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world stock market, us stock market
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3/23/05 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Target hit alerts: None issued
Buy alerts: VMSI
Trailing stops: CNX; VPI
Stop alerts: PD; ILA; FINL; USU
SUMMARY:
- Stocks try to rebound in face of rising CPI but continuing weakness in oil, materials undermines the move.
- CPI fuels inflation concerns.
- Oil heading for interim pullback as inventories rise.
- Fed set for full scale inflation battle, unfortunately for the market.
- Housing market remains strong but continues to plateau.
- Small and mid-caps break lower through the 50 day EMA as all major indices trade below key support and leaders struggle.
- Short week may see little action Thursday.
Weak rebound fails to provide any serious answer to recent selling.
Futures tanked on the stronger than expected CPI, but they showed resilience, rebounding from pre-market lows. Stocks opened lower but then turned positive quickly into the session. In short they had pretty much priced in the CPI given all of the oil and Fed-speak the prior session and indeed the prior week. Stocks rallied positive even as the oil stocks lagged on a weaker oil price. That price turned even weaker when the inventory data hit, driving oil down more than $2/bbl.
Stocks were not blowing away the recent selling, but they were rallying. All but the small cap indices, and they were getting hammered because of the plethora of small oil and gas companies on those indices. They rallied toward resistance and failed, but regrouped and surged in the early afternoon right into the next key resistance. They were looking decent with volume running strong, but just as they hit the teeth of resistance news hit that the third largest refinery on earth suffered an explosion with fatalities. That took the wind out of the move. Gasoline futures shot higher and stocks sold back from resistance. By the close the gains were mostly gone except in SOX.
It was not just a turn lower into the close. The small and mid-caps fell below their 50 day MA on rising NYSE volume, joining the other indices below key support. NYSE volume surged once more, posting another 2+B share session. Breadth was very weak on both indices. The negatives are not only continuing but they are moving toward more extreme levels. Thus far they have not set stocks loose with a real relief move, but the rubber band keeps getting stretched and stocks always come back to test a move whether that move was up or down. We don't think the rubber band will break on this round, but the market has not caught a break yet that would let it rebound.
THE ECONOMY
February CPI fans inflation fears as oil continues to push into other areas of the economy.
Consumer prices topped overall and core expectations, coming in at 0.4% overall (0.3% expected) and 0.3% core (0.2% expected), adding more worry over inflation and its impact on the economy. More precisely, the worry, as seen in the response to the new FOMC language, is what the Fed is going to do about inflation. In past oil spikes the move was political by the cartels that hold all of the oil. Thus the market knew that the rise would eventually crack and that there would be no 'pass through' to consumer prices. Indeed, manufacturers knew this as well and thus they would not and could not raise prices. What the Fed said or did was not that critical because investors knew the market would handle the situation.
Now that demand is driving the price investors view the odds of a near term end to the rise less probable. Indeed, even if the price rise stalls, oil would still have to drop $15/bbl or so to make a real dent in the demand and the psychology that is helping drive prices higher. Thus the Fed really has to do battle with demand driven inflation from the energy sector. It is one area that supply has not expanded and is the real root of inflation in this business cycle. Years of sitting around while oil prices were low has again caught the US without a plan for the next oil spike. In any event, it is resulting in inflation that is moving into consumer prices, and with the FOMC statement Tuesday, the Fed has laid the groundwork to do battle, using the interest rate hike club as its weapon. As we noted Tuesday, however, that is the chemotherapy method of economic health: give the economy enough poison to kill the sickness and hopefully not kill the patient.
The CPI readings only confirmed the Fed's Tuesday statement. Year over year the CPI rose 3%; the core 2.4%. Compare that with the 1% year over year gains just three months back. This spike in oil prices on top of a steady climb the prior year is definitely working into prices and that will take its toll on the economy. Indeed, we recall how even as the core failed to show rapidly expanding inflation the past year we noted that there was inflation in key areas, those areas where you and I have to spend money every day. Computers and electronics prices are falling, but as we noted before, you don't have to buy a computer every week (although we have had some models whose performance would make you think that was the case). Thus those price drops are not something we feel in our budgets.
Oil fades over $2, but not nearly far enough to make a difference.
