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us stock market, stock split
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01/05/05 Investment House Daily
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MARKET ALERTS:
Target hit alerts issued Wednesday: None issued
Buy alerts issued: None issued
Trailing stop alerts: FSL
Stop alerts: VSAT; GISX
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SUMMARY:
- Stocks not ready to rebound as midday bounce off 50 day EMA fails late.
- ISM services posts another strong gain.
- 'You know, there is only so much land out there' and other famous phrases.
- Oil inventories fall but products stocks rise.
- Time to make a stand at the 50 day EMA after three downside, high volume sessions, and the small caps may not be there to help for now.
- Retailer December sales to hit in earnest on Thursday.
Stocks try to make a stand on the third day, but roll over late in the session once more.
Unlike Monday and Tuesday, investors were not so eager early on. Stocks started mixed and then managed to build into a very modest gain in the first hour. A good ISM services report put a bit more spunk in the upside move. Unfortunately, that last little pop on the ISM report was it. Stocks softened up ahead of the oil inventories data and slipped into a three hour downtrend that took NASDAQ to the 50 day EMA and SP500 to support at 1185.
That put us into lunch and we noted in an alert that this was the point stocks should bounce if they were going to, and NASDAQ et al put in a good bounce from there, taking SP500 back to its session high hit on the morning run. Solid rebound with stocks holding key support.
The bounce, however, only gave sellers another opportunity to sell into strength. NASDAQ slipped into a 20 point thumping as it rode back down to new session lows by the close and just below the 50 day EMA. SP500 tossed in the towel as well, sliding 9 points in the afternoon as it sought its 50 day EMA as well. SP600 (small caps) tanked through its 50 day EMA as the small caps and semiconductors (SOX, SMH) continue to define the meaning of weak in 2005.
That leaves stocks lower for three straight sessions and on mostly rising volume. Wednesday they tried a bounce and failed; that is a sign of weakness, but stocks were able to attempt a rally Wednesday as opposed to just screaming lower all session. NASDAQ volume was lower, another sign the selling is losing some steam. After three sessions the 50 day EMA is a good point to bounce, and stocks are showing signs of slowing the selling. The action was still decidedly bearish Wednesday both overall and intraday, but with the economy still in a fundamentally good condition, a sharp 3 day selling bout to the 50 day EMA will likely yield some form of bounce, either a relief move before continuing to sell or base, or a rebound with buyers moving in solidly after the early year reshuffle.
THE ECONOMY
ISM Services for December tops expectations.
The 63.1 reading topped the 61.0 expected and the 61.3 in November. None of those levels are slouches and give you the general idea: services continue a very solid expansion. New orders rose to 60.3 from 59.9, an indication of future activity. Employment was basically flat, coming in at 54.9 (55.0 November); expanding but still sluggish. Prices paid edged higher to 71.4 from 71. All in all pretty much a 'run of the mill' strong report that dovetails nicely with the ISM manufacturing report issued earlier this week.
Mortgage applications drop again as interest rates move higher.
Mortgage applications fell 10.6% last week on the heels of a similar drop the week before. New applications fell 13.7% and refinancing fell 5.7%. Rates continue to edge higher overall though short term rates are still rising a bit faster than long term rates. We said it before many times, it is the low rates that have fed the housing market subsequent to the nesting period after 9-11. As rates rise the housing market will cool.
That makes the Fed's comment Tuesday regarding its concern for the housing market a bit circular: the Fed is worried the housing market might have become too hot and set up a sharp decline yet it is raising interest rates because it is worried about such a decline. That is the old 'this is going to hurt me more than it hurts you' illogic that Jerry Mathers in 'Leave it to Beaver' struggled with when Ward meted out punishment.
Housing market pundits chanting their version of 'it is different this time'
This week alone we have heard 4 different housing analysts utter the chant that we have heard at the peak of the real estate market in years past. We all know that when we hear stock market traders or analysts say 'things are different this time' that the bottom or top is about to be put in. Most recently this happened in the final down leg in September and October 2002.
