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us stock market, stock research
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6/05/04 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Target hit alerts issued Friday: None issued
Buy alerts issued: COSI; QCOM (bonus); STN (bonus)
Trailing stops issued: None issued
Stop alerts issued: JCI; SOX
SUMMARY:
- Stocks rush higher on jobs report but cannot break resistance on lack of volume.
- Close to 1 million jobs in 3 months but leading indicators softening.
- SP500 fails to hold break over 1125 as summertime market still has reservations about Iraq, oil, and the Fed.
Jobs report spurs nice gains, but market unable to hold the important moves.
Three excellent months of job creation helped propel stocks higher from the open. A month ago strong jobs data raked the market over the coals as remembrances of a Fed brandishing rate hikes over the market's head while it pressed its boot on the market's neck reemerged. We felt that the market may have gotten over that worry, and watched to see if the jobs report could be the catalyst to break the indexes out of their range. Early on stocks were trying to do just that. SP500 managed to crack over resistance mid-session after running up to that resistance early and moving sideways. That had the look of a solid move: smacking into resistance, stalling, then blasting higher.
Problem is, volume was not as energetic as price. It was wimpy, mid-summer slack trade, and without conviction, the move over 1125 could not hold to the close. After a nice break higher midday the bids faded and stocks slipped. The downside momentum continued to the close with NASDAQ undercutting its opening price gap. Solid gains turned into just decent gains on the close as the indexes failed in a breakout opportunity. The market was willing but not ready to make the breakout move. That means the market still has to deal with Iraq, oil, the Fed, the election, and now, summer.
There are competing histories here. Election years often see a pretty decent summer. There can be a pause early and then a rally late summer and on into the election. The other summer pattern is an early summer rally that fades half way into the July earnings season. The market struggles into September where it then makes bottom that segues into an October to year end rally.
In 2003 this routine was disrupted as the market came off of a serious 3 year decline. The early 2003 consolidation after the bounce off the October 2002 lows set up the summer rally, and after 3 years, there was a lot of money ready to go to work. After that early 2003 consolidation, a massive breakout ensued that carried stocks right through the summer with just a pause after the July earnings season.
This year the market is digesting the 2003 rally that preceded the economic recovery. It has other factors to consider this year that come with an economy that has moved past recovery, e.g., Fed rate hikes, higher earnings comparisons, possible changes in economic policy with the election, and of course, renewed fears regarding terrorism as it has been over two years since 9-11. If it were a matter of just digesting gains, one could argue the current 4.5 month consolidation was enough. It is still working on the consolidation, but thus far it has not found the catalyst to break it out. The employment data, a rather obvious milepost, could not do it. Most likely the move will come rather unexpectedly once the market comes to grips with all of the near term impediments.
Thus we anticipate a further break higher to keep the summer rally moving higher. We do not expect it to continue to run through the summer. Indeed, the financial programs Saturday morning were abuzz with talk of a big summer run based on the strong economic data, tech spending being back, John Chamber's swagger; you know, the good old days. This all sounds way too rosy and explains the bulls/bears diverging once again. The market can squeeze more out of this current rally based on a decent consolidation in the first half of the year, but if optimism continues to run higher and higher, that is the governor on the very move the pundits are touting.
Compare last year during the December 2002 to April 2003 consolidation. At that time pessimism was very high as most felt the market had only provided a bear market bounce off the October 2002 low. We saw a nice, low volume consolidation with solid price/volume action and great accumulation. Economically sensitive stocks such as TSCO were setting up nice accumulation bases. The combination of pessimism and good stock and index accumulation made us very positive for a good breakout. Now we have a so-so consolidation, a modest follow through, mediocre price/volume action, and important leadership stocks such as semiconductors struggling. Overlay the support seen in the pundits and the picture is not nearly as bullish. It is not bearish, but it is not as strong as the start of 2003. That makes since given the big run in 2003. Things are reverting more to 'normal' patterns.
THE ECONOMY
Jobs power toward the million mark.
