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stock prices, stock market prices
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7/08/08 Investment House Daily
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SUMMARY:
- Stocks stammer, oil continues its selloff, then stocks finally start their relief bounce
- Government, private sector join ranks, try to calm markets.
- Pending home sales reverse, come in lower
- Wholesale inventories rise but less than April
- Relief bounce looks to be underway and looking for more upside.
Took a bit of doing, but stocks start their relief bounce.
It was a typical morning at the early stages of earnings season with a warning from Office Depot that sent the stock careening lower; classic sign of economic strife as small businesses cut back on spending wherever they can. Of course when ODP sells a 5 ounce can of compressed air for cleaning electronics for $14 when Lowe's sells a 10 ounce can for $5.99 the smart small business goes where the deals are. Analysts were out again with upgrades of GOOG, RIMM and CELG while downgrades hit Gymboree and Merrill. Bernanke was out as well, talking about wanting more regulatory powers and extending the borrowing facilities through year end. The former was viewed skeptically, the latter positively.
The news helped bump futures a bit higher, and once more it didn't hurt, but it really didn't help either, that oil was down sharply (135.95, -5.39). The dollar was up versus the euro and pretty much all other currencies as well, improving after the ECB hikes rates last week but indicated it might be done. A stronger dollar was not impacting oil prices last week, but as the dollar heads toward the upper half of its 2-month range it seems to affect oil prices more. It did on Tuesday and oil is now at its April/May/June trendline, the first key test as oil once again fades but has yet to crack.
As noted, even the lower oil was unable to boost stock prices. A volatile morning but then a climb to positive through lunch. That of course was met by early afternoon selling. At that point, however, Treasury Secretary Paulson and Jamie Diamond from JPM spoke about the economy and financial markets. They were not really upbeat. Paulson had some ideas about covered bonds and the like, but also said that the government would not and should not rescue all distressed borrowers. Tough love.
Jamie Diamond was even less upbeat, painting quite a bleak picture for the financial markets but in doing so the market got a bit of honesty from the financial sector. One of the issues for the markets is just how much worthless junk is owned by institutions. It is rather amazing that in the post-corporate governance scandal that financial statements do not reveal the type and depth of assets and loans. In any event, a little honesty went a long way to helping the market come to grips with the big unknowns on the balance sheets. It was bad, but it also helped to start fixing an idea of what to expect in the future. Markets hate uncertainty or unknowns. Thus even if you know something is bad at least you know how bad and can take action based on that. Without any knowledge no one is willing to take positions and we get what we have had. While Diamond did not answer all the questions by a long shot, he helped get everyone on the same page and that helped the financial markets.
TECHNICAL. Stocks responded to that double dose of tough love and I suppose Bernanke's early comments, and sprinted higher to close at session highs. Volatile morning, threatening to give up gains to sellers again, then locking in the upside and surging to the close after testing key lows. More bullish action after some atrocious intraday activity during the selling. That indicates there is some strength brewing in this bounce. Needs it.
INTERNALS. Volume was up on both NYSE and NASDAQ, and that is generally a good thing on the upside. Sure beats higher selling volume and weak upside volume. It can also be an attribute of a short covering rally. So . . . good to see but not the answer in itself. Breadth is also worth looking at. In short covering rallies breadth is narrow as the stocks that were sold off are bought after downside moves as short positions are closed. They bounce and bounce the indices because the large caps are usually what are shorted. Tuesday breadth was solid at 2:1 on NYSE and 2.3:1 on NASDAQ. Not bad and typically not indicative of short covering, but we also have to take into consideration that most all stocks were shot down in the recent selling as even the leaders were marked and sold off. Thus a broad rebound from a nasty selloff does not mean there is massive long side investing starting. They can be positives but we have to look other factors discussed below.
CHARTS: SP500, NASDAQ and SP600 all held support tapped on Monday and they all bounced nicely. As noted Monday, it was a logical place to bounce and it was time given the hard selling and the stretched rubber band: a lot of losses in a very short time. The question is how much upside is there on this move? SP500 has at least 1300 on the upside. NASDAQ around 2350ish but that is very rough. DJ30 can look at the March lows given that was the point it tried to hold before closing up shop. As for what we call Tuesday, we call it the first day of a new rally attempt: big gains, rising volume, strong breadth. Start the clock: need a follow through session (big gain, rising volume, more good breadth) Friday through next Wednesday to show the buyers are coming back in again. But . . . the market will need leadership to build into patterns.
