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world stock market, us stock market
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1/15/05 Stock Split Report
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Stock Split Report Subscribers:
MARKET ALERTS
Targets hit alerts issued Friday: None issued
Buy alerts issued: TBL; BCR; SSI
Trailing stops issued: None issued
Stop alerts issued: None issued
The market alert service is a premium level service where we issue intraday alerts relating to the general market conditions, when stocks hit action points (buy, stop, target, etc.), and when we see other information impacting the market or our stocks. You can sign up for Stock Split Report alerts at the following link:
http://www.investmenthouse.com/alertssr.htm
SUMMARY:
- Bulls win the rubber match as stocks post solid price gain.
- PPI lower thanks to energy but is going to be higher thanks to energy.
- Manufacturing production and space utilization on the rise.
- Interest rates are still the key to the market (along with oil).
- Friday bounce sets up stocks for follow through next week, but this is a 'show me' market at this stage.
- Earnings, interest rates and oil versus a market rebound.
Stocks head into long weekend with a setup for next week.
The Thursday breach of the 50 day EMA by SP500 and DJ30 and some continuing negative characteristics (early month distribution, weak rebound volume, modest upside breadth, inability to rebound from support, ignoring good news) still overhang the market, but Fridays rebound at least set stocks up for an attempted follow through next week to the Wednesday higher volume reversal session.
For the week stocks overall lost ground with SP500 and DJ30 joining the small caps and techs below the 50 day EMA for a day. Price/volume action improved a bit as did intraday price action as the indexes bent but refused to break. Even with the new breaches of the 50 day EMA, stocks held a pretty tight range and did not break down. Indeed the Friday rebound posted the third winning session for stocks last week and the second in three sessions where stocks not only held onto gains but rallied into the close, allowing SP500 and DJ30 to recover the 50 day EMA.
The modestly improving upside action has not turned back the selling that started the year. While there was some accumulation Wednesday as stocks rallied on rising volume, most of the improvement on the up sessions and the lack of volume on the down sessions was due to sellers backing off. There was no buying surge to push stocks up, just a cessation of the sharp selling that started the year.
That leaves the indexes straddling the 50 day EMA to start the third week of the year, a point where they could break either direction. Friday saw SP600 (small caps), NASDAQ and SOX leading, and that is why the market posted a gain. While money has flowed out of small caps (small cap funds suffered an outflow last week), it has not moved into large caps. Indeed, the only up sessions this year have occurred when the small caps and NASDAQ are in the lead.
That is a telling indication that money is not moving back into the market after running from it hard the first week of 2005. That was still in large part tax selling, i.e. taking a gain after the first of the year to avoid 2004 taxes on it, but buyers have not been enticed back into the market yet. With the Fed appearing to be preparing the market for continued and possibly more intensive rate hikes (say 50 basis points) and oil climbing back toward $50/bbl, buyers that may have been ready to re-enter on a dip such as this have hesitated. This week they will have a chance to move back in and provide some follow through to the Wednesday reversal. It will take a change in market character, but that is what follow through sessions are all about.
THE ECONOMY
Producer Prices fall in December as energy leads the drop.
PPI fell 0.7% in December, much lower than the 0.2% drop anticipated and the 0.2% November decline (+0.5% originally reported). This was the sharpest drop in 18 months. The core rate (less food and energy) rose 0.1% (0.2% expected). Thus the price drop was tied to the energy price decline for that month. Energy fell 4% overall with gasoline done 14.4% and heating oil fell 10%.
For the past 12 months the core is up 2.2%. That is higher than the 1% rise in 2003 and -0.5% in 2002, but it is still a very modest rise. After all those prior years were an economic struggle with the economy just starting to turn. Now the economy is in very good shape and still expanding. This modest rise is in line with an expanding economy; prices rise in an expansion. They did it during the boom years as well. This is still a number that does not suggest inflation ready to run out of control.
Energy, however, is already rising in January and even toward the end of December. That is setting the stage for a higher PPI in January, with the potential for taking back all of that 0.7% decline and then some. Thus the idea that the December number will put the Fed on hold is nonsense. Indeed we don't want the Fed on hold. We want the Fed to raise rates to where it wants (3 to 3.5%) and then be done with it.
