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world stock market, us stock market
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1/29/05 Technical Traders Report
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Technical Traders Report Subscribers:
MARKET ALERTS
Targets hit alerts issued Friday: OVNT
Buy alerts issued: CHS
Trailing stops issued: NXTP
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. To subscribe to the Daily alert service you can sign up at the following link:
http://www.investmenthouse.com/alertttr.htm
SUMMARY:
- Indices post first positive week of 2005 but still struggling below key resistance.
- Export decline drops initial Q4 GDP reading well below expectations.
- Employment cost index declines in Q4 as wages fall, benefit costs rise.
- Stocks sluggish and still show negative bias, but again refuse to sell off significantly.
- Many look to the Iraqi election, but the market looks to basics.
- Earnings past high point as economic data takes center stage along with Fed.
Lackluster session holds up just enough to give market its first up week for the year.
Friday stocks closed lower, but after a morning sell off and 4 hour lateral consolidation, a late bump higher pushed DJ30 to positive for the week, joining the other indices with the first weekly gain of 2005. After bouncing back to test resistance following the hard selling two weeks back, however, it was unable to make the real move, a break back through the key support it broke as it made its second down leg in the 2005 selling. A modest gain for the week, but the market overall is still in a negative stance as it enters a news heavy 5 days ahead.
Friday the news was mixed, but overall it was the type that is typically good for the market. GDP was lower than expected and not great news for the future, but with the Fed on the rate hike warpath that was a modest positive. MSFT earnings were solid the night before, earnings pre-market were mostly strong, there was a major merger announced (PG + G = PGG?), and oil was falling all session. Stocks feigned a positive move early, but after SP500 made two tries at 1175 they were out of gas. Good news was not good enough once more.
A sharp drop looked to be the start of the next leg lower. A last half hour bounce took some sting out of loss though all indices closed negative. Volume was higher on NYSE, a bit lower on NASDAQ; another distribution session on NYSE stocks as it struggles with the breakdown from key resistance. This is the battle facing the market next week, and it will have wide-ranging news to chew on: Iraq election (first democratic election in history in an Arab nation); OPEC meeting; FOMC meeting on rate hikes; jobs report. Obviously historic events and others that in the future could be viewed as historic. Interesting times indeed, and as usual the market is one of the primary arbiters of what it all means. Right now it is not looking great near term, but it still is far from buckling.
THE ECONOMY
First reading of Q4 GDP falls short of expectations while deflator rises.
The 3.1% growth was below the 3.5% expected and well off Q3's 4% rate. That was the slowest since the 1.9% whimper in Q1 of 2003. The problem was exports dropping at the fastest pace in over two years despite the weak dollar. At the same time imports rose. Exports add to GDP, imports deduct. That was enough to drive GDP well off pace and masked some continuing strength.
Deducting imports is necessary to give a clear domestic production reading, but it also belies the real strength of the overall economy. It is a historical fact that US citizens consume a lot of foreign goods when they are prosperous. Moreover, the lower dollar helps inflate the import figure beyond what it would have been say a year ago. That is another impact of a falling dollar that is not readily apparent: the economy is stronger than it appears as a weaker dollar and thus relative higher import prices shroud some of the strength.
Even with the slower finish to 2004, GDP for that year rose an impressive 4.4%, topping the 3% 2003 growth that saw some tremendous surges in the second half. From humble beginnings, that year saw GDP growth reach over 7% in Q3 as investment spurred by the tax cuts took off.
In a market already skittish that the Fed is not going to ease up with its rate cuts (one of the reasons the market lurched lower this year), the GDP report was taken as a bit of good news. It shouldn't have been. The Fed is not going to stop rate hikes because of this. It is watching other 'indicators' that it prefers (more discussed below). We all saw the results of that back in 2000.
Employment cost index falls.
While the GDP was a disappointment (but a veiled one given most of the shortfall was due to rising imports and falling exports), it was not a disaster and it won't keep the Fed on the sidelines. The employment cost index, a measure of how much it cost businesses to hire and maintain employees, was down to 0.7%, less than the 0.8% expected and the 0.9% the prior period.
Salaries and wages rose 0.4%, the smallest quarterly increase since Q1 1999. Benefits rose 1.4% following at 1.1% gain the prior period. That disparity in wages versus benefits follows the trend the past 12 months (and beyond): wages up 2.4%, benefits up 6.9%. The wage growth was the lowest 12 months in the history of the data. The higher medical costs continue to squeeze employers and employees. We really need changes that put medical decisions back in the hands of the patient and the doctor and get away from medicine practiced on the theme of "don't worry, insurance will pay for it."
Healthcare benefits need an alternative, and that alternative is catching on.
