Tuesday, March 23, 2010

Rumors of Fed Discount Rate Hike

- Mostly profit taking to end the week but 'over there' sectors feel selling pressure heat.
- India raises investor concerns with a surprise rate hike, fueling rumors of a Fed discount rate hike.
- Dollar surges out of its consolidation, helping push oil back from its peaks
- Watching for the breakout test and how strong stocks remain.

After a long advance stocks take a breather on expiration.

Some sellers hit the market on Thursday, but it was limited to energy and commodities. There was a stronger dollar, and it pressured those areas. Selling was more widespread on Friday, but the brunt of it was again borne by the energy sector and commodities. The OIH chart shows two sharp downside sessions on Thursday and Friday, and the rest of the market showed minor profit taking. The SP500 was down 0.5% and managed to bounce off its lows on the session. The strong rise in the DXY0 triggered this. There was a strong bounce Thursday, a strong bounce Friday, and it broke out of the consolidation just as it did in mid-January after the month-long consolidation.

The dollar was turning higher due to industrial worries in Europe about Greece. The bailout that seemed so sure just a few weeks back was rattled this week when Germany preferred the IMF option. Greece gave the rest of the EU a timetable as to when it needed to get something done, or else it would turn to the IMF. With that uncertainty, the dollar rallied and oil was pushed lower. It did not help that India gave a surprise hike in its interest rates during the session. That started a rumor that the Fed would raise the discount rate once again between the last meeting on Tuesday and the next meeting the coming month. If you combine those catalysts with the fact that the market is sitting on top of a three-week run, then you have some selling coming. Most of it was profit taking, but there was high-volume selling in those sectors tied to the dollar and overseas trade. It was not just energy and commodities that were hit; those indices that had rallied the most recently were the target of the most selling. NASDAQ dropped 0.7%, and the SP600 dropped almost an entire percentage point, but neither was in trouble at all. They are still holding their uptrends and were due for a test. This was just a one-day pullback, and they still have room to test quite a bit more before consolidating this last run of three weeks this month. When you combine February on top of it, you are looking at a very solid six-week move to the upside.

Stocks started down and tried to bounce early, but they never came close to the flat line, and then tumbled through mid morning. It was flat line the rest of the session, and then about 15 minutes into the last hour, the bottom fell out and they hit new session lows. That triggered a round of late buying that pushed stocks back up. They recovered all of the last hour loss, but that still kept the indices well below the flat line and sporting losses they had not felt all week long. It seems like the market makers and the NYSE specialists that were bemoaning the lack of volatility finally got a bit of it. it did occur in the last hour of trade and did not do much to help create more money through their volume of trades, however. The real action was the other markets. They drove a lot of what happening the stock market during the week and the selling that occurred before the weekend.


Dollar. The dollar started the breakout of its four-week consolidation. It looked dicey during the week, moved up, held its support at the 50 day EMA and another price support, and then it bounced on Thursday and Friday. There was good, strong volume, and it pushed it back below 1.36 Euros (1.3537 Euros versus 1.3609 Thursday). The dollar flirted with the 1.38 level earlier in the week as it sold off sharply, but it held the range and has now moved below that 1.36-1.38 range that has held it in check. With this break higher, it looks as if it is ready to move more to the upside and will continue to drive below 1.36 Euros and higher against the basket of currencies.


Oil. Oil had a second day of falling back. It came up and tapped the top of its range the past two weeks, fell back, and rallied back this week. It hit it again and looked very strong only to peel back as the dollar broke out of the upside. This puts oil in jeopardy of being able to make the break. There is a short double top in conjunction with the prior twin peaks. It will be difficult for oil to turn and make the break higher because the dollar is rallying and there is concern over what is happening in Europe. There is also worry that, since India raised rates, what happens if China raises rates? What kind of oil demand will we have moving through into the summer? It looked like things were shaping up quite well, but if the central banks of the world start to raise rates, the worry is that they be overdue their task (as is always the case they either ease too much or tighten too much) and that will have a negative impact on everything related to growth. That would be energy and commodities, so we watched oil, metal, and other commodities going down. Industrials have been struggling as well, unable to make new highs on this rally. They are still below their January highs. None of this news does well for any of those stocks tied to the "over there" trade associated with the emerging industrial nations.


