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SUMMARY:
- Big snapback but in keeping with recent character, volume lags.
- 3.8% Q4 GDP softer than expected, dollar falls on news.
- Plenty of crude, but turning it into gasoline is the problem for the summer.
- Tuesday break lower brings in short covering bounce.
- Economic data ramps up starting Thursday, and if stronger that insures a tougher Fed and possible market backlash as a result
Market doesn't wait any further, snaps back sharply right after breach of key support.
The sharp break lower Tuesday begged a rebuttal after three weeks of selling, but we were looking for another drop to set the rebound. The market did not wait any further, however, bouncing back at the open and rallying back. Unlike prior attempts there were two big differences: it held the move into the close, indeed sprinting to the finish; breadth was also strong as well, not a paltry rebound led by one or two large cap sectors. NASDAQ retook the 200 day SMA while SP500 moved back above its March 2003 up trendline. That is a lot of work in one session.
But then again, snapbacks tend to be violent. The rubber band is stretched and then something sets it off. The market was already looking stronger Wednesday, but when crude oil inventories sloshed over the market and oil fell well over $1/bbl, the upside move was lubricated even better. Stocks were getting primed to rebound, and the big splash of the crude oil build fueled the bounce even further.
Nothing is every perfect, however, particularly in this market. Volume again lagged as stocks moved up. NYSE volume was still above average so it was not so bad but NASDAQ lagged considerably, turning in another lower, below average volume bounce. NASDAQ remains a laggard even when it led the price charge higher on Wednesday. That low volume shows fewer buyers than sellers, at least on this move. It could change with a follow through session next week, but in this market with the negatives it has shown, that is not the best conclusion at this juncture.
There was a lot of breadth as noted, but the volume did not give a lot of strength to the upside moves in individual stocks either. To the point, there was not a lot of leadership moving on strong trade; a lot of stocks moved, but not a lot on strong volume. We heard one commentator exclaim the internets were 'on fire', but after the nasty plunge recently the moves were modest in comparison. As with the market overall it was a relief move from the selling.
The move obviously has more meat on the bones than the other recent rebound attempts and could provide a run right into the Friday jobs report. It will need to keep the breadth and attract more volume to show that more investors are moving back in. It still has the look of a relief bounce at this point and with the lower volume has not changed its character. We are approaching it as such, not buying into the move wholesale, but looking for stocks that held on the selling that are moving up on volume while we wait for the weaker ones to set up for more potential downside. Again, there were not a lot of strong volume movers yet on Wednesday.
THE ECONOMY
GDP at 3.8% falls below expectations of a 4% rise.
Expectations were for a bump higher to 4%, but the trade deficit offset rising inventories and kept the final reading at 3.8%. It was a one of those reports that affirmed the growth but did not spook investors with a 'too hot' reading. Of course here at the end of the first quarter, fourth quarter stats seem far removed. Basically the report showed continued solid growth and did nothing to spook anyone that the growth was slowing or rising too quickly.
Indeed corporate profits were up 12.5%, the strongest gain since an 18.9% surge in Q4 2001. For the year GDP rose 4.4%, an excellent rate. All great news, all past history.
That does not mean you ignore the report. The Fed won't because the price deflator posted a 1.7% gain, twice the 0.8% gain in Q3. The deflator is how much you have to mark down GDP based on the rise in inflation. The more inflation, the bigger the deflator. Greenspan factors the deflator into his overall inflation scheme, and there is no doubt this corroborates his and the Fed's view that rates must rise to stave off further inflation. Thus rates will continue to rise, and most likely at a faster pace as the Fed become more concerned it has let the genie out of the bottle.
Oil inventories rise, gasoline falls.
Once more the market awaited the weekly oil stockpiles, and once more it is evident that there is a lot of crude oil available in the world. Inventories grew by 5.4M bbl, much better than the 3 million range expected. As the Exxon CEO stated a few weeks back, supply is not a problem.
