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us stock market, trade stock
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04/06/05 Investment House Daily
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SUMMARY:
- Stocks continue rally but give most back by the close.
- Crude supplies continue to rise as gasoline inventories fall again.
- Is it Housing Secretary Greenspan, Energy Secretary Greenspan, or chairman Greenspan?
- Bounce runs out of buyers, fades into close, staying in the range.
- Watching the selling volume as the market pulls back in its current range.
No gas left in the tank after morning gains.
Futures were up and stocks continued their upside move at the bell, aided by a semiconductor sector upgrade and oil trading lower on the heels of the Greenspan Tuesday speech and ahead of the oil inventory data due later that morning. NASDAQ moved off the 200 day SMA, cleared the 18 day EMA, and kept on going to 2017. SP500 moved through 1185 and on up to the 50 day EMA (1189). That early move was aided after the first hour by an oil inventory report that showed another substantial build in crude stocks.
Techs, large caps and small caps sailed through near resistance and on up to the next level. Volume was up early but was still light overall. Right before lunch, however, the buyers ran out. The 50 day EMA on both SP500 and SP600 proved too much without more firepower from the buyers. Stocks stalled and started to slide lower into the close.
The action reversed the prior two sessions that showed a return to more bullish rallies into the close. After a 2.5 day move on no volume, a rollover at key resistance would almost be expected. Buyers stopped buying and that started a slow lowering of bids as buyers went cold. Sellers did not suddenly surge back into prominence; they were tentative with overall volume remaining low. NASDAQ volume, however, did climb higher as NASDAQ reversed, showing a tombstone doji, and closed lower. Not a major, 'ah ha' reversal, but a milder version of what the market has shown lately: distribution, even if somewhat veiled.
All in all it was not a bad session. Stocks did not run out of gas and then get throttled by sellers. That is mainly what we were watching for, and even though the indices finished at the bottom of their session range and gave away another move it was no reversal. Stocks will likely trade a bit lower but hold within the range . . . unless volume spikes up again to the downside. The action has yet to get rid of the distributive character, something that was still evident Wednesday even if it was quite subdued.
THE ECONOMY
Crude supplies rise again, gasoline supplies fall again.
Crude supplies rose by another 2.4M bbl, the eighth week of gains and pushing supply to a 25 year high. Gasoline supplies dropped 2.1M bbl, but supplies still remain 5% higher than same time last year. Gasoline prices, however are $0.45/gallon higher than they were in 2004. Heck, so is crude. Supply is higher, but anticipated demand is higher as well, and that is keeping prices up.
As Greenspan noted Tuesday, spot prices are lower than futures contracts prices. That is indeed allowing inventories to build, but it has yet to have much of an impact on prices. Yes oil fell marginally the past two sessions, but not in line with the current levels of supply. There are two possibilities: the market senses that supply, even if elevated at the moment, will not meet demand because production is insufficient, or there is a bubble that will pop.
As to the former, Greenspan noted that higher prices and demand brings about more supply. No doubt. If the demand is there money will flow to that area to meet demand. Problem is, that takes a long time with energy supplies. For example, ANWR drilling has been approved, but it will be at least 10 years before we see drop one from there. You have to conduct further seismic to pinpoint drilling locations, get the equipment on site, drill, set up production facilities, and set up delivery systems. Moreover, this all has to be done during the winter to minimize impacts on the tundra and permafrost. If there is a rational belief that supply cannot meet demand now that China and India want a lot of cars and other western goods and conveniences, higher prices are rational because no production sources cannot be turned on overnight.
On the other hand you hear talk of a 'super spike' and $105/bbl oil, demand increasing as far as the mind can imagine, the need to restrict fuel consumption by limiting vehicle size and horsepower, and other 1970's vintage conservation ideas. You can flip back to the late 1970's and see the same type of commentary about oil running to $100/bbl with no end in sight. It took over a decade to find tenants for all of those energy towers built on $50/bbl oil (the conservative estimate) in Houston, Denver, Dallas, etc.
Back then demand could not withstand the rise in price nor could it withstand a Federal Reserve that viewed oil price spikes as inflationary and fought them with higher federal funds rates. It was enough to toss the US into two nasty recessions that the US did not emerge from until taxes were slashed and investment incentives brought money back into the economy in the mid-1980's.
