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world stock market, us stock market
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11/20/04 Investment House Daily
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Investment House Daily Subscribers:
HOLIDAY SCHEDULE
Saturday through Tuesday: Market summary, best plays (new & current), continuing play table summary.
Wednesday: Market summary, continuing play table summary.
Monday: Full reports resume as usual
MARKET ALERTS:
Target hit alerts issued Friday: None issued
Buy alerts issued: STSI; PWAV
Trailing stop alerts: KEY; FFIV; JLG; ECL
Stop alerts: None issued
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SUMMARY:
- Market hit with barrage of bad news and this time cannot recover.
- Greenspan shows shades of 'irrational exuberance' once again, and the market then the economy may be the victims.
- High volume selling answers the question about the early week volatility.
- Holiday week is usually a good one, but now we have to account for Greenspan effect.
Inherent bullishness torpedoed by a potentially hostile Greenspan.
It was 'irrational exuberance' all over again, at least the way Greenspan's remarks were interpreted after a speech to a gathering of world central bankers. Greenspan was not talking about stock prices, at least not directly in his speech, but he was taking the same outspoken stance with respect to the trade and budget deficits, and how the Fed addresses those issues has a direct impact on investors. Some will argue the Fed has no control over the trade gap, but it does; by wielding the interest rate hammer it can take action to impact foreign investors' desire to invest in the US. In short, he can raise interest rates to make investing in the US more attractive and thus help mollify some of the fears of a widening trade gap turning off foreign investors. When combined with his comment that investors should be fully hedged against interest rate hikes by now, well, the market was going to get clocked.
As we noted Thursday, stocks have been acting as if the Fed's rate hiking campaign was winding down. They broke out of almost a year long lateral move as they continued a strong rally off the early fall lows. The market did this in 1984 and in 1994 when the Fed finished its rate hiking campaign in those years. Friday the market got a dose of the old Greenspan from 1999 and 2000 where he reverts to his Keynesian controls versus a free market economy. When Greenspan starts making these speeches about problems where the historical data do not support him, the market has a good reason to take note and be concerned. Greenspan is claimed to be a maestro, but he also tilts at windmills, creating problems and trying to solve them, then tell the world how great the Fed is at handling crises. As we discuss below, the speech may have been nothing more than a different angle on an old theme, but it was enough to concern the market, and it concerns us as well.
Facing this problem the market gave up its bullish bias as stocks fell through near support on rising volume. Added to the mix was oil up over $2/bbl, back to $48.44/bbl. That threw gasoline on the Greenspan fire. We kept watching for an afternoon recovery, but it never came. Stocks languished all session and never really tried to bounce. Volume jumped above Thursday levels, officially a distribution session on the bad news, but it was still lower than the very strong Wednesday upside trade. The sharp reversal on the news put the volatile action earlier in the week into better focus. It is still not the death of the rally by any stretch, but it looks ready to take a deeper consolidation. And if Greenspan is intent on another vendetta, then we need to think about the market erosion in the longer term.
THE ECONOMY
Greenspan tosses a crowbar into the rally with an apparently new aggressive posture.
In a speech and comments in a panel discussion regarding the euro on Friday, Fed chairman Greenspan appeared to take a more aggressive approach toward interest rates as well as the reduction of the trade and budget deficits. It was a lot to interpret and digest, and the market took it the way it usually does, the worst.
Greenspan's prepared text was not that alarming, stating basic principles and arguments regarding the impact of a perceived large trade deficit with a perceived large budget deficit. Greenspan discussed the negative potential ramifications of that combination, concluding the best solution was to lower the budget deficit to give potential foreign investors more comfort in investing in the US. Pretty mild stuff, but it was the timing that had analysts concerned ('why now?'), and also the frankness of Greenspan's statements in the text and in comments. In addition to comments regarding the trade deficit and its possible impacts, he gave a very clear warning that rate hikes were to continue when he noted that investors should be fully hedged by now with respect to interest rate increases, a clear indication that Greenspan was not in any way through with his rate hiking campaign.
