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money investment, investment help
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03/08/05 Investment House Daily
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SUMMARY:
- Oil hysteria, interest rate fears sweep market lower.
- Financial stations feast on oil frenzy
- Fed Beige Book takes a hawkish tone.
- Rates jump through key level, egged on by several issues
- Stocks back to a do or die point as NYSE indices giving back breakout.
- NASDAQ, SOX continue about their business, but will that provide support to NYSE indices?
Oil and interest rates, the two keys for 2005, slap the market.
At the end of 2004 our preview of 2005 put two factors at the top: interest rates and oil prices. Our fear was not of higher rates but of a hyperactive Fed. Thus far the Fed has been in line, continuing with its slow rate hiking, even suggesting that with higher energy prices and their drag on the economy, rate hikes would have to remain measured. Oil remained a problem as well. Even though the hype from the fall had died down, prices had not fallen that much, finding a nice comfort zone in the mid forties. That is too high if prices sustain that level. Recently, they have been about $10 higher on some winter storm and summer supply worries even as supply has risen the past 5 months.
The market has behaved relatively indifferent to the rise in oil prices, but Tuesday the higher recent prices were coupled with a sharp drop in the bond market that pushed the 10 year treasury past 4.2% all the way to 4.5%. That break of some resistance along with the 400 stories on oil prices Wednesday were enough to whip up quite a bit of fear. We heard it in the voices of floor traders in New York and Chicago as talk of $80/bbl oil and spiking interest rates seemed to finally come to roost in the heads of traders and some money managers. You literally could not turn to a financial station without enduring yet another oil report. Reporters were literally breathless at times.
That sent the recent gainers lower. In other words, the NYSE indices that just broke out suffered the brunt of the selling. Even with that, it was not until the last half hour when the big money moved in and sold oil stocks hard that those indices sold sharply to the 18 day EMA. Up to that point they were just slipping modestly lower. Even with that selling, though on much sharper volume, they still held the 18 day EMA on the close. At the same time NASDAQ and SOX showed some relative strength, posting modest losses compared to the other indices. NASDAQ undercut its 50 day EMA on rising trade, but it was done in the last half hour as everything was thrown out as the fear of the day peaked.
As noted, the action had a lot of fear, almost panic, attributes to it as part of the market finally seemed to wake up to the idea that interest rates and oil prices could indeed be a problem for stocks in the future. In addition to hearing from floor traders about their clients who were spooked and hearing in the traders' voices that they were all lathered up as well, we saw some big money move in very late and sell energy stocks. The hype around oil Wednesday was huge; it doesn't get much better sentiment-wise. Even with that energy stocks were sluggish and then there were big block sales of XOM and others.
That told us that smart money was taking money out of energy stocks as the fever raged. Typically that means the sentiment has peaked. That does not mean the market is going to crash because money was taken out of energy. As seen Tuesday, money is moving around and went into techs and chips. Wednesday those two indices were relative strength leaders, and they could again be the beneficiary of the energy profits. That remains to be seen, but there was enough whipped up emotion Wednesday to make us decide to be patient and let this emotional crescendo run its course and quite probably lead to a rebound.
THE ECONOMY
Two stories dominated economic news Wednesday: interest rates and oil prices. Oil got more headlines but the real story for the market was most like the interest rate picture as rates broke a key level and the Fed's Beige Book appeared much more inflation oriented than recent speeches have indicated. But first, let's go with they hype and check out the oil patch.
Did you see that story about oil . . . ?
You may have missed a specific story but you could not miss the stories if you turned on the tube. Oil prices came within a hair of its prior high near $55/bbl, and with recent comments from OPEC about 'getting used' to the current levels, speculation about $80/bbl oil and even $100/bbl oil ran wild. CNBC ran a poll as to whether you thought oil would reach $80/bbl. I have to admit I did not wait to see the results. I have heard it all before back in the 1970's and early 1980's. Before that it was in the sixties. Oil has strong price cycles and weak price cycles. It is in a strong price cycle now, and as usual the hype is about how we are going to run out, prices will double, etc.