LEADERSHIP: This is the next consideration after the internals. Many stocks bounced Tuesday, but many stocks were at best roughed up in the recent selling. That means a lot of stocks bounced in relief from some straight down selling, but that does not mean they were leadership quality stocks. Lots of trends and patterns were broken and that means they have to base out again; a bounce back up from that is typically a relief bounce that will fail and require more basing. There are stocks that are in good patterns and in position to rally, e.g. health services, biotech, some pharma, some telecom, and even a few tech (e.g. BRCM). There are also some strong stocks that were leaders and sold hard, but are now at the same points they recovered in earlier tests/corrections this year and are thus holding their trendlines and in great position to bounce (e.g. MON, DNR, BZP). Outside of those, however, leadership is thin. Thus a bounce here may be solid, may have some legs. As for its ability to be the end of the selling, not likely.
THE ECONOMY
Pending home sales in May fell 4.7%, more than the 2.8% expected, and negative after a 7.1% gain in April. What can you expect? Over the past three months, even into four months, the housing market has shown signs of bumping along the bottom as the data has rounded out and started to show improvement. At each change in a trend there are months of back and forth volume: volatility marks the change of seasons in weather, and it does the same for changes in trends. Thus you cannot sweat a decline one month after a solid gain the prior month; up and down is not bad.
Wholesale inventories lower but still up.
This is the old half empty/half full indicator. When an economy is recovering from a slowdown you want to see inventories lower so there has to be a build as the economy slowly comes around; that extra production required to meet demand gives the economy a kick in the butt. When things are rocking along you don't mind seeing good inventories builds as that helps avoid bottlenecks.
When an economy is slowing or trying to recover (i.e. come off the bottom), you don't like to see builds in inventories. That does not suggest that factories are churning out goods to meet demand. Instead it means that there is excess inventory stacking up as demand is slack. That is what is going on here.
As with the pending home sales, this is no real surprise, and the 0.8% gain, while bigger than the 0.6% expected, it was much lower than Aprils 1.4% build. A bit of a positive, but the general trend the past four months is rising inventories. When we see them tighten and then the regional manufacturing throw off a few 50+ readings in a row we will have a good indication there is some serious gelling in the economy.
THE MARKET
MARKET SENTIMENT
VIX: 23.15; -2.63. VIX has not been shooting higher on the selling, something nagging at the rebound attempt and really indicating the bounce is not the bottom of this selling. There is another way to look at volatility, one that we use at tops and bottoms in the market. We talked about it every night back in October and on through the entire fourth quarter: it is the daily up and down action where the market swings to the upside and then the downside with big percentage moves. That is the volatility of change, the season change in weather marked by strong storms that come and go. Look at the March bottom: up and down violently over two weeks then the rally on into early June. The past week there has been up and down action. Not the same magnitude at all, but up and down, back and forth. That has helped set up the current bounce trying to get underway.
VXN: 28.43; -1.95
VXO: 23.96; -2.65
Put/Call Ratio (CBOE): 1.01; -0.2. Eight consecutive sessions above 1.0 on the close. Solid raft of strong closes, indicating a lot of worry about more downside. With record short interest on NYSE as well, this indicates the market is ripe for a bounce.
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: 31.9%. Down again with another healthy drop from 33.7%. Below the 35% level and now a bullish indicator and getting close to the lows hit in March at 30.9%. Down from a rebound high at close to 50% on the run through May. In March 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: 44.7%. Strong surge higher once more, up from 39.3%. Well above the bullish level. 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: +51.12 points (+2.28%) to close at 2294.44
Volume: 2.532B (+6.59%). Strong above average volume as NASDAQ bounced sharply after testing the January 2008 lows.
Up Volume: 1.847B (+571.929M)
Down Volume: 644.006M (-398.108M)
A/D and Hi/Lo: Advancers led 2.36 to 1. Very respectable breadth as it was not all AAPL and RIMM
Previous Session: Decliners led 1.91 to 1
New Highs: 38 (+8)
New Lows: 347 (-167)
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: +21.39 points (+1.71%) to close at 1273.7
NYSE Volume: 1.728B (+13.53%). Strong volume, the best since the high volume just before quarter end. Very solid, very positive.
Up Volume: 1.292B (+838.252M)
Down Volume: 432.257M (-622.883M)
A/D and Hi/Lo: Advancers led 2.03 to 1
Previous Session: Decliners led 2.35 to 1
New Highs: 14 (+1)
New Lows: 459 (-164)
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
Again tested the 2005 highs and 2006 lows and bounced, this time really scorching to the upside. Good start to a needed bounce, the best start since the selling really got underway after the early June reversal. Should cruise to 1300, then a move to 1325ish would be a 50% recovery and a likely stall point.
SP600 (+3.16%) exploded higher after a nasty 45 point decline (12%) over the past two weeks. An ugly plunge, and after testing the March lows SP600 is rebounding furiously. Classic relief move.
SP600 Chart: http://investmenthouse.com/ihmedia/SP600.jpeg
SP400 CHART: http://investmenthouse.com/ihmedia/SP400.jpeg
DJ30
After a week of up and down lateral moves (that volatility talked about earlier), DJ30 bounced on stronger, above average volume. A drop in the bucket but the best move thus far and there is plenty of room to the upside to cover some ground before it tops out. The logical point is the March lows at 11,740. A 50% retracement takes DJ30 to roughly 12,000, so that 11,750 to 12,000 range is a logical bounce target.
