* * * *
10/07/04 Investment House Alerts Report
* * *
IH Alert Subscribers:
MARKET ALERTS:
Target hit alerts issued Thursday: None issued
Buy alerts issued: COST; PTEN
Trailing stops issued: WCN
Stop alerts issued: None issued
SUMMARY:
- Stocks reverse Wednesday late rally.
- Retail sales mixed as usual, August consumer credit tanks.
- Fed says it will pause if 'data pauses,' but it has been raising rates into a slowdown.
- Less than a month from the election, concerns of an attack are there but no one wants to dwell on it.
- Premature bounce leaves stocks wobbly heading into the jobs report.
Slow start, weak finish.
Thursday stocks got cold feet ahead of the September jobs report and oil shooting higher now that it has breached $50/bbl. They started soft, tried a modest rebound, but then folded up the tent, selling steadily lower and closing near session lows. Volume rose on SP500, faded some on NASDAQ, but it was solid trade once again.
Bullish action Wednesday, a reversion to bearish action Thursday, almost as if a switch was thrown. Those that led Wednesday lagged Thursday with small caps taking the worst beating (-1.6%) as stocks gave up the Wednesday rally and more. Retail stocks provided a positive glimmer as sales came in mixed as usual with some really strong performances. That was not enough to counter the overall urge to step aside ahead of the jobs report as well as the consumer credit report issued late in the session that really hurt stocks in the last hour. The consumer credit report was from August, older data than the September retail sales, yet it was given more weight than the more recent and more upbeat data. That just goes to show the market was simply not in the mood to rally, looking for a reason to sell ahead of the jobs report and the debate.
At the close NASDAQ had given up the 200 day SMA as easily as it moved through it Wednesday. At least volume eased a bit as it did. SP500 sold as well but managed to hold the down trendline. NYSE volume edged higher on the selling, adding a distribution session just after a modest accumulation session. Similar action to that in the last half of September. The market has improved, but it is still bucking headwinds the entire move higher. A slowing economic expansion, the coming election, oil racing past $50/bbl, potential terror attacks as the election nears. All are part of the wall of worry the market has to climb. It is climbing, but it also has times when it slides back.
THE ECONOMY
September retail sales grow, some areas spurting while others sluggishly rise.
Sales grew once more but slower for some than hoped, stronger for others than anticipated. Most of the talk centered on WMT, the largest retailer, that saw sales rise 2.4%, in the low end of its range. For many that tainted the entire season regardless of what others did. WMT has a lot of sales, but it is not the end of the retail stage. Consumer spending has really not gone underground as the economy has slowed its expansion; consumers continue to spend as shown by the government and private reports. Despite fears the consumer will cease spending, unless sentiment levels collapse, that won't happen.
Oil prices are a real concern if they continue to hold over $50/bbl; they could kill off the consumption. In September, that did not happen (not enough time has passed with high energy prices), and what the sales results show is continued movement away from the discounters and toward specialty retail just as it has been doing for the last six months or more. AEOS (+22%); BEBE (17%); PSUN (9.8%). Most of what you hear about, however, are the disappointments. The trend has been pretty clear: specialty retailers doing better, big discounters not so well. Overall retail expands as the weekly reports and monthly reports show, just not exploding higher. Again, oil will play a key role down the road if it stays high, not only for consumers, but for business as well.
August Consumer Credit plummets.
Consumer credit spending fell for the first time since November 2003, dropping by $2.4B to $2.038T, way off of the $5.5B gain anticipated. That was the biggest drop since 1990. Recall 1990? That was just about the time the recession that killed the Bush I presidency started. Does it mean recession is just around the corner? It is a warning flag, but as we have seen, the consumer spending continues to climb as we see weekly same store and chain store sales rise along with month sales reports.