Many will scoff and say there is a real problem. There was certainly no scarcity of facts and figures thrown out on the airwaves Wednesday supporting rising prices out over the next 50 years. We saw those back in the seventies and eighties as well. There is certainly more demand today than before, but there were very smart people back then who swore that we would be out of oil in 15 years. By the mid-eighties it was $9/bbl. Sure there were maybe unique events to push prices that low, but there was certainly no question that the $100/bbl oil cited back then was way, way overblown and the product of hysteria as opposed to reason.
When the CEO of Exxon says that his own people who run the refineries and other units that use crude stocks tell him they are having no problem getting supply, you listen. When he says the current price of oil is in no way supported by actual supplies, you listen. When oil stocks rise for the fifth straight month and top expectations once more, you should take note. The big money was doing that Wednesday as they sold oil stocks into the peak of the hype. Again, the hype and then the negative reaction to the stocks that should be rallying on the news often indicates the end of that stage. Oil is not going to plunge to $40/bbl, but the emotion has gotten the best of the current move, and it is likely not going to move much higher on this run.
More calls for opening the Strategic Petroleum Reserve.
Some prominent congressmen were showing photos of gas prices to a small gathering of reporters. The $2+/gallon price said it all: gas prices are already way too high even with stocks high and the driving season still months ahead.
Their solution: open the SPRO. The administration was accused of twiddling its thumbs while opening the reserve would lower prices and we would all be happy. Pure drivel. Opening the SPRO maybe would have staved off that initial spike on speculation back in the fall when emotions were again high, pushing prices ahead of them. That window of opportunity was missed, and the prices have become entrenched with the $45/bbl range a pretty solid support level.
If you opened the SPRO today you would have about zero impact on oil prices and more particularly, gas prices. The Exxon CEO says there is no supply problems. Getting oil is not a problem. The problem for gasoline is getting it refined. There is little refining capacity in the US, and none of it is new. There has been no incentive to build plants in the US due to environmental regulation. It simply is not cost effective, and thus no new plants have been built in twenty years. We could have ships lined up for 100 miles into the ocean with crude and gasoline prices would not crash. They would fall back from this latest irrational spike higher (the move started even as gasoline inventories hit 5 year highs and were 20 million higher than last year at this time). If you cannot convert enough oil into gas fast enough and the perception is that the existing capacity will not be able to meet demand in the future, price is not going to fall appreciably. That is the problem we are facing right now.
Until there is some shift in sentiment that there is enough gasoline and summer demand can be met, prices are not going to be impacted by opening SPRO. That is old thinking. That does not take into account what is happening right now. It is like saying that the way to end the last recession was to spur demand just as has been done many times in the past. Problem is, there was nothing wrong with demand; investment was the problem. That is why the first tax cuts failed to do anything for the economy. You had to match the stimulus to the nature of the problem. When that was done the economic recession ended. The problem right now cannot be fixed anytime soon. You cannot plan, permit, build and open a refinery in a couple of months. This, as with our entire litany of energy troubles, is just one part of the problem that the lack of an energy policy has spawned. We might now even get to drill a postage stamp sized part of ANWR now. It can provide us 1M bbl per day for over twenty years, but we have put off drilling there for decades. None of the problems can be solved in the short term, and we are living with the results. Anyone want to talk about Social Security? Many would take the same approach and we will have the same results if we do nothing.
Beige Book adds fuel to already rising interest rates.
While some viewed the Beige Book report from the Fed as benign, it certainly contained many more references to potential inflation triggers. One noted right off the bat was the ease at which producers were able to pass price hikes along to their customers. This jibes with what we heard over six months ago in our own surveys, particularly those using metals. They were getting price hikes from their suppliers and were being told to take it or leave it. That sounds like pretty easy price hiking, and it reflects the higher prices we are all seeing whether in boats, washers and dryers, etc.
There were also reports of larger pay increases and scattered shortages of skilled labor. The northeast and Midwest saw most of the hiring. This smacks of 'wage-led' inflation the Fed likes to believe exists. History does not support the notion; one of the classic times it should have was in the 1990's but there was no inflation then. The Fed decided to crash the economy anyway, however, just to make sure it never showed up. You can also burn your house down so it doesn't get termites. Effective, but foolish. Nonetheless, the Fed believes it, and since it holds the money supply in its little paws the market has to take note of it. It did.
