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world stock market, us stock market
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5/08/04 Investment House Daily
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SUMMARY:
- Strong jobs report tries to rally stocks but fear of rate hikes still controls for now.
- Sizzling jobs report continues string of strong economic data as expansion beats expectations
- Market still discounting interest rate hikes as large cap indexes head toward 200 day SMA.
Stocks still selling on good news in fear of rate hikes.
Friday was another example of investors betting against the economy in fear of the Fed embarking upon a rate hiking campaign. As previously discussed, that fear is not without merit given the Fed's track record on the economy once it decides it needs to clamp down on money supply. Despite strong economic data, investors fear the Fed will smother the recovery and thus limit earnings growth. When that happens, stocks are suddenly overvalued as earnings drives stock prices.
Stocks tried to put on a fairly brave face. Futures were down but once again rallied on the release of strong economic data with non-farm payrolls climbing another 288K, well ahead of expectations. They fought off a low open and turned positive. They held that gain most of the session before sellers took over ahead of the weekend and once again sold off. No relief bounce on the strong number, no short covering rally in bonds as the jobs report was rock solid.
Semiconductors showed relative strength with SOX gaining 1% though it was up over 2% on its high. Massive weakness in small and mid-cap stocks, however, seriously undercut that strength as the large cap and smaller cap indexes drove toward the March lows and the 200 day SMA. There are indications the selling is starting to get overdone, and another quick blowdown toward those levels will most likely do the trick. A look at the index chart patterns shows major weakness, but if they continue to fall hard and fear notches up further on breaches of the May low and the 200 day SMA, then there is enough to turn the market. Remember, this is a correction, not a major bottom. Sentiment indicators don't have to be at all time highs to do the trick, and they are getting there.
THE ECONOMY
Honey, now that's good job creation.
No way the economy could do better than March in creating jobs, but it did. Sure the overall number was lower (288K versus 337K revised), but it was still very strong, and when you factor out the 75K jobs in March that resulted from the end of the grocery strike, April was even stronger. 288K new jobs, the unemployment rate falling to 5.6%.
Strong in the overall number and stronger across the board. Business and professional services led the way with 123K, manufacturing up 21K (March revised up to 9K), construction +18K, retail +23K. All areas gained, and as the breakdown shows, it was not all gardening and burgers. For the past two months 625K jobs were created, the highest 2 month surge since April 2000 at the peak of the prior economic run. For the year job gains average 215K per month.
Hourly wages rose 0.3% the largest gain since last July. Interestingly, average hours worked held flat, but with jobs and wages increasing that means employers are adding workers, not more hours per worker. The productivity gains during the recession had allowed employers to run leaner and squeeze more out of existing (remaining) workers. To ramp up production further to meet demand they finally had to start adding workers. It came as we anticipated, a breakout, a bursting dam, a light switch turning on. Once businesses became confident enough, they started hiring fast.
Of course the spin doctors were out in force Friday saying it was just two good months out of thirty, the economy is still in trouble, deficits are still high, and it is just a matter of time before pigs start flying, dogs started sleeping with cats, etc. The argument that jobs took too long to recover is just wrong. Economists know that a recovery does not start until the stock market bottoms. That is the point where you start the job watch clock because the market is the best leading economic indicator. When it turns, then the economy turns. We said all along that job recovery would not start until late 2003 based on this indicator. It started a bit earlier than that, and now is really running. It also still amazes (amuses?) me how a question about job creation can be answered by a discussion about how we should not be in Iraq. Or there is the half-hearted acknowledgment of the gain but complaints that there is still a long way to go. That is like saying you are not back in a bull market until the old high has been hit. Love being in an election year with only 6 short, short months left.
Wholesale inventories rise but still low.
March stock on hand rose 0.6% (0.5% expected), but sales jumped 2.7%, the largest gain since August 1994. February inventories remained at a 1.2% gain but sales were revised higher to 2.1%. That took the stock to sales ratio to another record low at 1.13 months from 1.16 in February. This is one reason the Q1 GDP number did not jump as much as anticipated, but it does mean that manufacturing activity will have to increase.
It needs to increase for a number of reasons. One is the old supply and demand. This recovery got off on the wrong foot because the first tax cut package relied too heavily on so-called 'rebates' to US citizens. Rebates are historically proved ineffective, but Bush was not going to get his first tax cut passed without including this giveaway in the package. Thus a billions of dollars in potential stimulus was squandered, pumping up demand a bit but doing nothing to help supply. That is lingering even today as we see in the inventories data. That is THE critical inflation problem, i.e., where supply is not increased to meet demand. In any recovery you need to make sure the supply side is given a lot of incentive to invest and produce even before demand is stimulated. That means credits, higher expensing, accelerated depreciation, and capital gains cuts. Those did not emerge until the last round of tax cuts, and while they really helped jumpstart the supply side, we see that side of the economy is still running behind as business have yet to make big commitments to plants and inventory building. Thus it is imperative that we don't eliminate incentives for business to keep investing; business still needs to increase production and output to meet demand or we really do face inflation problems.
