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us stock market, trade stock
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3/22/05 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Target hit alerts: None issued
Buy alerts: TRMB; ATK; PD; PRZ
Trailing stops: GMT; ISSX
Stop alerts: SMH
SUMMARY:
- PPI back in line but Fed throws a scare of faster rate hikes at market.
- Fed keeps 'measured pace' language but eviscerates it, emphasizing increasing inflation.
- Indexes pull classic reversal, fall through support on rising volume.
- CPI to provide more inflation insight, but even if lower, at this point the Fed has set its course.
- Undercut of support and lengthy selling still setting up a relief move.
Investors get some good news and some not so good news.
PPI was out before the open and while the overall was a bit higher, the core came in at expectations and was well below January's six year high. That helped turn a soft open into a nice relief bounce ahead of the FOMC announcement. Pretty typical action and bolstered by the two weeks of downside preceding the meeting. Stocks were posting some nice gains with the small caps and semiconductors back in the lead. It did not hurt that oil was down well over a dollar as well, easing somewhat its chokehold on the market during this last spike higher.
The relief move was working, accelerating right into the 2:15ET announcement. When word hit stocks jumped on the 'measured pace' remaining in the statement, but then stalled on the talk of inflation and necessary Fed action to stave off threatening inflation. It became apparent that the 'measured pace' language was just a fancy phrase that now has no meaning. You can give someone a turkey and call it a duck, but most people still know it is a turkey. The market figured this out as well.
After it stalled it started to sell and volume started to climb. Bonds shot higher with the 10 year breaching 4.6%, the first time it has done so on this run since Greenspan announced his 'conundrum' before Congress. Both bonds and stocks fear a more active and aggressive Fed and both sold off. The large cap indices undercut next support as NYSE volume jumped above average. SP500 fell below 1175 and NASDAQ fell below the 200 day SMA. The higher volume shows the big money selling, not buying, at these support levels. This continues the negative character the past two weeks have shown following the failure of the early March breakout attempt.
The market typically takes a few days to fully come to grips with any Fed decision, and with this one giving with one hand and slapping with the other, it will certainly mull the decision. The short term reaction was quite negative, however, and put the large cap indices teetering on a serious breakdown. The small and mid-caps sold as well, but they have better patterns and they still have some wiggle room. They will have to do more than wiggle and will have to post leadership to help turn the large caps from their continued slide lower.
THE ECONOMY
February core PPI comes into line after January spike.
The core was expected to come in at 0.1%, right in line. That helped mute the overall PPI's 0.4% reading that topped the 0.3% expected. After the 6 year high in January, investors were relieved. Still, the overall PPI showed the largest year over year increase since 1995 (4.7%). The core was up 2.8% for the 12 months. That was the largest core jump since 1992.
February saw higher food and energy costs, the opposite of January. Energy rose 1.4% (-1% in January), and food climbed 0.8% versus the 0.2% decline January. What kept the overall number lower: durable goods (-0.5%) as vehicle prices fell 0.6% and a decline in capital goods (-0.3%). One month one area climbs, the next it falls while prices in another sector rise. What does that mean? Prices are still trending higher. Wednesday the CPI will give a better idea as to how much of these price increases are passing through to the consumer.
Fed raises rates, keeps 'measured' language and effectively removes it in one stroke, prepares investors for its removal
The Fed raised the fed funds rate 25 basis points to 2.75% as expected. It maintained the 'measured pace' language regarding the rate of rate hikes as expected. That was about all it did that was expected. While it maintained the measured pace language it also breached the next level of rate hiking by preparing investors for its removal from the statement come the next meeting in May.
At the same time it kept the language it wholly undermined it, effectively removing it from the statement already. Specifically the Fed noted once more that inflation expectations remained well contained but also that "pricing power is more evident." First mention of stronger pricing power. It was quick to note also that the rise in energy prices has not "notably fed through to core consumer prices." Okay, there is pricing power on the one hand but energy has not made it through yet. Hmmm. We suspect it is already starting to have an impact with $2/gallon to $3+/gallon gasoline already in the nation in March.
