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money investment, financial investment
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7/01/08 Investment House Daily
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SUMMARY:
- Market shows some character as it overcomes another flood of bad news, reverses off 2008 lows.
- ISM defies regional reports, expands even with an incredible jump in prices.
- Tuesday has the look of a reversal for a rebound rally though aided by first of quarter money.
A bit of backbone for a change, but you can only get so much oversold before you have to bounce.
There was more bad news, the kind of news from last Thursday that took the market from ready to bounce to screaming toward the 2008 lows. Rumors follow the financial sector like a cloud of flies over a beached carcass. Tuesday rumors swirled about Barclays and Deutche Bank; would profit warnings issue? FO (wines, hard liquor, golf clubs, all the stuff you need for your typical round of golf) lowered its guidance. Speculation swirled again about Israel attacking Iran or vice versa, i.e. a pre-emptive strike by Iran. That pushed oil prices sharply higher though it closed off those highs on the session (141.06, +1.06). Higher oil is harder on stocks as we have seen. Foreign markets were lower as the UK housing prices fell to match 1992 recession levels and UK manufacturing unexpectedly dropped.
That set the stage for more selling. Monday did not provide the washout session, but Tuesday was setting up to do it. Stocks started lower, tried to rally in the first hour, buoyed by an ISM that beat expectations and moved above 50 (50.2), showing expansion once more. The sellers moved right back on after that pop, however, and pushed stocks lower again. Another rally into midmorning, but then the sellers hit again, pushing the indices to session lows. That took the SP500 to the March lows, the lowest of 2008 for that index. Once more the market rebounded, this time moving to session highs by mid-afternoon. Some say it was GM announcing sales that were not down as much as expected. That was a help, a trigger to an oversold market that added some upside momentum after SP500 hit the 2008 lows and held. The news on top of holding the prior lows forced shorts to cover and drove the indices higher with impressive reversals (50 points on NASDAQ, 200 on DJ30). The sellers tried once more in the last hour, but they were done for the session, worn out from trying to take the market down but unable to keep it down. Tough work, at least when things get this oversold.
After SP500 hit the 2008 lows (or close enough for market work), it bounced and closed positive. That is a positive for sure, but you have to discount it some: it was the start of a new quarter and month and there is new money to be put to work. After this kind of selling many were looking to pick up stocks on the cheap. The buyers took advantage of the periodic selling bouts throughout the session just as the sellers took advantage of the buying bouts. Kind of a symbiotic relationship for this particular session.
Question is, can the new money hold the upper hand Wednesday, Thursday (just a half session) or next week? Oil was up as noted though it was off its high. At $141/bbl, even if it was flat or down a bit it doesn't really make that much difference. It is much too high for the economy to prosper. Thus while the reversal in the face of some more bad news looks promising to give us a tradable bounce, unless oil cracks like a rookie cyclist in the Pyrenees mountains during the Tour de France, it has to be viewed as just a rally within renewed selling in the overall market.
TECHNICAL. Lower open then a move to higher ground, overcoming 4 selling attempts during the session and posting a positive close. That showed some character the market has not had. Maybe that is not the right way to describe it. Maybe it just got beaten so bad it didn't matter anymore. Whatever the case, it took the bad news and bounced higher anyway.
INTERNALS. Breadth remained negative despite the gains (-1.4:1 NYSE, NASDAQ) as the large caps were the leaders, particularly on NASDAQ. Breadth also lags, and when the session is up and down it never really reflects the overall market that session. That is still a caveat: narrow breadth on a bounce smacks of relief bouncing as opposed to serious buying. Will have to see how that plays out the rest of the week. Volume jumped on the reversal off the lows and SP500 at the 2008 lows, and that is always positive, but again you have to factor in a new quarter and new money chasing values after the market was roughed up 20% from its highs. That of course helped drive the market higher and pushed up the volume. There was other interesting news as new lows surged over 600 on NYSE, over 500 on NASDAQ. That is getting to extremes and helps set up a rebound move. Another part of the puzzle falls in place.
CHARTS: The big move was the SP500 with its test of the 2008 low and reversal for a gain on volume. The other indices mirrored this intraday action though they were not at the 2008 lows or in the Dow's case, is bouncing from a breach of those lows. It is likely to come up and test as the SP500 bounces off that level. NASDAQ gapped lower and then reversed off of some lows of its own at the interim February and March lows, still well above the 2008 lows. SP600 pulled the same action, reversing at some interim lows above its 2008 lows. So, a selloff to support, then a reversal on some first of quarter volume. The charts look good for a bounce, and combined with the ability to withstand more bad news, a much better picture for a near term bounce has emerged.
