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money investment, Breakout test
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2/16/05 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Target hit alerts issued Thursday: None issued
Buy alerts issued: LH
Trailing stops issued: None issued
Stop alerts issued: ABFS
SUMMARY:
- Market fights through a swamp of news, data, and testimony, holds the line.
- Greenspan dominates the economic news.
- Housing starts hit a 21 year high, again.
- Energy and small caps perform but overall market still trying to take a breather.
- Greenspan takes another shot at the Hill.
Market ducks and weaves through a barrage of information.
Wednesday was about as full a calendar as you can get for a market session. Iran claims a bomb was dropped from an unidentified airplane in a field near a town that was near its heavy water nuclear facility (the one we offered to provide light water technology to build but were refused). Futures tanked as speculation ran wild as to who was responsible. It wasn't the US or Israel because the 'bomb' missed the nuclear facility. Indeed, as Mark Haines put it, if it was the US it would have been 20 cruise missiles versus one bomb. As it turned out it was a fuel tank that fell off of an 'Air Iran' plane; Iran was bombing itself. Amazingly Iran acknowledged this without too much delay, and that took some of the heat off stocks pre-market.
It did not hurt that housing starts hit a 21 year high as futures tried to recover from that earlier scare. With Greenspan still on deck for the Senate Banking Committee, however, investors were not ready to ring up the buy orders. Indeed, oil was up on the Iran story, and even after the truth came out it still did not give up much of the gains. More evidence oil is digging in at the mid-forties as its home base. When the oil inventory data was released at 10:30ET and showed a 2M bbl increase in crude but a 3.1M drop in distillates, oil sold to flat but then rallied to close over a dollar higher. Oil remains steadfast, and that is not good for the economy longer term as we have discussed before.
After all of the news, the market closed flat. Small and mid-caps posted gains as they press toward new highs, but with the low volume there was not much backing for the move. Low volume, flat breadth, still below key tops put in at the year end. There were some breakouts last week, e.g. SP500, but the volume has not surged in at levels that are going to take it definitively through the late 2004 highs. That remains the next big step for the market, and it is going to have to attract more buy side strength across the board to push the indices through these levels and more importantly, make the move stick.
THE ECONOMY
Greenspan covers a lot of ground, drops a bomb, throws bones to both sides.
Greenspan covered the landscape in his prepared text: the economy, interest rates, the dollar, the trade deficit, social security, job training & class warfare. Hard to imagine all of that in just six pages. That, of course, was just the beginning as the senators swarmed in like hungry seagulls on a fish head once his testimony was put into the record.
The statement: Greenspan started by noting that despite the rate hikes the Fed funds rate remains "fairly low." In other words, it is going to go significantly higher above 2.5% and the 150 basis points already taken back. He believes the economic fundamentals have "steadied." The savings rate still worries him as it stands at 1%, well below the 7% level he says is the average for the past 30 years. One of the main culprits for the drop is the ability of homeowners to access their accumulated wealth in their homes through new financing as well as selling into a strong housing market. This is good and bad to the chairman: it lowers the pool of national savings available to finance capital investment (a big issue in the Q&A) but a boon to the homeowner because cash is basically cash wherever it comes from. This does create a savings problem, however, as household net worth has outpaced debt. If the housing market should reverse some then there would likely be more savings. Again, that is good on the one hand (national savings) and not so good on the other (the consumer would not spend as much and there would be some economic slowing).
The interesting part started with a discussion of inflation and its relation to the dollar and oil prices. This touched on his worry about importing inflation as a declining dollar, currently being absorbed by exporters to the US in the form of lower profits, would not do so much longer. That means higher prices if they decide they cannot take the dollar bleed any longer and we get higher import prices here.
Greenspan's discussion of the bond market brought the most response, at least from the bond market. He said the lower trend in the long end despite the 150 basis point hike was a "conundrum". He does not believe this is forecasting slowing economic growth because stocks have continued to rise and credit spreads continue to narrow, both indications of confidence in the future. Greenspan suggested it may be due to subdued business demand for credit (but why is it subdued Mr. Chairman?) and eagerness of foreign investors to provide financing (this is one of the main reasons we feel is the case as they want to support our economy and its purchasing of their export goods).
