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world stock market, us stock market
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8/17/04 Investment House Daily
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MARKET ALERTS:
Target hit alerts issued Tuesday: None issued
Buy alerts issued: None issued
Trailing stop alerts: None issued
Stop alerts: WOOF; ADVS
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SUMMARY:
- Market finally gets good guidance, rallies on some better volume.
- Consumer prices soften, production gains disappointing.
- Bush betting on oil prices peaking on their own. It worked for the dollar and will work for oil, but can he afford the wait?
- Indexes stall at next resistance, but better volume and holding onto gains as tries to set up follow through session.
Rebound catches a bit more volume as some good earnings news finally shows up.
Earnings season is considered over, but some heavy hitters are still reporting earnings. Maybe not the biggest of the big names, but some important ones. HD followed Lowe's better earnings, beating the street by 6 cents and upping guidance. DE beat the street and said sales were strong across the board; nothing runs like a Deere, and of course, nothing costs as much either. MOT said it expected fall sales to be hot with its 20 new designs. JCP said that the back to school season was strong, echoing more positive comments from WMT and TGT last week.
After an earnings season where companies consistently disappointed investors with their guidance, the sudden rush of positive comments was more fuel for the new rally trying to get its feet. Stocks surged in the opening half hour with the indexes hitting their session highs. SP500 cleared its key test at the 18 day EMA and DJ30 did the same. Then they slipped lower and spent the rest of the session below that resistance point. Two tries at recovering that level failed, leaving the indexes to drift into the close.
Volume was stronger though still below average and breadth was decent at best. Still, the indexes did what they needed to do: maintained their position overall, even showing some accumulation, as they hold their gains in anticipation of a follow through session to the rally attempt that started last Friday. The market, particularly this market, cannot run higher session after session. That it did not reverse on volume when it tested the 18 day EMA was a positive. It still has to avoid a selloff Wednesday after failing to take out the 18 day EMA, but at least it has left itself in position to do so.
THE ECONOMY
Consumer prices soften, but so does industrial production.
July CPI fell 0.1% (0.2% expected) and the core rose 0.1% (0.2% expected). The overall number fell for the first time in 8 months while the core held steady with that 0.1% gain. Gas prices fell 4.7% from peak June levels, dropping overall energy costs 1.9%. Education even got in on the action with a 0.1% decline.
It was not only gas prices that allowed prices to dip slightly. We have noted the rise in inventories the past two months as an indication the consumer had slowed a bit. Hard to say producers were ramping up production as seen in the production and capacity utilization numbers. Capacity was slightly higher than revised lower June numbers and production, while up easily over a slow June (0.4% versus -0.5%), it was below expectations. More inventories with less demand equals lower prices. Simple supply and demand.
Of course energy prices have been on the rise again, and that will ultimately show up on the CPI if that rise is sustained. Gasoline prices are still down due to a combination of the summer driving season winding down and consumers simply driving less, but with limited refining capacity upside pressure will remain. Kind of like that uneasy feeling when your stomach hurts; you don't want to get too far from home base just in case.
What to do about energy prices (a.k.a., how to do nothing about them).
Oil has been one of those commodities that is as skittish as a water bug. When you think you have it cornered it darts away. Oil looked to be peaking a month ago and was indeed sliding back into the thirties. Then those geopolitical events come in and pump up prices again as the uncertainty places that terror premium on each barrel. Most oil analysts put that premium at $10 minimum.
Thus though the world economies are far from robust as seen last week in the Japan and EU GDP numbers, oil remains high and moving higher. The Yukos soap opera changes daily, some new 'crisis' arises in another OPEC country (e.g., Venezuela), an Iraq pipeline is blown up, and the ever present though hardly uttered threat to Saudi or other major producers production facilities. That is the real premium on each barrel. The rest is just the stuff of speculators.