Oil inventories rose much more than expected (+4.1M bbl) while gasoline fell more than expected (-4.1M bbl). Investors flipped the coin and higher crude inventories won out. Oil was already weak, and when the inventory data hit prices turned even lower. Oil closed at $53.81, down $2.22/bbl. Not quite time to break out the champagne of beers, however. Everyone was squawking when oil hit $45/bbl; now most would love to see it there again. Indeed, to have any real impact on pricing in all energy commodities oil needs to fall closer to $40/bbl.
It looks to have run out of some steam on this recent spurt higher and will likely move back into the forties, but dropping back to near $40/bbl is a very long shot. Some are calling this an oil bubble, and this little move higher here might be one, but that does not mean it is going down to $40 or below. Recall that it was on the ropes late 2004 and ready to break down from a head and shoulders. It did not, and wound up at $46 before spiking on this recent run.
The inventory news was good to see, and it put inventories at a 3 year high. That is with a strong economy to boot. Now the burn rate may be higher because of the strong economy, but we supposedly get more out of each barrel of oil as well. That argument will rage, but without question inventories are high as the Exxon CEO says there is no problem getting oil supply. The problem continues with refining and excess fear generated in this last move. The latter is abating and pricing is falling. Oil stocks tried to buck up at support but they are stumbling once more. Those are signs the recent spurt may be done, but they are not indicating a 'bubble' breaking as one commentator said Wednesday. Gasoline futures shot higher again Wednesday when a BP refinery exploded (it has through put of 496K bbl of oil per day); that is not going to help the economy. Probably the only way we get back to the low thirties or down to $25/bbl is through a world recession. We may not like high oil prices but worldwide recessions are even more distasteful.
The Fed's role.
Thus we have the battle lines drawn: the Fed has now stated that it sees inflation, though contained, is rising, and it would not be contained if not for the Fed raising rates. It sees pricing power in producers emerging, and it sees oil prices bleeding into the economy as a whole. The Fed did all but say inflation was not contained. We can now consider the Fed in a full fight with inflation.
That is what has the market spooked and that is what had us worried as we conducted our new year review of the 2005 market. The problem was not so much rising interest rates; rising rates are a normal symptom of a healthy growing economy. The problem was the Fed's role in the increases. It ahs to raise rates to keep them at market levels, but the Fed is always behind the curve either in raising too slowly or cutting too slowly. It also raises them too long and in the end too fast. History shows that the Fed simply is not very good at managing the economy. That is the REASON the Fed is not supposed to manage the economy, but as we have seen over the past seven years (and in many other prior instances), that is exactly what the Fed attempts to do. Greenspan says it is up to Congress to set policy, but then he goes on record during the heat of congressional debate as favoring one policy decision over another. We much prefer the current Fed's more transparent approach; the closed doors and cryptic statements from prior Feds were absurd. Markets need certainty to work well and thus Greenspan's Fed had made contributions in the transparency. It has not changed much, however, in the Fed's ability to actually get the job done.
Therefore you have a market that is now skittish. The Fed is not close to ceasing rate hikes as hoped toward the end of 2004, and it is showing every intention of picking up the pace. This is one area where past results do indeed indicate future results. When the Fed starts hiking it gets impatient and starts moving faster and faster. Then all at once the cumulative impact of those rate hikes hit the market and there are major slowdowns. This is the exact scenario we laid out to start the year, and we can see the Fed following the script with this last statement. Now the statement does not mean the Fed is going to go too far; the language seems rather reasoned (other than it viewing oil costs as inflationary as opposed to a drag on the economy). The problem is the Fed always talks a good game, but when things get emotional, the Fed succumbs to its emotions just like a novice trader.
We have always thought it would be better, given the long timeframe for rate hikes to impact the economy, to move in chunks and then back off for several months. Use all of the data to determine where neutral is and then raise rates all at once to just below that level. Tell the market this is what you are doing, and then back off for several months to see the impact. Transparent, reasoned, and more controlled because rate hikes are like compound interest: they build on each other and make their impact known at the tail end.
Where that leaves us.
Unfortunately this Fed is not doing this and thus we get the water torture treatment, wondering when the Fed will stop and knowing that it will likely go too far. That is acting as a governor on the stock market. It won't kill the market at first; stocks tend to post gains even as rates rise during the initial rate hiking. It is when the Fed gets past neutral without knowing it when the problems arise. With oil rising as well, that makes it even trickier because it is a moving target based on how oil is performing. Moreover, the Fed has hiked rates six times now over the past 9 months; while neutral is still out ahead of the Fed we can't lose sight that the Fed has already been playing this game for quite some time and as it sees signs of inflation growing it is going to lose patience as usual. Overall that means the Fed is going to keep hiking, it will increase the pace, and it will likely overshoot.
