Sector Investing

[ReturntoSender]

InvestmentHouse Weekend Update:

http://www.investmenthouse.com/1weekendmarketsummary.htm

- Relief bounce takes back some losses ahead of holiday.
- Existing home sales knock the housing market back to reality, but economy continues to improve even without housing.
- Market not likely done with this round of selling, but don’t tell that to some leading stocks.

Downside momentum fades as stocks rebound ahead of holiday.

After the worst NASDAQ downside session since March the downside momentum dissipated as quickly as it appeared Thursday. Futures were up, not sharply, but a solid advance. Again it was more of the usual: M&A (NASDAQ buying the Nordic exchange, KO buying a private water company), earnings (GPS and ARO in retail beat), and economic data (existing home sales fall 2.6% versus the -0.1% expected). The positives outweighed the negatives and the market was set for an advance, right?

Yes, the positives continue to their bullish trend. Economics are better than most given them credit. Earnings slowed during the economic mid-cycle slowdown, but they were also better than expected as the slowdown was not the end of the expansion as the popular media made it out to be. That helps push buyers back into the market after sentiment turned sour. Now sentiment is much better, even too good according to some measures (though others are still bullish such as individual investor pessimism) and the market is recognizing that the economy is not in the dumpster as the reaction to the strong new home sales on Thursday as well as the rising interest rates indicated. The underlying theme, the continued upside pressure, however, is the money. Lots of buybacks, lots of buyouts, and lots of money looking for a home.

After a sharp downside session buyers came right back in, looking for bargains on stocks that were just sold. Another dip, another move by some to pick up shares at a perceived better value. The market recouped some ground, but it was not a renewal of strong buying. Buyers were few as volume was light. Ahead of the long weekend many fund managers were not active. Some picked up some shares on the dip, and there were some good buys out there, but the best label you can hang onto Friday was a relief bounce after a pretty good thumping on Thursday.

The technical indicators bear out the relief bounce classification. The intraday action was low to high, a bullish indication, and breadth was solid at 2.2:1 on NYSE. There were quite a number of good rebounds from the selling. A nice bounce back. Volume, however, was the tell-tale indicator. It was extremely low, too low to suggest any real return to buying, particularly juxtaposed with the Thursday selling volume and the recent action on NASDAQ (distribution, failing once again its effort to take the lead) and SP500 (inability to clear to a new high).

Now the market has come back from each of these downturns during this rally. Get a down session or two and the money clambers back in and pushes it back up. It looked prime for a dive in late April and then the second week of May, but bounced right back and continued the move higher. Friday was right in line with that kind of action, but as noted, the volume was AWOL.

Perhaps the new week back from the holiday will continue the bounce and do so with more force; has happened before. We have to remain somewhat cautious as to that prospect, however, as these episodes are getting more frequent (three over the past four weeks) and severe (stronger volume). That is a sign of growing weakness on the move in addition to the NASDAQ distribution this month. Moreover, the rebound did not bring NASDAQ or SOX back from their breakdowns from the trend (in the case of NASDAQ) or the breakout (in the case of SOX). Of course, SP500 and DJ30 are the leaders and they are still easily above their trendlines. They did not escape the higher volume selling, however. They are not showing the same weakness as NASDAQ but they are not bulletproof either.

In sum this is a somewhat dangerous place given the higher volume selling that returned Thursday on top of the prior NASDAQ distribution, and, of course, the long run to this point. High volume selling after a long run is never what you want to see; big players are taking money off the table. To this point the market has survived these bouts and kept building onto the gains. We have had misgivings before and the market continued on higher, so we are not in any way discounting a continued move higher from here, particularly with the continuing parade of strong stocks that continue to set up for solid moves. Given all of the baggage, it is incumbent upon us to stick with the really strong stocks in good position. To that extent we took some money off the table from some solid upside moves as well as some laggards as we look to take the gains the market is giving as well as raised some cash to focus in on the strongest stocks that are ready to move again.

THE ECONOMY

Existing home sales don’t have that new home look.

After a scorching 16.2% rise in April new home sales, existing homes were in need of sprucing up. They fell and of course were expected to fall 0.1%. Not close. While the 2.6% drop was not of the magnitude of the new home sales gains, it was quite a miss. Moreover when you consider that existing home sales are 80% of the housing market with 5.99M annualized sales for April versus the 981K for new homes, you can see how that kind of decline has more impact. Sure new home sales are reputedly the litmus test for the housing market as furniture, flooring, etc. feed off of those sales, but the sheer number of existing homes shows the willingness and ability of owners to buy. With inventories jumping 10.4% to an 8.4 month supply, the highest since August 1992, the luster of the new home sales data started to splotch as harsh reality for the housing market came back to roost.