Ah speculators. Saudi Arabia says there is plenty of oil on the market to push prices lower. Problem is, price is not coming down. Saudi points to speculators, and Saudi is not altogether wrong. The Bush administration has bought into the Saudi argument that there is plenty of oil on the market, so much so that it is willing to wait it out as it did with the dollar. It is currently ignoring the fact that just as with the dollar's fall last year, speculators line up on one side of a currency or commodity and run the table. As long as there is no opposition the speculators keep up the pressure. One Fed intervention would have ended it, but the Bush administration wanted a weaker dollar to help US exports. It ultimately worked out for the administration: exports rose, and ultimately the very forces that caused the dollar to sink came around to cause its rise. If you have time and don't experience any other significant upsets, that is how it usually plays out. Fortunately for the US the economy continued to strengthen and that took the dollar higher.
With oil Bush is again betting it will peak. After all there is weakening global GDP, China is proactively trying to slow its economy, and speculation will surely die down. Problem is, as seen in the late 1990's with the stock market, speculation can carry a market higher and higher above rational levels, and trying to set some timetable based on that is extremely difficult. Moreover, Bush is adding to the problem with buying oil at $46/bbl to put into the SPR. If he opens the reserve with a few key sales, he could break the back of the oil climb.
Bush has waited too long, however, and he is in a political bind. If he does open the SPR after adamantly refusing, it is viewed as a purely political move. He could easily say that it had reached their target for a critical level and it was time to open it; of course, that would be the first time anyone mentioned a so-called critical level. If he doesn't open it he is viewed as being in the pocket of big oil; nothing new there. If he does open it, he is viewed as blatantly pandering for votes.
From our point of view, while there are reasons to keep on buying and not to open it (a major terror strike on Middle Eastern production facilities could put oil at $80 to $100/bbl), there are serious economic reasons as well. If oil can be brought down to $35 or less quickly, that could stave off a recession. It is a hard fact that each time oil has topped $35/bbl (regardless of real dollars) for a sustained period, a recession has followed. In 1991, a sale of 30 million barrels brought prices from $40 to $20. In late 2000, another $30 million barrel sale brought prices down to $28 from $37 (less effective because it was forecast that purchases would resume after the sale). The point: interventions work whether politically motivated or not.
The argument that you cannot draw it down to help the economy is wrong. First, it has been done in the past. Second, the statute expressly says we can draw it down to zero, empty, sucking air if there is a significant reduction in supply which results in a severe increase in price of petroleum products likely to cause a major adverse impact on the national economy. That is talking about completely draining it; small draw downs of the 30 million barrel variety have a much lower standard. Again, however, Bush has adopted the Saudi line that there is plenty of oil available, but the price is simply higher short term. Indeed, the Bush energy secretary seems to have changed the criteria of the statute when he said the administration would open the SPR if there was a "severe" disruption (as opposed to the statute stating a 'significant' reduction).
It is a good deal to us, the taxpayer paying for the oil. From 1977 to 2003 the average price for a barrel of oil was $20.80. The geniuses that buy for the SPR managed to get our average cost per barrel during that time at $27.14. We lost on the input; if we sell it on the open market at current rates, even down $10 from current rates, we make money. We also get the benefit of maybe, just maybe avoiding a recession caused by high oil prices. A double bonus.
When will prices peak for sure? When and if the market decides Kerry has wrapped up the election. We have little doubt he will follow President Clinton's precedent and open the SPR. The market will know this, and if it appears he has the electoral votes to win, oil will peak. It may peak before then due to other market reasons; Bush is certainly counting on that, but to do so is to take a low percentage bet. As long as the US is helping bid up prices short term with continued SPR buying at market prices and publicly refusing to acknowledge there is a need to open the SPR, there is nothing to stop the upside speculation.
THE MARKET
Bottom line: the indexes managed to hold much of their gains, posting a modest accumulation session and avoiding a high volume reversal. Now it was not a beautiful session. SP500 traded over the 18 day EMA intraday but could not hold the move, closing near the session lows. That is not particularly bullish intraday action, and the indexes are still going to have to take on and overwhelm that level. In short, they are not out of the woods, just counting down the time to surge higher in a follow through to the little rally that got underway last Friday. They have to hold these levels without a significant decline and certainly not a decline on rising volume, and then blast through on stronger trade. As they are sitting below key resistance, and given the weakness the market has shown up to this rally attempt, the end result is still very much up in the air. The indexes look better, but they have to show that follow through.