We don't think this recent market weakness is the start of rate hikes that have choked the economy. It was more a realization that the Fed was going to do what it said Tuesday it was going to do, i.e. not necessarily move at a 25 basis point per hike pace. That along with the recent oil price spike ramped up the concern of an overactive Fed and the recent decline. With the Fed in an open ended rate hiking campaign, however, that makes for continued choppy advances in the market. Then if the Fed gets too aggressive we will see the nascent signs of economic slowing just after the market makes another more volatile rollover. That is two-step signal the Fed has gone too far as seen in 2000. Thus far the economic data is still expanding, but we are always watching for signs from the leading economic data that things are starting to turn.
Existing home sales fall in February but less than expected.
The 0.4% drop to 6.79M annualized units was still more than the 6.70M expected and just under the 6.80M in January. The existing homes market is 80% of all sales made, and it is hanging in very solidly. There is a lot of talk about speculation in the housing market with even some FOMC members saying something about excessive speculation in houses. With the median price rising 11% year over year, and the turnover rate at 10% last year versus the historical norm of 5.2%, there is some merit to the idea. We have talked about this before, but from what we see there is not a massive movement into real estate speculation as seen in the 1980's just before that crash. We hear talk of flipping houses from some people we know, but they are in the real estate business to begin with. You get bubbles when Jim the plumber starts talking to you about going in on this house in the next subdivision that is perfectly located . . . There are areas where there are hot markets where people are making money turning over houses rapidly. That is still a very small part of the picture.
On the other hand, long end rates are rising once more and housing is an earlier cycle market. In this last cycle it was a really early as it never slowed down during the 'cocooning' stage after 9-11. It has thus had a long run on the back of low interest rates, cocooning, and then an economic recovery that saw a lot of second home buying. Accordingly, the market may not tank, but it has seen its strongest growth already, at least during this cycle. That is not a bad thing in itself. Housing always increases during economic recoveries and then fades as the recovery branches out. That is what is happening here. You have not heard much of late about what happens if the housing market fades, have you? Used to be the worry that if housing declined the economy would as well. Now that business has picked up across much of the economy that concern is not as widespread.
The real issues should be the focus.
Hate to keep coming back to it, but rising interest rates, spiking oil prices, and a Fed ready to escalate its war against inflation are the main factors confronting the market and the economy. Despite all you hear about the economy able to withstand $60/bbl, $80/bbl or even $100/bbl oil, that just is not true. When gasoline hits $3/gallon, that is when the pinch to the consumer really hits. In certain markets, gasoline is already there.
Further, don't be deceived by those who now say the Fed is doing a great job. Many were former Fed complainers who have backed off after the economy recovered. Well, Greenspan did not initiate the supply side tax cuts that triggered the recovery; he opposed them. Only after they worked did he give it the 'aw shucks, I was wrong' comments. He has his hands full worrying about China floating its currency as well as spiking energy, so we can sympathize. Still, the Fed is the Fed, and it has acted the same way in history even when Greenspan was not there (yes there was a time he was not on the Fed). The market and the Fed don't mix in these conditions, and there will be a point where the Fed overdoes it.
The irony of this is that there will be bears out there who will say 'I told you so' when the Fed overdoes it. They will say the fall is the next leg in the bear market, etc. they will not admit, however, that the economy was in pretty good shape as a result of fiscal policy that generated another economic surge until that move was choked off by the actions of a Fed trying to control inflation in a clumsy manner. If they want to say the Fed is part of the cycle, they can argue that but only in the loosest sense. Left alone inflation might run out of control, though the ultimate effects would most likely be less onerous than a Federal Reserve that is too aggressive and artificially chokes off an expansion.
THE MARKET
The market was bouncing but there was not a lot of upside excitement. A lot of beaten down stocks were rebounding from their recent pummeling. Volume was decent, a potentially good sign. At the same time, however, the small and mid-caps were negative, ultimately breaking their 50 day EMA on the close. Leaders (and the small and mid-caps have been leaders) were struggling as well even as the market tried to rally. If there is other leadership emerging that is not necessarily a bad thing, but Wednesday there were no emerging groups taking the lead, just those beaten down stocks rebounding modestly from the recent selling.