Again, consumer consumption goes back to sentiment. When sentiment levels are decent as they are now, i.e., well above the 50's and 60's, history shows no real cut back in spending habits. They may talk about buying fewer gifts at Christmas, putting off purchases, saving more, etc., but until they are really in the frying pan they continue to spend. Maybe not at record rates, but as we have seen, enough to keep sales expanding overall. Right now consumers remain optimistic about the future based on the Conference Board and Michigan reports. That is subject to continued energy price hikes and other potentially detrimental events (e.g., terror strikes), but in the latter case, that has been a possibility for over 3 years now. With respect to oil, well, we can watch how it moves day to day.
The Fed remains consistent, decade after decade after decade.
FOMC members were out again Thursday discussing the economy and interest rates again. The Fed remains quite upbeat about the economy, implying that it will continue interest rate hikes. It continues to state that the US economy is moving out of the 'soft patch' it hit in the summer, and that keeps the Fed funds futures contract pricing in another 50 basis points in rate hikes for the next two meetings (50 BP total).
At the same time, the economic data does not indicate the economy is ramping up. Sure it still shows expansion in the ISM reports, steadily recovering retail sales, and steadily increasing jobs, but it is hardly robust growth. Simply put, the growth has slowed after that powerful initial surge when the stimulus first kicked in.
Still, the Fed appears to be on course to continue its rate hikes on the back of an economy that is slowing already and has yet to really deal with the sharply higher energy prices that, after a short respite, have resumed a strong upside move. The Fed, in its drive to get more maneuvering room if rate cuts in the future are needed, is plowing ahead with its preconceived plan. This is nothing new. History is replete with examples of the Fed unrelentingly pursuing a course of action despite many clear signals that it needed to stop immediately.
The irony is, the Fed could be hiking its way right into that next slowdown or recession where it will need to cut rates again. Gee, good thing it raised rates so it had room to cut them when the rate hikes stalled out the economy. That is like not paying your credit card bill so you can have money to pay the penalty you get for not paying your credit card bill. The illogic very nearly makes my head spin right off.
At least one Fed official helped put some reality back into the picture. Governor Bernanke Thursday said the Fed would be more 'nuanced' and 'sensitive' in its approach this time around (or was that more compassionately conservative?). Instead of just full rate hiking speed ahead, if the Fed saw the economy pause, the Fed would pause as well. Two problems with that. First, you have to see the pause. Apparently the Fed needs new glasses because there is a pause right now, and the economy is not accelerating out of it, at least by any data compilations we have seen. Second, a pause is not the same thing as a cessation. A pause implies a continuation once (if?) things start to pick back up. With that threat of hikes hanging over the economy, is it really going to pick up if the Fed skips a meeting, particularly if everyone knows that the rate hike hammer is still ready to strike at the first sign of strength? That is like telling your kid to get A's on his report card and then grounding him when he does it.
Terror attacks expected to increase.
Not many want to talk about it, but when we talk with our sources in Washington DC and at the state level, there is a lot of worry about terror attacks ahead of the election. We all fear another big attack such as 9-11, but there is also concern about just a lot of 'smaller' attacks such as the pre-election attacks in Spain. Three bombings in Israel tonight on top of the Pakistan bombings earlier in the day may be a prelude to a lot of activity the next three weeks. Some speculate about major attacks on troops in Iraq, others about attacks here in the US. It is particularly interesting to learn that at least one terror attack per day is thwarted against US interests around the world.
The real issues for us is whether the market is ready for such attacks. A major attack? No. A series of smaller attacks? Maybe. Do we thus sell out of positions now and sit? We can. This is one of those issues that you know is out there and that can do serious harm. It is, however, similar to predicting earthquakes. At some point there will be 'the big one' in California, but in the interim real estate prices keep on rising right up to the fateful day. The market is taking the possibility into account, and that is part of the struggle it is having on a daily basis to move higher. It has not, however, fully discounted the possibility.