Industrial production and capacity use jumps.
In 2004 manufacturing created jobs for the first time in years. Yet, industrial production and capacity readings have continued their mediocre showing. December changed the playing field some as production rose 0.8% (0.5% expected), helping production post a 4.1% gain for the year. That was the best annual production in four years.
Capacity posted a solid gain as well, rising to 79.2 (78.9 expected). That was the highest level since January 2001. For 2004 utilization was 78%, the highest since 2000 (82%).
See a pattern here? The economic recovery is continuing and we are starting to see readings approaching those before the bust. We still hear some refer to the weak economy or, even still, an economy in 'tatters', and frankly you have to wonder what their agenda has to be. It may not be an across the board boom ready to collapse as in 2000, but it is not weak or in tatters. Indeed, the last thing you want is a boom time situation as existed in 2000. The Fed was raising rates higher and higher in a supposedly 'red hot' economy even was we saw signs it was starting to tumble. That last 50 basis point 'that ought to do it' rate hike in May of that year did do it; it torpedoed the last leg the economy was standing on. It was a nasty drop from 8% GDP growth to negative GDP growth. The Fed likes to say the recession was shallow, but the problem was we were diving off of a 30 meter platform into that shallow recession. The 'splat' heard round the world.
Interest rates still the key for 2005.
Why not go ahead and talk about the Fed then? More and more hawkish talk out of the Fed regarding inflation and rate hikes. The minutes released to start the year whacked the market as it became very clear the Fed was not done with rate hikes and was not even on the page (or in the chapter) in the Fed's 'Economy 101' manual that considers how to end a rate hiking campaign. Since then several Fed governors have hit the road openly talking about inflation and the need to keep it leashed in, implying more rate hikes ahead. Of course this also is in line with Greenspan's comments in November regarding the need to be fully hedged in the financial markets with respect to interest rate hikes as well as the Fed's recent comments about 'potential excess speculation' in the financial markets given the number of IPO's.
Friday Fed governor Poole added some gasoline to the fire, suggesting that there were no engraved stone tablets at the Federal Reserve or Treasury saying the Fed had to continue removing the 'policy accommodation' at the now infamous 'measured pace.' Along with the other hawkish noises emanating from FOMC members of late it is clear that the Fed is now focused directly on inflation as it was back in 1999 and 2000.
As we all know first hand (as we now too have lived through a nasty decline, one of the worst in US history), that can be disastrous. There is some inflation. Commodities are in a bull run, and Jim Rodgers is convinced they will be for 15 years more. While it is important for the Fed to get back to neutral (near 3%), the Fed often gets carried away. We know about getting carried away. Take pruning. Pruning is good for a tree or bush, clearing away dead branches, removing weak or crossed limbs, and improving the shape of the tree so it can grow healthier and faster. Most people get into it too much, however, and go too far. They end up with something resembling a popsicle stick as opposed to a spreading tree.
The Fed got carried away in 2000 just as it always has when it raises rates. The recent comments regarding upping the ante with respect to the amount of each rate hike is an indication the Fed is getting impatient as it always does. We have discussed in the past (when this round of hikes started) how the Fed says it will be measured and thoughtful in its rate hiking. It starts that way but it always ends with the biggest rate hikes of the series. Why? Because the economy and the market are slow to respond. It takes as much as 12 months for a hike to work its way into the economy. The big oil tanker takes a long time to get moving, but once it does it takes a long time to stop, particularly if you just cut the engine and do not reverse the propellers. In other words, just about the time the Fed gets impatient and increases the intensity of its rate hikes the economy starts feeling them and begins to slow. That is still not enough for the Fed and it continues. Then all of the sudden things drop hard and the Fed says 'our work is done.' No, it is just starting again because those last hikes will continue to work into the system and drag the economy lower. Before long the Fed realizes it overshot the market once again and has to cut rates. Just as investors make the same mistakes over and over, so does the Fed. Human psychology, whether you are buying and selling 100 shares of stock or sitting at the head of the US Central Bank, never changes.
Beyond inflation: the Fed versus the Trade Gap.
