Saturday, January 27, 2007

Stocks take a moment after Thursday high volume sell off.

- Stocks take a moment after Thursday high volume sell off.
- Factory orders weaker than expected, but showing strength in the right places.
- Economic data, FOMC meeting join earnings in a data overload week.
- Still see good stocks in good position, but market has to show they are deserving of buys.

Indices try the old Friday comeback, but not all join the rather tepid rebound.

After another tail kicking session that followed right behind a solid upside move, the indices tried to pick up the pieces and bounce right back, kind of fighting fire with fire. Durable orders were not as strong as anticipated, but business investment bounced back nicely after four months of weakness. Earnings continued their overall improvement with SP500 now looking at a double digit growth once more versus the 9.1% originally forecast.

That was not enough to keep stocks positive, however, and after opening higher the sellers moved in and the market turned negative. NASDAQ undercut its 50 day EMA and SP500 reached toward its 50 day SMA, but both recovered as stronger new home sales (+4.8%) quelled the sellers. The indices recovered and spent the rest of the session working higher, albeit rather unsteadily. Oil was rebounding once more, rising to 55.42, +1.19/bbl as it continued its rebound off $50. Oil's fall greased the way for tech stocks' early 2007 rise, but they are slipping and stumbling as it recovers. At the bell techs, chips and the small to mid-caps were a hair positive, but the NYSE large caps could not make the green. Notably, NASDAQ 100, the largest techs that led the early January tech charge, closed negative, unable to recover the 50 day EMA.

Technically it was not a bad day, just not a definitive response to the Thursday higher volume selling. The indices closed at or near session highs, coming back from morning selling; low to high intraday moves are positive bullish indications. This was applauded on the financial stations but as noted, it was hardly enough to turn around the Thursday distribution and the volatility seen of late.

Internals were weaker on the session with positive but mediocre breadth (roughly 1.4:1). Volume was significantly lower, but it was a non-expiration Friday and that is typical. Trade remained above average on NASDAQ while falling to average on NYSE. Again, however, that does not alter the strong Thursday selling that transpired the day after a technically solid move sent stocks higher. Further, NASDAQ 100 closed negative and below the 50 day EMA; its pattern is bearish. NASDAQ will find it hard to rally if the early rally leaders cannot recover.

Bigger picture, the selling bouts following the strong upside moves are the stronger action in the market right now. They have more volume, they have stronger breadth, the come in response to attempts to take NASDAQ upside. This volatile, high volume slugfest between buyers and sellers shows the sellers have caught up with the buyers after the run from July 2006. Right now the sellers are stronger because of the internal data as well as the fact that NASDAQ is in a fight to hold the 50 day EMA. As discussed Thursday, this type of action is typically a sign of change, and given that SP500 and DJ30 are in extended uptrends it suggests a correction of some sort in those trends. Of course it has not done so; every time the indices start to show a bit of volatility they manage to recover and move higher. This action the past two weeks is more virulent as noted.

All of this suggests it is a time to exercise caution because the market is showing signs of a near term correction to the long move. This does not mean the expansion rally is over, just a much needed correction appears in the works. We have pared positions over the past week and we will be quite selective in what we look at for the upside over the next couple of weeks until earnings season is over and this volatility plays out.

A guest on CNBC Friday discussed this volatility compared to the VIX. VIX is at historically low levels yet this guest noted how some historically rather staid large caps were moving in 5% or more jumps. Though volatility as measured by VIX and VXN is low there is real volatility in the market. When that occurs after a run it indicates change is in the air similar to a change of seasons.


Factory orders gain strength, particularly in business.

December orders rose 3.1%. That was lower than the 3.5% gain anticipated but topped November's 2.2%. Ex-transportation and the gain slipped to 2.3% (airplanes were up 26.5%), but that was still the best gain since March 2006.

A bit more interesting was the rebound in non-defense capital goods orders (basically business orders). They moved up 2.4% after declines in October and November in what was a softening trend in business spending the second half of 2006. Perhaps this marks the turning point, but you have to remember that businesses tend to spend more in December ahead of the year end for tax purposes and as departments use up their budgets to make sure the bosses give them at least that amount again.

