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world stock market, us stock market
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5/27/04 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Target hit alerts issued Thursday: ULGX
Buy alerts issued: FCEL
Trailing stops issued: IDSY
Stop alerts issued: DHR; MANT
SUMMARY:
- Market continues modest advance, shaking off midday dip.
- GDP bumps higher as Fed wrestles with rate hikes during an energy spike and renewed terror threats.
- SP500 takes out the 50 day SMA on rising trade as pre-summer rally continues.
Market resumes advance on slightly improving trade.
Big move Tuesday needed a breather, and after taking Wednesday off stocks resumed the pre-holiday rally. Things started well enough, but then midmorning the bids dried up, a sell program hit, and stocks were at session lows. Buyers returned mid-afternoon, however, and SP500 was able to recover and close above its 50 day SMA. While it still has to deal with 1125, the 50 day simple was another important milestone to put behind it in the recovery.
The ability to recover from mid-session selling and to advance on some better volume once again is just another sign of an improving market climate that has the major indexes back above their 200 day SMA, further working on the right leg of their double bottom patterns. Given the 3-day weekend ahead, the improving volume, even though below average, shows some accumulation ongoing as opposed to just a drift higher. It is by no means a powerful move with a clear cut move into stocks by the big institutions. Instead there is definitely a lack of sellers after the sharp reversals two weeks back with sellers stepping back and letting the market make its bounce. The improving volume shows something other than a mere relief bounce, but the move up was mostly just recovering for selling with few big breakouts. Thus this move left us a bit in limbo: higher prices but not a lot to buy into other than just a momentum move. Again we had to lay off some low volume movers ahead of a 3-day weekend, practicing some patience and looking forward to more volume ahead.
THE ECONOMY
Second Q1 GDP revision stronger on some better inventories.
It did not hit the 4.5% expected, but at 4.4% it beat the first revision (4.2%), helped by some better inventories. While economists were begging for higher inventory rates last year and early this year, already you are hearing the questions about the current rise: is this because business is slowing? Could be. The economy cycles within its overall trend just as the stock market. Business could have slowed some after a strong pace earlier in the year and late 2003, causing more inventory buildup. It can also be that businesses are simply increasing production in the face of continued overall strong consumer and business demand.
There is also the issue of hoarding raw products inventories. We discussed this two months back based on some comments from those in industry, particularly wood products, noting that supply was becoming an issue, and in order to have adequate materials on hand to manufacture goods, producers were buying and stockpiling as well as buying futures. With the continued China boom wood prices are rising even further. In addition, there is a cement shortage developing, also related to the voracious Chinese growth. We noted in 2002 how 5/8 inch aggregate had become hard to get for anything other than commercial cement users; those users were allocated first. Now the actual cement (concrete) is being bid up as well. Thus another element of the rise in inventories is actual raw materials on hand by both producers that provide them and the manufacturers that use them.
The Personal Consumption Price Index, a favorite of the Fed's with respect to inflation, fell to 1.7% from 2.0%. That is a major drop in what the government measures as inflation. As we all know, education and healthcare are not included, and those are two areas where inflation is alive and well. In any event, the Fed, if it wants to, can use this as a reason to hold off on rate hikes. We don't believe that would be the best thing the Fed could do right now, however.
Oil prices always lingering, though look to be peaking as anticipated.
If oil prices remain high this demand will, by historical comparisons, start to taper. We predicted oil prices were close to peaking, and Saudi Arabia is refusing to take no for an answer. It came out again today and said it wanted a big enough move by OPEC to make a "psychological impact" on the oil market. It is a thing of pride with the Saudis as the owner of the largest proved reserves and daily capacity to be able to influence the world oil price. It goes beyond that as well; that is the only stick the country has. If it loses clout and is also besieged by terrorist attempts to topple the regime, it quickly spirals down.
The tough talk and, as it turns out, actions (OPEC has already started putting more oil on the market) is having an impact on prices. The pressure to rise has been reduced for now, and oil fell below that psychological $40/bbl level. As we said before, a peak in prices does not mean a rollover. Demand is still strong and refining capacity is an issue here in the US as refineries, already behind and overworked, try to crank out the various different blends required by the EPA. With the driving season just starting, gasoline prices won't be going down anytime soon even if oil drops to $35/bbl.