That is what is so great about health savings accounts (HSA): the patient has a high deductible insurance policy to cover the big problems and has a tax free savings account to pay for day to day issues. Instead of big monthly premiums that are paid no matter what (and thus the idea that you should go in for any little issue in order to get the most from your premiums) you put money into your account, money you now have because your premiums are about one-third of what they were under a normal policy. You have a high deductible policy (deductibles start in the $1K range and go higher to near $5K) and you can put that money into a savings, money market or mutual fund tax free. The earnings are tax free as well; thus if you don't use it, it grows, and it grows tax free. Your kids can inherit it.
At the same time it encourages rational decisions about healthcare. You demand more information from your doctor because it is your money still in your account not some inflated premium already spent, a premium that is higher because insurance companies know the "insurance will pay for it" mentality built into the system. Insurance companies are already offering more and more plans because they love it: they get back to the insurance business as opposed to the medicine business as the patients and doctors actually interact and rationally discuss the best treatments.
On top of that some form of tort reform is needed. We are still uncomfortable with the government limiting what a deserving victim can recover, but there is a perversion of the punitive damages element. Those damages are supposedly to punish a company and set an example for others as well in order to benefit ALL of us that partake of the companies' goods and services. A $100 million punitive damage award to a single plaintiff does not benefit the rest of us. Even in the most abusive forms of lawsuits today, the class action, the punitive damages don't even benefit the class to any great extent; the attorneys are the ones that clean up. If there is really an interest in benefiting the general populace, then have punitive damages go into a public fund for some general benefit AND cap what the lawyers can make on them. I have been there. I have been in court. I have tried class action cases. I have tried cases that established Texas law regarding employee life insurance cases. The beneficiaries are the lawyers. Nothing against lawyers, but that is how the system has evolved. When you realize that most in Congress have law backgrounds then you realize that the system benefits itself. That is why change that benefits the victims and the rest of us is very hard to come by.
The Fed's wrong focus.
The Fed is overly worried about wages, fearing 'wage-led' inflation, something that is a subpart of the Phillips Curve theory, one of those theories that explained an aberration in the economy as status quo. In short, it described the action in the economy for a six year period in the 1970's, one of the worst in US economic history. Unfortunately, many of the modern economists view the world through this prism, and some on the Fed revert to it as well when things get beyond their ability to explain them. That also, unfortunately, happens more than we would like, and we are now entering a time when that appears to be starting. The Fed is going beyond its mandate and is casting around the trade deficit and federal deficit as areas it is trying to influence using its monetary policy tool, the cure-all remedy they hawk as did the snake oil salesmen in the nineteenth century. They start looking at 'indicators' with dubious ties to inflation and convince us they are correct. Economists fell asleep in 1999 and 2000 and were blindly led to slaughter. They are doing the same thing now. The trade gap may some day be a problem, but it is not the Fed that is going to solve it. If the Fed is what we fall back on to solve the problem, then we are in real trouble.
THE MARKET
Friday offered no change to the current market character. SP500 distributed again as big money continued to shed stocks even after 4 weeks of selling. 2005 has been a month of correcting with two sharp down legs. Last week's recovery showed some accumulation, but not enough to change the character. Indeed, to end the week SP500 and NASDAQ tested the support they broke, unable to move back over that level despite much heralded MSFT earnings Thursday night and other strong earnings before that.
Friday was a clear cut case of the inability to move on what was considered good news. As we have noted before there are overriding concerns the market has other than the past quarter's results and what CEO's think of the future. The past is the past and CEO's are always negative at the bottoms and positive at the tops. The market is worried about the Fed and more interest rate hikes and oil staying near $50/bbl. Friday oil was even down below $49/bbl, but that did little to help the market. It is the longer term trend that is the key, and after oil rebounded off the neckline of its head and shoulders pattern, the market started south. Higher interest rates (with no cap in sight) gratis the Fed and higher oil prices are not a good combination for the economy and before that, the market (because the market always reacts first).
Market Sentiment
Volatility is going nowhere, and while it is not a leading indicator, with the market still showing some distribution the lack of volatility is a signal it is not ready for a rebound.
VIX: 13.24; 0
VXN: 18.58; 0
VXO: 13.33; +0.55
Put/Call Ratio (CBOE): 0.77; -0.07. Also not at the 0.90 or better level that has triggered bounces even in this downtrending market.
NASDAQ
Stalled out at 2054 and the 10 day EMA again, fading into the downtrend again. Volume was lower, so at least no tech dumping.
Stats: -11.32 points (-0.55%) to close at 2035.83
Volume: 2.102B (-1.49%). Volume was lower but it remained above average as NASDAQ opened at resistance and sold the rest of the day. For the week it managed some accumulation after starting the with another distribution session. The upside was not as strong as the prior selling.
Up Volume: 778M (-303M)
Down Volume: 1.3B (+272M)
A/D and Hi/Lo: Decliners led 1.42 to 1. Nothing nasty to close the week.
