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7/16/08 Investment House Daily
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Investment House Daily Subscribers:
MARKET ALERTS:
Targets hit alerts: Took some gain on ECA
Buy alerts: ABMD; AVAV; DUG; IBB; PDS
Trailing stops: None issued
Stop alerts issued: Cleared out those not bouncing with the market: ATW; BZP; CHK; DNR; ERES; MEA; PSYS
The market alert service is a premium level service where we issue intraday alerts relating to the general market conditions, when stocks hit action points (buy, stop, target, etc.), and when we see other information impacting the market or our stocks. To subscribe to the Daily alert service you can sign up at the following link:
http://www.investmenthouse.com/alertdly.html
SUMMARY:
- Diving oil, attacks on short selling financials drive a big short covering oversold bounce.
- Expiration week helps inflate volume in this market volatility.
- CPI shows inflation is ramping all the way through the chain.
- Oversold bounce has started. Accept it for what it is until it proves otherwise.
Market gets some oil relief but the gains in stocks don't match the losses in oil.
There was some solid news and some not so great news before the open, but when you have stretched the rubber band this far it doesn't take a lot of perceived positives to send things snapping back. WFC reported great earnings and upped its dividend by 10% on top of some solid INTC, ABT, and ALTR earnings. Now Wells Fargo does own a lot of mortgages, but it is not in the crappy part of the market, and its earnings proved it. Never mind it is not one of the many in the slime; investors took heart, or at least some heart. There was some M&A with CLF in steel buying ANR in coal; maybe CLF is trying to catch the wave in price lower for energy near term. The economic data was mixed at best with the climbing CPI overshadowing the very nice 0.5% gain in industrial production.
It was, however, oil's second day of hard losses (closed at 134.49, -4.25 but off the 50 day EMA it hit early on) AND more government intervention in markets with a crackdown on shorting financial stocks that ignited the 3+% gains in some indices. Things were not that great early; not horrid, but not surging higher after the Tuesday reversal attempt. VIX gapped higher at the open with the CPI news. But then, oil inventories came in 6M bbl more than expected along with gasoline 3.5M more than expected and distillates up as well. That hammered oil, pushed energy stocks lower, and sparked a market jump. The ban on certain types of short selling exploded financial stocks higher. When the buying started the shorts had to cover. The snowball rolled and rolled and stocks posted 30+% gains. Stretch that band far and the snapback is vicious.
Sharp, explosive gains of 30% or more and gains of 2.5% and more on the indices in the midst of nasty downtrends is characteristic of a bear market rally. Maybe it is a bottom; turns can definitely be this strong, but typically this kind of seemingly unending selling then a sudden sharp and voracious rally is a bear market rally. Given the leadership ranks are thin, and while they can form up after a reversal and follow through, it is always better to start with a bevy of nice patterns from growth stocks to lead the market higher out of this kind of turn. While there is some leadership now, it is just not that widespread to carry the market on its shoulders.
TECHNICAL. Of course the intraday action was positive as the market started flat, fell lower, then posted a steady, uninterrupted gain into the close. Intervention in the markets that goes against an entrenched trade (shorting financials) tends to do that. What a violent turn in those stocks.
INTERNALS: The move was very broad and that does not typically indicate a short covering move. Of course, with all of this selling in just about every market sector, short covering would necessarily produce broad breadth (say that fast a few times after drinking a bottle of wine and spinning around 6 times really fast; try it, you may like it). After the 1000+ new lows on NYSE Tuesday, the count dropped significantly. It should; that is, how do you say it, extreme. Volume was lower but it is hard to say it was bad given it was still well above average, not much of a drop off from Tuesday. Now it is expiration week and thus volume is jumping. Moreover, with the rubber band stretched so much, with the usual pre-expiration rolling and shuffling heated by the feds limiting shorts' ability to keep shorting, the mix was close to nitroglycerin.
