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world stock market, us stock market
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04/16/05 Investment House Daily
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SUMMARY:
- Stocks dive lower with not attempt to rebound.
- Economic data continues to disappoint: NY regional PMI, Michigan sentiment flagging.
- Can the Fed see the error of its ways and pull a 1998?
- Something ready to jump out from behind the wood pile or is this another summer soft patch?
- The floodgates open and stocks fall through on heavy volume.
- Some upside speculation late Friday but for now that is all it is.
Still diving with no attempt to rebound.
After SP500 broke the 200 day SMA just before lunch some shorts started to cover. The break below the 200 day SMA hastened the selling but just as quickly the indices recovered those losses and SP500 retook the 200 day SMA. The shorts ran out of gas, however, and there were no longer term buyers stepping up to keep the move going. With 1.5 hrs left the indices peaked for the afternoon and started lower. SP500 fell back through the 200 day SMA and the selling accelerated into the bell, closing on the lows and a downside tick. Very weak technical action as no one wanted to step in ahead of the weekend.
About the only thing working upside was healthcare, primarily the pharmaceuticals after LLY won its patent case. Those rode higher, but the good news for that sector was offset by IBM's poor earnings showing and more weak economic data. Fears of a slowing economy finally hit the general market after over three months of selling and prior signs the economy was slowing. Tuesday's FOMC minutes triggered some misplaced euphoria and it did not take long for investors to figure out the Fed was still quite serious about rate hikes. With the signs of slowing the market was not buying what the Fed was selling.
Heavy volume showed further dumping of stocks with IBM adding 279M shares to the NYSE scorecard, over 5 times its average trading volume. It was also expiration, so higher volume is the norm. It was much, much stronger, however, with NASDAQ showing the highest trade since early January when the 2005 selling started. If you toss out the March 18 volume when SP500 was re-weighted, NYSE volume was the highest since the July 2002 first bottom in the double bottom base that year that ended the long downtrend. That tells us the downside action is starting to get to levels where you could start to consider them a bit extreme.
All major indices sold with vigor though the large cap techs and chips were the weakest. Again, healthcare was about all that worked thanks to LLY and the general defensive stance the market is taking. Heavy 3+:1 negative volume showed the vast majority of the market was heading south. Those are high numbers on top of the 2+:1 negative Thursday breadth, but when the downside breadth reaches 5:1 as it did back in 2002, then you can start to figure it is getting pretty much to the limits. This was hard selling, but without some outside influence this leg is not done.
THE ECONOMY
New York Empire State Index plunges many stories to a 2 year low.
Expectations were for 18.0. The 3.1 was another harsh slap in the face. The national number sometimes follows NY, sometimes not; it is simply not a very reliable indicator of overall manufacturing activity in the US. Still, the drop to a 2 year low is pretty clear there was trouble in the big apple area. That cannot be a good indication for manufacturing, and it is another indication of some slowing economic activity.
Michigan sentiment lower but beats the rumors running through the market.
The April preliminary Michigan sentiment survey (all 200 respondents) were glummer. Sentiment fell to 88.7, lower than the 91.5 expected and March's 92.6 reading. Rumors were racing through the market earlier in the session with talk of a 77 reading. While that would not necessarily mean disaster at that level, a drop that steep would have body slammed stocks. Of course stocks were body slammed anyway so it would have just been piling on. As it was there was a sigh of relief when the number came out as it is still plenty high enough to keep consumers doing what they do best. Of course this is the preliminary number, and that has about as much relation to reality as a soap opera to real life. In this market, however, that is ignored. In any event, the number was high enough not to cause any major concern, and it beat the whisper. Investors may have felt better, but they did not let it alter their attitude toward selling the market.
Industrial Production modest but in line.
Production posted a 0.3% gain for March, in line with expectations and topping February's 0.2% (revised lower from 0.3%). While no great shakes and backing off some from the prior pace to end 2004, it is still sharply stronger than it was same time last year. Thus no real drop off in production yet, but if the NY Index is a harbinger for lower overall manufacturing sentiment, then the production levels may be backing off.
