Replies to post #6689 on Sector Investing

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InvestmentHouse Weekend Update:

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

- Early rally attempt fades again, but this time market rallies back, helped by expiration volume.
- Plunge of 10 year bond and precious metals even as inflation talk crescendos tells us market is worried more about a Fed overdose.
- Kinder and gentler Fed-speak to end the week puts things in better perspective.
- One more shakeout on the down leg has set up a rebound. Will it take?

Stocks end a down week with an interesting reversal off morning selling.

Friday was another Thursday in the making, i.e. an early morning bounce and then the inexorable turn lower as sellers used the bounce to move in. Classic bearish action, and after 8 consecutive downside sessions on NASDAQ we heard many mutterings from brokers and floor traders that the market uptrend was really broken. After all, the sentiment indicators were hitting more extreme levels after more than a week of continued selling, yet a Thursday bounce attempt failed as sellers took over once more.

Stocks turned negative across the board an hour into the session on volume vastly outpacing Thursday. Looked like the same old selling, and with the high volume and 8 sessions already downside, the sentiment turned sharply negative once more. It was definitely a morning requiring that mixture of fear and arrogance Kevin Costner described in ‘Bull Durham.’ It was getting dicey, but we still saw good stocks holding up even as metals, energy, and other industrials continued their fade. An hour and one-half into the session I made a comment to one of our traders that the pessimism I was hearing on the other end of the phone couldn’t get much worse. About 20 minutes later the market put in its bottom for the day.

Stocks started back up, shaky at first but then really moving at lunch. NASDAQ, SOX, SP600 turned positive, and that high volume became an ally. The commodities turned off their lows, but technology was clearly in the lead with some decent earnings news fueling some covering and upside interest. They were the most sold out, so it makes sense they took point on the rebound.

Overcomes an afternoon selling attempt instead of meekly getting led to slaughter.

Stocks rallied into the early afternoon, hitting session highs. Then NASDAQ peeled off 18 points from the high and it sure looked like another failed move with the sellers winning out yet again. Just into the last hour, however, stocks bounced with NASDAQ taking back 14 points into the close. Sure it was a bit of covering ahead of the weekend what with the narrow breadth, but the ability to fend off some mid-afternoon selling was action not seen in over a week.

Fed-speak actually helps the rebound.

Now some of that late action is attributable to a pullback from the ‘hell no we won’t pause’ attitude the Fed speakers displayed Thursday. Hoenig candidly said the Fed too often gets trapped in its own web of rate hiking justifications and goes too far. He reiterated (from weeks and FOMC minutes gone by) the Fed has to be careful not to go too far. A Fed-whipped market responded with some upside, helping stocks close near session highs.

The rebound was across the board with metals, energy and other basics reversing from the early selling (they gapped lower) on volume. The indices showed the same action: selling off then reversing on volume. Expiration and its typically higher volume makes the read more difficult, but the price action was clearly a reversal, and though it was expiration, not all of the volume was due to the rollover of positions.

Outside a couple of earnings reports there was no news to drive the action. The week was all about bad economic news (bad meaning pretty solid data). By Friday there was not a whole lot more that could hurt stocks; you get thumped on the head enough you kind of get used to it. You don’t enjoy it, but it simply does not cause as much angst. Thus basically the market did it on its own along with that afternoon goose from Hoenig.

The week was spent selling off and with sentiment indicators spiking. Just when it looked as if that didn’t matter, stocks reversed and showed some decent action. Yes expiration played a role, but regardless, the stage is set for a rebound after all indices were thumped. The rebound is set, but can investors take the baton from Friday expiration and continue the move that just barely showed itself Friday?

For now you have to look at it as a relief bounce given all of that distribution leading into and during the selling. Even with that, there are some very tasty looking plays that can give us good trades on a relief move. Strong stocks that have been hit but not broken, reversing Friday in a positive manner. We can ride those up even if this ultimately stalls and this really turns into a nasty, Fed has ruined the economy sell off. That remains to be seen, and if it comes about we will ride the failed test down; that is the key to real downside gains (kind of like the reverse of the first upside breakout test). Either way we will take what the market gives, and for Monday we are going to be looking at some excellent stocks that have sold back and are showing a nice reversal Friday.

