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world stock market, us stock market
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5/20/04 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Target hit alerts issued Thursday: None issued
Buy alerts issued: NXTP; ABM
Trailing stops issued: None issued
Stop alerts issued: MATK; SPAB; DYAX
SUMMARY:
- Volatile within a narrow range as market basically sleeps.
- Too much focus on the lagging indicators.
- If oil stays high, what happens to rate hikes and the economy?
- Pre-expiration calm as market trades between near support and resistance.
Stocks mostly walk in place.
After a nasty Wednesday reversal that closed on the lows, investors seemed to forget about Wednesday by market open, rallying stocks early. Though that initial rally did not last, stocks never sold hard, holding easily above near support as the Wednesday downside momentum dissipated for the session.
After a higher volume reversal, stocks went to sleep on the eve of expiration as many of the big bets were placed earlier in the week. Volume dried up in anticipation of another expiration with the same questions about Iraq, oil, inflation and rate hikes still unanswered. Once again SP500 held above key support, but it was not tested by the action. The indexes don't paint a pretty picture but the last holdouts have not thrown in the towel. All in all the day showed little and did not change the near term negative character .
THE ECONOMY
LEI rises slowly, but March was a blowout.
This indicator looks 6 to 9 months down the road. It has been on a steady climb for over 6 months. April slowed to 0.1% versus expectations of 0.2%. Get out the salt. That follows a 0.8% gain in March that was revised from 0.3%. Massive revision, and it casts doubt over the April number as well. Seven of the 10 components were flat for the month, and that slowed the advance. The stock market was lower and energy prices were higher, the main drags on the indicators as both in theory lead to less consumption and a slower economy.
Economic trend is strong, but always watch for the details as opposed to the obvious.
The trend in LEI, however, remains very strong. The index is growing at a 3.5% to 4% annual rate, very strong indeed. Strong forecast indeed. We have to be careful, however, because now it seems everyone is focusing on lagging indicators and the 'hot' trend just as they did back in 1999 and 2000. Back then everyone was talking of strong employment leading to the mythological wage-based inflation as they discussed the 'white hot' economy being in a super strong uptrend. It was indeed trending higher, but we were seeing the clear signs of slowing in leading indicators as opposed to the lagging indicators the Fed was pawning off on the world as reasons for raising interest rates. The Fed had almost everyone looking in the rear view mirror as the car went over the cliff.
Classic example it today's Philly Fed report. It was woeful as far as expectations, coming in at 23.8 versus 32.0 expected and 32.5 in April. That was brushed off by the headlines and stories reporting on it because the trend is still up as it shows the twelfth consecutive month of expansion. Moreover, the headlines pointed out that though slower, the jobs portion was stronger. Again, looking in the rearview mirror as jobs are the last economic element to turn up and the last to turn down; once they start moving higher, no use in looking at them anymore.
Prices paid and costs of raw goods, however, shot higher. We talked in the past about how the demand side of the economy received more stimulus than the supply side and thus there was a danger of inflation if the supply side could not catch up. After three years of slump producers have been hesitant to ramp up production even with tax incentives to do so; they were burned with big inventories in 2000 and they are not going to do it again. Unfortunately that put them way behind and these jumping price components show they have not caught up. The worst thing that could happen would be to cancel incentives for businesses to continue to invest beyond what they think they will need. As we have seen, the recovery keeps beating expectations, and there has to be something to make producers expand production and production capability beyond their conservative views. Otherwise we are in for inflation.
Oil may be peaking, but it has to fall or economic trouble is ahead. How does that play with rate hikes?
We noted Wednesday that oil prices looked to be peaking based on what the oil sector charts were telling us all regardless of what the experts in the field think. You have to remember, once a trend is established in an area, no matter what area, the experts think it will go on forever. We just discussed one example, the 'red hot' economy of 2000. They see the trend, see the economic growth projections, and viola, there is $50/bbl oil. We have been there, done that. A lot of empty office space in the 1980's was built on $50/bbl oil that just never quite appeared. $9/bbl oil just could not quite make the rent payments.
Now we have oil over $41/bbl. If it holds at this level for a few months the economy is in trouble. No matter how strong growth projections are right now, paying over $2/gal for gas is going to cut into disposable income and curtail driving, vacations, discretionary buying, etc. While the US is much more energy efficient regarding the GDP growth versus BTU used ratio, it is not a wash. If prices remain high enough long enough the economy will falter.
So, what does the Fed do now? LEI is already forecasting slower trend growth based on high energy prices. As noted above, we cannot ignore the possibility of a slowing growth trend because of the obvious that is being overlooked, at least by the television heads, in favor of a lagging indicator such as employment. The Fed has to be chagrined at this; one of the worst case scenarios for the Fed is rising prices while energy prices spike sharply higher not on just demand, but on geopolitical concerns. That acts to slow the economy but does not alleviate the increases in energy prices. We said it in the last 1990's and it is still true today: raising interest rates is not going to convince OPEC to produce more oil. They are not connected; there is no market force at work there. The only market force is the hazy fear only some OPEC producers have about prices being too high so as to stall western economies that use their only resource. If that happens you simply won't sell as much oil and you lose pricing power.
