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money investment, investment help
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02/15/05 Investment House Daily
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Investment House Daily Subscribers:
MARKET ALERTS:
Target hit alerts issued Tuesday: None issued
Buy alerts issued: MICC; EPAY (bonus)
Trailing stop alerts: CTIC
Stop alerts: ACS; PARL
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SUMMARY:
- Stocks cobble together another gain but biding time ahead of Greenspan.
- January retail sales drop but still better than expected.
- December foreign inflows easily fund deficit but way down from November levels.
- December business inventories edge higher, sales rise faster.
- Fed struggling for a better game plan.
- NASDAQ taps 50 day SMA but fades
- Greenspan on deck as Congress warms up for political posturing.
Stocks have to recover late to post another gain.
The market started off stronger, riding some better than expected January retail sales and a New York PMI that was pretty much on target (19.19 versus 20) to a morning rally that pushed NASDAQ right up to its 50 day SMA in one run. That was more than we expected ahead of Greenspan's address to Congress starting Wednesday, and indeed it was all NASDAQ had in it on Tuesday. After hitting that level it backed off, then backed off some more, and then tumbled to negative in the early afternoon along with the rest of the market. Seems there was a sell program initiated when a rumor surfaced that some early trades were made in error and helped spark the early rally. Seems someone was worried about the rally's pedigree and sold on this news. Later it was confirmed that there were some erroneous trades on the Pacific Exchange.
Volume was running higher all morning; on the upside that was a positive, but it grew even more when the sell program hit. It managed to work out fairly well, however, as stocks managed to rebound to positive after the truth was put to the rumor and held that modest recovery into the close. It was a decent recovery with rising volume, and when you consider Greenspan speaks tomorrow, that was not bad action as the market again showed an upside bias, fighting off some selling to do it.
It was still no tremendous session. You most likely heard the financial stations touting the SP500 and DJ30 closing at new highs for the year. That is true but there are other highs just a stone's throw away from late 2004; that is not earth shaking news, but you need to keep perspective. Volume was up, and that shows continued accumulation as stocks recover. That is the lifeblood of any rally. Breadth remains tepid, however, even as SP500, DJ30, SP600 and SP400 crowd their old highs. You want to see more breadth as the make these moves to show the entire market is finding strength. This is showing up in the new highs list as well as new highs are hard to come by even as indices start to toy with those prior highs. Volume picked up in late January and it is showing good price/volume action, but it is lower this month on NYSE. The lackluster internals and the lower overall volume is a concern as the indices set up for the try at the breakout to new post-crash highs.
THE ECONOMY
January retail sales lower but better than expected.
It seems somewhat strange to call a 0.3% drop in sales better news, but when you are looking for a 0.5% decline, well, at least it puts it into perspective. Take out autos and sales rose 0.6%, also better than the 0.4% expected. That was better than the 0.3% gain in December, a month that saw auto sales surge and produced a 1.1% overall sales gain. As we have seen for the past two years, auto sales are on one month and off the next, running the overall number up and down. The constant has been ex-auto figure, and it has shown a steady gain. Indeed the past 12 months it factored into a 7.2% gain and 7.7% with autos. That clears up the picture from the month to month swings due to auto sales.
Of course part of that uptrend was the steady rise in gasoline prices over that same period. Sales is measured in dollar volume and not in units. If prices rise you could have rising retail sales without selling one more unit of anything. With that in mind, apparel posted a solid 1.8% gain; general merchandise stores sales rose 0.9%. Restaurants rose 0.7%, a good indication of how confident the consumer is. On the other hand, electronics fell 0.6% and furniture fell 0.1%.
There were the usual ups and downs, but the data shows a solid penchant to continue spending even after the holiday season. We must remember that January historically has been a throwaway month for retail sales as consumers were tapped out after the holidays. They were hardly that this past January.
Foreign cash inflows drop considerably but still cover the trade deficit.
Fund flows data lags other reports considerably. Tuesday we just received the December data. It was down substantially from November. Treasury investment was $61B, down from the huge $89B (revised from $81B). Overall foreign money flows dropped 31% as equity investment fell 51% after a huge 400% gain in November; that still puts foreign investment in US equities at a very high level.
The results were better than expected even if they were lower. As noted, they once again more than covered the trade deficit as foreign economies that rely on the US consumer happily bought US treasuries in order to keep the symbiotic relationship stable. Much of the big November gain is attributed to a post-election spurt on a belief that pro-growth policies would be continued. This jibes with what we posited months back, i.e. that the US with its solid growth compared to most places on earth as well as its stability will continue to attract foreign investment over and above that generated due to the trade relationship discussed above.