Thus we have to see how the new year starts before we conclude businesses are spending once more. Maybe they are all loading up for Microsoft's release of Vista. We are hearing that many IT managers are going to wait before jumping on board. In addition to the software many PC's will need some additional hardware to take advantage of the operating system. That is driving more than a few to consider using this introduction and next purchasing cycle as a point to perhaps move to Macs as opposed to more Wintel machines. Now that is really the interesting aspect of Vista.



VIX: 11.13; -0.09
VXN: 17.52; -0.11
VXO: 10.71; -0.08

Put/Call Ratio (CBOE): 0.97; -0.23. Topped 1.0 on the close Thursday, and that was the first time it has done so in this cycle. It typically takes several closes above 1.0 before you can look for a market turn. This along with the action in the indices indicates there are likely some more bumps ahead.

Bulls versus Bears:

Bulls: 52.7%. Well, bulls jumped right back up after plunging to 50.5% from 55.4%. That break higher by NASDAQ last week jumped them up and the reversal did not quell the spirit. The action this week likely will. Peaked in January 2006 peak at just above 60%.

Bears: 20.9%. As bulls rose, bears declined from 22.1%. Right back down after a nice recovery where bears almost undercut the 20% level considered bearish. It fought off 20% but is heading back to that level that is considered bearish for the market. Hit a new post-2002 high in that late June 2006 move, eclipsing the March 2006 high (33%) and well above the 2005 highs that spawned new rallies (30% in May 2005, 29.2% in October 2005).


Stats: +1.25 points (+0.05%) to close at 2435.49
Volume: 2.048B (-10.15%). Volume was again above average but lower than the Wednesday accumulation session and the Thursday distribution session where all of the Wednesday buying was basically tossed out the window. Price/volume action has shown accumulation sessions followed by distribution sessions, but it is not a draw. The downside has been stronger than the upside and that works to erode an index.

Up Volume: 1.029B (+434.803M)
Down Volume: 978.156M (-620.589M)

A/D and Hi/Lo: Advancers led 1.47 to 1. Pretty middle of the road breadth and actually a bit better than the index close suggests. The large cap techs closed lower and they have the most impact upon NASDAQ's price. In other words a few of them can be down and the index reflects that with a poor performance yet more NASDAQ stocks are up than down.
Previous Session: Decliners led 2.43 to 1

New Highs: 81 (+31). Was never very strong, even when NASDAQ broke to a new post-2002 high. The large cap techs led that move and hence the modest new highs overall. The solders were not following.
New Lows: 25 (+3)

The Chart:^ixic.html

Undercut the 50 day EMA (2424) on the low and then rebounded to once again hold above that level on the close. A good recovery given it looked rather grim midmorning. Volume was lower, and though still below average that means it could not compare to the selling volume on Thursday. Volume typically lightens up on Friday (when it is not expiration) so this was not that unusual. Unusual or not, it still doesn't take back the Thursday distribution despite the rebound. The rebound kept it in the 10 week lateral move, and that may be enough to keep NASDAQ consolidating and working on another breakout attempt. It will have to reverse the distribution that has cropped up, but two sessions (the past two Thursdays) does not automatically render a sell off. Much of the move is attributable to the large cap techs (NASDAQ 100 closed lower) and thus the action is exaggerated somewhat. Nonetheless given the distribution it is a time to exercise some caution, and with the large cap techs struggling the overall index is more questionable.

SOX (+1.46%) rallied back and led the market higher, managing to retake the 200 day SMA as it did. That takes back a chunk of the loss from last week, but SOX continues with a 4 month head and shoulders base of sorts, the last drop forming up the right shoulder as SOX could not complete a breakout after making that higher low in late December. Lots of congestion from 460 to 472ish, and SOX is just entering that range. Given the action in NASDAQ we are not too confident it is going to make the next break higher.


