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04/04/05 Investment House Daily
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SUMMARY:
- Stocks rally back from a weak start, close positive but on light volume.
- Few schedule economic reports, but more hawkish Fed is active this week.
- Afternoon rebound fails to push indices back through resistance.
- Earnings warnings start after hours with some technology names as stocks try to hang on ahead of earnings season.
Stocks turn back early selling, close positive on afternoon rally.
A modest bump higher in the first few minutes quickly gave way to continued selling from the Friday rollover as it looked as if the failed test late last week would lead to some continued downside. Stocks did sell and were looking quite weak. Higher oil, topping $58/bbl early on, was an oft-cited reason for the weakness. Oil rose even as OPEC dropped more hints about pushing up production another 500K bbl/day; current supply once again did not do much to placate a market that is worried about running out of oil in the future.
It also did not help that Greenspan has unleashed the FOMC members to the airwaves to spread the word about a more hawkish Federal Reserve with respect to interest rates. Poole was out this morning talking about inflation and the need for the Fed to act decisively to keep it in check. That PCE number from the spending and income reports last week has the Fed on inflation alert status. It was at 1.6% annual, right at the Fed's target. That is where the Fed wanted to see the level in order to show there was some growth as opposed to deflation that was the concern in 2002 and 2003.
This week Greenspan speaks three times and there will be several other speaking engagements by other FOMC members where they will explain to the rest of us just what needs to be done with the economy and how the steady and firm (yet gently so) hand of the Fed is going to guide us through this uncertainty. In short the Fed is hitting the streets similar to Bush's social security national tour with the intent to get us all ready for continued and in all probability more intensive rate hikes. This is the typical MO of the Fed before an official change in its policy: fan out the henchman and talk about how a change is in all likelihood coming. Of course no decisions have been made, but the 'signs' indicate that some different action is necessary.
One wonders if this will be any more effective than the Bush road tour. Thus far the market has certainly given an active Fed the thumbs down with respect to an open-ended rate hiking campaign. The market never likes a Fed that is hiking, and this one has already hiked rates several straight meetings and still has by all reckoning a long way to go. The market is not so much worried about the next few rate hikes, but whether the Fed will get too aggressive as it always does when the first few low BP hikes appear not to impact the economy. 50 BP hikes are much rarer than the 25 BP 'baby steps,' but Greenspan has shown that he is not afraid to use that ammunition as he did in May of 2000 with one last rate hike right as the market was ready to really seize up that fall. Thus no warm and fuzzy feelings with the prospect of what follows after the FOMC members say their lines this week.
Stocks recovered, however, aided by oil that turned back from rallying over $58 early and closed at 57.01, down 26 cents. As oil and oil stocks turned lower, stocks generally recovered. They turned positive in the afternoon and rallied into the last hour. NASDAQ recovered its 200 day SMA, but dipped late and closed just below that level. Basically it is testing that level once more and the actual close is similar to horse shoes; it is close. Volume did not recover, however, coming in significantly lower on the second trading day of Q2.
Stocks basically rebounded from a sharp turn lower on Friday when they cut back through support on rising volume following the low volume rebound attempt Wednesday. Once more stocks bounced after undercutting key support, and once again the bounce was weaker than the selling. That keeps the market in a negative character with NASDAQ and SP500 near though just below some important resistance at the 200 day SMA and March 2003 up trendline, respectively.
THE ECONOMY
Very little in the way of scheduled economic data due out this week, and none until Thursday. Prior to that we will hear from Greenspan and several FOMC members discussing inflation at various events. As noted, we expect that when inflation issues arise the Fed members will discuss the need to stay vigilant with what is a tightening inflation picture. In short, they are laying further groundwork after the last FOMC meeting and statement change to prepare us for some stronger medicine against inflation.
There are signs that the oil and gasoline rise is impacting the economy already, though overall the economic momentum is carrying the expansion forward. The market is not acting well. The economic data is still solid but shows some browning around the edges. That can mean just a normal slowdown before things move forward again, but with the market struggling while the economy appears more or less fine, you have to start looking at the weakness and also factor in $3/gallon gasoline in the summer.
The Fed hiked into the 2000 slowdown when there was no real sign of inflation. Now it is hiking into what appears to be some slowing, but there is inflation as well. The Fed cannot control oil prices unless it slows the economy so much that our demand falls. That is not desirable so the Fed plays this open-ended rate hiking campaign to stave off some inflation pressures yet avoid a major slowdown. Thus it would likely be quite unwise to start with 50 BP hikes and not tell the market it intends to raise to a certain level and then take a major pause to see how things shake out. If it starts hiking in 50 BP chunks but leaves things open ended, the market will find it difficult to make headway and the economy is put under pressure as well. The Fed is in a tough position as it still wants to get rates higher to give it some maneuvering room for future calamities yet knows that spiking oil prices are more of a tax on the economy than an inflationary problem.