Not satisfied with those explanations Greenspan noted the same thing was happening in Germany and in emerging market nations. Wow. No one commented on this, but it is a bombshell. The focus of the discussion has been the US trade deficit and federal deficit undermining confidence in the US economy and thus causing long rates to remain sluggish and actually decline, thus flattening the yield curve. Maybe it, as we suspect, has nothing at all to do with the deficits but is showing something entirely different. Not that the alternative explanations are all that great: Germany is stagnant in its economic growth, and if its long end is falling as well along with other markets, that suggests there is some global slowing ahead and it is likely due to higher oil prices. That puts the Fed tightening into a slowdown once more. The conundrum may not be so difficult to size up, but once again monetary leaders may not want to see it. As we noted last night, that can be disastrous.
The Q&A: Rate hikes and a lot of social security. Even some Medicare.
And that tightening is just what the Fed is going to keep doing. Greenspan was queried as to how long the current rate hiking was to continue, i.e. when enough was enough already. Greenspan adopted the Supreme Court's view that he would know it when he saw it. While we are inclined to agree that rate hikes are obscene, that standard does nothing good for the market. We discussed this before: open ended rate hiking is an open door to Fed frustration and thus more intense rate hikes. Indeed, given Greenspan's view that the falling longer bonds does not signal economic slowing, he will continue to raise rates, and most likely the intensity at some point.
The bulk of the questions related to SS. As expected both sides tried to get the sound bites they wanted so they could go back to the cameras and claim they had the full support of Greenspan. One democrat was notably pleased when Greenspan responded to his question that private accounts alone would not save social security. What many want is something called SS plus, i.e. keeping SS the same as it is now and expanding 401k's. You and I both know, however, that if just one person fails to put the money into the 401k there will be howls that we must take care of that person and thus raise taxes. The idea is to send less dollars to Washington because those dollars are not going to any trust fund; they are being spent and replaced by IOU's. It does not matter if it is democrat or republican; congress spends all the money it gets and then a lot more. It is a myth that surpluses guarantee SS. All the money is spent and it is a direct transfer from payor to payee that occurs now and will only get worse in the future.
Greenspan threw Bush a bone as well, however, saying he preferred private accounts as the way to get where the system needs to be. Greenspan defined the problem as a definite slowing of GDP and thus our standard of living unless productivity increases significantly over time. You cannot get that without capital assets. Greenspan was adamant that savings was needed to invest in capital assets that would increase output per hour. Otherwise you have to increase borrowing from abroad, and that is already considered too high and is not a fix.
The SS fix test: Greenspan was also clear that whatever was done has to create savings for investment in the capital assets that would provide the productivity and demand growth to keep the economy going and provide return to investors. He agreed that the current Bush plan would not do so immediately, but that it was the best plan for eventually getting the system to that point. He was clear the current 'pay as you go' system works only if the population rises significantly and the longevity increases slow. We called it a Ponzi scheme before, and Greenspan all but did that on Wednesday. He was clear: the current scheme creates no savings but is just a transfer payment.
All of this was broad policy. There was enough 'gotcha' questions and responses to make hammering out the specifics difficult. In the end Greenspan wants private accounts but he does not want to push too hard, take on a lot of debt (he considered $1T the max), and thus upset the markets. He was clear that something had to be done.
In the end Greenspan gave both sides something to argue with, but we doubt that is what he wanted. He wants to see that something gets done and done now and he gave them each some arguments so they can meet in the middle. The question is whether they take his lead. Judging from the way the sides were posturing after the testimony it is not going to be easy. Democrats think reaching across the aisle means agreeing with whatever they say needs to be done or else they threaten obstruction. Republicans think that reaching across the aisle means talking with the moderate republicans. We have seen more functional dysfunctional families than Congress.
Housing starts hit 21 year high.
Starts were up another 4.7% in January on top of the December surge. This is the fourth month out of six where housing starts have topped the 2 million annualized pace. The big gain in 1984 was an island of activity; the months preceding and following were much less. Housing starts dipped in November but that was the aberration and not the rule as starts surged in December and again last month.
This all points to the continued power of low interest rates. Rates ticked higher in the fall and that put a lid on the starts. As we all know, since that time rates have moved lower and the long end continues to fall still. That keeps rates low and makes homes more affordable. That drives the market from top to bottom and makes housing more readily available on a wider spectrum.
THE MARKET
Stocks were up and down but in a relatively narrow range as they chomped through the waves of information hitting on Tuesday. One commentator said the market did not react to what Greenspan said. It did; its reaction was trying to figure out just what Greenspan was going to do about the 'conundrum', how far he would continue to raise rates, and how higher oil prices and the economy would fit into his plans. He said a lot but as usual he left a lot unanswered. The market takes a bit of time to work through all of this, and it usually does not show its answer for a few sessions. It tried to put on a good afternoon rally once Greenspan was finished, and though it gave back much of that move it was enough to keep the indices mostly flat.