THE MARKET
We wanted the market to take a couple extra days to consolidate before it attempted the next move, and based on the action Thursday, it needed it. Now it is in a more precarious position heading into the jobs report. We feel it is almost a guarantee that NASDAQ will fill the recent gap on the news, not necessarily a bad thing. Much depends upon the jobs report, and with the big companies such as AT&T announcing even more layoffs, it does not look pretty. Of course, there is also the start of earnings season. AA announced a modest rise in earnings, but it was certainly not popping champagne corks Thursday after hours. GE takes its shot Friday.
Market Sentiment
Bulls versus bears: Bullish advisors rose to 52.6% from 51%, riding the coattails of the recent surge higher. Bears moved higher as well, moving to 24.2% from 22.9%. Usually they move in opposite directions, but the move leaves things pretty much status quo: Bulls are still advancing toward the bearish 55% level, and the bears are still close to the 20% level that is also a bearish indicator.
VIX: 14.5; +1.22. Volatility jumped off 13, the September low when that pullback started. Used the same level here in October as a low. The Thursday reversal indicates a possible selling round with some more to come.
VXN: 20.59; +0.82
VXO: 14.56; +1.56
Put/Call Ratio (CBOE): 0.86; +0.08
NASDAQ
Gave back the 200 day SMA as easily as it broke over that level Wednesday. At least volume backed off.
Stats: -22.51 points (-1.14%) to close at 1948.52
Volume: 1.754B (-9.87%). Volume declined significantly on the selling, a silver lining to the day, showing no distribution as stocks gave back the solid Wednesday move.
Up Volume: 699M (-677M)
Down Volume: 1.043B (+514M)
A/D and Hi/Lo: Decliners led 2.3 to 1. Decidedly negative tone internally.
Previous Session: Advancers led 1.67 to 1
New Highs: 115 (-17)
New Lows: 48 (+14)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
Gapped lower and spent most of the day selling. A late drop sent it down to the gap up point from last week. As noted, it would not be that bad a technical move if NASDAQ would fill the gap down to 1942, not a far move at all. Again, we have little doubt it will do that, most likely Friday unless the jobs report is much stronger than expected. NASDAQ got a bit ahead of itself with its late surge Wednesday, and Thursday it gave the move back on lower volume, continuing the consolidation of the solid move higher.
NASDAQ 100 gave back the Wednesday gain as well, ready to more completely fill the gap. Still in very good shape over the 200 day SMA.
Tried to make a move, but sold modestly by the close, holding in the recent range over 400 and the 50 day EMA (395).
S&P 500/NYSE
Sold back to the March/June down trendline on rising volume. Holding for now, but more sellers than buyers on Wednesday.
Stats: +0.02 points (0%) to close at 1130.65
NYSE Volume: 1.445B (+1.84%). Slight rise in volume as the index sold back, showing some big money unloading stocks just recently purchased.
Up Volume: 348M (-702M)
Down Volume: 1.091B (+739M)
A/D and Hi/Lo: Decliners led 2.72 to 1. The small caps led the losers, and that really broadened the downside.
Previous Session: Advancers led 2.19 to 1
New Highs: 245 (-76)
New Lows: 21 (+3)
The Chart: http://www.investmenthouse.com/cd/^spx.html
A distribution session immediately following the accumulation Wednesday as SP500 stretched its move off of the March/June down trendline (1130). It was not ready for that move obviously, and now it tests its strength at the trendline as well as the September highs (1129).
The air was too rare over 300 for SP600, and it turned and tanked back to the June high on the close. Still above the 10 day EMA (294.92), giving it some room to fade a bit more and then gather itself.
DJ30
DJ30 looked particularly weak, slicing back through the 50 day EMA (10,161) on very strong volume, landing back at the 50 day SMA on the close. Still below the 200 day SMA (10,298) and the down trendline (10,255), unable to even really give those levels a run.
Stats: -114.52 points (-1.12%) to close at 10125.4
Volume: 275 million shares Thursday versus 232 million shares Wednesday. Another distribution session. Price/volume action on DJ30 has been a real problem.