There are two worries. First, if Greenspan is serious about what he said regarding the need to narrow the trade deficit (by whatever means), he could take action if the Congress does not, meaning hiking rates in order to make US investments more attractive and thus avoid a dollar collapse and wholesale divestment of US assets. That is hardly comforting to US stock investors. Second, his conclusions were founded in assumption and opinion, drawing conclusions of what might be, and as usual, in conflict with actual history. Of all the history associated with Greenspan, his use of theories that are without substantial empirical evidence is the most consistent.
Now he did admit that there were no facts to support his conclusion that the twin deficits would lead to major US economic problems. Well, at least no facts that support his version. We often marvel at how the 1980's are pretty much forgotten in discussing the economic bounty in the 1990's. In that era a nasty recession with insane inflation was finally reversed by the use of massive tax cuts and incentives as well as a return to free market forces across various industry and governmental sectors. That produced some of the greatest growth rates in history, leading to the investment in the US that brought about the huge technological advances through the 1990's. Many ignore this accomplishment because they cannot get past the deficits created in order to fuel the expansion and outspend the USSR into economic ruin. Tax revenues exploded, and without the spending there would have been surpluses in the 1980's. In any event we had tremendous twin deficits at that time as well, and even with the other world currencies in crises we came through just fine. Beyond fine. It was the greatest expansion in US history that led to those surpluses everyone so fondly recalls (we discussed recently how surpluses cause the rise in interest rates).
Wait a minute. That is actual history, not just some theory about what may happen. But some will say 'what about the dollar' and its fall? So much is being written about the dollar versus the euro and how it has imploded. But is the dollar really low? No one seems to recall that just 3 years ago not a day went by when the concern was voiced about how the dollar was too strong. The dollar went on a massive, massive appreciation run versus other currencies in the 1990's. After this supposedly massive dollar decline, it is still at the 30 year average when compared, as it always has been, to a basket of all other currencies. It has declined versus the euro even though European economies are stalled in the mud; that means there is another game afoot with the euro that is unrelated to the relative economic strength of the US versus the EU. In other words, the dollar is just starting to get back to a level of normalcy vis- -vis other world currencies.
Greenspan back to his old tricks?
The real worry is that Greenspan will pull a 1999 and let his beliefs get in the way of the facts. Back then he was raising rates to avoid inflation when there was no inflation and no sign of inflation. He had to invent new inflation indicators in order to convince the world that rate hikes were needed. What he wanted to do was narrow the economic gap between the US and other world economies (once again the US economy was racing ahead of the world, spurred by the technological innovations the tax cuts of the early 1980's created. Despite the deficit, the US economy is still one of the world powerhouses, much stronger than its European counterparts, much of Asia, and all of the Western hemisphere. Does he have some similar motive here?
Are we overreacting? Could be, but we saw the same action without substantiation back in 1998 to 2000, and the result was a historic market crash and plunge off the economic cliff fostered by a series of missteps that made a lot of comfortable retirees living in squalor. When we see Greenspan once more ignoring facts in favor of pet theories, it is cause for alarm. He has a knack of forgetting what brought him the prosperity he claims, i.e. letting market forces work. Once there is prosperity returned he starts trying to impact policy; if he cannot, he makes the policy using his powers at the Fed. Unfortunately that is a very clumsy mechanism, and very bad for the market and the economy if Greenspan once again gets too caught up in his theories and goes overboard. Right now the rate hikes are not causing problems because no one thought there was a need for many more as inflation is more or less under control as growth and productivity continue to expand. If Greenspan starts using rate hikes to try and influence the trade deficit, that is a whole new breed of cat that could take a lot more rate hiking. Was that what Greenspan meant by investors needing to be fully hedged? The market seemed to take it that way.
Was Greenspan misinterpreted?
One thing Greenspan has been clear about is the need to cut federal spending. This year he advocated looking at overhauling the entitlements simply because we cannot meet them in the future. One of his targets: social security. And as we know, President Bush has made SS one of his primary themes for the second term. Greenspan and Bush are on the same page in this regard, so Greenspan's speech was most likely another angle in his argument that we reduce federal spending as soon as possible. The trade gap is just another argument he can use to try to push home his point.