LEADERSHIP. The ranks are thinning even with the set up for a bounce. Bounces in nasty selling do not necessarily have leadership, at least the kind that sustains itself to new highs. A bear market rally sees your beaten up stocks rally back from getting crushed as the shorts cover. If there are leaders that are still in good shape, they use the rebound to breakout again or continue a breakout after a test. See energy stocks. See the newly emerging medical stocks. Others are struggling, trying to get back on track: agriculture has seen two big players get rocked (POT, MON). Coal is still doing well but as a group it is on watch. Large cap tech is down but not out (AAPL, BRCM, QCOM). Yes a thinner list as the bear market takes down more stocks, but enough still kicking to put in some good moves.
THE ECONOMY
ISM pulls back to positive after four sub-50 months.
The 50.2 was a pleasant surprise versus the 48.6 expected and 49.6 in May. Export orders led the upside at 59.5. Production was at 51.2, and deliveries at 53.7. Orders were up but still below 50 at 49.7, the best showing since last year.
Prices screamed, hitting 87.0. To start the year prices were already huge at 76.0. Nothing but up since as oil goes through the rough along with all other materials. It is hard for companies to live with these kind of increases without passing them along, and the Michigan sentiment survey last week suggests that consumers are expecting that prices will rise as a result. As noted, that is a dangerous mindset as consumers pay up, the best they can, figuring there is nothing that can be done. Vicious cycle: they pay up and inflation grows, or they refuse and either prices drop and then they buy and businesses take the loss, or prices don't drop, consumers don't buy, and the economy goes into stagflation.
How did we get to such a gloomy prospect from a good 50+ ISM reading? Just playing the current trend. Things are heading lower in the economic picture outside this lone reading on manufacturing. It can signal a change, but the market has not bottomed yet and it typically does so just ahead of the manufacturing sentiment survey. Hey, maybe this bounce here is the bottom. Maybe I will invent a clean burning car in my garage over the July Fourth weekend as well.
THE MARKET
MARKET SENTIMENT
VIX: 23.65; -0.3. Hit 25.57 on the high, basically gapping to that point. Then it reversed as the market reversed. That is still over 10 points off the January high on that first leg of the early 2008 double bottom. Just not doing it as are the other indicators on this leg lower.
VXN: 28.73; -1.03
VXO: 24.62; +0.03
Put/Call Ratio (CBOE): 1.01; -0.09. Four straight sessions of 1.0 on the close.
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: +11.99 points (+0.52%) to close at 2304.97
Volume: 2.654B (+26.62%). Big volume on the reversal. Interesting, tantalizing, but also boosted by new money. Overall a positive, but have to see what kind of staying power there is as the bounce tries to continue.
Up Volume: 1.478B (+1.018B)
Down Volume: 1.151B (-432.643M)
A/D and Hi/Lo: Decliners led 1.39 to 1
Previous Session: Decliners led 1.86 to 1
New Highs: 37 (-16)
New Lows: 528 (+111). Over 500 and joining NSYE in the range that smacks of extreme levels.
NASDAQ CHART: http://investmenthouse.com/ihmedia/NASDAQ.jpeg
NASDAQ 100 CHART: http://investmenthouse.com/ihmedia/NASDAQ100.jpeg
SOX CHART: http://investmenthouse.com/ihmedia/SOX.jpeg
SP500/NYSE
Stats: +4.91 points (+0.38%) to close at 1284.91
NYSE Volume: 1.643B (+2.07%). Not a huge jump in trade over the recent selling, but a gain that shows overall buying on the reversal from the 2008 lows. Also, as volume did not explode higher it suggests that it was not all first of quarter money, just a continuation of what we have seen.
Up Volume: 803.373M (+100.226M)
Down Volume: 817.738M (-77.884M)
A/D and Hi/Lo: Decliners led 1.43 to 1. As noted above, weak breadth suggests short covering only. Will have to see if this improves as the bounce improves.
Previous Session: Decliners led 1.45 to 1
New Highs: 41 (-39)
New Lows: 625 (+148). Over 500, over 600, and at extreme levels.
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
Tapped down to the March low (1257, 1260 on the session low) and that helped set off the reversal as SP500 flipped 24 points low to close, finishing positive on stronger trade. With all of the positives and even with the caveats, this still suggests a tradable rally setting up.
SP600 (+0.15%) readied down to the April interim lows then reversed to close positive. Still in a nasty downtrend, but the sharp dip itself combined with the recovery to positive indicates the small caps are ready to bounce as well.