THE ECONOMY

Bonds telling another story than the financial headlines.

We discussed this all week, but the Friday action only underscored our point when bond yields fell once more (10 year yield 5.06%, down from 5.19%) and commodities continued their struggle (gold closed off $23 Friday, down to 657.50 after topping $700).

This tank in commodities started just as the inflation sensation whipped up a fine lather. A big surge in commodities prices and a run in bond yields peaked just as the ‘demand driven’ evangelists converted to ‘inflationism’ (hey, ‘The Da Vinci Code’ debuted this week). Another classic example of human emotion signaling a market change.

The real cause is something completely different. We covered it earlier in the week and indeed even in Q1 with the choppy market action (1 step forward, 1/2 step back): the market is worried the Fed will pull a ‘Fed’ and go too far. All of this talk about inflation and the need for continued rate hikes into June and beyond, and indeed the call for 50 BP hikes from the former ‘demand driven’ cult (nothing worse than a convert) gave the market the cold sweats. This time it appears some of the usually Fed wary pundits are the ones calling for the Fed to lower the boom. Talk about the perfect cover for the Fed to do the dirty deed. At least in 2000 there were a few of us out there questioning the Fed’s new math (many new inflation ‘indicators’ surfaced). Now they are complaining the Fed is too soft after 16 consecutive rate hikes.

Inflation is a lagging indicator. At least one Fed official noted that on Friday.

All of this because the year over year core CPI hit levels it already touched over the past year (2.4%) and a blow off top in commodities. Inflation, however, always lags what is happening in the economy and it always lags Fed action. Fed rate hikes take a long time to hit the economy despite more recent arguments to the contrary. A recent study of the 1990’s hikes (early in the decade and then the ones leading to the May 2000 fateful 50 BP hike) show that up to 18 months of lag time exists between hike and impact. Thus inflation we think we see today has yet to feel the pinch of most of the rate hikes the Fed has already put into the market. That is an amazing point to consider. Basically 12 of the rate hikes are still falling from the sky, ready to explode their ordinance on the economy over the next year.

Friday Kansas City Fed president Hoenig gave some clear talk on the impact of rate hikes and the Fed’s history. He sounded as if he had actually looked at the past and applied some common sense to the facts. He noted that the current higher inflation seen now was baked into the cake during the Fed’s PRIOR accommodation on interest rates and that indeed the economy was now slowing. He noted hikes work with a lag, but that the Fed historically had a hard time appreciating that ‘when . . . in the midst of the cycle.’ He noted that the current string of rate hikes would be felt next year (2007). We loved his statement that ‘you don’t want to be so dogmatic that you are not taking into account . . . how lagged effects are.’

This is the common sense the Fed-speak showed before the recent frothing regarding inflation. Indeed, the very hawkish tone of the Fed comments the past week proves Hoenig’s point: after 16 rate hikes, a last gasp spike in commodities and some continued solid economic reports spooked the Fed and lathered them up to start talking about 50 BP rate hikes (along with some smart commentators who know better). As we said in early 2005, they talk a good game at first but then get caught up in the moment when prices in a recovery inevitably rise a bit.

The season for price hikes.

One thing Hoenig did not discuss was inflation cycles. In an expansion there is typically a rise in prices at the end of Q1 and the start of Q2. Why? Because that is the typical business cycle for raising prices. Many attributed the tick higher in the core to gasoline price pass through, but what is really happening is prices were raised at this time just as they are every year.

THE MARKET

MARKET SENTIMENT

It was a week that saw the sentiment indicators move to levels that, in the current trend higher, have led to rebounds. VIX took out the October 2005 levels and moved to the April 2005 highs Friday before fading as the market recovered late. The put/call ratios consistently closed above 1.0. While the bullish advisors still rose, sentiment definitely plummeted as the selling continued, really turning negative Friday morning after that opening rally failed.

