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world stock market, us stock market
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02/23/05 Investment House Daily
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SUMMARY:
- Investors' sigh of relief over CPI lifts market.
- Korea clarifies the record regarding dollar investments
- Productivity equals better profits, and that helps keep producer costs from jumping into CPI.
- FOMC minutes hold out the stick of faster rate hikes if Fed deems it necessary.
- Rebound not enough to clear the recent distribution.
CPI helps modest rebound.
The fear building the past week over the PPI, the dollar, interest rates and spiking oil calmed a bit Wednesday with a few positive developments. Most important was the CPI that was in line and slightly better; after the PPI surge last week the market was on edge as to how those price increases were going to show up in the consumer index. When they did not futures bounced solidly higher.
Other news that did not hurt one bit was Korea's clarification to what it said regarding the dollar. Currency markets roiled Tuesday when it was reported Korea was diversifying out of US dollars. The market implied that meant Korea was going to start selling its dollar based investments and that might be the start of a move away from dollar denominated investments by other countries thus bringing on the host of problems discussed in the Tuesday report. When Taiwan indicated a similar mindset, that fear was confirmed in investors' minds.
Wednesday, however, Korea stated that it never said it was going to sell dollars; it was just going to diversify into other currencies in addition to its US dollar holdings. The two are not mutually exclusive: Korea can continue to hold its current dollar based assets and look at other currency denominated assets in future transactions. Of course, that also means it won't be looking so much at the US investments, and that has its own impact though not to the level if Korea decided to sell its dollar assets. That helped calm investors a bit, and when Taiwan again echoed with a 'me too', investor sentiment improved further. One wonders just how many phone calls took place between the appropriate US and Korean officials overnight and how hard they had to work to come up with the language released Wednesday. The market bought the story, but it was not a wholesale 'thank goodness'.
Oil received some good news itself. It was not, however, a major drop in the price per barrel though it did fall. It was still over $51/bbl by the close, so there was no major reversal. Kuwait provided the improved outlook, announcing that OPEC would not allow prices to get what it considered too high. We appreciate their concern. Of course it is in OPEC's interest to keep oil at a level that does not impinge western economic growth. It is the old balancing act between charging as much as possible to balance price and demand in order to maximize profit.
The news that helped (though after a $2 spike Tuesday one would expect a test), but it was hardly a breakthrough. The obvious question that was left unanswered by the statement: just how much capacity does OPEC have such that it could prevent a determined rise in price. It is said Saudi Arabia is just about maxed out, and its heavy crude gives many of the world's refineries indigestion. In other words, a lot of refineries cannot refine the viscous sludge from Saudi's wells, and that limits the impact of any extra Saudi production.
The market seemed to understand all of this. Strong futures failed to translate into strong stock gains. Indeed it was a volatile session with several lead changes as stocks bounced back and forth across the flat line. Volume started briskly, but it waned as the session progressed, falling well shy of Tuesdays distribution. Breadth was decent on NYSE as the small caps led most of the way until fading into the pack late. All and all it was a lackluster response that did not offset the recent distribution and that was a shell of the pre-market promise the strong futures suggested. We said in the morning alert we were leery of the futures jump based on the market patterns and the volume action. There was no sharp reversal after the early bounce, but the upside effort was markedly weaker than the recent selling. Thus the character did not change.
THE ECONOMY
CPI remains tame, allaying some inflation fears.
The consumer price index gave the market a reprieve Wednesday as it came in a bit lighter overall and in line at the core. Januarys 0.1% overall rise (0.2% expected) reflected some moderation in energy prices as evidenced by the 0.2% rise in the core (0.2% expected). Even though energy prices have risen since, the relatively steady, modest rise in the core indicates prices, at least as measured by the government, are rising gradually.
Energy fell 1.1% in January on top of the 1.3% December drop. That put energy up 10.6% over the past year. That is quite a gain. Other prices year over year appear to be well in check. CPI rose just 3% even with those surging energy prices while the core was up only 2.3%. The past three months the inflation rate has been even lower on an annual basis.
As we all know, however, prices are rising. Look at your medical costs; they continue to be driven by prescription drugs as we continue to subsidize the rest of the world for the new miracle drugs we all want but have yet to figure out how to equalize the field with respect to their costs. Clothing costs were also higher; it was not too long ago companies could not sell some clothes at any price. And there is still the PPI underneath all consumer prices, pushing, but as yet not making the pass through to our wallets (at least not in a big way).
Productivity and profits (PP) keeping consumer prices relieved.