In context, we are looking for a follow through on this rally not to deliver an ultimate breakout from the 2004 base, but to rally to set up another test that will be the end of the base. That is what we are looking for, but we always have to give the market its due as it makes the final decisions. Thus if we see strong moves in the market overall and in the stocks that have set up good bases, we go with those if they make the solid moves as well. At this stage of the game we have to be very cognizant of price/volume action; a resumption of distribution is usually the death blow to a young rally attempt.
Market Sentiment
VIX: 17.02; -0.55
VXN: 25.55; -1.17
VXO: 17.19; -0.37
Put/Call Ratio (CBOE): 0.95; +0.10. Moved right back up on a pretty decent upside session. Given the volume increase we suspect a good bit of this was covering put positions. The three closed above 1.0 worked to deliver the bounce seen thus far, but again, without the other sentiment indicators getting close to extreme levels, a significant rally, a breakout move, based on those three closes is a big bet.
NASDAQ
Gapped up to the 10 day EMA, rallied above it, and then hung on by it teeth to hold that level on the close.
Stats: +12.41 points (+0.7%) to close at 1795.25
Volume: 1.397B (+7.48%). Volume edged slightly higher but still way below average. If this was accumulation, it was some of the sorriest we have seen. It will have to deliver much better volume on any follow through move.
Up Volume: 1.071B (+70M)
Down Volume: 300M (+74M)
A/D and Hi/Lo: Advancers led 1.39 to 1. Was better than 2:1 early, then 1.7:1, then . . . you get the idea.
Previous Session: Advancers led 2.09 to 1
New Highs: 29 (-1)
New Lows: 89 (-30)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
Volume edged higher as NASDAQ continued its 3 day advance, clearing the 10 day EMA (1796) on the close. A good first start to a move toward the 18 day EMA (1821.91), but in late July NASDAQ closed above the 10 day EMA for two sessions before being thrust back by the 18 day EMA. The 18 day EMA is also coincident with the October 2002/March 2003 up trendline, and that will act as some resistance on the way back up. NASDAQ has dug itself quite a hole. It will need news such as from MOT on Tuesday to help it recover. It remains to be seen how the AMAT earnings are treated; volatile would be the best way to describe the stock after hours though it did hang onto some after hours gain. NASDAQ has a big test ahead in terms of the 18 day EMA. After that the big level is 1900 where there is a lot of price congestion and the 50 day EMA (1886) just before that level. To be the type of gain needed to set up the next test, however, NASDAQ is going to have to rise to 1900 or better.
Virtually the same action on the large NASDAQ stocks as with the overall index: gapped higher, held the 10 day EMA, slightly higher though below average volume.
S&P 500/NYSE
Solid early move over the 18 day EMA, but that resistance stopped it. Higher volume but still below average. Not bad as it can take a breather here and then make its move.
Stats: +2.37 points (+0.22%) to close at 1081.71
NYSE Volume: 1.268B (+5.08%). Volume was up for the second upside session. Modest accumulation at best, but at least showing the right price/volume action as opposed to a lower and lower volume move. Can take a breather here on some low volume then deliver a higher volume follow through. Needs to avoid higher volume selling.
Up Volume: 782M (-304M)
Down Volume: 458M (+343M)
A/D and Hi/Lo: Advancers led 1.48 to 1. Breadth declined all session along the lines of NASDAQ. Indeed, breadth on the two indexes was remarkably similar.
Previous Session: Advancers led 3.48 to 1
New Highs: 50 (+14)
New Lows: 19 (-30)
The Chart: http://www.investmenthouse.com/cd/^spx.html
Nice rally to1087 on the high, taking it over the 18 day EMA (1084). It could not hold the move after that early surge, failing twice to take it later in the session. This is a key level for the index, one it has to break to help lead the rest of the market higher to set up the next test and potentially the bottom. It can take a breather here for a session, even two, but then it needs to deliver the high volume follow through when it moves past this level and holds it to the close. It needs to clear 1100 and challenge toward 1125 to set up a good test.
