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money investment, day trading
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6/26/08 Investment House Alerts
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IH Alert Subscribers:
MARKET ALERTS:
Targets hit alerts: BZP
Buy alerts: DRQ; NOV
Trailing stops: None issued
Stop alerts: APH
SUMMARY:
- Tidal wave of bad news shreds market bounce attempt, sends DJ30 below its January & March lows.
- Sharply lower session but not a day to sell.
- Leadership sags as commodities surge, but using this to pick some up.
Relief bounce is no match for more negatives for the economy.
Plenty of economic news hit the market in the form of GDP (1% as expected), jobless claims (384K versus 374K expected), and existing home sales (4.99M versus 4.95M expected), but they were all pikers compared to the compared to the other forces at work that wiped out the market's hankering to attempt a relief bounce. The RIMM and ORCL earnings showed the growth areas as questionable. GS put Citigroup and GM on the 'focus sell' list. Rumors hit that a US automaker was going to file bankruptcy. The Fed's non-action had lingering effects as well. The lack of Fed action tanked the dollar almost 1% versus the euro. Oil spiked as a result ($139.64, +5.11), clearing $140 intraday, breaking out of its lateral consolidation. Gold was also spiking on inflation fear, jumping over $900 (919.40, +37.10). They 2 year treasury yield dove almost 30BP to 2.67% after flirting with 3% just Wednesday as investors moved (more like stampeded) to the safety of US treasuries. A tidal wave of bad news that, pardon the mixed metaphors, snowballed through the afternoon.
Stocks gapped lower as the picture of economic improvement the Fed tried to paint in its Wednesday statement was swept away. The market has been selling even as the economic data firmed of late, and now with the Fed and Administration not supporting the dollar, oil has surged to a new high and as we know the economy cannot withstand that. The Dow blew out its January and March lows and SP500 is heading that way.
TECHNICAL: Basically as bad of intraday action as the price action indicates as stocks gapped lower, DJ30 popped its 2008 lows, and they all finished at their lows as the sell on close orders overwhelmed a late attempt to rebound with some short covering.
INTERNALS: As you would expect, the market had bad breadth with NYSE AT -5.5:1 and NASDAQ at a relatively tame -3.8:1. Pretty ugly, and -5:1 gets in the realm of extreme, but as a reminder, we have seen -11:1 on NYSE during the last few bottoming episodes over the past couple of decades. Volume jumped on both NYSE and NASDAQ after lagging all session; the sell on close orders really exploded trade late. New lows jumped over 400 on NYSE; getting toward the level you look for when selling starts to crescendo. It is not a 'this is the bottom' kind of indicator, but part of the puzzle that starts all fitting together.
CHARTS: The big news was the Dow blowing out its March and January lows and SP500 heading that way. NASDAQ gaped lower right at the point it gapped higher in mid-April on the way up, closing right at its 2004/2006 up trendline. The gap lower at the point it gapped higher sets up what is called an island reversal, and in this interest it is a downside reversal. Thus we can look for more downside from NASDAQ in the future though before it gets too nasty it will try and rebound to test. For now NASDAQ remains well above its January and March lows, and after DJ30 and SP500 get through breaking out all the prior lows that may put NASDAQ near its 2008 lows. Maybe at that point the economy will have been wrung out and the market will start pricing in some growth. That is something to watch for, but it is still a ways out in the future as this breakdown in the next leg of the bear market has just started.
LEADERSHIP: Most stocks were lower on the session though some energy and others here and there were positive. Why not more energy with oil exploding higher with a new breakout? As we have seen on each new high in oil, the energy stocks lag as fears of these ever-increasing prices will kill off the world economies and thus the demand for the very products experiencing the price surge. Thus the stocks lag at first, then move higher. Many energy, metals, and other commodities have been 'victims' of the selling, but only to the extent they have fallen to support during the selling with many of the leaders really not experiencing much of a pullback at all. We anticipate that given the prior similar action in these situations as well as the holds at support, they are going to bounce right back up as they have done. Thus we started taking some partial positions Thursday in stocks such as DRQ even if it was before the 'official' buy point. They are still in great shape to buy so we can add to them as they move higher.
Not the day to chuck it all in.
