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us stock market, stock watch
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2/02/05 Technical Traders Report
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Technical Traders Report Subscribers:
MARKET ALERTS
Targets hit alerts issued Wednesday: DDDC
Buy alerts issued: TTEC; WGAT
Trailing stops issued: None issued
Stop alerts issued: SHFL
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:
- Stocks rise again on mixed volume with weaker internals.
- FOMC raises rates 25 BP, steady as she goes.
- Oil inventories fall when expected to rise yet oil loses ground: welcome to the politics of oil
- Challenger jobs report shows fewer layoffs and an upswing in hiring.
- Small caps surge late and lead once more as NASDAQ bumps at the 50 day EMA, still unable to make the break even on the GOOG earnings.
- Market on its own for a day after a lot of major events.
Stocks endure Fed meeting, post modest gain with softening internals.
As has been typical of the last few FOMC meetings, stocks started mixed but managed to hold the line and post a modest gain into the actual decision. Also typical, stocks swung back and forth after the news, managing to close the session on an upswing in the post-Fed gyrations.
This rather predictable action held true even with the hype surrounding the GOOG earnings and the President's state of the union address tonight. Basically, however, the action simply continued what we have seen the past week as the market rallied back: early rally, last hour attempt to sell, then a comeback to close near session highs. You could thus say that in spite of the Fed the market maintained its action versus the market reacting to the Fed. Split the difference and say it was a function of both as the Fed basically gave the market what it wanted.
Small caps led again, but it took that late surge to put them into the leadership spot. That also helped bolster market breadth, but NYSE volume was lower as the overall advance, point and breadth-wise, was weaker. NASDAQ sported some stronger volume, but it was still well below average, not coming close to matching the strength of NYSE volume during the recent rally. Moreover, even with the GOOG earnings excitement NASDAQ could not crack through its 50 day EMA. NASDAQ remains the follower, but its inability to generate volume to break it out suggests it could falter and lead (at least itself) to the downside after this 50 day EMA that filled the mid-January gap lower.
THE ECONOMY
Fed hikes Fed Funds rate 25 basis points to 2.50%, leaves statement as is.
The Fed did what was expected with the rate hike and with the statement regarding current conditions, raising rates 25 BP and leaving the statement almost verbatim. The Fed cited the usual litany of reasons to stay the course: robust productivity growth, moderate output growth despite higher oil prices, improving labor conditions, well-contained inflation and longer-term inflation outlooks, equal upside and downside risks for the next few quarters allowing accommodation to be removed at a measured pace.
In short the Fed gave everyone what was expected though it may not have been what was hoped, that is, a softer stance toward inflation. As we indicated earlier, however, there was no way the Fed was going to soften its stance based on some possible weaker data. The Fed is on a mission to get rates over 3% and most likely over 4% on this round of hikes. The question has been whether it moves at a faster pace in getting there as some of the Fed governors have hinted. For now the Fed is sticking with the measured pace; that is what helped take the sting out of the statement for those wanting to see some softening of the Fed's stance. The Fed split the baby sort of, though it did just what it said it was going to do.
What the Fed will end up doing.
If the Fed moves at a 25BP increase at every meeting, that takes the Fed through 2005 to get to 4%. Here is the bottom line: the Fed is not going to move that slowly. The Fed is going to continue the 25 BP rate hike for another few meetings, but if the economy continues to show strength the Fed will inevitably start raising rates at a faster clip. That would be a bad thing if it was an open ended rate hiking campaign. It would not be that bad a thing if it got the FFR to the Fed's target (and despite its claims, it does have one around 4%) faster and then the Fed went on vacation.
The Fed tends to hike and hike until it sees results. Problem is, by the time it sees the results it has a substantial backlog of rate hikes in the pipe that have not even started to work on the economy. It takes hikes six months or more for a rate hike to impact the economy. We have used the analogy before of a supertanker with a head of steam. It takes a long time for it to come to a stop even after the engine is cut. Heck, it can even reverse the engines (as in a rate cut) and it still takes a lot of effort to overcome the inertia that a huge vessel has. It is a tricky game of judging when to cut the engine to glide to a stop at the dock versus slamming into the dock and severely damaging or sinking the ship.