Previous Session: Decliners led 1.06 to 1
New Highs: 68 (-6)
New Lows: 44 (-2)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
NASDAQ gapped higher and ran to resistance at 2054 but then fell back down. Managed to rebound off its lows but also gave back 20 points off its high. The MSFT earnings had no staying power, at least not enough to turn investors back into technology stocks. After testing the 10 day EMA (2050) NASDAQ turned back down and looks ready to test 2000 or the 200 day SMA (1975) as the third leg of the downside move.
The large cap NASDAQ 100 performed a bit better than the overall NASDAQ, but it too turned lower at the 10 day EMA and looks ready to test the 200 day SMA (1468).
SOX turned lower and gave back some of its recent run. It moved above the 18 day EMA (402) Thursday and tried to extend Friday, but it turned back. Now it is trying to hold some support at 400, but as with the other indices it has that look of continuing weakness.
SP500/NYSE
Made two runs at 1175 resistance and failed, sinking on rising trade. It did recover more than it lost as it rebounded from the low, but that was not that encouraging.
Stats: -3.19 points (-0.27%) to close at 1171.36
NYSE Volume: 1.645B (+2.71%). The large caps distributed again Friday after showing some accumulation Wednesday. While the point loss was not high the action was not positive. Higher volume after trying resistance again suggests churning, another form of distribution. Higher volume while unable to make progress below resistance after a bounce means a lot of stock is changing hands at that point. Kind of a game of hot potato where no one wants to be the last one holding onto shares.
Up Volume: 644M (-274M)
Down Volume: 977M (+311M)
A/D and Hi/Lo: Decliners led 1.14 to 1
Previous Session: Advancers led 1.31 to 1
New Highs: 101 (-53)
New Lows: 24 (+5)
The Chart: http://www.investmenthouse.com/cd/^spx.html
After an ugly week two weeks back SP500 returned fire with a couple of accumulation sessions to take it back up to resistance at 1175. It tapped at that level four of five sessions last week but was unable to crack it even with the accumulation. Friday's churn at resistance suggests it is ready to turn lower and start its third leg lower in this correction. Next support is the early 2004 highs near 1157.
The small caps were relative strength leaders last week though not Friday as they were in the middle of the pack. SP600 managed to retake the 50 day EMA (314.67) and it held on by its teeth Friday. It managed to hold above 310, the neckline in its head and shoulders early in the week and bounced. It is in position to move higher and lead the market, but it is still in the 10 week head and shoulders base.
DJ30
There was good and bad for DJ30 when a merger announcement between G and PG sent PG lower and an appeals court invalidated MRK's patents on Fosamax. That pumped the volume up as DJ30 dipped further after testing the 50 day EMA (10,524) Wednesday and rolling over. 10,400 is still an important support level, but the 200 day SMA (10,279) still looks like a likely target.
Stats: -40.2 points (-0.38%) to close at 10427.20
Volume: 358 million shares Friday versus 269 million shares Thursday.
The chart: http://www.investmenthouse.com/cd/^dji.html
THIS WEEK
The Iraq election is really an historic event and could be another shot heard around the world so to speak. Some are suggesting that if the results are positive, i.e. no major violence, big turn out, etc., that the market will surge. Again, it is an historic event, but we don't believe the market has been or will be trading on the election.
The market is trading on the future six to twelve months out, and its primary concerns are interest rates and oil prices. The election could have an impact on oil prices eventually, but that is after the insurgents realize that the Iraqi citizens are going to get addicted to voting for their leaders and they move on to infest another country. OPEC meets Sunday and it is likely to raise its price band, the range it wants to keep oil prices at, into the mid to upper thirties if not $40/bbl. Its band is over a decade old and with the weakening dollar it has even more of an excuse to raise the target price. That will have much more impact on the market than the immediate outcome of the Iraq election. Twenty years from now we may look back at a Middle East that has turned more democratic, but that won't happen by Monday.
The FOMC has a two day meeting this week, deciding the other major part of the market equation right now. The Fed was thought to close to the end of its rate hiking back in late 2004 and hence the market breakout. Even the idea of 100 basis points more in hikes back then was not that bad because it was probably going to be all she wrote. Now with Greenspan and his band of merry men talking about correcting our trade gap woes, setting target levels of inflation, and even curing scurvy, all with the mighty interest rate club, well, the market has come to the realization (once more) that you it is hard to fight the Fed.
The bond market is showing something of that mindset as well with the long end rallying and those rates falling at almost twice the rate of the low end. The Fed is raising the Fed Funds rate (and the FFR has the most impact on short term rates) yet rates are falling, the long end faster than the short end. Kind of makes sense as the Fed is raising the short end so it is somewhat resistant to the drop, but falling rates in a supposedly strengthening economy are strange unless there is a great surge of capital investment. There is some investment ongoing, but demand is still stronger than supply (and supply is tied directly to capital investment) and thus there is some inflation. Interest rates falling, prices rising, economic activity not quite as hot, and a Fed intent on raising rates further. That has the sound of a bit of stagflation. That is a premature prognosis, particularly with bond spreads still narrow. We don't, however, want to ignore the signs that are popping up even if they are mild right now.