The data was a slap in the face of the hopeful after the new home sales. It dredged up worries the economy would head lower again given the continued weak housing market. There is this idea that the economy cannot survive without the housing market we have had the past 7 years. You know, the housing market that survived the recession and was given steroids after 9-11 as no one wanted to go anywhere and Greenspan would not let interest rates rise. All of that artificially prolonged what is always an early cycle market in each recovery. Housing jumps quickly because pent up demand is released, then it fades because you don’t have to repeatedly buy homes. This one also benefited from the second home boom as boomers bought that home away from home.

Thus housing hung on much longer than usual. It definitely helped prop up the economy during the recession and it did not hurt things during the expansion. As in all expansions, however, the housing market declines and typically, the expansion goes on. There was that mid-cycle slowdown it is still recovering from, and one of the effects is the slowing housing market after the crazy nothing down loans at the end of the cycle as well as a simultaneous slowing in business investment. We are already seeing, however, the effects of a return in business investment (2 consecutive months back in the black) as the economic data improves once more and the leading economic indicators really start to take off. That is hardly an indication of a further economic slowdown.

THE MARKET

MARKET SENTIMENT

An interesting mix of sentiment right now. The CBOE put/call ratio has popped off four straight 1.0+ closes, typically an indication the options market is getting too apprehensive about the market’s ability to rise further. There is also some record short interest on the NYSE (7.48%) this past week, another sign of high anxiety. Individual investors are still apprehensive, something that still has not let go since the 2000 meltdown. The discount brokerages confirm that the so-called ‘retail investor’ is hardly in the market.

The contrast to that is the high level of bullish and low numbers of bearish investment advisors. They are gushing but apparently the average individual investor is not paying any attention. Thus this particular measure of high bullishness is not necessarily representative of the entire spectrum of investors.

VIX: 13.34; -0.74
VXN: 17.07; -0.95
VXO: 12.86; -0.95

Put/Call Ratio (CBOE): 1.05; -0.1. Fourth straight close above the 1.0 threshold that indicates an extreme in the options market.

Bulls versus Bears:

Bulls: 54.3% for the second straight week. Still bumping up against the 55% level considered bearish. It remains too high, but as noted above, there are other indications that say that there are potential investors out there that are still apprehensive. Nonetheless, it is where you would expect when the indices are hitting new all-time or multiyear highs. It was 45.5% eight weeks back, making a steady climb higher. It has not topped its recent high at 53.3% but is well off the 60% hit in December 2006. For reference it bottomed in the summer 2006 near 36%.

Bears: 20.7%. After a month below the 20% level considered bearish (19.6% last week), bears are on the rise. Well, they are stirring; the level hardly indicates they are ready to charge. A big plunge the past three weeks from 24.7%. Quite a drop from the 27.5% hit 6 weeks back. The rally has taken the bears down from the recent highs near 29 (28.4% and 28.9%). It is now matching its January and February lows. For reference, it hit a post-2002 high in that late June 2006 move (hit near 36%), 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).

NASDAQ

Stats: +19.27 points (+0.76%) to close at 2557.19
Volume: 1.569B (-35.45%). Talk about extremes. Volume surged Thursday on the sharp sell off and then dried up on the rebound attempt. More sellers than buyers in the market right now, particularly on NASDAQ where price/volume action has shown more distribution than accumulation this week. After trying to show some leadership this month, techs are showing struggling price/volume action.

Up Volume: 1.149B (+842M)
Down Volume: 363M (-1.63B)

A/D and Hi/Lo: Advancers led 1.87 to 1. Not bad at all but pale in comparison to the Thursday thrashing.
Previous Session: Decliners led 3.15 to 1

New Highs: 89 (-15)
New Lows: 64 (+4)

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

Gapped higher and managed to hold the move to the close. Hurrah. NASDAQ managed to hold above the February peak at 2531 (2525 closing) on the Thursday selling, and it did hold above the lows mid-month. That means it could possibly make a higher low here and resume the upside, but it has dug a hole for itself. It broke the trendline, it closed below the 10 day EMA Friday, distribution surged back onto the picture (on top of the three sessions in the prior two weeks). It has overcome this scenario before on this run, but it is again leaving it up to DJ30 and SP500 to do the heavy lifting.

