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trade stock, stock picking
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7/17/08 Investment House Daily
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Investment House Daily Subscribers:
MARKET ALERTS:
Targets hit alerts: Took some gain on DUG; ECA; MYGN
Buy alerts: BUCY; FLIR
Trailing stops: POT
Stop alerts issued: CF; MON; NAL
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SUMMARY:
- Nice earnings along with oil sliding downhill perpetuate the rally.
- Housing starts post a nice 9.1% gain as housing continues its indications a bottom is forming. Of course bottom does not mean a surging rebound
- Manufacturing still struggling as Philly improves but not as much as expected.
- After hours earnings show some great companies while GOOG and MSFT leave big question marks.
Bank earnings and another sharp oil decline spur the rally.
There were the jobless claims at 366K, not as high as expected but up over last week (340K), but that was a footnote in the morning action. JPM bolstered WFC's earnings as two big banks beat the street handily. Indeed even some regional banks reported strong earnings. In addition, YUM, NOK, CAL, KO, and UTX all beat the street with UTX raising its guidance. So far, so good. There was a collective 'whew' and the market rally was cleared to continue.
Of course, despite the futures skipping higher early, it was not that easy. There were some comments in the JPM conference call about prime mortgage losses, not sub-prime, were up 'dramatically.' The market's early gains turned to midmorning losses as the rally lost its nerve on just a bit of a negative comment thrown in. It took another serious oil decline as oil broke through its 50 day EMA to set the rally back on track. Stocks surged back and posted new session highs. Then oil hit its second trendline (February/April) and held. The market rally stopped right there. Oil closed sharply lower (129,29, -5.31) and below $130 for the first time in a couple of months, but it is very interesting how the market rally for the day stalled right as oil held that key trendline. The technical indications got way overdone to the downside and set up this current 2-day rally, but it could not find its footing and make the move until oil started to break. Oil is still exerting its influence even with the extreme oversold condition.
The result of the oil decline and continued bounce was a solid 1.2+% gain on the indices, sporting solid trade. The stocks crushed in the May to early July selling continued their rebound while conversely the leaders that rose when the rest of the market suffered that selling, the so-called (by us) Big 3, are in their own 'hell of the 45 degree dive angle selloff' that the rest of the market experienced ahead of them. Demand destruction from their own pricing success is killing the Big 3 while the rest of the market (or most of it) bounces from an oversold condition.
We say oversold despite the glowing and gushing cheeks and comments from the financial station journalism majors talking of a 'market turn' or a 'market bottom.' The turn certainly is strong. Too strong in fact. These bear market rallies tend to be stronger and sharper than any bull market rallies. They are stronger, faster, better. They hatch from very negative conditions and explode higher with fury as all of the despair and anger is unleashed. Then they burn out because there is no substance, no 'beef' as the 1980's hamburger commercial complained. It is easy to get caught in the hype because they look so strong, particularly compared to the nasty selling that preceded them. Just as always, however, you play it for what it is, no more. You pick a few horses that can run hard before cratering again. You pick the leaders that remained in good technical position all through the selling, maybe picking the early leaders in a new bull run if this turns out to be something of a surprise and a real rally emerges (the biotech, medical, healthcare stocks are filling that bill). You play some downside from those rolling over (energy, oil). Then when the market surge runs out of gas at resistance, you play a lot more downside on the rollover.
TECHNICAL: Early on it was not great action. An early upside bounce did not last despite the solid earnings. Gains turned to losses. When oil broke the market got back on track and rallied to mid-afternoon. It struggled, however, to the close as oil held its lower trendline. Managed to hold onto the gains into the close nonetheless.
INTERNALS: Sold breadth once more as all of those beaten down stocks continued to surge in relief. Volume was solid, moving up again though all sessions but Monday this week have been above average and quite strong. Expiration week, and the midweek high volume is pumping up the trade, particularly with this rebound as traders scramble to close or roll out of positions for the next expiration.
CHARTS: Pretty much a textbook continuation of the rebound rally from some just nasty, tail kicking, manhood robbing selling. Good bounces taking SP500 through its 10 day EMA and toward the 18 day EMA, bumping the prior 2008 low in March. 1320ish is 50% retracement. NASDAQ cleared its 18 day EMA and is approaching an old trendline from 2004 as well as the 50% retracement, the latter at 2358, coincident with the 50 day EMA.
