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world stock market, us stock market
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6/28/08 Investment House Alerts
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IH Alert Subscribers:
MARKET ALERTS:
Targets hit alerts: None issued
Buy alerts: AGU; PDO
Trailing stops: None issued
Stop alerts: CE; PX
SUMMARY:
- Stocks sluggish to end the week as Dow flirts with 'bear market' territory after a dive lower for the week.
- SP500 now the focus as it mulls its options at the 2008 lows.
- Income up on the rebates as savings rate jumps to 5%: surprise! not all rebates are getting spent.
- Sentiment falls to multi-decade lows while inflation expectations match gold's new rise.
- Dollar drops from lack of support and bond yields flop as investors turn back to safety of US Treasuries.
- Big 3 leadership continues to provide opportunity . . . for now.
- Looking for selling to bottom for this leg ahead of Independence Day.
Down a bit further to end the week though leaders move higher.
There was not a whole lot of change Friday following the Thursday blood letting. Most stocks were lower on the session, but the indices, outside of the Dow, were down modestly and indeed toyed with positive all session before slipping just negative late.
The Dow was the downside leader, continuing its selling with a 0.93% loss on the session. That was about 50 points off its low, however, and that intraday move put it in 'bear market' territory, i.e. 20% off its high, something the financial stations were all slobbering over, but something that was pretty clear to all of us following the October to January selloff. Ever since that decline it has been up to the bulls to take back control, and though they tried with the January/March double bottom and bounce higher into May, the attempt ultimately failed, killed by lack of serious upside volume and $130+/bbl oil . . . er, now $140/bbl oil.
The session had the usual amount of information for investors to chew on, but the data didn't make a whole lot of difference with respect to the action. Incomes were up thanks to the rebate checks, and spending was up as well, but so was savings. In the ongoing game of brokerage one-upmanship (a.k.a. get even), LEH issued a note that MER would require write-downs two times previously expected. ERIC (telecom) warned on the earnings front. Michigan sentiment hit a 28 year low (that's 1980 levels for those who are math challenged such as myself).
TECHNICAL: A volatile session with stocks starting low then moving to positive, selling off, recovering, and then slipping just negative on the close, outside of the Dow that is. Up and down, finishing lower. Not a banner day, but not a day that was a downside rout. Outside of Friday, however, the intraday action was negative and markedly so. If Friday was an upside response to that, it was a very ameliorative response.
INTERNALS: Not the bad breadth from Thursday and indeed breadth was rather modest at roughly -1.5:1 on the session after a -5:1 NYSE showing Thursday. Volume exploded to unnaturally high levels, and there were a couple of reasons for this. First, it was quarter end and similar to expiration, there is a lot of money moving around ahead of the new quarter. Earlier in the week stocks were bought and sold so they would show up in the portfolios for the quarter just ended: buy the good stocks so your prospectus and statements show the winners, and then after that is in the books, start swapping out right as the quarter ends. Second, the Russell indices were rebalanced, and that requires a lot of buying and selling among the index tracking funds to get the right balance, and that drives volume higher. Thus the huge spike on NYSE as well as NASDAQ as the Russell tracks a lot of the smaller issues, and there are more of them than large caps.
CHARTS: It was a week where the charts told much of the story, or more accurately, showed the culmination of a story we have tracked the past couple of months. DJ30 was in a clear downtrend off of the May double top and serious breakdown to start June. It sold to the March lows early in the week and looked ready to bounce before the plethora of bad news hit Thursday and it crashed to new 2008 lows. Importantly, DJ30 has been leading lower during this selling just as it led upside in the spring bottom and rally. The other indices don't look great either, but it is never a straight show lower, and once more the indices are ready for a relief bounce. SP500 tapped at the January lows on the Friday low and bounced. NASDAQ 100 closed the mid-April gap higher and reversed to close positive, historically a sign of an intraday reversal. Thus, similar to Wednesday before all of the bad news hit, the market is ready for a bounce, but it is just an oversold relief bounce at this point.
As for the bigger picture outside of a relief bounce, SP500 is the next key index to watch after the Dow collapse. As noted, it is at the prior lows. From here it has a triple option of sorts, recalling the days of the wishbone offense at Texas and Oklahoma. The first option: barreling right up the middle with a strong surge off of these prior lows, in a triple bottom breakout run. What has to happen for that to occur? Oil has to break down. It has not done that and indeed just broke out to new highs last week ($140.25, +0.61 on Friday). Thus the fullback up the gut has little chance of breaking free for the big one, and unfortunately in the current market condition, the old 'three yards and a cloud of dust' offense is not going to make it.
The second option: SP500 bounces here as it looks it wants to do, but without oil breaking down the move lacks strength as it just an oversold bounce. It thus bounces but runs into resistance, either near resistance or higher up if the bounce has more force, and then rolls over, forming a right shoulder to a 5 month head and shoulders that could form off of the current chart pattern. In other words, the quarterback keeps the ball, makes it around end, and is heading downfield, but fumbles at the end of the run. This requires no bad news hitting to wipe it out before its time; it will have a couple of weeks before earnings season but warnings are always an issue. Even if it goes this route it ultimately follows the Dow lower.
The third option: SP500 pulls a Dow and heads lower from here, posting now bounce, forming no shoulder, just collapsing lower through the 2008 lows. In this scenario the quarterback never gets the snap, fumbling it from the center. Or the first option is no good, the second option is blocked, and he then pitches it out to the trailing back, but the end crashes and causes the ball to fall short of the trailing back and the opposing team recovers. As with the 1978 Cotton Bowl between Texas and Notre Dame (where this occurred), the rout is on.
Other than option three, all of this takes several weeks to play out. As noted above, we view the near term move as a bounce along the lines of option 1 or option 2 given the patterns on SP500 and NASDAQ 100. The end result is likely option 2, i.e. the bounce that runs into resistance and rolls over. Without a breakdown in oil and a simultaneous move higher by the dollar. That requires a lot of actions from the powers that be that as of Friday they are unwilling to make. Thus option number 2 is most likely right now.
LEADERSHIP: As noted Thursday even as the market burned, the Big 3 were down but hardly out, holding near support. Friday they were bouncing. No great big bounces, just holding support and bounce as you would expect. There are a lot of leaders that are at the 10 or 18 day EMA and in solid shape (e.g. AGU, CHK) while others are at the 50 day EMA, the key level of support if a stock is going to keep moving higher. They can still rally right back up, but we will know soon if they are going to make it or not. They likely bounce near term as we believe the market will post an oversold bounce. The key is how hard they bounce, i.e. what kind of volume pushes them. Strong volume and they are golden. Low volume and you unload them at resistance because they are going to head back down. Those at near support are the ones we look to as the easy buys, those at the 50 day EMA need to show strength for us to buy. Everything else is trouble unless oil implodes or unless we are looking at them as simply short term trades in a relief bounce.
THE ECONOMY
Income, spending, savings: no real surprise despite the surprise.
May income blew past expectations, rising 1.9% versus 0.4% expected. The government data shows the reason: $48B in tax 'rebates.' Why on earth the experts were so off on this leaves you scratching your head or maybe not; the data has been off so many times the past two years this is not surprising. You can see it now: 'oh no, I forgot about the tax rebates!' In any event, income was up and disposable income rose 5.7% on the month.
Whatever the reason income jumped and spending was higher (0.8% versus 0.4% in April), but with the jump in incomes it was not commensurate in its growth. Thus the savings rate jumped to 5% when it has been running, generously, at 0.7% or lower. While Wal-Mart said it saw people spending their checks at its stores and Best Buy sold a lot of flat screen televisions that pushed its earnings up more than expected, more are saving their rebate checks versus spending them. No surprise; that is what happened in the last recession when 'rebates' were issued. They were used to pay off credit cards, i.e. money already owed without new purchases and there was no stimulus. While some are going to WMT and BBY, many are also pumping their checks into their gas tanks, and that is not a recipe for expanding economic activity.
Dollar heading back down while gold and inflation expectations surge: wakeup call for the Fed and the Administration.
Ever since the FOMC decision Wednesday, gold has jumped. As reported the past couple of months, gold sold off and was in trouble. It did not make the definitive break lower, however, as concerns about what the Fed was going to do along with energy and food prices allowed it to hang on. With the Fed talking modestly tougher on inflation but not providing anything definitive on inflation or the dollar, gold jumped. It closed Friday back over $900/oz at $931.70.
We loved the break lower in gold as it suggested we were going to get by this jump in energy prices without a spike in inflation. That doesn't look to be the case right now given that the Fed, while talking a bit tougher on inflation, looks to be acting too late once more. The Fed had to worry about the mortgage and credit crises; no question about that. With its great innovations of auctions and opening the discount window, it resolved the problem of getting the liquidity where it needed to go. Great move. The market responded.
Now, however, the next crisis is here, and it is fighting inflation as energy prices explode. In the 1970's the Fed fueled inflation by cutting rates into the spike in energy prices. With the Fed cutting rates to fight the mortgage and credit crises even as oil moved higher, the inflation demon is slipping out of the box. Many say it is already out.
The Michigan sentiment report out Friday showed a paltry 56.4 reading, a 28 year low. Yes, yes, we all know that story. The more important kernel involves inflation expectations. They are up at almost 6%, rising along with gold now. While the core PCE stands at 2.1% year/year as the May income and spending show, this gold/inflation expectation combined rise is not good news for inflation. The Fed is in danger of making the same mistakes of the 1970's Fed though it has those other issues it had to deal with. Tough hand that Greenspan left Bernanke to deal with.
Bernanke has to stay the course. He has to continue making certain the financial companies get the liquidity they need through access to auctions and the discount window. That will come up for renewal in September and some say that the Fed cannot continue that and raise interest rates as well. Nonsense. They are different issues. The Fed can hike interest rates while still keeping the facilities open. THAT is the beauty of these facilities and that is why the market rallied at the time: the Fed did not have to cut rates and pump up liquidity in an inefficient manner anymore. Thus the Fed can hike rates and still use the facilities as they work hand in hand. There is no incongruity there at all, only a lack of understanding by many pundits. Hopefully the Fed will get much tougher and raise rates quickly, but as we know it is going to take until September before it has primed the market. It needs to get more acting along those lines with extra-meeting speeches saying, somewhat like Trichet, we will fight inflation.
Don't forget the dollar.
The Fed cannot abandon the facilities. There is going to be more angst in the financial sector. They will need a continued open artery for liquidity to handle these problems even as the Fed takes on inflation.
To do that, there is another leg to the stool. We have the facilities to help the financial side, there are rate hikes to fight the rise in energy prices. Last, there is support for the dollar. The falling dollar pushes dollar denominated commodities and goods higher. We are thus importing inflation with a weaker dollar. Some support for the dollar with some rate hikes and some tough Fed talk would work wonders in reversing this trend. If the administration would wake up in its last year of power and finally do the right thing by the dollar, the uninterrupted rise on oil prices would finally crack. That would not only help the inflation situation, but it would give the economy a new breath of life and thus the market as well.
There are so many benefits from supporting the dollar right now that it is almost mind boggling that the Fed and administration are not working hand in had to attack the problem. It shows an incredible and fundamental lack of understanding by the Bush administration as to what the dollar means to the world economy. Just as his father before him, he chooses to ruin prosperity by foolishly undermining our currency in order to help industries sell overseas. That is not the way to do it. Simply make our tax structure competitive with foreign corporations and that would solve much of their problems. Then they could compete and not need the 'help' of a weaker dollar. Pick up a history book and read it, then do the right thing. Unfortunately, neither candidate to take Bush's place has a better understanding of why a stronger dollar is good for us AND the world.
THE MARKET
The week saw some significant moves in sentiment while some aspects still need improvement. Bulls/bears look really positive. The put/call ratio is picking up. New lows are jumping. Traders just don't care about the economic data, saying it just doesn't matter right now. Still, volatility is lagging, and thus not all of the pieces are in place. Working toward it, but not there yet.
MARKET SENTIMENT
VIX: 23.44; -0.49
VXN: 28.67; -0.39
VXO: 25.63; -0.28
Put/Call Ratio (CBOE): 1.13; -0.01. Another session over 1.0 on the close as the put/call ratio is stacking up a good supply of high readings necessary to indicate a turn in the market.
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: -5.7 points (-0.25%) to close at 2315.63
Volume: 3.166B (+36.65%). Big volume, but as noted there were reasons for this big spike.
Up Volume: 1.128B (+862.078M)
Down Volume: 1.802B (-200.053M)
A/D and Hi/Lo: Decliners led 1.49 to 1
Previous Session: Decliners led 3.84 to 1
New Highs: 36 (+6)
New Lows: 386 (+54)
NASDAQ CHART: http://investmenthouse.com/ihmedia/NASDAQ.jpeg
NASDAQ is trying to put in a reversal for an oversold bounce after just undercutting its old 2004 trendline Thursday. Nice doji with tail on volume (though inflated by other issues), ready to bounce, but likely just a bounce.
NASDAQ 100 (+0.02%) was the only index to finish positive and as noted above, it put in an intraday reversal and wants to rebound toward 1950 after filling the mid-April gap.
NASDAQ 100 CHART: http://investmenthouse.com/ihmedia/NASDAQ100.jpeg
SOX CHART: http://investmenthouse.com/ihmedia/SOX.jpeg
SP500/NYSE
Stats: -4.77 points (-0.37%) to close at 1278.38
NYSE Volume: 2.144B (+39.64%). Volume up for the same reasons as NASDAQ, particularly with the small and mid-caps on the NYSE.
Up Volume: 846.966M (+723.518M)
Down Volume: 1.312B (-98.466M)
A/D and Hi/Lo: Decliners led 1.65 to 1
Previous Session: Decliners led 5.51 to 1
New Highs: 53 (+20)
New Lows: 509 (+85). Getting to the point where it fits in with a bottoming schema.
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
Tapped at the January low (1270) on the Friday low and bounced modestly. As discussed above, SP500 is set for a bounce up off this level, and what kind of bounce, i.e. the triple option, remains to be seen. Still think it is just a bounce that fails without a crash by oil.
SP400 (-0.44%) was basically flat on the session after crashing below the 200 day SMA Thursday and putting SP400 at the February and April highs. A good point to bounce and test the breakdown from the May and April head and shoulders, and that is more weight to the argument that any SP500 bounce is just a bounce.
SP600 Chart: http://investmenthouse.com/ihmedia/SP600.jpeg
SP400 CHART: http://investmenthouse.com/ihmedia/SP400.jpeg
DJ30
Led lower on the breakdown, putting the next peg in the board Thursday as it crashed the 2008 lows, and it could not bounce Friday, finishing down almost 1% while most of the market was flattish. Though it has led to the downside, it is now somewhat out of the picture as SP500 tests the 2008 lows. It is not likely to help, but if SP500 bounces it will go along with it.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
MONDAY
Short week as we celebrate our independence on Friday. It is already summer and you can bet that even though there have been fireworks in the market in a typically quiet time, things will slow down heading toward the weekend.
That in itself can help the market make the relief bounce discussed above. The sellers have done the damage, breaking down DJ30 and sending SP500 down to the 2008 lows. With a holiday week they are likely going to feel they have done all the damage they can do for now and will close a chunk of their positions and go on vacation. Closing those shorts will help start a bounce, and then some light volume for the rest of the week will let the market rebound. The real test comes the next week when they come back.
There is also another possibility. After such a strong dive lower that breaks prior lows there is often a reaction early the next week that sends stocks lower once more and is the actual flush out that sparks a rally. If this happens it will be a stronger upside rally that will need to be watched closely to see if there is something more there than just a bounce. Once again, however, unless oil breaks its seemingly unending climb higher AND puts in a sharp reversal, it is likely not going to happen.
How we use these moves. On a bounce that lacks strength we look at how stocks rebound off of support. Those lacking strength and stall at next resistance (those would be the 50 day EMA bounces up to the 10 or 18 day EMA) are suspect, and if they do stall they should be closed. We also use the bounce to prepare downside plays, moving in as the bounce stalls at resistance. We are also going to look at new upside buys as discussed above, moving into those stocks that ignored the selling and are still in great position to move higher.
If the market is going to suffer a breakdown where all indices collapse, then even the Big 3 (energy, agriculture, steel/metals) and other stray sectors that are holding up will fall as well. Ultimately in a bear market, everything, or just about everything, goes down. Rails already broke down and they were a leader in the spring rally. Some ag stocks are struggling right now after strong runs and they have to right the ship or that sector could go the way of the rails. For now, if the strong stocks and sectors set up and start higher, showing us the moves higher, we are going to take what they are giving. Ultimately all of the market is going to have to deal with a lower dollar and $140+/bbl oil if oil does not break down. That will drive the US and world economies into hard recession. That will ultimately break the oil upside cycle, but the costs are huge. All the more reason for the Fed and administration to act on the dollar, but we cannot control that so again, we will just take what the market gives.
Support and Resistance
NASDAQ: Closed at 2315.63
Resistance:
2330 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 2426
2451 is the August closing low
2500 from interim August lows.
The 200 day SMA at 2502
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 1278.38
Resistance:
1317 from the February low
The 10 day EMA at 1317
1324 is the April low
1331 is the June low
1339 is an ancient trendline
The 50 day EMA at 1359
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 1414
Support:
1270 is the January low
1257 is the March low
1237 is the July 2006 low
1224 is the June 2006 low
Dow: Closed at 11,346.51
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 11,797
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 12,322
The 90 day SMA at 12,452
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 12,873
13,092 is the December 2007 intraday low
13,133 is the May 2008 high
Support:
11,317 from March 2006
11,061 from February 2006
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
June 30 - Monday
Chicago PMI, June (9:45): 48.5 expected, 49.1 prior
Michigan sentiment revised, June (10:00): 56.7 expected, 56.7 prior
July 1 - Tuesday
Construction spending, May (10:00): -0.6% expected, -0.4% prior
ISM Index, June (10:00): 49.6 prior
July 2 - Wednesday
ADP Employment, June (8:15): 28K expected, 40K prior
Factory orders, May (10:00): 0.6% expected, 1.1% prior
Crude oil inventories (10:30): 830K prior
July 3 - Thursday
Non-farm payrolls, June (8:30): -50K expected, -49K prior
Unemployment rate, June (8:30): 5.4% expected, 5.5% prior
Average workweek (8:30): 33.7 expected, 33.7 prior
Hourly earnings (8:30): 0.3% expected, 0.3% prior
Initial jobless claims (8:30): 384K prior
ISM Services, June (10:00): 51.5 expected, 51.7 prior
July 4 - Friday
Market closed for Independence Day Holiday
End part 1 of 3
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