A rather diminutive bounce by SOX (+0.55%) after the thumping Wednesday and Thursday. At least it held the 90 day MA after diving to that level. Of course it splashed the April breakout from its 6 month base, posting an impressive reversal. Chips are once again in the familiar position of having to recover.

SP500/NYSE

Stats: +8.22 points (+0.55%) to close at 1515.73
NYSE Volume: 1.226B (-30.76%). Lowest volume of the month and indeed since early April, not surprising for the Friday before Memorial Day. Some distribution Thursday as with all indices, but NYSE has not experienced the NASDAQ affliction in that regard.

Up Volume: 899.122M (+576.541M)
Down Volume: 313.244M (-1.124B)

A/D and Hi/Lo: Advancers led 2.27 to 1. Solid breadth even though just half of the downside shown Thursday. That was extreme. The upside breadth Friday was rational.
Previous Session: Decliners led 4.32 to 1

New Highs: 79 (-48)
New Lows: 32 (-12)

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

SP500 spent the week flirting with a new all-time closing high, breaking the old closing high (but not the intraday) on four sessions but could not hold the move despite assurances from the financial station jocks that it would happen. The watched pot had a leak in it. In any event the large caps bumped the upper channel along with that old high and fell back to near support at the 18 day EMA to regroup. Thursday was an all-out retreat, but it did hold near support and bounced Friday. Still comfortably above the up trendline and other than that repeated failure to take out the old high and the sell off Thursday it is pretty much business as usual in this uptrend. We will have to see what the new week brings and if it will recover yet again.

SP600 (+0.75%) was again a market leader Friday, bouncing off its up trendline. Just Wednesday it hit the upper channel line on the intraday high. Then the Thursday selling roughed it up as the energy sector had to take some lumps. Now it is testing the October/January up trendline. Thus far it has this trendline since coming out of the March correction, and if it can hold this week along with SP500 that bodes well for the market.

DJ30

DJ30 had its own case of the dips last week, but they were mild compared to the technology issues and even the small caps. It tested the 10 day EMA Thursday then bounced off that level Friday. Some distribution on the blue chips as well, but hardly any major volume. The Dow has enjoyed better upside volume than downside this month. In short, DJ30 is extended, but it is not showing signs of being extended. Hard to argue with that.

Stats: +66.15 points (+0.49%) to close at 13507.28
Volume: 183M shares Friday, a wisp of the 240M shares Thursday that was a notch above average. Some distribution but not a wanton sell off.

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

TUESDAY

A short week but a lot happening. A mountain of economic data starting with consumer confidence, FOMC minutes, Chicago PMI, the jobs report, personal income and spending, the ISM index. You name it, it is next week.

That is just an overlay to the market action that stumbled some last week. NASDAQ is facing a gut check after tumbling from its upper channel line it hit mid-week. A good run to that point and then it was sold hard Thursday, holding the February top that marks the breakout to a new post-2002 high on this move. Key point of NASDAQ. The other indices are in better shape, but if NASDAQ struggles that makes it harder on all of the indices.

It was likely not a one-day event, particularly with the build up over the past few weeks on NASDAQ. Of course, that has yet to slow the move thus far even with NASDAQ showing that distribution and giving up another attempt at leadership. It gets harder and harder to sustain gains the farther a market or stock runs. Recall how a stock runs after a breakout. It surges higher and then makes steady, regular bounces up the short term support. As it gets to the fourth iteration, however, the moves start to get a bit wilder in the moves, surging more but giving back more as the sellers start appearing more. Finally the buyers are not numerous enough to fight off the attacks and the stock then succumbs and has to correct more than the short term support. Kind of like a major mountain climb on the Tour de France where a contender loses his team and the other teams attack and attack.

As noted, thus far the market, and even NASDAQ, has warded off those attacks. There are still many solid stocks in position or just about in position to move higher, and as the market is made up of stocks and moves in accordance with the leaders, the fact that many quality stocks are hanging in and still setting up for upside moves is at least an indication the rally is not ready to go quiet into the night.