Stats: -1.72 points (-0.12%) to close at 1422.18
NYSE Volume: 1.508B (-14.05%). Volume fell back to average as the large caps posted a modest loss. The index rebounded but not a lot of volume as it did, and that indicates the buyers did not come running back in after the test.

Up Volume: 783.952M (+319.553M)
Down Volume: 707.209M (-572.724M)

A/D and Hi/Lo: Advancers led 1.38 to 1. So-so.
Previous Session: Decliners led 3.27 to 1

New Highs: 135 (+25)
New Lows: 9 (-2)^gspc.html

The large caps sold toward the 50 day SMA (1413), hitting 1417 on the low. An afternoon rebound brought them back close to flat, keeping the uptrend intact. Similar to NASDAQ, SP500 reversed Wednesday's breakout to a new post-2002 high on a high volume sell off Thursday. Another breakout pushed back by the sellers; it wasn't just a technology bit. Given the rebound Friday it may try to keep its trend in place. As with NASDAQ, however, we view this as a risky proposition at this point given the long run. One key will be how the large financials recover from their late week selling as well. Many showed the same action Friday as SP500 (gee, a connection?) but some of them are extended as well after long runs following a breakout. We were able to squeeze some gain out of this last bounce higher, and we want to see if they hold up for another run.

SP600 (+0.39%) sold to its 50 day EMA intraday and then rebounded to post a gain on the close. Nice action that keeps the index working on the handle to its nine month cup with handle base. SP600 suffered through the Thursday selling as well, but as it did the prior week, it held up nice, using the selling to make a higher low. Improving energy stocks helping the index out, but unlike the other indices, you cannot complain about the action SP600 is showing.


DJ30 sold off as well but recovered, showing just a modest loss. The same old action as seen in early January and in late November: an intraday test in the neighborhood of the 50 day EMA and then a rebound to hold the trend. Bulletproof to this point, and it may once again avoid any correction. We will see; it is NASDAQ and SP500 we are more concerned about as triggering any correction, and they have shown some distribution.

Stats: -15.54 points (-0.12%) to close at 12487.02
Volume: 247M shares Friday compared to 245M shares Thursday. Thursday was a distribution session but Friday the blue chips recovered after an intraday sell off on even stronger trade. Interesting, but again, the more germane focus is on NASDAQ and SP500.

The chart:^dji.html


Another data overload week ahead as the economic reports come back full force. Consumer confidence, Q4 preliminary GDP, Chicago PMI, the FOMC, personal spending, the ISM index, factory orders, and the jobs report. Hell, there is hardly time to worry about earnings.

The recovery in economic data ahead of the expected timetable is both positive and negative for investors. Positive because it keeps earnings growing. Negative because the Fed is still blustering about the need for rate hikes, and in its Phillips Curve view of the world (at least by its spoken word), prosperity is considered risky.

Thus stronger economic data has that 'hurts so good' aspect to it as history shows fighting the Fed is a bad move. Indeed, the market took off last summer just before the Fed announced its pause (and also after oil peaked near $80) after two years of lateral movement while the Fed hiked rates. Pretty strong proof in that pudding. Thus the question: will an improvement or a return to stronger economic data cause the Fed to hike rates again (assuming of course that the Fed's indicia of inflation continue their soft decline)?

The only way that will happen is if the housing market indeed shows concrete proof it has turned the corner back up. Not just bottomed; bottoms can last a long time. No, it has to show it is recovering and likely for several months before the Fed would act. Housing starts did show some life in December (new home sales rose 4.8% that month as we found out Friday). Something to watch, but as noted, it will take more than a month or two to change the Fed's view on this.

To buy or not to buy.

There are still many solid stocks in position to move higher and from many different sectors. There are still techs that look good. Medical appliances, healthcare, metals, chemicals, some energy, industrial machines. Yep, there are still may solid stocks. The question is whether, given the action shown the past two weeks, do we want to buy into any moves higher or wait patiently and let this volatility and distribution play out.