While any Fed rate hiking campaign makes the sober take pause, what really scares you is when the Fed starts branching out the Federal Reserve's duties. At the turn of the century it was not just inflation the Fed was fighting; it got involved in bubbles, job counting, market sentiment, and consumer spending levels all with respect to fighting inflation, inflation that was not there. It was frightening the way it mirrored the Fed of the late 1920's in its actions and the rationale for those actions.
Today the Fed is not inventing a bunch of new inflation indicators as it did in the late 1990's (guess it doesn't have to as it has plenty of new ones to use from then), but it is taking another dangerous tack: it is starting to warn about the trade deficit and its implications on interest rates and growth. Greenspan did this in November. The Cleveland Fed did it again on Friday. We know the underlings don't say anything without Greenspan's approval. We also know that when we start hearing a theme from the Fed it is a clear warning that the Fed is gearing up for some sort of offensive.
Specifically, the Cleveland Fed opined that with the trade gap at 5% of GDP and outstanding claims on US assets at 20% of GDP it will be increasingly difficult to finance more foreign debt. Nothing new there; that has been the complaint for years. It further opined that the deficit would reverse and that would be preceded by a currency decline. There could also be a decline in currency inflows and that would start to push up borrowing costs (i.e., interest rates), and that could slow growth.
Okay. That is the critical portion. It is the same idea that former Treasury Secretary Robert Ruben espoused regarding the federal deficit: in servicing such a big debt the US would be a big player in the borrowing market, competing with businesses and individuals. That would drive up interest rates and 'crowd out' the smaller guys, thus hurting the housing market, business, and generally causing economic decline. It is the same argument simply shifted to the international scene due to the trade gap being international in nature.
Problem is, despite the Fed's reference to history being a guide, there is no real history on this with respect to an economy such as the US. Maybe there is some history with respect to a sub-industrialized South American economy that had no real assets or production or GDP to begin with, but not with a world leading economy. INDEED, the real world facts show that deficits do not cause interest rates to rise. During the periods of deficits in the 1980's interest rates fell. They only started to rise when the US started to retire debt. Rates did not start to rise significantly in this recovery until the Fed started its rate hiking campaign.
Thus when the Fed gets all worked up over something such as the trade deficit, implying it is going to have to act, you have to wake up and listen. Not to the Fed's comments about the deficit, but about the Fed doing something about it. We know what the Fed does: it raises rates higher and faster and it dries up the money supply. That is all it can do, and its tangential (at best) impact on foreigners wanting to finance our debt will be one of the minor impacts. The economy will be in the toilet long before rates hit a level that would matter. And, of course if the economy goes into the tank because of rate hikes, that will be the real incentive for foreigners to stop investing in the US.
Market picking up on the Fed's new intent.
We have discussed before the fallacies of this debt funding theory before. The real problem for the stock market is if the Fed continues to pursue this. It is making all of the noises it has made in the past when it wants to take on an issues, and the market has picked up on this. Thus the breakout and rally at the end of 2004 partly based upon the idea that the Fed was going to raise rates near 3% and stop has had to take a powder and consider if that was correct. That may not be why the market sold to start the year (though the selling coincided with the Fed minutes release), but it is one of the primary reasons buyers have not jumped right back into stocks after that initial selling. The smart money knows that if the Fed takes on the trade gap with rate hikes, the trade gap is not going to be the casualty. The economy will suffer and stocks will decline in advance of the economy.
Is there a safe harbor? As with Greenspan, the Cleveland Fed said that if there was greater fiscal restraint, i.e. less federal deficit spending and real action on entitlements, there could be more domestic savings and that would help rectify the purported problem. In other words, cut spending outlays and get some social security reform done and that will mollify foreign investors and also put a lot more money into the US economy to help it continue to grow based on investment by US citizens as opposed to foreign interests.
THE MARKET
The market showed a bit more improvement Friday, managing once more to hold onto a gain into the close. SP500 back above the 50 day EMA and SP600 holding at support set things up better for next week than on the close Thursday. After the strong first of the year selling, the Fed's renewed interest rate zeal, oil climbing back toward $50/bbl, the flirtation with the 50 day EMA on all indexes, and the Wednesday higher volume reversal, it is time for the indexes to make a move one way or the other.