Note, however, that this is something we discussed two weeks back with respect to helping out the inflationary pressures. If manufacturing remains strong even as demand fades some, that can help supply catch up with and surpass demand. Inflation arises when demand exceeds supply, and this recovery was predicated on demand. Consumer demand never faded significantly during the recession; it was business demand and massive inventory hangovers that slowed the economy and supply. Demand increased thanks to the first round of misaimed tax cuts, further widening the demand versus supply gap. It was not until business received true incentives to invest that the recession ended. Demand, however, was still way out in front and due to the conservative approach by businesses since then supply still has not caught demand.
If demand slows down in a 'slow patch' then maybe, just maybe supply will catch up and relieve the inflationary problems. Hate to have to slow down to reach equilibrium; it is always better to increase supply and grow your way out. Unfortunately we started in a hole with the recovery and that has the Fed trying to deal with the bit of inflation that has cropped up.
Will the Fed pull a 1998?
And therein lays the rub. As we noted Thursday, the Fed is sticking to its story for now, i.e., that it has to raise interest rates in order to forestall inflation. In its last rate hiking statement it expressly said that inflation was under control because the Fed was sticking to its measured rate hiking. The recent FOMC minutes left some believing the Fed was going to take a softer, Sears-like approach (the softer side of Sears) to rate hiking even though the minutes talked extensively about inflation, something previous minutes have mentioned almost in passing as being 'well-contained.' Sure enough a Fed governor was out Thursday once again stating that the 'imbalances' that lead to inflation were under control thanks to the Fed's ongoing rate hiking campaign.
Over the past several weeks we have written about the weakening economy and how it looked as if, once again, the Fed was tightening into a slowing economy. High energy prices were apparently taking their toll and would continue to do so as gasoline prices rose into the summer. Maybe this is just another summer slowdown as in 2004, but energy prices are a lot higher and gasoline is already as high as it was back then. It has the makings of something more significant.
There is also a lot of clamoring this week about the economic slowdown and that the Fed is overreacting to the inflation threat. Certainly gold is not indicating inflation. Now that it is in vogue, more than a few pundits on the financial stations this week talked matter of factly about how the Fed typically causes recessions. The market is certainly struggling for the second year in a row; even though 2004 ended higher, it was a low volume, end of year bounce that made the gain. It has now given back all of that move as the economy slows once more. The point: the market has been weak for almost 5 quarters now despite a growing economy. That is another indication that the Fed is tightening into trouble.
What is a 1998? It is the most unlikely of events. That is when the Fed is hiking rates and realizes mid-stream that its assessment of the economy was wrong. The Fed halts its rate hiking and it tells the world that is what it is doing. The Fed did that in 1998. Of course it had to deal with the Russian currency crisis at the time, and that took priority over the Fed's hiking campaign. The point is, the problems that culminated in the Russian crisis were building even as the Fed hiked rates because of its take on the US economy.
Thus far the Fed is showing no signs of capitulation with respect to its mission to quell the current inflation even as oil prices are starting to curtail consumption and the market dives. Of course the Fed cannot just drop rates every time the market tumbles; it would lose the credibility it gained from episodes such as the tightening that crashed the market in 1987, the tightening that led to the 1991 recession, the tightening that led to the crash in 2000. To focus on the market is wrong, however. The Fed would not be responding to the market, but to the economy. We have said over and over that the market is another indicator of the economy. When the market tumbles and there are specific reasons it would do so, e.g., oil prices sustained over $50/bbl for months, declining tax incentives, and a year of rate hikes already under the belt, then it is really acting as an indicator of more economic weakness to come. The Fed would be blamed for fixating on the market, but in reality it would simply be reacting to what the economy was showing through economic indicators.
What is the likelihood of the Fed doing this? Very slim. We have seen the Fed does not like to admit its mistakes; it still thinks it saved the economy back in 2000. It would take a major crisis for the Fed to alter its course (such as the Russian currency crisis), and we are left wondering if we would rather have that or a Fed raising interest rates.