The technical indicators show this was a very weak session with sharply negative indicators. Many were selling, but these are typically not the best days to sell positions. First, while the market is pricing in some lower earnings, it was not pricing in a RIMM miss and an ORCL hedge on its guidance (and that is EXACTLY what it was: ORCL is simply lowering expectations as it always does and will likely beat as it has a penchant for doing just as it did Wednesday in a weaker economy). The market was going to gap lower with those items, and when you piled on the other garbage that was out pre-market, the hysteria was whipped up to resemble a frothy dairy product and nothing good was going to come from it.
Okay, why else and what do you do about it? The market wanted to bounce from an oversold condition as it reversed Tuesday and started to bounce Wednesday. Then the plethora of bad news hit and undercut it. Given the other reasons below, even with the additional bad news, the deferred bounce will try to raise its head again. Ever see the 'Butterfly Effect' and other similar movies that were all knockoffs of each other or the Dean Koontz novel 'Lightening' (though after reading three of his novels they all seemed the same people just a different and sometimes absurd plot)? You change history but it keeps trying to come back to way it was supposed to be. Thus the selloff interrupted the oversold bounce only to make things more oversold.
And that leads us to another market phenomenon closely related. The indices put in two important levels with the January and March lows that led to the bounce through early June. DJ30 crashed through those lows Thursday, starting a new leg to this selloff or bear market if you prefer. That leads to immediately more selling as seen Thursday and as we may see Friday morning. Then there is a short covering surge as the shorts, perpetually nervous (as we are when we have short positions), cover and drive stocks back up to the level where the key bottoms were broken. They either recover and sail on to greener pastures, or as is typical, they fail and head lower again. Most stocks, especially our positions, are not in nearly as dire a position, and thus the bounce will send them nicely higher. Then we decide if we keep them or sell them given how they respond on the bounce. Many of our positions are leaders just pulling back; thus the bounce could put them back in great shape.
And once again that leads us to another point: most of our positions are holding up well, and indeed are using the selling to test support and set up a new bounce for the reasons discussed above relating to the spike in commodities prices. Thus we are going to look at new positions on some of these plays that are set up well and have basically laughed off the selling. At the same time we have to be cognizant of the possibility that these sectors ultimately succumb to the overall market selling and economic malaise because as also mentioned above, at some point the economies cannot support these prices and they fall and take the stocks with them. An indication of this right now would be if these stocks, after pulling back, cannot recover and break lower. Ag is a concern with this respect along with coal. The railroads broke down and some of agriculture's leaders are struggling. Just need to keep this bigger view in mind as we go about the day to day business in the market.
THE ECONOMY
No big assessment of the final GDP reading, rising jobless claims, and a bit better existing home sales. Why? Because they don't mean a thing right now. The market is telling us that the economy is going to slow further and this data is out of date. Housing may indeed continue to bottom, but that is still a long way off and indeed dovetails with the economy still heading lower: housing is an early cycle recovery sector, and if it continues to show signs of bottoming that is an obvious positive even as the other economic indicators head south once more and likely turn in some negative and thus more traditional recession-like GDP numbers.
THE MARKET
One thing we heard today from trading desks is something I touched on earlier: no one cared about the economic data. Didn't want to hear it, felt it didn't mean much given the market's technical action and the macro picture with surging oil, gold, and worries about what the US is going to do with its presidential election.
MARKET SENTIMENT
VIX: 23.93; +2.79. Up but still below the early June highs at 24.75. That means it could still use a goose to get it up near 35 or even 40 to 45, and that means more selling, i.e. something like SP500 breaking its January and March lows as well.
VXN: 29.06; +2.67
VXO: 25.91; +3.5
Put/Call Ratio (CBOE): 1.14; +0.28. Back over 1.0 on the close. Rather surprising of late as the put activity has not really jumped given all of the weakness. Similar to the VIX, things are a bit too calm, but that appears to be changing.
Bulls versus Bears:
For the second time this year bears are crossing above bulls, doing so basically where they did in March on their way to much more extreme readings just about the time the market made the March low and started the last rally. Positive for the market and if SP500 is going to hold the long term trendline is the place to do it.