Right now demand is remaining strong in the face of rising oil. One reason is that much of the rise in the US price of oil is because the dollar has dropped so sharply the past 1.5 years. Much of the rise we feel is not experienced by Europe with its currency appreciating significantly against the dollar. Of course Europe pays more per liter than we do, but that is because over 80% of what Europe pays for petrol is tax. The relative price rise, however, has been much less across the Atlantic. Thus demand is not feeling the same crimp as it will here in the US if prices continue to rise.
That means demand is not likely to decrease significantly overseas, and the demand side will keep prices higher than current supplies would suggest. We still believe price will fall from current levels, but it will be hard-pressed to get below 45/bbl if it starts a significant decline. There is some fluff in the current price, but there is also some real demand issues driving price. They will meet somewhere in the middle, and we still believe that will be around the $45/bbl range. That would be great for the US economy, at least compared to $55/bbl oil. Hey, you take what you can get, and $45/bbl looks a lot better than $55/bbl.
Look, up on capitol hill. It's the Energy Secretary, it's the Housing Secretary. No! Its Chairman Greenspan!
Social security, Medicare, energy (on Tuesday), and now federal subsidized mortgages. Greenspan addressed part of Congress Wednesday on the need to limit the size of portfolios of FNM and FRE. He has a point that the two simply control too much of the market, and if there is a problem they can fail and set off a cascade of economic trouble at least as nasty as the savings and loan collapse of the 1980's.
A bit of background: there were a lot of loans in the eighties made on inflated real estate whether it was oil and gas properties, strip mall properties, homes, apartments, duplexes, etc. If it was real estate, it was loan worthy. Billions of loans were made on properties that were inflated in many instances double or triple their real worth. The money was taken and spent. When the market started to struggle the excesses started to show up. When it collapsed we ended up footing about $500 billion in losses, bailing out the FSLIC.
Tuesday a new report came out regarding real estate values, and it noted that appraisal prices were being inflated by at least 10%, and that those appraisers who were not going along with the game (the honest ones) were being forced out of some markets. This does not appear to be on the same scale as back in the 1980's, but the first signs of that problem were not glaring either. The housing market has been not and there has been inflation in values; the pressure is there because if the appraisal is not high enough the deal often falls through because the buyer has to make up the difference. When the buyer and lender want the deal to happen they will turn to those appraisers who will facilitate the deal. That is how problems start. That is how the SEC was asleep at the wheel in the 1990's: it received part of its funding from IPO's, so it was not about to throttle the golden goose. There are myriad examples, all opening the door to excess.
Moreover, we often wonder why the federal government is involved in the mortgage business in the first place. There is nothing in the Constitution about providing or insuring mortgages, but it does say that any powers not expressly enumerated are reserved to the states. Good intentions saw that constitutional issue ignored, and what we have now is another, for all intentions, bloated federal agency under the name of Fannie Mae that is so dominant it is artificially skewing the market. Further, as is typical when this type of power is vested in a government controlled of backed entity, fraud and corruption are ripe. When the institution fails or starts to falter because of this we all end up paying far more to clean up the mess than we benefited from the program in the first place. Our framers were incredibly smart because they saw what an all-powerful central government could do. That is why they limited its power because even good intentions are perverted by an all-powerful central government.
Thus, Greenspan is right about the potential for disaster when too much government-created power is placed into one entity. If FNM goes, there is another disaster that requires the government to pay to fix the problem. That means you and me and that saps more money from the economy where it should be going. BUT, is it Greenspan's place to talk about this at all? He is the Fed chairman not the Housing Secretary, the Energy Secretary, or the head of social security. His mandate is to promote price stability. Much as with the federal government, however, he has spread his power and influence to other areas he should not be in. Given that, however, we are glad to see someone in the government (for all intents and purposes he is) pointing the finger at big government and saying 'too much.' The irony is that it is someone who has spread his own power and influence beyond his mandate as well. At least everyone in the federal government is consistent.
THE MARKET
The market showed the opposite intraday action of the prior two sessions: up early, rallying, then giving up the gains. Volume was overall low, a constant of late, but it did move higher as NASDAQ reversed to close slightly lower. That has also been a constant, i.e., slight to heavy distribution. It was lighter Wednesday and perhaps another signal that the distributive action is running its course. The indices are certainly trying to consolidate laterally though in a choppy range.