Wednesday we opined that job creation the past three months could approach 1 million, and with the 248K created in May (225K expected) along with upward revisions to March (353K from 337K) and April (346K from 288K), job creation in the most recent 3 months hit 947K. Gains were across the board as two-thirds of the sectors added jobs. Manufacturing added another 32K, making 91K hires since January, one of the strongest stretches of manufacturing hiring in years. Three quarters of the jobs created pay wages at or greater than median income levels. Employment search services noted that the $75K to $150K salary level jobs showed "a tremendous amount of activity." They also noted a "very steady trend" by companies to "invest in people and technology." All of this added up to the best 3 month period of job growth since March to May 2000, the strongest stretch of the boom, occurring ironically just as the economy rolled over.
Actually, there is not that much irony involved. Jobs are the most lagging indicator in the economy. Employers hang onto employees long after the downward slide starts and they wait well after the rebound is underway to add workers. In May the average factory workweek was higher (41.1 hrs), overtime rose (4.7 hrs, the highest since 7-2000), and wages were up 0.3% for the second straight month (now at a 4% annual growth rate, quite high). All of these are the indicia of an expanding jobs market. They are not, however, confirmation that the economy will continue to grow. They show the economy has grown to a level necessary for companies to hire in order to keep up with the demand and competition. They do not forecast how much further the run is. Thus even as jobs surged in early 2000 we were looking at leading indicators that were telling us the economy was starting to nose over.
Is the economy surging or slowing?
Before anyone starts emailing their friends, we are not saying that the economy is folding over as it started in early 2000. That occurred after a long expansion and a not so subtle rate hiking spree by the Fed intended to stop the stock market and the 'runaway' consumer. Of course, to stop the stop market and the consumer it had to mortally wound the economy. The stock market would go first, then the consumer. It did just that, and of course, the Fed could not stop the house of cards it helped build from falling. It all came down as we are all well aware.
Right now the economy is just hitting stride after that nasty downturn. Monetary policy is still extremely accommodative even if the bond market has tanked and thus pushed interest rates higher. The Fed has yet to hike rates, and Greenspan practically stated last week that he would not raise rates more than a quarter point in the first hike. That should come in June with the next move in August. Greenspan said this was not going to be like 1994. No kidding. We almost passed out. Other than the admission in 2001 that the Fed did not really know whether the wealth effect really impacted consumer spending to any degree (the Fed even asked for evidence from any interested source), this is the closest the Fed has come to admitting it has screwed the pooch in the past. Greenspan seems so intent on not killing the recovery that he is ready to err the opposite way.
This is part of his legacy building in the twilight of his career. The economy has turned back up and Greenspan wants to make sure it is still moving well when he retires after the election. A couple of minor hikes along the way shows just how strong the economy is, yet it won't put the crimp on the growth. No complaints; the Fed is staying behind the economy as opposed to trying to manipulate it closely.
Leading indicators, high energy costs suggest economic slowing ahead
Greenspan has to be somewhat concerned. Energy prices spiked just as the economy became 'self-sustaining' as some put it, i.e., when the economy no longer needs monetary stimulus to keep it going. Energy prices are a real problem for the Fed. Higher prices historically mean economic slowing. They also simply mean higher prices that can (emphasis can) lead to inflation. During the last few energy bumps higher, however, prices were not passed along. Not in 1984, not in 1994, not in 1999. The Fed, however, views them as inflationary. Thus the dilemma: one element that by rising can both slow the economy and yet give the impression of inflation in the economy.
Problem is, energy prices are not something that the respond to the Fed's arsenal, at least not directly. The Fed can jack up interest rates enough to slow the economy and thus lower energy prices to an extent even if they are cartel controlled. While that may be the Fed's goal or at least in line with its goals in some instances, with the economy just now recovering that is not what it wants this time. So the Fed is not going to raise rates in response to rising energy prices. It is willing to risk that they won't cross over into prices again this time around as it goes slow with the rate hikes.
