Sector Investing

[ReturntoSender]

InvestmentHouse Weekend Update:

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

- Modest gains cap an important breakout week.
- Consumers get weary as June retail sales turn sluggish on steadily higher gasoline prices and housing weakness.
- Business sales are not slowing but are increasing.
- Thursday breakout trying to spread out the gains and improve a flattening A/D line.

Stocks add to Thursday gains in a quiet session.

After the Thursday fireworks you expected a quieter session, and that was Friday. Quiet but up. Retail sales were mushy after better than expected (but still so-so) same store sales. The sales report and a slight hangover from the Thursday blowout started the session indecisive, and an oil price topping $74/bbl intraday (closed at 73.93, +1.43) did not help. Nonetheless, after some morning chop the indices started a slow steady climb to positive territory. Nothing spectacular, but again, the fireworks were Thursday and the Friday session was more of a cleanup day.

The big news was Thursday with the strong breakout from the 7 week choppy, lateral move that threatened to break SP500. That move showed a bit of everything with its low volume ascents, its distribution, breaks of trendlines, faltering large cap and small cap leadership. It was also just two months out from the February and March 3% correction, and its proximity raised questions as to the market’s ability to continue the rally.

As in March, however, with that month’s low volume climbs punctuated by distribution sessions, the market weathered June’s short comings and broke to new highs. With the US economy on the rebound from its mid-cycle slowdown and continued world liquidity in the form of new wealth in India, China, Brazil, and of course petro-dollars requiring a home, the market found its bid once more, and found it in a big way.

Technically the Friday action was a non-event with lower volume, flat breadth and modest gains. Leadership was moving again, however, as GRMN, CMI and friends were on the move yet again. More than that, the moved broadened out as techs cemented their new leadership role and were even joined by SP500 as it found its legs, recovered, and then joined NASDAQ and DJ30 with its own new highs on Thursday and Friday. Even SP600 moved to a new all-time high. The move into tech while keeping, for the most part, with the existing leadership in energy, metals, materials and basically anything to do with the world infrastructure build out, was key. The ‘new’ growth stocks that have led this rally, i.e. the ‘old economy’ stocks of the 1990’s that are the ‘new economy’ stocks as the world builds out, are now joined by tech. That movement or rotation into other areas is crucial for the continuing success of the rally. The Friday numbers didn’t show it, but the pattern for the past three weeks does as NASDAQ held its trend and then rose to the first new high following the June malaise.

THE ECONOMY

Retail sales growth trend flattens.

Same store sales were better than pretty lukewarm expectations, but June retail sales overall were worse than thought. With expectations of flat sales, the -0.9% showing was quite disappointing. Take out autos and the damage moderated, but it was still -0.4% versus an expected 0.2% gain. That was the largest drop in 2 years, but then again, May was the biggest gain in over a year. March and May were much stronger than expected while April and June were much weaker.

The upshot is that the trend is still up but flattening as the mid-cycle slowdown came to an end. That is not as unusual as it sounds. The consumer moves in cycles just as other segments of the economy, and with oil prices moving into the seventies and gasoline prices holding just below the $3/gallon level, the consumer, just as women sometimes do, is getting weary.

Weary for now. The backdrop still shows a strong jobs front as many companies are finding it hard to attract the kind of talent they need. With a strong jobs market the consume rarely ceases spending. More than any other factor, the fear of the pink slip is what drives consumption. Gasoline and housing prices may have their impact, but if a consumer is confident about his or her job, lay your bets on continued consumption. It does not hurt that consumer sentiment remains strong. While sentiment and actual consumption are not directly correlated, it is good to see the consumer still confident, and indeed growing in confidence, as the Michigan sentiment final report for July indicated on Friday (92.4 versus the 85.3 prior).

Business sales continue to grow.

While the headlines Friday focused on the retail sales aspect, the market appeared to pick up on the other story that was the backbone of the Friday economic data: strong business sales. The consumer is important, but as we saw in the last recession, if you don’t have business spending you don’t have a good economy. In 2000 and 2001 the consumer was not running wild, but he was not slowing much either. With the post-September 11 home remodeling and cocooning effect, sales of homes and home-related merchandise prospered even as economic activity turned negative. The complete lack of business investment in the aftermath of the Fed-induced investment collapse left the economy gasping. There was no capital investment for three years, not until the second Bush tax cuts were passed that provided the incentive to buy equipment even though the real need was not there. That jumpstarted a new wave of investment and brought the economy back.

While retail sales were lower, business sales surged, up 1.3% in May or 16.5% annualized. Unlike retail sales, business sales are growing and growing and growing in strength. From December 2006, retail sales have posted annualized gains of 6.5%, 3.9%, 3.6%, 4.5% 11,7% and 16.5% in May. For the past three months that is 16.3% growth. Sure the economy needs both the consumer and retail to prosper, but with continuing strength in the business sector that means continued job creation. As discussed above, jobs equal consumer strength. Thus with businesses buying and investing, that is only good for the jobs picture. Thus we anticipate continued economic expansion. Indeed, looking at the ECRI indicator, it continues to post gains and predicts in the words of its compiler, ‘fairly healthy’ economic growth.