Is there something down the road that is spooking the market?
Traders sometimes talk about something hiding behind the woodpile, ready to jump out at the market. It is called a bear, a rabbit; any animal will do. That something is a nasty surprise that the market is factoring in before it is really understood. Something negative is perceived to be there and the market sells off in anticipation.
Markets are pretty good indicators of future economic activity. As a compilation of all available knowledge they synthesize the facts and rally or sell accordingly. They are not always right, but when two or more markets line up and point to the same thing they are powerful. By that time they get together, however, many times the cat is out of the bag.
The stock market sold off in 2000 even as the bond yield curve was still healthy overall. It was not until the market tanked that it inverted late in the summer of 2000. Thus by the time confirmation from the yield curve showed up the market had already given back a big chunk before double topping in September and diving.
This year the yield curve flattened some in February and March as the Fed hiked rates more, but it never inverted. After Greenspan's 'conundrum' testimony the long end started higher, putting curve in a more normal pattern. That is its current state though it flattened a bit Friday as investors moved to bonds in a big way, fearing a slowing economy. Whether it flattens further remains to be seen, but again, the market has already started a serious dump lower ahead of the any flattening.
Some very smart economists such as Art Laffer don't see anything that is set to surprise investors and would prompt this sell off. The economy has grown at a 3% or better clip for 7 consecutive months, a record. A slowdown during such solid growth is understandable. Yet, would a normal slowdown be accompanied by a harsh market sell off?
In the summer 2004 'soft patch' the market achieved similar losses as now. NASDAQ dropped 300 points from the start of July to mid-August where NASDAQ bottomed for the 425 point run to the end of 2004. From January 2004 to mid-March 2004 NASDAQ dropped 250 points. At this juncture NASDAQ is down 275 points from its high to start 2005. SP500 fell 85 points during the same 2004 interval; as of the Friday close it has dropped 87 points.
These numbers do not necessarily mean the selling is over, but it does put it into perspective. The 2004 summer selling was just as severe, even more so on NASDAQ as it happened in 6 weeks while NASDAQ has taken 3.5 months to do it this year and it still has not caught up. So before we run off and proclaim the market is forecasting a major slowdown we have to recognize it sold just as hard last summer during an earnings season and the economy still grew at 4% in Q4.
This time oil is higher and has been higher for many more months than in 2004. The Fed is also further down the road with its rate hikes and is still threatening further hikes at a potentially more intensive pace. That is the real difference. The slowing we are seeing is similar to that in summer 2004. Thus it is, as we have said, most like the combination of an overactive Fed and higher oil prices that are causing this selling as the market fears a Fed and energy induced recession. There could always be a shock from the dollar; that is one of the main fears given the trade deficit, talk by Korea and Japan regarding diversifying out of the dollar. If there is something else lurking besides oil and the Fed, that would be it.
THE MARKET
Diving through next support as the gates to the downside opened further. SP500 broke the 200 day SMA and NASDAQ is just over several price points that used 1900 as support in times past. The market is massively oversold with this quick drop, but it blasted through what were seemingly logical rebound points; it could do the same here. It will rebound at some point, however, as this kind of selling cannot go on indefinitely. The market is never clear as to how long though, just as in October 1987. Many pros were sure the market was oversold on Friday and moved in to buy only to see DJ30 drop over 22% the following Monday. Ouch.
Right now it is a falling knife as far as the indices and, from the breadth, most stocks. While most stocks are selling we do note that many on the report are still holding at or above the 50 day EMA; stronger stocks hold up better, but they get put through the wringer as well when there is serious selling afoot. The one positive when all stocks get sold: the market is getting closer to flushing out the system.
