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world stock market, us stock market
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3/12/05 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Target hit alerts: MDRX; ALVR
Buy alerts: CNX; HE
Trailing stops: None issued
Stop alerts: FLSH; FSL; ISLE; PRFT; SHFL; TV
SUMMARY:
- Friday rally fails to materialize as techs and chips struggle.
- Trade gap grows even as exports hit a record.
- Money supply creeps up but still trending lower overall recently.
- No surge of sellers, just a lack of buyers send indices to 50 day EMA.
- Expiration week to add volatility as stocks try to hold the 50 day EMA.
- Subscriber Questions
Stocks run out of gas again.
The Friday rally lasted about 15 minutes. Less than one-half hour into the session stocks peaked and started lower. An intraday lateral move lasted 3 hours and then failed mid-afternoon. Very similar action to that in January when the market was trending lower: tried to set up an intraday consolidation and then failing in the last hour. The action summed up the week, finishing on the lows.
After a breakout the prior week in the face of rising oil prices, last week saw oil and rising interest rates take back what was just gained. Ironic as well since the oil hype hit a peak last week just as the oil stocks started to sell. Energy futures indicate a price around $43/bbl, big money started leaving oil stocks, and the Exxon CEO said supply was no problem. But of course the market, despite the minute by minute ticker on oil on the financial stations (it now has its own bug in the corner of the screen), does not care about where oil is this minute but what impact it will have on earnings and thus stock prices down the road. Thus even as oil stocks fell purportedly in anticipation of some lower near term prices, the market fell as well in part on the problems associated with longer term high prices.
Of course part of the problem with the market was the fact that oil stocks fell. Oil, metals, and basic materials had led the market higher, and last week they were all falling. SP600 and SP400 were hard hit as many of the smaller oil and gas companies reside there. At the same time NASDAQ and SOX were relatively unscathed, at least until Friday. After selling all week the NYSE indices held up fairly well Friday while NASDAQ and SOX were under fire. The switch coincided with a bit of renewed strength in steel stocks (good earnings update from Nucor) and oil stocks bouncing back a bit. Overall, however, the market was hit because three of the leading sectors, steel, materials, and energy, sold off pretty hard.
Thus the market sold because some of its strongest components that had led higher sold off. The business of those leading stocks, however, is something, at least in the case of the oil stocks, that can ultimately lead to trouble for the market. So, was it just some selling in leading stocks that caused the pullback or was it the market factoring in the impact of higher oil prices and rising interest rates? Kind of like the chicken or the egg.
By Friday the NYSE indices had pretty much sold out. At least they ran out of time to sell more. The small and mid-caps were the relative strength leaders after lagging the entire week. They closed above the 50 day EMA along with the SP500 (though SP400 held the 18 day EMA, showing the best strength) on lower volume, a good place to rebound. I will put it this way; the big money will either step in at this point to buy or it won't. After one big heavy day of downside volume, trade tapered to close the week. It was not a downside blow down, but the breakout was clearly given back. Now these indices are in the position of needing to rebuild and set back up.
NASDAQ finished the week breaking below some support at 2050 where we wanted it to hold to continue the formation of its handle. The base has not failed, it just is taking a turn that will require a bit more time to complete the pattern. Volume was lower on the selling than the upside to start the week, so there was no real distribution, just a lack of buyers.
That pretty much sums up the finish to the week: sellers did not drive stocks into the dust, buyers just melted away. Oil prices and interest rates may have come to roost on the market, but outside energy, materials and steel there was not a lot of heavy volume. The buyers from the prior week just walked away and stocks fell. Now that the NYSE indices are back to the 50 day EMA we will see if they step back in.
THE ECONOMY
Trade gap bigger than expected but no record.
Okay, it was the second largest of all time. $58.3B versus expectations of $56.4B and December revised higher to $55.7B. That was a 4.5% increase in the gap versus the 6.2% drop in December. Exports were strong, rising to $100.8B, a new record. That was up just 0.4%, however, versus the 3.2% December jump. Even with those record exports the gap widened as imports rose 1.9% to $159.1B. Oil was not the culprit. Electronics (televisions, DVD's) and foreign cars were strong. Also very strong was cotton apparel.
