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world stock market, us stock market
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8/02/02 Investment House Daily
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MARKET ALERTS
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SUMMARY:
- Indexes lose footing on another round of weak economic data.
- Recession worse than thought. Does that mean a better recovery?
- Settling back toward the July lows on lower and lower volume.
- More downside this week then a bounce or outright failure.
- Subscriber Questions
- Team Trades
Another round of dank economic numbers skid the indexes lower.
Employment and factory orders piled on top of the falling GDP and a longer recession than thought, pushing the markets lower as investors guess as to whether the economy is really recovering or is sliding back down. It does not take much to push the panic buttons in investors right now as they are still scorched (at least those that fought the trend) from the July market burn off, and the bounce from that selling so quickly reversing. Look at the VIX. It hit 48.97 on the high today before settling for 45.39. Another couple days of this action and it will top what it hit in the July selling.
What makes that so interesting is the volume. Volume has all but dried up to a much more typical summertime pattern after a crescendo in volume during the July sell off. There are not a whole lot of sellers. The market is instead being pushed lower by fewer and fewer sellers as buyers are not stepping in to stem the tide the past two sessions. This is really very good action.
Is that two scoops or a double dip?
The weaker economic numbers have double dippers all over the place. That refers to the infamous 'double dip' recession phenomena that sometimes surfaces after a recovery starts. What causes this? Well you would think it is a slowdown in the economy on all points. That is what the analysts who broadly propose the idea would have you think. It is really, however, a numbers trick. Because of the way the government counts economic activity, healthy economic action is actually masked by headline numbers that look weaker. Sound confusing? Of course. It is the government we are talking about after all.
First lets get the picture set straight. The Chicago PMI and ISM were not the death blow that they were made out to be. The both still showed expansion. It was just not as prolific as in June when the numbers were really strong. Fact: recoveries are never straight line just as slowdowns are never straight line. You have good months and not so good months. July was not so good, but it was still an expansion. The larger trend is still up. Trends tend to stay in place unless something drastic happens. Nothing drastic has happened; the trend is still recovery.
It is numbers. Imports and inventories are just part of the equation but their impact is rather perverse. What happens in a recovery is that inventories are fat after a slowdown as demand dropped leaving unsold goods. Inventories are counted as part of GDP; that makes GDP look better than it actually is. As the recovery starts, inventories are drawn down without being replaced: they are bought in an improving economy, but manufacturers are not producing because they are not sure the recovery is real. The next GDP reading is thus lower as inventories that were counted toward GDP the prior quarters are not gone. Activity picked up, but GDP is lower. Other than a burst of some inventory building in Q1, inventories are still being drawn down without a lot of replacement. That makes GDP look weaker than it actually is.
On top of that imports are deductions from GDP. As we discussed last week, there was large scale stockpiling of imports in anticipation of a longshoremen strike on the west coast. This huge import buildup was factored into the equation without adjustment. Without this buildup, GDP would have easily topped 2% and most likely hit expectations.
Thus the way the numbers are counted makes the cycle look like a double dip when that is not necessarily the case. Yes it appears the consumer slowed in July, but that was after a big surge in June. Moreover, consumers switched to autos in July with the reintroduction of 0% financing. Again, it is an ebb and flow but the trend still shows improving conditions. There was way too much gloom over the GDP and ISM numbers.
Employment not that bad either.
Non-farm payrolls moved up just 6K versus 66K anticipated, largely due to a 16K drop in government workers (that in itself is something that should be heralded). Private sector jobs were up 22K, an improvement by itself. Moreover, June non-farm payrolls was revised to 66K from 36K making three straight months of gains. That is key; for the first time the revision was upward and now downward. Gains were not wiped away; losses were reversed. Further, long-term unemployed (out of work greater than 3 months) were down 230K. There are all positives.
There is no question there was a slowdown in July after a very hot June. The average work week fell to 43 hours from 43.4. Factory orders fell 2.4% (-1.7% expected). Still manufacturing is expanding, consumers are consuming (autos in July instead of soft goods at Wal-Mart) and the employment picture, despite the naysayers from Friday's report, is improving (fewer continuing claims, fewer long term unemployed, fewer jobless claims). You have to look behind the numbers and see the real story. Thus, it looks like two scoops as opposed to a double dip.
What is mind boggling about all of this? This is EXACTLY what was being bandied about in March and April. There were very sane discussions of how economic numbers and activity tracked in a recovery. What has happened? It has all gone out the window in an emotional purge just as the July selling spiked on sentiment and volume. The sane heads from earlier in the year have, in an emotional reaction, forgotten what economic recoveries look like.
A bad perception is good. A worse recession is good as well.
Not that all the gloom is bad. Again, that VIX is shooting higher on no volume selling. That shows excessive worry without stock dumping. That bodes well for a light volume and successful test of the July low. Keep that wall of worry there, give them no hope. That shakes out those last sellers and sets the stage for a much better market recovery off of this test.