Gold. Gold had the hammer taken to it as well. It is still in its base and setting up. There is the inverse head and shoulders pattern, but when it looked to be approaching the breakout point, it was knocked back down on Friday. It is trading back ward the support at 1100 ($1,107.60, -19.90). It was kicked hard, but it is still in the pattern. If there will be inflation, you would expect gold to rise, and it is setting up to do just that. The news on Friday kicked it in the teeth because India raised rates to squelch its potential inflation, and China may do the same. Gold suffered a setback in that respect.


Bonds. Bonds sold off after rallying earlier in the week after the FOMC meeting. That caused the 10 year to rally, and it reached down to 3.64% in the week, but the yield has rebounded as bonds sold back. Indeed, the 10 year closed at 3.7% on Friday, back where it started from earlier in the week. That keeps bonds in their range. The Fed said it will keep rates down forever, but then India raised rates. That created the rumor on Friday that the Fed would raise the discount rate again, as it did between the last two meetings. With that in mind, bonds sold back. Investors were just playing a guessing game with what the Fed will do. Bonds are definitely stuck in a range right now.




Breadth. Breadth was flat on NASDAQ with decliners ahead -1.6:1, and decliners stepped out a bit on the NYSE to lead -2.5:1. This is because the small caps and mid-caps were taking most of the beating on the session; whenever they do, there are more of them around, and that means the breadth will expand.

Volume. Volume shot higher to 2.8B on NASDAQ, up 40%. It was up 1.9B shares on the NYSE, up 113%. There were two factors working today, with the first being expiration. It had been quiet all week with respect to expiration and, when that happens, it generally saves up the ammunition for a Friday fireworks display. In addition, there was some SP balancing going on at the end of the day, and that pumped the volume up even further. There was tremendous volume on the session, but you cannot take a lot from it. It obscures what was actually going on. You can look at some of the individual areas that were under pressure, such as the energy sectors. It was under pressure Thursday as well, but even some of that was tied to expiration since oil was starting to fall back from its rally. Those stocks became less favored and were rolled over into the next expiration period.


SP500. The SP500 matched the prior high on its break over the January peak and then tested back on the session. It did bounce off the intraday low and recovered, but still closed down 0.5. The big move during the week was the break over the January peak and the close that held that, and it even extended that on Wednesday. The rest of the market was extended even before SP500 made this break, so it could easily come back to test 1151. Indeed, it went all the way down to 1155 on the low Friday, and that is going to be the key test for SP500. There are some bears calling this a double top, and perhaps they are right. The answer comes with this test of this break. Will it become support after it acted as resistance, or will it just give way and sell off into a deeper correction? Right now, everything indicates it can go higher. There is no heavy selling in the market only a few sectors are suffering selling. The indication is that it could continue to move higher after that test.

NASDAQ. The NASDAQ showed the same action. It had broken out above the January peak before this week. It even came back and tested a bit to start things out and then rallied. It tapped at the 10 day EMA on Friday and recovered some off the low. There was big volume, but it is attributable to expiration. It is still well above the prior peaks from January and the closing high for January at 2320. NASDAQ closed at 2374, so there are roughly 50 points before NASDAQ makes the test of that level. It does not have to test all the way back. SP500 can make the test all the way back, and NASDAQ and the SP600 can fill part of that rally and then be ready to make the move higher. They can use SP500, since it is the laggard, and make it test all the way back. It does not have that far to go anyway, so let it do it and then move higher. There is still plenty of strength; obviously the trend is in great shape. The test is the key, same with SP500. How it holds that test and what the leading stocks do as it tests will tell you the quality of the move and what to expect as it starts back up.

SP600. SP600 suffered almost a 1% loss on the day, but even so, its pattern looks very similar to NASDAQ. It sold off, but it tapped the 10 day EMA on the low and recovered. It is still in a great uptrend, and it is still well above its January peak at 344. It closed at 349 on the session, so it has plenty of room to test. One would think 350ish in the 18 day EMA range would be where it would come back to test. There are other old resistance areas that it could come back and hold without having to collapse all the way down to the January peak. It was a stellar run by the small caps.

SOX. Semiconductors, once again tried to come back and make it to their January peak, but they have not made it yet. They are trending higher. They are in the process of selling back again, but are still holding the trendline. That looks solid, but they have lagged this entire time and are not a leadership group. I cannot extrapolate and say they look solid for a breakout over this area; indeed, they got close to it and have turned tail.