Oil stocks surged, not necessarily because of oil price moves, but because it is becoming clearer that prices are going to hold up. That is what the longer term futures contracts are suggesting, and as noted, oil looks quite comfortable at this level. Small and mid-caps were solid as well, suggesting that the market is still not viewing, in the short term, sustained oil prices as a major threat.
The rest of the market generally held steady. SP500 showed a lower volume doji after peaking at 1212 for the second straight session. NASDAQ went was flat below the 50 day SMA, but it also continues to hold above the 50 day EMA. DJ30 posted the same move as SP500, a doji just below the late 2004 highs though it showed some rising, average volume. SP500 and DJ30 have returned to their prior highs and are trying to piece together another breakout.
The problem remains the same as it was in late 2004 but to a lesser extent: lack of substantial volume on the move. Volume has been above average at times and the price/volume action is solid, but overall volume levels are lower. Another factor to add is the lack of new highs and a weaker A/D line as the indices try for another new high. A breakout may cure all of these ills, but until it shows us that move we have to be cognizant of some pretty serious shortcomings in this most recent leg back up.
Market Sentiment
VIX: 11.1; -0.17
VXN: 17.41; -0.15
VXO: 11.31; -0.09
Put/Call Ratio (CBOE): 0.74; -0.05. The put/call ratio closed above 0.90 on back to back sessions that helped spark the current rebound. It did its job for the bounce, but we note that it did this many times in 2004 and sparked moves higher. Those were bounces higher and not breakouts. Something to keep in mind as the market takes on the former highs with some so-so volume.
NASDAQ
An afternoon push turned NASDAQ positive after a shaky open, but it dipped late to post a slight loss on low, below average volume.
Stats: -1.78 points (-0.09%) to close at 2087.43
Volume: 1.905B (-9.21%). A significant drop in volume as NASDAQ worked through all of the news. Not bad action at all given the issues confronting stocks Wednesday. NASDAQ has also shown lower overall trade this month, but we also note that NASDAQ is still working near the bottom of its base, still consolidating. You don't mind seeing lower overall volume when that occurs.
Up Volume: 820M (-491M)
Down Volume: 1.067B (+375M)
A/D and Hi/Lo: Advancers led 1.05 to 1. No big issue on the session given NASDAQ was flat.
Previous Session: Decliners led 1.07 to 1
New Highs: 106 (-18). Again, with NASDAQ still working through its base and not yet challenging its old highs, this is not as important an indication. It will become so if NASDAQ returns toward its prior highs. Of course if it does that the other indices will have already broke out ahead of it and cleared the way given they are already pushing toward new highs.
New Lows: 30 (+2)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
Narrow range as NASDAQ made a half-hearted waive at the 50 day SMA (2100) and fell back into the close. Lower, below average volume, narrow range, flat breadth. Not bad action as it also easily held above the 50 day EMA (2076) as it works to digest last week's nice break higher through that level. Still well off its late 2004 high, but working through the base with most of the right characteristics.
NASDAQ 100 gave back more than overall NASDAQ as the large cap techs continue to struggle more than techs in general. Managed a lower volume doji while holding the 50 day EMA, holding that key level and still trying to work higher in its base as well. Some key resistance still holds at 1550, the bottom of the early January consolidation attempt.
After four sessions of gains semiconductors fell back but held much of the move the past week off of the 200 day SMA (419). Its next key resistance is at 450, but it has to take a breather after clearing the 200 day SMA and rallying higher before it can continue on.
SP500/NYSE
The large caps held steady below their prior highs as volume backed off. Trying to hold on and set up for the next breakout to a new post-crash high.
Stats: +0.22 points (+0.02%) to close at 1210.34
NYSE Volume: 1.482B (-2.67%). Volume fell to just below average as SP500 held steady below the prior highs. Good to see volume fade as it did as that does not raise the suggestion of churning (high volume turnover) as investors play hot potato with stocks. So far showing good price/volume action but volume has not been that strong this month, certainly not as strong as the selling volume in January.
Up Volume: 722M (-181M). Wow. A real standoff.
Down Volume: 742M (+161M)
A/D and Hi/Lo: Advancers led 1.07 to 1. Even with the small and mid-caps posting gains breadth was flat. Needs to show a strong 2+:1 ratio if it gives us a breakout over the late 2004 highs.