Thus Greenspan is playing to growth as opposed to inflation, basically what he has said he is going to do. He cannot really do anything about energy prices anyway, so he is going to adopt a Paul Newman truism and only worry about things he can control (or at least thinks he can control). If energy prices don't back off below 35 fairly soon, however, they will have a negative impact on the consumer and the supply side as well. Not necessarily price inflation, just less disposable income for consumers and more costs for businesses. Less consumption by consumers, higher costs cutting into corporate earnings; that is the scenario higher energy costs set up if they remain strong for several months.
ECRI (Economic Cycle Research Institute) has a good track record with its leading indicators. They look 10 months ahead at an economic peak, 3 months ahead at an economic trough. They were rising ahead of the economic upturn then peaked in July 2003. They moved basically sideways through March, but then started to slide. In April they undercut the July 2003 to March 2004 lateral range and have slide each week since. Rallied ahead of the economic rally, kept moving up as the economy started to run, then peaked 11 months ago. The break lower did not start until recently, so any downturn is still quite a way down the road. It can still turn back up over the next month or two and change the track.
Again, this is not enough to predict an economic decline, but sustained higher energy prices historically cause economic slowdowns. It is also true that the US economy gets more GDP per barrel of oil than it used to, so it has some cushion against higher prices. That makes the timing of the drop in prices important. If oil prices continue to fade toward 35 or less as OPEC suggested they would, that will help. If gas prices back off in August and do not remain high into early fall, that will also help avoid a slowdown. The economy has momentum now as can be seen in the fact that consumer spending is still solid even with gas prices averaging over $2/gallon: with more people working and making more money (higher wages), that is helping offset higher energy prices. Again, this is something to keep watching as we move forward.
THE MARKET
The jobs report generated excitement among those in the market. Unfortunately there were not that many involved. SP500 made the break over 1125 midday, but without volume it could not hold the move. There was not major rollover, no breakdown from the range, just the inability to hold a breakout over resistance on what should be some good news. Strong job creation reported Friday, lower oil prices, strong ISM. Not enough to trigger a breakout. Whether the continuing issues in Iraq, lingering concerns regarding rate hikes, uncertain political climate, or a combination of these and other factors, the market was not ready to make a move Friday when the door was left wide open.
Market Sentiment
Mixed indications again. After improving, bulls and bears started to diverge again, not quite getting where they should have been. Bulls finished the week at 45.1% after dipping to 42.6% last week. Bears fell to 24.5% after coming close to 30%. It was getting there, but optimism crept back in.
The put/call ratio continues to run high, closing once more over 1.0, indicating more puts than calls being purchased. The market is generally optimistic; rarely are more puts than calls traded. Yet, over the past month the CBOE put/call ratio has closed over 1.0 over 10 times. There continues to be heavy hedging and speculation that stocks will fall. This is historically a contrary indicator: when most bet on one direction, particularly the atypical direction, that is a signal of extreme sentiment. Extremes typically lead to reactions in the other direction.
VIX: 16.78; -0.25
VXN: 23.84; -0.09
VXO: 16.51; -0.78
Put/Call Ratio (CBOE): 1.02; -0.11
NASDAQ
Gapped back over the 50 day SMA, took a swipe at 2000, then gave much of the move back as it could not attract any volume.
Stats: +18.36 points (+0.94%) to close at 1978.62
Volume: 1.426B (-7.03%). Volume faded even further below average. Yes it is the first Friday of the official summer, but we expected a bit more volume given the sustained good economic news.
Up Volume: 1.082B (+738M)
Down Volume: 324M (-846M)
A/D and Hi/Lo: Advancers led 1.95 to 1. Breadth was solid all day as stocks rose on the news. Just no volume to back it up.
Previous Session: Decliners led 2.54 to 1
New Highs: 55 (+3)
New Lows: 23 (-11)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
After the Thursday thud lower, the Intel update and good jobs news reversed the poor action. NASDAQ gapped over the 50 day SMA (1977) then ran up to 1995.50, within spitting distance of next resistance at 2000. It gave back 17 points on the close, however, as its modest pullback from 2000 turned into a dump in the last half hour when NASDAQ shed 12 of those 17 points. It managed to hold the 50 day SMA on the close and thus the recent range, but that was small consolation. It starts the week basically from square one, back to working on the lateral move, trying to find a catalyst and the buyers to send it higher.