If this is the start of a longer term market fade based on the Fed’s actions, then these indicators may produce a near term bounce but fail to push the market back into its uptrend. For now they look good enough for a decent rebound move to test the breakdown. From there we have to reassess the market’s potential.

VIX: 17.18; +0.19. Hit 18 on the high, matching the April 2005 highs. It has moved as far on this run as that April run as well. Definitely enough to spark up a move here.
VXN: 20.95; +0.64. NASDAQ’s volatility indicator blew past even the April 2005 levels on the intraday high. As with VIX, that should provide some upside push.
VXO: 15.58; -0.24

Put/Call Ratio (CBOE): 1.27; +0.05. And yet another close above 1.0, the sixth in a row. The overall ratio closed above 1.0 again (1.09), its third straight close above that key level for the week, and the fifth in the last 6 sessions. That has not occurred since September 17-20, 2002. You know that time; it was during the second leg of the double bottom in 2002 that set the bottom on the bear market. Note that the market did not bottom, however, until mid-October with, about 100 more points to the downside on SP500. This large number of high closes indicates enough anxiety, speculation, or predictions of more downside to show the crowd has bought into the downside. That is usually when the downside is over.

Bulls versus Bears:

Bulls: 46.3%. Bulls rebounded for the second week, rising from 44.3% and 43.9% before that. Bulls had been declining from the April peak at 53.2%. This rebound is surprising given the hard fall to end last week. After a month climbing from 42.3% back close to the 55% level considered bearish, the recent slide was good until this rebound. It rose from 42.3% on the low this cycle, a level below the prior lows in May and October 2005.

Bears: 25.3%. Bears were in sync with bulls, falling even as the market sold off to end last week. A significant drop from the 26.8% last week and the 28.6% the week before. This time around they peaked well below the 33% hit on the high the last time bears started growling. The 33% high hit last cycle topped the prior two highs (30% in May 2005, 29.2% in October 2005) that gave way to strong rallies. The 20% level and below is considered bearish. It started this move just above 20%, the threshold level.

NASDAQ

Stats: +13.56 points (+0.62%) to close at 2193.88
Volume: 2.587B (+22.68%). Strongest volume since late April, surging on the May expiration. Have to see this as mainly expiration driven trade, but we still like the mix with the price action.

Up Volume: 1.571B (+790M)
Down Volume: 991M (-314M)

A/D and Hi/Lo: Advancers led 1.28 to 1. Hardly an impressive internal reading, but given the reversal session and the late move to positive, it was about as good as could be expected.
Previous Session: Decliners led 1.65 to 1

New Highs: 55 (-9)
New Lows: 142 (+31)

The Chart: (Click to view the chart)

After 8 downside sessions NASDAQ once again tried to rebound with a gap higher, and once again the bounce was sold and the index turned negative. It pierced some support at the early September peak but then staged a nice comeback to hold that level and post a gain. Good thing because intraday it undercut its breakout from the 2 year triangle (2177). Good reversal, good volume. Now it needs to follow through on the move. After getting no love 8 days a week it is ready.

SOX (+3.22%) found the terra firma at 475 and rebounded almost back to the 200 day SMA (491.83). That still represents a key resistance point and the bottom of the March pullback at 493 to 496. That is also a peak from December 2005, and thus it represents some significant resistance. SOX dug itself a pretty good hole, but it has some momentum with AMD jumping.

SP500/NYSE

Stats: +5.22 points (+0.41%) to close at 1267.03
NYSE Volume: 2.08B (+13.46%). Volume surged on NYSE as well as it tested the 200 day SMA and rebounded. Again, you cannot impute all of the volume to normal market action; expiration played a role. As with NASDAQ, however, it is the right kind of price/volume action on a reach lower, breach of support, and then a rebound to close positive.