On top of that, reports supposedly out of China claimed that country was looking to diversify and tie the yuan to a basket of securities as opposed to the dollar. Now some have been clamoring for this as a way to help rectify the US trade deficit because as long as the yuan is tied to the dollar, it does not matter how far the dollar falls; the yuan will fall with it and we get no benefit from the falling dollar. Problem is, once the yuan is free of the dollar and starts to rise, all of the Chinese goods we import suddenly jump in price. Inflation. That is another reason the bond went spiraling lower.
After the report hit, the 10 year note yield moved over 4.5%, a point it has not been since last July. That is a key point as the note cleared some resistance and shot higher without hesitation. It seems as if the fact that the Fed is hiking rates and the history of open-ended hiking sprees has finally hit the bond market. 'Oh, the Fed IS raising rates and we know what the Fed does when it raises rates . . .' The bond market tanked and rates shot higher, finally reflecting some of the strength in the economy that was brought into question by the action in the long end of the bond market.
The issue seems to be swinging the other way completely as now there is worry about inflation popping up with all of this economic strength. The reality, however, lies with the Fed raising rates and not sure itself when it will stop. 'I will know neutral when I see neutral' as uttered by Greenspan is not something a market wants to hear. It just took a month for it to sink in. Bonds sold and stocks woke up and did not like reality versus the dream they were having.
THE MARKET
The breakout is on the ropes as SP500 and friends have fallen back on rising volume, actually cutting below the breakout point but holding a typical support level, the 18 day EMA. SP500 sold as many points as NASDAQ, something basically unheard of. NYSE volume was approaching NASDAQ as well. It is an uneasy point as they thudded down on that level on rising volume Wednesday. They are still in decent shape, but one of the problems with this market is the inability to deal with success. Make a breakout, get a sell target painted on your head. The Tuesday pullback was modest, the Wednesday selling getting nefarious.
Again, there was a lot of hype around the selling Wednesday as interest rates and oil prices whipped up the market. We suspect that was driving the action, and the hard selling in the last half hour was in large part an exodus from energy stocks. The small and mid-cap ranks are filled with oil and gas stocks, and when the money started leaving Wednesday these indices started to show it fast.
The market will still have to holds its ground from here. There are pullbacks and then there are breakdowns. You could argue the Wednesday action was the latter and you would not get a lot of resistance. Still, they held at the 18 day EMA and NASDAQ and SOX are still getting some of the money from the other indices. That rotation will have to really pick up, but these other indices will simply have to hold up here as well. A lot of the selling late Wednesday was on high emotion, but the indices will have to translate that into holding this level and continuing higher.
Market Sentiment
VIX: 12.7; +0.3
VXN: 17.8; -0.06
VXO: 12.59; +0.64
Put/Call Ratio (CBOE): 0.97; +0.10. Jumped quickly as the selling entered its second day.
NASDAQ
NASDAQ fell through the 50 day EMA on rising though still below average volume. Did not want to see the break through that point, but it is still basing.
Stats: -12.26 points (-0.59%) to close at 2061.29
Volume: 1.913B (+9.65%). Volume rose as NASDAQ sold back for the second session. A bit of a shift of the price/volume action, but still not bad as it is below average in the base.
Up Volume: 659M (+225M)
Down Volume: 1.215B (-80M)
A/D and Hi/Lo: Decliners led 1.97 to 1. Another session just below 2:1, showing a bit more pressure than we would want.
Previous Session: Decliners led 1.88 to 1
New Highs: 81 (-17)
New Lows: 71 (+12)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
The low volume gave way to stronger trade though still below average. NASDAQ undercut the 50 day EMA (2070) in the last half hour as selling across the market ramped up. Even with that, volume as noted, was below average. NASDAQ remains in its 9 week base but we want to see it hold 2050 or better on this pullback so that the handle it is trying to form remains intact.
Similar action as NASDAQ, NASDAQ 100 scaled back on rising volume, but performed decently, still working in its base.
SOX again held above the 18 day EMA (432.57), showing a doji and very few ill effects from the selling in the rest of the market. It is maintaining its 4 month reverse head and shoulders, still set up for the move higher. INTC gives its mid-quarter update Thursday after the close; may not move much before that tidbit.