Problem is, Congress won't see it that way. Somehow when smart people go to DC they seem to lose the ability to grasp common sense themes and revert to a second grade level of understanding (our apologies to all second graders). Many in Congress either through ignorance or bitter partisanship will take this to mean the tax cuts should not be made permanent, social security should not be touched (because of the 'transition' costs), and the tax system should not be overhauled. We already saw article after article Friday discussing just this, saying because it would further widen the budget deficit, they could not be done. Greenspan has, however, been very clear that he feels the tax cuts should be made permanent and that entitlement spending and federal spending in general should be slashed. Over the long run, fixing social security and the tax code will narrow the budget deficits. Indeed, the international investing community would see these steps as great positives even if they did increase the deficit in the near term. The actions would pay huge dividends down the road.
What Greenspan needs to do is make it clear that he was not saying we should not fix social security or make the tax cuts permanent, but that we should do both as part of a plan to reduce the deficit. As former Dallas Fed governor McTeer said Friday afternoon, he interprets Greenspan's remarks as they did when he was on the Fed just a few months back: reduce the deficit by reducing spending and growing the economy. That means continued reduced taxes and fixing broken programs such as social security.
And perhaps another subtler interpretation?
Here is one to ponder. Greenspan worries about both the federal deficit and the trade deficit. Between the two, he appears to be more concerned currently with the trade gap as that could, in theory, implode the dollar and the economy. Greenspan's speech laid out the negatives associated with a trade gap that became unsupportable, but he was not that hawkish on the dollar versus other currencies, noting that trade issues tend to work out if proper adjustments are made. In other words, as we have discussed before, the very problem of a trade gap is often corrected by the result of the trade gap, i.e. a falling currency. If a currency falls as a result of the gap it eventually gets low enough to reverse the process as goods become cheap and foreigners buy more of them than they can export.
While Greenspan talked of reducing the budget deficit as a method of furthering foreign investment even if the trade gap was large, that was more of a band aid, and he said as much. What would fix the gap? A lower dollar. We have run trade deficits for decades; when the US economy is strong as it has been for most of the past twenty four years, consumers buy a lot of goods, domestic and foreign. It has never hurt us. During that time, however, the dollar soared and the gap widened because of it (along with other economies simply failing to enjoy the US expansion because of their more structured, controlled economies). In any event, Greenspan's comments sent the dollar plunging, something he surely knew would happen. That fits with the premise that Greenspan wants a lower dollar.
As noted above, the dollar is just now getting back toward a 30 year average against other currencies. The trade gap is improving with it. Greenspan may just be saying (though no one is listening) that the dollar is not low enough and thus the current account is going to be too big for too long. If Greenspan is not calling for slowing the US economy, something he has said he does not want to do and something that his statements regarding the tax cuts supports, then a desire for a narrower trade gap with a strong economy means a lower dollar and stronger economies overseas. Indeed, Greenspan and the Bush administration have been telling other countries to grow their economies with stimulus and a reduction of regulation. Growing economies, a lower dollar, and a strong US economy means a smaller trade gap.
If you worry about such things, those are two possible interpretations. We don't really worry about a trade deficit because history, real facts, indicate it is not a real problem when you have a US economy that is posting solid growth. That attracts capital. Yes China is still growing and India is surging, but compared to the other world economies, the US is a pillar of strength. As the last foreign funding last week showed, foreign investors are still more than willing to dive into US investments even as the current account deficit nears 6% of GDP.
The market versus Greenspan.
Again, the big fear is Greenspan is not being clever, but once more believing he can create economic theory and enforce the same. If he really wants to affect the current account with interest rates, we are in deep trouble. The market saw it as a real problem Friday and distributed. The market has been cruising with a great recovery this past month that we believe is still part of the bull market that started back in late 2002. As in 1998 to 2000, however, Greenspan is getting at odds with the markets. He thinks he knows more than the synthesis of all investors in the world; in other words, he thinks he knows what is best for all investors. He would never admit it, indeed, he does not know this. He thinks he is applying sound theory just as he thought in the late 1990's. Many out there still think that but for the Fed's action the collapse would have been worse. In our view, but for the Fed's action we would all be much better off than we are today, having avoided the collapse and had an easier down cycle that would have been more of a slowdown in a great race forward.