THE MARKET
After a morning continuation of the Friday weakness, stocks rebounded in the afternoon. NASDAQ reclaimed its 200 day SMA (1993), but it failed to hold that level on the close. SP500 tapped the 10 day EMA on the high and closed over 1175 but below the March 2003 up trendline. Pretty close, but the volume was weaker and the breadth was puny. NASDAQ 100 led overall NASDAQ as many of the roughed up large cap techs rebounded.
It was no show of strength, but again the market refused to go ahead and sell off. It ducked lower last Tuesday on volume but rebounded the next session. That move did not hold and stocks fell Friday once more on rising volume. Monday they fought off an early selling follow through and posted another gain. Low volume and narrow breadth, but hung in there to fight again. Earlier this year the market pulled a couple of rabbits out of its hat and managed to recover and rally into February and early March. It looks weak, it acts weak, but it has yet to give up. That keeps the possibility of a follow through session to last Wednesday's rebound session alive though the Friday distribution session dealt it a sharp blow.
For now, despite the recent, albeit weak, attempts to recover, the price/volume action shows higher volume on the selling, and that continues to point to further selling in stocks. That higher volume selling indicates funds and other institutions are selling stocks. The Fed and oil prices are formidable economic and thus market adversaries, and some of the big money has been selling out shares in the uncertainty about what those two negatives hold for the future. As of yet SP500, DJ30, SP600 and SP400 have not taken out their lows for the year, and that keeps them in a base for now, though the bases have a more toppish look to them at this juncture indicating further basing is necessary. At the same time the continued distribution is eroding the base out from under them.
Market Sentiment
VIX: 14.11; +0.02
VXN: 18.07; +0.46
VXO: 13.49; -0.48
Put/Call Ratio (CBOE): 0.88; -0.18
NASDAQ
Tech stocks recovered some ground, coming back from early selling to try a break above the 200 day SMA. Volume was lower, and thus it could not hold the move back over that support level as it dipped late.
Stats: +6.26 points (+0.32%) to close at 1991.07
Volume: 1.632B (-14.77%) . Volume dropped from just above average Friday to significantly below average Monday, the lowest volume since the prior Monday. Maybe it was a Monday thing, but lower on a gain nonetheless. Most of NASDAQ's action has been on below average volume for over a month, but the distribution has still occurred as the index slipped lower and broke through the January and February lows. Sometimes it is quieter as it has been here, but it has worked NASDAQ below the key 200 day SMA.
Up Volume: 841M (+286M)
Down Volume: 776M (-558M)
A/D and Hi/Lo: Decliners led 1.19 to 1. Modest index gains but still negative breadth. Much of the move was in the larger cap issues that control most of the index' movements, and thus the weaker breadth. Further, it was a late rebound, and that can keep the breadth figures skewed some. Still, a lower volume and narrow breadth rebound is not one to get too excited over.
Previous Session: Decliners led 1.79 to 1
New Highs: 42 (-13)
New Lows: 135 (+17)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
Rallied off the morning low that held support near the October 2004 high (1971), rising above the 200 day SMA (1993) in the last hour. The index slipped some the last 15 minutes, and that kept it below the 200 day on the close. Pretty close, and still no official decision on which side will when out, but the higher volume reversals and negative closes versus the lower volume upside gains suggests the sellers are more active and are still unloading positions. Again, it has yet to give in, and that holds out the possibility of a recovery through this level as NASDAQ has moved more or less laterally the past two weeks, moving around the 200 day. Buyers will have to step up, however, and again, they are in the minority for now with uncertainty about the Fed and oil.
NASDAQ 100 led overall NASDAQ with a 0.5% gain. It was up to 0.8% but that larger lead faded some into the close. Similar to NASDAQ it remains below the 200 day SMA (1482) but moving laterally the past 12 sessions. It is showing some distribution and it is below the 200 day, but it is trying to hang on and set up another move. Overall, however, the trend remains down.
SOX put in the only loss for the session, but it rebounded to close very near the 410 level that has propped up the index the past two weeks. Struggling to hang onto its pattern as it too works below the 200 day SMA (413.14). It is being stubborn at the 410 support level as the sellers have been unable to put it away.
SP500/NYSE
SP500 rebounded from early weakness as well, but it too could not retake key resistance and volume faded as it rebounded from the Friday selling.
Stats: +3.2 points (+0.27%) to close at 1176.12
NYSE Volume: 1.671B (-4.12%). Volume was still above average, but it faded once more on an upside session that followed a higher volume downside or distribution session. Unlike NASDAQ, NYSE volume has moved above average the past week as it bounces up and down along its up trendline. That volatility and wilder volume signals increased activity; if the price/volume action was without distribution we would view the action as more of a positive.
