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investment help, day trading
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04/11/05 Investment House Daily
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SUMMARY:
- Large caps show relative strength, but market still sluggish ahead of earnings stampede.
- Oil continues its recent weakness as gas futures continue to rise.
- Lumber prices falling even as copper rises.
- Market is almost too quiet with low volume and very modest trading range.
- Trade balance will keep the Fed poised to raise rates further.
Slipping lower but still very light trade shows no serious selling.
An early bump higher in response to the Friday selling quickly faded, and stocks were under water for the second session. They did not tank lower, however, as the large caps held up in the early going and eventually brought the struggling small and mid-caps back off their early lows.
It was no complete recovery as NASDAQ closed below its 200 day SMA and SP500 was again below its March 2003 up trendline. The small and mid-caps still closed near session lows and further from their 50 day EMA. They are slipping, but volume was very low once more. That lower volume on the modest drop is a continuation of the Friday low volume selling, and it is characteristic of this low volume market. As noted over the weekend, stocks can sell on low volume just as easily as they moved up on light trade, and they have been giving back last week's move Friday and Monday.
It is also a very quiet market with the indices trading in a relatively narrow range the past three weeks. This low volume pullback from last week's rally does not suggest renewed distribution or intensifying selling, just the few buyers from last week backing off. It is further consolidation action within the range and may very well act as a shakeout, i.e. a low volume fade where the remaining sellers unload their positions; once they are gone the buyers can take over and drive stocks higher.
Dull markets can yield to strong moves. With the distribution trailing off as the indices trade in a range on low volume, the market is trying to set up for a move. It is not tanking, just trying to continue working laterally and set up a new floor to attempt to rally off of once more. At this juncture it is still just moving past some distribution, but it has also managed to hold some prior lows on SP500 and the smaller cap indices. Still quite shaky and still looks to have plenty of work ahead of it, but it is also refusing to give in.
These quiet markets can be susceptible to news, and that is why earnings season is very important right now. Earnings season is upon us and earnings are expected to rise but at a slower 8% to 8.7% (upped a bit over the weekend). Lower expectations, and when a quiet, boring market has low expectations it is often surprised by better news. Earnings may not do it. Earnings may actually put more pressure on stocks, but that could lead to the next leg lower in NASDAQ that ultimately sets up the next rebound. Quiet market with a earnings coming: will earnings and guidance be strong enough to offset energy and the Fed? Seems unlikely to us, but out of earnings disappointment and another leg lower on NASDAQ, the market will try to put something together if it feels the Fed is going to put an end to its rate hiking this year, but the Fed still needs another 150 basis points or so before it is ready to call it quits, and that takes it past this year unless it moves up to 50 BP per meeting. All in all, it is still hard to fight the Fed, particularly with high energy prices on top of its action.
THE ECONOMY
Oil falls, gasoline rises. Refining is the problem.
Oil was down early once more but managed to rebound in the afternoon session to $53.71/bbl, +0.39. Though it closed higher, it was down early and only modestly recovered. That action continues the relative weakness demonstrated the past week. We don't want to make too big of a deal of this; oil is still $12 or so from where it would make a real difference in pricing to the economy. Despite those opinions that the economy could withstand $80/bbl oil, the effects are already showing up here in the mid to upper fifties.
Supply is good but price remains high. Indeed, there is plenty of current supply. The concern is the burn rate (that phrase doesn't apply only to internet stocks), i.e. will those supplies we have now be there in the future. That is helping prop prices up even with this slide the past week. Oil may even be able to go lower and crack below $50/bbl, a psychological moral victory. Would that really help gasoline prices, however, the key to the summer consumption side of the economy?
Probably not. Oil would have to fall to the mid to low forties to really impact gasoline. Even then the issue is problematic. You could have full supertankers lined up across the Atlantic and heading into all ports of call and still have a problem with gasoline prices. There is simply not enough capacity to meet the anticipated demand. Even with gasoline supplies running 5% ahead of last year, we know that gasoline does not have a long shelf life and thus we are living hand to mouth with what come out of the refineries. That is why gasoline futures are going higher even as spot oil and oil futures move lower.