December sales top inventory rise.
Inventories rose 0.2% (0.3% expected) while sales rose 1.0%. This is a two-sided indicator: inventories rise either because companies are making more goods to meet anticipated demand, or they rise because there is less buying by the consumers. The 1% rise in sales indicates that consumption was the stronger and pulled inventories down such that the inventory to sales ratio is 1.3 months.
This highlights a problem that is rarely discussed, i.e. where demand picks up faster than supply. This entire recovery was one where demand has led supply. Despite what government reports suggest about low inflation, there are key elements of our budgets that are running away from the pack, e.g. insurance, healthcare, education. What keeps inflation low are prices of computers, televisions, telephones and the like. As we have often said, you don't have to buy a new computer every week (if you do you should check your warranty) but you do have to pay insurance, education, and healthcare on a regular schedule. Moreover, with the price of steel, petrochemicals, and other materials doubling or more, costs are higher.
That excess demand over supply has kept prices rising even as supply starts to come around. December's report is another example of how demand continues to outstrip supply as producers continue to purposefully run tight inventory levels after getting caught in 2000 with excess inventories worth billions that were written off as junk. They may not like the higher cost of supplies, but they do like the higher prices and are not too inclined to change things near term. They would do it with the right incentives, but this is what happens when you get a boom fueled by intervention and then try to engineer a soft landing. It is not going to happen. Economists call the market crash and economic bust in 2000 and 2001 a 'soft landing.' It was not soft for millions put out of work pretty much in the blink of an eye.
What is the Fed's game plan?
We continually hear on the financial stations how the Fed is playing it just right, keeping inflation down yet encouraging expansion with its 'measured' approach to raising interest rates. Some are even hoping that the Fed will take a pause in its campaign and then resume later.
That is a recipe for disaster. That is what happened in the 1970's when the Fed hiked rates with no real game plan. That is true. The Fed had high unemployment, high inflation, high energy prices, and a slow economy. It didn't have a clue what to do so it started raising interest rates with the intent of doing it until something changed. That is not a plan. That is punting.
The market reacted as if there was no plan. That was the long bear market of the 1970's. In 1984 the Fed overdid it with too many and too harsh of rate hikes. It was through, however, by the end of the year. In 1994 it went too far again, but then it realized it went too far and told everyone it was done. It learned something from the 1970's, but not enough. Now it is threatening to revert to the 1970's approach of just raising rates without communicating in some manner a relatively clear plan.
It says it is going to remove the accommodation at a measured pace. That is better than just saying it is going to hike rates as we can all guess as to when the accommodation has been removed. The Fed always goes beyond that level, however, even though everyone in the bond pit knows when it has gone too far. Eventually the market loses confidence in the 'measured' pace simply as a matter of course. The market knows the Fed changes its pace because it gets frustrated at the apparent lack of impact of its moves even though it knows rate hikes are cumulative and tend to hit with force all at once. Greenspan fired off one last 50 basis point hike in May of 2000 even as the market was crashing and the economy was showing clear signs of faltering.
A measured pace has worked thus far, but now it is a year into the cycle. Moreover, there were hints at the first of the year that the Fed would maybe move faster. That did not help the market as stocks dove lower that month. The market knows and it won't forget. The Fed cannot continue an open ended rate hiking campaign for two years or more and not get the market pricing in chances the Fed is going to go too far. The Fed always goes too far and ends up slowing the economy before it is done. An open ended rate hiking plan is no plan for the market It is much too open to emotional decisions. Our studies of the Fed show that it typically gets impatient and raises too much at just before it stops and just after the signs of a slowing economy become all too clear. You can see that the Fed suffers from the same emotional problems that plague investors.
One last comment. In some fairness to the Fed, it does not really know what to do now just as it did not in the 1970's. It sees social security and Medicare sapping away much of our output in 25 years and it also sees the problem of China floating its currency. At the same time it has no ammunition to lower rates if something major happens. It is thus compelled to somewhat ignore the other problems ahead and at least get itself to where it can handle emergencies in the near term. That underscores the mishandling of the recovery attempt in the last recession. It took too long to produce the fiscal incentives (tax incentives) that really got the economy going. A lot of rate cutting ammunition was used up with no result before that fiscal stimulus was passed. Next time we need to start the fiscal stimulus right off and not worry as much about interest rates. Just have the Fed pump up the money supply and provide incentives to invest.
