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world stock market, us stock market
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02/05/05 Investment House Daily
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Investment House Daily Subscribers:
MARKET ALERTS:
Target hit alerts issued Friday: IMAX
Buy alerts issued: PMTI; SGMS; HTCH
Trailing stop alerts: None issued
Stop alerts: DJX; BRCM
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:
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SUMMARY:
- Stocks ignore disappointing jobs report, latch onto Greenspan comments and rally for second consecutive up week.
- Non-farm jobs limp along as unemployment rate falls, earnings rise.
- Greenspan backs off trade gap/interest rate threat, stocks love it.
- Bonds rally as Greenspan softens stance, but they were rallying (and yields were falling) before Greenspan spoke.
- NASDAQ breaks through the 50 day EMA but it is SP600, SP500 and that stronger NYSE volume that does the heavy lifting as market shakes off January selling
- Now we see how much staying power investors have.
Stocks take best case scenario from so-so news, rally to the close.
After just one day of rest stocks resumed their upward bias, and they did it with some flair though NASDAQ still showed no volume. There was a hint of that continued strength the last hour of Thursday as stocks rebounded from their selling, and Friday stocks rallied all day and finished with a bullish spurt higher. Volume jumped on NYSE once more as SP500 and SP600 rallied nicely to cap a solid week. NASDAQ volume was lower, but it and SOX made the strongest price moves and NASDAQ broke through its 50 day EMA, putting some distance between it and that resistance. It may not have had the volume, but SP500 and SP600 had already paved the way with their strength in the rebound the past week. NASDAQ and SOX were just playing catch-up to the leaders.
A soft open did not last for long as buyers stepped in early and often. The unemployment rate fell but the jobs report produced less jobs than expected and earnings rose (something the Fed thinks can cause inflation, though at this level even if you believe in that theory you would have to agree there is no wage inflation). Michigan sentiment followed that disappointment up as it was less than expected as well. The market didn't care, putting the best face on the news and rallying anyway. With mediocre economic news, Greenspan's G-7 speech definitely made a big impact as he was actually upbeat (as upbeat as he can be) about the trade gap prospects and the federal deficit, implying the Fed was not going to raise rates as a way of fighting the trade deficit.
The laggard NASDAQ and SOX turned into leaders Friday as the most downtrodden enjoyed the best moves or at least got in on the moves the small caps had been taking for themselves. Volume was lower on NASDAQ, so there was no real accumulation, just some short covering and scattered bargain hunting as the overall market rallied. It was that kind of day; the laggards rebounded and the leaders moved higher on the real volume. There was no real attempt to sell the market as in the other sessions during the week. Stocks rallied, moved in a lateral consolidation, and then rallied again mid-afternoon. That was another sign of the day's strength as stocks were strong all session as they finished a strong week.
THE ECONOMY
Before we can give the reason for the rally on the economic news that is hitting the market, we have to look at the specifics. Then we can pull it all together.
Jobs report disappoints but it was enough for Bush to fend off 'job loser' title for first term.
The unemployment rate fell sharply to 5.2% (expected to hold steady at 5.4%), but the economy could only muster 146K non-farm jobs compared to the 200K expected. Moreover, December was revised lower to 133K (157K originally reported). The lower weekly jobless claims the past few weeks were not enough, at least not yet.
Last week we talked about how companies were still favoring implementing technology to hiring, getting more out of existing personnel and taking advantage of what was invented in the 1990's (while those companies that made the inventions languish, ironically). Productivity dropped off Q4 (though still above historical averages), but companies still do not want to hire yet, preferring to rebuild profits and repair their finances after one of the nastiest plunges in US history. The recession may have been short and shallow as defined by the textbooks, but the 10 point swing in GDP growth over a few quarters and the resulting 'fish kill' of new companies that went belly up in the bust told a different story.
Profits over people.
The surviving companies are basking in the glow of profits, they like it, and they don't want to give it up just yet. They are in the market for their own stock (buybacks) and other companies (mergers) to better set up their finances and competitive edge before they turn to adding personnel. Right now we are starting to see mergers pick up. That is often eventually followed by hiring, but that is after the resultant layoffs are completed and things have settled down. That still does not bode well for traditional non-farm job creation in the months ahead.