The housing equivalent is 'there is only so much land' or 'they are not making any more land, you know.' Well of course they are not other than some swamp reclamation here and there (though in Florida they are undoing a lot of that now); we all read the story 'Tide in the Attic' in elementary school and know the Netherlands has some reclaimed watershed as well. The question is at what price are people willing to pay for that quantum of available real estate. At some price point buyers will walk away. With interest rates rising, that price point drops because debt service rises.
Think about it this way. If this 'there is only so much land' argument were true, why would there ever be any decline in real estate prices? Prices would only rise given that there are more and more people born each day or entering the country in need of housing. Nonetheless real estate price do move in cycles just as any other market.
It is easy to understand the view that prices will only rise. In the late 1970's oil was inevitably going to $100/bbl; many believed this as certainly as they believed a hammer would fall to the ground if they dropped it. The environment for continued price increases appeared certain no matter what scenario you looked at. Nonetheless oil fell from $35/bbl to $9/bbl. Some day it may hit $100/bbl but waiting for that could be like a Cubs fan waiting for a pennant. It has happened before in real estate as well. Austin in the early 1980's; indeed most of the oil producing states during the oil boom. California during the same period. Timber land in the southeast all during the 1980's and most of the 1990's. No one thought prices would fall but they did just that. At the top we heard this same phrase: 'you know Bob (or Bill or Jane or Susan; you fill in the blank), there is only so much land out there.' Last time we checked, a lot of that land, even with the boom the past 5 years, is still out there with nothing on it but scorpions, cactus, juniper, the occasional rattler, and a 'buy this land' sign on it.
While we do not see the kind of rampant speculation in real estate that occurred in prior periods immediately preceding the hard fall, there are areas where people are buying with the intention of flipping the land for immediate profit. That goes on every day in real estate, but when Bob and Ellen next door start telling you about this choice piece of land that has been overlooked for some unknown reason and how you had better join them in jumping at the opportunity because as we all know 'there is only so much land out there', then you need to back off and ask what in sam hill is going on here.
Oil update: inventories fall yet rise.
Overall crude inventories fell 3.3M bbl last week versus the 500K drop anticipated. That was not great. Distillates, however, rose 2M bbl (expected to be flat) and heading oil jumped 1.2M bbl, also ahead of expectations. Gasoline rose 2M bbl as well. That was not bad.
When looking at inventories, the important points are the products as those are what is in immediate demand. Thus when the news hit oil fell. Not a massive drop but oil lost ground because what was needed here and now was in plentiful supply. If overall crude inventories had been along the lines of expectations, prices may have really tanked. As it was they were unable to offset the Saudi Arabia announcement it was cutting production 500bbl/day as part of its agreed to cuts to start the year.
Crude is still hanging tough in the $42-$43/bbl range, refusing to fall below $40/bbl. This is the key fight at this juncture. Oil broke its uptrend and fell hard. It is now trying to regroup. It would be an important psychological move to pierce and fall below that $40/bbl level. It needs some catalyst to do so, something along the lines of an Iraqi election that comes off reasonably well.
THE MARKET
January continued to stink Wednesday though it tried to put a bow on the action with a mid-session rebound off of NASDAQ 50 day EMA. The true picture emerged again in the afternoon as it gave up that move and more, closing at session lows. That left NASDAQ hovering around its 50 day EMA and SP500 just above that support level. After three sharp downside sessions it is time to fish or get off the pot (mixing our metaphors in order to pass the FCC standards and spam blockers).
As noted there was at least an attempt to rally Wednesday and NASDAQ volume was lighter as it sold to the 50 day. Signs that the selling is easing and that there could be at least a relief bounce ahead. Problem is, the small caps are getting pounded, tanking below the 50 day EMA as the leader in 2004 is sold off to start 2005. Money is moving out of small caps to start the year. The large caps are showing relative strength as money is not leaving them as fast; it is not moving in yet, but it is not leaving as fast. That suggests some rotation getting ready to take place.
After all, look at charts such as MSFT, GE, C, JNJ, HD etc. There has been some pretty gnarly drops to the 50 day EMA this week but these stocks are just going about their business in very orderly, well contained tests or consolidations. That shows us there is no dumping of these shares even as many tech and small to mid-cap stocks are hit with some pretty salty selling pressure. That suggests that the money coming out of other areas is going to move back into the market.
