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4/02/05 Technical Traders Report
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Technical Traders Report Subscribers:
MARKET ALERTS
Targets hit alerts: MHP
Buy alerts: WGII; OTIV (bonus)
Trailing stops: None issued
Stop alerts: MFE; AGYS
The market alert service is a premium level service where we issue intraday alerts relating to the general market conditions, when stocks hit action points (buy, stop, target, etc.), and when we see other information impacting the market or our stocks. To subscribe to the Daily alert service you can sign up at the following link:
http://www.investmenthouse.com/alertttr.htm
SUMMARY:
- Strong pre-market, strong early surge reverses and collapses.
- Jobs market softens but inflation fears stoked by ISM prices paid.
- We have to stop fearing prosperity, but no one believes the Fed gets it or is going to avoid slowing the economy.
- Big money sells into first of quarter rally that saw some new money enter.
- Stocks head into earnings season in retreat.
Stocks try to surge on belief Fed will be easier, then reality sets in.
Futures were strong even before the weak jobs report hit the wire as stocks were going to try another Wednesday-like relief move. The jobs data fueled the fire somewhat as non-farm payrolls sliced expectations in half and had some toying with the theory that the weaker data would somehow mitigate the Fed's stand on rate hikes and inflation. We even heard some opine the Fed was going to move into a holding pattern with respect to rate hikes. Nonsense.
Even so stocks opened higher and rallied quite nicely in the first half hour. Not massive gains, but a solid move upside. Then the ISM index hit, originally reported at 63.1; it was quickly retracted to an in line reading. That was not bad, but the prices paid jumped to 73 from 65. That slapped the market with harsh reality; prices were rising, the Fed has officially declared war on inflation (no 'police action' here), and despite a weak jobs report the Fed has made the decision it is going to hike rates to get them up past negative (where it is now). The market rolled over and sold off into the close on slightly rising volume. No major sell off, but it kicked the Wednesday rebound attempt out the door.
Raising rates is something the Fed needs to do, and that in itself is not bad for the economy or the market. Investors, however, have no faith that the Fed can raise rates in a benign manner that will assist or at least not impinge the economy's growth. The Fed's history is littered with economic tombstones bearing the inscription 'Taken too young, a victim of over-Fedding.' The market knows this and for now has no stomach to fight the Fed. Add to that stubbornly high oil prices and you have a struggling market, one that is looking down the road and does not like what it sees with the Fed clearly stating it is fighting inflation and consumers having to deal with $3/gallon gasoline this summer.
THE ECONOMY
Puny non-farm payrolls spark hope of a laxer Fed.
110K was less than half the 220K forecast and well off the 243K in February (revised lower from 262K). 3 million traditional jobs created the past two years in a non-traditional recovery. As noted last week, the big corps are still laying off personnel even as bottom lines have bulged. That is not going to stop. It was more of the same: factory jobs -8K, service sector +86K, temps and retail lower.
On the other side of the fence the unemployment rate fell to 5.2% from 5.4% as the household survey logged 357K new jobs. That put unemployment at a 3.5 year low. There continues to be some divergence between the two as one measures traditional jobs and the other measures whether you are working or not and that can mean for yourself, something that often occurs after the kind of boom and bust cycle of the 1990's.
This was a disappointment with the slowest job creation since July. It does not change the trend, however, one that sees steady employment increases. Is it stable as the Fed appears to view it based on its last statement? Hard to say that is the case unless you look at the household survey and its continued growth in jobs. Of course the Fed does not believe in the household survey, but reality suggests the job creation is somewhere in between the two surveys.
The disappointing news was enough to send the bond market scurrying higher and stock futures as well, the theory being that if the economy slows its growth the Fed will slow its rate hiking. That makes intuitive sense and the Fed always says it reacts to the economic indicators, blah, blah, blah. The Fed is like a stubborn old man. It may take awhile, but once it gets an idea in its head it won't give it up until it is painfully obvious that it is completely wrong.
ISM brings market back to earth.
That was driven home with the ISM. It came in at 55.2, beating the 54.9 expected and just under the February 55.3 reading. Solid though not great growth, the slowest increase since September 2003. The overall reading was not the issue, however. Prices paid surged 7.5 points, the first rise in 5 months. That stung the market that is now focusing on inflation and interest rates after wallowing in an oil-based quagmire the first part of March. Modest expansion similar to the jobs report was ultimately not the issue for a market that has no faith in the Fed's ability to hike rates and fight inflation without simultaneously causing a significant economic slowdown.