There will still be some hope that the Fed will say something in its statement that acknowledges a hint of slowdown and that it will consider backing off from its rhetoric that it may increase the pace of rate hikes or utter some other market soothing phrase that will reassure the market that it is near the end of its campaign. That is not going to happen. The Fed is always behind the data. It always frets over data that are not really tied to inflation such as the jobs report or the employment cost indicator. Those are lagging indicators of economic activity and are not really decent inflation indicators. Indeed, there is no empirical evidence tying them to inflation; they are part of the Fed's 'studies' that are theory and not fact. Thus by the time they show a problem in the form of trouble and decide it is time to stop hiking rates, the damage has been done. That is what happened in 1999 and 2000. Economic trouble was brewing in early 2000 but the Fed was too concerned about the consumer to see business investment was dropping dramatically. By the time it made its last move, a 50 basis point zinger in May that year, it was way too late. Way too late. The market had already made its first violent downward spike.
The bond market and the stock market are a powerful one-two punch in predicting economic activity. When the market starts to fall and the yield curve starts to flatten it has been one of the surest predictors of slowing economic growth. Moreover, we heard the infamous 'things are different this time' phrase from several pundits last week during the very few (much too few) discussions of the yield curve and the market behavior. Now the market has not tanked; it is still in a normal correction as far as size, but after basing most of 2004 one would expect a bit more upside and strength than has been shown. Most of the volume has been to the downside; this has not been a modest profit taking pullback. It still has not found bottom and thus it still has more basing to do, meaning it has to sell some more, move laterally as volume eases, and then start back higher. That, of course, presumes the bond market coupled with this stock market pullback is not forecasting slowing economic times. If that is the case and there is still worry about the Fed, then the market will be in for more than just a short correction.
Very near term there may be a bump up on the Iraq election, but economic reality will not give the market much time to celebrate with OPEC, the Fed, and the bond market driving the action. This week we are looking for the third leg to continue. It started lower Friday so it may just take OPEC and the thought of the Fed to keep it moving lower.
Support and Resistance
NASDAQ: Closed at 2035.83
Resistance:
2047, the June high.
2050-54, prior resistance and the June high (the 10 day EMA is at 2050)
2066 to 2070, the bottom of the January lateral move.
The 50 day EMA at 2078
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:
2000
The 200 day SMA at 1975
S&P 500: Closed at 1171.35
Resistance:
1175 second high in that double top that spanned late 2001.
The 50 day EMA at 1180
1185, the top of the November consolidation range.
The 18 day EMA at 1180
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:
1157 is solid support from January through March consolidation tops.
The 200 day SMA at 1134
Dow: Closed at 10, 427.20
Resistance:
The late April, June peaks at 10,478 to 10,512
The 50 day EMA at 10,523
The 18 day EMA at 10,525
Price consolidation at 10,600 level
10,754 is the February high
10,975 - 11,000 from Q4 2000, Q1 2001
11,350 from the May 2001 highs
Support:
10,400, the bottom of the November/December range
10342 the early September peak.
The 200 day SMA at 10,279
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
January 31
Personal Income, December (08:30): 0.4% expected and 0.3% prior
Personal Spending, December (08:30): 0.8% expected and 0.2% prior
Chicago PMI, January (10:00): 59.8 expected and 61.2 prior
New Home Sales, December (10:00): 1200K expected and 1125K prior
February 01
Auto Sales, January: 5.6M expected and 5.9M prior
Truck Sales, January: 8.2M expected and 8.7M prior
Construction Spending, December (10:00): 0.5% expected and -0.4% prior
ISM Index, January (10:00): 57.7 expected and 57.3 prior
February 02
FOMC policy announcement (2:15): 25 basis point hike expected, no changes in statement.
February 03
Initial Jobless Claims, 01/29 (08:30): NA expected and 325K prior
Productivity-Preliminary, Q4 (08:30): 2.0% expected and 1.8% prior
Factory Orders, December (10:00): 0.8% expected and 1.2% prior
ISM Services, January (10:00): 61.0 expected and 63.9 prior
February 04
Non-farm Payrolls, January (08:30): 185K expected and 157K prior
Unemployment Rate, January (08:30): 5.4% expected and 5.4% prior
Hourly Earnings, January (08:30): 0.2% expected and 0.1% prior
Average Workweek, January (08:30): 33.8 expected and 33.8 prior
Michigan Sentiment-Rev., January (09:45): 96.4 expected and 95.8 prior
End part 1 of 3
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