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us stock market, trade stock
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02/08/05 Investment House Daily
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Investment House Daily Subscribers:
MARKET ALERTS:
Target hit alerts issued Tuesday: None issued
Buy alerts issued: EASI; IPMT; CPKI; RDEN (bonus)
Trailing stop alerts: None issued
Stop alerts: None issued
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SUMMARY:
- Stocks post modest gains on rising volume in a quiet session.
- How big is the debt?
- SP500, SP600 forming handles, setting up for next move.
- SOX lends a hand with a solid move, but NASDAQ still a question mark.
- CSCO earnings come up short on pleasing investors.
Stocks show decent price/volume action but manage only modest gains.
There was no economic news, at least of the monthly report version. Oil was lower, close to $45/bbl as it continued its modest slide back to its lowest level in a month. It was helped lower by Saudi Arabia's commitment to hold production at 9M bbl/day. No major drop but just a further softening as the fears relating to the commodity ebb and flow. One thing is clear, oil is not acting as if it is about to collapse any time soon as it looked ready to do back in December. Of course, it did not fail at that point when it was in much worse technical shape; now it is just easing back as the fears earlier in the month die down.
There were some earnings and the results were mixed. Either companies beat the number but warned about the current quarter or 2005, or they missed but upped the forecasts. The result was a lot of nothing. Some stocks moved up, some moved down, most went nowhere. After a first hour rally stocks gave everything back, found support, and rebounded slightly. A 2.5 hour lateral move into the close kept stocks positive, but marginally so. Flat breadth, below average volume (though higher than Monday), closed in the middle of the session range. Basically another quiet session where stocks moved laterally, adding slightly to last week's gains, and setting up for the next attempt at the upside.
THE ECONOMY
Surpluses and deficits follow the economic cycle, at least since the explosion of federal programs the past 50 years.
Right now we are being bombarded with information, very little of it factual, about deficits and debt. One side complains of 'record' deficits, pining for the days where a technological boom that started in the 1980's produced government surpluses. Unfortunately, they erroneously believe that the surpluses were created because Clinton pushed through the largest tax hike in history. Tax hikes don't cause economic growth, they shorten it. Indeed, the tax hike played a large part in ultimately limiting the surpluses because that was the start of the squeeze put on the roaring economy that had its roots back in the 1980's with the huge capital investment in the US at that time.
The government started to misapply the excess tax receipts by paying down debt and initiating more and more social programs. When you have huge surpluses and the government keeps them, the economy is being starved of the real currency that keeps it going. Money supply started to dry up, and instead of reducing debt creating the friendly environment for businesses Secretary Ruben theorized, rates started rising as the economy ran out of the money it needed. Add to that a Federal Reserve on the warpath against prosperity (the "runaway consumer") and non-existent inflation just as its ancestor in 1929, the result was predictable (and indeed we were unfortunately correct): the market keeled over and the economy followed it with a massive drop in GDP growth the last half of 2000. That was when the recession's roots were sown.
Fortunately taxes were cut, but not soon enough to forestall the recession. It was labeled as shallow, but for anyone in business, it was one of the worst given the heights from which it fell. The Fed cut rates, but to no avail. Finally some tax cuts with real incentives for business to spend money were passed, and that got the economy growing once more. Many like to blame the tax cuts for causing the return of deficits. If you know economics at all and are honest when looking at history, you would know the surpluses were doomed to evaporate with the next slowdown in the business cycle. Surpluses and deficits come and go based upon the economic cycle. Surpluses are spent by Congress and then more money is needed to pay for all the programs. Taxes are raised and the economy gets a double whammy: the surpluses that should have been returned to the economy and then tax hikes on top of that. Recession and deficits follow.
If taxes were not cut we would still be in recession or at least be experiencing weak growth. The deficits would be even larger because tax receipts would be much, much lower than they are now. Indeed, the budget projections, just as they ALWAYS are, are being rewritten monthly to account for the rise in tax revenues over and beyond projections. Why? Because the budget projections do not account for economic growth caused by tax cuts. That is the same reason the surpluses were underestimated and indeed not even forecast until they were suddenly there. The budget forecast did not take into account economic growth producing more and more tax revenues. The recession was baked in the cake in 2000. The surpluses were already doomed because of the excess spending and the slowing economy that was going to take in fewer tax receipts to pay for those programs Congress porked up on. If we raise taxes again on the top 1% as one Congresswoman said needed to be done you could just go ahead and write the deficits even higher because the 3.5% projected GDP growth in 2005 would fade into mediocrity along with the tax revenues.
How to look at deficits and debts.
The deficit is how much more is spent each year versus what is taken in. The debt is the accumulation of all deficits. You hear a lot about a record deficit these days, but it is not. Those wailing about the record are looking at current dollars. Adjust those dollars for inflation as is done in EVERY financial calculation on earth, and it is not a record in dollar amounts. Nor is it a record as a percentage of GDP, the true way to look at a deficit. The 10 year projected deficit many like to look at is running at less than 2% of GDP. Since 1970 the average deficit has been 2.4%. Somehow a deficit that is projected (and the projections as noted above fail to take into account economic growth and thus greater tax revenues) to be less than the average is being called a record deficit.