What the Fed should do now: state at what Fed Funds rate it believes the 'accommodation' would be removed, say that it is going to get there by a certain date, and then do it. It could footnote that statement saying if would stop before that level if the data showed economic slowing. It would not, however, surpass that level on this round of hikes, giving plenty of time for the rate hikes to take affect before starting any more. That would give the markets confidence about what was going to happen and avoid that eventual round of pricing in a slowdown because the Fed does not know when to stop.
THE MARKET
It was a volatile session with solidly positive but then turning negative in the early afternoon. Then it was back up a bit for a modestly higher close on rising volume. NASDAQ tried the 50 day SMA but could muster the strength to break it. The internals were not really that great, and have not been that great on this move.
That does not mean Tuesday was a throw away. SP500 and DJ30 posted solid gains on rising volume, NYSE volume turning in a good above average performance. NASDAQ volume was solid as well as it too came in above average. That volume, however, was boosted by some erroneous trades on the QQQQ; QQQQ traded twice the level it did Monday.
As has been the case, just about everything but NASDAQ is ready for a new near term high. Again, that is not bad action at all. It will, however, have to show better breadth and highs as these indices make that move to show that there is more depth the buying. As noted, price/volume action is solid, but volume is not at the top levels even of this year. Good mechanics only carry you so far; eventually you have to bring the power to the plate.
Market Sentiment
VIX: 11.27; -0.25
VXN: 17.56; -0.12
VXO: 11.4; -0.19
Put/Call Ratio (CBOE): 0.79; -0.11
NASDAQ
NASDAQ tapped the 50 day SMA on the high and turned tail. It took a late rebound to recapture positive.
Stats: +6.3 points (+0.3%) to close at 2089.21
Volume: 2.098B (+27.02%). A nice volume surge but pumped up by some erroneous early trades. Going to take it for face value as the price/volume action has been good overall in the recent move higher.
Up Volume: 1.311B (+300M)
Down Volume: 692M (+94M)
A/D and Hi/Lo: Decliners led 1.07 to 1. The reversal did not help NASDAQ breadth; even with the positive index close breadth often lags and there was no time for it to catch up by the Tuesday bell. As noted, breadth needs to improve as NASDAQ makes the break higher through the 50 day SMA.
Previous Session: Decliners led 1.01 to 1
New Highs: 124 (-7). We will expect more as NASDAQ moves toward 1600.
New Lows: 28 (-5)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
NASDAQ rallied right out of the chute to the 50 day SMA (2102). We were not looking for it to continue the move so soon but it did. Unfortunately it was not ready for the rally and it gave 12 points back by the close. NASDAQ is working on its base, still holding the 50 day EMA (2076) it recaptured last Friday. It is lagging, but it is building the base which is just what you want it to continue to do as the other indices try for new highs.
NASDAQ 100 moved through the 50 day EMA, finally joining overall NASDAQ over that level. It too tapped the 50 day SMA on the high and then faded below 1550 resistance. It too is working on its base.
SOX rallied again, stretching toward next resistance at 450 but after getting to 445 it faded as did NASDAQ. Best move over the 200 day SMA (419) since early 2004, and with AMAT's earnings finally pleasing investors after hours (it took some time), SOX could be in for another test of 450 (the December high).
SP500/NYSE
SP500 hung onto most of its modest gain as it continued its breakout move on rising volume. Heading for a test of the top of the base.
Stats: +3.98 points (+0.33%) to close at 1210.12
NYSE Volume: 1.523B (+18.16%). Volume moved back above average on another upside move. This continues the solid price/volume action (up on up sessions, down on down sessions). Overall volume could be better. Volume on the February move started on good trade but it has really fallen off pace the past two weeks even as it kept solid price/volume action. That shows there is ongoing accumulation, but it is not heavy accumulation. Thus a move can be subject to a strong surge in selling.
Up Volume: 903M (+210M)
Down Volume: 581M (+4M)
A/D and Hi/Lo: Advancers led 1.18 to 1. Really weak breadth as SP500 and SP600 near highs. This shows not everyone is engaged.
Previous Session: Advancers led 1.25 to 1
New Highs: 296 (+3). Needs to improve. These indices are right at the cusp of new highs. If just a few are leading it is easier for some sellers to stop the move.
New Lows: 17 (+7)
The Chart: http://www.investmenthouse.com/cd/^spx.html
Another above average volume advance on the breakout move as SP500 nears its January high at 1218. It has shown solid price/volume action in this move but there was not huge volume on the break over the February high that made the handle. When it gets to 1218 we anticipate it will take a breather.