There has been improvement in the daily action, but it has been tepid improvement with no flashes of strength that can even come close to the sharp selling that started the decline. The sellers have abated some for now, but the buyers have not moved back in. After the Wednesday reversal on better trade the market is still set up to show us a follow through this week. Show us. That is the key. Given the tepid response to the early January selling, it will have to show a strong volume move with breadth. And leadership. We want lots of leadership. There are still plenty of prior leaders and new potential leaders that have pulled back in this selling and could rebound and lead once more. There are also a lot of stocks that have broke through support, tapped at it, and are struggling. Again, the market needs to show us what it wants to do. The bias is still downside for now as the modest improvement is indeed only modest.
Market Sentiment
Bulls versus bears: The selling to start the year put a dent in some of the bullishness. Bullish investment advisors fell to 59.4% from well over 60%; still at a bearish level. Bearish advisors rose to 22.9% from 20%, moving just above a level considered bearish. Not nearly enough movement to trigger a change of fortune in stock prices.
We note that this roughly corresponds with the drearier sentiment following the close Thursday. Some of the commentators were a bit downbeat, talking of 'over-enthused' investors and looking for places to 'hide.' These are decent signals but at this stage not enough on their own. We do not that ahead of a holiday weekend it was able to hold its gain. In other words investors were not so scared they were bailing out before the weekend.
VIX: 12.43; -0.41
VXN: 18.57; -0.52
VXO: 12.85; -0.22
Put/Call Ratio (CBOE): 0.72; -0.18
NASDAQ
Still below the 50 day EMA, rebounding back toward that level on lower though still above average volume.
Stats: +17.35 points (+0.84%) to close at 2087.91
Volume: 2.092B (-1.79%). 2B shares again and still above average, but lower trade, not enough to give the index a push through this point that has stalled it recently. Volume remains strong overall with each session above average this year. Some accumulation, some distribution last week. The higher volume rebound Wednesday has tried to set the stage for a follow through this week.
Up Volume: 1.335B (+659M)
Down Volume: 730M (-636M)
A/D and Hi/Lo: Advancers led 2.05 to 1. Very nice breadth as the techs and chips were the market leaders.
Previous Session: Decliners led 1.75 to 1
New Highs: 65 (-2)
New Lows: 27 (-2)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
NASDAQ rebounded but could not recover the 50 day EMA (2092) Friday, continuing its string of closes below that level last week. Steep drop, unable to rebound sharply, undercutting the 50 day EMA. Not a great combination of positives to build on. The higher volume rebound after testing lower last Wednesday is its best attribute, and next week that has us looking for a follow through session. Not holding our breath on it, but watching to see if it can deliver one or if the weakness resumes.
NASDAQ 100 also could not reclaim the 50 day EMA on its Friday rebound. The larger cap techs did produce a bit better gain (1%), but not a real distinction on the session.
SOX led the move higher (1.8%), but of course, it led the move lower as well. It is more volatile, so its daily gyrations are not as telling as its trend. It did recover some support at 400 but stalled after tapping the 10 day EMA (406) on the high. It is still in the downtrend after breaking lower from that short head and shoulders pattern to start the year. Trying to recover but we note that good Intel earnings could not help it.
SP500/NYSE
Large caps recovered the 50 day EMA Friday, holding the lateral range dancing around that level. Weak below average volume, however.
Stats: +7.07 points (+0.6%) to close at 1184.52
NYSE Volume: 1.335B (-11.6%). Volume slid below average as the large caps rebounded back over the 50 day. The lack of volume suggests no real conviction; ahead of a three day weekend that is typical. Given how weak the market has been, not bad.
Up Volume: 942M (+397M)
Down Volume: 361M (-583M)
A/D and Hi/Lo: Advancers led 2.08 to 1. The small caps managed to lead the market, and that pushed breadth up.