The same is true of the debt. While everyone is flapping about the 2005 deficit, one that is declining as we speak thanks to increased economic activity and thus higher tax returns, the actual debt is less than the long-term average of 41% of GDP.
But many still cannot understand why this is the real measure of debt, i.e. a comparison to GDP. While you can always adjust current dollars to account for inflation and thus better compare absolute dollar amounts, that does not tell the story either. Why? Because it compares how much you owe to how much you actually make. Think of it this way: $5K of debt is a lot of debt when you make $10K per year (50%). If you make $100K per year, however, that $5K is just 5% of the income you produce. If it doubles to $10K it is still just 10%. The point: as your income goes up, a static amount of debt goes down. Thus the one way to accurately compare your debt loads is to calculate what percentage they are of what you make.
Thus what some call a 'record' debt fails for two reasons. First, it is not even a record if using inflation adjusted dollars. Second, it is not a record as a percentage of GDP, either the deficit or the overall debt. It boggles the mind how something so basic can be the subject of so much misinformation in Washington, DC.
Spending is the real problem.
And here is the kicker that just blows right by most in DC: the deficit is not the problem; it is federal spending. Deficits are caused by spending more than is taken in. What is taken in (tax revenues) rises and falls with the economic cycle. If you raise taxes too much the economic cycle fades and tax revenues actually fall despite rising rates. Cut taxes and you get more economic activity and tax revenues actually rise. That sounds nice, but it is the 'in between' time before the tax cuts take effect that often results in deficits. The economy starts to slow but the actions taken to revive it come to late.
Spending, however, does not ever back down. Indeed, the current budget proposal is the first to actually make cuts in spending since Reagan, the most famous government shrinker of the modern presidents. If government spending rises each year (as it has done without fail), then there will inevitably be deficits when the economic cycle turns lower and tax receipts fall off. Citizens demand an expanding economy, so measures are taken to get the economy moving once more. That creates a further deficit as tax revenues are purposefully limited up front in order to stimulate economic activity and generate greater tax revenues later.
The 1980's through the 1990's are an example of that. If the government had not expanded by spending all of those extra tax revenues on ever-expanding and constitutionally questionable programs (to put it mildly) we would be in much better shape when the inevitable economic downturn came. Even more to the point, if the excess tax revenue had been returned to the taxpayers without expansion of federal programs, the economy would have had a much better chance of fending off the economic downturn. Surpluses are bad; their existence demonstrates the government is taking too much money out of the economy, and that will eventually stall economic growth. Further, the government spends them, growing the government to levels that the tax revenue cannot sustain when the economic downturn the excess taxes cause inevitably occurs.
Soap box time: big federal government or empower the individual and the states?
The founding fathers limited the federal government because they feared the tyranny of a central government that was too powerful. Income taxes were only allowed if apportioned among the states; thus the current scheme was not originally constitutional because the founding fathers knew it would create a huge government. It has come to pass, however, for good or bad. One of the reasons that it should have been limited but likely the founding fathers did not fully comprehend: the power to drastically alter the economic fortunes of the states and the citizens in those states. The Federal Reserve wields incredible power as does the Congress in requiring reams of information on you as a taxpayer that was never intended to be collected and the ability to throw you in jail for something that was specifically left out of the Constitution as drafted by the founding fathers. As you listen to the debate over social security, realize that this is a debate about state and individual rights versus those that want to keep the federal government dominant by keeping a majority of the country tied to it as the provider of benefits. That is 180 degrees opposite of the roles the state, individual, and federal government were supposed to play under the constitution even as amended to this day.
THE MARKET
Another quiet session, this one posting modest gains across the board as opposed to the mixed finish Monday. Volume edged higher, indicating slight accumulation. The gains were not the real story, however. SOX managed a clean break through the 200 day EMA. At the same time SP500 and SP600 appear to be forming handles to the new short cup or double bottom patterns that have formed in the solid rebound that started at the end of January.
Those are positive developments, but NASDAQ is still deep in the woods. It showed some life today with better volume on a small gain ahead of the CSCO numbers. SOX was strong as noted. After hours everything tech was weaker as CSCO posted another lackluster quarter. How that pans out tomorrow, particularly how NASDAQ holds the 50 day EMA and SOX holds its move through the 200 day SMA, will tell us much more about the budding recovery.
Market Sentiment
VIX: 11.6; -0.13
VXN: 17.6; +0.04
VXO: 11.22; +0.01
Put/Call Ratio (CBOE): 0.81; +0.08. Like to see the put activity rising as the market shows overall decent strength.
NASDAQ
Held the 50 day EMA, posting a small gain off of that support on some rising volume. It gave back two-thirds of the move to close, so no time to get too excited.
Stats: +4.65 points (+0.22%) to close at 2086.68
Volume: 1.964B (+14.28%). A significant volume increase over Monday, but Monday was extremely low volume. Trade was still below average on the session, continuing the overall lack of enthusiasm toward NASDAQ stocks.