How long profits can continue to grow remains to be seen. Commodity prices continue to rise and are cutting into that profitability. As Whirlpool said in its earnings statement last week, it has to raise prices to defend its profitability. Others are going to have to do the same. They may get some help from imports. Greenspan noted in his G-7 speech Friday that the lower dollar would invite higher priced imports. That means importing some inflation. Sounds bad, but not for domestic companies as that will allow them to push their prices higher as well. Thus the profit margins (a.k.a. earnings) remain higher and that supports higher stock prices. That is one of the few instances where inflation can actually benefit stock prices.
In the end, the jobs report was just another disappointment in a string of disappointments. The reports are not bad at all. Indeed, just enough jobs were created last year to put Bush in the positive column for his first term by about 130K jobs (we always wondered about Kerry's claim of job losses several months before the end of the year). No tremendous surge, but considering that the market crash, the tech bust, recession, 9-11, Afghanistan, corporate scandals, and Iraq all occurred during that four years, it was an outstanding recovery. Yes companies are still hesitant to expand personnel, but that is a factor of what happened before and what still lies ahead with the war on terror, Iraq to finish, and Iran, Syria, and North Korea still to deal with.
Greenspan defies expectations, upbeat on the trade gap, federal deficit, tells Europe to take care of their own economies.
Greenspan made four important points in his G-7 speech Friday, but listening to the analysis of it, half of the key points were missed. To be fair Greenspan was not clear, but then again he never is. He was notably upbeat, however, something he lacked in November with his threatening speech at the central bankers' conference when discussing the current account imbalance and the dollar. That set the stage for the latter speeches from other FOMC members that discussed faster and more intensive rate hikes that was one of the two big factors (oil was the other) that really put the kybosh on stocks to start the year. Friday Greenspan was taking back some of that harsher language.
Point one. Greenspan backed off from his posturing to use the interest rate hiking club to narrow the trade gap. He threw down the gauntlet around Thanksgiving, stating that higher interest rates in the US might be what it would take to get more investment in the US and thus finance the current account deficit. It would not eliminate the deficit but it would theoretically keep the funds flowing into the US seeking higher interest rates.
Friday he changed his tune. The part that everyone got was when Greenspan predicted the gap will fall. Basically he said that the current account gap would start taking care of itself, implying that the dollar had fallen far enough to start the road to recovery. Indeed, he noted that the dollar's fall had started to make a dent. Could it also have been the fact that foreigners have shown they are overwhelmingly willing to finance the gap even at these supposedly dangerous levels? Yes. The treasury auctions have shown multibillion dollar excess demand over and above the trade gap.
Point two. More importantly, however, Greenspan finally said what we have said all along: foreign countries are more than willing to support our trade deficit because they have geared their economies to supply the US economy, the constant consumption engine (even in our recent recession) the past twenty years. They would not dare bite the hand that feeds them, strangle the golden goose, etc. (choose your clich ).
Implicit in this was the not so subtle (though many missed it) lecture to Europe to increase their domestic demand and grow their economies. Get off the subsidies, the overregulation, high taxes, etc. and implement policies that generate investment and create consumer demand in Europe as opposed to just relying on the US to support their economies. Here in the US we talk about our own welfare system, but much of Europe and even Japan the past 15 years has taken part in the largest economic welfare program of all time: they don't have the demand to buy their own products so they rely on the US to take absorb most of their production. They have geared their economies to supply the US. Getting rid of their stifling regulation, overbearing social programs, high taxes and cronyism would help their citizens improve their earnings and standard of living in that they would have more income to buy more and better goods. That more than anything would help the trade deficit and make the entire world more prosperous.