Overall we also note that many stocks continue to hold at or above their 50 day EMA, a key nearer term institutional support level. As we have noted earlier this week, a sharp pullback to this level after a good run is not uncommon during a continuing uptrend. Given that it has occurred at the start of the year, it suggests some cashing in of gains and some reallocation. If they can hold the 50 day EMA, show better price/volume action, and rebound or start a lateral move, there is a good chance for a resumed upside move.
Market Sentiment
Still little movement in the volatility indexes even as the market continued selling hard the past two sessions.
VIX: 14.09; +0.11
VXN: 20.18; +0.12
VXO: 13.97; -0.16
Put/Call Ratio (CBOE): 0.95; +0.17. This ratio is reaching a level that, during the 2004 base, triggered upside moves.
NASDAQ
Tried a modest bounce but could not handle any upside, falling to the 50 day EMA at the close. Volume eased . . . slightly.
Stats: -16.62 points (-0.79%) to close at 2091.24
Volume: 2.397B (-11.1%). Volume fell, indicating the selling intensity was lighter. It is noteworthy that volume was lighter during the rally attempt and then quickened as the afternoon selling took hold. In short, hardly a cessation of the selling pressure, but showing some positives. Nothing to hold your breath over at this juncture, however.
Up Volume: 666M (+130M)
Down Volume: 1.713B (+1.713B)
A/D and Hi/Lo: Decliners led 2.47 to 1. Still a pretty ugly downside rout.
Previous Session: Decliners led 3.06 to 1
New Highs: 40 (-29)
New Lows: 20 (+4)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
Managed to turn positive early and then midday, but that lunchtime bounce from the 50 day EMA (2093) folded up quickly in the afternoon. NASDAQ had set up a nice little doji pattern at the 50 day EMA before that late selling. As it is, it has now made the full test of important support, and if it is going to do something upside, this is the time. Even a slight gurgling noise would be welcome. When you look at the chart you are struck by the sharp, rapid decline after a steady rise. A decline that comes in the face of continued solid economic improvement. Either stocks have had a 'come to Jesus' meeting with respect to the Fed rate hikes not ending anytime soon or this is a start of the year reallocation. How it responds to this support will tell us the future. Wednesday it showed some signs of upside life; now it has to put those into play.
Same story with the large cap techs. They sold on lower though strong volume to the 50 day EMA, trying to make a stand there. They are just over the top of their 2004 base (1550), a good place to make a stand.
SOX was fairly putrid again, leading to the downside with the small caps. It did check up above some support at 400. This could produce a bounce, but in the bigger context, SOX fell out of its lateral move between the 200 day and 50 day MA.
SP500/NYSE
The large caps slowed the drop after they too rebounded midday. They were unable to hold the bounce, however, falling to a session low on the close as volume jumped higher.
Stats: -4.31 points (-0.36%) to close at 1183.74
NYSE Volume: 1.738B (+1.06%). Volume was sharply higher for the second consecutive session as the small caps were sold hard.
Up Volume: 429M (+238M)
Down Volume: 1.282B (-197M)
A/D and Hi/Lo: Decliners led 2.59 to 1. A bit better even as the small caps crashed through the 50 day EMA.
Previous Session: Decliners led 3.11 to 1
New Highs: 31 (-17)
New Lows: 15 (+6)
The Chart: http://www.investmenthouse.com/cd/^spx.html
SP500 sold again, giving up almost 10 points from its intraday bounce high. Overall the loss was more contained as SP500 slowed the point drop as it approached its 50 day EMA (1180). It is still easily over that level despite the continued distribution. We could very well see the large caps reach down a bit more toward the 50 day and then try a rebound.
The small caps led the downside Wednesday, even surpassing SOX in its woes. SP600 fell through the 50 day EMA (315.93) as the sharp profit taking continued. Money is flowing out of the small caps to start the year. They have been pronounced dead for the past year or more, but now it is showing real weakness. There is support at 310; that will be a key level for this index as it continues to sell.
DJ30
The blue chips were positive most of the session but they too succumbed to the late blow down and posted a modest loss. Volume fell below average as DJ30 tapped down to the November and December resistance levels. Good point to hold after it gave up the high in the 2004 base (10,754) Tuesday. As noted above, the industrials are not selling as sharply as the other indexes.