Growth and prosperity are not our enemy.
There were those stating Friday that the Fed would consider slowing its rate hiking, citing the jobs data as a reason to do so. As FOMC member Moskow said early Friday, however, the jobs report was just one data point and that it was not going to alter what the Fed believed. Logically if there were many indicators slowing appreciably the Fed would take note, but as we have previously discussed, by the time they are clearly visible the Fed has so many rate hikes in the pipeline that interest rate mortars will be raining down on the economy for months to come after it stops raising rates.
The problem with the Fed is that is populated now by Phillips Curve Keynesians that tie economic growth and jobs growth to inexorable inflation. Moskow was on CNBC Friday reciting from a 1970's textbook on economics, speaking of the Fed's decision process in terms of the gap between output and consumption, i.e., demand based. Classic Phillips curve dogma, and as you recall, the seventies were not great economic years for the US as they undermined the very principles of the Phillips Curve. Of course, nearly every recorded year of economic history undermines the Phillips curve.
You may not remember, but back in 1999 Moskow was the FOMC member who showed how thoughtful he was with respect to US citizens when he stated there needed to be more unemployment in the economy. Again, classic Phillips curve BS. They believe if there are 'too many' people working and GDP growth is 'too' high, inflation will inevitably follow unless the Fed acts to slow the economy.
There are many episodes in economic history that disprove this belief. The most recent was in the 1990's boom where incomes surged, consumption was rampant, the job market was tight, and GPD was growing off the chart. There was, however, no inflation. The Fed chased what it thought was inflation, but it was not even its shadow. The Fed made up new inflation indicators that were nothing more than indicators of economic prosperity. It raised rates right into an economic slowdown in the name of preventing inflation from cropping up. It did not because it crashed the market and the economy followed. Ironically, given how we have emerged from the crash driven by demand without the supply to meet that demand, you could say that the Fed caused the current inflation. In any event, this was just another Fed action in the face of prosperity that resulted in anti-prosperity. Moskow got his wish; several million US citizens lost their jobs and many are still not working today.
The Fed is not the only one that does not get it, however. Investors have a legitimate concern about the Fed's ability to hike rates to neutral or slightly above neutral and know when it is actually there without overshooting the mark. It has an extremely poor track record. There is also this idea, however, that higher interest rates in and of themselves are going to tank the economy.
Interest rates tend to rise with an improving economy because demand for money increases. If it is believed that the economic improvement will continue then longer term rates will rise along with short term. A smart Fed raises rates with the natural rise in rates, not getting too far ahead so as to choke off growth. Typically the Fed starts too slow and then tries to make up ground too quickly at the end. But I digress. Naturally rising interest rates does not automatically mean the economy will falter. The Fed funds rate was at 5.5% during the stock market boom from 1993 to 1995. Not until the Fed got way out ahead of real interest rates and dried up the money supply in fear of inflation did the economy choke off. Rates right now are 2.75% and basically still negative versus the real rate of interest. Raising rates in a manner that simply keeps up with the market driven rise won't choke off the economy. The 1990's are a good example until 1999 and 2000 when the Fed screwed the pooch and got too aggressive.
Why the Fed has to raise rates for now.
Even though it will likely go too far, the Fed is stuck with raising rates for now. First, it simply has to keep up with the natural rise in real interest rates as the economy continues to improve, albeit more slowly now. As usual the Fed was behind the curve and got in the game late and has to make up ground.
The other reason is there is real inflation this time, unlike in the 1990's. That decade was led by a massive supply side move where great products were and technologies were developed, and those created their own demand as companies and individuals snapped up the new technologies that did not exist before that decade. Where people once asked why they would ever need a personal computer they were now buying their second or third one. There was plenty of supply to meet demand as the boom that started in the 1980's continued.
This time around recall that demand never really tanked as is often the case in other recession. Housing remained strong and the consumer still consumed (the 'cocooning' effect). It was the business side that shut down as it was saddled with massive worthless inventories it could not move. Then came the demand side tax cuts that did nothing to jumpstart the dormant business side of the economy but did ratchet up demand even more. More demand, stagnant or less supply. That is the start of inflation. Finally the tax incentive cuts were passed and that started businesses once more investing in their businesses and getting supply going once more.