The Fed's dilemma: low Fed Funds rate needs adjusting higher, but surging energy prices and new terror threats sap economy.
There is one constant of history: we never learn from it. I am reminded how in school we are asked why we learn history, and one of the responses is that we have to learn from our mistakes. Given that society and those in charge make the same mistakes again and again, it is clear there is no learning from history, just a process of documenting repeated similar mistakes. What is true is that practice at screwing up makes perfect screw-ups.
The Fed is the perfect example of our inability to learn from history. First, you cannot effectively regulate free markets. When you do, they are not free and they adjust to the regulation and start building imbalances that will continue to grow until the regulation is changed. Then they shift, not gently as the Fed likes to talk about with its 'soft landings,' but violently as the props that caused the imbalance are kicked out from under. Second, the Fed ignores the first history lesson and each time says to itself 'this time it will be different.' It talks about reason and a steady hand, being analytical regarding the data. At first it may be, but after a while it sees no results, gets impatient, and then succumbs to the very supposed irrationality in the market it says it is trying to fight. It overreacts and makes the same mistakes all central banks have made. Just look at the parallels between the late 1920's central bank and the current Fed's actions in the late 1990's and early 2000. They are striking and almost shocking in their similarities. The results of both actions, therefore, are not surprising. The only thing that saved us from a 1930's style meltdown was the tremendous capacity and efficiency of our economy today. It certainly was not the Fed's anemic rate cutting campaign after the collapse that restored the economy and kept us from a decade long deflation nightmare.
So, what pops to mind is the rule of unintended consequences. EVERY TIME the Fed acts, up or down, there is something else that comes along to just upset the apple cart. Watched 'Jurassic Park' again the other night and noted how the 'chaos theory' is very similar: you mess with natural systems, and they will still find a way. You cannot control the outcome, only some of the symptoms, until the entire thing cleanses itself with a big upheaval and goes about its business on its own.
The Fed has lowered interest rates to historical lows after its ridiculous rate hiking in the late 1990's and early 2000. It had to do the former because of its folly in doing the latter. While raising rates it was worrying about minutia, making mountains out of mole hills. Then when it had harpooned the economy, real trouble hit. The market crashed ahead of the economy. The election added problems. The recession that inevitably follows. 9-11 struck just when the market was trying to turn. Corporate scandal. Millions unemployed as large corporations went under and small companies were caught in the wake. Afghanistan. Iraq. Plenty of troubles.
Now it is caught with rates too low to do anything in the event of another world shock. It also has an economy with a demand side that is ahead of supply, the remedial economics textbook definition of inflation. At the same time it has surging energy prices that, despite what many like to say, are not really inflation but are a tax on growth. They truncate economic activity if they stay too high for too long. While it is true they are not as high as the were in the 1980's in today's dollars, they are still high enough to bring about another economic recession. In light of this, does the Fed want to raise rates? It would slow the economy even as energy prices are doing the same. Gee whiz, you mean to tell me that oil prices rise when there is demand and that ultimately has the effect of slowing economic growth in a natural cycle? Yes grasshopper, that is how things work unless the Fed steps in.
On top of that it has a terror threat at hand. That could cause some slowing of the economy as well though many are admirably thumbing their noses at the terrorists and saying in national polls that they are not changing any plans based on these threats. The terror threat cuts both ways, however. With rates at 1%, the Fed has no maneuvering room in the event of disaster. It can always buy treasuries and has other methods, but confidence in institutions at times of crisis is key, and with interest rates as the one thing the general public understands regarding the Fed, it has to be able to lead by showing it is ready, willing and able to intervene. One percent is basically an empty ammo case.
To raise or not to raise?
The Fed has no choice. It has got to raise rates. Its planned approach of 'go slow and see what the data says' is even more bogus now than usual, however. First, it needs some room to work if there is a problem. Second, the Fed will lose patience with its go slow approach because the economy never responds until the cumulative impact of many rate hikes finally hits. It will go slow for a year (if nothing major happens) and then start with 50 and 75 basis point hikes until the economy squeals like a pig. Then it is too late.