NASDAQ and SP500 probed near resistance but they failed mid-afternoon, helped a bit by the news of the refinery explosion, but the move did not have a lot of strength behind it even as stocks hit their peak. Breadth was still negative thanks to the weakness in small and mid-caps, and volume did not advance sharply until the afternoon selling. NYSE volume surged past NASDAQ again as the oil and materials stocks sold on volume. NASDAQ trade was lower and still below average. NASDAQ is not selling as hard as NYSE and eventually that may help, but for now it has slid lower and the bounce Wednesday could not push it back over the 200 day SMA.
The market remains oversold and the sentiment indicators are at relatively extreme levels, but the market can remain oversold until it gets a catalyst. Thus far oil, rate hikes, and fear of the Fed have kept things weak since the breakout failed. Ironically, falling oil prices may finally provide the catalyst.
Market Sentiment
VIX: 14.06; -0.21
VXN: 17.68; -0.35
VXO: 13.39; -0.36
Put/Call Ratio (CBOE): 0.83; -0.2. The modest bounce pulled the put activity back, but it has remained high for two weeks now with 5 closes above 1.0. The concerns re oil, inflation, and the Fed, however, have carried more weight.
NASDAQ
NASDAQ rallied past the 200 day SMA intraday and tapped 2000, but that was the end of the move. It reversed when the refinery news hit and sold into the close.
Stats: +0.88 points (+0.04%) to close at 1990.22
Volume: 1.796B (-4.27%). Volume remained below average and was lower on the rebound attempt. It was running lower all session and that shows there was no surge in buyers as the market tried its early rebound. NASDAQ volume remains lower overall but it is still in a distributive mode as the recent action has been higher volume on downside sessions. In short, techs are still without buyers even after 11 weeks of trying to base.
Up Volume: 1.063B (+609M)
Down Volume: 666M (-734M)
A/D and Hi/Lo: Decliners led 1.96 to 1. Breadth turned worse as the small cap techs struggled. Hardly at extreme levels, however, that might suggest a rebound.
Previous Session: Decliners led 1.57 to 1
New Highs: 29 (-33)
New Lows: 106 (+29)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
NASDAQ continued its weakness even with an upside session. It is oversold, but this rebound had no strength in it. Volume was lower as it cleared the 200 day SMA (1993) and stalled out at 2000 resistance, and it was selling into the close. As far as rebounds go this one was weak. That makes 3 upside sessions in the last 12, and they were weak upside. Very oversold but not showing any signs it is ready to move higher.
NASDAQ 100 showed similar action as it tried the 200 day SMA (1566) on the high but peeled back into the close. The large cap techs performed better, rebounding from their recent thrashing. That is what we mean by beaten down stocks bouncing back. In the end they fell back from the 200 day SMA test, still below key resistance. The large caps were holding their gains after the close, however, so they could provide some much needed upside spartk. In any event, they have a lot of rebuilding to do before they are ready to make any consistent moves.
SOX held at 410 once more, trying to establish some support at that resistance from two October 2004 peaks at that level. It is still below the 200 day SMA (408.49) on the close but showing relative strength after AMAT announced it was paying a $0.03 dividend. That may have bucked the sector up Wednesday, but when the big names turn into dividend payers, that is typically the indication that stock is no longer a growth stock. The excitement in the semiconductors is in a few relative unknowns that are trying to set up for another move but not getting a lot of help from the market just yet.
SP500/NYSE
Tried to move through next resistance at 1175, but even with stronger volume it was unable to hold that move. It is holding at a key up trendline, however, and that may give it the boost to reverse the recent selling.
Stats: +0.82 points (+0.07%) to close at 1172.53
NYSE Volume: 2.282B (+6.95%). Volume surged yet again, once more eclipsing NASDAQ trade. As noted before that indicates the more speculative index (NASDAQ) has the speculation wrung out of it. We also note, however, that much of the volume is tied to energy stocks that are on the smaller cap indices and are selling once more. As small caps have rallied faster than the rest of the market, one can argue that the speculation in those stocks is still high and they are starting a correction. Their break below the 50 day EMA Wednesday on this volume shows they still have selling to do as well.