Stats: -32.95 points (-0.31%) to close at 10597.83
Volume: 263 million shares Wednesday versus 293 million shares Tuesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
THURSDAY
A light economic data day, but retailers will be releasing their December sales figures Thursday and with all of the hype about the holiday season it will have an impact. After hours AEOS reported excellent sales and SBUX reported an 8% increase. The former was up, SBUX was down. Expectations in financial markets can be a bear. SBUX has showed signs of slowing sales and this solid holiday period did not satisfy investors. Overall we anticipate a solid showing.
The other factor over the market is the Friday jobs report. With the FOMC minutes causing a stir this report still has some importance even after the election. Given the private agencies reports, there is not a lot to suggest an upside surprise. Challenger reported the fourth straight month of 100K+ layoffs. The regional and national manufacturing and services reports show hiring slipping in December. Thus not many are expecting an upside surprise after expecting one the past few months. That alone makes you want to take the upside bet, but the data still suggest otherwise.
With the jobs report Friday and the lackluster bounce attempt Wednesday, stocks may split the difference and hang around the 50 day EMA to see which way the economic wind blows Friday. This is the place where stocks are going to have to put together something if they are going to stem the selling. As noted, there are large caps (as well as some mid-caps and small caps as not all are in the tank) that have held up just fine during this selling, waiting for the selling to stop and money to be put back into the market.
In short, despite the hard selling to start the year as portfolios are readjusted, many stocks are in good shape to move higher. Now several of those we cited are about as exciting as mud drying and move about as fast. The point is that the last three days have hurt many stocks but many are still in good shape and the damage thus far is not fatal. We still suspect portfolio shuffling to start the year as a main culprit, and the relative strength of many stocks suggests this. Of course we have to be ready if the 50 day EMA starts to give way and stocks cannot recover by the close.
Support and Resistance
NASDAQ: Closed at 2091.24
Resistance:
2110 - 2112, the top of the November consolidation.
January high at 2154 (early 2004 high)
2250 - 2260 from January/February 2001 highs and lows.
2282 from 5-2001 high.
Support:
The 50 day EMA at 2093.61 is still trying to hold.
Price support at 2090.
The April high at 2079
2050, prior resistance and the June high.
S&P 500: Closed at 1183.74
Resistance:
The 18 day EMA at 1198.80
1200 acted as resistance on the last trip higher
Q1 1999 lows at 1215
October 1999 low at 1233
Q2 2001 peak at 1310.
Support:
1180 to 1185, the top of the November consolidation range.
The 50 day EMA at 1180
1175 second high in that double top that spanned late 2001.
Dow: Closed at 10, 597.83
Resistance:
The 10 day EMA at 10,713
10,754 is the February high
10,975 - 11,000 from Q4 2000, Q1 2001
11,350 from the May 2001 highs
Support:
Price consolidation at 10,600 level
10,570 is the early April high
The late April, June peaks at 10,478 to 10,512
The 50 day EMA at 10,536
10,400, the bottom of the November/December range.
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
January 03
Construction Spending, November (10:00): -0.4% actual versus 0.4% expected and 0.3% prior
ISM Index, December (10:00): 58.6 actual versus 58.5 expected and 57.8 prior
January 04
Auto Sales, December: 5.2M expected and 5.1M prior
Truck Sales, December: 8.3M expected and 7.8M prior
Factory Orders, November (10:00): 1.2% actual versus 1.0% expected and 0.9% prior (revised from 0.5%)
January 05
ISM Services, December (10:00): 63.1 actual versus 61.0 expected and 61.3 prior
January 06
Initial Jobless Claims, 12/31 (08:30): 330K expected and 326K prior
January 07
Non-farm Payrolls, December (08:30): 175K expected and 112K prior
Unemployment Rate, December (08:30): 5.4% expected and 5.4% prior
Hourly Earnings, December (08:30): 0.2% expected and 0.1% prior
Average Workweek, December (08:30): 33.8 expected and 33.7 prior
Consumer Credit, November (15:00): $6.0B expected and $7.7B prior
End part 1 of 3
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us stock market
stock split
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