We avoided inflation in the 1980's and 1990's because of the massive investment in technology that started with tax credits shot supply higher, and it was able to meet any demand that came along. We get into trouble when supply is handicapped or ignored while demand is pushed. The Fed can raise interest rates and get them up to nominal rate levels, but it also needs to keep close eye on the money supply and not let it dry up. Too little money and it does not matter where rates are.
Another major reason inventories need to rise more is supply interruption. Lean inventories work great when everything is perfect. They allow more cash flow, better profits, and the ability to expand because everything is not tied up in inventories. Perfection is hard to maintain. We live in a world of terror strikes. A supply interruption of any extent causes delays and price spikes. Another inflationary problem. We are seeing it in the price of oil and gasoline already. Jus the fear of the problem has helped drive prices higher.
Economic future.
The market continues to struggle with economic growth versus the Fed clamping down on that growth. The future still looks good for job creation, but that is not the real key. Employment is a lagging indicator, so the fact that it is rising is good, but it does not provide insight into the market's future. That comes from the probabilities of rising earnings, and those come from expanding sales.
Looking at the other economic indicators such as leading indicators, business investment, consumption, ECRI, and many more future looking economic indicators, the economic future looks solid. Growth projections have underestimated actual growth all along just as they underestimated the slowdown all the way down. Economists are just as bad as any other profession in clinging to the most recent trends and failing to see new trends.
We see this as a broad-based expansion that is continuing to build strength. There is talk of fading earnings in Q3 and Q4 based on difficult comparisons. Yes comparisons will be harder, but if the economic expansion continues they will beat them an continue to grow at a healthy pace. The fear remains the Fed getting in the way of that growth. The market still has to shed the last worries about valuation vis- -vis any Fed rate hike impact. Another blow lower toward the 200 day SMA on SP500 and DJ30 more and more looks as if that will be all it takes.
THE MARKET
Stocks could not hold the attempted rally yet again, closing miserably near session lows. NASDAQ gave up 40 points, SP500 broke 1100 on stronger volume, small and mid-caps plunged, leading the charge lower. NYSE decliners outpaced advancers better than 12:1.
It was not all gloomy, and some of the bad data is actually good data in the world of the market reading. NASDAQ showed relative strength all day until it the afternoon. SOX was up over 2% though it closed out the day 1% higher. Tech and chips, the leaders to the downside, performed relatively better. NYSE breadth was unmercifully bad. You have to go way back to October 1997 during the height of the Asian crisis to find such a horrid breadth reading. These readings often come with important market turns.
In 2002 the long downtrend came to an end when there were two sets of strong negative breadth on NYSE. The first was on July 22 during the first leg down at -4:1. The second was a series of high negative readings in October, the worst at -5.96:1 on October 9 just as the market bottomed. This year there was a massive negative breadth reading on April 13. Now we are seeing the second high readings as SP500 cuts toward the March low and 200 day SMA. This pair of readings coming as DJ30 and SP500 finally sell off, joining NASDAQ and SOX at these levels, suggests the bottom of the base is forming.
In addition, volume is playing into this scenario as well. We discussed NYSE versus NASDAQ last week, noting that NYSE volume was catching up to NASDAQ. That is an indication the more speculative tech sector is getting sold out. Friday NYSE volume actually eclipsed NASDAQ as DJ30 and SP500 exploded lower on rising volume, heading toward the March low and the 200 day SMA as those two indexes started to catch up with the tech selling. The CBOE put/call ratio again closed over 1.0, the fourth time in the past week. The overall put/call ratio (all regional exchanges included in the calculation) closed at 0.98; another downburst toward the 200 day SMA on SP500 and DJ30 would push that over 1.0 on the close as well.
All of these point toward a potential near bottom. They are secondary indicators and thus take a back seat to price/volume action, and there have been 6 NASDAQ and 5 SP500 distribution sessions in the last 6 weeks. In other words, the distribution has occurred as has the selling. Further, no market analysis is complete without a look at leaders. Many areas of strength were hit Friday including gaming, oil & gas, medical instruments and drugs. In short, even the defensive areas were not a safe haven. The momentum is still downside, and another hard drop looks likely but could also set the bottom. The weak rebound to start the week and the sharp rollover put a lot of pessimism back into investors as hope was squashed out again. That plays into a firmer bottom setting up, but for now it has just hinted at one with secondary indicators.