Nonetheless, at least for the near term, the market actually appears to be coming to grips with the prospect of rate hikes all the way through 2005 and into 2006. The late 2004 rally was more of a euphoric move after the election was over and visions of tax reform, social security reform, lower oil prices, and a slumbering Fed dancing in money managers' heads. 2005 got here and it is clear that these are all controversial issues that won't just sail on through. The Fed even changed the game by talking of more intensive rate hikes.
The market sold on the cold slap of reality (along with some gains taken after year end) but is now trying to piece together a comeback in spite of rising oil and indefinitely rising interest rates. It is not there yet; NASDAQ is still underperforming. Though the market can move higher without NASDAQ providing leadership, it cannot really run. NASDAQ is at an important level, ready to show if it can match its counterparts' gains.
Oil inventories fall when expected to rise and oil falls.
You would think supply and demand would push prices higher when oil stocks fall. Crude drop 300K when it was expected to rise 1.5M bbl. Heating oil fell 2.9M, more than the 2.4M drop expected. Gasoline, however, rose 1.6M when it was supposed to fall 300K bbl. Less crude than expected, less heating oil in winter; that should have prices up according to conventional wisdom.
Instead, oil dropped on the news. The reason was the weekend OPEC meeting where OPEC left production levels as is. In doing so, however, it said that if it saw supplies rise it would not hesitate to cut production without another meeting. Thus when US supplies were lower that was viewed as a positive because OPEC would not immediately say that supply was too high and cut production. Thus, lower supply helped lower prices modestly as traders were worried about the OPEC vow to cut production if supplies grew.
Now when you think about that idea, it is really pretty stupid. If supplies do rise it is not just due to shipments of oil but also economic activity. Oil supplies rise when economic activity falls because a slowing economy needs less oil. That is not happening right now, but if you do cut production and raise prices into a slowing western economy, prices are still going to fall because the higher prices from production cuts only work to slow the economy further. You may get a higher price but you will sell less and you risk an indefinite economic slowdown versus a participating in and profiting from a continued economic expansion where your product will be in demand longer term.
Challenger jobs survey drops below 100K job cuts.
For the first time in four months job cuts did not top 100,000. At 92,351, however, they were just a stones throw away from the 105,045 reported in December. On the other side of the equation, 31K hires were reported, the most since summer 2004.
Maybe the jobs picture is turning the corner; we will get the government's view on Friday with the jobs report. Still, one month does not reverse the three months of layoffs. Moreover, as we have often noted, jobs are a lagging indicator. They are necessary to keep the economy moving, but just because jobs improve does not mean the economy necessarily follows. Jobs follow the economy and not vice versa. If the stock market fails in this rally attempt and the bond market remains in a flattening mode, the economy would be at risk, and even if jobs jumped 300K in January that would not be any reason to assume the economy is just fine for the rest of the year.
THE MARKET
The market lost a bit of its momentum Wednesday. Yes the small caps rallied late and continued their resurgent leadership and yes the major indices mostly posted gains. Still, the market was a bit weaker. Volume was lighter on NYSE and still below average on NASDAQ. Breadth lower and mediocre on both NYSE and NASDAQ. Not damaging readings, just a bit less strength.
The so-so readings are no cause for alarm for the upside move, just a sign that the move was a bit winded after a week of gains. We watched NASDAQ closely as it tested its 50 day EMA and actually broke through at one point. Volume was up but it was still quite low as tech stocks pressed further up against the 50 day, unable to use the GOOG earnings as the catalyst to make the break.
At the close SP500, SP600, SP400 and DJ30 all posted gains and looked pretty good. NASDAQ even posted a gain though SOX could not. Techs continue to struggle, but again, to this point they have not held the market back. NASDAQ looks ready for a test lower, however, following this lower volume gap fill; it does not look as if it would pull the rest of the market down, but as always we will watch volume levels and the action of the leaders on the inevitable test of this last move.