That is the current condition. What is driving the market is the future and fears that we are running out, burning up more oil than we can replace. Otherwise with this streak of significant weekly builds oil would be lower. It would be even lower if the dollar were stronger as well. Markets are never really driven by just one factor, and this combination of elements is keeping prices higher than they would be. No one has a handle on just how much oil can be produced over the next ten years, but much of what they see indicates that use is vastly outstripping additional reserves. Of course it does not help that giants such as Royal Dutch Shell keep revising their statements of reserves lower and lower. This has created an environment of uncertainty on many levels, and uncertainty about supply with respect to an important commodity exerts upside pressure.
Oil slumped on the news of the large build, falling almost $1.50/bbl. It bottomed, however, and started to climb back steadily during the Wednesday session. By the close it was down less than a quarter. Again, current supply is one thing, beliefs about future supply control the market.
Case in point is gasoline. Supplies fell 2.9M bbl the past week, more than expected, but overall supplies are up 6.3% above levels at this time last year. Supplies are higher, but the fear is that supply will not keep up with demand, and the BP refinery explosion only added to that concern. Consequently prices are at summertime highs in the spring even with strong current supply. Last year prices worked higher along with oil prices, and the market suffered in the summer. We can look for a similar price problem this summer based on current prices versus supplies, and $3/gallon gasoline is not going to do the economy any favors.
THE MARKET
The Tuesday push lower brought the rebound as expected, but it did it without the final dip lower we were looking for. That does not change the situation much, but it did give the indices a better run at resistance. They made the most of it with a sprint to the close taking NASDAQ and SP500 back above the support they just broke.
Three weeks of selling with plenty of distribution and a sharp break below resistance brought in the short covering. It did not hurt that Thursday is the quarter end and after dumping some dogs Tuesday the fund managers looked to dress up their portfolios for those reports sent to investors.
The breadth was more impressive than usual on a relief move, but the entire market was sold off ahead of this rebound with the small and mid-caps finally breaking down as well. Thus when the covering started the entire market moved. Volume was lower so it was not a bonanza of buyers returning to pick up stocks.
It could lead to further upside in two forms: a further relief bounce Thursday and into Friday that runs out of steam or a bit more bounce, a stall, and then a follow through next week. The former is a continuation of the weakness, the latter a change of character and indicate more sustained upside. The change of character is the key; heading into Wednesday the market was distributing, and the rebound Wednesday did not change that. There is another alterative, the one day wonder. Most likely Wednesday was not that; as noted above, there was more meat on the bone with the rally into the close and the breadth. At this juncture the lower volume and lack of leadership says relief bounce to the recent selling.
Market Sentiment
Volatility shifted back below the 200 day SMA Wednesday and the put/call ratio fell, but that is what you expect when the market rallies. We still do not believe sentiment levels were at levels that would indicate a sustained rebound though the bears in the bulls/bears tug of war continue to grow.
VIX: 13.64; -0.85
VXN: 17.36; -0.63
VXO: 13.3; -0.63
Put/Call Ratio (CBOE): 0.83; -0.14
NASDAQ
NASDAQ jumped back above the 200 day SMA and 2000, but volume was lower. A first step and good to see a quick response to the breach, but still no strength.
Stats: +31.79 points (+1.61%) to close at 2005.67
Volume: 1.783B (-3.24%). Volume was lower and still well below average. It was higher but still well below average on the Tuesday selling. Most of NASDAQ's trade the past two months has been below average, but it has recently started showing distribution (higher volume selling). It will have to ramp up the trade on the upside moves to rebuild its pattern.
Up Volume: 1.44B (+1.01B)
Down Volume: 221M (-1.18B)
A/D and Hi/Lo: Advancers led 2.24 to 1. Better breadth on the upside but as with volume, still unable to top recent negative breadth on the selling.