In sum, all of the major indices are above their January peak, and now they are suffering a bit of profit taking. Some are hit harder than others as seen with SP600 because some of their sectors are tied to the oil trade. Nonetheless, these are strong trends that are in shape for now. I am looking for an SP500 test of its January peak at 1151 that it broke above last week. That will be the key test as to whether it holds. SP500 could break back down into the range of the January peaks. Remember, support sometimes acts as a point that bounces things, and other times it acts as a range. This is where the buyers and sellers fought things out. It could come back into this range even to the bottom of the range and still break back to the upside. In conjunction with SP500, watch how NASDAQ comes back and tests. If SP500 falls back into the lower half of this range, does NASDAQ come back and hold its top of its range? If it does, it can bounce and continue to lead higher. If not, then we have to reevaluate at that point. For now, the trends are strong, the buying has been strong, and there is plenty of liquidity in the market. That has been enough to push stocks to the upside.


Healthcare. Given the vote this weekend, healthcare is on everyone's lips no matter where you turn. The healthcare plans may have their last hoorah. AET gapped higher and was surging, and we were able to take some gain on that. HUM has something to do with Medicaid Part A, and it is not doing as well because that is something that is impacted more by the healthcare bill. Nonetheless, it is performing rather well. RMD is taking off to the upside with a nice 45-degree run. Healthcare is doing fine, and we will see what happens next week.

Retail. Retail had another decent session. PNRA continued to move higher, and we were able to take gain there. BBBY had a good week, but has pulled back a little after gapping higher. BBY announced good earnings and gapped to the upside. It has already been trending higher into those numbers. ANN had a nice run and is coming back a little. These are a bit tired, and they have had a great run. They need to pull back, and that is what they were doing on Friday as part of that overall profit taking.

Energy. Energy was one of the areas that have been kicked in the teeth. HAL is back for a second day on rising volume. It has not broken down its pattern, but it was in trouble. SLB was the same story; it was selling on higher volume, but it did manage to hold up and bounce back on the 50 day EMA. Not all stocks were able to do that. APA broke out below its 50 day EMA after making a lower high. It is a dangerous-looking pattern. SUN is doing okay. It has something of a double bottom with handle pattern, so it is in decent shape and still setting up for a new move higher. A lot of the smaller stocks were really hammered this week.

Financial. Financials had a good week and helped the SP500 make it up through the January peak. GS was up modestly on Friday, but it still trending higher in a nice run. WFC is stalling out a bit at the end of the week, but again, there was a nice break higher that helped push SP500 through the January peak. FITB had a nice rally, and there was a small pullback to test the ruin higher. Financials are holding up. They are not in great buy shape because they have rallied off no patterns and rallied straight up. We will see whether they present a decent buy next week after a bit more of a pullback.

Industrial. Industrials did not make new highs. DE had a double top at the prior peak, and it has been unable to punch through. That does not mean it will not, but it is a difficult pattern. A lot of these stocks have been lagging, unable to make the break through the prior highs. CAT is in the same type of situation. It is trying to move higher, but it is running into serious resistance from October, November, and early December. CAT noted on Friday that it sent a letter to Nancy Pelosi saying that the bill would cost them 100M to implement based on what the bill requires for it employees. That will fall on deaf ears because we are not talking about impact we are taking about agenda at this point. This thing will get passed, and we will have to deal with it. It is likely one of those things we will deal with down the road. It will be a 1970's-like malaise situation versus an immediate impact. But I digress.

The industrial patterns are unable to break the January peak. CMI did break, but it has double topped and is struggling. It looks like it wants to turn over and give back some gains. It may come back and test down to 56 and the 50 day EMA, and we will see what happens after that. That is an example of those stocks that have not been able to break through their prior peaks; something is holding them back. A lot of that is tied to the "over there" trade and worries with Europe, and now new issues with foreign central banks raising their interest rates.

Metals. Metals have not been able to make new highs. They are turning back well below the prior highs. FCX turned back on higher volume. BHP has been unable to break through its peaks and is forming something of a double top below that prior peak. We entered X on Friday, and it sold off nicely for us after we entered but then bounced back off the lows. It still has a very bearish pattern and plenty of room to fall before it gets to the next support. It is another of the stocks that was unable to break through the prior peak. There is a cadre of these in the industrial areas that are related to the "over there" trades that are lagging the rest of the market. Maybe they have had their growth spurt. Maybe they were the leaders earlier and are now taking a back seat to the rotation of the next group of growth leaders. We will see. These are very important stocks as we saw in the run up through 2007 to 2008. They have not yet recovered from that sell off. They are up off their lows, but have not broken out and moved to leadership positions.