Large cap tech looks plenty risky right now with its distribution and close below the 50 day EMA after a couple of failed breakout attempts. Good looking breakout moves that got spanked hard. Hell, NASDAQ may hold and give us a breakout, but again, twice it has shown what it needs to for a strong break higher and twice it got b ch slapped. The strength and timing of the selling, particularly on the past Thursday, clears up the question somewhat as to whether the hard selling two Thursdays back was expiration related. With the volatility and the smack down it's a higher risk time for the market.

That means it is best to play it safer or more conservative with really strong names and patterns for the upside. Three out of four stocks follow the overall market direction, so if a correction takes hold most stocks will feel it though to what extent varies. Thus we are selective with what we look at to the upside, and we will also be looking at some downside positions anticipating a much needed market pullback. Indeed, we were taking some positions Friday on some weakening stocks, looking for a pullback starting this week. Again, not an end to the gains seen since October 2002, but a correction needed after a steady climb since the Fed went on pause. It would take the Fed coming back and hiking rates to end the run. Better hope housing stays mediocre until the CPI and PCE really fall.

Support and Resistance

NASDAQ: Closed at 2435.49
2468.42 is the November 2006 high
2471 is the December 2006 high
2509 is the January 2007 high
2493 is an interim peak from February 1999
2523 is price resistance November 2000

The 50 day EMA at 2424
2412 from June 1999 low
2384 is an interim peak from January 1999
2379 is the October high.
2376 is the April high, the former post-2002 high
2368 is the early October handle high.
2333 is the top of the Q1 2006 trading range (the January and mid-March 2006 highs)
2316 from interim tops in January and March 2006 trading range
2300 represents some price support

S&P 500: Closed at 1422.18
The 18 day EMA at 1424
1425 is an interim high from November 1999
1430 is the July up trendline
1432 is the December 2006 high
1444 from February 2000
1475 from peaks in December 1999 and January 2000

The 50 day EMA at 1409
1408 is the November high
1401 is a low from April 2000
1390 is the October high.
1389 is a low from November 1999
1378 is a low from May 2000
1371 to 1373 is the December 2000 peak and the January 2001 peak
1358 to 1362 mark a series of peaks from April 1999 to August 1999 high and the February
2002 low at 1360.

Dow: Closed at 12,487.02
About 8.6% above the 200 day SMA. It turned choppy after hitting 8.5% of separation in late October, but is has not sold off and just hit a new high.

The 18 day EMA is 12,503
12,499 is the December intraday high.
The 50 day EMA at 12,364
12,361 is the November 2006 high
October high is 12,167
11,986 is price support from mid-October and the early November low.
11,865 from the early October consolidation
11,750.28 is the pre-2000 all-time high

Economic Calendar

These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.

January 30
Consumer Confidence, January (10:00): 109.5 expected, 109.0 prior

January 31
GDP Q4 advance (8:30): 3.0% expected, 2.0% prior
Chain deflator (8:30): 1.7% expected, 1.9% prior
Employment cost index (8:30): 1.0% expected, 1.0% prior
Chicago PMI, January (9:45): 52.0 expected, 51.6 prior
Construction spending, December (10:00): 0.0% expected, -0.2% prior
Crude oil inventories (10:30): 789K prior
FOMC policy statement (2:15)

February 1
Personal income, December (8:30): 0.5% expected, 0.3% prior
Personal spending, December (8:30): 0.7% expected, 0.5% prior
Initial jobless claims (8:30): 318K expected, 325K prior
ISM Index, January (10:00): 51.5 expected, 51.4 prior

February 2
Non-farm payrolls, January (8:30): 150K expected, 167K prior
Unemployment rate (8:30): 4.5% expected, 4.5% prior
Hourly earnings (8:30): 0.3% expected, 0.5% prior
Average workweek, January (8:30): 33.9 expected, 33.9 prior
Factory orders, December (10:00): 1.5% expected, 0.9% prior
Michigan sentiment, revised (10:00): 97.8 expected, 98.0 prior

By: Jon Johnson, Editor

Jon Johnson is the Editor of The Daily at

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