SP500/NYSE
The large caps turned down hard, landing on the 18 day EMA on a sharp volume increase as the oils sold hard. This is where the rest of the market has to pick up the slack.
Stats: -12.42 points (-1.02%) to close at 1207.01
NYSE Volume: 1.703B (+11.85%). Strongest volume since the portfolio shuffling to end February. Maybe some portfolio shuffling out of the energy stocks as volume ramped as they sold off late. Cannot ignore the distribution, however, particularly after the breakout move. Has to hold here.
Up Volume: 377M (-68M)
Down Volume: 1.319B (+271M)
A/D and Hi/Lo: Decliners led 3.96 to 1. Very ugly downside. A lot of energy stocks are small and mid-cap stocks, and they were under the gun. The widespread selling, however, was not just due to energy stocks. Indeed, it was almost at an extreme level Wednesday.
Previous Session: Decliners led 1.83 to 1
New Highs: 125 (-76)
New Lows: 33 (+15)
The Chart: http://www.investmenthouse.com/cd/^spx.html
SP500 lost as many points as NASDAQ, meaning it vastly underperformed the techs. It managed to hold the 18 day EMA (1207.42) on the close, but was diving lower to that level when the bell rang. SP500 fell below the post-crash high (1218) and the February high (1215). This is the last near support to hold the move.
The small cap SP600 tanked lower as well, closing near its 18 day EMA (329.85). That leaves it right near the breakout point as well, but the small caps were big contributors to the very negative breadth. Overall it is good shape, but it also was under distribution coming off the high. Time to put up and move up or test the 50 day EMA (324).
DJ30
The blue chips were hit as well and sold to the 18 day EMA (10,800) also. Gee, volume finally came to life, moving back above average. XOM volume was over three times average (68 million; 11 million average); that pretty much made the difference in the volume. Gave back the post-crash high (10,868) but not in bad shape when you consider the source of the rising volume.
Stats: -107 points (-0.98%) to close at 10805.62
Volume: 267 million shares Wednesday versus 205 million shares Tuesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
THURSDAY
INTC's mid-quarter update is Thursday after hours. That will be after the fact. The important action will occur long before that. Stocks finished on the low and that typically leads to more downside to start the next session. After an undercut we are looking for the sentiment to shift and stocks to rebound. This is based on the strong sentiment Wednesday, the higher put/call ratio, and the general emotional selling tied to oil prices and interest rates. Those are real problems confronting the market, but Wednesday gave signs it was overdone already; by the time they were perceived as trouble the trouble had already come.
The action was pretty much in step with this market: up a bit, back a bit, etc. If there is anything left in the break upside, it should start showing up by the end of the week. Wednesday was not a vote of confidence for the market, and once more it will have to perform just when it looks as if it has given up for dead.
Support and Resistance
NASDAQ: Closed at 2061.29
Resistance:
2066 to 2070, the bottom of the January lateral move.
The 50 day EMA at 2070
The 50 day SMA at 2078
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:
2050-54, prior resistance and the June high is stronger
2047, the June high is minor support.
2023, an early October 2004 peak.
2000
The 200 day SMA at 1990
S&P 500: Closed at 1207.01
Resistance:
Q1 1999 lows at 1215
December high at 1218.
October 1999 low at 1233
May 2001 interim peak at 1266.
Q2 2001 peak at 1310.
Support:
1196, the mid-January high and the early December peak in the left shoulder.
The 50 day SMA at 1195
1185, the top of the November consolidation range.
1175 second high in that double top that spanned late 2001.
Dow: Closed at 10,805.62
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:
The 18 day EMA at 10,800 is trying to hold.
10,754 is the February high
The 50 day EMA at 10,691
The 50 day SMA at 10,677
Price consolidation at 10,600 level is a key level.
10,400, the bottom of the November/December range
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
March 07
Consumer Credit, January (3:00): $11.5B actual versus $5.2B expected and $8.7B prior (revised from $3.1B)
March 10
Initial Jobless Claims, 03/05 (08:30): 310K expected and 310K prior
Wholesale Inventories, January (10:00): 0.6% expected and 0.4% prior
Treasury Budget, February (2:00): -$98.5B expected and -$96.7B prior
March 11
Trade Balance, January (08:30): -$56.8B expected and -$56.4 prior
End part 1 of 3
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