Stats: +152.25 points (+1.36%) to close at 11384.21
VOLUME: 271M shares Tuesday versus 248M shares Monday.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
WEDNESDAY
Crude inventories are all that is on tap officially though the earnings season is here and it will start to take over from economic reports though anything Paulson and company say will be important. Wouldn't some solid statements about the dollar be grand right now? I suppose one can dream.
AA started things off after hours beating estimates and posting a nice gain on the news that held into the end of the extended session. Very good news, very good start. Of course the fact that AA beat when things are slowing down when it could not beat when times were good may be an indication the rest of the companies are going to be less than hoped for. In short, it is hard to make much use of AA's results. The only thing of import is that it is one of the first to report.
Whatever AA reported, it looks as if the market has started a technical bounce in response to the hard selling that pushed DJ30 through its 2008 lows and SP500 as well. SP500 found support at some 2005/2006 highs and lows and NASDAQ found support over its 2008 lows. The steep selling and the convergence of the indices at prior lows/support levels has triggered some short covering. We have seen a good bounce one day scuttled by bad news the next. That can happen again, but this looks like a 50% kind of retracement rebound, and thus we expect it to continue for a few sessions.
Of course you look to see if there is follow through starting Friday, as that would set up a new rally attempt of some merit. It would then be up to leadership to emerge. As noted there is leadership in health services, biotech and some telecom is showing up. There would need to be more cropping up as well, though if these current solid bases and stocks lead the way others would have time to build new bases of their own.
That remains to be seen as to how leadership takes hold. For now we view this as a relief/oversold bounce that has a target of a 50% retracement of the losses before it runs out of gas. That would be a strong rebound move. It may develop into something more if oil continues to tank and falls to 120ish. If so, then it takes care of itself because we are looking at leaders in position to move higher and are actually making the breakout moves. If the market continues higher and builds strength, these stocks will lead the way and we will be in great shape. If it stalls out at those retracement levels then we are aware of those levels and we can get out of Dodge at that time and we will have several downside plays in the pocket to trot out as that occurs.
Support and Resistance
NASDAQ: Closed at 2294.44
Resistance:
The 10 day EMA is 2305
2335 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
2377 is a 50% retracement of the June to July selloff.
2378 is the mid-February peak; 2379 from the October 2006 peak
The 90 day SMA at 2377
2386 is the August 2007 intraday low
2388 is the June 2008 low
2392 is the April 2008 peak
The 50 day EMA at 2393
2419 is the January 2008 peak and the early February peak
2451 is the August closing low
The 200 day SMA at 2491
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
2155 is the March 2008 low
S&P 500: Closed at 1273.70
Resistance:
The 10 day EMA at 1282
The 18 day EMA at 1302
1317 from the February low
1324 is the April low
1325 is a 50% retracement of the May to July selloff
1331 is the June low
The 50 day EMA at 1340
1341 is an ancient trendline
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 1407
Support:
1270 is the January low
1257 is the March low
1244 is an August 2005 peak
1240 to 1221 are September 2005 peaks1234 is the July 2006 low
1224 is the June 2006 low
Dow: Closed at 11,384.21
Resistance:
The 10 day EMA at 11,455
11,634 is the January intraday low
11,670 is the May 2006 intraday high; 11,642 closing
The 18 day EMA at 11,659
11,731 is the March 2008 low
12,000 is a 50% retracement of the May to July selloff
12,050 from the March 2007
12,070 from the early February 2008 lows
The 50 day EMA at 12,102
12,250 from late March 2007 lows
The 90 day SMA at 12,370
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
The 200 day SMA at 12,805
12,845 is the August closing low
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
10,912 peak from March 2005
10,854 from December 2004
10,701-10,705 from July 2006, July 2005
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
July 8 - Tuesday
Pending home sales, May (10:00): -4.7% actual versus -2.8% expected, 7.1% prior (revised from 6.3%)
Wholesale inventories, May 910:00): _0.8% actual versus 0.7% expected, 1.4% prior (revised from 1.3%)
Consumer credit, May (3:00): $7.8% actual versus $7.0B expected, $7.8B prior (revised from $8.9B)
July 9 - Wednesday
Crude oil inventories (10:30): -1.98M prior
July 10 - Thursday
Initial jobless claims (8:30): 395K expected, 404K prior
July 11 - Friday
Export prices, June (8:30): 0.4% prior
Import prices, June (8:30): 0.5% prior
Trade balance, May (8:30): -$62.1B expected, -$60.9B prior
Michigan preliminary sentiment, July (10:00): 55.5 expected, 56.4 prior
Treasury budget, June (2:00): $33.0B expected, $27.5B prior
End part 1 of 3
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