Problem is, supply still has not caught up with demand. Businesses have been reluctant to staff back up to full levels, opting to put technology to work instead whenever possible. As we hear almost daily, demand has continued to grow as the supposedly spendthrift US citizen continues to buy. Supply just ahs not caught up and the expiration of some of the tax incentives in 2004 is not helping. What may turn out to help is rising gas prices. When gas hits $3/bbl this summer the consumer is going to feel it. When more costs are passed along to the consumer the consumer is going to feel it. When fuel 'surcharges' are again tacked on to services it will be felt. That will slow the consumer, and if business spending and investment continues, that would allow the supply side to 'catch up.'
That is how you beat inflation. You have to have the supply to meet demand so you don't get the pressures of too much money or demand chasing too little supply. Supply will meet demand if left alone. Unfortunately we never leave it alone so we have the endless cycles of creating and then ending incentives as the government tries to find the right balance. Thus if the consumer pulls back for awhile on oil pricing that could help alleviate the supply/demand gap. Gasoline and oil prices, however, cannot stay at those levels for an extended period or else there is the risk of overall economic slowdown.
As you can see the Fed has a tight line to walk. Real inflation coupled with demand ahead of supply and those ever-present high oil and gasoline prices. How does it craft policy using interest rates and money supply to get more supply side investment than there already is? It can't. That is up to the executive branch and the legislature. Right now they are at gridlock on SS. They are not going to devote any time to spurring more supply side growth. That means a Fed that has to tighten further even as oil and gasoline prices will work to slow the consumer and overall economy. Again, a slower consumer may help the supply side catch up to demand, but you hate to implement a 'fix' that involves slowing your economy. As seen in 2000, 2001 and 2003, there are simply too many other negative variables (e.g., corporate scandal, 9-11) that can hit at any time. Dealing with them during a strong economy is hard enough; when you weaken it and then get hit, the results can be a disaster.
THE MARKET
You can search for silver linings in the Friday market action. You can note that SP500 and DJ30 have not broken their January closing lows, that volume has not been runaway to the downside, that breadth has been relatively decent despite some ugly sessions, and that there is even still some leadership. I also once found a nickel at the bottom of our ferret's poop dish. In short, if you look hard enough you can always find some nuggets (and I am not talking about ferret nuggets), some silver lining. There are definitely stocks that are still moving higher, ignoring the market. Overall, however, the market, despite some fog from quarter end, the SP500 rebalancing, and the like, is showing distribution and a continued negative character.
Wednesday was heralded by some serious pundits as a change in character. One day rarely, rarely is a bona fide, take it to the bank change in character. There has to be extremes in sentiment, breadth, volume, volatility, etc. While it showed an impressive point rise, Wednesday simply did not possess the volume and overall leadership to seriously vie for the crown of reversal day. Sentiment is still ambivalent. Volatility is bottom scraping. We said at the time it would take continued buying this coming week to show any change from the volume selling that has regenerated of late. After Friday's distribution session on the heels of the Wednesday rebound and Thursday snooze, however, it looks as if Wednesday's try at initiating a new rally is already dead. It typically takes just one session of distribution prior to a follow through to throttle the life out of a rebound attempt, particularly when the index patterns are weak as they are now.
Last week we discussed how another bounce might just be something the shorts sold into, and after the Wednesday bounce and Thursday rest ahead of the jobs report, the sellers had their rest and were ready to move in once more. As discussed already at length, an active Fed and surging energy prices are not the cornerstones of long, sustained rallies.
The action was classically bearish the past two weeks. Sliding lower to key support, showing some distribution along the way. Trying to set back up and rebound off the support, but then breaking sharply lower in a major breach. Then the Wednesday snap back as the shorts covered after the breakdown, a common scenario, but on weak volume. That made the test of the breach, and when the next trigger came along, in this case the prices paid component of the ISM and an unrepentant FOMC member Moskow, the break lower came home.
It was not a nasty breakdown Friday, but volume increased as the indices swung sharply from a gain to a solid loss. Again, classic bearish action as the market struggles with unknown quantities: the Fed rate hikes and the rising energy costs. Pundits pay lip service to Greenspan knowing what he is doing, but the Fed is an emotional group of humans, and their results over history emphasize that they are just as prone to overacting as Jim Carey. The market doesn't buy it. It also doesn't assertions that the US economy will be just fine until oil hits somewhere between $80/bbl and $100/bbl. With Goldman looking for a 'super spike' to over $100, well, it doesn't take much imagination to realize the market is not too sure about energy either.
