at 12,604
12,573 is the mid-February high
The 90 day SMA at 12,524
12,518 is the August intraday low
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.
May 5
ISM Services, April (10:00): 49.5 expected, 49.6 prior
May 7
Preliminary Productivity, Q1 (8:30): 1.2% expected, 1.9% prior
Pending home sales, March (10:00): -0.6% expected, -1.9% prior
Crude oil inventories (10:30): 3.8M prior
Consumer Credit, March (3:00): $6.3B expected, $5.2B prior
May 8
Initial Jobless claims (8:30): 380K prior
Wholesale inventories, March (10:00): 0.4% expected, 1.1% prior
May 9
Trade balance, March (8:30): -$61.3B expected, -$62.3B prior
End part 1 of 3
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us stock market
understanding the stock market
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