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investment help, financial investment
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3/21/05 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Target hit alerts: None issued
Buy alerts: SYNC (bonus)
Trailing stops: URBN
Stop alerts: WHT
SUMMARY:
- Large caps stumble lower as buyers stay away ahead of FOMC meeting.
- FOMC set to raise rates but focus is on the statement.
- A lot (too much) faith being put in Greenspan.
- NASDAQ, smaller caps still set for a relief bounce.
- Focus is on the FOMC, but PPI is out before the open.
Not quite ready for a rebound.
Stocks rebounded Monday, but it was a rebound after early selling, and it just managed to get NASDAQ back to flat. The large caps were not so fortunate, struggling to another loss and on volume that, while lower, was still quite strong.
An acquisition of ASKJ by IACI provided no spark outside the actual deal. Stocks started weak and sold from there with NASDAQ undercutting 2000 and SP500 breaking 1185, a level that has held in recent selling sessions. It is Fed week, and after a couple of weeks of in depth discussion of oil prices, focus shifted to interest rates and where they were headed. There was a lot of 'fear of the Fed' talk now given the market has given back its recent breakout attempt and general gloom has settled in and the oil price spike has become old news even though oil prices have not faded.
There were several stories looking back to prior Fed rate hiking campaigns and the results. A super majority of those have ended with a bad outcome for the market and the economy, something we have been discussing since last year. Again, with the market down for a couple of weeks and starting yet another week with losses, it is finally time to focus on what may have been the cause. Oil and Fed rate hikes are two huge issues for the market, and the past two weeks it has given up a breakout attempt in deference to spiking oil prices and a Fed that has no idea when it is going to stop hiking rates. Nothing new here, but it the second blow in the one-two punch finally made it to the front page.
By the close NASDAQ and the smaller caps fared the best, posting modest losses. NASDAQ volume was much lower as it tapped the 200 day SMA on the low and rebounded. The small and mid-caps held their 50 day EMA easily. They remain in good shape for a relief bounce. SP500 and DJ30 were in trouble once more, continuing to struggle below the 50 day EMA as DJ30 undercut some key support at 10,600. Both of those indices remain under significant pressure.
Indeed, NYSE once again gave NASDAQ volume a run for its money. While that is not a readily apparent plus for SP500, it is noteworthy for the market overall: when NYSE volume comes close to eclipsing NASDAQ trade that tends to show much of the selling is over. Why? Because NASDAQ is the speculative index, and when its volume has dropped vis- -vis NYSE the speculation is typically out of the market. Thus rising NYSE volume versus NASDAQ volume has tended in the past to indicate a selling bout is ending. It is no guarantee with the large caps still stumbling lower, but when the sentiment indicators start stacking up as they have been after two weeks of selling you start looking for a rebound move.
THE ECONOMY
After Tuesday the federal funds rate is expected to sit at 2.75%. No big deal there. What everyone is focused on is the statement and whether the Fed is ready this time to remove the 'measured pace' language with respect to its pace of rate hikes. Lots of talk on both sides of the argument, and even the Fed has weighed in with two Fed governors indicating that the Fed would have to remove the 'measured' language sooner than later. Is Tuesday soon enough? Further, if it does, what would it mean?
Greenspan has spoken of the 'conundrum' of long term rates rising more slowly than short term rates. Since that testimony that conundrum has more or less worked itself out as long term rates jumped past 4.5%. The real Fed conundrum is what to do if oil prices remain strong while the Fed Funds rate remains low. Strong oil prices are a tax and a drag on the economy. There has been talk of $80 to $100/bbl oil required before the US economy is impacted. The Vice President said last week that $60/bbl was the point of trouble. If the latter is the case, we are close enough for horse shoes.
The Fed, as in the 1970's, has to decide what to do. Back then it raised rates hard after some indecision, and the results were horrific. Everything back then was in such a terrible mess, however, it is hard to pinpoint the blame on Fed rate hikes. In retrospect they did not help, but a lot of policies tried at that time did not help. The Fed is caught with the FFR too low yet oil prices too high. At this juncture the economy is not showing any drag and there is that $80 to $100/bbl talk as well; thus we doubt the Fed is going to defer to higher oil prices right now and stop the rate hikes at this meeting.