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: 33.7%. Below the 35% level and now a bullish indicator. Down from 36.3% last week and a precipitous fall from 43.0% the week before. Falling from a rebound high at close to 50% on the run through May. 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. They are crossing over again now even before the prior lows are hit. 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: 39.3%. Up from 37.4% last week and 32.6% the week before. Crossed above bulls last week and is burying the crossover this week. Again, that is one of the best indications that sentiment is getting extreme on the negative side. It is again past 35%, the level that historically indicates too much pessimism. 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. 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: -79.89 points (-3.33%) to close at 2321.37
Volume: 2.317B (+7.89%). Definitely distribution as the large cap techs let the overall NASDAQ down.
Up Volume: 265.861M (-1.472B)
Down Volume: 2.002B (+1.604B)
A/D and Hi/Lo: Decliners led 3.84 to 1. Getting fairly extreme.
Previous Session: Advancers led 1.74 to 1
New Highs: 30 (-16)
New Lows: 332 (+115)
NASDAQ CHART: http://investmenthouse.com/ihmedia/NASDAQ.jpeg
Sold to the long term 2004 trendline, just undercutting it. Support also at 2275 and still well above its January and March lows. As noted, it can sell off down to those levels behind the large cap NYSE, and at that point the market might be ready to bottom. That is a ways off, and this is a good point (the trendline) for NASDAQ to bounce back up with DJ30 as it tests the break of its January and March lows. That does not change the island reversal discussed earlier; it can bounce but then still face more downside after that.
NASDAQ 100 CHART: http://investmenthouse.com/ihmedia/NASDAQ100.jpeg
SOX CHART: http://investmenthouse.com/ihmedia/SOX.jpeg
SP500/NYSE
Stats: -38.82 points (-2.94%) to close at 1283.15
NYSE Volume: 1.535B (+9.58%). Quite strong selling trade as NYSE stocks were dumped across the board.
Up Volume: 123.448M (-833.3M)
Down Volume: 1.41B (+1.009B)
A/D and Hi/Lo: Decliners led 5.51 to 1. Getting there but as noted, if we see a 10:1 or so move, even intraday, that is a very good indication, if the other indicators are ripe as well, that an extreme or selling climax has hit.
Previous Session: Advancers led 2.35 to 1
New Highs: 33 (+10)
New Lows: 424 (+267). Getting closer to the 500 that indicates some serious selling that can lead to a rebound. Not a timing instrument, just a 'getting warm' kind of indicator.
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
Racing toward its January low (1270) and March low (1257), following in DJ30's footsteps. When it reaches those levels, and it won't take long, it will try to hold and bounce similar to DJ30 before the additional bad news chopped it to ribbons. With the Dow rebounding to test as shorts cover after another downside dive Friday that takes SP500 to these levels, that would start that rebound that wanted to start before the late Wednesday and Thursday news swept it under.
SP600 (-2.28%) is at the last range of support before it too heads toward the January and March lows. It can give up another 7 points or so (closed at 370) before finding this interim support, and after another selloff Friday that will put it at that level and ready for a relief bounce.
SP600 Chart: http://investmenthouse.com/ihmedia/SP600.jpeg
SP400 CHART: http://investmenthouse.com/ihmedia/SP400.jpeg
DJ30
Talked about this action to extremes above, so we won't beat it to death. Blew out the January/March lows. Closed on the low. Took out the 2004/2005 trendline. Will rebound to test the break below those key lows as shorts cover. Won't be successful in recovering but will turn over. Will play it to the downside when that happens. Before it is over it will likely be at the 2006 summertime lows at 10,700 or 10,660 from January 2006.
Stats: -358.41 points (-3.03%) to close at 11453.42
Volume: 302M shares Thursday versus 236M shares Wednesday. Huge volume on some components cut to sell pretty much ensured stronger selling volume.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
FRIDAY
As noted above, likely some sloppy trade early Friday as the momentum downside continues. That is not always the case, however, as many times this year some ugly selling has found a rather benign tape the next session. The best is a continuation of the selling that takes SP500 to its January low and then bounces back as the Dow rebounds to test its break of that very level. That clears out the last near term sellers and sets up the bounce. If there is some upside pre-market, that can still end up in more selling as a negative market takes an early bounce and trashes it.