Point three. He was encouraged by the renewed interest in fiscal restraint in D.C. We have heard that Greenspan has made trips to the White House behind the scenes, talking with the Bush people about the need to reign in spending. Greenspan was pushing the revamping of SS and Medicare before Bush. Funny how those that lavished praise upon Greenspan when he incorrectly stated back in 2001 that tax cuts were not the answer (to his credit he later said they were timed just right) reviled him when he told Congress we could not live up to the promises being made and ignore him now. Some of those same senators forget that just a couple of years ago they were saying things such as 'everyone would agree to some private accounts as part of a social security revamp.' Time hasn't changed anything, just political power struggles and the need to have something to fight what the current administration is doing even if it requires you to sacrifice principle. Nothing new, sadly, in politics.
Point four. Greenspan is somewhat worried that the lower dollar will drive inflation in the US: lower dollar means higher costs of foreign goods, and as we buy so many, the prices we spend go up. Reading between the lines, he was not so much worried about inflation from Europe as China. He devoted a short but noteworthy paragraph to China, stating how it was not really a problem with respect to inflation right now because it tied its currency to the dollar. That was as close as he has come in public to worrying about when China floats its currency versus the dollar. Greenspan mentioning this, however, has significant impact on the world economists as it lets everyone know it is something that is coming. When it happens we will see two effects: The ability of us exports to look much more attractive to China and thus narrowing the trade gap but also a jump in inflation as Chinese goods become much more expensive overnight.
Point four, subparagraph A. While Greenspan says he is worried about importing inflation from Europe and elsewhere, he is not that worried. Despite the world economic recovery Greenspan still has some reservations about the ability to continue the growth. He would like to see a bit of inflation just along the lines of what the economy is showing. After all, the bond market is heading the wrong way for a growing economy. Thus, a little inflation from abroad would help domestic companies and their profit margins as higher foreign prices would support higher domestic prices.
Why did stocks rally on continued weakening economic data?
Slowing economic data is a potential problem for the economy ahead, and with the bond market yield curve flattening (as discussed before and below), it is a real concern looking further down the road. On the other hand, there is the shorter term view that a continued softening yet still expansive economy represents a good environment for a more restrained Fed, particularly one that still has worries about deflation way back in the background.
More importantly to the action Friday, however, investors found relief in Greenspan saying as explicitly as he can (in other words implying) that the Fed was not going to raise interest rates just to help keep the current account deficit funded. He started this idea around Thanksgiving, and after the first of the year his FOMC gunslingers were out with hawkish statements about faster rate hikes, inflation targets, etc. That along with oil rebounding knocked the snot out of stocks to start the year. Friday Greenspan did some damage control, taking back a lot of the loose talk about tougher rate hiking. The market, already taking back its gains, got a real boost from this 'clearly' stated step back in rhetoric.
What the heck are bonds doing?
Bonds rallied on the jobs report, paused, and then really surged when the Greenspan speech hit the wire. Why? Same reason as stocks: if the Fed was not going to joust at the trade gap, a boisterous rate hiking campaign just became much less likely, at least near term. The Fed will eventually lose its patients and raise rates too much as we discussed last week; it always does. For now, however, Greenspan is saying he's not going to do it, and the bonds liked that. Apparently bond traders are more worried about the Fed jacking up rates than the possibility of importing inflation given a low dollar. So, bonds rallied some more.
We say 'more' because bonds were already rallying and yields were falling even as there is some inflation and continuing expansion in the economic indicators. The 10 year is just over 4%. The 30 year is not far behind at all. The curve is flattening still and it is not because the Fed was not raising rates fast. While the stock market has started to rebound (and thus takes part of the punch out of the 1-2 punch of the stock/bond predictor), the bond market has as well and that flatter yield curve suggests economic slowing down the road. As noted last week, spreads are still narrow so it is not flashing imminent failure; and as noted, it also helps that stocks are recovering from what was a pretty hard dive in January when the yield curve accelerated its flattening.
If the yield curve can steepen a bit more then we don't care if yields go lower. As long as the short end and long end do it together that is great because it shows low inflation despite an economy that is still expanding. As they say on the late night financial programs, it is not the size of the yield but how it curves (or something like that). That could still happen given the narrow spreads; those indicate not a lot of risk premium built in, and that says bond traders are not at the point of panicking.