MARKET SENTIMENT
Market sentiment is tricky. You want to see extremes, but an extreme reading in one indicator does not mean a turn is coming. You want to see them all line up toward extreme levels; that is a good indication of a change in direction coming. Timing is still an issue even when they are all moving in sync. It gets us ready for the move, and if we see the right kind of upside volume and leaders setting up for a break higher then we can anticipate a reversal and follow through to come.
Talking with floor traders late Friday and after the close we heard a common question: what will Monday bring, a reference to 1987 when a horrid Friday closed out a nasty week just to see the really ugly drop on Monday after most figured a relief bounce was next. The fact that many seasoned traders were unwilling to step in ahead of Monday is an indication of a healthy does of concern, fear, panic or whatever you want to label it. Now if we could only hear 'its different this time.' Alas, the only thing we have heard that reference is the price of oil as we discussed a couple of weeks ago. Now look at where oil is, threatening to break $50/bbl just after we were assured things were different this time.
Bulls versus Bears:
Bulls continued to fade last week though not at the same clip as the prior week. Bulls fell to 46.2% from 47.9%, below the 55% level considered bearish but still well above the 35% bullish mark. Back in August and September 2004 at the bottom ahead of the year end run bulls fell to 40%. Bears actually fell to 29% from 29.2% the prior week. 20% is considered bearish while 50% is considered bullish. At last year's bottom, however, bears only made it to 30% before the market rallied. Need another good drop in bears to better set up this indicator.
Volatility:
Volatility screamed higher over 3 points Friday, continuing the 6.5 point move from Wednesday. While major bear downturns show readings in the 50's or more at bottoms, this is not a major bear downturn (yet). At the August 2004 turn in the market VIX reached 20 following a similar spike in May. VIX has made a higher high with this move, topping the March and October highs. It is getting there.
VIX: 17.74; +3.21
VXN: 21.85; +3.84
VXO: 16.65; +2.37
Put/Call Ratio (CBOE): 1.42; +0.35. The CBOE shows its ninth close above 1.0 in the past month. They are piling up. In addition, the overall put/call ratio (combination of all options exchanges) closed above 1.0 Thursday and then hit a 12 month high at 1.2 Friday. That is three closes above 1.0 since mid-March. The fear level and speculation to the downside is getting extreme according to this indicator. Now that the other indicators are lining up with it a bottom may start forming. It can take time, however, as in the late 2004 double bottom.
NASDAQ
96 points in three sessions with a volume crescendo is pushing NASDAQ toward a date with some prior support levels at 1900.
Stats: -38.56 points (-1.98%) to close at 1908.15
Volume: 2.384B (+21.75%). Tremendous volume surge, the highest since the 2005 selling kicked off in January. A lot of dumping tech after the IBM, AAPL, and other less then exciting tech earnings.
Up Volume: 303M (-66M)
Down Volume: 2.051B (+488M). Massive downside volume at better than 6:1.
A/D and Hi/Lo: Decliners led 3.18 to 1. Holding at extremely ugly levels. A pop to -5:1 or thereabouts would be another indicator of a bottom setting up.
Previous Session: Decliners led 3.1 to 1
New Highs: 19 (-5)
New Lows: 267 (+107). Getting better but 500ish is more indicative of a bottom forming.
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
Straight drop on exploding volume. Plowed through 1950 with ease and is now approaching 1900 support where it has bounced before. That is some significant support as noted Thursday, and it looks as if it will have the chance to prove it. Right now it is a matter of getting sold out on this leg lower that we are calling the third leg since the selling started in early January.
The large cap NASDAQ 100 sold a bit harder than the overall NASDAQ (-2.3%) as the IBM news triggered a disdain for the large cap techs. Next support is at 1048 and then more significant support at 1380.
SOX is in full retreat now, undercutting the January low (383). 375 is the next support level. Its reverse head and shoulders pattern has turned into a double top.
SP500/NYSE
SP500 dove below the 200 day SMA on a very strong volume shot. Breaking key support from early January as well.
Stats: -19.43 points (-1.67%) to close at 1142.62
NYSE Volume: 2.234B (+13.81%). Big volume, the heaviest since 2002 excluding the recent SP500 rebalancing session where volume jumped as large cap shares were bought and sold to match the new balance.