The PPI remains a problem for prices. It has clearly showing an increase while the CPI has posted very modest rises, hardly what you would call inflation. Are those prices about to burst through into the consumer side as has been feared for months?
First some history. There have been other episodes of rising energy prices and producer prices that never made it to the consumer. 1984 was a classic example with rising energy and producer prices. Those were coupled with a Fed rate hiking campaign as well. Fears were prices would jump the boundaries, but they did not. A Fed success story? The Fed would have you believe so. A good spike in productivity as a result of the massive investment the Reagan economic package sparked did the most to prevent prices from finding their way to the consumer.
How does that work? Well the more productive a company is, the more profit it can make because its costs are lower. If the cost of making products or providing services drops, then materials cost increases can be matched or offset. Thus a company can hold prices steady and still make a good profit. The more productive or efficient, the more the profit. Over the past year corporate profits have soared, and as we saw in this last earnings season, even with rising materials costs profits remained strong. That allows them to absorb more materials price increases.
Productivity has been stellar the past 8 years or so, easily exceeding historical norms. The last quarterly report was less than expected, but we expect productivity was understated. Just in the past few years have companies really started to reap the benefit of the devices created in the 1990's. That is flowing directly to the bottom line. The ever-present question is how long productivity gains can offset costs. We suspect that is not about to end anytime soon though there are signs costs are breaking through in some areas. For instance, the appliance makers are starting to feel the pinch of steel prices that have more than doubled. Boat makers use steel and petrochemicals, and both of those are pushing boat costs higher. Thus the rise in materials prices is not completely benign. The question is what do you do to keep things under control
FOMC minutes indicate 'steady as she goes' with a caveat.
The fresher FOMC meeting minutes released Wednesday show a Fed that still believes inflation is under control for now, but some members are clearly edgy about the future. On the whole the Fed believes that core inflation will remain stable "assuming further removal of policy accommodation." In other words, the Fed feels it must continue to raise rates to fend off inflation breaking through to the consumer side.
Thus the Fed will continue to raise rates, and as we discussed over the weekend, that has some problems in and of itself as there are signs the Fed could be raising rates into a slowing economy. For now economic activity is quite nice, but there are indications of slowing down the road as previously discussed, not the least of which is oil over $45/bbl for a sustained period.
The Fed is going to raise rates, however, and the question is at what pace. We noted when this rate hiking campaign started that the Fed would start at a slow pace, but as always, it would get impatient and feel it would have to raise rates faster. This even though its prior hikes have not even worked through the system to impact the economy. It takes almost a year for a hike to fully impact the economy; thus there is always a lag time between impact and the intervening rate hikes. It is thus very easy for the Fed to overshoot. It is also very easy for the Fed to get impatient, increase the pace of the hikes, and thus compound the slowdown when they finally impact the economy.
Signs of that impatience showed up in the recent minutes as more members carped about the slow pace of hikes. The FOMC minutes noted "the real federal funds rate was generally seen as remaining below levels that might reasonably be associated with maintaining a stable inflation rate over the medium term." Translated: rates were too low and the Fed had better get them to a higher level fairly soon or risk inflation. That is what the 'medium term' phrase meant. The Fed even added more emphasis, stating the pace of rate moves at upcoming meetings "would depend upon the incoming data." Thus the Fed expressly acknowledges what some of the members were stating before Greenspan's testimony to Congress. This is an important because the Fed is now preparing us for rate hikes at a faster pace. In this world of a supposedly a transparent Fed, it prepares us for what is to come. It is seeing a time, just as it always does, where it will need to raise rates at a faster pace. This, of course, before any of the previous hikes have fully impacted the economy. You make the call.
THE MARKET
Stocks generally rebounded Wednesday, but the volume was lower and, bread was mediocre, and there were no major breaks of resistance. SP500 cleared the 50 day EMA, but it was only able to tap the 50 day SMA before fading to close. NASDAQ managed to come back to positive by a hair. SP600, DJ30 and SOX managed to hold their major support, the first two posting positive bounces.
Other than the price bounce, however, there was little positive to bring home. Volume was substantially lower than the recent selling volume, and that was the major factor that points to a relief bounce. Pundits are still split on whether this is just a pause or the start of something worse. The market will show us that, and right now it is stacked a bit more in favor of the latter. Higher volume selling after some twin tops on SP500 and a lower overall volume assent. Indeed, just as SP500 was trying to make the breakout it got pushed back on rising volume. That is classically bad action; you want to see buyers clambering to get in as a stock or index breaks higher, not sellers jumping in and selling it down harder than it rallied.