Problem is, by the time the economy shows the problems it will be too late. Moreover, the market will have already shown the problems as it forecasts the economic woes. Monday many were saying the market was worried about rate hikes. That in part was true, but it was worrying about rate hikes and oil prices when it started to sell two weeks back. The problem with the Fed is always the same one, and the one shown in the studies discussed on the financial stations Monday: it waits too long to act whether it be in cutting rates, hiking rates, or stopping a rate hiking campaign. By the time it sees the whites of their eyes it is too late. There are no precision guided bombs when it comes to rate hikes. Carpet bombing is all it can do.
So the Fed will hike rates again, and it will probably be okay in doing so though the oil price spike is a wild card that changes the calculation. As for removing 'measured,' well that cuts both ways. If the Fed removes that language, in the current depressed market mindset that will be a negative because it gives the Fed free reign to hike as fast as it sees fit. Of course that is something it has regardless of what it says in its statements, but it is an admission by the Fed that things are such that it no longer has to be measured in taking back the rate hikes.
Of course, it also means that the Fed does not have to raise rates either. If it deems the economy is in trouble or in danger of running aground it can then pause its rate hiking. Cutting it won't happen outside calamity, but if oil prices spike and people get spooked then the Fed could decide to back off a meeting or two. Changing the language allows it to do that. Thus we view the removal of the language as the Fed giving itself some maneuvering room. It wants to keep hiking and will do so Tuesday, but if oil proves to be more of a drag than anticipated, it has the ability to take a pass on a rate hike here and there.
Greenspan getting way too much credit.
Greenspan is getting a lot of praise from many corners though the WSJ did not spare him any quarter Monday, blaming his Fed for being too loose and creating a real problem ahead. He had many defenders on the day, however, talking off a 'Goldilocks' economy where all is well and giving Greenspan the credit. He was against the tax cuts that jumpstarted the recovery; he admitted he was wrong later, but he did not make it easy to get the needed incentives passed.
We are a bit concerned that many believe the economy is just fine as Greenspan takes his victory lap this year. The market has not broken down, but it gave back a breakout attempt and is at a point now where it has to make the move or enter another period of struggle or worse. In short, the market is not just running higher and higher as if the economy was a Goldilocks economy. It has struggled the entire way the past 15 months. If the future was so bright, the market would have sniffed it out a bit more by now other than that low volume move to end 2004. Thus don't dust of the 'maestro' headlines just yet. Greenspan has already raised eyebrows with his forays' into policy (taxes, entitlements, savings, etc.), and we can expect more this year as he starts to put the spin on his legacy. One thing we can count on is that Greenspan does not want to be remembered as letting inflation get out of hand in his last year, and we can thus expect more rate hiking.
THE MARKET
The gloom Monday was pretty palpable as the market was unable to muster a gain after two weeks of getting roughed up. Though SP500 and DJ30 continued to get boxed around we were not too worried as the Monday before the FOMC meets is often quiet. Moreover, NASDAQ and the small and mid-caps continued to hold support and show very good indications of a relief bounce to come.
It thus looks as if a rebound is coming, and as noted over the weekend, when there is an FOMC meeting, that move often starts on the day the Fed is set to make its announcement. Thus Tuesday looks to be ripe for a bounce, particularly with NASDAQ and the small and mid-caps again showing relative strength at key support.
There are many caveats lurking around in the background, the primary being this will likely be no more than a relief move at this juncture given the market's reversal from its recent breakout attempt. Another one dealing with the Fed meeting is the statement language. If the measured language is removed it may be interpreted as giving the Fed free reign to hike rates faster, and a market already fearing the Fed could be induced to sell further. Given the selling to this point, however, that might just be the washout move that SP500 and DJ30 need as well to set up a rebound move. Most likely, if there is a rally into the FOMC decision and it removes the language we get a big hiccup, but by the end of the session stocks will be coming back.
Market Sentiment
VIX: 13.61; +0.47
VXN: 17.83; -0.05
VXO: 12.97; +0.07
Put/Call Ratio (CBOE): 0.78; -0.49. Fell off pace Monday after several closes above 1.0 and a few in the nineties the past two weeks. That is a level considered extreme and can help start a rally.
NASDAQ
Nice doji at the 200 day SMA on lower volume as NASDAQ is set up to make the relief move. Now it has to convert the picture into reality.
Stats: -0.28 points (-0.01%) to close at 2007.51
Volume: 1.648B (-26.94%). Major decline in volume, but that was expected after the Friday expiration surge. Below average as NASDAQ continues to work in its base. Outside a couple of distribution sessions volume has behaved during its 2005 base.