That will keep the pressure on gasoline prices through the summer, and unfortunately the Fed is viewing higher energy prices, at least outwardly, as inflationary as opposed to the tax they are upon the economy. That keeps the Fed hiking rates, most likely at a faster pace, even as the economy struggles with a gas crunch this summer due to lack of refining capacity. That is obviously not the best scenario for stocks or for the consumer.
Lumber prices falling even as copper rises.
We use a lot of copper and lumber when we build. Both are good barometers of construction and economic activity, and they often move higher and lower together. Copper continues to rise on the China growth story. Lumber has risen sharply from the recession, but it has faltered recently and is heading lower even as copper continues higher.
Lumber prices double topped in late February and mid-March at 410. Since then they have dropped to 371.50 (10%). That pretty much matches the drop in crude oil prices. There is some talk that copper is being driven by China, but CME lumber prices are driven by the US market. This decline in lumber is something to watch as the housing market continues the plateau it started in 2004. It is a plateau at record levels, but it is a plateau. Lumber prices look further down the road and they are pricing in a further slow down in construction. Oil is pricing something of a slowdown. Gasoline is not, but that is because demand will exceed supply because of no refining capacity expansion in the past 20 years.
This is another indication that the Fed is tightening into a slowdown. It is hard to believe with the historically low interest rates and the inflation that is starting, but when demand exceeds supply you have inflation. The economy is not tanking but it is showing those signs of weakness that are the cracks around the edges. Could be a normal slowdown, but you have to look at all of the indicators, and lumber is a key indicator of future activity economic activity, and it is diverging from copper. That indicates one is wrong, and with copper being a commodity that is being traded heavily, we suspect there is speculation built up in that price while lumber starts to fall.
THE MARKET
Another very quiet session of trade with stocks moving up and down but in a generally narrow range. There are always exceptions as some stocks breakout and others breakdown, but the range is modest, the volume is low, and the action is very quiet. That always makes you suspicious that something is up. Indeed, the market has been trying to forge a lateral move the past three weeks. Forge is the wrong word; it implies strength, and whatever this market has, strength is not it right now.
That can be good if stocks continue to build, form bases and then breakout. Many stocks are doing that or are testing recent breaks higher. Many more are struggling to form bases or are even in downtrends. There are still a number of stocks capable of leading, but of late they have been on their own.
The market tried to initiate a rally two Wednesdays back in late March when it reversed after a sharp break lower by NASDAQ and SP500. It has moved higher since then but it has been unable to deliver a follow through move. Indeed, NASDAQ is sliding back along with SP600; they are still technically capable of delivering a follow through, but 9 days into the rally typically does not yield strong follow through. Stocks are fighting the erosion of the rebound attempt; at least they have not succumbed to further distribution.
That keeps the attempt at a lateral consolidation alive. SP500 is still above its January lows and showed some relative strength Monday, but it is also struggling below some key resistance in a head and shoulders base. NASDAQ is moving in a clearer lateral move along the 200 day SMA, trying to set up the next move, actually showing some pretty decent consolidation action. This is a good place to hold, but it could also be setting up for a third down leg in this 2005 correction. Distribution has ceased, so it is fighting that move, but it still has not shown it is ready to move higher.
Again, with the Fed still very much in the picture for what looks to be the entirety of 2005, we have to weight these lateral moves with equal parts pessimism and promise. Distribution has stopped for now, but the index patterns have hardly transformed into a positive building phase. If earnings are going to change things for the positive, it will take some seriously good news.
Market Sentiment
VIX: 11.98; -0.64
VXN: 16.9; -0.06
VXO: 12.59; +0.49
Put/Call Ratio (CBOE): 1.02; +0.09. Moved back above 1.0 mark on the close that can signify downside speculation or expectations are getting more extreme. The more such sessions that pile up the more likely at least a rebound or relief move takes shape. Given the current patterns in the indices you would expect more of a rebound than a serious, sustainable rally.