Cotton apparel? Imports from China surged 8% ($281M) after the import quotas were allowed to expire early this year. That put the gap with China at $11.5B from $9.9B; even OPEC does not compare at $4.7B. The elimination of quotas are already drawing fire as being the death of US apparel manufacturing. It may be the case. We are also going to see a lot of less expensive clothing from China, India, and Pakistan. Consumers benefit, specific industries suffer. Something of the Wal-Mart syndrome: low prices are benefiting millions and millions of citizens but there is the negative impact on the smaller shops that are pushed out of the market.
WMT is an interesting case study with advocates on both sides, particularly on the issue of blocking expansion into certain areas. On the one hand the free enterprise advocates say that WMT should not be blocked by local regulations form locating where it wants. They want to market to answer the question: if people don't want the WMT there they won't shop there. On the other side there are those wanting to use zoning and other initiatives to block WMT from their areas. The free market advocates cry foul, but when you think about it, this is how it works here: WMT is a success, so much so it is being hemmed in some by those who don't want it around. There is nothing wrong for local jurisdictions blocking a business if they don't want it. As long as it is what the people who live there want then that is free enterprise at work.
Gap widens for the same old reasons.
Anyway, the trade gap continues to widen. Some continue to browbeat the US consumer as spending too much. We have an economy growing at 4%. That is pretty darn prosperous and prosperous people consume. The problem is other countries with economies at best stuck in the mud. They are not consuming much of anything and thus their industries are more than happy to sell to the US.
Case in point. The Organization for Economic Cooperation and Development's leading indicators posted the third straight monthly gain ending January. The greatest area of gain and future growth prospects: the US. On the other hand, the Euro zone's indicators declined. Their economies are not strong enough to employ their populations and thus support solid domestic consumption. So they pack up the goods and ship them to greener pastures.
Money supply edges higher.
Last week the talk was about oil and interest rates as the 10 year note moved base 4.50%, the highest since July 2004. That has an impact on mortgage refinancing (it faded again this week for the third week in a row), and it also suggests that the prior yield curve flattening and the economic slowing it implied are not a hot point for the economy and helps solve the Greenspan 'conundrum.'
Again, money supply was ignored. As we have discussed in the past, money supply is the lifeblood to the economy. Rates can be high, rates can be low, but the underlying money supply is the key to whether the economy can get the lifeblood it needs to expand. It has been falling even with modest, 'measured' rate hikes. That puts pressure on the economy. Thus far it has not stalled it out, but this is how the Fed stalled out the economy in 2000, and one of the reasons it had a hard time getting going again even as the Fed cut rates. Money supply was still very low even as rates were dropping laterally. The Fed was at first too concerned about re-inflating the 'bubble.' After 9-11 it finally loosened up the purse strings.
Money supply has been contracting faster than the interest rate hikes of late. Last week it improved with M2 rising to $6.4458T, M3 +$16B to $9.5628T, and M1 +$2.3B to $1.3722T. It is still on a decline for now, however, and that will have more impact on the economy, at least a faster impact, than rate hikes. The levels are still allowing the economy to function and expand, but just as with sustained rising oil prices, the impact will start having an impact.
Economic data to ramp back up.
After a lull in the data, this week is loaded with retail sales, regional manufacturing surveys, leading indicators, current account, industrial production, etc. The interesting aspect of all of the data is continuing improvement in the face of rising oil prices and now jumping interest rates. The data is a bit behind the times as oil is higher and so are rates.
THE MARKET
The NYSE indices pulled the classic breakout one week then a turn right back down that gave back the breakout move. Volume was sharply higher on one key session as the market made its roll back over. That distribution showed some unloading of stocks that were just bought on the breakout.
Stocks tried to rebound a bit but faltered and closed lower Friday but on lighter volume. Not a lot of distribution last week, but enough to send the breakout back to the drawing board. Holding the 50 day EMA is at least a good point to start the week. NASDAQ appears to have more work to do as well as it slipped deeper into its base, unable to hold a lateral move to set up the breakout. In short, the moves were given back but no serious breakdowns.