On the positive side there is still a wide swath of leadership that is holding support despite the harsh selling sessions of late. A market follows its leaders, and if the leaders can hold the line and resume their moves on good volume, that is an indication the market will likely follow. The exception is perhaps energy stocks; they can thrive as the rest of the market suffers (higher prices benefit them but not the rest of the economy). Recall that a lot of breakouts leading up to the selling were getting shorter shelf life; instead of a multi-day surge on volume, a session or two of upside and you could stick your fork into many of them.
In sum, the market bounced in relief Wednesday on some lessening of the Tuesday worries, but the volume was not there. Indeed the pre-market enthusiasm (many financial stations were quite pleased with the futures reaction to the CPI) quickly abated when the trading started. There was a gain, but it was not a gain that changed the character. The market is still in an uptrend, but the latter part of the move up was just not enough to push them to a solid breakout.
Market Sentiment
VIX: 12.39; -0.75
VXN: 18.44; -0.56
VXO: 12.28; -0.55
Put/Call Ratio (CBOE): 0.83; +0.02
NASDAQ
A big nowhere on the session, running up and down in a 16 point range and closing flat on lower volume. Hardly an answer to the recent distribution as it cut back through the 50 day EMA.
Stats: +0.93 points (+0.05%) to close at 2031.25
Volume: 1.903B (-8.45%). Volume backed off to below average on the session. No accumulation, no reversal of the prior distribution. We note, however, that volume remains overall light whether upside or downside, and not as clearly distributive as on NYSE. That gives it a chance to hold near 2000.
Up Volume: 913M (+333M)
Down Volume: 949M (-538M). A standoff just as reflected in the price change.
A/D and Hi/Lo: Advancers led 1.03 to 1. And yet another example of the standoff. Hardly an answer to the harsh downside breadth Tuesday.
Previous Session: Decliners led 2.68 to 1
New Highs: 50 (-26)
New Lows: 63 (-1)
The Chart: http://www.investmenthouse.com/cd/^ixq.html
A relatively narrow range, trading on both sides of flat as the early optimism dried up relatively quickly and NASDAQ was set to struggle the rest of the session. It held some minor support on the low (2024) and bounced. The lighter volume overall indicates that NASDAQ may not be ready for a death roll, but maybe that double bottom near 2000 alluded to Tuesday night. The action did not turn back the distribution, and thus a further test seems likely before a bigger upside move.
Large cap techs performed better than the overall NASDAQ, trying desperately to hold near 1500. As with NASDAQ overall, the volume was lower and a test of the 200 day SMA (1474) looks likely before a more sustained upside move.
SOX taped the 200 day SMA (418.89) intraday and rebounded for a modest loss. SOX lagged the market, but it is still holding the breakout above the 200 day. It has fully tested it, but it is still holding. That keeps it alive for a further upside move.
SP500/NYSE
The large caps retook the 50 day EMA but volume was lower than the prior two distribution sessions. Looks like a test before another move lower. One good sign: the small caps were out in the leader early and held up decently into the close.
Stats: +6.58 points (+0.56%) to close at 1190.8
NYSE Volume: 1.497B (-14.1%). Lower though average volume on the rebound shows there was no accumulation. It was average, but that was still lower than the prior two distribution sessions and lower than the upside volume in the prior move up. Will need to improve to punch it higher.
Up Volume: 1.028B (+752M)
Down Volume: 441M (-1.017B)
A/D and Hi/Lo: Advancers led 1.75 to 1. So-so breadth on the advance, another in a continuation of weakening in the advance/decline line.
Previous Session: Decliners led 3.62 to 1
New Highs: 97 (-117)
New Lows: 25 (-13)
The Chart: http://www.investmenthouse.com/cd/^spx.html
Gapped up and never undercut the opening price, posting a rather decent session. It retook the 50 day EMA (1188.52) but stalled at the 50 day SMA (1193.76), tapping that level on the session high. Lower, average volume, modest breadth. It was a decent rebound session. It did not, however, wrest control back from the sellers that sold the index lower as it tried to extend a modest breakout. They jumped on it and sold it harder than it rallied to the upside. Until there is a change to accumulation, that is the tenor, particularly given the price pattern versus the volume over the past two months.