NASDAQ
NASDAQ turned lower and closed below the 200 day SMA, but it did so on very, very low trade.
Stats: -7.23 points (-0.36%) to close at 1992.12
Volume: 1.392B (-8.7%). The lowest volume since the end of 2004. Even though NASDAQ moved lower on the session and undercut the 200 day SMA, there was little conviction just as there was little on the move up through that level. No return of the sellers, just a lack of buyers and more apathetic trade as it remains in the current lateral move. Decent consolidation activity.
Up Volume: 533M (+151M)
Down Volume: 833M (-277M)
A/D and Hi/Lo: Decliners led 1.85 to 1. Techs were pretty much the weaker link Monday as breadth remained poor. There are fewer leaders though there still are some.
Previous Session: Decliners led 2.19 to 1
New Highs: 25 (-11)
New Lows: 104 (+33). Starting to expand but hardly at a level that would be considered extreme enough to indicate a bottom forming.
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
Fell back through the 200 day SMA (1993) on very low volume. A modest breach in both price and volume is nothing to get in a snit over. NASDAQ is still moving in its three week lateral range that has yo-yo'ed back and forth across this key point. It is making its second lateral consolidation attempt after the second leg lower. It is making a bona fide attempt at consolidating and setting up the next move higher given the low volume and lateral move. At this juncture it is still forming up, but we would not be surprised to see a third leg lower in this base. We still call it a base because overall the action has been limited with respect to price and volume overall has been very low. Positive longer term but not a solid indication of any near term recovery.
NASDAQ 100 turned lower through the 200 day SMA as well but the large cap techs, in line with the large caps in general, held up better than overall NASDAQ. It too is moving in its lateral range the past three weeks, bouncing back and forth across the 200 day SMA. It is working on a consolidation but still has its work ahead of it.
SOX faded back to the 200 day SMA (411.90), holding at that level on the low and giving a modest rebound. SOX continues to show some relative strength as it minds its own business and attempts to ride out the current action with a lateral move along the 200 day as it looks to rebound from this rather mild, tame pullback.
SP500/NYSE
The large caps were the relative strength leaders, holding flat on very low volume as it tries to make a higher low and retake some key resistance levels.
Stats: +0.01 points (0%) to close at 1181.21
NYSE Volume: 1.223B (-7.93%). Lower NYSE volume still. Volume matched price and breadth, hardly registering on the seismometer. NYSE is leaving its distribution behind as it tries to build upon the three week more or less lateral move along its up trendline.
Up Volume: 637M (+263M)
Down Volume: 883M (-384M)
A/D and Hi/Lo: Decliners led 1.3 to 1. Very mild breadth, matching the index action overall.
Previous Session: Decliners led 2.51 to 1
New Highs: 49 (-13)
New Lows: 76 (+36)
The Chart: http://www.investmenthouse.com/cd/^spx.html
Tight doji on the candlestick chart after the Friday pullback is a decent indication. The large caps did not sell off, and though they closed below the March 2003 up trendline (1184) the action was not bad: low volume doji near support. The overall pattern is still weak with the February interim high near 1212, the March high at 1229, and the recent high at 1191, just over the 50 day EMA (1189). With the price/volume action improving the past two weeks the current move takes on a bit better light, but we cannot ignore the weak pattern, a pattern that is markedly different from NASDAQ.
The small cap SP600 fell further from its 50 day EMA (323.50), continuing the Friday sharp drop after testing that level at the peak of last week's run. A very similar pattern to SP500 with the left shoulder in February, the March high and now a potential right shoulder that peaked at the 50 day EMA. It will need some serious earnings positives to offset this pattern.