THE MARKET

MARKET SENTIMENT

VIX: 15.15; -0.39. Tuesday volatility spiked over the early June highs and Wednesday it gapped and touched near 18, the rough average high in the spike from early March. That combined with the late June spike to 19 did not match the March high just over 20, but it was enough to bottom out the June consolidation.
VXN: 16.44; -0.81
VXO: 15.05; +0.18

Put/Call Ratio (CBOE): 0.94; +0.18. Just a couple of closes above 1.0 on this last round of selling.

Bulls: 49.5%. Basically flat from last week’s 49.4%. Still high but well off the 53.8% three weeks back and the 56.7% five weeks back. The 55% level is considered bearish, and it topped that level on this last run. Still off the 60% hit in December 2006 but getting closer. For reference it bottomed in the summer 2006 near 36%.

Bears: 21.3%. Nice jump from 18.0% after hanging in that 18% range for three weeks. After hitting near 30% in March it has faded back in the subsequent rebound and this current selling is not jumping it higher. Still is holding lower and did not rise as it did in March. Well off the 27.5% hit in April. 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: +5.27 points (+0.2%) to close at 2707
Volume: 1.751B (-18.25%). Volume fell well off pace and back below average but as it has done all year, when it mattered, volume was up. Thursday trade surged above average and eclipsed the Tuesday selling volume. That shows that buyers dominated at the key time.

Up Volume: 931.044M (-942.624M)
Down Volume: 805.926M (+485.43M)

A/D and Hi/Lo: Decliners led 1.15 to 1. Up session but decliners led as the large cap techs posted a better overall session (0.55%).
Previous Session: Advancers led 2.48 to 1

New Highs: 123 (-44)
New Lows: 40 (0)

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

NASDAQ started a bit softer then after a choppy morning session it climbed steadily into the close. New post-2002 high but that was about it. After the Thursday breakout from the trading range, who really cared? NASDAQ took the leadership role during the 7 week lateral move, something it tried to do in prior to the February and March correction. This time the move is sticking. With earnings coming out, the break higher the past two weeks has been building in those earnings, anticipating better than expected results. The consolidation led up to this break and now the earnings have to come through. You have to like the action NASDAQ showed this week.

SOX (-0.20%) was down on the session, but as with NASDAQ, you have to like the action it showed. It surged early in the week, continuing the breakout resumption. It made a higher low at the 10 day EMA and then blasted off Thursday. A big part of the NASDAQ breakout as well.

SP500/NYSE

Stats: +4.8 points (+0.31%) to close at 1552.5
NYSE Volume: 1.342B (-19.3%). Volume faded on NYSE as well as SP500 continued its recovery and breakout and SP600 pushed to a new high as well. The real story as we know was the Thursday breakout volume that surpassed the Tuesday selling volume.

Up Volume: 801.224M (-646.692M)
Down Volume: 513.027M (+308.278M)

A/D and Hi/Lo: Advancers led 1.1 to 1
Previous Session: Advancers led 2.65 to 1

New Highs: 236 (-56)
New Lows: 17 (-9)

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

Friday saw more upside but it was really a ‘do nothing’ session on the heels of the big surge higher. SP500 rallied past the all-time high at 1553, but faded modestly on the close. That is just a matter of taking it out this week. Volume was lower and well below average, breadth was flat, but the big moves were Thursday and they came with strong breadth, volume, and price gains. Super action when it counted that took SP500 off of the 50 day EMA test and the higher low at that level as SP500 followed NASDAQ and DJ30 higher. Now it has made the break to a new all-time high and its feet are back under it all ready.

SP600 (+0.26%) gapped lower but then recovered, posting a modest gain and edging out to a new all-time high. The small caps are still trying to regain their footing after stumbling and giving up leadership to the large caps as well as to the techs.

DJ30

The blue chips showed us the great breakout Thursday, capping that ever-improving pattern it was showing over the past two weeks. As we said at the time, but for the SP500 pattern we would have been really bullish on the Dow. As it turned out the bulls again proved they were stronger than the bears and the pattern improved and the breakout exploded higher. Friday was a low volume continuation move, adding a few points as an afterthought to the strong breakout.

Stats: +45.52 points (+0.33%) to close at 13907.25
Volume: 222M shares Friday was a pretty dramatic fade from the 300M shares Thursday, but as we noted above, the Thursday volume was what mattered.

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

MONDAY

The breakout is in the bag and now it is show time for the earnings. NASDAQ improved and broke to a new-post 2002 high ahead of the other indices, building in expectations of stronger earnings than what was originally believed. We wrote the past couple of weeks about earnings being stronger than expected what with the stronger quarter 2 GDP that was going to show up, and last week more and more were talking about this. Thus the big break Thursday as the market is now starting to suspect that companies performed better than originally expected.