A/D and Hi/Lo: Advancers led 1.42 to 1. Ho-hum. Turned positive late so the breadth did not have time to catch up.
Previous Session: Decliners led 1.62 to 1

New Highs: 23 (+5)
New Lows: 161 (+9)

The Chart: (Click to view the chart)

SP500 undercut the 200 day SMA (1257.73) in the morning, then reversed on strong volume, recovering that level and posting a gain. The 200 day is basically coincident with the range of the November and December 2005 lows as well as the February 2006 lows. That is a pretty decent band of support that is helping set a floor to this selling. Similar to all of the other indices, an undercut of support and then a rebound on strong volume to close positive. The makings of a reversal to the selling to provide a relief move. Now it has to show us.

SP600 (+0.44%) reached down toward support at 370 (372.14 on the low) then rebounded to close positive. More resistance at 380 and at 384.75 (April low); when you sell off the move back up is a tough. The action Friday was a good start.

DJ30

DJ30 showed a doji Friday, holding the February high (11,137) and above the April closing low (11,074). Perfect point to find support and get back into its uptrend. Strong volume, the strongest since the end of April, as DJ30 showed a doji on the candlestick chart. After a pullback that often signals a recovery ahead. Want to see DJ30 clear the 50 day EMA (11,270) and its up trendline (11,280) as it recovers this coming week.

Stats: +15.77 points (+0.14%) to close at 11144.06
Volume: 485M shares Friday versus 338M shares Thursday. Strong volume as it tested and reversed. Expiration trade accounted for some of the volume, but as with the other indices, you have to like the price/volume action after this sharp selling.

The Chart: (Click to view the chart)

THIS WEEK

Friday was more eventful as we had hoped with the intraday fade ramping up more fear in the market. That along with some short covering helped turn the market back up from its dive, at least for Friday. There was some short covering ahead of the weekend and more position shuffling due to expiration. Thus the start was good, but as we noted last week, it has to continue the move from there this week.

The sentiment indicators rose sharply during the week as the selling advanced. Friday when that first rally failed you could feel (and in the voices of the brokers, hear) the letdown that another rally attempt had failed after more than a week of selling. That appeared to be the final straw, producing the rebound and setting the market into position to at least provide a good rebound this week.

We see several quality stocks that have faded but have held some key support and showed reversal action Friday. After more than a week of strong selling and spiking sentiment indicators, this action indicates a rebound ahead. Again we will have to see just how strong the rebound is, but in any case many of these stocks we see can produce us a nice trade higher. During the move we will see how strong the buyers come back with volume and breadth, and we will see what key ground the indices can recover. There is leadership ready to move, and the market will need it.

If we get the continued rebound, we will be looking for another high volume and strong price gain starting Wednesday. That will indicate a follow through to the Friday reversal and set the stage for a continued run. Often you see a reversal followed by the confirmation, but then a fade. That fade often chases out the short term players, afraid of a drop. That typically sets up the really strong moves. Need to see that volume hold, and see that strong follow through run.

Support and Resistance

NASDAQ: Closed at 2193.88
Resistance:
2205 is the December 2005 closing low.
2218 is the August 2005 peak before the sell off through October 2005.
The 200 day SMA at 2229
2240 is closing low in February range.
The 10 day EMA at 2240
The 18 day EMA at 2268
2273 is December 2005 closing high.
2278 is December 2005 intraday high.
2288 from December 2000 low.
2300 from the April intraday lows.
The 50 day EMA at 2294

Support:
2185 to 2182 is the September 2005 peak and interim high from November 2005.
2162 to 2155 from December 2005 and September 2006
2100 from the early and mid-2005 peaks.

S&P 500: Closed at 1267.03
Resistance:
1272 to 1268 is the November and December 2005 closing highs and March 2006 closing low
1280 from the April lows
The late January peak at 1285
The 10 day EMA at 1287
1297.57 is the recent February high.
The 50 day EMA at 1297
The January high at 1303
The October/April trendline at 1308
1311 is the March intraday resistance on this move.
1315 is the May and May 2001 peaks
1317, the recent intraday highs from April.
1324 to 1329 from the October 2000 lows.

