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us stock market, trade stock
SUMMARY:
- Stocks get Greenslammed, dive to close on Fed Chairman's upbeat comments.
- Greenspan sees no deflation, some pricing power.
- Distribution plagues stocks after low volume Monday. Test of 200 day SMA possible for NASDAQ.
- MOT earnings super, raises guidance: earnings today not trumping rate hikes tomorrow.
Stocks again have a hard time dealing with potential rate hikes.
Last Tuesday the market reversed a modest Monday bounce and sold on heavy volume on fears that a strong retail sales report on the heels of a strong jobs report meant rate hikes were coming. Monday night we noted our caution after another low volume Monday bounce ahead of Greenspan. For the second time in one week the same result transpired: modest buying thumped by concerns of higher rates down the road. It does not really matter what earnings are right now as they deal primarily with the past quarter. Of course guidance takes into account the current quarter, companies typically don't project much past that regarding earnings (though Tuesday GM did say it was shooting for $7/share for the year). The problem is, the market looks down the road 6 to 9 months at least, and that puts it well in the range where the Fed will be raising interest rates. Investors perceive the start of a Fed rate hike campaign as necessarily bad for the market.
It can be just that, and the Fed's track record is not one that let's you sleep with ease. It has ruined more expansions than it has fostered. It gets addicted to its current posture, raising rates too much or staying with a loose policy too long (though the former has occurred far more often than the latter). In that sense it is a lot like those stock analysts that get too addicted to the trend and fail to watch for signs of change, staying bearish when the market says its time to buy or saying buy when the market says sell.
Right now the Fed can easily raise the Fed Funds rate 1% (100 basis points) and come nowhere near pressuring the real rate. In other words, the economy is strong enough to move short term rates over 2% and the Fed could move its benchmark to 2% and not truncate borrowing and economic expansion. Indeed, a clearly telegraphed move up to that level and then a cease and desist would be excellent for the market. One of the problems with the Fed is the 'hide the ball' methods of the past (and the present) where it keeps the market guessing. It would be so much better for businesses, and thus the market, if the Fed would say here is where we think it needs to be, that level will let the market set the rates, we are going to move it there and then let it sit until we see the need otherwise, and we will tell you when we are going to make the move and to where. Businesses can plan with that kind of transparency, and when they know the Fed is going to follow and not lead that lets them look to the market and make appropriate decisions.
Such a rate hike would actually be a boon to stocks. Recall the fear that the Fed was letting things get too hot and inflation would result. Well, once the Fed even hints it will indeed raise rates at some point the opposite then there is the run for the hills mentality. Once that is over, once it is priced in, we think reality sets in. The economy is still surging faster than almost all economists say it is, and once the market gets over this interest rate hike selling jitters it will start building economic gains and thus earnings increases back into prices. In other words, near term investors fear the impact of rate hikes more than they value the continuing economic gains. Longer term, history shows that an expanding economy trumps interest rate increases as long as the Fed does not decide we have enjoyed enough prosperity as it did back in the late 1990's. Again, if the Fed just plays catch-up and does not try to take the lead with rates, then the economy will do fine and stocks will price that in once more.
THE ECONOMY
The key elements of Greenspan's comments were in the Q&A and not his prepared text that dealt with the banking sector and its ability to deal with rising rates. It seems the fact that he acknowledged higher rates as part of his thesis rattled investors ("oh my gosh, he is ASSUMING higher rates"). In the Q&A, however, he had to get into tomorrow morning's talk. He noted that the threat of deflation was over. He noted that companies were getting a bit of pricing power, another way of saying there is some mild inflation. A bit of inflation beats any amount of deflation. The market would have loved this language a year ago, but now it is acting mortified.
Greenspan's remarks were expanded upon by Mr. Bernanke earlier in the day, and the market was not wild about those remarks which probably made the reaction to Greenspan's answers even stronger. Mr. Bernanke noted that the Fed has now seen the whites of one eye of inflation. He also stated that the Fed Funds rate is 'so low' that it could be higher and still be in an accommodating stance. That is precisely what we are saying. The question is where will the Fed target the Fed Funds rate. These drawn out, plodding rate hiking forays never work well. Why? Because it takes a long time for them to impact the economy, and their impact is cumulative. Thus the Fed raises and raises and raises without any indication things are slowing. The Fed gets impatient, jacks up rates faster, and then all of the sudden the economy collapses. We have used the analogy of a fully laden super tanker at full speed when the Fed was jacking up rates in the last 1990's (that analogy was then stolen by others, but you know what they say, get a good analogy . . .). You cannot stop that on a dime. The market knows this. Thus, if the Fed tells everyone where its target is and that it will raise rates faster or slower to get it there, then people can plan and they won't panic about the Fed going too far. This is what worries the market and is not, and probably will not, be answered by the Fed.