In any event, a bit more selling to test the next levels is not a bad thing and as noted above, if the leading stocks and sectors hold near support they put themselves into buy position for another run higher. We are going to use that as an opportunity to buy stocks still in good shape even after all of this selling and get what we can out of them. We have to be cognizant of the rails' breakdown and the struggles in agriculture and even some coal stocks as indicators that other sectors are succumbing to the selling, but that does not mean we cannot make money off these stocks that held up well in some violent selling.
We won't ignore the downside and will look to play it as we did the prior drop, but at this juncture we let the market bounce for the reasons discussed above, and then we move in. It could take several sessions to rebound test these levels, and as the indices approach resistance we will be putting on plays to take advantage of a turn back down.
In sum, the Dow entered a new phase of the bear market. SP500 is going to follow but it will likely bounce off its January and March lows before it joins DJ30. NASDAQ is in trouble as well with its island reversal pattern, but it has room to sell while DJ30 and SP500 collapse below the 2008 lows, and still hold at its 2008 lows and find bottom. That all remains to be seen; there is a lot of wash still to sort through. What we will do is take advantage of the moves in the market as they set up in a macro selloff. For now it is setting up for a bounce preceding another decline. We will play it accordingly.
Support and Resistance
NASDAQ: Closed at 2321.37
Resistance:
2324 is the trendline from the summer 2004/July 2006 lows, Q4 2005 consolidation
2340 from the March 2007 low
2370 from the April 2006 peak
The 90 day SMA at 2381
2378 is the mid-February peak; 2379 from the October 2006 peak
2386 is the August 2007 intraday low
2388 is the June 2008 low
2392 is the April 2008 peak
2419 is the January 2008 peak and the early February peak
The 50 day EMA at 2430
2451 is the August closing low
2500 from interim August lows.
The 200 day SMA at 2503
Support:
2286 is the first April 2008 gap up point.
2261 is a March 2008 interim low
2202 is the January 2008 low
S&P 500: Closed at 1283.15
Resistance:
1317 from the February low
1324 is the April low
The 10 day EMA at 1325
1331 is the June low
1339 is an ancient trendline
The 50 day EMA at 1362
1370 is the August 2007 intraday low
1374 is the March 2007 closing low
1387 is the April 2008 intraday high
1396 is the February 2008 peak
1406 is the August and November 2007 closing low
The 200 day SMA at 1415
Support:
1270 is the January low
1257 is the March low
Dow: Closed at 11,453.42
Resistance:
11,634 is the January intraday low
11,670 is the May 2006 intraday high; 11,642 closing
11,731 is the March 2008 low
The 10 day EMA at 11,995
12,050 from the March 2007
12,070 from the early February 2008 lows
12,250 from late March 2007 lows
The 50 day EMA at 12,399
The 90 day SMA at 12,474
12,518 is the August intraday low
12,573 is the mid-February high
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
The 200 day SMA at 12,892
13,092 is the December 2007 intraday low
13,133 is the May 2008 high
Support:
11,317 from March 2006
11061 from February 2006
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
June 24
Consumer Confidence, June (10:00): 50.4 actual versus 57.0 expected, 58.1 prior (revised from 57.2)
June 25
Durable goods orders, May (8:30): 0.0% actual versus 0.0% expected, -1.0% prior (revised from -0.5%)
New Home sales, May (10:00): 512K (-2.5%) versus 510K expected, 525K prior
Crude inventories (10:30): +800K actual versus -1.2M prior
FOMC policy statement (2:15): Left Fed Funds rate at 2.0%, warning of inflation and economic slowing, but not putting an emphasis on one over the other though its no change in rates and more talk of inflation issues shows it is shifting more in that direction.s
June 26
GDP final, Q1 (8:30): 1.0% expected, 0.9% prior
Chain deflator, Q1 (8:30): 2.6% expected, 2.6% prior
Initial jobless claims (8:30): 375K expected, 381K prior
Existing home sales, May (10:00): 4.95M expected, 4.89M prior
June 27
Personal income, May (8:30): 0.4% expected, 0.2% prior
Personal spending, May (8:30): 0.7% expected, 0.2% prior
PCE Core inflation, May (8:30): 0.2% expected, 01% prior
End part 1 of 3
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money investment
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