Previous Session: Decliners led 2.71 to 1
New Highs: 33 (-11)
New Lows: 89 (-40)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
After selling through the 200 day SMA (1992.90) in a sharp break lower, the shorts moved in and covered positions. That pushed NASDAQ back above that support level and over 2000. The late push higher jumped it past the 10 day EMA (2003) where it stalled intraday, a modest victory. It remains below the January low (2008.70), the 50 day EMA (2044), etc., and unless volume turns up it will likely fail a lower volume relief move.
Similar action on NASDAQ 100, clearing the 200 day SMA (1482) on lower, below average volume as it too rebounds from the recent selling that pushed it into its second down leg of the 2005 selling. There is resistance at 1500 and then at the 50 day EMA (1511). If volume does not improve we look for it to fail around those levels and continue the second leg.
SOX recovered the 200 day SMA (413) as well, but it stalled out near the 50 day EMA (421.47). Hard to stay 'stall' as it closed at the session high. In better shape than most of the indices, trying to make a higher low at support at 410.
SP500/NYSE
The large caps moved right back through 1175 and the March 2003 up trendline, but as with NASDAQ, volume did not follow.
Stats: +16.05 points (+1.38%) to close at 1181.41
NYSE Volume: 1.707B (-5.91%). Volume was above average but was still below average as the large caps rebounded. Some covering, some window dressing ahead of the end of quarter.
Up Volume: 1.772B (+1.226B)
Down Volume: 342M (-1.311B)
A/D and Hi/Lo: Advancers led 3.24 to 1. Excellent breadth to the upside as large and small caps moved higher. If there was good volume that would have been a very positive sign if you ignore the bad patterns. Point to remember: the entire market sold recently across the board. Thus there was some covering across the board.
Previous Session: Decliners led 2.11 to 1
New Highs: 26 (+1)
New Lows: 52 (-37)
The Chart: http://www.investmenthouse.com/cd/^spx.html
SP500 cleared the March 2003 trendline (1179) in one swoop after the Wednesday volume selling. Good recovery on many fronts without the further move toward the 200 day SMA near 1150, but it has not reversed the bearish pattern. It will have to show a significant volume move next week as a continuation of this reversal attempt. A better showing than NASDAQ with respect to volume and the move will likely lead to further upside overall, but it will have to change its stripes in the process.
The small cap SP600 bounced right back as well, regaining all of its Tuesday loss. Unlike the other indices, it is still below its key support that it broke last week (the 50 day EMA at 324) and how it handles that level on this test will tell us more. Last time it failed to make the move. Looks as if it will try that move again.
DJ30
Bounced off the 200 day SMA (10,377) and cleared 10,500 with ease. Volume was lower and average as it made the move, a familiar story. It bounced at support and at the January low. As with SP500 that does not change the pattern, just sets the neckline to a head and shoulders trying to form up. Remember, head and shoulders patterns threaten to form from time to time, but until they finish and break down they are just possibilities. Focus on the volume versus the price, the leadership, and where the rebound attempt is. This is the first step. It has more to prove, particularly at the 50 day EMA (10,644) if it can make it there.
Stats: +135.23 points (+1.3%) to close at 10540.93
Volume: 276 million shares Wednesday versus 301 million shares Tuesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
THURSDAY
The economic data starts to roll Thursday with regional manufacturing, personal spending, and factory orders. That is the lead in to the Friday jobs report and national manufacturing report. The strength or weakness of the Thursday reports will influence fears of inflation and assumptions as to how the Fed will act. The market will view it that way, but the overriding issue is that the Fed is going to keep hiking for now and it has suggested it will do so even more aggressively.
Tuesday the mood was glum and we noted that the pessimism was about to the point where it would provide a relief move; it came a day earlier than we thought. After the close Wednesday there was a split. Some said Wednesday washed away the negatives of Tuesday while others remained skeptical. Wednesday did not wash away Tuesday; Tuesday was part of a longer downtrend. When key support was broken after that downtrend some short positions were covered. That is nothing unusual. Short covering is the first step to any rebound whether the rebound is just in relief of if it is the start of a sustained move higher.