The small caps were leading most of the session, but late in the day they weakened and faded into the pack, eclipsed slightly by the large caps. They held the 50 day EMA (320.49) and bounced nicely. It was nicer until they gave back 2.5 points (two-thirds of the gain) on the close. Still in the pattern (the handle to the 7 week cup base), but the handle has been more volatile than you would like to see. You want the last shakeout to be quiet as that shows the fight between the buyers and sellers is over and the next move shows the tenor. The high volume and significant point swings shows buyers and sellers still slugging it out. That usually means more time is needed to complete the consolidation.
DJ30
Blue chips bounced off their 50 day EMA (10,615) as well, taking back some of the 174 point thumping administered Tuesday. Volume was significantly lower, dropping to average as the Dow bounced. Did what it had to do given the drop to the 50 day EMA. The volume does not indicate it is ready to make a strong move; may take a bit more to consolidate out.
Stats: +62.59 points (+0.59%) to close at 10673.79
Volume: 268 million shares Wednesday versus 341 million shares Tuesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
THURSDAY
Durable goods orders are released Thursday along with initial jobless claims. We note that claims have dropped to near 300K and that the Fed made note of this in its minutes. Neither will probably be market moving. The better chance of a market mover comes from oil inventories released at 10:30ET (delayed because of Monday holiday). With oil prices spiking, inventories will add some fuel to the movement. When you think about oil price moves and the rhetoric lately, you have to just shake your head. OPEC was worried prices would tumble again so they made a big deal out of determining whether to cut production. They decided not to, but IF inventories rose significantly they would cut production without the need of a meeting. Now prices are spiking without a cut and with decent US inventories. OPEC is about as good at controlling oil prices as the Fed is managing the economy (and yes we know managing the economy is not the Fed's job, but that is what it tries to do at times).
As for the market action, the Wednesday relief bounce did not change the recent selling character. The markets remain in uptrends, but they were sold hard when they tried to break to the January highs. The price/volume action, declining breadth, lack of new highs, and shorter lifespan of breakouts mitigate against a strong upside move from here. At the same time SP600 held the 50 day EMA along with DJ30, and just a bit more selling on NASDAQ and SP500 sets up a rebound attempt with a potential double bottom. In short, the selling was not good, but outside of SP500, it was not all that bad. Thus the downside may not be huge either.
We are going to look for those leaders holding support and presenting a buying opportunity if the market can regroup, hold the line, and continue its move. The leaders will step out a bit ahead of the market as leaders often do. Thus a bit more pullback on NASDAQ, SP500 and company that holds the coming support levels may set a rebound if the intensity of the selling backs off a bit.
Support and Resistance
NASDAQ: Closed at 2031.25
Resistance:
2047, the June high is minor resistance
2050-54, prior resistance and the June high is stronger
2066 to 2070, the bottom of the January lateral move.
The 50 day EMA at 2072
The 50 day SMA at 2095
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:
2023, an early October 2004 peak.
2000
The 200 day SMA at 1982.85
S&P 500: Closed at 1190.80
Resistance:
The 50 day SMA at 1193.76
1196, the mid-January high and the early December peak in the left shoulder.
1200 acted as resistance before.
Q1 1999 lows at 1215
December high at 1218.
October 1999 low at 1233
Q2 2001 peak at 1310.
Support:
The 50 day EMA at 1188.52 is potentially support.
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 1140.69
Dow: Closed at 10, 673.79
Resistance:
10,754 is the February high
10,868 from the December 2004 high.
10,975 - 11,000 from Q4 2000, Q1 2001
11,350 from the May 2001 highs
Support:
The 50 day SMA at 10,653
The 50 day EMA at 10,615
Price consolidation at 10,600 level is a key level.
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 10,309
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
February 22
Consumer Confidence, February (10:00): 104.0 actual versus 103.0 expected and 105.1 prior (revised from 103.4)
February 23
CPI, January (08:30): 0.1% actual versus 0.2% expected and -0.1% prior
Core CPI, January (08:30): 0.2% actual versus 0.2% expected and 0.2% prior
FOMC Minutes, February 2 (14:00): Will continue to remove the policy accommodation to preserve low inflation, but will pick up the pace if required.
February 24
Durable Goods Orders, January (08:30): 0.0% expected and 1.1% prior
Initial Jobless Claims, 02/19 (08:30): 306K expected and 302K prior
Help-Wanted Index, January (10:00): 38 expected and 38 prior
February 25
GDP-Prel., Q4 (08:30): 3.5% expected and 3.1% prior
Chain Deflator-Prel., Q4 (08:30): 2.0% expected and 2.0% prior
Existing Home Sales, January (10:00): 6.75M expected and 6.69M prior
End part 1 of 3
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