What it needs to do in this situation even more so than usual is tell the market 'this is our target based on where we see nominal rates currently.' Then it needs to raise to that level all at once. Tell the market you are going to do it, let the market adjust, then do it. You instantly get some catastrophe maneuvering room, you don't shock the market, you give the equity markets a tremendous boost of confidence in the Fed and the future of earnings, and you regain the credibility that you have shredded in the prior 5 years if not the entire history of the central bank. If you think we are kidding, just remember the 'WIN' buttons of the Ford years and how that was supposed to 'whip inflation now.' All that seemed to do was whip up inflation to incredibly painful levels when Carter took over. When I was 18 I had a button that said 'porno stuntman'. Wearing the button did not make it so.
Will the Fed do this? Not a Greenspan Fed. Some of the newer chairman wannabes are talking as if this might be something they would do, but none have gone on record saying that is the best way to handle the situation. Greenspan has been chairman since 1987 when he crashed the market as his first order of duty. He has not changed his playbook. If ever there was a time to do it, this would be it given the imminent threats, whether or not they ever materialize. You don't think the big money in the market is already worrying over the Fed's lack of impact power at these current rates?
THE MARKET
Pre-summer rally continues on some improved trade, taking out another key level.
Blue chips were in the lead Thursday as techs and smaller caps took a back seat. The market is finding some support from different sectors, not bad as money is moving in and is being spread around as opposed to just one area getting all the love. That is helping all of the indexes move higher through near resistance, and doing so on volume that is again increasing on up sessions. It is by no means strong trade, but it is rising on up sessions. Given the Memorial Day holiday Monday, not bad action at all.
We refer to this as a pre-summer rally because it is starting before Memorial Day, the traditional yardstick for the start of the season. There was follow through earlier in the week, and this is a continuation of that follow through, adding to the rally that started just about two weeks ago. Not a blowout rally, but it is pre-holiday, and very importantly, summer rallies can sneak up on you quietly and be half over before most acknowledge there is a rally underway. We said the market would start moving ahead of resolution to all of the near term issues facing it such as Iraq handover and oil pricing, and it is trying to do just that.
Some are saying the move or summer rally won't occur until June 30, the handover date. They also said back in 2002 that there would be no market recovery until the economic data showed definite improvement. Of course, the market started rallying when things still looked bleak, just as it always does. The market anticipates events; it only reacts when there is major, major news that could not be anticipated. It anticipated the peak in oil prices as the oil services stocks rolled over three weeks before the price actually started to soften. That was closer in time than usual, but it is more of a short term issue such as the Iraq handover. The market reads events ahead of time and while the handover may add to a move, we think any move based on that even starts before then, and it may have started now.
Market Sentiment
Bulls versus Bears: The measures held roughly flat this past week with 42.4% bulls and 27.3% bears. Bulls are falling toward the more bullish 35% reading, but bears, though moving higher, are still at rather low levels. Indeed, 20% is considered bearish for the market, and they are stubbornly holding out as usual.
VIX: 15.28; -0.69
VXN: 21.5; -0.13
VXO: 15.53; -0.7
Put/Call Ratio (CBOE): 0.94; -0.07
NASDAQ
Continued the rally through the 200 day and 50 day EMA, moving higher on improved but still below average volume. That shows modest accumulation but definitely not heavy conviction.
Stats: +8.35 points (+0.42%) to close at 1984.5
Volume: 1.645B (+2.23%). Volume rallied on an up day, something good to see as opposed to lower volume or selling on rising volume. Still, it has been below average the entire move, hardly a showing of widespread movement into technology.
Up Volume: 1.048B (-136M)
Down Volume: 496M (+94M)
A/D and Hi/Lo: Advancers led 1.2 to 1
Previous Session: Advancers led 1.44 to 1
New Highs: 78 (+9)
New Lows: 23 (-5)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
Gapped higher, tested the simple 50 day MA (1972) on the low, and managed to rebound in the afternoon session to post another gain. Rising but modest volume shows modest accumulation. NASDAQ definitely has not been under heavy accumulation, just enough to keep it moving higher since the selling backed off last week. It ran into resistance at 1990 on the high (1991) and fell back. That resistance runs up to 2000, the next key level ahead, though it has cleared some major hurdles in its first moves off the low. It is always a process of breaking resistance, resting, then breaking the next level when an index recovers. When volume remains low, it makes the process that much more laborious.