SP600 tapped 330 on the high and backed off for a modest gain. It is pinching off between that all-time high and the 10 day EMA (326.42) on the low. Made a higher low the past week but has not been leading higher most sessions. Needs to breakout and pump up the NYSE breadth and the new highs to give this move of the S&P stocks some strength and further upside.
DJ30
Volume was up but still below average as DJ30 moved close to a new post-crash high (10,868). DJ30 is mirroring the SP500 action but volume has been notably below average most sessions this month as it moved higher. As with the NYSE indices, this is not building the kind of support that will beat a new wave of selling at the prior high. Volume is lower the past two sessions as it approaches the December high; that can turn into a low volume second peak to a double top. We saw the results of that in several stocks that made a second top on low volume in late December.
Stats: +46.19 points (+0.43%) to close at 10837.32
Volume: 241 million shares Tuesday versus 215 million shares Monday.
The chart: http://www.investmenthouse.com/cd/^dji.html
WEDNESDAY
AMAT's earnings finally touched a positive nerve after hours and may provide some upside to NASDAQ Wednesday. There were tech earnings disappointments, however, so it could turn out to be a wash.
The bigger news will be Greenspan before Congress. Democrats are confident Greenspan will prefer deficit control to privatizing some social security to the tune of $800B or so over the next 10 years. We don't see it that way; Greenspan would gladly pay that money to write off $12T in the future. He may not agree with all of the particulars, but he will advocate that Congress and the administration work together to make a fix that does not involve raising taxes. He will advocate a fix, not the mindset that SS is fine; he said last year it was not fine. Indeed, a lot of the senators and representatives complaining today that the system is okay also stated in the past that it needed to be fixed. They gave President Clinton a standing ovation when he said SS had to be fixed now versus later. Ah, you have to love politics.
The market may be a bit disappointed in the news that comes out. It may be what is expected, but with DJ30 and SP500 approaching their year ending highs and volumes, breadth and new highs iffy, we need to be on the ready if the market takes on some water. A good move up but one that has lost some punch this month. Still a lot of positives but it is vulnerable if the sellers return.
For now the market still has more positives and has yet to show the return of sellers. Even Tuesday it recovered after a rocky midday dump lower. The character changed some with this rally off the low that set up the base and broke out SP500, but it was not a hands down reversal. Again, we say on the alert, keep the stops buttoned a bit tighter, and not take a lot of chances until we get a good test on SP500 that holds and sets up some more buy points.
Support and Resistance
NASDAQ: Closed at 2089.21
Resistance:
The 50 day SMA at 2102
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 1980
S&P 500: Closed at 1210.11
Resistance:
Q1 1999 lows at 1215
December high at 1218.
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 1192.56
The 50 day EMA at 1186.62
1185, the top of the November consolidation range.
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 1138
Dow: Closed at 10, 837.32
Resistance:
10,868 from the December 2004 high.
10,975 - 11,000 from Q4 2000, Q1 2001
11,350 from the May 2001 highs
Support:
10,754 is the February high
The 10 day EMA at 10,721
The 50 day SMA at 10,631
Price consolidation at 10,600 level is a key level.
The 50 day EMA at 10,590
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 10,298
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
February 15
NY Empire State Index, February (08:30): 19.19 actual versus 20.0 expected and 20.08 prior
Retail Sales, January (08:30): -0.3% actual versus -0.5% expected and 1.1% prior (revised from 1.2%)
Retail Sales ex-auto, January (08:30): 0.6% actual versus 0.4% expected and 0.3% prior
Business Inventories, December (10:00): 0.2% actual versus 0.2% expected and 1.1% prior (revised from 1.0%)
February 16
Housing Starts, January (08:30): 1925K expected and 2004K prior
Building Permits, January (08:30): 2000K expected and 2032K prior
Industrial Production, January (09:15): 0.3% expected and 0.8% prior
Capacity Utilization, January (09:15): 79.3% expected and 79.2% prior
February 17
Export Prices ex-ag., January (08:30): 0.1% prior
Import Prices ex-oil, January (08:30): 0.5% prior
Initial Jobless Claims, 02/12 (08:30): 315K expected and 303K prior
Leading Economic Indicators, January (10:00): -0.2% expected and 0.2% prior
Philadelphia Fed, February (12:00): 17.5 expected and 13.2 prior
February 18
PPI, January (08:30): 0.3% expected and -0.7% prior
Core PPI, January (08:30): 0.2% expected and 0.1% prior
Michigan Sentiment-Prel., February (09:45): 95.5 expected and 95.5 prior
End part 1 of 3
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