Remember our discussions the past month about the ‘new old economy’ stocks whose products are in demand by a robustly expanding global economy. The products are in demand because of growing global economies, and there is a lot of money to buy their stocks because of the growing global economies. For now it is a self-perpetuating cycle that has continued to push the indices, particularly SP500 and DJ30, higher and higher. DJ30 and SP500 did start to struggle as DJ30 moved to 10.7% above its 200 day SMA, something it has historically done. But it is really not laboring at all, at least from its reaction last week when NASDAQ cracked. If there is a paradigm shift taking place where the ‘old economy’ stocks on the SP500 and DJ30 form the 1990’s are now the ‘new economy’ stocks of the 2000’s (and tech stocks, at least the big names from the 1990’s, are ‘old economy’), then there is plenty more upside on this run. With DJ30 and SP500 still solidly in their uptrends, that is still on the table. Pretty cool.

Thus we are still looking at those stocks that are in the leading sectors (metals, energy, industrials, chemicals, etc.) that are in position or are getting close to a point where they will resume their moves. There are many out there, and we are looking at some more positions on current holdings on the report. We love averaging up into winners that have already made us money. We always have to take our cues from the market overall and the leaders, and there are signs to be wary, but if the market speaks through its strong leaders, you have to listen. Otherwise you can rationally talk yourself out of participating in great runs simply because you believe the market is extended. It may be, and it may be showing signs that is the case. If the leaders are moving and moving on volume, however, you have to move with them.

Support and Resistance

NASDAQ: Closed at 2557.19
Resistance:
The July/August trendline at 2568
2580 is the November/February up trendline
2580 is the May high
2590-95 from an April 1999 interim peaks
2607 is the top of the November/February channel
2778 from a July 1999 peak
2887 from a September 1999 peak
2920 from an October 1999 peak

Support:
2540 is a newer trendline from December/January that has propped up NASDAQ in April and twice in May. Interesting.
2531.42 is the February high (post-2002 high); 2525 intraday
2523 is price resistance November 2000
The 50 day EMA at 2517
2509 is the January 2007 high
2471 is the December 2006 high
2468.42 is the November 2006 high
2460 is the March high
2405 is the ‘hump’ high
2400ish from the late November and late December 2006 lows.

S&P 500: Closed at 1515.73
Resistance:
1520 from the September 2000 peak
The upper trendline of the channel at 1531
1528 close, 1553 intraday from March 2000 all-time index peak

Support:
1500 from April 2000 peak
The 18 day EMA at 1507
1501 is the late November to February up trendline
1496 is a peak from July 2000
The 50 day EMA at 1480
1475 from peaks in December 1999 and January 2000
1461.57 is the February 2007 high.
1440 is the mid-January high
1439 is the March high
1432 is the December 2006 high
1425 is an interim high from November 1999
1410 is the ‘hump’ high
1408 is the November high

Dow: Closed at 13,507.28
Resistance:
Now just 9.5% after the selling (hit 10.7% on the prior sessions) above its 200 day SMA

Support:
The 10 day EMA at 13,460
The 18 day EMA at 13,336
13,322 is the upper channel line in the November/February channel
13,245 is the November/February up trendline that marks the lower channel.
The 50 day EMA at 13,034
12,796 at the February 2007 high
12,700 is the early February peak intraday high
12,623 is the mid-January high
12,511 is the March intraday high.
12,499 is the December intraday high.

Economic Calendar

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

May 29
- Consumer confidence, May (10:00): 104.5 expected, 104.0 prior

May 30
- Crude oil inventories (10:30): 1.9M prior
- FOMC minutes (2:00)

May 31
- Q1 GDP preliminary (8:30): 4.0% expected, 4.0% prior
- Initial jobless claims (8:30): 311K prior
- Chicago PMI, May (9:45): 54.3 expected, 52.9 prior
- Construction spending, April (10:00): 0.0% expected, 0.2% prior

June 1
- Non-farm payrolls, May (8:30): 140K expected, 88K prior
- Unemployment rate, May (8:30): 4.5% expected, 4.5% prior
- Hourly earnings (8:30): 0.3% expected, 0.2% prior
- Average workweek, May (8:30): 33.8 expected, 33.8 prior
- Personal income, April (8:30): 0.4% expected, 0.7% prior
- Personal spending, April (8:30): 0.4% expected, 0.3% prior
- Core PCE inflation, April (8:30): 0.2% expected, 0.0% prior
- ISM index, May (10:00): 54.0 expected, 54.7 prior
- Michigan sentiment, May final (10:00): 88.5 expected, 88.7 prior