THE MARKET
The higher volume selling can be blamed on expiration, Greenspan, oil, or all three. As with Tuesday they could have just been an excuse for an overbought market to start its selling. After all, we noted the increased volatility earlier in the week that is often a precursor to a more substantial pullback. The question was whether the market was going to move laterally and then break higher or move back for a more 'normal' pullback.
The Friday higher volume selling tends to corroborate the more substantial pullback as the indexes fell through near support, showing the first distribution session in quite some time. The higher volume could be attributed to expiration, and with the Greenspan missive on top, a higher volume sell off is understandable. In short, volume could ease as it continues the test, hold, and then rebound and resume the rally once more.
There may be something else at work here with the Greenspan comments. The market reacted as if it expected a lot more rate hiking ahead. The market always overreacts near term even if Greenspan is heralding a more ambitious rate hiking campaign. Thus it can still test and continue a holiday rally. We are going to continue watching for erosion based on this new development, i.e. more distribution, breaking key support, leadership stumbling. There was some of that Friday, but a day does not change a strong trend.
Market Sentiment
VIX: 13.5; +0.52
VXN: 19.72; +0.93
VXO: 14.6; +0.65
Put/Call Ratio (CBOE): 0.81; +0.18
NASDAQ
Stalled out at 2100 and sold back on rising trade to the 10 day EMA. Harder fall than you would like to see to start a pullback.
Stats: -33.65 points (-1.6%) to close at 2070.63
Volume: 2.04B (+2.87%). Volume cracked 2 billion shares once more, last time on Wednesday. A sharp distribution session is not that significant during a strong uptrend, particularly when it is the first in over a month. It was expiration, so that can explain some of the selling, but leaders were diving on volume as well. On a modest pullback leaders tend to ease back to support as there are not that many willing to sell them.
Up Volume: 635M (-471M)
Down Volume: 1.382B (+523M)
A/D and Hi/Lo: Decliners led 2.1 to 1. Got uglier.
Previous Session: Decliners led 1.09 to 1
New Highs: 106 (-19)
New Lows: 24 (-1)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
Fell at the open and never got back up. It broke back through the February and March highs (2095, 2080), managing to hold over the 10 day EMA (2068). It was a harsh fall as techs distributed (higher volume selling). This was not an easy pullback, and though it was expiration Friday where volume can jump, many leaders were falling on rising volume as they moved through near support. That is the litmus test for a rally. There were several reasons to sell Friday, and the leaders were not immune. The interest news from Greenspan really shook up investors as the higher volume selling indicates.
The large caps sold harder than the overall NASDAQ as the big names that have recovered of late were under pressure. It is diving back to the 10 day EMA similar to NASDAQ.
SOX dove back through the 200 day SMA (441.28) as Goldman Sachs downgraded the chip equipment sector. The chips just started to move, making them prime targets for downgrades. The index is still building up off of the lows in the base, but will have to recover this key level.
S&P 500/NYSE
Volume was up as SP500 fell back through 1175. Still holding the breakout, but a harsh loss.
Stats: +0.07 points (0%) to close at 1170.34
NYSE Volume: 1.524B (+4.48%). Volume moved back above average as the large caps broke through near support. First distribution day in a while, but a serious drop.
Up Volume: 365M (-381M)
Down Volume: 1.153B (+465M)
A/D and Hi/Lo: Decliners led 2.52 to 1. With the small caps struggling the breadth was weak.
Previous Session: Advancers led 1 to 1
New Highs: 134 (-39)
New Lows: 11 (+2)
The Chart: http://www.investmenthouse.com/cd/^spx.html
After a brief tour above the early 2003 second top, the large cap index broke back through, struggling to try and hold the 10 day EMA (1171). Volume rose as it dumped lower; again, not a good easy test but also not an automatic end to the rally. Stocks can sell sharply in a continuing rally, particularly with expiration or bad news. They got both Friday. Now we see if it can hold 1155ish, the January to February highs that mark the top of the base. We want to see the index hold near the top of the base. This level is bolstered by the 18 day EMA at 1160.