QQQ gapped higher as well and managed to hold a gain on once again rising volume. Still leading the overall tech index, though the rest of the pack is catching up. Moving toward resistance at 37.50, the hump in the middle of the double bottom pattern.
S&P 500/NYSE
Cleared the simple 50 day MA on once again rising volume as it continues the post follow through move.
Stats: +6.34 points (+0.57%) to close at 1121.28
NYSE Volume: 1.448B (+5.97%). Rising though below average volume on the gain. Some modest accumulation continues post-follow through, and given the holiday weekend, not a bad showing. If this rally was going to last longer term it would need more conviction, but summer rallies often show positive price/volume action but on lower overall levels. That is pretty much the nature of the beast.
Up Volume: 1.037B (+233M)
Down Volume: 385M (-159M)
A/D and Hi/Lo: Advancers led 2.26 to 1. Some once again solid breadth even with the smaller cap issues lagging the large caps.
Previous Session: Advancers led 1.74 to 1
New Highs: 80 (+10)
New Lows: 18 (-8)
The Chart: http://www.investmenthouse.com/cd/^spx.html
Finally made it over the simple 50 day MA (1117) though it tried to give it up mid-session. Volume came back in during the afternoon and pushed the index back above that key level. Volume was still below average, so the move lacked real conviction; very much like early summer rally conviction. Given all of the obstacles confronting it, not bad, but we cannot expect it to carry the market higher through the summer. We do feel this is the summer rally beginning before summer officially starts. Given all the issues, it is not waiting. On the high it tapped toward next resistance at 1125. That is the last key resistance before it would take on the April highs at 1150. The index has paused at 1125 five times this year, so there is definitely resistance at that point. We would not be surprised at all to see it test that level Friday but be unable to move over it on the close; that would be reserved for after Memorial Day if there is not terror event or other problem arising over that period.
DJ30
The best performer of the group, DJ30 rallied on rising though still below average volume. Unlike the other indexes, it has not moved over its 50 day MA (simple or exponential at 10,249 and 10,215 respectively), and that 10,250 is also a price resistance point making the ice doubly thick. As with SP500, it may not be ready to make the break over that level, at least to hold to the close, on Friday given the holiday weekend.
Stats: +95.31 points (+0.94%) to close at 10205.2
Volume: 187 million Thursday versus 171 million Wednesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
FRIDAY
Even though it precedes a holiday week Friday is not without its important points. Personal income, spending, revised Michigan sentiment, and Chicago PMI are all significant economic data points. Again, however, they don't add much to the mix at this point other than maybe giving the existing trend a nudge if the favor it. The market knows the Fed is going to raise rates; the data may or may not impact when it will do so.
We are expecting that the indexes will try the next resistance points Friday and may even clear them intraday. Whether they hold through the close is problematical. Stocks have pushed higher ahead of the weekend and there will be some position squaring ahead of the three day vacation, particularly with renewed terror threats. There is nothing that says anything will happen over the Memorial Day weekend, and there are better targets later in the year if you want to get morbid about it. Still, with the threat out there and the official opening of the WWII memorial in D.C. there is the possibility.
Thus we anticipate some pressure on stocks late in the session, particularly on a continued move higher into the afternoon session. Stocks have moved well off of the lows but there is not a lot of conviction to power them significantly higher ahead of the holiday weekend.
The market has rallied, but it has not been an easy one to make money in. Scattered and volatile moves with some stocks surging and hitting decent gains while most move up but not enough to log a decent return. That is the lack of conviction the market has shown to really push stocks up to new ranges, breaking the near term resistance so they can really post solid gains. Perhaps that will come post-Memorial Day; many stocks have started good moves, but finishing has been the problem during the uncertainty. With oil prices easing and Iraq handover getting nearer we could see this nascent rally turn into the summer rally everyone looks for but usually overlooks.
End part 1 of 3
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world stock market
us stock market
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