And what about that worse than thought recession? Well, in the world of contrary indications, that is good. Remember the FOMC lament that a weak recession meant a weak recovery. Well, we kept saying that things sure felt like a worse recession for small businesses and large as well. Not only did the GDP fall from high levels, it fell to deeper lows than thought and for longer than thought. Economists brushed off a stronger recovery scenario thinking that demand remained well sated during the brief slowdown. The pain we were all feeling was real; glad to see the government caught on and that does bode better for a better recovery AND perhaps some more responsive action by the Fed and the government as well.
Goldman Sachs thinks some relief is coming. It changed its forecast for the Fed Funds rate to 1.0 by year end, a 75 basis point drop from today's rate. We would love to see more government action in the form of incentives; despite the 'corporate welfare' label pinned on business incentives, lower taxes help businesses plan for future expenses and provide a stable environment for investment. Moreover, 80% of the corporations out there are small businesses that employ the majority of the U.S. workforce. We all benefit from the 'corporate welfare' with a better economy, jobs, and yet, more tax revenues for the federal government to waste.
THE MARKET
This is very interesting action. We noted a few weeks back that NYSE volume had surged in June, and it maintained that pace in July. Then it broke loose, shooting higher as the market sold off. Typically summertime volume is lame. This summer it has been anything but lame. That is, until last week.
After the big volume surge on the selling, the rally up after the initial reversal and rally session was lame. What has been really notable, however, is how low it has been on the pullback toward the July low. Volume has dropped below average for the first time since the sessions sandwiched around July 4. The market fell Thursday and Friday, but the volume was very low. If buyers on the rally were not as strong as the sellers on the July hatchet job, the sellers on this test are mostly extinct.
Why is this so good? As noted, the VIX is spiking higher on this selling. That means the risk premium is higher. Risk premium is a market euphemism for fear. Fear is ratcheting higher again but there are not a lot of sellers, at least not as many as in July and not more than the recent buyers. This is a classic sign of a final shakeout. What could upset it? Volume shooting higher on the selling. It could do it on the final day on a reversal at the July low, but better would be just a continued drift lower on lighter volume.
What is not good about this action? It is too fast. We wanted another couple of weeks on the move higher off the July low and then a couple of weeks or more back down. That would take us through August and into September and closer to a more traditional point for the market to bottom. Remember back in March 2001? The Dow and S&P 500 set up 9-day double bottoms. They rallied well off of those levels, but that was not the greatest foundation for a long term rally. This time we have the sentiment indicators on the side of any rally, so that is an additional positive. All in all, you never get the perfect formation. If the market shows us a slow drift to the July lows and powers up, we go with what it is showing us as opposed to some textbook perfect idea of how it should be.
Sentiment Indicators
As the market sold the sentiment indicators started ratcheting back up to high levels, and they were not waiting around. The VIX put in a 10 point 2-day move on the close, and a 14-point move intraday over the Thursday and Friday sessions. The VXN galloped up Friday. These indications show that anxiety remains high despite the recent bounce.
VIX: 45.39; +3.90. Intraday hit 48.97 on the high, just 10 points off of the intraday high at the height of the July selling. The close was just 5 points off of the July closing high. A major move the last two sessions of the week.
VXN: 65.44; +5.09. After lying dormant through Thursday, the VXN shot higher on the Nasdaq selling Friday. It too is just 5 points off of its recent July closing high.
Put/Call Ratio (CBOE): 0.93; +0.17. Big jump Friday. Not over 1.0, but some more selling back could produce another close over 1.0.
Nasdaq
Turned over at the 18 day MVA and is sliding lower but on very, very light volume.
Stats: -32.08 points (-2.51%) to close at 1247.92. Another substantial point loss even if volume folded.
Volume: 1.423B (-8.33%). Very light below average volume that indicates there were fewer sellers in the market than buyers during the up sessions. It is a difference with an importance. It is more indicative of a shakeout of the remaining sellers: high despair/anxiety levels accompanying light selling. It shakes those worried investors out of positions.
Up Volume: 265M (-13M)
Down Volume: 1.146B (-118M). Fewer overall sellers, but sellers ruled the day. Still, it was really also a lack of buyers.
A/D and Hi/Lo: Decliners led 2.25 to 1. Definitely a broad sell off.
Previous Session: Decliners led 1.69 to 1
New Highs: 17 (0)
New Lows: 212 (+55). Rising, but not anywhere as near the 500+ levels in the July selling.
The Chart: http://www.investmenthouse.com/cd/$compq.html
Continuing the rollover from the 18 day MVA (1323.59), the Nasdaq slid to the May downtrend line on the close. Volume has just disappeared with trade falling even further below average. It does not look as if the May or March down trendlines will hold (1230). The gap up on Monday has been filled (1262), but it looks as if the test of the July low (1192.42) is an easy mark. A low volume fade to that point and even undercutting it would set up a good rally point. The problem is the same one noted above: the move is fairly short; a month-long move up and down would be better and establish a better double bottom base to support a longer move to the upside.
Dow/NYSE
Breaking below the short term moving averages, falling on lower NYSE volume once again. The point loss was heavy but was at 300 points before a late move higher. All things are relative.
