Sunday, February 21, 2010

Fed Discount Rate Hike Rattles Market

- Fed after hours discount rate hike rattles market but cannot keep it down.
- CPI turns down the heat on the inflation after the PPI stoked the fire a bit.
- Dollar breaks below 1.36 euro again, but again recovers.
- Oil continues its rally toward the top of its range.
- Indices continue their climb toward the January peaks though SP500 still has to deal with another key level first.

Once more stocks overcome a tad of adversity.

A solid two week rally continued Friday as stocks once more faced some headwinds but in the end came out on top. Not a big move but you have to be at least somewhat impressed with how stocks fight back and how money rotates through the market. Friday the large cap techs struggled, but the 'over there' sectors (industrials, energy, metals and other commodities) scored solid gains.

The adversity du jour came from the Fed and the ripples fanning out from its move. After hours Thursday the Fed raised the Discount Rate, the rate banks charge one another for short term loans at the 'discount window' needed to meet liquidity demands, 25BP to 0.75%. The Fed and its band of merry soothsayers explained that this was a technical move and as such is not typically made at meetings but as a matter of ordinary course. Thus it was made outside the last meeting ended last week.

That it was raised is in keeping with exactly what Ben Bernanke said earlier in the week, i.e. that the Discount Rate would be raised; he just didn't say when. That it is done outside rate decision meetings is not exactly true. During the Greenspan era it was raised often in conjunction with the Fed Funds Rate, and I recall one specific event when it was raised with the FFR and the journalism majors on CNBC were lathered up about the move. It is a technical move: it is kept a bit higher than the FFR to make it something of a penalty to have to use it. The reason: the Fed wants banks to go to each other to meet capital requirements, not the Fed. The Fed removed the 'penalty' on the rate during the crisis to remove any stigma or hesitance about going to the window. Now it is just putting it back on in order to wean banks off of the free money from the Fed, preferring, as it should, that they go to the open market.

The market initially took the news as a necessary step before the Fed could start hiking rates. That is exactly what it is, but the Fed has not said when it will actually start hiking rates. One Fed official said about three months back that the 'extended period' language in the statement meant 6 or so months. Thus as that language was still in the last statement it is a pretty good guesstimate to say another six months from then, or in late summer. Regardless, the Fed is laying the necessary groundwork for the inevitable rate hiking, doing just what it said it was going to do.

Initially the market was down after hours and into the pre-market, but after investors digested the facts they again bought into the market. After all back in 2005 and 2006 the Fed was hiking rates 25BP each meeting and the stock market still climbed. Eventually the Fed goes too far and chokes things when it should be doing the opposite, but that is how the Fed, envisioned as evening things out and avoiding imbalances, creates the very imbalances it supposedly helps us avoid.

In any event, the market swallowed the news and once again, as it has done all week, it overcame adversity and rallied back to close positive. Not a big move by any means, but again stocks turned positive after opening lower.

Stocks also received some help from the CPI that came in tame, even negative on the core, cooling the worries the PPI stoked Thursday. The dollar bounced on the Fed move, falling below 1.36 euro, but as it lost some strength on the day stocks recovered. By the close the indices were all positive though SP500 still has an important fight ahead of it next week as it sits just below the top of the November/December consolidation.


Dollar. Again the dollar was up early, rallying on the Fed raising the Discount Rate. Why? If it suggested the Fed was closer to raising the FFR, the higher rates would support a stronger dollar. Pre-market the dollar traded to 1.3522 euro. As you know, that 1.36 level is the bottom of the range it has made with 1.38 at the top. The dollar faded some as the session wore on, and though it closed stronger (1.3606 versus 1.3612 Thursday), the fade was enough to bring stocks back up. It also rose on the Dollar Index as well, but there too it gave back a big upside gap.

Gold. The yellow stuff traded basically flat, and that is not bad at all. Thursday the PPI looked hotter and gold bounced up. Friday the Fed raising rates could have taken some luster off gold as it would be perceived the Fed would fight inflation possibilities. With the core CPI negative there was more pressure to push gold lower. It gapped lower but it rebounded after testing the same support at 1100. Gold, as with stocks, is overcoming adversity and holding up very well. The pattern is still the break over the December/January/February down trendline and a subsequent test. We could get a buy out of this.

Oil. Oil continued higher in its range, heading toward the peak at 82-83. It also overcame the rate hike and stronger dollar (stronger dollar means you can price oil in fewer US dollars) to continue its rally upside in its range. At 80 oil has his some resistance from the November consolidation range, but the range does run higher. After this two week move it could take a day off, but again, it could have done that Friday given the news, but it did not.