Thus the continued unloading of stocks overall. There are still leaders out there, sectors and key stocks that continue to move higher as the market stumbles. Some of them are historically not good to see out in front from historical terms, at least for the overall health of the economy and the market (e.g. energy). Other sectors that have held up well were under some fire Friday, e.g. retail, as the reality of $3/gallon gasoline this summer starts to sink in. It gets harder and harder to fight the overriding action that results from the Fed and energy. The market continues to show some leadership and has not collapsed, but the erosion from distribution, even rather low volume distribution, is taking its toll. After the Tuesday rebound attempt, the reversal does not bode well for early April, and that is no April Fool's joke. Earnings are just ahead, however, and if the market ever was set up to rebound on good news, this would be it. Still, earnings are past history; the Fed and energy are still in the future.
Market Sentiment
Once more the CBOE put/call ratio topped 1.0 on the close. That marks six times in the pat three weeks it has done that. During the 2004 trading range that often signaled a rebound was coming (as few as one was enough at times). Thus far in 2005 it has meant nothing. The overall put/call ratio tallying all options exchanges showed a 0.89 reading; not enough to show the kind of fear that shows a massive switch to betting on the downside. Thus, as a contrarian indicator, it is not contrary enough in the current market environment.
Certainly we will see more pessimists this coming week as the market continues to slide. Bulls will fall, bears will rise. As noted Thursday, however, they still have a 25 point differential to bridge before we get a really good signal of worry.
Volatility is still very low. Very low. The VIX needs to vault well into the twenties before we would even get interested in what it is showing.
VIX: 14.09; +0.07
VXN: 17.61; -0.04
VXO: 13.97; +0.35
Put/Call Ratio (CBOE): 1.06; +0.33
NASDAQ
Techs gapped higher and ran into the 18 day EMA. That was it. They reversed and gave up 30 points from the intraday high, turning a second rebound attempt in three days into the second ugly distribution session in four.
Stats: -14.42 points (-0.72%) to close at 1984.81
Volume: 1.915B (+4.23%). No massive surge, but volume moved back above average for the first time in two weeks, and of course it did it on a reversal. Higher volume reversals are some of the most significant signals an index can throw off, and NASDAQ was doing that Friday.
Up Volume: 555M (-179M)
Down Volume: 1.334B (+313M)
A/D and Hi/Lo: Decliners led 1.79 to 1. The reversal kept breadth from getting too out of hand. Breadth lags the price move of the index a bit, and when an index reverses breadth often does not look that bad. We are not viewing this as a silver lining.
Previous Session: Decliners led 1.02 to 1
New Highs: 55 (+5)
New Lows: 118 (+22)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
NASDAQ not only reversed, but it turned over and sliced back through the 200 day SMA (1993) without much of a fight. The sharp break lower Tuesday cleared the downside path, and after the low volume snapback, NASDAQ is finding its way lower with relative ease. Modest support at 1971 to 1954 from October 2004 peaks. There are some interim tops at 1921 as well. After that there are lows at 1900. That is a long drop and it is not going there all at once if at all, but it can step down to that level with interim bounces.
A gap through the 200 day SMA failed as well with a big, higher volume reversal. No sign of leadership, at least upside, from the large cap techs.
SOX sliced through its 200 day SMA (413.36) as well, though it is still holding above its recent March lows near support at 410. SOX tested that level once more on the Friday low, managing a modest rebound. That will be the critical level for NASDAQ this week opens the door to the 400 to 395 level.
SP500/NYSE
The large caps reversed lower once more, tapping the 50 day EMA on the high but then falling through the post-crash up trendline on rising, above average volume.
Stats: -7.67 points (-0.65%) to close at 1172.92
NYSE Volume: 1.743B (+1.16%). Volume was above average for the fourth consecutive session as distribution sessions once more dominated the upside in the past week as the market tried to bounce on lower volume but failed.
Up Volume: 721M (-461M)
Down Volume: 1.447B (+438M)
A/D and Hi/Lo: Decliners led 1.03 to 1. Very modest negative breadth, but as noted with NASDAQ, when an index reverses intraday breadth often lags the price moves as breadth transitions more slowly.
Previous Session: Advancers led 1.59 to 1
New Highs: 59 (+14)
New Lows: 54 (+14)
The Chart: http://www.investmenthouse.com/cd/^spx.html
SP500 rallied sharply early, moving to the 50 day EMA (1190), tapping at that level on the high before reversing 17 points on the close. That took it back below the March 2003, post-bust up trendline (1180) and below the twin peaks of the early 2002 double top (1175). It is still above the January closing low (1163.75), but the continued distribution and Friday reversal gives little evidence it is going to hold at that level. The 200 day SMA (1133) looks easily reachable without too many hesitations as the index has broken lower through support, attempted to rebound, but has failed.