The key: "with appropriate monetary policy action, upside and downside risks to the attainment of both sustainable growth and price stability should be kept roughly equal." That says it all: the Fed feels that without its action in hiking rates the risks toward inflation would dominate. Thus there are going to be more rate hikes and with this statement the Fed has laid the groundwork for more intense rate hikes. It probably won't raise 50 basis points at the next meeting when it removes 'measured pace' from the statement, but the Tuesday statement will be the last one with that language.
The market sniffed through this pretty quickly, concluding the 'measured pace' was a lame duck and that the Fed was really starting to worry about inflation. Moreover, and very critically, the Fed's statement indicates it is not viewing rising energy prices as a tax on the economy but a potentially inflation source. Rising energy is a tax; it really hammers discretionary spending by consumers and investment by businesses. The Fed, however, is worried about the pass through of 'surcharges' and increased manufacturing costs to consumers more than that tax on the economy.
It is a fine line but an important one. If you view it as economically negative, then you mitigate your restrictive actions. If you view it as inflationary you tend to hike interest rates in response. The latter compounds the detrimental aspects of the rising costs. Rate hiking to beat rising energy costs is akin to treating heartworms in a dog: you basically poison the dog enough to kill the worms and avoid killing the dog. The dog gets sick as hell, but if it is strong enough it does not die. What the Fed was telling us Tuesday is that it is going to do what the Fed always does: raise rates to dampen demand enough to avoid as much inflation as possible. After this statement we seriously doubt the Fed is looking for neutral. It is looking to hike rates until it feels inflation is no longer a threat.
The unfortunate history of such campaigns is that the Fed overshoots and slows the economy into recession. The reason is that rate hikes take anywhere from 8 to 12 to more months to have an impact, and they are cumulative. In other words, they all hit pretty much at the same time. Thus the economy appears to be rocking along oblivious to the hikes (as with oil right now) until it stalls. The market typically starts to pitch over well ahead of that, but the Fed is a very poor market watcher as well. Why do you think Greenspan raised rates one more time in May 2000 even after the stock market had rolled over and careened lower? In his mind and from the figures he was looking at there was no appreciable slowing in the economy. No, it all happened at once as GDP cascaded lower in just three short quarters. To us the Fed was very clear Tuesday with its statement. You just have to know the history of the Fed. Unfortunately it is following the script right now, proclaiming to be even handed, yet when push comes to shove it will panic and overdo the hiking. As the song says, that's just the way it is, some things will never change.
THE MARKET
Stocks rallied into the FOMC decision on lighter volume with some really nice individual moves that were, despite the market volume, showing good trade. When the Fed's statement was released and the market saw the Fed's true course of action it stalled and reversed the early gains. Volume jumped as it turned lower. On the close SP500 broke through next support at 1175 and NASDAQ undercut the 200 day SMA. A low volume rally, a reversal on volume, breaching key support levels. At least NASDAQ volume was still below average, but that is really fishing for a positive.
SP600 and SP400 did hold their 50 day MA as they were the leaders in the morning and the relative strength leaders on the close. They are pretty much the last major indices still holding a key support level. That always gives the market a chance, and with any undercut of serious support there is always a rebound attempt. After two weeks of hard selling one would expect more of a rebound attempt than a half session leading into the FOMC announcement. The put/call ratio remains high and NYSE volume has now outstripped NASDAQ volume. There are positives in the midst of the gloom as there always are when things go from bad to worse. Once the market digests the Fed language some more that could also allow a relief move.
That all remains to be seen. The market did not like what the Fed had to say Tuesday, no doubt drawing on past experiences with a Fed that is ready to label anything inflationary and use the rate hiking stick to bend the economy to its will. In other words, the rate hiking is going to continue and there is no end. Another open ended Fed rate hiking campaign has the market selling through support and continuing the general negative character that renewed itself when it the breakout attempt failed. It definitely remains a stock by stock market at this point.