LEADERSHIP: The formerly leading Big 3 continue to sell as a result of demand destruction after oil held over $140/bbl for an extended period after a nasty, prolonged rise. Financials are driving higher on their oversold surge. The emerging leadership in medical and healthcare sectors continue to rise, looking solid. Maybe there will be some leadership emerge out of this and form some good bases, given a follow through comes, but there is still a lot of work to do from here. Yes I said 'if' a follow through comes. Thursday was not follow through in a longer term sense; it is short term follow through in that the rally did not immediately collapse. That allows the rally to continue and then try and provide the longer term follow through, i.e. the strong session 4 to 10 days after a rally starts that shows the buyers stepping in after the initial short covering rally. It is necessary for a longer term rally to occur, but it is not in itself sufficient: there has to be leadership and plenty of it to lead on to the upside.
THE ECONOMY
More signs housing is bottoming.
But . . . a bottom is not a rally. Signs improve as part of the bottoming process just as the stock market looks horrid then great and then back to horrid as part of the bottoming process. Of course, you have to start somewhere, and the data across the housing sector (starts, sales, etc.) are up and down month to month, but that is part of a bottoming process. Indeed, there is an ever so slight tick to the upside in the mix.
Starts can be an indicator of a bottom approaching in and of themselves. In just about every economic slowdown in modern times, when housing starts fall below 1 million on an annualized basis a bottom in the sector was on the way. In December 2007, starts fell just under 1M for the first time in this cycle. After a bounce the next two months they fell below 1M in March, edged to that level in April, and then fell again in May. Indeed, June was supposed to be 960K but came in at 1.06M. Starts have hit the level historically associated with a bottom in the housing sector, and the month to month action is showing the familiar up and down volatility associated with bottom forming. June was a strong rebound, continuing that volatility. To us, this and the other firming housing data is very clearly the formation of a bottom in this industry 3 years and 2 months after its peak in May 2005. Cool.
Philly Fed is still bumping in negative territory w/little change, but there is some history here.
The Philly manufacturing index for July remained negative at -16.3, worse than expectations (-15.0) but better than June's -17.1. Looking over 2008, all of the readings are in this range after a plummet lower to start the year, as Philly fell from the zero line it bumped off of since late 2005.
This -20 range, however, is one where the index tends to find bottom. A nasty plunge down to -38 in 2001 after 9-11 quickly rebounded, and on a test in late 2001 it held . . . -20. That was the same back in 1995 in that slowdown during Fed rate hiking. The -20 level has, as with housing starts and the 1M level, indicated a bottom being put in. Very interesting.
THE MARKET
MARKET SENTIMENT
VIX: 25.01; -0.09
VXN: 29.87; -0.26
VXO: 25.92; -0.42
Put/Call Ratio (CBOE): 0.86; -0.07. Second day below 1.0 on the close after 13 days topping that level. As noted Wednesday, however, the work has been done, at least for now, for the bounce in progress.
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: 27.8%. Scratched back up last week, but basically no gain, up just 0.4% from 27.4%. I guess it just got about as bad as it could get as the market was not showing any signs of improvement at that point. A sharp plunge from 31.9% the prior week, 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: 48.9%. While the bulls may have managed a paltry optimism gain, the bears swelled their ranges, rising from 47.3%. Not as strong a move as before with a gain from 44.7% and 39.3% in the preceding weeks. 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: +27.45 points (+1.2%) to close at 2312.3
Volume: 2.654B (+5.26%). Strong volume again on the upside, but as noted above, all of the midweek volume on expiration week, particularly one with a reversal underway, is inflated by that expiration as positions have to be rolled over and the scramble pumps up the volume.
Up Volume: 1.958B (-264.767M)
Down Volume: 722.692M (+489.129M)
A/D and Hi/Lo: Advancers led 2.16 to 1
Previous Session: Advancers led 3.37 to 1
New Highs: 58 (+8)
New Lows: 126 (-123)
NASDAQ CHART: http://investmenthouse.com/ihmedia/NASDAQ.jpeg
Gapped higher over the 18 day EMA, then gave it all up to test the 10 day EMA, found its footing, and then rallied to recover most of its early gain. Third upside session on its way toward 2358, the 50% retracement and/or the 50 day EMA (2358) moving down to meet it.