QQQ showed similar action, gapping higher, rallying, then giving back just about all of the move. Held the range on the close but a pretty weak showing given the good Intel and jobs news. As with NASDAQ, it starts the week anew, trying to find reason to breakout from this double bottom with handle pattern.
S&P 500/NYSE
Made the breakout over 1125 but could not hold it, maintaining the lateral move, forming the handle to the base. Lost the breakout battle but held the overall pattern.
Stats: +5.86 points (+0.52%) to close at 1122.5
NYSE Volume: 1.115B (-9.32%). Ambitious attempt at a breakout given the lack of volume. A veritable trickle of trade. Once it started to slide back from 1125, with this light volume it did not take much to give back 7 points, over half the move for the session.
Up Volume: 833M (+593M)
Down Volume: 276M (-709M)
A/D and Hi/Lo: Advancers led 1.95 to 1. Mediocre finish after posting well over 2:1 much of the session.
Previous Session: Decliners led 2.71 to 1
New Highs: 61 (+11)
New Lows: 16 (-1)
The Chart: http://www.investmenthouse.com/cd/^spx.html
After a lot of movement Friday, the large caps ended the week still in the lateral move over the 50 day EMA (1115). Volume remained very much below average. Now it was disappointing that SP500 could not make the breakout over 1125 stick, but it also was just another session of low volume, lateral movement in the handle to its double bottom with handle base. Yes it did not hang onto the gains, but there was no reversal, just further work on the pattern and showing the type of price/volume action you want to see. The jobs report did not break it out, but it did not break it down either. The index continues to build the pattern, and as long as it does that, the closer it gets to resolution of the other issues standing in the way.
DJ30
Got really exciting for a moment as the blue chips topped 10,300, clearing resistance at 10,250. That lasted as long as it did on the other indexes before the afternoon slide. It gave back 57 points from that high, closing once more below the 50 day SMA (10,257) as well as some price resistance at 10,250. It too continues to work laterally after the bounce up off the May low near 9900. It is mimicking the SP500 though not the best pattern. It continues to follow along.
Stats: +46.91 points (+0.46%) to close at 10242.82
Volume: 161 million shares Friday versus 162 million shares Thursday.
The chart: http://www.investmenthouse.com/cd/^dji.html
THIS WEEK
The market starts over again Monday, still in the pattern that it tried Friday, albeit somewhat weakly, to break from. The good jobs report could not break it out but it also did not result in a sell off as it did last month. Instead, further pattern building as the market tries to resolve another group of issues involving Iraq, the Fed, oil prices, and elections. The pattern is still one that is working toward a near term resolution. SP500 has formed a decent double bottom with handle, QQQ as well. Accumulation weeks versus distribution weeks have evened out. The pattern holds, but the market is going to have to deliver once more as it did with the follow through session after rallying off the May low.
The PPI (producers price index) will be the economic data that receives the most attention as inflation worries are one of the dominant market themes. Economics near term, however, do not appear to be a driving force. The market seems to have become comfortable with growth as evident in that it did not sell off on strong jobs news Friday as it did last month for the April report. Instead of a specific news item setting off the market, it will more than likely come unannounced as investors are finally comfortable with the progress in Iraq (much better than reported via the popular news media) and energy prices. Again, the pattern is set up and stocks need to provide a break higher within the next week or so.
We still believe the market is in a summer rally and is working on setting the stage for the next move. The moves are fitful and sporadic much like the volume. Such is a summer rally. We are looking for a further breakout, but not with a ton of volume. As initial targets for the rally we are looking at the April highs (2075 NASDAQ, 1150 SP500). After that move the market will be heading into the July earnings season, and we see that as the peak of the summer move before a pullback into late July on into September.
End part 1 of 3
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