CHARTS. NASDAQ and SP600 held the prior 2008 lows and bounced, looking to take back 50% of the losses on this sharp selloff. 50% is a typical retracement level. SP500 surged 2.51% . . . and it is still below its 10 day EMA. Talk about a pernicious downtrend. Now the Dow made it over its 10 day EMA. Much rejoicing. SP600 looks a lot like NASDAQ, and as NASDAQ is looking for a follow through starting as early as Friday given its Tuesday reversal and positive close, SP600, a growth index, is doing the same. Will they succeed? The odds are against them. See below as to why.
LEADERSHIP: In the bear market starting in 2000, after the nasty selloff there were several sharp rallies and even follow through to those rallies 4 to 5 to 6 sessions later. Yet, the market would then turn back down and sell some more. The culprit: no leadership. Right now the market has some leaders, but the list is thin. That makes the attempt to make a meaningful turn here a tough one unless there is follow through and then some solid growth sectors form up good bases over the next several weeks. It is always better, however, to have growth stocks already in bases and ready to surge when a follow through comes along.
THE ECONOMY
CPI shows pervasive inflation.
Consumer prices at the core level were just a bit over expectations (0.3% versus 0.2%), but that put the yearly rate at 2.4%. The overall number jumped 1.1% versus the 0.7% expected, pushing the year over year inflation rate to 5.0%. Too high, and yet the Fed is turning away from its inflation fight in order to make sure the financial markets work. Yet it is taking actions that go way beyond that, now wanting to regulate not only banks, but ALL financial institutions. Power grab in a time of crisis. Might be well intentioned, but that does not make the thorns any less sharp for all of us.
Energy rose 6.6%. Transportation +3.8%. It was all to the upside as prices hit a level not seen since the 1990's. Of course at that time the inflation rate peaked and quickly turned lower. Right now the inflation pressures are continuing to grow, and that means no peak. It means more upside still to come, particularly with the Fed abandoning all hope of controlling it near term. It wants the financial markets to function and thus allow institutions to hang on, but it is doing so by sacrificing our free enterprise system and a willingness to follow the failed actions of the Fed in the 1970's. Been there, done that. Frankly, just about anything is better than that because I don't see any Ronald Regan in the wings ready to re-energize our economy.
Maybe Bernanke knows something or has data or inside information (you would hope) about more collapses to come and has decided it better to prop them up quickly then get back to inflation fighting. He is a history buff and has extensively studied the Great Depression and the 1970's. To make the same mistakes knowing what he knows about those eras suggests things are pretty bad . . . or that he has panicked. Putting my money on the latter for what that is worth.
THE MARKET
MARKET SENTIMENT
VIX: 25.1; -3.44. VIX hit 38.84 on the high, topping the January and March levels. Good action but then it reversed to close sharply lower as the stock rally ensued. It was a good move, but well into the 40's would have been a lot better and more meaningful for a long term bottom.
VXN: 30.13; -2.88
VXO: 26.34; -4.1
Put/Call Ratio (CBOE): 0.93; -0.22. After 13 days over 1.0, the massive surge took it below 1.0 on the close. The work, however, has already been done.
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: 27.4%. Plunging from 31.9% and blowing past the 30.9% low hit in March and well below the 35% level considered bullish for stocks (gets so low there is plenty of money lying around to fund a rally if things turn). Steep drop 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. Now it is going above and beyond. Bulls and bears have crossed over again, doing so 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: 47.3%. Up sharply from 44.7% and 39.3% the week before. Well above the bullish level and the highest since 1995. 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. 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: +69.14 points (+3.12%) to close at 2284.85
Volume: 2.521B (-10.21%)
Up Volume: 2.223B (+702.311M)
Down Volume: 233.563M (-983.72M)
A/D and Hi/Lo: Advancers led 3.37 to 1
Previous Session: Decliners led 1.48 to 1
New Highs: 50 (+7)
New Lows: 249 (-323)
NASDAQ CHART: http://investmenthouse.com/ihmedia/NASDAQ.jpeg
Showing the credentials of a reversal looking for a follow through over the next week (another strong gain on volume and breadth starting Friday or later). NASDAQ reversed Tuesday off the 2008 low and Wednesday it rode that reversal. A good start and looking to retake 50% of the selloff, moving up to 2358. Just so happens the 50 day EMA is at 2360. All mathematics sometimes, with a health dose of investor sentiment directing the near term moves.