The chart: http://www.investmenthouse.com/cd/^dji.html
FRIDAY
Jobs report before the open will direct the market action, not because of its ability to indicate the economic future, but because of its impact on continuing Fed policy and on the debate Friday night and the election overall. The headline number may very well disappoint, but that could be mitigated by strong revisions to the two prior months, something that is a possibility given the flux of summer jobs reporting that was only further obfuscated by the hurricanes. It is conceivable that if the headline number hits its mark and there are solid upside revisions the prior two months, 2+ million jobs could have been created in the past year. That would be a much better record than the year President Clinton was re-elected. Indeed, all of the economic indicators would be at least as good with most being better than when Clinton was re-upped. From a strictly economic point, it is amazing this race is as close as it is. Of course, there is more than economics at work.
No doubt the action Thursday was disappointing, i.e., another quick reversal after breaking to a new rebound high. It happened the last two weeks of September and set off that selling bout where the market was able to pull one out of the hat, hold at the 50 day SMA, and then rebound on very strong trade up to this point. Again, we expect NASDAQ to fill the gap and SP500 will undercut its trendline. SP500 has some near support, NASDAQ will have to make some support, maybe at the September high.
Again, much rides on the jobs report as well as the first key earnings coming out of the box. SP500 sold on some rising volume, but overall the picture is not bleak; it appears things got a bit overheated, rallying before it was ready to continue.
Friday has the potential for a wild day, but often that turns out to be less exciting that anticipated. We will watch an early move lower to see if SP500 can hold near support and if NASDAQ holds the gap on the fill or the September highs. If they do, that sets the stage for a rebound. SP500 sold on some rising trade and the reversal indicates it needs some more time before it is ready to continue, but overall the action was not too deleterious to the upside rally to this point. We will use a hold of support and a solid rebound to put on some more positions on those solid movers we were taking partial positions in this week as the market moved higher.
Support and Resistance
NASDAQ: Closed at 1948.52
Resistance:
The 200 day SMA at 1965
January/late June down trendline at 1975
Price resistance at 2050
Support:
Gap up point at 1942
The 10 day EMA at 1930.
Recent September high at 1921
September gap up point at 1894
The 50 day EMA at 1893
The October 2002/March 2003 up trendline at 1880
S&P 500: Closed at 1130.65
Resistance:
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:
The March/June down trendline at 1129.50
1125 to 1130 stalled the last move and could be some support.
The 200 day SMA at 1119
The 50 day EMA at 1114
The 50 day SMA at 1106
1096 to 1100 represent price support.
May low at 1084 (closing) to 1076 (intraday).
1080 (May and July lows).
1064 (August low).
Dow: Closed at 10,125.40
Resistance:
The February/June 2004 down trendline at 10,250
The 200 day SMA at 10,298
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:
The 50 day SMA at 10,124
9980 to 10,000 held last week.
9900 is some support from the May and July lows.
9783 to 9793, the August lows.
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
October 04
Factory Orders, August (10:00): -0.1% actual versus 0.1% expected and 1.7% prior (revised from 1.3%)
October 05
ISM Services, September (10:00): 56.7 actual versus 59.0 expected and 58.2 prior
October 07
Initial Jobless Claims, 10/02 (8:30): 335K actual versus 355K expected and 372K prior (revised from 369K)
Consumer Credit, August (3:00): $-2.4B actual versus $6.0B expected and $11.2B prior (revised from $10.9B)
October 08
Non-farm Payrolls, September (8:30): 150K expected and 144K prior
Unemployment Rate, September (8:30): 5.4% expected and 5.4% prior
Hourly Earnings, September (8:30): 0.3% expected and 0.3% prior
Average Workweek, September (8:30): 33.7 expected and 33.8 prior
Wholesale Inventories, August (10:00): 0.8% expected and 1.3% prior
End part 1 of 3
|