Market Sentiment
VIX: 12.8; +0.31
VXN: 18.57; +0.69
VXO: 12.96; +0.43
Put/Call Ratio (CBOE): 0.99; -0.02. Holding at a very high level. Wednesday it closed at 0.97, Thursday at 1.01, and just a marginal drop Friday. Holding at levels that can prompt a rebound, and with the NYSE indices sitting on the 50 day EMA or higher, a rebound could very well be in order this week.
NASDAQ
Techs are still in their base and trading on below average volume, but Friday it slipped below some support at 2050 and it will have to regroup and continue its basing.
Stats: -18.12 points (-0.88%) to close at 2041.6
Volume: 1.8B (-2.22%). Lower and continued below average volume shows there are not a lot of sellers in the market, just a lack of a lot of tech buyers. Not something unfamiliar during the past 6 weeks as NASDAQ works on its 2005 base.
Up Volume: 522M (-337M)
Down Volume: 1.254B (+300M)
A/D and Hi/Lo: Decliners led 1.21 to 1. Very modest negative breadth once more as NASDAQ went out of the week with a whimper.
Previous Session: Decliners led 1.46 to 1
New Highs: 54 (+10)
New Lows: 92 (+22)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
NASDAQ was unable to hold support at 2050 and thus continue its handle to the 10 week base. That indicates it will do some more basing as opposed to putting the finishing touches on the pattern right here. Bigger picture, NASDAQ is forming a base on base pattern, building a new pattern right after the long 2004 base and end of year breakout. That breakout was on low volume so there was not widespread support for that move. It is now trying to work out the sellers and set up the next breakout. Again, the inability to hold 2050 will likely mean that NASDAQ has a bit longer time to base out.
NASDAQ 100 was under more pressure Friday as the large cap techs were unable to hold any positive ground on the INTC and NSM news. They suffered more than overall NASDAQ (-1.2%), falling toward the bottom of their 2005 base. Already near the bottom of the base, the index did hold support at 1500.
Intel's update did well after hours Thursday but was not nearly enough to support chip stocks overall. SOX was showing the relative strength, holding its 18 day EMA (432.82) all week, setting up for the next move higher. That did not hold up Friday as chips fell hard through the 18 day and landed just above the 50 day EMA (424.68). It is still in its 16 week reverse head and shoulders, but as with NASDAQ, this move means it is going to take some more time to complete the base and try the breakout.
SP500/NYSE
Large cap sold again Friday, unable to turn Thursday's rebound into anything positive. Held the 50 day EMA on the low and volume was low so it still has a chance to regroup and rebound.
Stats: -9.17 points (-0.76%) to close at 1200.08
NYSE Volume: 1.448B (-9.63%). Volume fell below average as the large caps fell to the 50 day EMA. A silver lining. Indeed, outside that one clear heavy day of distribution last week there was no real dumping of shares. Holding above the 50 day EMA Friday at least keeps set up for this week.
Up Volume: 524M (-245M)
Down Volume: 885M (+75M)
A/D and Hi/Lo: Decliners led 1.53 to 1. Decliners were once again in the modest realm as the small and mid-caps were able to stop the bleeding from earlier in the week. The A/D line has continued to dip, but it is still holding above its January low and maintaining its uptrend.
Previous Session: Decliners led 1.4 to 1
New Highs: 82 (+21)
New Lows: 39 (+12)
The Chart: http://www.investmenthouse.com/cd/^spx.html
A momentary move above the 10 day EMA Friday caved at the February high (1215) and reversed for a the third loss in four. SP500 managed to hold the 50 day EMA (1197), tapping at that level on the intraday low and then rebounding modestly to close. It managed two things: held the 50 day and closed above 1200 again. It gave up the breakout from the prior week but as noted, there was only one really nasty day of distribution (Wednesday), and by Friday the leading small and mid-caps had stopped their selling. Holding over the 50 day EMA, it is set up this week to try a rebound.
SP600 was under serious pressure Tuesday through Thursday as the small oil and gas stocks were getting filleted. Made no attempt to hold the 18 day EMA (329.30), falling right through on Thursday. Friday it showed a doji over the 50 day EMA (324.56), never coming down to tap that level during the selling. As with SP500, holding over that level is a positive for next week, but with that plethora of small oil and gas stocks it may have some trouble making the move off this key support.