THE MARKET
NASDAQ broke through the 50 day EMA Friday, tested it intraday, and then rallied right into the close. It was not alone; SP500, SP600, and even SOX all bolted higher, the former two on a very nice NYSE volume surge. SP600 is near another all-time high in just about the flash of an eye. Even the blue chips, helped by a favorable ruling regarding tobacco damages that surged MO higher in the afternoon, cleared that key resistance. Strong breadth across the market, mixed but solid volume, breaking through key resistance, good leadership. Lots of positives but still a bit of mediocrity in tech land.
Market Sentiment
VIX: 11.21; -0.58. VIX hit a new low for the year and a new low since 1995. What does that mean? Not a whole lot at this point.
VXN: 16.92; -0.44
VXO: 10.92; -0.86
Put/Call Ratio (CBOE): 0.75; -0.1
NASDAQ
Broke through the 50 day EMA in a solid price move and decent breadth, but volume remained below average and was lower. Hardly a great confirmation of the move.
Stats: +29.02 points (+1.41%) to close at 2086.66
Volume: 1.944B (-2.83%). Volume has simply not been good on the move back up. No accumulation. NASDAQ is following in the wake of SP500 and SP600. Fortunately they have paved the way with the volume move.
Up Volume: 1.499B (+973M)
Down Volume: 425M (-1.035B)
A/D and Hi/Lo: Advancers led 2.07 to 1. Solid upside breadth. Maybe not much volume, but stocks were moving higher.
Previous Session: Decliners led 1.42 to 1
New Highs: 158 (+39). Still not a great number, but it is also still well off its December high.
New Lows: 35 (-14)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
The intraday action was strong all through the close. NASDAQ rallied to the 50 day EMA (2076) early, consolidated, broke over it, tested, and then floored it into the close. This was the first major break of the first leg of the rebound off the January selling. It has 2100 and the 50 day SMA (2108) as the next resistance. This low volume is a problem as not as many buyers have moved back into tech as were selling it to start the year and in the second leg lower in mid-January. Without volume the move is likely to fail unless SP500 and the small caps continue to advance on volume. That would relegate NASDAQ into a follower status, a role it has already been playing on this rebound, so not much change there.
NASDAQ 100 rebounded solidly as well, but it is still well below its 50 day EMA (1544) and has yet to fill the January gap lower. The big techs are lagging (e.g., JNPR) on this rebound, and they don't have the volume right now to break resistance.
SOX regrouped, cleared the 50 day EMA (409.96) and is ready for another try at the 200 day SMA (420.79), the resistance that has stopped its rally attempts since late May. Critical point for SOX.
SP500/NYSE
Another beautiful move for the large and small caps, rallying from support on rising volume.
Stats: +13.14 points (+1.1%) to close at 1203.03
NYSE Volume: 1.647B (+5.95%). Excellent volume increase as SP500 moved off the 50 day SMA test (the one day test). The volume has the strength to push SP600 to a new all-time high, and push SP500 toward its high as well.
Up Volume: 1.248B (+624M)
Down Volume: 376M (-526M)
A/D and Hi/Lo: Advancers led 3.31 to 1. Excellent breadth as the small, large and mid-caps all moved higher together.
Previous Session: Decliners led 1.16 to 1
New Highs: 416 (+167). Now this is an impressive reading.
New Lows: 11 (-7)
The Chart: http://www.investmenthouse.com/cd/^spx.html
Strong volume, excellent breadth, and a surge in new highs underpin this excellent move. SP500 clears 1200 resistance though there is a bit at 1206, an interim high from mid-December. Impressive recovery and SP500 looks ready to test the December high (1218). After more than a week of rallying without any real rest, it may take a little time off when it nears that level and set up for a run through it.
The SP600 hit a new all-time closing high though it missed taking out the all-time high (331.02) on the close. Still a very impressive move after recovering from the early January selling and forming a 4 week double bottom with handle. May take a breather at this point after a strong run, but a very nice move and after a rest will be ready to rally further.