Bonds. The 10 year bond yield actually fell as bonds rallied even as the Fed took the first step in the tightening show. Typically bonds would sell as investors figure the Fed is going to raise rates and take the value out of their bonds. Wasn't the case Friday, similar to stocks, as bond investors figured it was still quite a ways off.



Breadth. Flat as you would expect on the flat session (1.1:1 NASDAQ, 1.4:1 NYSE).

Volume. Volume picked up on Friday of all days, moving up to average on both NYSE and NASDAQ. That after three sessions of below average trade as the indices moved higher. A bit of adjusting before the weekend on expiration Friday, nothing more than that. Still a low volume move up and the next question is whether volume comes in as SP500 tries to break the last resistance before the January peak.


SP500. Another upside session but it took a bit to get there. Nicely tapped 1100 on the low, holding above the 50 day EMA, and then rallying for a modest gain. On the high it tapped at the range marking the top of the November/December consolidation and backed off. After a couple of weeks moving upside it was not ready to take on that resistance ahead of the weekend. This coming week is an important one as the large caps face the last serious resistance point before it can try and continue its climb to test the January peak, the high on this rally that started back in March 2009.

NASDAQ. Struggled at first as well, gapping lower, then recovering to a modest gain. NASDAQ is in the neutral zone, i.e. above the 2205 peak of the November/December consolidation and below the bottom of the January peak at roughly 2272 (resistance is always a range). Again, it is rather typical after the first significant correction for an index or stock to come back to test the prior range, either the bottom, middle, or even try a breakout. That is the key test; everything else is warm-up. NASDAQ was able to move even with the large cap NASDAQ 100 posting a modest loss. That indicates the techs could climb on up to that key level this coming week and give us the first real look at what is left in the tank for this recovery bounce.

SP600. The small caps are already at the lows of its January consolidation. From laggards to leaders the small caps are going to give us the look this coming week along with NASDAQ. Thus far they are showing no fear heading toward this level. No hesitation Friday as they led the market gains.

SOX. The chips are slowing down a bit. They cleared the December consolidation last week and advanced the gain a bit more Friday, but lost more off the high than they gained on the close. Slowing down the move. Maybe just a pause but a key group to watch: they led off the last low and led on the downside this time. They are not leaders in the sense of this upside move, but we will watch in the event they turn lower as a warning shot for the other indices.


Energy, Industrials, Metals. These 'over there' stocks led Thursday and as the dollar weakened off its highs Friday these sectors scored another solid session.

Technology. Techs were not upside leaders Friday, but they were not in bad shape. AAPL is setting up an interesting pullback/flag over the 50 day EMA. GOOG was lower but looks good in a modest test.

Semiconductors. Some individual chips discussed in Thursday's report show some of the issues for the sector. BRCM has rallied just past the 78% Fibonacci retracement, sitting right under the January peak, showing a doji on the candlestick chart. Potential roll back down in its range. MRVL is showing a gravestone doji at the 61% retracement, also the C point in a potential ABCD pattern; that gives a potential play down toward 17 before a flip to play the upside off the D point. The point: chips are lagging and showing indications they can slide back. Not a massive rollover, just continuing existing patterns. Definitely worth watching this coming week.

Financial. Still not getting off the dime to help SP500 as that index tries to take on and take out the November/December consolidation. JPM rallied past its 200 day SMA and into the resistance over 40, but it gave it up on the close, showing a tombstone/gravestone doji. If SP500 is going to break through that consolidation level it will need their help. GS, MS, WFC are showing some kind of life, but they will have to improve if they are going to give SP500 the help it needs.



Volatility is in a nose dive, making a lower low Thursday and again Friday after spiking to a new high since early November. Getting to the level it bounced in past moves but no indication right now it is ready to turn.