Still a lot of work to do, but it is noteworthy that the indices tried to make a break from the range and provide a follow through to last Wednesday's rebound session. The strength is not there. No volume, no breadth, and on Wednesday, no ability to hold a gain. Buyers simply ran out of steam after 2.5 days of low volume upside.
The indices showed dojis on the candlestick patterns, and after a move up or down and doji can indicate a change of direction. As the indices just tried a move up to break out of the recent range, the dojis suggest some downside back into the range. Nothing bad about consolidating within a range. The key on this test is whether the volume remains under control and the indices continue to consolidate in the recent range, or it spikes higher and the market starts the third leg lower. We note that the consolidation attempt after the first down leg of this selling in January lasted 6 weeks. The current move is just 2.5 weeks old.
Market Sentiment
VIX: 13.15; -0.53
VXN: 17.35; -0.32
VXO: 12.62; -0.67
Put/Call Ratio (CBOE): 0.99; +0.14. Lots of put action on an 'up' session. Buying protection and betting on a fall from here. Still pretty high overall, a contrarian indicator; when it signals high pessimism the market can rally. Of course, it has closed over 1.0 on five occasions the past month and no rally.
NASDAQ
Moved over 2000 and the 18 day EMA, but rolled back over to close basically flat on rising, below average volume. Still not there yet.
Stats: -0.18 points (-0.01%) to close at 1999.14
Volume: 1.768B (+3.18%). Volume was higher but still below average as the index reversed a gain. Some mild distribution that does not mean a whole lot, but in the context of continued poor price/volume action, it shows the character has not made a wholesale change.
Up Volume: 696M (-208M)
Down Volume: 1.017B (+272M)
A/D and Hi/Lo: Advancers led 1.1 to 1. Matched the overall index action.
Previous Session: Advancers led 1.11 to 1
New Highs: 75 (+25)
New Lows: 97 (-22)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
Rallied over the 18 day EMA (2007) to 2018, but it reversed and closed ever so slightly lower on rising volume. Hard to get all bent out of shape about a rollover given the low volume, the losses were mild, and the index is still the range that has been forming the past two weeks. The first test on this pullback will be the 200 day SMA (1993), but it has been a soft support with the index trading on both sides of it. It is acting as if it has gravitational pull right now, and frankly that is what the index needs after breaking through the bottom of its 2005 base in mid-March. How harsh the volume is on any selling is the key to the continuation of the lateral move and the success of this attempt to consolidate.
NASDAQ 100 sold back through its 200 day SMA (1482) on rising volume as the large cap techs led the overall NASDAQ lower (-0.2%). Not a major drop, but where the large cap techs go the NASDAQ follows. Thus we anticipate a breach of the 200 day SMA by overall NASDAQ if the large cap techs continue lower.
SOX was leading upside on the Merrill upgrade, but after tapping the 18 day EMA (416.49) and still below the 50 day EMA (419.68), it rolled over for a fractional gain. Still, yes still, holding support at 410. An upgrade allows it to hold support. Now that is power.
SP500/NYSE
The large caps raced up to the 50 day EMA, saw their shadow, and fell back on lower volume.
Stats: +2.68 points (+0.23%) to close at 1184.07
NYSE Volume: 1.442B (-3.35%). Volume backed off even further below average as the bounce continued higher. The entire move has been on lower and lower trade as the buyers became fewer and fewer. It is very, very hard to sustain upside moves on lower and lower volume because there are fewer and fewer left to carry the load. Unless something changes they fail. The doji Wednesday at the 50 day EMA suggests that is the case.
Up Volume: 999M (-106M)
Down Volume: 759M (+10M)
A/D and Hi/Lo: Advancers led 1.49 to 1. Smaller caps were outperforming . . . until the end of the session when they once more sold off more than the large caps.