So does the Fed go ahead and start raising rates, adding insult to injury with the already spiking energy prices? You sure can lower energy prices by jacking up rates high enough to stall the economy. It did just that in 1999 and 2000. The law of unintended consequences strikes again. There is always something unintended that happens when the Fed acts on rates that works to exacerbate the problems. Now the Fed is caught with the Fed Funds rate too low it has to raise rates. The only thing that helps it out is that the nominal interest rate is higher and it can raise rates and still be neutral. It is a tricky tightrope to walk once more, however, as the ultimate impact of the energy tax is not known and extremely difficult to quantify. The Fed has to worry about supply unable to meet demand yet which is pure inflation trouble and at the same time trying to quantify the extent of economic slowdown if oil continues to rise or hold steady. It has to raise some, but it is ever more critical that it not go too far. It is also critical that fiscal policy encourage producers to produce.
Summary: This makes the current rate hiking campaign even more frightening than it would have been, and anytime the Fed acts it warrants concern. We feel this is exactly what the market is struggling with right now, why it cannot get traction. Maybe it can divine where prices will be given the slump in oil sector stock prices of late; if they are signaling a price fall, then the market could find a bottom somewhere around here still. That will be easier once the market sees Iraq taking over and having the ability to govern itself and not collapse under the siege of the terror groups and unfriendly neighbors that fear any type of free society in the area in a kind of reverse domino effect.
THE MARKET
Expiration is on the way and the market was frozen in its tracks Thursday in anticipation. The big moves were earlier in the week, but Friday may well be back to more violent swings. Thursday changed nothing with SP500 still holding over the 200 day SMA while NASDAQ and DJ30 remain in their near term downtrends below the 10 day EMA. The breakdown in the latter two has not been rectified and the reversal off the 200 day in SP500 has come under pressure. The market does not look great and the uncertainties confronting the market are still there. We have noted that rallies are often born out of the worst looking times, but there is also at least some technical spark there. That spark may be SP500's refusal to give up the 200 day SMA, but as we said before, it will have to show it.
Market Sentiment
Bulls versus Bears: Bulls are still falling, dropping to 43.6%, getting down from that bearish 55% level. Bears have risen to 26.7%, up off 20% and its bearish implications. Still a long way from a crossover that would be the best indication, but improving.
VIX: 18.67; -0.26
VXN: 25.54; -0.55
VXO: 19.36; -0.01
Put/Call Ratio (CBOE): 1.21; +0.41. Jumped higher as more downside bets placed and positions squared ahead of expiration.
NASDAQ
Tapped the 10 day EMA on the high, tested the Tuesday gap up point on the low, and finished in the middle, still in the downtrend.
Stats: -1.58 points (-0.08%) to close at 1896.59
Volume: 1.544B (-15.93%). Volume back to very low, below average levels as NASDAQ held steady. Did not do anything to change the near term character below the March lows.
Up Volume: 636M (-400M)
Down Volume: 885M (+120M)
A/D and Hi/Lo: Decliners led 1.33 to 1
Previous Session: Advancers led 1.12 to 1
New Highs: 29 (-13)
New Lows: 101 (+20). New lows still remaining light overall as NASDAQ stalls out.
The Chart: http://www.investmenthouse.com/cd/^ixq.html
NASDAQ was flat on the session, sleeping on low volume as it tapped near resistance in the form of the 10 day EMA (1911) and backing off. Virtually no change after the Wednesday reversal that saw NASDAQ rally to the 18 day EMA (1930) and then tank on high volume. It has shown much more strength downside than upside as it struggles below the March lows (1897) and layers of resistance such as the 10 and 18 day EMA, and the 200 day SMA (1948). Again, the recent break below that March low opens the door to more selling, and the inability to rebound successfully is a sign of weakness.
Once again the QQQ outperformed overall NASDAQ, posting a modest gain but it too failed to take out the 10 day EMA (34.92) on the close. It has not broken its March lows at 34, successfully bouncing off of them Monday when tested. It and the SP500 remain two of the most prominent positives for the market at this level.
S&P 500/NYSE
Still working laterally over the 200 day SMA, able to fend off the nasty Wednesday reversal through lack of concern by investors.
Stats: +0.51 points (+0.05%) to close at 1089.19
NYSE Volume: 1.207B (-21.76%). Volume tanked as the large caps went nowhere. Not bad given the high volume reversal Wednesday.