NASDAQ 100 CHART: http://investmenthouse.com/ihmedia/NASDAQ100.jpeg
SOX CHART: http://investmenthouse.com/ihmedia/SOX.jpeg
SP500/NYSE
Stats: +30.45 points (+2.51%) to close at 1245.36
NYSE Volume: 1.731B (-7.09%). Lower but still strong volume as the NYSE indices rebound from the 2-month downtrend. As with NASDAQ, expiration is driving a lot of this increased volume, with the start of a bounce causing even more volume as positions are covered and rolled like mad.
Up Volume: 1.35B (+812.353M)
Down Volume: 367.395M (-945.696M)
A/D and Hi/Lo: Advancers led 3.04 to 1. Strong move but even then it just topped the downside breadth on the recent selling.
Previous Session: Decliners led 2.87 to 1
New Highs: 23 (-3)
New Lows: 366 (-795). Tuesday it was extreme at over 1100.
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
SP500 posted strong gains, closing at session highs but still below near resistance at the 10 day EMA (1250). That is how strong the selling was to this point; a 2.51% gain cannot top near resistance. SP500 is still 12 points off its 2008 low (1257). Strong move, but the pattern and all the resistance indicates simply an oversold bounce in a very strong 2 month downtrend.
SP600 (+3.48%) is a much different pattern, holding at the 2008 lows in a 2 week lateral move and then starting the bounce higher. Did this 8 sessions back, however, and it was gutted the next session. If oil keeps falling, SP600 keeps rising.
SP600 Chart: http://investmenthouse.com/ihmedia/SP600.jpeg
SP400 CHART: http://investmenthouse.com/ihmedia/SP400.jpeg
DJ30
The blue chips posted an impressive point gain, but even at 2.5% it was running at the back of the pack along with SP500. It did move through its 10 day EMA, but it should even in a relief bounce after two months of selling. It should break through near resistance and test back up near 12K on the move.
Stats: +276.74 points (+2.52%) to close at 11239.28
VOLUME: 307M shares Wednesday versus 331M shares Tuesday. Another session of strong trade, but as with the other indices, it was also driven by expiration.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
THURSDAY
Already Thursday. My how time flies when the feds intervene, oil falls, and half of the market (the shorts) are threatened with cutting off their livelihood. There is more news with housing starts and permits, jobless claims, and the Philly Fed. Earnings as well; it is earnings season. EBAY reported and was roughed up after hours. EBAY was a leader out of the 2002 low. If it was looking to duplicate that feat it is going to face a serious set back Thursday. Of course the market is not ready to totally recover, so even EBAY has time to recover. Okay, that is a big stretch; we don't expect EBAY to lead on the next true bull market. If we wait for it to do that we might be waiting a long, long time.
Back to the market overall. Wednesday was a solid start to an oversold bounce. Strong technicals, but with all of the market selling off a rebound will have solid looking indicators. Again, leadership is the key and it is thin.
Another major player here is oil. Two hard days lower helped spark a move higher. Thing is, oil held its 50 day EMA on the low and bounced. What does that mean? The 50 day EMA is key support for any stock or commodity, and it shows that buyers stepped up at that key level. It means that oil is not an over-boiled noodle ready to tumble back to $100 without a fight. It has been here before, e.g. in March, May, and early June. It cannot bounce off of this level forever, but the action at the 50 day shows it won't necessarily go quietly. If oil bounces, the market is again under immediate pressure. If it bounces $5 the market is back in trouble. At these prices the market is beholden to oil.
Given the strength of the bounce and barring an immediate rebound in oil, this is the relief bounce we knew was coming, and we are looking for that roughly 50% retracement of the losses from the start of the last leg lower in May. Of course we will watch the strength of the move and see if there is follow through on NASDAQ starting Friday through next week. You also have to watch what leaders show up along the way; there are not many right now but we are watching to see if some promising patterns build quickly. Hard to do with the hard downtrend in place, but it can happen.