Wednesday had both strong points and weaker points. Strong breadth, closed at the high, retook support that was just broken. Lower volume and lack of strong leadership are some pretty serious weak links. In addition, oil was rising again even though a strong drop in the commodity helped fuel the rally.
Where it takes us remains to be seen. Quarter end shuffling/window dressing had something to do with the action as funds load up on the winners for the quarter and sell the losers. Short covering ahead of key economic data was another factor. In short, Wednesday did not just sweep away the prior three weeks of downside.
With the negative character of the market we are viewing this rally as one to potentially sell into with respect to marginal positions. We will continue to look at the strong leaders that pulled back in the selling, held key support, and are rebounding on strong trade. Those used the selling as a breather and are ready to move higher. Others in downtrends (the majority) have a lot of overhead supply to beat that was built up over the past three weeks. They can do it, but it typically takes a bit of rallying, then back filling, rallying, etc. to rebuild their patterns and get rid of the overhead supply. Thus this run higher will meet resistance and stall out; they key for it is whether there is subsequent follow through next week or if it just fizzles and rolls over and continues the second leg lower in this 2005 selling.
Until it shows us that we are going to have to play the upside cautiously with the strongest, watching overall volume as the market moves higher. If the move fails it will have set up some decent downside position. With oil and a hiking Fed still unresolved, the market will continue to face obstacles as it struggles through this base.
Support and Resistance
NASDAQ: Closed at 2005.67
Resistance:
The 18 day EMA at 2017.
The 50 day EMA at 2044
The 50 day SMA at 2048
2050-54, prior resistance and the June high is stronger
2066 to 2070, the bottom of the January lateral move.
2100 from February and March.
January high at 2154 (early 2004 high)
Support:
The 200 day SMA (1993).
Early October high at 1971.
Late 2003 highs from 1960 to 1970.
1921 at the September 2004 highs.
S&P 500: Closed at 1181.41
Resistance:
1185, the top of the November consolidation range.
The 50 day SMA at 1193 and the 50 day EMA at 1191.
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:
March 2003 up trendline at 1179.
1175 second high in that double top that spanned late 2001.
1163 is minor support.
1154-1157 tops from early 2004.
The 200 day SMA at 1151
Dow: Closed at 10,540.93
Resistance:
The 10 day EMA at 10,540 probably won't stop it.
Price consolidation at 10,600 level is a key level.
The 50 day SMA at 10,660
The 50 day EMA at 10,644
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 10,377
September high at 10,342.
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
March 29
Consumer Confidence, March (10:00): 102.4 actual and 103.0 expected and 104.4 prior (revised from 104.0).
March 30
GDP-Final, Q4 (08:30): 3.8% actual and 4.0% expected and 3.8% prior
Chain Deflator-Final, Q4 (08:30): 2.3% actual versus 2.1% expected and 2.1% prior
March 31
Initial Jobless Claims, 03/26 (08:30): 320K expected, 324K prior
Personal Income, February (08:30): 0.4% expected and -2.3% prior
Personal Spending, February (08:30): 0.5% expected and 0.0% prior
Chicago PMI, March (10:00): 60.5 expected and 62.7 prior
Help-Wanted Index, February (10:00): 41 expected and 41 prior
Factory Orders, February (10:00): 0.5% expected and 0.2% prior
Apr 01
Auto Sales, March (00:00): 5.4M expected and 5.3M prior
Truck Sales, March (00:00): 7.8M expected and 7.6M prior
Non-farm Payrolls, March (08:30): 220K expected and 262K prior
Unemployment Rate, March (08:30): 5.3% expected and 5.4% prior
Hourly Earnings, March (08:30): 0.2% expected and 0.0% prior
Average Workweek, March (08:30): 33.7 expected and 33.7 prior
Michigan Sentiment-Rev., March (09:45): 92.5 expected and 92.9 prior
Construction Spending, February (10:00): 0.6% expected and 0.7% prior
ISM Index, March (10:00): 54.9 expected and 55.3 prior
End part 1 of 3
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