Market Sentiment
VIX: 14.27; +0.66
VXN: 18.03; +0.2
VXO: 13.75; +0.78
Put/Call Ratio (CBOE): 1.03; +0.25. Back above 1.0 on the close, making a week of closes over that level in the past two and one-half weeks. Lots of put activity often indicates selling is getting overdone as more and more speculate on the downside and more protection is bought by the big money positions. When everyone thinks the market is falling it typically goes the other way. After a blast through key support it often makes a serious bounce, upsetting the apple cart for those that finally threw in the towel and started to buy into the downside. Thus these indicators are likely telling us a rebound attempt is coming. It probably won't last, but it will be enough to get those recently moving into the downside whipsawed.
NASDAQ
NASDAQ fell through the 200 day SMA on rising though still below average volume.
Stats: -18.17 points (-0.91%) to close at 1989.34
Volume: 1.876B (+13.87%). Rising volume but still well below average. NASDAQ is not attracting much buying interest, but it is also not receiving a lot of heavy downside volume. Indeed, NYSE volume surged past NASDAQ trade Tuesday as the NYSE showed above average volume. That is another indication that the selling is getting overdone and that a rebound attempt will come along before too long.
Up Volume: 454M (-477M)
Down Volume: 1.4B (+733M).
A/D and Hi/Lo: Decliners led 1.57 to 1. Very mild downside breadth once more.
Previous Session: Decliners led 1.17 to 1
New Highs: 62 (+12)
New Lows: 77 (-19)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
NASDAQ cut through the 200 day SMA (1993) on the close as the sellers were once again outnumbering the buyers. They did so intraday and over the past few sessions as well as downside volume has led upside trade, otherwise called distribution. That is when the big money sells its stocks. Undercutting the 200 day SMA on rising trade is even more significant as it shows the institutions not wanting to step in at this important level. Overall the pattern can still form a double bottom with the right leg undercutting the left. The move below the 200 day SMA is a nice touch as that often triggers a rebound just as everyone concedes major support has been broken and is looking for more downside.
NASDAQ 100 dove below the 200 day SMA (1482.70) on that rising volume. It too has undercut the January low, unable to make a move off of the key support. A test to 1450 and then it is ready to rebound.
SOX further undercut the 200 day SMA (415) after making a solid move over that level intraday. It hit the 10 day EMA on the high (420) and failed, closing at the session low. Was moving well on some upgrades to start the session but that obviously could not outlast the Fed.
SP500/NYSE
Volume jumped above average as SP500 broke some key support at 1175.
Stats: -12.07 points (-1.02%) to close at 1171.71
NYSE Volume: 2.134B (+40.84%). Strong, above average volume as the SP500 dove through key support. The distribution in SP500 continues. NYSE volume topped NASDAQ trade, an indication that the market is getting oversold. That can lead to a bounce after this hard selling, but that is about al at this juncture based on the breach of key support levels and the lack of a real accumulation base at this point after the failed breakout attempt.
Up Volume: 572M (-11M)
Down Volume: 1.542B (+306M)
A/D and Hi/Lo: Decliners led 2.53 to 1. Negative breadth remains ugly.
Previous Session: Decliners led 2.33 to 1
New Highs: 61 (+6)
New Lows: 82 (+12)
The Chart: http://www.investmenthouse.com/cd/^spx.html
SP500 broke 1175, the tops from the early 2002 double top that acted as resistance and the support after the late 2004 breakout. The pattern has degenerated after the failed breakout attempt, distributing on the way down. It is still holding above the January low (1163.75) for now, but that is not really a support level, just one you don't want to see it break as that means it still has to find its bottom.
The small cap SP600 rallied well off the 50 day EMA (325) but after hitting 328 on the high it reversed and fell back to the 50 day SMA (323.89) on the close. Hanging on for life at this support level, but if it does it makes a higher low. It has its work cut out for it to lead the rest of the market in a rebound.