THE MARKET
NASDAQ's move over the 50 day EMA was short-lived. Ditto for SP500, SP400, SP600, DJ30. A modest rally continued early, wavered but held together ahead of Greenspan, but then folded as Greenspan was pressed regarding the state of the economy. It is good said Greenspan, and that was bad for stocks. Fearing what he might say in the Wednesday session, they bailed out ahead of the close, driving volume higher in something akin to panic selling as breadth turned from flat to heavily negative. That indicated that the hedge funds and others were dumping everything, fearing what Greenspan might say in the morning.
Volume jumped on the sharp dive late in the session, indicating some clear distribution returned to the market. NASDAQ has had a hard time showing any kind of strength around the 50 day EMA, and its third clear distribution session in six indicates that it will have to pull one out of the hat to hold up here and rally. The gravitational pull from the March lows and the 200 day SMA is growing, however. The 18 day EMA is ready to test the upside crossover, something typical after the breakthrough, but the higher volume selling is making a successful test problematical.
After hours MOT blew away its earnings as it appears NOK's loss it MOT's gain. It guided higher as well, blowing away Q2 expectations. MOT was up 15% after hours, but right now earnings are not trumping market concerns regarding interest rates, at least not outside the specific stocks reporting. It is clear the Fed is going to raise rates, but the market is dealing with uncertainty as to the when and how much. The market often sells at first whenever it faces uncertainty. Tuesday it was acting pretty dumbfounded. Still in the base, yes, but not ready to rally toward the breakout.
Market Sentiment
Volatility moved higher and the put/call ratio jumped as well, but neither to levels that make you stand up and take notice. They were simply gyrating within their recent ranges.
VIX: 16.67; +1.25
VXN: 23.07; +1.67
VXO: 16.51; +1.28
Put/Call Ratio (CBOE): 0.81; +0.14
NASDAQ
Tried to extend the low volume Monday bounce but then reversed in some wicked late, high volume selling. Obviously not ready to try a breakout yet.
Stats: -41.8 points (-2.07%) to close at 1978.63
Volume: 1.932B (+14.45%). Volume exploded late in the session as NASDAQ ripped off 40+ points from its in 90 minutes. Three clear distribution sessions in the last six indicates more dumping that buying in the past week. Overall accumulation is decent, but when it piles up in close proximity as it has here, it can push the index down to the next support level.
Up Volume: 334M (-943M)
Down Volume: 1.576B (+1.185B). Down volume jumped late as well.
A/D and Hi/Lo: Decliners led 2.47 to 1. Breadth was positive most of the session and flat after the Greenspan text. Then when NASDAQ broke the 50 day EMA and failed in its test, the sellers jumped in hard.
Previous Session: Advancers led 1.29 to 1
New Highs: 119 (+4)
New Lows: 34 (+13)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
A head fake to the upside and then another Tuesday with distribution. Undercut the April lows and the tops of the November and December range (1990ish). The index was trying to form the right shoulder to a reverse head and shoulders pattern, but that was pretty much blown apart Tuesday as the index could not garner upside volume, opening the door to the downside. That downside is the 200 day SMA (1923) and 1895 where it bottomed on the March lows. The distribution indicates that is the course it seeks, i.e., trying to form a double bottom. The distribution has to stop. In the early 2003 base volume was very light as NASDAQ fell back to form the second leg; that shows there was not a lot of selling of stocks. If the big money dumps all of the stocks it up until recently was accumulating and tears down the leadership as well, then the base ultimately fails. For now the base still shows accumulation weeks ahead of distribution and once this interest rate reaction works through the market the economic story once again takes precedence.
S&P 500/NYSE
Blew through the April lows on above average volume. The reverse head and shoulders pattern is not dead, but it is not feeling well.
Stats: -17.56 points (-1.56%) to close at 1118.15
NYSE Volume: 1.508B (+26.62%). Volume opened up to the downside Tuesday as NYSE showed the second clear distribution session in six. After showing some decent trade as it moved up off the 50 day EMA, that volume faded when it needed it Friday and Monday, turning to selling volume instead.
Up Volume: 300M (-293M)
Down Volume: 1.202B (+616M)
A/D and Hi/Lo: Decliners led 3.28 to 1. Lagged NASDAQ all session but the results were similar by the closing bell as everything turned lower.
Previous Session: Decliners led 1.02 to 1
New Highs: 104 (-11)
New Lows: 70 (+35). The high/low differential is shrinking on NYSE as the lows start to pick up the pace.