Up Volume: 752M (+180M)
Down Volume: 1.458B (-84M)
A/D and Hi/Lo: Decliners led 3.55 to 1. Downside breadth getting uglier as the small caps fell through the 50 day EMA. Not at a -5:1 level that would be considered extreme and a possible reversal signal, so this is now just an indication of continued weakness along with the stronger distribution in the small and mid-caps.
Previous Session: Decliners led 2.53 to 1
New Highs: 12 (-49)
New Lows: 145 (+63). Even with the increase this is still at a very modest level.
The Chart: http://www.investmenthouse.com/cd/^spx.html
SP500 could not recover 1175 resistance after making a couple of runs at that level. The large caps closed positive, but with the smaller caps selling hard to call the session an accumulation. More importantly, SP500 is trying to hold a longer term up trendline (1176) from March 2003 through the August and October 2004 lows. That is the up trendline that formed on the first test of the late 2002 double bottom that marked the end of the long downtrend. Very significant that this is where SP500 is trying to hold, showing a doji at that level. That can indicate a rebound, but for now it would be a relief move. SP500 has not reached extreme levels at this point or has formed a base it can mount a sustained run from.
The small caps cracked Wednesday, dropping below the 50 day SMA (324) on very strong NYSE volume. The energy and materials stocks that have been leading and that are plentiful on the SP600 are selling on high volume. The small caps have fallen back into their January and February base. Some support at 318 and they will likely test that level before this is selling is over. They will also try to test this breach before too long, but the breach of the 50 day EMA has broken some ice. Many have called for the end of the small cap rally, but it is noteworthy that they, not the large caps, were the holdouts in the selling that started early March.
DJ30
DJ30 sold modestly, showing something of a doji well above the next support level at the 200 day SMA (10,685). Trying to hold over the 200 day and the January low (10,368). Remains in an overall toppish pattern with the higher high and unable to hold above the late December high. Ready to bounce back with the higher volume hold and rebound, but at this juncture a relief move is all it would be.
Stats: -14.49 points (-0.14%) to close at 10456.02
Volume: 326 million shares Wednesday versus 308 million shares Tuesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
THURSDAY
Last day of the trading week as the market is closed for Good Friday. Durable goods orders, jobless claims and new home sales are out before the open, but none of those have a real bearing on inflation or oil, the factors pressuring the market of late.
As noted above, it may be oil's decline that helps spark a relief move in stocks. Down over $2 Wednesday, if it moves below $50/bbl that could give some life to beleaguered stocks. There always seems to be a fly in the ointment of late, however, and Wednesday that was the BP refinery explosion that put additional pressure on gasoline futures. Details are still not completely clear as to whether it was a part of the refinery that handled gasoline though early reports say it has to do with octane levels.
Stocks are not dealing from a strong hand with the small and mid-cap breaks below the 50 day EMA. Now that they have also broken that support we may see that rebound take shape. SP500 is at the up trendline for this upside move from the October 2002 low. There is nothing really to drive an upside move at this juncture other than a relief move. After this selling even a relief move is not going to rescue stocks; it is going to take more time to rebuild, a task made more difficult by the Fed's stance regarding inflation and oil prices.
That leaves the market with almost three weeks of straight downside, approaching the January lows. It will bounce at some point over the next week; Wednesday was not that move. When it does it is a rally to leave some positions that are struggling and look for some downside to set up. A lot of damage has been done that will have to be rebuilt and again, a rebound from here is just that unless something extraordinary happens. With oil and the Fed, that is less likely.
Support and Resistance
NASDAQ: Closed at 1990.22
Resistance:
The 200 day SMA at 1993
2000
The 10 day EMA at 2017 and the 18 day EMA at 2031 are the near term obstacles as the index bounces.
2050-54, prior resistance and the June high is stronger
The 50 day EMA at 2053
The 50 day SMA at 2055
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 1172.53
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 1194.
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:
1176 is the up trendline from the March 2003 low.
1163 is minor support.
1154-1157 tops from early 2004.
Dow: Closed at 10,456.02
Resistance:
Price consolidation at 10,600 level is a key level.
The 50 day SMA at 10,667
The 50 day EMA at 10,675
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 10,376
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): 0.4% actual versus 0.3% expected and 0.1% prior
Core CPI, February (08:30): 0.3% actual versus 0.2% expected and 0.2% prior
Existing Home Sales, February (10:00): 6.79M actual versus 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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