Previous Session: Advancers led 1.31 to 1
New Highs: 94 (+20)
New Lows: 20 (-18)
The Chart: http://www.investmenthouse.com/cd/^spx.html
SP500 moved up to tap the 50 day EMA (1884) on the intraday high and then fell back for a marginal gain. Not great move, and the doji after a 2.5 day run indicates a pullback. The light volume on the reversal indicates the sellers were not piling on. Thus a move back into the recent range from basically where SP500 closed on down to 1165, the recent low. If volume spikes, that low is in jeopardy. If it remains low, that suggests the consolidation will try to continue.
SP600 small cap index rallied almost to the 50 day SMA (325.43) on the high and then reversed the entire move. Lower NYSE volume indicates no surge in sellers as it made the turn. It remains in the range and once more is holding above 320 on the close (321.54). That is a support level but it has been cracked in the past two weeks, so it is not necessarily a do or die point. Its recent low at 316 is the bottom of the current range. If volume remains light it should hold that low and continue its lateral walk.
DJ30
Low volume, well below average, as DJ30 bounce as well. It tapped the 18 day EMA (10,540) on the high and then faded to hide below the 10 day EMA (10,487) on the close. A modest gain, but as with SP500, the entire move was on lower and lower trade, and the 18 day EMA is a level that weak stocks and indices struggle at. Now DJ30 is still above the 200 day SMA (10,379), and that has held solidly on this pullback and during the 2 week lateral move. We would expect that level to hold on a test back from this low volume rally as long as volume remains light, trying to transition from distribution to accumulation.
Stats: +27.56 points (+0.26%) to close at 10486.02
Volume: 237 million shares Wednesday versus 271 million shares Tuesday. Weak, weaker, weakest. That is the volume track on this three day bounce.
The chart: http://www.investmenthouse.com/cd/^dji.html
THURSDAY
Some economic news Thursday with weekly jobless claims, wholesale inventories, and consumer credit. Earth shaking indicators, indeed. The market is looking more toward earnings now, and it even got some decent news after hours as BBBY surprised to the upside and took back some of the nasty downturn it showed Wednesday. The stock is in a downtrend and it will try to move out of that.
The point, however, is that a stock that was selling and thought not likely to meet numbers actually had a decent quarter with high energy prices. There could be other surprises working out there where companies were more efficient than anticipated and were able to pass along and efficiently use technology to cut costs and keep profits strong. The market has sold ahead of earnings and is now trying to consolidate laterally and set up for the next upside move. It tried the move Wednesday, but it was premature, unable to finish the job. It looks as if it will have to recoup, recover, take some Viagra and make another run at a more satisfying breakout experience. Speaking of Viagra, did you see the story that it can cause some vision problems? No kidding. Apparently it really can make you go blind.
As noted above, we will be watching volume as stocks make what appears will be a pullback in the market after a low volume bounce. Volume to the downside will tell us whether sellers are jumping back in and dumping stocks or if it is still just a modest pullback while the buyers take a breather and try to gain more strength. Right now the market really appears to be trying to transition from the distribution to neutral and then to accumulation. It is still in between the first two as it tries to smooth out the volatile sideways move the past 2.5 weeks. Again, volume on the moves will tell us who is getting the upper hand. If it remains low that is a positive for the upside as it shows the sellers may be exhausted. May be. Remember the lateral move in January and February settled down but failed as well. We just need to keep our eye on the volume and the leaders and we will see if a positive is developing.
There are still several stocks in solid patterns that moved well in the bounce and others that are holding up well and still setting up for an upside move. With the market moving laterally those are getting a good, solid rest that allows them to shake out the last sellers, pick up a few buyers, and then breakout when the market firms further. There are many stocks trying to rebound from downtrends, and they are approaching resistance after three upside sessions on low volume. If the market fails on rising volume, they are likely to lead lower and provide quick downside opportunity.
Support and Resistance
NASDAQ: Closed at 1999.14
Resistance:
The 18 day EMA at 2007
The 50 day EMA at 2035
The 50 day SMA at 2042
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 at 1993
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 1184.07
Resistance:
1185, the top of the November consolidation range.
The 50 day EMA at 1189 and the 50 day SMA at 1193
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 1182
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 1152
Dow: Closed at 10,486.02
Resistance:
The 10 day EMA at 10,487 and 18 day EMA at 10,540
Price consolidation at 10,600
The 50 day EMA at 10,610
The 50 day SMA at 10,657
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 10,379
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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