DJ30
DJ30 continued its drop lower, cutting through 10,500 on rising, above average volume. It is en route to the 200 day SMA (10,375) as it works on a broadening top. There is not a lot of good to say about DJ30 other than maybe it can provide a rebound off of the 200 day SMA when it gets there. After three weeks of selling at that point it will be ready to rebound.
Stats: -94.88 points (-0.9%) to close at 10470.51
Volume: 308 million shares Tuesday versus 254 million shares Monday.
The chart: http://www.investmenthouse.com/cd/^dji.html
WEDNESDAY
CPI is released before the market Wednesday, providing more input as to hw much energy, materials, and other price hikes are working their way into consumer wallets. The market may take some solace from an in line or better reading, but the market also knows the Fed is intent on hiking rates and is ready to do it faster once it removes the 'measured' pace language at the next meeting.
That would lead you to believe there is further downside, particularly after the drop through important resistance on the large cap indices. After some further downside, however, there will be a rebound or relief move. The put/call ratio is high, NYSE volume is outpacing NASDAQ trade, breaching support after over two weeks of selling. The market tends to do the opposite of the obvious. With the breach of support there will most likely be more downside in the future, but most likely after a rebound.
Wednesday we are looking at more downside early given the reversal and drop through support on volume. After morning selling we will watch for a rebound move to start once the market has digested what the Fed said, what CPI indicates, and the remaining sellers have a chance to put in their orders. After that we anticipate a relief bounce. With a short week, however, the move may be limited as not many short term traders will want to remain in positions over a three-day weekend.
It is a market under pressure but we are not going to be chasing downside at this point unless it is downside that has its own merit, e.g. a continuing downtrend ready to move lower. General downside plays where stocks are moving with the market will be somewhat oversold at this point. Best to let them rebound and set up for the next leg lower to get the best downside leverage. As for the upside, it is a market of individual stocks, and there are still stocks that are moving higher. Many stocks had set up to rebound if the downside pressure was relieved, but they did not get the chance Tuesday. We will continue to look for strong stocks that are holding support and ready to rebound, making their own wake. After further selling Wednesday we will look for those that are able to recover and hold their support for a rebound move. At this juncture that is about all the market is giving.
Support and Resistance
NASDAQ: Closed at 1989.34
Resistance:
The 200 day SMA at 1993
2000
The 10 day EMA at 2023 and the 18 day EMA at 2036 are the near term obstacles as the index bounces.
2050-54, prior resistance and the June high is stronger
The 50 day EMA at 2056
The 50 day SMA at 2057
2066 to 2070, the bottom of the January lateral move.
2100 from February and March.
January high at 2154 (early 2004 high)
Support:
Early October high at 1971.
Late 2003 highs from 1960 to 1970.
S&P 500: Closed at 1171.71
Resistance:
1175 second high in that double top that spanned late 2001.
1185, the top of the November consolidation range.
The 50 day SMA at 1194 and the 50 day EMA at 1195.
1196, the mid-January high and the early December peak in the left shoulder.
1200
Q1 1999 lows at 1215
December high at 1218.
Support:
1163 is minor support.
1154-1157 tops from early 2004.
Dow: Closed at 10,470.51
Resistance:
Price consolidation at 10,600 level is a key level.
The 50 day SMA at 10,670
The 50 day EMA at 10,684
10,754 is the February high
10,868 from the December 2004 high.
10,975 - 11,000 from Q4 2000, Q1 2001
Support:
10,400, the bottom of the November/December range
The 200 day SMA at 10,375.
September high at 10,342.
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
March 22
PPI, February (08:30): 0.4% actual versus 0.3% expected and 0.3% prior
Core PPI, February (08:30): 0.1% actual versus 0.1% expected and 0.8% prior
FOMC policy announce (2:15): Raised federal funds rate 25 basis points. Left in 'measured pace' but keyed on rising inflation and need for more Fed action.
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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