VIX: 20.02; -0.61
VXN: 20.81; +0.16
VXO: 19.19; -0.44

Put/Call Ratio (CBOE): 0.84; +0.04

Bulls versus Bears:

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: 35.6%. Moved back over the 35% threshold level below which suggests bullishness. Bulls fell even as the market rallied for two weeks. Bounced up from 34.1% last week. After peaking at 53 on this move the bulls lost some nerve, falling to a new low post- July 2009. Once again bulls peaked out near the 50% level. Bulls have bumped at 50ish since late August 2009, falling to 45ish and then rebounding. Getting close to the 35% level that is the threshold for what is considered a bullish climate. Hit a high of 47.7% mid-June on the run from the March lows. Again, to be seriously bearish it needs to get up to the 60% to 65% level. Dramatic rise from 21.3% in November 2008, the bottom on this leg. This last leg down showed us the largest single week drop we have ever seen, falling from 33.7% to 25.3%. Hit 40.7% on the high during the rally off the July 2008 lows. 30.9% was the March low. In March the indicator did its job with the dive below 35% and the crossover with the bears. A move into the lower 40's is a decline of significance. A move to 35% is a bullish indicator.

Bears: 27.8%. As bulls rose bears did as well, indicating more bearishness in the market still despite a modest tick higher in the bulls. Up from 26.1% the prior week and 22.2% before that. Over 35% is considered bullish for the market, so still a ways off even though bulls are falling to a bullish level. Continuing the rise from 16%ish on the lows this leg where it held for several weeks. Peaked near 28% in November, falling short of the 35.6% hit in July 2009. For reference, cracking above the 35% threshold considered bullish. Hit a high on this run at 47.2%. For reference, bearishness hit a 5 year high at 54.4% the last week of October 2008. The move over 50 took bearish sentiment to its highest level since 1995. Extreme negative sentiment. Prior levels for comparison: 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). That was a huge turn, unlike any seen in recent history.


Stats: +2.16 points (+0.1%) to close at 2243.87
Volume: 2.07B (+3.95%)

Up Volume: 1.058B (-331.444M)
Down Volume: 1.054B (+419.425M)

A/D and Hi/Lo: Advancers led 1.13 to 1
Previous Session: Advancers led 1.45 to 1

New Highs: 147 (+45)
New Lows: 11 (-2)





Stats: +2.42 points (+0.22%) to close at 1109.17
NYSE Volume: 1.121B (+16.67%)

Up Volume: 621.04M (-90.863M)
Down Volume: 438.328M (+200.687M)

A/D and Hi/Lo: Advancers led 1.4 to 1
Previous Session: Advancers led 2.21 to 1

New Highs: 147 (+42)
New Lows: 14 (+2)




Stats: +9.45 points (+0.09%) to close at 10402.35
Volume DJ30: 241M shares Friday versus 185M shares Thursday.



The Fed is likely on the sidelines for awhile and the market can focus on domestic reports (new and existing home sales, GDP second iteration, Chicago PMI) as well as anything that comes out of Europe and its Greece issues. Didn't hear much from the continent to end the week other than the strikes occurring in Greece in protest of austerity requirements given the Greek government lied about its spending. Hmm. Kind of like the US and all its 'off balance sheet' expenditures that don't really count in the budget, right? Greece, US, UK, Ireland, Italy, Portugal, Spain. Who else is out there? Don't you get a d j vu all over again to something called the Latin American debt crisis of the 1980's and early 1990's? Same problems but of course that could never happen in the more stately economies of Europe and the US.

Of course I digress, but that is the backdrop to this entire stock market move. It may end up with some additional calamity to settle the books and obtain balance once more (as many sage economists have said, you don't solve a massive credit problem with more credit, though that is what we are trying to do here and in Europe); that is down the road. As always we simply watch what the market is doing and how we can profit from it. We cannot avoid a calamity, and if it is as bad as it could be it really won't matter other than whether we sock away enough food and such. But again, I digress.

As noted in the Summary, there are many places to watch. SP500 as it takes on the top of the November/December consolidation. SP500 as it tests its January peak and NASDAQ as it rallies to do the same. SOX as it tries to continue after something of a stall as the mid-December lateral move. There is definitely a showdown coming with the January high. For a time it looked as if the indices would not make that move and indeed they may not all manage it. Nonetheless SP600 will do it and NASDAQ likely will as well. That would also mean that SP500 would break through the next to last resistance level to at least wave at that January high. Then the next major inflection point is reached and the market will show its hand.

We will continue to play that move. Even though the market is up for two weeks and many stocks are a bit stretched, the market tends to move in waves and thus there will be stocks to play upside if the move continues. Then we see how the test plays out and if need be take the gain and look to the downside.

It is not cut and dried what the market does if it reaches that prior high. With the correction preceding this bounce history says anticipate a bigger corrective move to the downside. Of course there is still massive liquidity in the system and as noted early last week, that money could mean that the January selling is all the market takes and would be heading toward a new breakout now as in June and July 2009.