We are not going to run out and play every rebounding stock and sector. When they run out of gas or the next bad news hits they can turn on you damn fast. We will instead look for stocks that held up well in the selling and are coming off solid support or formed good bases and are breaking higher. They had money in the selling and they typically continue attracting the money on at least part of these bounces, and that keeps them from being such turncoats against you once the market bounce runs out of juice.
So we look at the good patterns and stocks at support ready to bounce. As the move progresses higher we look for more downside as stocks lose the momentum of the early reversal. That doesn't mean energy won't remain weak and provide more downside, but when the market bounces and sends weak stocks back to resistance and they stall, that is where the downside comes fast and pretty easy. Thus we play the solid upside and when the indices retrace near 50% of their losses we start looking for the downside because when the market turns back it won't wait around too long.
Support and Resistance
NASDAQ: Closed at 2284.85
Resistance:
2286 is the first April 2008 gap up point.
The 18 day EMA at 2294
2338 is the trendline from the summer 2004/July 2006 lows, Q4 2005 consolidation
2340 from the March 2007 low
2358 is a 50% retracement of the June to July selloff.
The 50 day EMA at 2361
2370 from the April 2006 peak
The 90 day SMA at 2376
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
2451 is the August closing low
The 200 day SMA at 2478
2500 from interim August lows.
Support:
2261 is a March 2008 interim low
2202 is the January 2008 low
2155 is the March 2008 low
S&P 500: Closed at 1245.36
Resistance:
1244 is an August 2005 peak
The 10 day EMA at 1250
1257 is the March low
1270 is the January low
The 18 day EMA at 1270
1317 from the February low
The 50 day EMA at 1318
1320 is a 50% retracement of the May to July selloff
1324 is the April low
1331 is the June low
1342 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
The 200 day SMA at 1398
1406 is the August and November 2007 closing low
Support:
1240 to 1221 are September 2005 peaks1234 is the July 2006 low
1224 is the June 2006 low
1176 from the Q4 2005 lows
1167 is the January 2005 low
1154 from the May 2005 lows
1142 is the 2005 closing low
Dow: Closed at 11,239.28
Resistance:
11,317 from March 2006
The 18 day EMA at 11,397
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 50 day EMA at 11,896
11,982 is a 50% retracement of the May to July selloff
12,050 from the March 2007
12,070 from the early February 2008 lows
12,250 from late March 2007 lows
The 90 day SMA at 12,302
12,518 is the August intraday low
12,573 is the mid-February high
The 200 day SMA at 12,723
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
13,092 is the December 2007 intraday low
13,133 is the May 2008 high
Support:
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 15 - Tuesday
PPI, June (8:30): 1.8% actual versus 1.3% expected, 1.4% prior
Core PPI (8:30): 0.2% actual versus 0.3% expected, 0.2% prior
NY Empire Sate PMI, July (8:30): -4.96 actual versus -5.0 expected, -8.7 prior
Retail sales, June (8:30): 0.1% actual versus 0.4% expected, 1.0% prior
Retail ex-auto (8:30): 0.8% actual versus 0.9% expected, 1.2% prior
Business inventories, May (10:00): 0.5% expected, 0.5% prior
July 16 - Wednesday
CPI, June (8:30): 1.1% actual versus 0.5% expected, 0.6% prior
Core CPI (8:30): 0.3% actual versus 0.2% expected, 0.2% prior
Net foreign purchases, May (9:00): $67.08B actual versus $65.0B expected, $111.90B (revised from $115.1B)
Capacity Utilization, June (9:15): 79.9% actual versus 79.4% expected, 79.6% prior (revised from 79.4%).
Industrial Production, June (9:15): 0.5% actual versus 0.2% expected, -0.2% prior
Crude oil inventories (10:30): 2.95M versus -3M expected, -5.8M prior
FOMC minutes, June 25 meeting (2:00)
July 17 - Thursday
Building permits, June (8:30): 965K expected, 969K prior
Housing starts, June (8:30): 960K expected, 975K prior
Initial jobless claims (8:30): 380K expected, 346K prior
Philly Fed, July (10:00): -15.0 expected, -17.1 prior
End part 1 of 3
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