DJ30
The blue chips posted a modest loss on very low volume, continuing the Friday selling, but a very mild second day of downside. They have already found their 200 day SMA (10,380) and are not showing much recent distribution. They are thus in a position to hold the line at near support, but not yet showing signs of converting that into a break higher.
Stats: -12.78 points (-0.12%) to close at 10448.56
Volume: 192 million shares Monday versus 201 million shares Friday.
The chart: http://www.investmenthouse.com/cd/^dji.html
TUESDAY
Some heavy hitting economic data Tuesday with the trade balance, FOMC minutes, and the Treasury Budget. These are some of the important reports underlying the strength of the dollar and investment in the US, key areas of concern the past six months. There is considerable worry that the trade deficit is or will become too large and that will start to sour foreign investment and causing selling of dollars for non-dollar denominated assets, further weakening the dollar and driving prices higher in the US. With oil prices still high and the Chinese yuan tied to the dollar, there cannot be a lot of improvement in these numbers. Thus there will be added worry about the trade gap and that will put a bit more pressure on the dollar as seen Monday after a solid recent move higher.
Earnings season nears as well and we expect additional noncommittal trading ahead of more heavily weighted earnings reports with some softness early on the trade figures. The indices have been very quiet even as they rebounded last week, trying to put together a consolidation but outside of NASDAQ, the patterns look toppy still. NASDAQ is no picture of strength, but at least it has a potentially bullish base still forming.
From these patterns it is difficult to see an upside resolution near term. It is not impossible as earnings could be better than expected and upside guidance blow away expectations. That could rally stocks near term but it also gives the Fed more ammunition to continue hiking rates through 2005 even as gasoline moves well past $2/gallon in April. That remains as the overarching factor impacting the market in 2005. The Fed is still posturing that it is going to raise rates even faster though we can see indications the economy is starting to show signs of slowing as it did in 2000 as the Fed kept hiking. When the Fed does realize it has gone too far and says it is going to back off the market will respond well, but the Fed just set itself up to raise rates faster. As usual the Fed will be well behind what the market and the economy are telling it. Typically, the market has started to sell first and now we are seeing weakness start to crop up in parts of the economy. The market leads, telling us ahead of time what is going on in the economy. The signs are there buy the Fed gets an agenda in its head and it is going to stick with that agenda until it is painfully obvious (painful for all of the rest of us) that it needs to change tactics.
Support and Resistance
NASDAQ: Closed at 1992.12
Resistance:
The 50 day EMA at 2031
The 50 day SMA at 2040
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 is still acting as loose 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 1181.21
Resistance:
March 2003 up trendline at 1184
1185, the top of the November consolidation range.
The 50 day EMA at 1189
The 50 day SMA 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:
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 1153
Dow: Closed at 10,448.56
Resistance:
The 18 day EMA at 10,523
The 50 day EMA at 10,596
Price consolidation at 10,600
The 50 day SMA at 10,658
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 10,380
September high at 10,342.
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
April 12
Trade Balance, Feb (08:30): -$59.0B expected and -$58.3B prior
FOMC Minutes, March 22 (2:00)
Treasury Budget, March (14:00): -$69.88B expected and -$72.9B prior
April 13
Retail Sales, March (08:30): 0.8% expected and 0.5% prior
Retail Sales ex-auto, March (08:30): 0.5% expected and 0.4% prior
April 14
Initial Jobless Claims, 04/09 (08:30): 330K expected and 334K prior
Business Inventories, Feb (08:30): 0.5% expected and 0.9% prior
April 15
Export Prices ex-ag., March (08:30): 0.1% prior
Import Prices ex-oil, March (08:30): 0.2% prior
NY Empire State Index, April (08:30): 18.0 expected and 19.60 prior
Industrial Production, March (09:15): 0.3% expected and 0.3% prior
Capacity Utilization, March (09:15): 79.6% expected and 79.4% prior
Michigan Sentiment-Prelim., April (09:45): 91.7 expected and 92.6 prior
End part 1 of 3
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