NASDAQ 100 CHART: http://investmenthouse.com/ihmedia/NASDAQ100.jpeg
SOX CHART: http://investmenthouse.com/ihmedia/SOX.jpeg
SP500/NYSE
Stats: +14.96 points (+1.2%) to close at 1260.32
NYSE Volume: 1.971B (+13.85%). Strongest volume of the month as financials continued their recovery surge, and as noted above, given it is expiration week that is forcing a lot of position rolling and closing and thus the volume has surged. Thus we are not reading this as a big jump in accumulation.
Up Volume: 1.386B (+36.564M)
Down Volume: 547.306M (+179.911M)
A/D and Hi/Lo: Advancers led 2.7 to 1
Previous Session: Advancers led 3.04 to 1
New Highs: 31 (+8)
New Lows: 145 (-221)
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
Made it through the 10 day EMA and past the March intraday low, heading toward the January intraday low at 1269, where the 18 day EMA resides as well. That could stall it out near term, but we are still looking for a move more toward the 50% retracement level at 1320ish.
SP600 (+1.44%) moved through the 18 day EMA and over the April low. Looking for a move up near 370 to 372 as the first potential resistance point.
SP600 Chart: http://investmenthouse.com/ihmedia/SP600.jpeg
SP400 CHART: http://investmenthouse.com/ihmedia/SP400.jpeg
DJ30
On through the 10 day EMA and the 18 day EMA on strong volume. Nowhere near the 2008 lows (the January intraday low is up at 11,635). Moving well and at 50% recovery takes it up to 12,000, but it is going to have some resistance at 11,750 on the way.
Stats: +207.38 points (+1.85%) to close at 11446.66
VOLUME: 335M shares Thursday versus 307M shares Wednesday. Strong volume, topping the Tuesday trade and thus the month high, but also there is short covering ahead of expiration here as well.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
FRIDAY
Earnings are the buzz after hours. IBM reported a strong quarter and jumped higher. GOOG missed. MSFT missed on its guidance. MER was down on its results as well. The initial IBM strength eroded as the other earnings pushed stocks lower. Late in the after hours session IBM was negative from the close. The pitfalls of having to announce along with big name stocks that miss expectations.
The results impacted many stocks, and given some big NASDAQ names missed, QQQQ was mugged and rolled after hours, closing at 44.83 after a regular session close at 45.64. Not a great way to start expiration Friday, and after two strong upside sessions (three upside sessions on NASDAQ) these earnings may usher in a down day for the stock market. That won't necessarily mean the end of the rally. There are no straight shots up or down, though the May to early July selling certainly seemed that way. Strong volume on expiration helped drive the gains, and as expiration unwinds a pause would not be atypical.
After that we expect the rally to continue. The selling was intense so it will in our opinion win out and smother this rally, but that very intensity of the selling fuels the intensity and degree of rebound. That is why we are still looking for a move up to retrace 50% or so of this selloff. Could be more, could be a bit less, but that is a good point to shoot for.
Given that we are still going to look for some upside plays that fall into a couple of categories. One, they were in good patterns or were forming good patterns through the selling and are ready to move and make the move with the rally. Two, we are looking for horses that can run and can still make a solid upside move even after these 2 days of rallying. The pullback on the after hours earnings may provide the kind of interim test back they need to provide a nice entry point for the last part of the run. We are going to look at those, and soon we will start looking at what downside plays are setting up from these rebounding stocks as they come up for air from their downtrends. If this somehow beats the odds and turns into a true market turn, we will be positioned to ride higher with some strong leaders.
Support and Resistance
NASDAQ: Closed at 2312.30
Resistance:
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 2358
2370 from the April 2006 peak
The 90 day SMA at 2378
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 2476
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 1260.32
Resistance:
1270 is the January low
The 18 day EMA at 1269
1317 from the February low
The 50 day EMA at 1317
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 1397
1406 is the August and November 2007 closing low
Support:
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
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 11,446.66
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 50 day EMA at 11,878
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 12,299
12,518 is the August intraday low
12,573 is the mid-February high
The 200 day SMA at 12,710
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:
11,317 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 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): +11.1%, topping the 965K expected, 969K prior
Housing starts, June (8:30): +9.1% (1.01M), topping the 960K expected, 975K prior
Initial jobless claims (8:30): 366K actual versus 380K expected, 346K prior
Philly Fed, July (10:00): -16.3 actual versus -15.0 expected, -17.1 prior
End part 1 of 3
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