Friday we got the further move higher after a mixed start, and we took some gain off the table as the market continued higher. As we noted last week, love taking gains as others drive up the price of the stocks and options we bought earlier. Now we have to look at what can still drive higher even after this 3-day run to end last week and make us money. Despite the blast higher Thursday there are still strong stocks that moved ahead of the overall market that are taking a breather, setting up for the next move. There are also others, thanks to the ongoing rotation, that are setting up for breakouts in the next wave of moves.

Earnings are always a wildcard; some surpass expectations and are rewarded, some don’t and are rewarded still, while others are sold whether they beat or miss. Much has to do with expectations as seen in Q1: things were expected to reek, and when the companies reported close to double digit gains once more the market rewarded them. This time 4.3% earnings growth looks light again and that is why we were writing about upside surprises. Last week it seems the market woke up to this and started the process of adjusting expectations through price moves.

That makes the season a bit more dicey than it was a couple of weeks back. Strong earnings will still be rewarded, however, and we are going to continue looking at stocks with solid earnings and sales growth rates that are also in good buying position. There are many good stocks out there making money and moving higher, but with many already logging good moves since the last test there are some to avoid simply because they need to let gravity do some work, pullback, and set up for the next break higher.

That is one reason you have to be careful following some buy recommendations on televisions shows. Often those stocks are mentioned because they have had good runs but that does not mean they are in good buying position at the time. In the worst case those touting them have positions and want some more buying to push them a bit further before cashing out. The usual case is an honest recommendation, just at the wrong time. There is other game you can hunt while the stock sets up for its next move. When it is ready then you move in.

That is what we do; we watch great stocks in great patterns and let them set up. When they make the move we make our move. Our goal is always to make money on the play but we also want to maximize our overall returns by moving in at the right time to catch the more explosive moves out of bases, off tests, etc. In that way our money works harder for us because we are in the stock when it is moving in our direction versus waiting for a base to end, etc. Of course we will let a strong move continue on, but we will also bank some interim gain along the way.

Back to this week and earnings. They kick off big time and we are going to see some big rewards and some big punishment just as we always do when expectations are mixed. More are expecting better gains, and that along with the move higher last week sets the bar a bit higher. That said, we are not going to stay away from all plays or cash out of positions simply because their earnings report is due and the market has rebounded well. This latest breakout is part of a larger trend higher after the 2006 and early 2007 slowdown, and if we have strong stocks in solid position to move higher we will take advantage of that when the opportunity arises.

Support and Resistance

NASDAQ: Closed at 2707.00
Resistance:
2778 from a July 1999 peak
2887 from a September 1999 peak
2920 from an October 1999 peak

Support:
2673 is the July high
2642 is the top of the November/February channel
2642 is the November/February up trendline
The 18 day EMA at 2641
2634.60 is the June peak
2601 is the mid-May intraday peak.
The 50 day EMA at 2596
2589 is the October/December/January trendline
2531.42 is the February high (post-2002 high); 2525 intraday
2523 was price resistance November 2000
2509 is the January 2007 high

S&P 500: Closed at 1552.20
Resistance:
1553 intraday high from March 2000 is the all-time index peak
1558 is the upper channel line from October/December 2006

Support:
1541 is the early June high.
1539 is the mid-June intraday high
1534 is the early July high
1528 is the March 2000 closing high
1531 is the late November to February up trendline
The 50 day EMA at 1510
1490.72 is the early June closing low
1475 from peaks in December 1999 and January 2000
1461.57 is the February 2007 high.
1440 is the mid-January high

Dow: Closed at 13,907.25
Resistance: At a new high so nothing holding it back other than gravity.

Support:
The early June high at 13,676 (closing), 13,692 (intraday)
The mid-June high at 13,689
The early July peak at 13,671
The 10 day EMA at 13,655
The mid-May peak at 13,556
13,535 is the upper channel line in the November/February channel
The 50 day SMA at 13,490
13,470 is the November/February up trendline that marks the lower channel.
The 50 day EMA at 13,414
The 90 day SMA at 13,080
12,796 at the February 2007 high

Economic Calendar

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

July 16
- New York PMI, July (8:30): 17.0 expected, 25.8 prior

July 17
- PPI, June (8:30): 0.1% expected, 0.9% prior
- Core PPI (8:30): 0.2% expected, 0.2% prior
- Net foreign purchases, May (9:00): $70.0B expected, $84.1B prior
- Industrial production, June (9:15): 0.3% actual, 0.0% prior
- Capacity utilization, June (9:15): 81.5% expected, 81.3% prior

July 18
- CPI, June (8:30): 0.1% expected, 0.7% prior
- Core CPI, June (8:30): 0.2% expected, 0.1% prior
- Housing starts, June (8:30): 1.45M expected, 1.474M prior
- Permits (8:30): 1.49M expected, 1.52M prior
- Crude oil inventories (10:30)

July 19
- Initial jobless claims (8:30): 308K prior
- Leading economic indicators, June (10:00): 0.1% expected, 0.3% prior
- Philly Fed, July (12:00): 13.0 expected, 18.0 prior
- FOMC minutes, June (2:00)