The mid-cap SP400 held the best of the indices, showing a doji at the 18 day EMA Thursday and another one Friday, closing above that level again Friday. We note that it held over the late December high in so doing, a sign of some real strength. Could be a source of leadership this week.
DJ30
The blue chips sold as well, undercutting the 18 day EMA (10,802), but holding over 10,754, the February high. Volume was up again but was also still below average. It too has given back last week's breakout, but it is holding well above the 50 day EMA (10,701) and it too is in position to bounce this week.
Stats: -77.15 points (-0.71%) to close at 10774.36
Volume: 243 million shares Friday versus 224 million shares Thursday.
The chart: http://www.investmenthouse.com/cd/^dji.html
THIS WEEK
We will see a lot more economic data this week, and thus far the economy appears to be chugging right along with a 4% growth rate. The larger than expected trade gap will pare back some of the estimates (imports are subtracted from GDP), but as we know, when the US is prosperous it runs trade gaps. It has done so for decades, in good times and bad, sickness and health, etc. There is no reason to expect this data to show weakness, other than the impact of higher oil prices.
To this point oil prices have not hurt growth, or if it has, the economy is much stronger than expected. If oil is impacting the economy, just think where GDP growth would be right now. More than likely, the full impact of these sustained $40+/bbl has yet to be felt. To that point, the data this week will not be all that telling because it is mostly ancient history. The regional manufacturing data will be the most real time, and the leading indicators will provide some more insight into the next several months.
As for the market, the small and mid-caps showed some life to end the week after leading lower during the early week selling. They as well as the SP500 and DJ30 are still over the 50 day EMA and in position to rebound this week. The early week distribution was sharp but limited in duration.
Expiration is Friday and that typically leads to early week volatility. The NYSE indices are set to rebound, but the early going action could be up and down around that 50 day EMA level as positions are set for expiration. We have a feeling still that last week's realization regarding oil and interest rates will not break the market down at this point, that there is still some upside here before the summer slowdown.
We will be looking to pick up leading stocks that have come back to test their breakouts, the 18 day EMA and even the 50 day EMA in this selling. Holding those levels, particularly the first two, shows strength that much of the market does not have. That is a natural ambush point to move into the leaders after some selling such as last week put a scare into the market.
Support and Resistance
NASDAQ: Closed at 2041.60
Resistance:
2047, the June high is minor support.
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 2069
The 50 day SMA at 2073
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:
2040 is some minor support.
2023, an early October 2004 peak.
2000
The 200 day SMA at 1992
S&P 500: Closed at 1200.08
Resistance:
The 10 day EMA at 1209.
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:
1200 continues to hold on the close.
1196, the mid-January high and the early December peak in the left shoulder.
The 50 day SMA at 1195 and the 50 day EMA at 1197.
1185, the top of the November consolidation range.
1175 second high in that double top that spanned late 2001.
Dow: Closed at 10,774.36
Resistance:
The 10 day EMA at 10,830.
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 50 day EMA at 10,701
The 50 day SMA at 10,676
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 15
NY Empire State Index, March (08:30): 20.5 expected and 19.19 prior
Retail Sales, February (08:30): 0.6% expected and -0.3% prior
Retail Sales ex-auto, February (08:30): 0.8% expected and 0.6% prior
Business Inventories, January (10:00): 0.6% expected and 0.2% prior
March 16
Current Account, Q4 (08:30): -$182.3B expected and -$164.7B prior
Housing Starts, February (08:30): 2043K expected and 2159K prior
Building Permits, February (08:30): 2070K expected and 2132K prior
Industrial Production, February (09:15): 0.5% expected and 0.0% prior
Capacity Utilization, February (09:15): 79.3% expected and 79.0% prior
March 17
Initial Jobless Claims, 03/12 (08:30): NA expected and 327K prior
Leading Economic Indicators, February (10:00): 0.2% expected and -0.3% prior
Philadelphia Fed, March (12:00): 20.2 expected and 23.9 prior
March 18
Export Prices ex-ag., February (08:30): 0.7% prior
Import Prices ex-oil, February (08:30): 0.2% prior
Michigan Sentiment-Preliminary, March (09:45): 95.3 expected and 94.1 prior
SUBSCRIBER QUESTIONS
Q: I've hears a lot of talk about the Phillip's Curve and its so called accuracy. Would you please share your thoughts on its performance and accuracy as to the market's present and future activity? Thank you. I very much appreciate your insight and advise.
