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world stock market, us stock market
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3/16/05 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Target hit alerts: NMGA
Buy alerts: UPS; ULTI; MHP
Trailing stops: GET; GRP
Stop alerts: CWTR; STLD
SUMMARY:
- SP500 breaks below 50 day EMA as volumes climb again.
- Stronger housing starts, production cannot offset twin troubles for 2005 market and economy.
- Oil spurts higher on higher inventories, underscoring the hype in the market.
- GM a lesson in economics.
- More volume but no volatility as stocks head lower toward expiration.
- More downside before another serious attempt at the next move higher.
Downside move continues as investors find no solace in economic data in the face of oil prices and interest rates.
GM gave a serious warning, the current account imbalance hit a record, and after an hour into the session oil spiked to a new dollar high. Too much for stocks to handle. After a weak open on weak futures NASDAQ had fought its way back to positive and was looking pretty decent. Then the oil data hit, and while crude stocks rose 2.6M bbl, gasoline and distillates were sharply lower, and that choked off the rebound attempt. Stocks stumbled and then trended lower for the rest of the session with no serious attempt at rebounding.
SP500 broke below the 50 day SMA, rebounded to test that level and failed. Volume rose as it did, and that is a bad technical indication. Yes it is expiration week and some of the volume is attributable to position shuffling ahead of expiration, but when volume accompanies a breach of key support that is always an indication of more than just some position shuffling.
Short term sentiment is pretty negative at this point given the breakout failure and now SP500, one of the leaders in the breakout attempt, piercing the 50 day SMA. Typically an index that breaches key support will sell quickly after doing so but then come right back for a test of that breach. It either recovers that level or it fails and opens the door to further downside. Thus we are anticipating a bounce Thursday or Friday toward the 50 day EMA. The high volume breach of this level is not a good indicator, but how the index trades when it makes the test will tell how much more downside or basing is needed. Wednesday most everything was negative, but that in itself is part of the process of reversing the selling.
THE ECONOMY
Production, capacity utilization, and housing starts are good, but not good enough Wednesday.
More solid economic data was released Wednesday, but with current market worries about oil prices and interest rate impacts upon the economy, investors decided past data does not indicate future results. As oil prices rallied higher, investors decided to step aside once more at current stock price levels.
Production rose 0.3% in February, just below the 0.4% expected and solidly higher than the 0.1% rise in January. Capacity rose to 79.4, better than the 79.2 expected and 79.0 in January. Housing starts rose 0.5% to 2.193M annualized units, a new record. Once more the economic data continues to show an expanding economy.
Oil prices offset good economic data.
Month old data, however, does not have the impact of rising oil prices and a rate hiking Fed in factoring future stock prices. The market was able to break higher earlier this month in the face of those issues, but the move did not last long as concerns continued to run higher about oil, interest rates, and a stagnating money supply.
Wednesday oil inventories were released and overall inventories rose 2.6M bbl. Gasoline fell 2.9M bbl and distillates dropped 1.9M bbl, however, and that appeared to be the market's focus. Interestingly, it was oil prices that rose to record levels, at least as measured in unadjusted dollars, even though supplies overall continue to climb. Distillates and gasoline are more a refining issue than a supply issue. Thus one would expect their price to rise when their inventories fall, not crude prices when supply continues to steadily improve.
That shows there is still a lot of speculation and hype surrounding this latest spike higher. If there is any negative news with respect to anything petroleum, prices rise overall. Wednesday that pushed oil prices over $56/bbl, and even though sentiment is getting extreme here, as noted last night, sentiment extremes don't offer timetables as to when the extreme will correct. Thus while we believe oil will fade from this recent spike, the timing depends upon the strength of the current speculation.
Q4 current account hits a record deficit as we threaten to make the same mistakes of the past.
$665.9B is a record for a year. In Q4 the deficit was $187.9B, a record for a quarter itself. The current account is the broadest measure of trade with the world. It includes goods, services, investment inflows, etc.