Market Sentiment
VIX: 11.66; -0.37
VXN: 17.3; -0.46
VXO: 11.38; -0.24
Put/Call Ratio (CBOE): 0.73; -0.17
NASDAQ
Tried to break the 50 day EMA and even had a bit better volume (though still below average), but ended up showing a doji below that key level. After a 7 session rally it has set up for a test.
Stats: +6.36 points (+0.31%) to close at 2075.06
Volume: 1.992B (+3.25%). Volume moved higher but was still below average as NASDAQ bounced up and down intraday below the 50 day EMA. Even with the gain, the doji below that resistance hints at some churn (high volume turnover) where shares are passed around at the peak of a move. That can indicate an interim top; with volume still below average, it is not a strong signal, but with the other factors discussed below, NASDAQ appears to be setting up for some type of pullback.
Up Volume: 1.138B (+30M)
Down Volume: 815M (+39M)
A/D and Hi/Lo: Advancers led 1.37 to 1. Another day of mediocre breadth as NASDAQ fills the downside gap.
Previous Session: Advancers led 1.31 to 1
New Highs: 148 (+17)
New Lows: 32 (-7)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
Volume was up Wednesday, but still below average as NASDAQ posted a modest gain. It took a last half hour rebound once again to ensure the gain, but NASDAQ once more was up to the task. Volume was better, but it was also still well below average and still at the lowest levels of the year as it has been all week. There just is not a lot of enthusiasm for NASDAQ stocks even as the rest of the market has rallied on better volume and breadth. NASDAQ has now retraced the second down leg of the sell off this year. It has filled the mid-January gap lower, finishing that move this week on that low volume. It has been unable to break the key 50 day EMA (2076.64) in that effort. That makes two layers of ice it has to break through to continue this move, and at this juncture it is simply not getting the strength it needs to make the move. Strong tech earnings and GOOG's strong numbers Tuesday night were not enough to make the break through. In short, the move is a classic set up for further downside ahead. If SP500 and SP600 were not performing as well as they are, it would be just about a lock. As it is NASDAQ looks as if it will test, but it may just be an easy pullback to test the recent upside move and not a continuation of the selling in something of a third down leg.
NASDAQ 100 never made it to its 50 day EMA, showing its own doji, a hanging man doji, below the 18 day EMA. That rising volume with a doji below support indicates the stock is being sold as fast as it is bought, and that typically means a pullback ahead.
SOX turned back at its 50 day EMA (410) as well, posting the only loss of the indices. It was quite a modest loss, easily holding the 18 day EMA after tapping that level on the low (403.61). If NASDAQ heads lower SOX will likely do the same. Again, given the strength of the other indices, the extent of the pullback is the question. Without their strength SOX would be a lock for a stronger downside move.
SP500/NYSE
The large caps and small caps continued higher, tapping at the mid-January breakout attempt highs on lower volume. Needs a break and could easily take a breathe here and test the 50 day MA before reloading for the upside move.
Stats: +3.78 points (+0.32%) to close at 1193.19
NYSE Volume: 1.612B (-5.43%). Volume slipped but was still above average as SP500 and SP600 continued their moves. With the continued strong volume for the past week it is hard to call this a real problem for the move.
Up Volume: 1.04B (-136M)
Down Volume: 522M (+16M)
A/D and Hi/Lo: Advancers led 1.69 to 1.
Previous Session: Advancers led 2.19 to 1
New Highs: 332 (-31)
New Lows: 8 (-4)
The Chart: http://www.investmenthouse.com/cd/^spx.html
SP500 moved further above its 50 day SMA (1189.29) Wednesday on lower though still above average volume. It tapped the mid-January breakout attempt high (1196) and backed off slightly to close. This is a level to watch though it is hardly a key point that would thrust SP500 to new lows for the year. It matches the early December high in the left shoulder of its head and shoulders pattern and thus represents some resistance. A test back toward the 50 day EMA (1180) would set up the next leg if the test is orderly and on lower trade.
The small cap index shot higher late in the session to close at the highs and leave just four points between it and a new all-time high. Now that is a recovery after its troubles started to show up in December ahead of the rest of the market. A little double bottom action in January and a volume move higher this week has turned the pattern into a better looking future. It is still right at the early December high (326.35) that was the left shoulder. It too could find some resistance there and come back to test the move with a tap at 320. Otherwise it looks solid still, coming back from the dead yet another time.