Stats: -193.49 points (-2.27%) to close at 8313.13. The gains and losses come in big chunks of late.
Volume: 1.534B (-7.67%). Lower and below average volume on the selling, the first below average session since right after the July 4 holiday.
Up Volume: 305M (-58M)
Down Volume: 1.23B (-61M). As with the Nasdaq, more sellers than buyers, but relatively fewer sellers than the buyers earlier in the week.
A/D and Hi/Lo: Decliners led 2.68 to 1. Was worse, but improved as the session closed out. It was broad selling as fear swept the market.
Previous Session: Decliners led 1.55 to 1
New Highs: 24 (-2)
New Lows: 132 (+61). Rising, but nowhere near the 900+ during the July sell off.
The Chart: http://www.investmenthouse.com/cd/$indu.html
The Dow moved into the March downtrend channel Monday but had no volume to support the move. It could not break the downtrend and fell below the channel and the short term moving averages, Friday popping the 10 day MVA (8447.32). Volume faded on the selling. Again, no share dumping compared to the July selling and to the recent buying. Fear rising, no heavy selling. That is the sign of a shakeout of the sellers.
S&P 500:
Very similar action to the other indexes, turning lower after breaking back into the downtrend channel but failing to break the March downtrend line. Friday the large caps popped the 10 day MVA (878.88) on that below average volume NYSE volume. On the low (853.95) the index tested potential support at 850 and rallied back. We doubt that 850 will hold. It is possible that the index could rally from there and extend this upside move. Ultimately that would be good for the market; another two weeks or more of rallying followed by a few weeks of selling sets up a better bottom on another test. Again, that is perfect world talk. It looks as if the market overall is in for a quicker test of the July lows.
Stats: -20.41 points (-2.31%) to close at 864.24
NYSE Volume: 1.534B (-7.67%)
The Chart: http://www.investmenthouse.com/cd/$spx.html
THIS WEEK
The week gets off fast with the ISM services out Monday a half hour into the session. It is expected to fare better than the ISM (manufacturing) report. It should continue to show the expansion in the services sector to mirror the continued expansion elsewhere. Not huge, but a continued expansion. If the economy can show expansion on an off month such as July, that is pretty darn good.
The question is whether the market thinks it is. The past week it obviously did not and it sold. The selling had no conviction, however. For now it has been fear selling by those mortified by the poorer economic news and the belief that it won't get any better. With the recent selling, however, the market has priced in weaker economic news even before it was released. From the lack of volume on the selling, all it needs is to test the prior low to shake out the remaining sellers. That shifts the balance to the buyers. Then it is up to buyers; they need to come in with heavy volume.
We picked up downside positions Friday; some stocks (not many) were selling on higher volume. We anticipate a move down to the July lows. That is our 'safe' target on downside positions given the lighter volume. If volume increases, really increases, then an undercut of the July low is likely. From the recent history with sentiment indicators moving to extremes, the sharp, high volume sell off, and low volume test of the low to set up a double bottom, we anticipate the July low to more or less hold and give rise to a better rally.
Until then there are still some downside positions we are looking at for the move back to that level. After that we will clear out and let the market tell us if it is going to bounce from there or just give it up. Again, lighter volume on the selling increases the odds of the successful test and completion of the double bottom pattern. If volume remains light, we close out our positions at that point and then look for the bounce. There will be some good double bottom patterns with handles at that point to pick from.
Support and Resistance
Nasdaq: Closed at 1247.92
Resistance: The 10 day MVA (1298.74) and price resistance at 1300. The 18 day MVA (1323.59). The hump in the double bottom pattern at 1354.48 followed by 1357.09, the October 1998 bear market low. Then 1418, the interim test after the September low. The 50 day MVA (1430.01) and the second March down trendline at 1440. That is followed by 1500.
Support: The March downtrend line at 1255. The May down trendline (1230). The bottom of the March downtrend channel (1185), right at price support from 1190 to 1200 (the July low is 1192.42).
S&P 500: Closed at 864.24
Resistance: The 10 day MVA (878.88). The lowest channel line in the March downtrend channel (888) and the 18 day MVA (890.92). The middle of the potential double bottom at 911.64. The predominant bottom channel line from the March downtrend at 915. The March down trendline at 950. The 50 day MVA (952.10).
Support: 855 and 850 from the October 1997 low and Q2 1997 held on the low Friday. The July low at 775.68.
Dow: Closed at 8313.13
Resistance: The 10 day MVA (8447.32). The 18 day MVA (8528.69). The lowest bottom channel line of the March downtrend at 8615. The late July high that is the potential middle of the double bottom at 8762.14. The May down trendline at 8765. The March down trendline at 8980. Then the 50 day MVA (8998.50). After that price resistance at 9250 and then 9500.
Support: The September closing low is 8235.81 is possible. 8062, the September 2001 intraday low. The target we look to hold around it the July low (7532.66). The October 1998 lows are at 7400 and 7467. After that is 7000, some 1997 lows and highs.
End Part 1 of 2
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world stock market
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