This gap is one of the issues many deficit hawks fear. The theory is at some point no one will want to trade with us because of too much debt. Problem is, no one knows what that level is. There is speculation it would be at 5% of GDP. That did not do it. So, there was speculation that 6% of GDP would cause problems. Not happening yet. Indeed, no one knows so once more we are shrinking from shadows, fearing the unknown.
Certainly it is not causing any decline in the level of foreign investment in the US. As seen Tuesday, countries are still falling over themselves to buy US securities of all types. We have discussed at length their rationale for doing so, primarily to keep their US consumer driven economies alive.
There has been recent talk from Korea and even Japan about 'diversifying' their currency holdings out of the dollar. When you think about it, however, this has the look of a self-fulfilling prophecy that likely won't come to be. There has been so much talk about at what point foreign central banks may balk at funding the deficit that they actually start thinking about it when they were not worried about it before. This is not the first time we have talked ourselves into trouble. We did it back in 1999 and 2000 worrying about inflation and the possibility of a market and economic crash because of the heights of success we were enjoying. Sure enough we talked ourselves into taking the actions that, in an effort to avert a crash, actually brought about the crash.
Greenspan started all of this nonsense with his speculation last year in a thinly veiled attempt to get Congress to stop spending by threatening to fight the trade deficit and dollar weakness with the interest rate club. Not long after that we heard that talk from Korea and Japan. That is one major reason we have heard and seen Greenspan out on the stump the past month assuring the world that the trade gap and current account would heal themselves. He went too far with idle speculation just as he did when he and the Fed speculated that the 'wealth effect' would cause over-consumption and inflation (as we reported a few years back, after the crash he shockingly admitted the Fed simply was not sure if this was actual fact). Now he is trying to take it back before it gets out of hand and indeed becomes another self-fulfilling prophecy.
Markets are emotional entities. They are thus very touchy and susceptible to suggestion, particularly when one of the most respected financial minds in the world freely speculates about what may or may not happen. Greenspan appears to have realized the error of his speculation and is trying to grab the words out of the air and take them back.
GM's woes are a microcosm of the future US economic problems.
GM's profit fell 37% in Q4. It expects Q1 earnings to lose $1.50 per share. For the full year it expects $1 to $2 profit, well below the $4 to $5 previously expected. Ouch. Lower SUV and truck sales as gasoline prices rise and more incentives are demanded by consumers. The market isn't great, but that is not really GM's long term problems. The market softens, the market surges. The problem with GM is its ability to adjust to the changing market is hamstrung by its entitlement programs.
The auto industry is always changing as there is always strong foreign competition. GM now faces stiff competition from Japan with their entry into full-size trucks the past year. Okay, that is normal. You adjust and meet the challenge. Problem is, GM and other US automakers cannot do that.
GM's labor agreements make it more of a healthcare and pension company than an automaker. A staggering portion of the cost of every vehicle GM makes is the cost of worker healthcare and pensions much higher than anything Japanese automakers have to pay for their workers. What if GM wants to idle a plant because inventory is too high? It can do it, but it has to pay the workers over 90% of their pay. It is almost to the point of why bother because it certainly won't help the company make it through the rough times. In short, GM has contractual obligations it has made that ultimately will drag it down because it simply cannot continue as it is and compete with the world auto market. It has effectively collectively bargained its way out of being competitive.
Compare with the US. Mathematically we will not be able to pay for social security and Medicare. There are not enough people paying in to pay for the recipients. If taxes are raised to make up the difference the economy will decline and even further limit the ability to meet the shortfalls from the entitlements. We have also made promises that a changing world and changing demographics will not allow us to meet, at least under the current system. Just as with GM, the US needs to restructure its operations and its methods of paying its obligations. Failure to do so means a failure to compete with the rest of the world and will eventually relegate us to a second rate economic power.
THE MARKET
Stocks fell harder Wednesday when the oil data came out. NASDAQ actually was moving higher when spiking oil prices took the legs out from under techs. They headed lower and followed SP500 down as the large caps broke the 50 day EMA. NASDAQ is still in its base though it is distributing now. SP500 has totally given up the breakout attempt and is seeking its new bottom in this selling. The small caps were relative strength leaders again Wednesday, and if there is any possibility of a near term rebound of substance, the small caps will be the leaders.
That does not look too likely given the volume break through the 50 day EMA, but we also have to remember that it is expiration week and volume is pushed higher during that week and moves can be skewed. For the large caps and techs look to be in for more basing as this selling officially puts the 'failed' label on the SP500 breakout attempt. As noted, the small and mid-caps are trying to hold the line but there is a lot of weight from the large caps. All in all the action converted to negative with the failed breakout, and the increased volume selling has further eroded the upside potential. Expiration week has skewed some of the action, but the higher volume selling below support is a continued negative short term.
Market Sentiment
VIX: 13.49; +0.34
VXN: 19.01; +0.33
VXO: 13.85; +1
Put/Call Ratio (CBOE): 1.05; +0.20. The put/call ratio remains high. Obviously some of the activity this week has been expiration related as it the ratio has spiked on up days and dropped on down days. Wednesday the action was what you would expect with put activity spiking on a sharply lower session. Even with the skewing because of expiration week, this is still a positive for a coming rebound in the market.
NASDAQ
NASDAQ continued lower Wednesday, its second hard drop in as many sessions. Volume jumped as it seeks the bottom of its 11 week base.
Stats: -19.23 points (-0.94%) to close at 2015.75
Volume: 2.002B (+8.2%). Not quite average, but a 2 billion share session has been a rarity on NASDAQ as it has based. You don't want to see volume spike in a base, particularly to the downside. Not fatal, but not something that can continue of NASDAQ is going to hold the bottom of its base and continue building for an eventual breakout.
Up Volume: 407M (-167M)
Down Volume: 1.567B (+401M)
A/D and Hi/Lo: Decliners led 1.81 to 1. Bad but not horrid. Techs remain under pressure but not as much as the large caps.
Previous Session: Decliners led 1.68 to 1
New Highs: 38 (-39)
New Lows: 91 (+18)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
Techs gapped lower, tried an early rebound to positive territory, but then gave it up. A surge lower with the rest of the market closed it near the session low and just over the February low (2008) and the 200 day SMA (1992). It seems destined to test those as it dropped on the strongest volume of the month.
NASDAQ 100 managed to find its way to the 200 day SMA (1482) already. The large cap techs are struggling a bit more than the overall index, but both are in the tank currently, testing the bottom of their 2005 base.
The chips are down and NASDAQ is as well. SOX fell to the 200 day SMA (416.70) as it teeters on the verge of its own breakdown after forming a nice 15 week reverse head and shoulders base. It is do or die time for the chips.
SP500/NYSE
The large caps gave up the 50 day EMA with some authority, slicing through that level and failing an intraday test as volume pushed back above average.
Stats: -9.68 points (-0.81%) to close at 1188.07
NYSE Volume: 1.653B (+8.67%). Volume moved above average for the first time in a week, and the return of stronger volume was once again associated with selling. Large caps are under distribution, and no doubt the volume was pushed higher by GM's 10x average volume. That was not the entire story, however. Options expiration and piling on as SP500 broke below the 50 day EMA made up the rest.
Up Volume: 429M (+25M)
Down Volume: 1.199B (+100M)
A/D and Hi/Lo: Decliners led 2.61 to 1. Ugly downside as NYSE stocks were down across the board. Small caps were relative strength leaders, but they were still down 0.5%.
Previous Session: Decliners led 1.99 to 1
New Highs: 49 (-62)
New Lows: 64 (+32)
The Chart: http://www.investmenthouse.com/cd/^spx.html
The large caps started week and unlike NASDAQ were never able to mount any kind of a rebound attempt. Midday they rose some, but failed when they reached the down trendline formed by the early lower high. Undercut the 50 day SMA (1195) and failed an intraday test. On the low it did manage to hold some support at 1185 and bounce slightly into the close. It is still hanging in mid-flight after the Wednesday drop, however, and it seems unlikely that it will mount any serious recovery attempt before a tap toward 1175. It could to that intraday Thursday, however, and set up a rebound move toward the 50 day. For now it the character is negative and it needs to flush that out with another move lower before it can have a successful run back to take on the 50 day.
SP600 held at the 50 day EMA (324.86) on the low. That still keeps it well into the upper end of its base though it too has failed its early March breakout attempt. It is still in position to rebound given the close above the 50 day EMA, but that is what SP500 could have done as well. It needs to lead here, but it has a lot of drag on it from the other indices.
DJ30
The blue chips' prospects were grim before the open with the GM news, and they lived up to the pre-market billing. DJ30 sliced through its 50 day EMA (10,703) on the first above average volume in a week and only the second above average volume session of the month. As with SP500, that other session was a selling session as well. Heading to the late February low (10,610). Still a lot of downside momentum and a test of 10,500 is not that far off.
Stats: -112.03 points (-1.04%) to close at 10633.07
Volume: 278 million shares Wednesday versus 237 million shares Tuesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
THURSDAY
More economic data might give the market something to feel better about Thursday, and the data is a bit more forward looking with the LEI and Philly PMI. The market is in a clear blood letting right now, however, and it will have to run its course. It is expiration week and that skews the moves and volume more, and that is what we have seen the past two sessions. We could see that start to dry up Thursday, and indeed after a weak open and some further selling we could see a rebound to test the recent breach by the SP500.
What the action shows at a minimum is that there will have to be more prolonged basing before stocks can attempt another move higher. That has been a familiar theme in 2004 and now 2005. Stocks build up, set up and break higher, but then run out of gas as the same problems of energy and rate hikes is still hanging over stocks down the road. Thus far the economy and consumer have shaken off the price increases. The market is not sure how long they are going to be able to do so, and thus the breakout attempt was truncated.
Many stocks continue to hold up at support, but the list is getting thinner as only the strong and the story stocks are able to stand the selling. We continue to look for those that are making the stand and start to move back up on volume, but we also have to be patient and let this plunge run its course. When it hits its next bottom, and that could be intraday Thursday, we will be watching for stocks that have held near support start to jump higher. Those will provide some opportunity; they held support during the trip lower, and thus they are ready to lead higher on a rebound.
Again, it is time to be patient and let things set back up.
Support and Resistance
NASDAQ: Closed at 2015.75
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 2066
The 50 day SMA at 2067
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:
2000
The 200 day SMA at 1992
S&P 500: Closed at 1188.07
Resistance:
The 50 day SMA at 1195 and the 50 day EMA at 1197.
1196, the mid-January high and the early December peak in the left shoulder.
1200 is being broken.
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:
1185, the top of the November consolidation range.
1175 second high in that double top that spanned late 2001.
1163 is minor support.
Dow: Closed at 10,633.07
Resistance:
The 50 day SMA at 10,673
The 50 day EMA at 10,704
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:
Price consolidation at 10,600 level is a key level.
10,500 is some support.
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): 19.60 actual versus 19.9 expected and 19.19 prior
Retail Sales, February (08:30): 0.5% actual versus 0.6% expected and 0.3% prior (revised from -0.3%)
Retail Sales ex-auto, February (08:30): 0.4% actual versus 0.8% expected and 1.0% prior (revised from 0.6%)
Business Inventories, January (10:00): 0.9% actual versus 0.9% expected and 0.2% prior
March 16
Current Account, Q4 (08:30): -$187.9B actual versus -$183.0B expected and -$165.9B prior (revised from -$164.7B)
Housing Starts, February (08:30): 2195K actual versus 2030K expected and 2183K prior (revised from 2159K)
Building Permits, February (08:30): 2074K actual versus 2070K expected and 2132K prior
Industrial Production, February (09:15): 0.3% actual versus 0.4% expected and 0.1% prior
Capacity Utilization, February (09:15): 79.4% actual versus 79.2% expected and 79.2% prior (revised from 79.0%)
March 17
Initial Jobless Claims, 03/12 (08:30): 315K expected and 327K prior
Leading Economic Indicators, February (10:00): 0.1% expected and -0.3% prior
Philadelphia Fed, March (12:00): 20.0 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): 94.9 expected and 94.1 prior
End part 1 of 3
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world stock market
us stock market
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