SP600 is making the deeper test after failing to break to a new all-time high last week. It showed the same volatility and is now testing the 10 day EMA (311.80) as expected, but the drop was all in one session, much harder than we wanted to see. Could be expiration Friday, but after this run it looks ready to fall harder. 18 day EMA is next at 308.
DJ30
Stalled at 10,600 midweek but then rolled over Friday on rising, above average volume. Fell through the June high (10,480), managing to hold the 10 day EMA (10,449), the next support level. It needed that rest and it tanked on volume, not exactly a nice, orderly drop. 10,350 looks like the next support point.
Stats: -115.64 points (-1.09%) to close at 10456.91
Volume: 275 million shares Friday versus 242 million shares Thursday. First distribution session since October.
The chart: http://www.investmenthouse.com/cd/^dji.html
MONDAY
A shortened holiday week ahead with the market closed Thursday and open a half session Friday. The week is usually a good one, and with an overall uptrend the natural drift is higher.
There is still an uptrend in place, but the indexes are peaking after a strong run just as they move into the week. There were many external influences at work Friday, and perhaps they will be transitory and the seasonal trend will resume. If it does we need to recognize it for a rebound move if volume is light, and odds are it will be as most managers leave work Friday before the holiday week. Indeed, that is most likely one reason we saw high volume. Managers wanted to get square before the weekend and with Greenspan's news there was a bit more impetus to take some gain before leaving.
Many solid stocks landed back at near support Friday, and if the market is inclined to recover, there will be some entry points. The difficult part is that volume most likely won't be as strong as last week, making judging moves harder. These weeks we tend to let current positions run if the bias is upside. A new buy may be in order if we get some good volume on a solid rebound from a leader.
Friday could potentially have serious undertones for the market; we did not like what we heard from Greenspan given his past follies, and it was clear the market did not like it either. Again that does not mean that the rally is over. A single distribution session during a run higher is not unheard of nor is it fatal. We will continue to let the stocks tell us what we should do, particularly the leaders as they set the pace for the rally. Friday there were more than we wanted falling through near support on more volume than we wanted. Every rally needs leadership, and if it fails the rally fails. The good thing is that if Greenspan is truly going to raise interest rates for the wrong reason (fighting a trade gap as opposed to inflation, the former requiring much more hiking), it won't devastate the market overnight. As seen in 1999 and 2000 it is a latent problem that takes a while to take hold.
Thus we will watch stocks that have outperformed the overall market during the rally (have hit new highs, broken out of bases early in the move and rallied since) to see if they hold support and can rebound or if they continue selling on high volume. We are keeping some pretty tight stops given the Greenspan speech, taking the position we would rather keep what gain we have and minimize any loss than hope the selling ends quickly.
Support and Resistance
NASDAQ: Closed at 2070.63
Resistance:
The April high at 2079
Price resistance at 2090.
Some resistance at 2100.
January high at 2154
Support:
The 10 day EMA at 2067
2050, prior resistance, may provide some support on a test.
Some price points at 2000.
October high at 1971
The 50 day EMA at 1977
The 200 day SMA at 1953
S&P 500: Closed at 1170.34
Resistance:
1175 second high in that double top that spanned late 2001, early 2002.
Q1 1999 lows at 1215
October 1999 low at 1233
Q2 2001 peak at 1310.
Support:
The 10 day EMA at 1171.34
January highs at 1158
1142-1146 are the June highs.
1130 acted as some resistance on the move higher.
1128 to 1125 the September closing high.
The 50 day EMA at 1138
Dow: Closed at 10,456.91
Resistance:
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 10 day EMA at 10,449
September high at 10,342
The 200 day SMA at 10,245
The 50 day EMA at 10,213
The February/June 2004 down trendline at 10,188
9980 to 10,000.
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
November 23
Existing Home Sales, Oct (10:00): 6.77M expected and 6.75M prior
November 24
Durable Orders, October (8:30): 0.5% expected and 0.2% prior
Initial Jobless Claims, 11/20 (8:30): 335K expected and 334K prior
Michigan Sentiment-Rev., November (9:45): 96.0 expected and 95.5 prior
Help-Wanted Index, October (10:00): 37 expected and 36 prior
New Home Sales, October (10:00): 1200K expected and 1206K prior
End part 1 of 2
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