So we play the upside as the move continues but we also note that many stocks are stumbling even as the market moves higher, an indication that the market may indeed hit the wall at that prior January high. We can play some of those as well. Indeed, as noted in the Market Summary, some of the chips are in position to head lower near term before they continue overall upside moves. Take what the market gets, right? Just have to be a bit nimble here and look for entry points in patterns, using shorter term timeframes such as the 60 minute chart in conjunction with the daily chart to fine tune entry points. We play the move and then see what happens at the critical inflection point as again, it looks as if at least NASDAQ will join SP600 at that level.

Support and Resistance

NASDAQ: Closed at 2243.87
2245 from July 2008 through 2260 from late 2005.
2275 - 2278 from the February 2008 and April 2008 lows
2292 is a low from January 2008
2319 from the September 2008 peak
2326.28 is the January high
2324-2370 is a range of resistance from early 2008
2382-2395 from 2008
2412-2415 represents a series of peaks and lows in 2007, 2008
2453 is the August 2008 peak

2210 (from September 2008) to 2212 (the July 2009 closing low)
The 50 day EMA at 2207
2205 is the November 2009 peak
2191 is the October 2009 peak
2177 is a low from March 2008
2169 is the March 2008 closing low (double bottom)
2168 is the September 2009, intraday peak
2167 from the July 2008 intraday low
2155 is the March 2008 intraday low
2143 is the October 2009 range low
2099 is the mid-September 2008 closing low
2070 is the September 2008 intraday low
2060 is the August peak
2048 is the early October 2009 closing low
The 200 day SMA at 2042
2015 from an early August 2008 peak

S&P 500: Closed at 1109.17
1114 is the November 2009 peak
1119 is the early December intraday high
1133 from a September 2008 intraday low
1150 is the January 2010 peak
1156 is the Sept 2008 low
1185 from late September 2008
1200 from the July 2008 low

1106 is the September 2008 low
1101 is the October 2009 high
The 50 day EMA at 1098
1084 to 1080 (September 2009 peak)
1078 is the October range low
1070 is the late September 2009 peak
1044 is the October 2008 intraday high
The August peak at 1040
The 200 day SMA at 1028
The early October 2009 closing low at 1025
The early August intraday peak at 1018
The November 2008 peak at 1006 closing 1007.53 intraday
992 is the August 2009 consolidation low

Dow: Closed at 10,402.35
10,496 is the November 2009 high
10,609 from the Mid-September 2008 interim low
10,963 is the July 2008 low

10,365 is the late September 2008 low
10,285 is the late December consolidation peak
The 50 day EMA at 10,279
10,120 is the October 2009 peak
9829 is the September 2008 closing high
9918 is the September 2008 peak
9855 is the early September peak in its lateral range
9835 is the late September 2009 peak
9654 is the November 2008 high
9625 is the October 2008 closing high
9620 is the August 2009 peak
The 200 day SMA at 9572
9430 is the early October low
9387 is the mid-October peak

Economic Calendar

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

February 19 - Friday
CPI, January (08:30): 0.2% actual versus 0.3% expected, 0.2% prior (revised from 0.1%)
Core CPI, January (08:30): -0.1% actual versus 0.1% expected, 0.1% prior (no revisions)

February 23 - Tuesday
Case-Shiller 20-city, December (09:00): -3.1% expected, -5.3% prior
Consumer Confidence, February (10:00): 55.0 expected, 55.9 prior

February 24 - Wednesday
New Home Sales, January (10:00): 355K expected, 342K prior
Crude Inventories, 2/19 (10:30): 3.08M prior

February 25 - Thursday
Initial Jobless Claims, 02/20 (08:30): 460K expected, 473K prior
Continuing Claims, 02/13 (08:30): 4570K expected, 4563K prior
Durable Orders, January (08:30): 1.5% expected, 0.3% prior
FHFA Housing Price I, December (10:00): 0.7& prior

February 26 - Friday
GDP - Second Iteration, Q4 (08:30): 5.7% expected, 5.7% prior
GDP Deflator - 2nd, Q4 (08:30): 0.6% expected, 0.6% prior
Chicago PMI, February (09:45): 59.0 expected, 61.5 prior
Michigan Consumer Sentiment, February (09:55): 74.0 expected, 73.7 prior
Existing Home Sales, January (10:00): 5.50M expected, 5.45M prior

By: Jon Johnson, Editor
Copyright 2010 | All Rights Reserved

Jon Johnson is the Editor of The Daily at

Technorati tags:

No comments: