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us stock market, understanding the stock market
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3/19/05 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Target hit alerts: UPS
Buy alerts: HLEX
Trailing stops: MDRX
Stop alerts: ASTM; GOLD
SUMMARY:
- Modest losses to close a down week as volume surges on expiration and SP500 float rebalance.
- Michigan sentiment fades as gas prices rise.
- FOMC ready to hike rates again even as oil prices start to impact economy.
- After two weeks of losses, poised for a rebound.
- Fed, PPI, CPI this week give more insight to oil, interest rate impact.
Modest losses, huge volume close out a rough week.
The market spent Friday moving lower once more, finding no reason to rebound from a week that showed a resumption of higher volume selling. Given the heavy selling Tuesday and Wednesday, Friday's losses were modest. NASDAQ, NASDAQ 100, SP600 and SP400 simply put the finishing touches on their test of next support. NASDAQ and NDX fell all the way to the 200 day SMA while the small and mid-caps found support at the 50 day EMA. Not a bad place to land after two weeks of selling. SP500 and DJ30 were not so neat in their finish, closing below the 50 day EMA, but holding some interim support nonetheless.
Another week of rising oil prices and speculation about running out of black gold with a rate hiking Fed background took precedence over some continued solid economic data. Stocks spent their second week of decline, with the large cap indices breaking important support levels in the process. Volume saw a return on the selling as the stocks purchased on the breakout were sold. Oil was the dominant factor in the headlines, but the Fed's continued activity beyond 2004 is the other element adding to the troubles.
While the economic data was solid overall, Friday's action was not helped when Michigan sentiment fell unexpectedly. After the selling and before the FOMC meeting Tuesday there was not much impetus to step in on the buy side, and the Michigan data tossed cold water on any desire to buy. Volume was massive, starting strong, easing some midday, and then exploding late as the SP500 'float' rebalance was implemented. Strong volume was pushed to huge volume on NYSE as buy on close orders hit the tape. On top of the rebalance it was expiration Friday, and that makes analysis of the session somewhat pointless other than noting where the market closed and the prior action that lead the market to that close.
Well, not entirely. There was a late rebound that cut the losses as shorts covered ahead of the weekend after the second week of hard selling. Maybe some buyers were coming in to pick up some values, but overall it was short covering before a weekend ahead of an FOMC meeting, two down weeks, NASDAQ and NASDAQ 100 closing over the 200 day SMA, and the small and mid-caps closing over the 50 day EMA. The shorts wanted to get out of positions ahead of Monday, short covering is how rallies always start. Given the other factors noted, stocks are in position to bounce, and shorts were not taking chances after a strong downside run. Stocks are indeed in good position to post a more significant relief move this week as the sellers back off to let stocks recover some ground before trying to move back in.
THE ECONOMY
Michigan sentiment drops more than expected.
The 92.9 reading for March was no major decline, at least not in terms of causing any retrenchment in consumer attitudes about consumption. 94.9 was expected after a prior showing of 94.1 given the recent unexpected increase in non-farm payrolls. Both current conditions and expectations were lower. Seems heating oil prices and gasoline prices and the anticipation of a nasty summer higher of higher pump prices are having their impact.
We have said before that sentiment does not start to cause consumption problems until it is well down in the low sixties and more likely down in the fifties. Thus a reading in the nineties is hardly something to get worked up about. Until those levels are hit there is not a whole lot of correlation between consumer feelings and consumption. Until those low levels are hit it is feelings, nothing more than feelings. Moreover, it is the Michigan preliminary reading. That is rarely accurate and typically underestimates confidence levels.
But . . . the slowing in the face of other solidly increasing economic indicators is noteworthy if it holds. Oil prices are high and consumers remember 2004 when gasoline spiked up in the summer. We are not even at the start of the driving season and gasoline prices are spiking with inventories above 2004 levels at this point and even at 5 year highs. Even with supply prices are rising. Oil could fall $15/bbl and that might start impacting price, but the problem remains capacity. It has been 20 years since any company built a refinery given all the regulation and liability baggage that goes along with it. Nothing wrong with environmental regulation to protect us, but we have to have some foresight and balance in doing so, realizing that you cannot simply write regulations without considering the impact when Murphy's Law strikes. Just ask the Fed; it has a tremendous batting average when it comes to its attempts to fine tune the economy. It starts some rate hiking to cool the economy when there is no problem. Of course then problems hit and the rate hikes already in the pipeline wreak havoc when they hit the economy on top of the other crises.
Fed to meet, raise rates.
Speak of the Fed. Tuesday the FOMC holds a one-day meeting where it will raise interest rates another 25 basis points. The speculation is not as to the hike but whether the Fed will remove the 'measured pace' language regarding its rate hikes. There is a fear of inflation that many cite as reason the Fed will remove the language in preparation for faster rate hikes.
There is also the problem of rising oil prices that will start dragging the economy the longer they hold at these levels. The economy can stand up to $80 to $100/bbl? Nonsense. The economy is not that much more efficient with its use of oil. But if the Fed believes that as the new Dallas Fed governor says it does then the Fed will continue to raise rates even as oil holds these levels or even moves higher. We feel oil will start to decline before too long, but it has a long way to go before it gets back to a level that will really take pressure of the economy.
The LEI is flattening some, preliminary sentiment indications are fading a bit, auto sales for larger vehicles are pancake-like. Not definite signs of trouble, but they are in line with the effects of $50+/bbl oil. As noted with sentiment, still a long way from trouble levels but unlike the Fed and many 'this time it is different' pundits we don't think oil prices at these levels for such a long period of time are harmless or will be absorbed without a hiccup.
That leaves the Fed in a pickle, though if it feels it will take $80/bbl or more oil to impact the economy, a pickle that it may not see. Looking back at Federal Reserve history, that is not too surprising. For all of the brainpower it is amazingly consistent (dogmatic?) in its approach to the unknown: raise rates and see if it works. That is an oversimplification, but in the past 75 years the Fed will approach the unknown with a hike first and assess later attitude.
The problem is that higher energy prices act as a tax on the economy. You recall the last couple of energy spikes when many companies imposed energy cost 'service fees.' I nearly hit the limit when my termite inspector tacked on a few dollars to the bill as an energy surcharge. The more direct cost is at the pump. Gasoline, already over $2/gallon in many areas is going higher without oil prices dropping hard. It is going to be a long spring, summer and early fall for drivers, fliers, and basically any traveler. That has the natural tendency to slow the economy, typically quite dramatically the longer prices stay high.
The Fed may be worried about inflation now and wants the flexibility to raise rates faster if it needs to, but the worst thing it could do as energy prices continue to hold high levels is really start ratcheting up the pace of rate hikes and shrinking money supply further. That is piling economic slowing on top of economic slowing.
Greenspan has hinted in the past three months at the Fed's understanding of the relationship between higher oil prices and a slowing economy. Yet with the spike in prices being demand driven as opposed to cartel contrived, he may fear inflation as the greater problem. That simply is not a pretty scenario for the economy, and as we noted at the beginning of the year, this oil/interest rate one-two punch is the big obstacle for the market this year.
The past three weeks saw the market breakout and then turn over and sell back into its base. No doubt tied to these problems, aided by oil's recent sprint higher and the hype surrounding that move. The Fed might think $80/bbl oil is workable, but the market is not that gullible.
THE MARKET
Rough week for the market with some higher volume selling and a Friday volume explosion. Expiration week and an SP500 rebalance that required buying and selling. As noted, hard to take much from that, but it was the second week of selling as the market continued its return to weaker character, and even with the expiration week that prior week shows the action was heading lower. NASDAQ is down about 5% from its early March interim peak, SP500 just over 3%. Not huge in the grand scheme, but the failed breakout and some stronger selling volume last week add to the weaker character.
The past two weeks were a return to weaker action. That still leaves SP600 and SP400 above their 50 day EMA, a key support level. NASDAQ and NASDAQ 100 are testing their 200 day SMA, another key support level. Of course they broke their 50 day MA on the way there, but they never did make the breakouts and are still in their basing patterns. SP600 and SP400 have held up pretty darn well given the market selling. SP500 and DJ30 gave up their 50 day MA last week and remain the odd indices out as far as support, at some minor levels where they could hold but somewhat in no-man's land.
Bigger picture, SP500, SP600, SP400 are still holding their breakouts from the 2004 base, the latter two market leaders that are still holding key support. NASDAQ is in another base after giving up its late 2004 breakout. It has lagged but it is also working on a base. SOX is a problem as it has cracked below the 200 day SMA, but the next upside move most likely won't be the keeper. It will be a relief move and whether the SOX broke the 200 day or not won't be the key. After two weeks of selling with NASDAQ dropping 5% to key support, stocks are ready to rebound. For now given the downside move and associated volume we are not anticipating more than a relief move. It can show us otherwise, but the recent drop in the large caps indicates they have more work to do before they can sustain a meaningful bounce. The small and mid-caps may be a different story; they have started to hold up better with oil stocks making a modest recovery last week.
Market Sentiment
Bulls versus Bears: Bears fell to 54.5% last week, falling back below the 55% level considered bearish. At this level, however, the game is similar to horseshoes: bulls remain high. Bears rose to 24.3% from just over 20%, the level considered bearish. A stronger rise in bears than a drop in bulls. Both are still far from the extremes that would generate a dramatic market rise. Indeed, they are closer to the levels that would indicate the market would continue to struggle.
VIX: 13.14; -0.15
VXN: 17.88; -0.58
VXO: 12.9; -0.61
Put/Call Ratio (CBOE): 1.27; +0.20. High readings all week with 5 closes above 1.0 the past two weeks and the rest of the time mostly in the nineties. The overall put/call ratio (factoring in all of the option exchanges) closed at 1.07 on Friday. That is also an important move given it compiles all of the option activity, but it was also expiration Friday and options have been active all week. In any event, after the two week decline to support on NASDAQ and the small and mid-cap indices, these reading are piling up to give us an upside rebound this coming week.
NASDAQ
Just about finished the move to the 200 day SMA Friday, undercutting the January low in the process. After two weeks of selling, prime bounce territory.
Stats: -8.63 points (-0.43%) to close at 2007.79
Volume: 2.255B (+27.36%). Volume ran higher early and then again late as expiration once again jumped volume for the week. It was a down session and thus technically distribution. However, NASDAQ tapped at the 200 day SMA on the low and rebounded late on some of that short covering and buying off that key support level. Rising volume at an important support level, particularly when combined with a decent rebound is what you want to see. Whether shorts covering, longer term buyers, or a combination, it shows the big money does not think stocks will continue lower through that point. Combined with the two weeks of selling ahead of the action it strongly suggests a bounce. Overall the distribution (higher volume selling) is bad for the index as it erodes its strength, but after the selling a bounce is coming and the high volume at the 200 day Friday indicates it is ready to do that.
Up Volume: 751M (-104M)
Down Volume: 1.402B (+505M)
A/D and Hi/Lo: Decliners led 1.54 to 1. Got to -2:1 intraday but the late rebound helped push it back to a modest level. Would have really liked to see it spike near -3:1 intraday as that often is extreme enough to help set a rebound, particularly when combined with the volume, the rebound off key support, and the spiking put/call ratio.
Previous Session: Decliners led 1 to 1
New Highs: 59 (+11)
New Lows: 107 (+19). Very much under control as the index tested and held the 200 day SMA.
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
NASDAQ struggled yet again, but also held in its 11 week base for 2005. It has now come back to test the prior low set in January (2008.68) as well as the 200 day SMA (1992) that has been slowly rising to meet the index. The selling picked up pace last week with three distribution sessions counting Friday's wild expiration action. Distribution such as that often spells more selling, but there are those key points mentioned above: still in the base, holding over the 200 day SMA, volume rising off the 200 day, double bottom pattern setting up. NASDAQ may not be ready for the breakout move, and indeed stocks and indices rarely make successful breakout runs from deep in the bottom of the base, but it is ready to rebound off this key support and work on building the right side of the pattern. As noted last week, the breakdown from the 50 day EMA and further selling does not mean the pattern breaks down, but it does mean it is going to take longer to regroup and finish the base.
NASDAQ 100 undercut the 200 day SMA (1482) and then rebounded late to hold that level on the close. Like to see those undercuts and rebounds on volume. Even if it was short covering, it shows the shorts were not willing to ride things further lower given the prior selling, the key support, and the weekend. Primed for a bounce, but it also has a lot of near overhead resistance from the 50 day EMA (1524). It will need some strength, i.e. volume, to give us a good rebound play.
SOX really struggled, breaking below its 200 day SMA (416.06). Unlike the other indices the late rebound did not push it back above this key support point. Teetering on the point of a breakdown, but if the rest of the market rebounds SOX will at least follow it a bit.
SP500/NYSE
SP500 broke the 50 day EMA last week but has managed to hold next support and showing a couple of dojis Thursday and Friday. After the hard selling, it too is set for a relief bounce.
Stats: -0.56 points (-0.05%) to close at 1189.65
NYSE Volume: 2.343B (+48.15%). Explosive volume as the SP500 rebalanced to allow for actual shares in the float, i.e. trading, versus those outstanding but held in but not traded, e.g. large blocks held by family members in Wal-Mart. Volume was strong but shot higher late on the buy on close orders.
Up Volume: 937M (+37M)
Down Volume: 1.378B (+742M)
A/D and Hi/Lo: Decliners led 1.69 to 1. As with NASDAQ breadth was -2:1 intraday but recovered some late as NYSE stocks managed to rebound into the close.
Previous Session: Advancers led 1.39 to 1
New Highs: 74 (+13)
New Lows: 61 (-18). Not bad at all as the small and mid-caps held their 50 day EMA.
The Chart: http://www.investmenthouse.com/cd/^spx.html
SP500 did indeed continue the selling after breaching the 50 day EMA (1196.53) Wednesday, but as with Thursday, the index managed to rebound intraday and post a very modest loss (posted a gain Thursday). Huge volume but it was rebalancing so was skewed way out of anything meaningful. The important points were that after breaking the 50 day it held next support at 1185 on the closes, still easily above next support at 1175. The pattern is not particularly pretty, and as noted Thursday it has picked up tones of a head and shoulders. At this juncture that does not mean a whole lot. It is enough to know it failed its prior breakout and has given up some key support on the fall. It was weak in failing the breakout and weak in the inability to hold the 50 day EMA. Not in as great of a position as NASDAQ and the smaller caps to post a rebound, but after the hard selling it is likely to do just that at least up toward 1200.
The small cap SP600 was under pressure as well the past two weeks but unlike the large cap indices, it did not undercut its 50 day EMA (324.98). It did so intraday and then rebounded to hold that key level on the Friday close. It is still in very good shape to support a rebound, and with the oil and gas stocks finding their feet again, it is in good shape. The mid-cap SP400 broke below its 18 day EMA, unable to retake that level by the end of the week. Indeed, it tapped toward its 50 day EMA (667.46) on the Friday low, but it too rebounded, never threatening a breakdown. Either of these along with the NASDAQ can give us a good upside play in the rebound from this recent selling.
DJ30
The blue chips held steady, posting a slight gain as volume exploded higher. One of the culprits was WMT as it was rebalanced in the S&P due to large familial holdings of its stock that are not traded. The index reached way down to 10,557 on the low, undercutting 10,600 support but rebounding to hold that key level. It too broke below its 50 day EMA (10,698) but a couple of dojis to end the week after two weeks of harder selling indicates it wants to try a bounce toward 10,750. At that point it will show us what any relief bounce is made of.
Stats: +3.32 points (+0.03%) to close at 10629.67
Volume: 531 million shares Friday versus 227 million shares Thursday.
The chart: http://www.investmenthouse.com/cd/^dji.html
THIS WEEK
After a pretty hard two weeks of butt kicking following the breakout, stocks are set up to try a rebound. Problem is the same issues that caused the selling are still there, oil and rising rates, and indeed the FOMC holds a one day meeting Tuesday to raise rates again. With speculation running almost as rampant as the oil price game as to whether the Fed changes its statement language, the market may remain frozen in its tracks ahead of the meeting. What we typically see ahead of the Fed, however, is a run into the announcement on the day the announcement is due. That means we may see a more of a pause Monday and then a move higher into the meeting on Tuesday.
With the indices showing dojis at support to end the week, however, we want to be ready to move into some upside plays fairly early to take advantage of some of the relief bounce. Index plays require you to get in pretty quickly when looking for a bounce move as opposed to a breakout. That is more aggressive because they can still reverse on you, but after two weeks of downside they are set to bounce. Moreover, the small and mid-caps are in good shape, having weathered the selling and still holding their 50 day EMA or better in the case of the SP400.
The ability of the smaller cap indices to hold their 50 day EMA was in part due to the oil and gas stocks finding some support to end the week. If that continues to take hold these indices could improve rapidly. We are still skeptical as to whether oil will hold the recent gains, but as noted last week, even when sentiment gets to extreme levels, price may not respond right away. Thus we could see more upside near term before the current price move runs its course.
The selling the past two weeks has worked to weed out the strong from the wannabes. There are still a number of quality stocks that are holding at near support or that have flushed out some of the fluff and are ready to move off the 50 or 18 day EMA. To them the selling was just a pause in a continued upside move. These periodic points provide entry opportunity for new positions in the stock or adding to existing positions and averaging up into a winner.
Oil and interest rates (more specifically the Fed in the latter case) are still the main obstacles to the market in 2005. Oil has not only failed to crack but has galloped to a new high in unadjusted dollars. The Fed is also unsure as to when it will be done raising rates. As we have discussed frequently, these are open ended questions for the market, and with them hanging overhead the market continues to move haltingly.
Thus far the economy has not shown much of a drag by higher oil prices, but the market will show trouble long before the economy does. The market will anticipate the problems and sell off ahead of time. That is why the recent failure of the breakout and the resumption of some distribution is a real caution flag. The market is set to rebound after two weeks of selling, but the strength of that rebound is key. If volume remains low as stocks recover, that shows the big buyers are still holding back, and that limits any upside we can expect. For now the market is back on the defensive, and any upside has to be suspect and viewed as a relief move only until it shows some serious upside trade.
Support and Resistance
NASDAQ: Closed at 2007.79
Resistance:
The 10 day EMA at 2036 and the 18 day EMA at 2046 are the near term obstacles as the index bounces.
2050-54, prior resistance and the June high is stronger
The 50 day EMA at 2061
The 50 day SMA at 2060
2066 to 2070, the bottom of the January lateral move.
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 1189.65
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
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 10,629.67
Resistance:
The 50 day SMA at 10,675
The 50 day EMA at 10,698
The 10 day EMA at 10,279
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 22
PPI, February (08:30): 0.3% expected and 0.3% prior
Core PPI, February (08:30): 0.1% expected and 0.8% prior
FOMC policy announce (2:15): Expected federal funds rate increase by 25 basis points. Major issue is whether FOMC removes 'measured pace' language from its statement.
March 23
CPI, February (08:30): 0.3% expected and 0.1% prior
Core CPI, February (08:30): 0.2% expected and 0.2% prior
Existing Home Sales, February (10:00): 6.65M expected and 6.8M prior
March 24
Durable Orders, February (08:30): 0.8% expected and -1.3% prior
Initial Jobless Claims, 03/19 (08:30): 318K prior
New Home Sales, February (10:00): 1140K expected and 1106K prior
End part 1 of 3
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us stock market
understanding the stock market
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