Up Volume: 1.024B (+303M)
Down Volume: 1.023B (-424M). Very evenly matched but overall volume was lower.
A/D and Hi/Lo: Advancers led 1.08 to 1. Modest breadth was hurt as the energy stocks turned back during the session. Many of those stocks are listed on SP400 or SP600 (small caps), and when they are under pressure they drag down breadth.
Previous Session: Decliners led 1.03 to 1
New Highs: 59 (0)
New Lows: 57 (+3)
The Chart: http://www.investmenthouse.com/cd/^spx.html
SP500 continued its somewhat lateral walk along 1175 and the March 2003 up trendline just over 1180. It is holding above the January closing low (1163.75) as it tries to recover above 1175 and the up trendline. Friday it attempted that move, making it up to the 50 day EMA (1189.45) before it rolled over. As with NASDAQ, it is making a try at holding this level, but it too is suffering distribution, selling on stronger volume than it can put together on a bounce. Toppish pattern as well, and if it fails below this trendline sharply, it will fall to the 200 day SMA (1151) to start with after a very weak right shoulder to a head and shoulders pattern. It has recovered from what appeared to be a more definitive drop lat Wednesday, but it still has not retaken the key levels and its price/volume action has indicated further distribution and opens the door for a fall from this resistance.
The small caps posted a modest gain, holding that 320 level from late February once more. Still below the 50 day EMA (323.66) and distributing with the overall NYSE, but holding up reasonably well. It is trying to work through a toppish pattern along with the other indices, holding this near support and well above the January low (310).
DJ30
The blue chips undercut the 200 day SMA (10,378) on the low but rebounded with the rest of the market to retake that level and post a modest gain. It has tested and held the 200 day on three occasions in the past two weeks, showing some distribution last week. Volume was lower Monday, but it also was still above average. It has backed down to the 200 day and the January closing low (10,368) and is trying to make a stand. AIG bounced Monday, and that took some of the pressure off of DJ30. It is in position to bounce as it has held the 200 day and 10,400. Not sure if it can lead the other indices, however.
Stats: +16.84 points (+0.16%) to close at 10421.14
Volume: 293 million shares Monday versus 319 million shares Friday.
The chart: http://www.investmenthouse.com/cd/^dji.html
TUESDAY
No scheduled economic data but we will hear more from the Fed and its line that it has to continue its hiking to keep inflation at bay. Again, there is nothing inherently wrong with the Fed hiking rates; it is just what happens when it cannot figure out when to stop.
The rebound keeps the possibility alive for a follow through to last Wednesday's rebound, but there are some obstacles. The Friday higher volume selling immediately on the heels of Wednesday move shows sellers are still in charge. There is also some key resistance that have been sold through and are now trying to hold back upside. The continued distribution has been eroding the upside move, burning through the buyers.
Thus the market keeps its negative spin despite the Monday rebound. Monday bought the market some time but it did not change the character. In addition, earnings warnings started coming in after hours with some rather minor players (ATRS in software and RSAS in security software) saying they were going to miss expectations. They were hammered after hours as you would expect. They may not have a lasting impact on stocks Tuesday, but the earnings pre-season got off to a rougher start.
Stocks may try to follow through to the upside Tuesday but with the recent price/volume action we do not expect them to make a breakthrough. The continued higher volume selling shows more sellers than buyers and often signals even more selling to come. The market can always turn on a dime if it gets the impetus, but with the Fed posturing more aggressively and oil still strong, the impetus would have to come from somewhere else. Earnings may be that somewhere else; the market has sold ahead of them, and some robust guidance could be the fuel buyers need to venture back in. Earnings don't ramp up until later this week, and thus in the interim the market may simply continue that lateral move along resistance.
Support and Resistance
NASDAQ: Closed at 1991.07
Resistance:
The 200 day SMA at 1993
The 18 day EMA at 2010
The 50 day EMA at 2038
The 50 day SMA at 2043
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 1176.11
Resistance:
March 2003 up trendline at 1180
1185, the top of the November consolidation range.
The 50 day EMA at 1189 and the 50 day SMA at 1192.62
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:
1175 second high in that double top that spanned late 2001 and early 2002 is being boxed around of late.
1163 is minor support.
1154-1157 tops from early 2004.
The 200 day SMA at 1151
Dow: Closed at 10,421.14
Resistance:
The 10 day EMA at 10,494 and 18 day EMA at 10,557
Price consolidation at 10,600
The 50 day EMA at 10,622
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): 330K expected and 350K prior
Wholesale Inventories, February (10:00): 0.7% expected and 1.1% prior
Consumer Credit, February (3:00): $7.5B expected and $11.5B prior
End part 1 of 3
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