Previous Session: Advancers led 1.18 to 1
New Highs: 290 (-6). Very anemic as the mid-caps moved to a new closing high and the small caps moved in on another all-time high of their own.
New Lows: 14 (-3)
The Chart: http://www.investmenthouse.com/cd/^spx.html
Doji just below the late 2004 highs (1218) as SP500 tries to take a breather and set up for the next break higher. Nice breakout last week pushed it to this level though volume was on average lower than the prior selling volume. it could stand a pullback toward 1200 over the next few sessions and then a strong volume rebound and breakout along with a good surge in breadth and new highs as well. The overall volume and mediocre new highs as the large caps approach the prior top keeps us on guard in the event this move runs out of gas.
A new closing high on the SP600 as the small caps led the market, but the move was undermined by lower NYSE volume and a lack of any breadth. The small caps continue to lead and this move could represent the precursor to the rest of the market following. As noted with SP500, that move has to be stronger than what was shown Wednesday.
DJ30
There were some strong volume moves on DJ30 Wednesday, and that pushed volume for the blue chips up to average. It too showed a doji just below its highs in the base (10,868). Volume on the Dow has been a bit lower this month, but not much more than January. It could actually turn to leader on a breakout try. The overall market would still have to show better breadth and more new highs even if DJ30 leads the way.
Stats: -2.44 points (-0.02%) to close at 10834.88
Volume: 257 million shares Wednesday versus 241 million shares Tuesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
THURSDAY
Greenspan airs part two tomorrow and perhaps can add a big more enlightenment with respect to how he envisions social security reform. Of even more immediate importance to the market is the 'conundrum' Greenspan has regarding the long end of the treasury market. When the head money man, the 'maestro' to many, does not have the answers as to the whys, the market reacts. The bond market did that Wednesday by selling off. Of course Greenspan admitted something even more shocking back in 2002 when he admitted the Fed did not really know whether the so-called wealth effect actually impacted the economy at all. Given he had based much of his rate hiking in 1999 and 2000 on market gains and the 'runaway consumer', that was a shocking admission.
So, there is precedence to this conundrum talk. Unfortunately it appears that if the Fed is prepared to address this conundrum with further rate hikes. Maybe addressing it is a misstatement; more like ignore it for now and keep on raising rates into what it perceives to be a strengthening economy. From what the bond market is saying here and in other economies, that could be a questionable action. For now, however, it is clear that the Fed is going to raise rates until it gets to neutral, some unknown level out there in the future. The market does not like open ended rate hiking. It probably won't like $45/bbl oil for a sustained period either.
As of yet it has not reacted negatively and that is one of the reasons Greenspan says he thinks things are fine. Of course, things looked fine in 1999 and 2000 as he raised rates into a slowing economy. As noted before, the Fed is somewhat hand-tied by the Chinese currency problem and the dollar; it pretty much has to raise rates some to address these issues in the future. Of course the Fed's ability to influence rates appears to have declined some based upon the last two hiking and cutting rounds. More on that this weekend.
As for Thursday and indeed going forward, we are going to be careful as SP500 and DJ30 test their old highs. Volume has not been great on this rally and we want to see any pullback occur on light trade and hold near support, then rebound on much stronger trade and breadth. Leadership is still good, a strong positive for the market. Further, Fridays have been strong the past two weeks as the market has continued the rally. Once it can clear the recent highs with a strong move we will feel better. We will continue to look for good leadership stocks; if the market makes that move we want to be moving with it. At the same time we are going to be careful with current positions and play defense rather than see this lower volume move fail.
Support and Resistance
NASDAQ: Closed at 2087.43
Resistance:
The 50 day SMA at 2101
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 1981
S&P 500: Closed at 1210.33
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 1193
The 50 day EMA at 1186.56
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 1139
Dow: Closed at 10, 834.90
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 10,741
The 50 day SMA at 10,637
Price consolidation at 10,600 level is a key level.
The 50 day EMA at 10,600
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 10,300
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): 2159K actual versus 1925K expected and 2063K prior (revised from 2004K)
Building Permits, January (08:30): 2105K actual versus 2000K expected and 2069K prior (revised from 2032K)
Industrial Production, January (09:15): 0.0% actual versus 0.3% expected and 0.7% prior (revised from 0.8%)
Capacity Utilization, January (09:15): 79.0% actual versus 79.3% expected and 79.1% prior (revised from 79.2%)
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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money investment
Breakout test
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