Up Volume: 931M (+180M)
Down Volume: 667M (-735M)
A/D and Hi/Lo: Decliners led 1.17 to 1. Very modest negative breadth.
Previous Session: Decliners led 1.54 to 1
New Highs: 50 (-9)
New Lows: 96 (-11). Still quite tame as NASDAQ tests its 2005 low.
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
NASDAQ undercut 2000 for the second straight session but again managed to rebound and close above that level. Volume was below average so there was no heavy selling. There was also no surge of buyers as it rebounded off the 200 day SMA (1993), the level it tapped on the session low. Nice hammer doji at key support and the January low (2008.68). NASDAQ is set up well for the rebound. If it does give us the move, it will have its serious test at 2059.
NASDAQ 100 shows a nice, tight doji at the 200 day SMA (1482) as it too holds the January low. Holding the 200 day SMA on the close is a good indication once more, but as with NASDAQ, it has to convert this into a rebound. Looks ready.
SOX could not retake its 200 day SMA (415.81) though it did trade above that level intraday. It showed relative strength with NASDAQ Monday and can provide a bounce as well, but it has sank deep into the base and will have a fight at its 50 day EMA (423.39) on any relief move.
SP500/NYSE
The large caps stumbled lower once more, breaking through near support on the close.
Stats: -5.87 points (-0.49%) to close at 1183.78
NYSE Volume: 1.515B (-35.33%). Volume was much lower as expected, and it was below average once more. It was still strong compared to NASDAQ, however, and that is often an indication the selling is winding down.
Up Volume: 583M (-354M)
Down Volume: 1.236B (-142M)
A/D and Hi/Lo: Decliners led 2.33 to 1. Still seriously skewed to negative as the large caps remain under pressure.
Previous Session: Decliners led 1.69 to 1
New Highs: 55 (-19)
New Lows: 70 (+9)
The Chart: http://www.investmenthouse.com/cd/^spx.html
The large caps ducked lower once more, undercutting 1185 support on the close. They did come off the low (1178.82) on the close, though it was hardly an exhibition of strength. The large caps held 1175, very important support from the prior double top back in early 2004. Not set up to rebound as well as the other indices.
The small cap SP600 reached down to the 50 day SMA (323.61) on the low and rebounded to close above the 50 day EMA (324.99). Still in position to rebound off the 50 day. Showed relative strength Monday, and looking for that to turn into a rebound move along with NASDAQ.
DJ30
The blue chips were pressured once more, closing below key support at 10,600. Volume was back below average, but little consolation as DJ30 showed no inclination to rebound off the two dojis to end last week. Looks as if it will test next support near 10,500. Small consolation.
Stats: -64.28 points (-0.6%) to close at 10565.39
Volume: 254 million shares Monday versus 531 million shares Friday.
The chart: http://www.investmenthouse.com/cd/^dji.html
TUESDAY
NASDAQ, SP600, and SP400 remain poised to rebound, and after two weeks of selling and the session of an FOMC meeting we are expecting a rebound to try and take hold Tuesday. CPI comes out before the open; it may stoke some inflation fears, but the main event is the FOMC and what its statement says. Any rally into the statement followed by removal of 'measured' will be under pressure but should recover; if 'measured' is left in it will stoke the move higher.
As of the Monday close the market remains defensive. Also mixed. The smaller caps and techs are ready to rebound, the large cap industrials are not there yet. We continue to look at those stocks that have used the recent selling as just another part of their upside moves; strong stocks rally and then test the move. We want to pick them off as they make their rebounds on strong trade as they are the market leaders.
Support and Resistance
NASDAQ: Closed at 2007.51
Resistance:
The 10 day EMA at 2031 and the 18 day EMA at 2042 are the near term obstacles as the index bounces.
2050-54, prior resistance and the June high is stronger
The 50 day EMA at 2059
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 1993
S&P 500: Closed at 1183.78
Resistance:
The 50 day SMA at 1195 and the 50 day EMA at 1196.
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 10,565.39
Resistance:
Price consolidation at 10,600 level is a key level.
The 50 day SMA at 10,673
The 50 day EMA at 10,693
The 10 day EMA at 10,730
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:
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): 6.70M 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): 315K expected and 318K prior
New Home Sales, February (10:00): 1150K expected and 1106K prior
End part 1 of 3
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