DJ30
Nice surge as DJ30 got another boost from one of its components; it has enjoyed strong sessions from individual stocks the past two weeks. Friday MO gave it 15 points to the upside that really started the drive higher into the close. Volume was higher, but it was still below average. That leaves some doubt about the move, but there was strong volume at the first of the month as DJ30 kicked it into gear. Volume was up but still below average and thus less than impressive. It cleared that key resistance at 10,600 and looks ready for a shot at the December high (10,868).
Stats: +123.03 points (+1.16%) to close at 10716.13
Volume: 246 million shares Friday versus 229 million shares Thursday.
The chart: http://www.investmenthouse.com/cd/^dji.html
THIS WEEK
After a fairly wild earnings season that turned out quite a bit better than expected with earnings up 21% overall versus the 15% expected and a ton of economic and world events, stocks will have little scheduled outside data and events to influence them. They will have to do it on their own, but if the end of the week was an indication, they should do pretty well.
NASDAQ is still the question along with SOX as they continue their moves without a ton of volume on NASDAQ last week to support the move. NYSE and the small cap NASDAQ stocks are where the leaders are, however, and it is sporting the volume that indicates accumulation. NASDAQ can follow along, and with it having lagged already, its stocks can rebound on bargain hunting and short covering. Not forever, but it can tag along up the December highs.
The market character continued to change through Friday though it is still not powerful across the board. That is the way this market has been, however, with rotation the key starting in December when the small caps started to struggle and under-perform. Large caps gained some momentum before pretty much everything fell to start the year. Small caps continued to show relative weakness, however, until this rebound started and the money went back to what worked in 2004, at least with respect to small caps (NASDAQ has not reclaimed its leadership seat).
The small cap rebound and leadership potentially indicates that the economy is ready to resume a better expansion, something of a counter to the flattening bond yield curve. We are still concerned about the bond market and what it is forecasting longer term. For now, however, there are stocks and groups of stocks under accumulation. We are going to continue to look to those well-positioned to make the strong breaks higher and step in when they give us the entry point. Some are extended after this week, others still set up, e.g., some early leaders that led the move and are taking a breather, reloading for the next move.
As you note, not all plays that hit the buy point are automatically bought. Volume plays a key role and Friday several plays hit the buy point but did not show the volume we wanted to show the move had backing. We look at a lot of stocks in promising patterns and good credentials knowing that not all will make the move we want. We have to take a pass on some that rally without the volume support; we want to see a lot of demand for the stock when it hits a critical level. We want it to show us it is worthy of our money. That means staying patient, seeing the move, and moving in when you are comfortable with it. It is remaining patient and letting the stock work for you; if the buy credentials were right it often will. This last selling round weeded out a lot of the also rans; those that held their ground are rallying well. We will look to pick up some this week that are ready to join them.
Support and Resistance
NASDAQ: Closed at 2086.66
Resistance:
The 50 day SMA at 2108
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 2076
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 1977
S&P 500: Closed at 1203.03
Resistance:
Q1 1999 lows at 1215
October 1999 low at 1233
Q2 2001 peak at 1310.
Support:
1200 acted as resistance and now may hold as support.
1196, the mid-January high and the early December peak in the left shoulder.
The 50 day SMA at 1190
1185, the top of the November consolidation range.
The 50 day EMA at 1181
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 1136
Dow: Closed at 10, 716.13
Resistance:
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 SMA at 10,600.
Price consolidation at 10,600 level is a key level.
The 50 day EMA at 10,536
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 10,285
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
February 07
Consumer Credit, December (3:00): $7.9B expected and -$8.7B prior
February 09
Wholesale Inventories, December (10:00): 0.9% expected and 1.1% prior
February 10
Trade Balance, December (08:30): $57.4B expected and -$60.3 prior
February 10
Initial Jobless Claims, 02/05 (08:30): 329K expected and 316K prior
February 10
Treasury Budget, January (2:00): $5.1B expected and -$1.4B prior
End part 1 of 3
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