Market Sentiment
Above we noted sentiment indicators that suggest the market is hitting some extremes that are part of bottom formation. We will no doubt receive emails citing the bulls versus bears surveys that are not hitting extreme levels. It is true that some of these indicators are not hitting extremes. The VIX, for example, is nowhere near an extreme level. That does not, however, mean that the other indicators are without merit. Rarely do you get all sentiment indicators lined up together. Moreover, this is not a major market bottom trying to be put into place, but a correction after a big run in 2003. In other words, it is c consolidation in a continuing run higher. Thus the indicators such as bulls versus bears or VIX don't have to all hit extreme levels.
VIX: 18.13; +1.08
VXN: 25.5; +0.32
VXO: 19.07; +1.42
Put/Call Ratio (CBOE): 1.01; -0.25. Fourth close at 1.0 or above in the past two weeks. A series of closes over 1.0 such as this accompanied the late October 2002 bottom as well as other bottoms.
NASDAQ
Spent most of the day in positive territory, but could not make it through the 10 day EMA, tapping that point on the high. It sold off and gave up 40 points to close at the low.
Stats: -19.78 points (-1.02%) to close at 1917.96
Volume: 1.648B (-7.07%). Volume backed off on the reversal and selling. There was no heavy dumping of stock just as there was no dumping Thursday when NASDAQ sold off and rallied back over the 200 day SMA on rising volume. NASDAQ really appears to be sold out here at it nears the March lows once more. Accumulation in the NASDAQ consolidation is still solid at 4 to 2.
Up Volume: 599M (+133M)
Down Volume: 1.037B (-245M)
A/D and Hi/Lo: Decliners led 2.83 to 1. Strong downside breadth once more, but nowhere near the league of NYSE.
Previous Session: Decliners led 2.46 to 1
New Highs: 30 (+1)
New Lows: 98 (+22)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
Rallied most of the session until reality set in and it broke lower, closing below the Thursday intraday low when NASDAQ bottomed and rebounded on some stronger volume. The 10 day EMA (1957) on the high but that did not last. It put up a fight and only got sloppy late. It slid below the April low (1919) and is heading toward the March low (1896). A slip below that would provide a good scare, and with the other indicators in the market, a potential point to bottom.
SOX continued its relative outperformance, but it too gave back much of its gain. It hit the 18 day EMA on the high (465) and gave up 7 points on the close. It is the first index to undercut the 200 day SMA and the March low, and it is trying to be the first index to recover. Classic double bottom with the slight undercut of the March leg down. Of course, it now has to make that strong volume move higher. There is nibbling ongoing in the chip stocks; that will have to turn into serious buying.
S&P 500/NYSE
Undercut near support on volume, moving toward the March low and the rising 200 day SMA. It is finally breaking down in this consolidation, something it needed to do.
Stats: -15.29 points (-1.37%) to close at 1098.7
NYSE Volume: 1.649B (+9.55%). Strong, rising volume as SP500 undercut near support. The distribution of late has taken its toll.
Up Volume: 182M (-115M)
Down Volume: 1.454B (+252M)
A/D and Hi/Lo: Decliners led 12.29 to 1. Massive downside breadth rarely seen in the market. This pairs with the April -6.7:1 reading in April and this extreme suggests the selling is getting extreme. Even the Thursday breadth was excessively negative.
Previous Session: Decliners led 4.28 to 1
New Highs: 27 (-1)
New Lows: 713 (+402). An explosion in new lows as SP600 and SP400 broke below the March lows. This is another signal of some extremes popping up.
The Chart: http://www.investmenthouse.com/cd/^spx.html
Broke through the weekly up trendline from the early 2003 lows and broke 1106 as well. Still holding in a support range at 1096, but looks ready to try the March low (1087 intraday, 1091 closing) and possibly the 200 day SMA (1076). Heavy negative breadth, breaking near support, surging new lows. It is finally making the break lower it needed, and it looks to be doing it on the right kind of negative numbers.
DJ30
Sliced through 10,250 with ease, selling on rising, above average volume. As with SP500, DJ30 is starting to make a drop toward the March low (10,007 intraday, 10,048 closing) and the 200 day SMA (10,001) for the second leg of this drop. Given the relative strength in SOX and NASDAQ, the breadth readings, the new low readings, and the put/call ratio, we believe a test and slight undercut of the 200 day may be all DJ30 and SP500 need to be ready for a reversal.
Stats: -123.92 points (-1.21%) to close at 10117.34
Volume: 228 million Friday versus 202 million Thursday.
The chart: http://www.investmenthouse.com/cd/^dji.html
End part 1 of 3
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world stock market
us stock market
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