The VIX remains low. It gapped lower on Wednesday and is now below the January low. Looking back, it is still hitting ranges it hit in 2008 before the meltdown. If you really look back, you can see its above levels hit in 2004, 2005, 2006 and early 2007. The market was rallying the entire time, so low volatility does not necessarily mean low stock prices or that a selloff is imminent. In the long term, when volatility starts to rise as the market rises, there is trouble. The economy topped in 2007, and the market started to struggle after that. Stocks continued to rise, however, and volatility rose as well. In the present, shorter term this low volatility combined with the market run has you looking for a short term pullback. Right now there is no issue with respect to volatility other than near-term complacency that can lead to a pullback (but not a major correction).

VIX: 16.97; +0.35
VXN: 17.87; +0.63
VXO: 16.51; +0.33

Put/Call Ratio (CBOE): 0.97; +0.2

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: 46.1%. Still on the rise, climbing form 44.9% last week. On the rise since hitting 35.6% on the low in February, the lowest it has been since July 2009. Over the 35% threshold level below which suggests bullishness. 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. 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.

Bears: 21.3%. Bears are indecisive, trading in a range in the low 20's. Down from 23.6% last week, and that was up from 22.7%. Again, bears have been more skeptical on this move though they are down sharply falling from 27.8%. 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: -16.87 points (-0.71%) to close at 2374.41
Volume: 2.828B (+39.18%)

Up Volume: 550.333M (-425.039M)
Down Volume: 2.331B (+1.253B)

A/D and Hi/Lo: Decliners led 1.59 to 1
Previous Session: Decliners led 1.3 to 1

New Highs: 172 (0)
New Lows: 19 (+3)

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


Stats: -5.92 points (-0.51%) to close at 1159.9
NYSE Volume: 1.975B (+113.64%)

Up Volume: 480.674M (+159.72M)
Down Volume: 1.474B (+887.652M)

A/D and Hi/Lo: Decliners led 2.47 to 1
Previous Session: Decliners led 1.47 to 1

New Highs: 327 (-105)
New Lows: 22 (-1)

SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg

SP600 CHART: http://investmenthouse.com/ihmedia/SP600.jpeg


Stats: -37.19 points (-0.35%) to close at 10741.98
Volume DJ30: 434M shares Friday versus 153M shares Thursday.

DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg


The economic calendar is once again filled with various details about the health of the US economy. None of these are particularly huge or noteworthy with respect to the market, although durable orders are significant and the weekly rendition of jobless claims will be closely watched. On Friday, there will be the third look at the Q4 GDP. There are no changes expected and nothing to indicate there has been a significant change. Inventory jockeying and some import and exports may make it blip one way or the other, but there is nothing significant to change what was previously recorded. That mainly dealt with huge inventory moves that inflated the GDP. The next reads will be interesting after the initial moves in inventory have been made.

The key for the market is how the indices test. I am confident there will be a test and, after the Friday selling, one would anticipate further downside. SP500 started to move toward its January peak, and we will see how far it makes it to that level. Maybe this was just an expiration blip and the market will take off to the upside once more. It has the horsepower to do that, and there are stocks in position that could run higher. Not all stocks have rallied straight for six weeks and are sitting at the apex of long moves. Nonetheless, the path would seem to be more downside first. That will take off some of the fluff from six weeks of upside moves and thus set the move better to the upside. I am not sure how many buyers want to come in at this particular level. The one thing we do know is that in every pullback thus far whether two, three, or four days has been met with buyers. Until something changes that, whether it be from market behavior or something exterior to the market, we will continue to look for opportunity to the upside. This weekend I will be looking for opportunity for stocks that are presently in position to move higher. Then, if there is a pullback, we will be watching the leaders come back and test support levels and look for opportunities to move into them.

There are still downside plays available. As we went through the leadership areas, I pointed out stocks that could be in a position to sell back further whether or not the market tests. Indeed, if the market tests more, they will drop harder because they are simply in position. They have not put together big runs to the upside, and they will fade back to support. They have developed somewhat bearish patterns, and there is money being taken out of them. Stocks such as APA, or BHP are possible downside plays that we can look to make and profit from as well. We are not going to turn our back on those, particularly since the market has been up substantially over the past six weeks and has started to suffer profit on Thursday and Friday.