Support:
The 50 day EMA at 1258
1250 to 1248 from the November and December 2005 lows.
1245 from the August 2005 high and 1241 from the September 2005 high
1225 from the March 2005 high

Dow: Closed at 11,144.06
Resistance:
11,159 is the February high.
The 50 day EMA at 11,270
11,280 is the October/January/February up trendline.
The March 2005 highs at 11,329 to 11,335
11,350 from the May 2001 peak
The 10 day EMA at 11,323
The 18 day EMA at 11,349
11,401 from the September 2000 peak and April 2001 highs
11,417 from the recent April highs.
11,425 from April 2000 peak
11,452 from December 1999 peak
11561 is the DJ30 closing high
11,638 from January 2000
11,723 is the January 2000 closing high
11,750 is the January 2000 intraday and all-time high.

Support:
11,097 to 11,137 is the last peak from the February top.
11,044 is the January high.
10,985 is the March 2005 intraday high
10,965 from Q4 2000 and November/December 2005
10,931 is the November 2005 high
10,890 is the December 2005 closing high.

Economic Calendar

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

May 24
- Durable goods orders, April (8:30): -0.5% expected, 6.4% prior
- New home sales, April, (10:00): 1.150M expected, 1.213M prior
- Crude oil inventories (10:30)

May 25
- GDP, Q1 (8:30): Next iteration. 5.8% expected versus 4.8% prior reading
- Deflator, Q1 (8:30): 3.3% expected, 3.3% prior
- Initial jobless claims (8:30): 315K expected, 367K prior
- Existing home sales, April (10:00): 6.79M expected, 6.92M prior

May 26
- Personal Income, April (8:30): 0.7% expected, 0.5% prior
- Personal spending, April (8:30): 0.6% expected, 0.6% prior
- Michigan Sentiment, final, May (9:45): 79.5 expected, 79.0 prior

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Margin Debt in Billions:

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From Briefing.com: 8:48AM Zoran responds to report regarding options grant (ZRAN) 22.70 : Co responds to a report by the Center for Financial Research and Analysis that identified it as one of 17% of the cos in a survey conducted by CFRA that they considered to be "at risk for having backdated option grants." Upon learning of the CFRA report, the co referred the matter to the Audit Committee of its Board of Directors for review. Under the direction of the Audit Committee, the co's mgmt, assisted by outside counsel, conducted an internal compliance review and concluded that each of the option grants identified by the CFRA report had been properly made at a regularly-scheduled meeting of the Board of Directors or its Compensation Committee and that none of these grants had involved any "backdating." Mgmt has also conducted a broader review of all other option grants made to the co's officers since it's initial public offering in 1995 and has reported to the Audit Committee that, in the opinion of mgmt, all such grants have also been properly made. Mgmt's conclusion with respect to these additional option grants is still under review by counsel and the Audit Committee.

8:30AM Therma-Wave receives repeat orders for advanced products from an Asian Foundry (TWAV) 1.54 : Co announces it has received multi-tool orders for Therma-Wave's leading edge Opti-Probe thin-film measurement and Therma-Probe ion implant monitoring tools. One of the co's leading Asia based foundry customers is expanding their installed base of co metrology tools with the placement of follow-on orders for Opti-Probe OP7341XP and Therma-Probe TP630XP products for use in their advanced 300mm semiconductor production facilities.

6:41AM ASML Holding raises bookings outlook for 2Q06 (ASML) 18.70 : Co announces that it expects 2Q06 order entry to be at least 40% higher than 1Q06 net bookings of 62 lithography systems. ASML expects its Q2 2006 bookings level to be higher than previously disclosed due to strong customer demand for deliveries in 4Q06 and 1Q07.

3:32AM Semtech receives informal inquiry from SEC (SMTC) 15.36 : Co announces that it has received a letter from the SEC dated May 18, 2006 requesting that it voluntarily provide information regarding stock options granted since January 1, 1997.

http://finance.yahoo.com/mp?u

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OIIM still watching for a good entry. I also want to test the charts to see if I can get a monthly to show up