A: The Phillips Curve is an economic theory that is avidly followed by some and equally disdained by others. Basically it is the 'speed limit' theory describing economic activity in relation to inflation. In general, the 'Curvers' believe that there is a limit to the level of growth that can be sustained without inflation. Too much employment, solid wage growth and a bustling economy send fear into these economists. In short, real prosperity is something they want to avoid because they believe strong growth leads inevitably to inflation.
This is the bug that got into Greenspan's head in the late 1990's. He became convinced that inflation had to be just around the corner because GDP growth was strong and sustained while unemployment was very low. He cleverly couched his fears in terms of 'new' inflation indicators, but the underlying theme was that there was too much prosperity and it scared him. We still remember Broaddus, one of the FOMC members at the time, stating that employment needed to be lower. Again, prosperity was the fear of these economists. They espoused free markets, but when we actually had prosperity they reverted to their old textbooks and crashed the economy. Ironically, they did exactly what the 1920's central bank did, i.e. chased non-existent inflation with rate hikes and lowering the money supply until the market and then the economy cracked. They feel their theories were correct, but that is like taking credit for putting out a 4 alarm fire after you started it.
The fascinating thing is, the Phillips Curve has, outside a six year period in US economic history, never applied to the real world facts. Economists who were Curvers were baffled in the 1970's when there was economic decline, high unemployment, but soaring interest rates. That did not fit the equation, but they kept treating it as if it did, applying PC (Phillips Curve, not politically correct) theories. All that caused was the worst recession since the Great Depression. It is an example of how the theory did not apply in a bad economic time.
Indeed, the recession did not end until supply side theories were put into place in the early 1980's using the Laffer Curve. That theory plots taxes revenues against tax rates. At too high of rates there is no incentive to take risks and invest and thus tax rates fall. If you lower taxes from high levels, the economic activity increases and thus tax revenues increase. Lower tax rates equals more tax revenue. That set off a binge of investment that led to the 20 year boom. GDP and tax revenues soared, unemployment tanked. Inflation? It was a no-show even up to the point where the Fed crashed the market and economy in fear of non-existent inflation.
These are just two examples, one a good time and one a bad time, where the Phillips Curve did not apply to the real world facts. Unfortunately, there are many who still adhere to this discredited theory. They may not say it openly, but when things are good they start to play defense instead of staying on offense. The Fed is this way. When you hear talk of economic 'speed limits', that is just a euphemism for the PC. That is the real fear once more, i.e., that we have a prolonged expansion and the Fed fears the wrong things will cause inflation.
Prosperous, productive, employed people don't cause inflation. They are part of the reason we have prosperity. Policies that limit investment, restrict money from where it would naturally flow, and promote demand over supply are the cause of inflation. If supply is not restricted it will not only meet demand but it will create demand. An example is the PC. There was no market for PC's and as you recall in the early days of the devices the common question was why would anyone need a computer. The PC made its own market when everyone realized in fact they did need a computer. It was not the market demanding a computer for the home, it was the investment in technology that made the PC possible that created the market. People generally don't need many of the products nanotechnology is producing (e.g. nano-fiber self-cleaning pants versus cotton pants), but once they see them and what they can do there is demand for them. Supply creating demand.
The fear for the economy is that the Fed adopts policies that are PC related as opposed to free market related, and it cuts off the money supply once more. After Greenspan leaves there will be a power vacuum. The administration will need to appoint a strong free market thinker to fill his place and fight off the many on the Fed (now that McTeer is gone) who believe there is a 'speed limit' for the economy. The market last week was pondering the Fed getting too aggressive, just as we have discussed earlier this year as one of the keys to the market's performance in 2005. If the Fed gets too aggressive and does not provide any insight into when it will quit hiking rates, and if it continues contracting the money supply into the future, the economy could have a real struggle in the summer.
End part 1 of 3
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world stock market
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