The small caps tapped the 18 day EMA on the high and faded, managing to hold onto a third of the gain. Closed right at 270 where it has resistance from the neck of the head and shoulders pattern. It is still weak and it needs help from the rest of the market to get back to 280, a good point to then come back for another test of the lows, lows that the index has held from May.
DJ30
Rallied over the 18 day EMA (9987) on the high (10,024) but it too lost its nerve, closing just below that resistance. Volume was higher but still well below average. This is the bottom of its base, at least the March bottom, and thus significant resistance. As with the other indexes, it needs to clear here and get to near 10,250 to set up the next test. Still in a downtrend, still a lot of work to do. Then again, all of the indexes have a lot of work to do.
Stats: +18.28 points (+0.18%) to close at 9972.83
Volume: 186 million shares Tuesday versus 176 million shares Monday.
The chart: http://www.investmenthouse.com/cd/^dji.html
WEDNESDAY
No scheduled economic data, but after hours AMAT reported a profit, and more importantly, rising equipment orders. That helped boost the stock after hours along with other chip equipment makers. It also gave QQQ a modest (modest is the word) bump. Whether that news translates into gains for the overall market as the raised guidance did on Tuesday is the question. It can be the news that provides a follow through move; at this juncture we just watch for the market to show the move.
We will continue to focus on those stocks that have held up the best in the selling and are setting up the best moves. If there is a follow through they should be out in front moving with volume. Tuesday was a bit disappointing in that regard because many of the movers lacked strong trade. As overall volume was still well below average, that was not really surprising.
We will also not be surprised to see the market take a pause. Three upside sessions, even while not roaring, is a lot of upside for this market. It would not be a bad thing for stocks and the indexes to ease back a bit on lighter trade Wednesday, then give a strong break higher Thursday. The market is showing some positive attributes, but it is still overshadowed by a pretty nasty downtrend. Once again, it will have to show us the move.
Support and Resistance
NASDAQ: Closed at 1795.25
Resistance:
Gap down point at 1822.
The October 2002/March 2003 up trendline at 1822
The 18 day EMA at 1822 is key resistance.
1830 - 1850 (July lows) and the May 2004 lows (1876 closing, 1865 intraday) may prove to be some resistance.
The March 2004 lows (1897 - 1989)
The 50 day EMA at 1887 is key resistance.
The 2004 down trendline at 1940
The 200 day SMA at 1975
Support:
July 2003 highs at 1755.
Late July 2003 top at 1735.
June 2003 intraday highs at 1686 to closing range at 1644 to 1677 (mid-July low here as well).
1600.
S&P 500: Closed at 1081.71
Resistance:
Still testing 1080 (May and July lows).
May low at 1084 (closing) to 1076 (intraday).
The 18 day EMA at 1084
1096 to 1100 represent price supports and the 50 day EMA (1101).
The 200 day SMA at 1109
The March/April down trendline at 1122
1125 was key price support.
1142-1146 are the June highs.
The April and January highs (1150 to 1155).
1159 (February highs) and 1160 to 1175 the highs in that double top that spanned late 2001, early 2002.
Support:
1062 - 1058 from November 2003
1048-1040 from September 2003
1010 - 1015 from June/July 2003
Dow: Closed at 9972.83
Resistance:
The 18 day EMA at 9988 is a first real test.
10,000 is the March lows and a psychological level.
The 50 day EMA at 10,109.
The February/April down trendline at 10,119
The 200 day SMA at 10,241 is going to be key whenever it makes it back there.
Late April, June peaks at 10,478 to 10,512
10,570 is the early April high
Price consolidation at 10,600 level
10,747 is the February high
Support:
9783 to 9793, the August lows.
9625 - 9660 from September 2003.
9500 from various price points in late summer to fall 2003.
9250. More solid support from the June through August 2003 consolidation.
End part 1 of 3
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world stock market
us stock market
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