The Chart: http://www.investmenthouse.com/cd/^spx.html
Similar to the other indexes, SP500 tried a modest rally, never got any traction, then turned over aggressively after Greenspan's testimony hit the wire. Broke the 50 day EMA (1127), some price support at 1125, and the April lows (1120.75). Optimal level to hold for the reverse head and shoulders would have been 1125 to 1120; it is not out of the woods, but the stronger volume selling inflicts a lot of damage to patterns versus low volume pullbacks. There was no reversal attempt and the SP futures were slaughtered after hours. MOT's earnings helped mitigate that damage, but it is doubtful if it will be able to turn SP500 back up into the pattern from here. It is not out of the question, but if NASDAQ heads toward the 200 day SMA, SP500 can easily test 1100 or the March low (1087).
DJ30
Volume was up as the blue chips sold through the 50 day EMA (10,391) once again though managing to hold roughly at the prior April lows (10,322). Volume was below average on the selling, so not as severe as its two relatives. It could use a quick test to 10,000 (the March lows) or even an undercut down to the 200 day SMA (9924). That would let it set up a double bottom, giving it a much broader base to break higher from.
Stats: -123.35 points (-1.18%) to close at 10314.5
Volume: 204 million versus 173 million Monday.
The chart: http://www.investmenthouse.com/cd/^dji.html
WEDNESDAY
Earnings and the Fed dominate Wednesday. MOT trounced earnings and guided significantly higher for Q2. Without question that is a winning story. Those stock specific results, however, have not been translating across the market. The Fed was the focus late Tuesday, and it will be the same Wednesday morning as Greenspan starts his talk to the Senate before the market opens. This talk will be more on point as to rate policy than Tuesday when the information had to be gleaned in the Q&A session. After what he said Tuesday, investors were not waiting around to see his reprise Wednesday.
There was plenty after hours negative holdover, mitigated some by earnings. Indeed, QQQ was edging higher in the aftermarket. Greenspan and the Fed's views on rates are going to be the primary concern again in the morning, however; at best the earnings give insight into the current quarter while rate hikes are going to impact the market months and months ahead. Thus the focus is back on what Greenspan says in the morning and latter and to a lesser extent with the Beige Book released in the afternoon. Greenspan will try somewhat to mitigate concerns, but the Fed is going to raise rates, and it is hard to paint a friendly picture unless it is specific as to the target and how it will get there. Don't count on that.
With Greenspan speaking early we anticipate the market to trade cautiously as investors wait and see if he has any new kernels of information they can cling to. Overall the increased volume indicates a lower test toward the prior lows. Then we see if the indexes are still ready to continue base building and work back up toward a breakout. Most stocks were under pressure Tuesday, including the leaders. Many still hold over near support; on any further selling we want to see the volume back off, indicating no heavy dumping of these important stocks. They need to hold up to help set the bottom and foster the breakout.
We still look for the market to hold near NASDAQ 1900 or higher and set the bottom of the base. Accumulation remains positive for now, and volume needs to back off on the selling to remain that way and show us that the jerk lower the past week was a reflex reaction to a sudden and overdone fear of rate hikes. We are not going to press on new positions, but wait for them to present themselves whether new breakouts or leaders testing support and then providing the rebound.
Support and Resistance
NASDAQ: Closed at 1978.63
Resistance: 1990 to 2000, the top of the late 2003 base. The exponential 50 day MA (2011), the simple 50 day MA (2013), the 18 day MA (2012). 2050 represents some prior price points. Breakout from the pattern is 2080. 2089 is the February closing high. 2112 is the early January high. 2154 is the January high.
Support: Some prices from the March consolidation attempt (1943). The 200 day MA (1921). Mixed tops and bottoms at 1900. The March low (1896).
S&P 500: Closed at 1118.15
Resistance: 1125 represents some price points. The exponential 50 day MA (1127) and the simple 50 day MA (1134) and the 10 day MA (1131). The January high (1155). Next is 1159 (February highs) and 1160 to 1175 the highs in that double top that spanned late 2001, early 2002.
Support: 1106 is a May 2002 top and represents some early 2001 lows. 1096 to 1100, then the March low (1087). 1075 to 1070 from the December consolidation.
Dow: Closed at 10,314.50
Resistance: The exponential 50 day MA (10,391). The simple 50 day MA (10,442). 10,570 is the April high. Price consolidation at 10,600 level. September/November up trendline (10,665). 10,747 is the February high.
Support: 10,000 to 9900-9850. The 200 day SMA (9924). 9859-9855.
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
4-19-04
Leading economic indicators, March (10:00): 0.3% actual, 0.3% expected, 0.0% February.
4-21-04
Fed Beige Book (2:00)
4-22-04
Initial jobless claims (8:30): 340K expected, 360K prior.
4-23-04
Durable goods orders, March (8:30): 0.7% expected, 2.5% February.
End part 1 of 2
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