Previous Session: Decliners led 1.19 to 1
New Highs: 103 (+11)
New Lows: 20 (0)
The Chart: http://www.investmenthouse.com/cd/^spx.html
Recaptured the 50 day EMA (1181) on a low volume move. The low volume was disappointing for an important move, but as noted, the action has been weak and the fact that SP500 held the gain into the close ahead of a long weekend is not too shabby. It is not a sign of great strength or a new rally ready to emerge. It is, however, another sign of some firming backbone in the market overall. It too is set for a follow through attempt this week, but it is also fighting the same problems as the other indices.
The small cap SP600 rallied off of support at 310, a level turning out to be key support for this index. It made it up to the 50 day EMA (314.93) but could not move past that level. It held the move to the close; as with the other indexes that is a good sign given the weakness to this point. SP600 is ready to try a move, but its pattern is still weak: left shoulder, head to end December, plunge lower and below the November high.
DJ30
DJ30 managed a move back above the 50 day EMA (10,547) on the close. A small first step. Volume was low so there was no real buying, just no sellers. The key is recovering 10,600 and moving through the 18 day EMA (10,630) on above average volume. It has to do that to shake off the quite toppish pattern it established last week when it gave up support at 10,600.
Stats: +52.17 points (+0.5%) to close at 10558
Volume: 223 million shares Friday versus 271 million shares Thursday.
The chart: http://www.investmenthouse.com/cd/^dji.html
THIS WEEK
Consumer prices, regional manufacturing surveys and Michigan sentiment will play a role this week below the umbrella of interest rate concerns and rising oil prices. That is a lot of smoke for the market to try and blow through and deliver a follow through session to the Wednesday reversal on volume. The import of the follow through is that it shows longer term buyers enter the market after the shorts started things off when they covered. If the long buyers don't come in then the shorts can reassert control. Thus we look for a strong session on above average volume with a strong price gain in the 2% range on one or more of the indices.
A follow through still seems more of a long shot as the index patterns are not that solid. The quick, hard drop and inability to rebound says the buyers did not immediately return after unloading positions to take gains and free up money to allocate elsewhere. Interest rate unknowns and rising energy prices are definite overhangs on pushing money back into stocks just now.
If we see a follow through session and strong stocks racing back higher again, great. What we see in the index patterns and in the manner they fell suggest the indices need more consolidation.
In that environment we are much pickier with what stocks we look at for upside positions. Our buys became fewer last week as quality stocks showed fewer breakouts. If the indexes rally further without strong volume and breadth, we will watch for near resistance to stall them out. That should set up some good downside positions.
The indexes are hardly dealing from a position of strength here, and assuming only a rebound this week would be wishful thinking. While still a bit oversold still, they have tried to hold their position the past week and consolidate for another move. If the consolidation fails to produce such a move, then there is more downside from here. We are thus looking at downside positions from here as well to take advantage of any downside.
Support and Resistance
NASDAQ: Closed at 2087.91
Resistance:
The 50 day EMA at 2091.85
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:
2050, prior resistance and the June high.
2023 from the early June 2004 high.
S&P 500: Closed at 1184.52
Resistance:
1185, the top of the November consolidation range.
The 18 day EMA at 1191
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:
The 50 day EMA at 1181.34
1175 second high in that double top that spanned late 2001.
1166 is some support.
1157 is solid support from January through March consolidation tops.
Dow: Closed at 10, 558.00
Resistance:
Price consolidation at 10,600 level
The 18 day EMA at 10,631
10,754 is the February high
10,975 - 11,000 from Q4 2000, Q1 2001
11,350 from the May 2001 highs
Support:
The 50 day EMA at 10,547
The late April, June peaks at 10,478 to 10,512
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 18
NY Empire State Index, January (08:30): 26.5 expected and 29.93 prior
January 19
CPI, December (08:30): 0.1% expected and 0.2% prior
Core CPI, December (08:30): 0.2% expected and 0.2% prior
Housing Starts, December (08:30): 1900K expected and 1771K prior
Building Permits, December (08:30): 1985K expected and 2028K prior
January 20
Initial Jobless Claims, 01/14 (08:30): 367K prior
Leading Economic Indicators, December (10:00): 0.2% expected and 0.2% prior
Philadelphia Fed, January (12:00): 26.5 expected and 25.4 prior
January 21
Michigan Sentiment-Preliminary, January (09:45): 98.0 expected and 97.1 prior
End part 2 of 3
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