This is not a great secret of a game plan, but given the strength of the market and that there is still good leadership and money rotating through it, we can use that to our advantage to continue to play the upside. We cannot ignore that there is more selling appearing, however. It is not just profit taking; there is serious selling going on in some of the energy areas. It may bleed over into some of the weaker areas such as industrials and metals (and perhaps other commodities that were unable to take out their January highs.) They are laggards, and that marks them as being weaker. If the oil prices continue downward, that would likely mean that the dollar continues its breakout and resumes its uptrend, and those will come under pressure. That has been the initial move whenever the dollar recovers from selling. Those eventually came back around and rose even as the dollar rose during this last rally, but the initial response is negative for those stocks. That makes them targets on this rally. Although they recovered from the lag, they are not dealing from a position of strength. They have broken above and are now coming back to test it. We will watch them for potential downside plays at the same time we look for new upside plays to develop during a pullback.

Have an excellent weekend. Support whatever side of the healthcare bill you believe in, and get out there to let them know what you think. We have to take the process back from the people in Washington who do not seem to understand that we have a constitution to follow. Whichever way we vote, we have to follow the constitution; without it, we do not have anything. It is the law of the land, and following it is what has made us great. As long as we are true to that document, it will show us the right path and we will remain great regardless of what side is in power and what we are doing. Support your side and urge our congressmen to abide by the constitution. That way, we cannot go wrong.

Support and Resistance

NASDAQ: Closed at 2374.41
2382-2395 from 2008
2412-2415 represents a series of peaks and lows in 2007, 2008
2453 is the August 2008 peak

2324-2370 is a range of resistance from early 2008
The 10 day EMA at 2360
2320 to 2326.28 is the January high
2319 from the September 2008 peak
2292 is a low from January 2008
2273 to 2282 marks bottom of January 2010 lateral peak
2275 - 2278 from the February 2008 and April 2008 lows
The 50 day EMA at 2273
2245 from July 2008 through 2260 from late 2005.
2210 (from September 2008) to 2212 (the July 2009 closing low)
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
The 200 day SMA at 2099

S&P 500: Closed at 1159.90
1185 from late September 2008
1200 from the July 2008 low

1156 is the Sept 2008 low
1151 is the January 2010 peak
The 10 day EMA at 1151
1133 from a September 2008 intraday low
Bottom of the January 2010 consolidation 1131 to 1136
1119 is the early December intraday high
The 50 day EMA at 1120
1114 is the November 2009 peak is breaking
1106 is the September 2008 low
1101 is the October 2009 high
1084 to 1080 (September 2009 peak)
1078 is the October range low
1070 is the late September 2009 peak
The 200 day SMA at 1051
1044 is the October 2008 intraday high
The August peak at 1040
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 10,741.89
10,963 is the July 2008 low

10,730 is the January 2010 peak
10,609 from the Mid-September 2008 interim low
10,496 is the November 2009 high
The 50 day EMA at 10,430
10,365 is the late September 2008 low
10,285 is the late December consolidation peak
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
The 200 day SMA at 9779
9654 is the November 2008 high
9625 is the October 2008 closing high
9620 is the August 2009 peak
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.

March 23 - Tuesday
Existing Home Sales, February (10:00): 5.00M expected, 5.05M prior
FHFA Home Price Index, January (10:00): -0.9% expected, -1.6% prior

March 24 - Wednesday
Durable Orders, February (08:30): 0.5% expected, 2.6% prior
Durable Orders ex Au, February (08:30): 0.5% expected, -1.0% prior
New Home Sales, February (10:00): 315K expected, 309K prior
Crude Inventories, 03/20 (10:30): 1.01M prior

March 25 - Thursday
Continuing Claims, 03/13 (08:30): 4560K expected, 4579K prior
Initial Claims, 03/20 (08:30): 450K expected, 457K prior

March 26 - Friday
GDP - Third Estimate, Q4 (08:30): 5.9% expected, 5.9 prior
GDP Deflator - Third, Q4 (08:30): 0.4% expected, 0.4% prior
Michigan Sentiment -, March (09:55): 73.0 expected, 72.5 prior

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

Jon Johnson is the Editor of The Daily at InvestmentHouse.com

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