SP600 Chart: http://investmenthouse.com/ihmedia/SP600.jpeg
SP400 CHART: http://investmenthouse.com/ihmedia/SP400.jpeg
DJ30
The Dow continued to flail around in its own self-induced purgatory, further undercutting the 2008 lows and coming close to the 2006 lows. Then a 200 point reversal for a modestly positive close on rising volume. Still way down in a 1600 point hole from the May twin peaks, and yes, was in 'bear' territory on the session again (along with SP500). Down and out, but ready to bounce.
Stats: +32.25 points (+0.28%) to close at 11382.26
VOLUME: 299M shares Tuesday versus 282M shares Monday. Higher volume as the Dow tested lower then reversed to positive, just as with the other indices.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
WEDNESDAY
ADP jobs survey, factory orders, and crude oil inventories on tap ahead of a short session Thursday (market closes at 1:00ET) and Independence Day Friday. So many headwinds remain, but the market is vastly oversold and is trying again to set up a rebound. Last Thursday the set up was bowled over with bad news. Tuesday the market took a snoot full of bad news and still managed to reverse. Seems it has had its fill and is ready for some relief.
That means stocks that have been crushed will rally back as the shorts start covering ahead of a 3.5 day weekend. Those are not the best buys; they rise rapidly and then reverse rapidly once the move is over, tending to gap lower when they do reverse. To play it more on the safe side and still get upside bang we will do what we always do, look at strong stocks that pulled back modestly during the selling and are ready to rebound as well as those that didn't seem to notice the selling, just set up a good base. That shows they are still getting money pushed their way and are not getting sold. A market move higher means they get money their way as well.
While we take advantage of those plays we also watch the quality of the bounce to see if there is volume, breadth, and good moves by the leaders in energy, steel, and a recovery in agriculture. Further, a move in technology and in medical will be important. If agriculture and some energy falter on the move, breadth remains paltry, and volume is an issue, then you know the market is heading back down once the bounce is over. Given the circumstances with oil, the dollar (down yet again), and inflation, that has to be the presumptive result of any bounce. In that instance we set for the downside once more when the move starts to fade.
There are still major issues that could sink any bounce attempt just as last week. If Israel attacks or Iran does something pre-emptive of threatens to do so such as heading junkyard ships into the Straits of Hormuz, a threat to scuttle them and block the route of 20% of the world's oil supply, any technical move is again put on hold as oil goes toward $200 overnight and the only thing that holds up is gold. You cannot seriously factor in those types of events, however. They are simply part of the risk equation at this point, meaning all the more we have to look at the solid leaders on the upside moves as our horses to ride. The interesting thing to note about these stocks is that despite all of the nasty selling in the market overall, they are still behaving well. As noted last week, if things continue to worsen they won't hold up either, but thus far there are still plenty of solid upside moves setting up thanks to the continued demand for commodities and services related to growth and expansion overseas.
Support and Resistance
NASDAQ: Closed at 2304.97
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
The 50 day EMA at 2416
2419 is the January 2008 peak and the early February peak
2451 is the August closing low
The 200 day SMA at 2498
2500 from interim August lows.
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 1284.91
Resistance:
The 10 day EMA at 1306
1317 from the February low
The 18 day EMA at 1324
1324 is the April low
1331 is the June low
1340 is an ancient trendline
The 50 day EMA at 1353
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 1412
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 11,382.26
Resistance:
11,634 is the January intraday low
11,670 is the May 2006 intraday high; 11,642 closing
The 10 day EMA at 11,655
11,731 is the March 2008 low
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 12,249
The 90 day SMA at 12,852
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 12,852
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): 49.6 actual versus 48.5 expected, 49.1 prior
July 1 - Tuesday
Construction spending, May (10:00): -0.4% actual versus -0.6% expected, -0.1% prior (revised from -0.4%)
ISM Index, June (10:00): 50.2 actual versus 48.6 expected, 49.6 prior
July 2 - Wednesday
ADP Employment, June (8:15): -20K expected, 40K prior
Factory orders, May (10:00): 0.5% expected, 1.1% prior
Crude oil inventories (10:30): 830K prior
July 3 - Thursday (NYSE closes at 1:00ET)
Non-farm payrolls, June (8:30): -60K 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): 385K expected versus 384K prior
ISM Services, June (10:00): 51.0 expected, 51.7 prior
July 4 - Friday
Market closed for Independence Day Holiday
End part 1 of 3
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money investment
financial investment
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