DJ30
DJ30 rallied again, moving through its 50 day SMA (10,594) on the close. Volume was lower but still above average. Key, key level for DJ30 as this 10,600 is the high in the left shoulder of the 11 week head and shoulders pattern. Looking better, but would not be surprised to see it come back to test the 50 day EMA (10,526) before making much more upside.
Stats: +44.85 points (+0.43%) to close at 10596.79
Volume: 279 million shares Wednesday versus 283 million shares Tuesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
THURSDAY
Iraq election, OPEC, Fed, most earnings, and after tonight the State of the Union out of the way. Now what? The market will have to go its own way, at least for Thursday (Friday is the jobs report). For the most part the market looks better with the SP600 and SP500 rebounding on better volume and clearing some important resistance.
Nonetheless, NASDAQ, DJ30 and SOX are at very important levels that they need to handle in order for the advance to continue. As discussed, all have rebounded with the market but are at critical resistance levels. NASDAQ in particular is at a crossroads as it has rallied back up to the gap down point and the 50 day EMA, moving on lower volume this week as it completed the move. It will either continue the selling in a third downside leg or pullback slightly and then rebound to take out the 50 day EMA and join the rest of the indices above that level.
Given the strength of the other indices the latter appears more likely, but the Fed decision still has not worked all the way through the market and the jobs report is still out there. Those two should not have a major impact on the action, at least causing more severe downside for NASDAQ, but we really want to see how NASDAQ handles filling the gap on lower volume. With the rest of the market more or less solid, it looks as if a modest test should lead to more upside.
Thursday we will look for some softness, particularly if there is another modestly higher open. Then we will see if that test holds and sets up some more buy points from stocks that continue their recovery from the January selling.
Support and Resistance
NASDAQ: Closed at 2075.06
Resistance:
The 50 day EMA at 2076.64
The 50 day SMA at 2109
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:
2066 to 2070, the bottom of the January lateral move.
2050-54, prior resistance and the June high
2047, the June high.
2000
The 200 day SMA at 1976.63
S&P 500: Closed at 1193.19
Resistance:
1196, the mid-January high and the early December peak in the left shoulder.
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 SMA at 1188.62
1185, the top of the November consolidation range.
The 50 day EMA at 1181.92
1175 second high in that double top that spanned late 2001.
1157 is solid support from January through March consolidation tops.
The 200 day SMA at 1133.16
Dow: Closed at 10, 596.79
Resistance:
The 50 day SMA at 10,594 is cracking.
Price consolidation at 10,600 level is a key level.
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 10,526
The late April, June peaks at 10,478 to 10,512
10,400, the bottom of the November/December range
10342 the early September peak.
The 200 day SMA at 10,281
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
January 31
Personal Income, December (08:30): 3.7% actual versus 3.3% expected and 0.4% prior (revised from 0.3%)
Personal Spending, December (08:30): 0.8% actual versus 0.9% expected and 0.4% prior (revised from 0.2%)
Chicago PMI, January (10:00): 62.4 actual versus 59.0 expected and 61.9 prior (revised from 61.2)
New Home Sales, December (10:00): 1098K actual versus 1200K expected and 1097K prior (revised from 1125K)
February 01
Auto Sales, January: 5.3M expected and 5.9M prior
Truck Sales, January: 7.8M expected and 8.7M prior
Construction Spending, December (10:00): 1.1% actual versus 0.5% expected and 0.3% prior (revised from -0.4%)
ISM Index, January (10:00): 56.4 actual versus 57.0 expected and 57.3 prior
February 02
FOMC policy announcement (2:15): 25 basis point rate hike to 2.5%, no change in 'measured pace.'
February 03
Initial Jobless Claims, 01/29 (08:30): 330K expected and 325K prior
Productivity-Preliminary, Q4 (08:30): 1.8% expected and 1.8% prior
Factory Orders, December (10:00): 0.6% 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): 200K 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): 96.0 expected and 95.8 prior
End part 1 of 3
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