Up Volume: 529M (-264M)
Down Volume: 669M (-60M)
A/D and Hi/Lo: Advancers led 1.4 to 1
Previous Session: Advancers led 1.18 to 1
New Highs: 11 (-11)
New Lows: 51 (+7)
The Chart: http://www.investmenthouse.com/cd/^spx.html
The selling momentum died off quickly from the Wednesday close to the Thursday open as large caps actually managed some positive territory early. A midday slump fell to 1085, but that was well above the 200 day SMA (1081). That was enough, however, to spark some buying interest and push stocks back to session highs before some late selling closed them in the middle of the range. That shows precisely the standoff between the bulls and bears heading into expiration. SP500 and its large cap makeup has two things going for it, though only one is for certain at this point. First, it is home for many large drug, medical, and healthcare stocks that are often used as safe havens during selling. As we have seen, medical related stocks of all sorts have performed better during this market weakness. Second, there is this belief that money is transitioning into large caps as the bull run in the economy is in its second year. Perhaps that is another reason that explains why SP500 is holding up, but we note that it won't go far without the rest of the market.
DJ30
Held flat after the Wednesday high volume reversal. As with the other indexes, given the reversal that was not bad action but it did not change the character. DJ30 is still below 10,000 and the 10 and 200 day SMA (10,017; 10,037), and still below the March lows (10,007). It is moving laterally, trying to hold the line, but it remains in that near term downtrend with the 10, 18, and 50 day EMA all stacked up on each other and sloping down.
Stats: -0.07 points (0%) to close at 9937.64
Volume: 155 million Thursday versus 227 million Wednesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
FRIDAY
Expiration Friday for May was foreshadowed Wednesday with the violent reversal late in the session. Thursday was volatile but in a narrow range. Friday we see if those in control late Wednesday once again position for the downside as they did Wednesday. Everyone is watching the SP500 and to some lesser extent the QQQ as they have yet to break down though they are on the ropes after the Wednesday reversal. Earnings are mostly done, economic reports are waning for now, and the market looks, as always, to the future.
At some point the near term uncertainty relating to Iraq, rate hikes, inflation and the election will be over. At this juncture the market looks weak and in trouble, but it also has not broken down in every sector. It is still in the decision making process, always an uncertain time for stocks. We are sticking with stocks in solid upside patterns or that are in established downtrends as those tend to go about their business regardless of the market action. If it breaks lower, however, even good patterns will be under pressure to hold up. Choppy markets pressure all stocks; those left standing when it is over will be the survivors, ready to lead. Those that continue to hold support in the upper reaches of their patterns are worth letting ride, but if SP500 breaks lower and cannot recover, they will feel the drag as well.
We may not do a whole lot Friday unless the market establishes a clear trend, something not easy to do on expiration Friday. We will just be patient and let opportunities to develop if they will. No need to rush in at this point right as the market is deciding what it wants to do unless there is a clear move in a very strong ore very weak stock.
Support and Resistance
NASDAQ: Closed at 1896.59
Resistance: 1900 is potential resistance. The MA in such a move lower are always a resistance level. 10 day EMA (1911); 18 day EMA (1930); 200 day MA (1948). The April closing low at 1978. 1990 to 2000, the top of the late 2003 base. The simple 50 day MA (1973) and 50 day EMA (1968). 2050 represents some prior price points and has stopped NASDAQ the last time it tried that level. Breakout from the pattern is 2080. 2089 is the February closing high. 2112 is the early January high.
Support: 1890, the gap up high at on Tuesday. The April lows (1880, 1878) trying to hold. 1850 below that. Some price tops at 1777, 1750.
S&P 500: Closed at 1089.19
Resistance: The 10 day EMA (1095). 1096 to 1100. The 18 day EMA (1103). 1106 is a May 2002 top and represents some early 2001 lows. 1125 stalled the last bounce attempt. The exponential 50 day MA (1115) and the simple 50 day MA (1118). The April and January highs (1150 to 1155). Next is 1159 (February highs) and 1160 to 1175 the highs in that double top that spanned late 2001, early 2002.
Support: April lows (1079, 1076). The 200 day SMA (1081). 1075 to 1070 from the December consolidation. 1058 - 1060 from November tops.
Dow: Closed at 9937.64
Resistance: The 10 day EMA (10,018). The 200 day SMA (10,037). The 18 day EMA (10,100) and 10,250. The exponential 50 day MA (10,246) and simple 50 day MA (10,261). 10,570 is the April high. Price consolidation at 10,600 level. 10,747 is the February high.
Support: 9900-9850. 9650; 9585.
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
5-17-04
NY Empire State Index, May (8:30): 30.21 actual, 34.0 expected, 34.03 April (revised from 36.1)
5-18-04
Housing starts, April (8:30): 1.969M actual, 1.98M expected, 2.011M March (revised from 2.007M).
Permits, April, (8:30): 1.999M actual, 1.96M expected, 1.946M March (revised from 1.976M).
5-20-04
Initial jobless claims (8:30): 345K actual, 326K expected, 333K prior.
Leading economic indicators, April (10:00): 0.1% actual, 0.2% expected, 0.8% March (revised from 0.3%).
Philly Fed Index, May (12:00): 23.8 actual, 31.0 expected, 32.5 April
End part 1 of 3
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world stock market
us stock market
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