Up Volume: 1.097B (+429M)
Down Volume: 847M (-188M)
A/D and Hi/Lo: Advancers led 1.13 to 1. Nothing to get too worked up about here.
Previous Session: Decliners led 1.05 to 1
New Highs: 146 (-23)
New Lows: 24 (0)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
A lot of up and down action in the first half of the session, but NASDAQ easily held above the 50 day EMA (2077) but also bounced back down from some resistance near 2100. Not ready to continue the move, but showing some modest accumulation now that it is above the 50 day EMA. CSCO had the techs under pressure after hours, and NASDAQ's test will be whether it can hold the 50 day EMA.
NASDAQ 100 tapped the 50 day EMA (1543) on the high and faded back. It held onto a gain on the close, holding the 18 day EMA. It has filled the gap lower from mid-January. CSCO will put it under serious pressure Wednesday. SP500, SP600 and even SOX look decent; NDX and QQQ don't.
SOX rallied through the 200 day SMA (420.17) with a good surge. It is an important move, but it will have to hold. After hours SMH (the exchange fund) had dropped back below its 200 day SMA. SOX itself has rallied over the 200 day in early December but could not hold the move. A key test is coming.
SP500/NYSE
SP500 and SP600 look solid, moving laterally as they try to form handles to their short 5 week patterns that are attempting to break up the topping patterns that formed to end 2004 and start 2005.
Stats: +0.58 points (+0.05%) to close at 1202.30
NYSE Volume: 1.415B (+5.22%). Volume was up on NYSE, showing some slight accumulation for NYSE stocks. Nothing earth shaking, but a continuation of the solid price/volume action displayed on this latest rebound.
Up Volume: 737M (+121M)
Down Volume: 657M (-53M)
A/D and Hi/Lo: Advancers led 1.25 to 1. Sleepy internals.
Previous Session: Advancers led 1.06 to 1
New Highs: 258 (-111)
New Lows: 15 (+8)
The Chart: http://www.investmenthouse.com/cd/^spx.html
The large caps cleared some resistance at 1200 last Friday and are now trying to work laterally in a narrow range over that level on lower volume. Great price/volume action showed accumulation on the way up and is setting up a break higher. It is trying to effectively erase the head and shoulders that was forming, and if it holds the line over the next couple of sessions it will be ready to break higher. The CSCO earnings won't help it, but we will know more about the strength of the index.
SP600 is showing similar action, posting a modest gain on rising NYSE volume as it moved to a new all-time closing high. As with SP500, a couple more days of lateral movement at this level, preferably with a slight fade, sets up the next break higher.
DJ30
After blasting through the 10,600 level Friday on rising but still quite low volume, DJ30 has moved laterally as well though it posted a slight gain Tuesday on rising volume. It too has worked to break up the head and shoulders that had formed. Now it is in the same position where a couple more days of lateral and low volume movement sets up another attempt at a break higher.
Stats: +8.87 points (+0.08%) to close at 10724.63
Volume: 244 million shares Tuesday versus 218 million shares Monday.
The chart: http://www.investmenthouse.com/cd/^dji.html
WEDNESDAY
Wholesale inventories are released at 10ET Wednesday, but the primary focus early on will be the reaction to CSCO's earnings. CSCO hit on revenues and earnings (pro forma; gap was a penny light), but sales were light, inventories rose, and gross margins fell. CSCO fell after hours, but it was no slaughter. Its impact, however, was felt across much of the techs including the semiconductors. The extent to that impact will key the NASDAQ's ability to hold the break above the 50 day EMA. NASDAQ 100 is already in a troublesome position, showing a doji below the 50 day EMA after filling its downside gap; that is not what you call starting from a position of strength on Wednesday.
Judging from the after hours reaction, this CSCO news looks to be the first test of the recent rebound. We would still be surprised to see CSCO have an overbearing impact; it is no longer a growth stock on NASDAQ, just one of those mature companies that produces a lot of product at lower margins.
The initial reaction was negative but not a slaughter. We will see if a softer open is met with buyers. Again, NASDAQ 100 is not in a position of strength and it is set up to fall. There is a real dichotomy between the SP500 and SP600 on the one hand and the large cap techs on the other hand. Wish we could say 'two against one', but often the weak link exposes the entire market.
Support and Resistance
NASDAQ: Closed at 2086.68
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 2076.91
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 1977.91
S&P 500: Closed at 1202.30
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 1190.85
1185, the top of the November consolidation range.
The 50 day EMA at 1183
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, 724.63
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 10,608
Price consolidation at 10,600 level is a key level.
The 50 day EMA at 10,550
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 10,287
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
February 07
Consumer Credit, December (3:00): $3.1B actual versus $8.0B expected and $2.0B prior (revised from -$8.7B)
February 09
Wholesale Inventories, December (10:00): 0.9% expected and 1.1% prior
February 10
Trade Balance, December (08:30): $57.0B expected and -$60.3 prior
February 10
Initial Jobless Claims, 02/05 (08:30): 325K expected and 316K prior
February 10
Treasury Budget, January (2:00): $8.6B expected and -$1.4B prior
End part 1 of 3
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