The small caps tried their 50 day EMA (323.77) on the intraday high but as with the rest of the market, reversed and gave up the gains (about 4.5 points). It too continues to struggle below key support in a widening topping pattern. Its action was similar to the other indices last week, breaking sharply lower from the support breach but then rebounding quickly to test that break lower. It looks to have failed in that move, and it looks ready to fall to test 310 as the next leg lower runs its course.
DJ30
The blue chips tapped the 18 day EMA (10573) intraday and then reversed with the rest of the market, falling to tap the 200 day SMA (10,378) on the low. Volume was sharply higher, the highest of the week as DJ30 reversed the low volume Wednesday bounce. As with SP500, it is holding above its January closing low (10,368). A key test of support for the blue chips as the 200 day SMA is also at important price support at 10,400 from the September 2004 interim peak.
Stats: -99.46 points (-0.95%) to close at 10404.3
Volume: 319 million shares Friday versus 259 million shares Thursday.
The chart: http://www.investmenthouse.com/cd/^dji.html
MONDAY
Very slow economic data week coming with nothing out until initial jobless claims Thursday. Feast to famine. With earnings getting started this month the market will have a short respite before having to digest this avalanche of news. As noted earlier, the selling ahead of the earnings have left them in a position, most likely after some further downside, to rebound if there is some unexpectedly good news. The market, whether trending up or down, rarely moves in a straight line. Thus it can still rebound on some good earnings results after this selling even if the rebound does not break the trend lower.
Monday the second quarter really gets underway, and there is always the possibility of yet another reversal as the fund managers all get back to work and put more new money into the market. Of course, the earth could also open up on Monday and swallow half of Houston. It can happen but the trend is lower and the action has resumed its bearish posture after an attempted rebound Wednesday and Thursday.
As noted there are still sectors that continue to lead. The energy stocks have recovered after once more flirting with breakdowns (and not all were able to right themselves late last week when they started to recover), and the ever-sexy textile area performed well last week. Moreover, utility and some materials are making further headway. In addition many leaders continue to perform in many sectors from medical to even semiconductors. If the market continues to sell more will come under pressure, but with the leaders we see across many different sectors, there is still a lot of positive activity in the stocks that have been turning in the best growth and growth prospects.
Many are heading lower, however, and the selling and distribution is only setting them up for further downside. We can look to some of the indices for downside plays after the failed Wednesday rebound as well as many individual names that are already in continuing downtrends. We prefer downside plays on those stocks that are already trending lower and have made their typical rebound up to resistance in the downtrend. They are ensconced in the trend and are less likely to reverse out of the trend on us versus a stock that has sold off hard and looks ready to break even lower only to rebound. We tried some of the oil and gas plays last week and they rebounded on us. Thus we won't be going to that well unless we see downtrends that have already formed; there are a few of those out there even in energy, coming off peaks and making their second turns lower from resistance.
In short we anticipate continued weaker action in stocks as the Fed and oil continue their moves into unknown territory. Those uncertainties are leading big money to move out of the market until such time as there is another perception the Fed is getting close to ending its hikes and oil is peaking. The money will come back before the outcome is clearly determined, but the action last week indicates it is not near that stage yet.
Support and Resistance
NASDAQ: Closed at 1984.81
Resistance:
The 200 day SMA at 1993
The 18 day EMA at 2012
The 50 day EMA at 2040
The 50 day SMA at 2044
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:
Early October high at 1971.
Late 2003 highs from 1960 to 1970.
1954 from October as well.
1921 at the September 2004 highs.
S&P 500: Closed at 1172.92
Resistance:
1175 second high in that double top that spanned late 2001 and early 2002
March 2003 up trendline at 1180
1185, the top of the November consolidation range.
The 50 day SMA at 1192 and the 50 day EMA at 1190.
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.
The 200 day SMA at 1151
Dow: Closed at 10,404.30
Resistance:
The 10 day EMA at 10,510 and 18 day EMA at 10,573.
Price consolidation at 10,600
The 50 day EMA at 10,630
The 50 day SMA at 10,654
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 10,378
September high at 10,342.
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
April 07
Initial Jobless Claims, 04/02 (08:30): 350K prior
Wholesale Inventories, February (10:00): 0.7% expected and 1.1% prior
Consumer Credit, February (3:00): $8.0B actual versus $7.5B expected and $11.5B prior
End part 1 of 3
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