Up Volume: 438M (-8M)
Down Volume: -2.146K (-1.911B). 4.8:1 down volume over up volume. Bad but we have seen it twice as bad.
A/D and Hi/Lo: Decliners led 3.24 to 1. As with NASDAQ, another nasty decliner session.
Previous Session: Decliners led 3.45 to 1
New Highs: 17 (-1)
New Lows: 187 (+69). Not much damage here. As with NASDAQ you want to see 500 or so to show an extreme.
The Chart: http://www.investmenthouse.com/cd/^spx.html
SP500 is now trading at an important level. It broke through the 200 day SMA (1153) with relative ease, just pausing there for a half hour before giving it up. It did make a midday run and recovered that level, but that was short-lived before it rolled over and solid into the close. The 200 day SMA was important, but SP500 is now flirting with breaking back down into the 2004 base it broke out of last November. At the close it is right at the October 2004 high; a break below that level pushes it back into that base and that means it has to start all over in the basing process. The head and shoulders breakdown is in full swing; a full consummation of the pattern would bottom SP500 around 1105. Before it gets there it will try a rebound around this level or at 1125.
SP600 dove through its 200 day SMA (305) as well, breaking up 310 support for good. Next support is at 301 and then 296. As with SP500, the small caps have consummated their head and shoulders pattern and are seeking the next bottom.
DJ30
IBM contributed 28 million to the overall volume, but with 417M shares trading hands it was not that much of an influence (6.7%). Some psychological support at 10,000 from the March and September 2004 lows. It will try a modest bounce at that level but 9900 or 9825 is the next real support.
Stats: -191.24 points (-1.86%) to close at 10087.51
Volume: 417 million shares Friday versus 303 million shares Thursday.
The chart: http://www.investmenthouse.com/cd/^dji.html
MONDAY
Friday there was a lot of activity in May $36 and $37 strike call options on the QQQQ. Despite what the floor traders were telling us there was still some big hitters moving into the market, betting on a rebound from this falling piano. A bit more downside may put the market ready for a rebound. It definitely could use another good downside on Monday to really conjure up images of 1987 and spike the sentiment indicators higher. They are coming into line together as discussed above, but they need another push to push out the last sellers.
We are not ready for knife-play, i.e. trying to pick the bottom just yet. Indeed, other than some sentiment indicators jumping higher the market is showing no signs of slowing the selling and setting up any sort of bottom. When it does bounce off of this selling that won't be the bottom. Stocks will have to bounce and then test this selling again.
As for further downside, well, we were taking gains Friday and will do so again early this week on some continued selling. We anticipate the market is set to bounce shortly after this tail kicking, and we will wait for the bounce to set up more downside positions for the next move lower that tests this sell off.
At this juncture we have to let the market do the talking. All the speculation about what state the economy is in is just that. The market sells well before the problems are certain (just as it starts to rally well before it is certain things are better), and it has been really ripping off the downside yardage of late. We have to ride out the downside, look for either a high volume reversal coupled with a further spike in sentiment, or just a fade out that gasps for air on low volume and then just starts back up. At that point we will be focusing on those stocks that managed to hold their near support down to the 50 day EMA; those are stronger stocks, particularly when you look at how ugly the indices are.
We are already looking at those this weekend as well as continuing to look at upside all across the healthcare sectors. They continue to hold up and move higher as defensive plays and simply as good market leaders. They have the ability to lead upside in market rallies as well as being defensive positions to make money during this type of selling. Even they were fading back some by the close; given they have put in some decent moves this pullback will better set up further upside.
Earnings will continue, and after this negative response to the initial results, maybe they will actually start to help. GE and C reported solid results that show promise for other stocks to report solid earnings and good guidance. They did not help Friday, but after this sharp selling runs its course, some good results will most likely help spark stocks back to the upside.
Support and Resistance
NASDAQ: Closed at 1908.15
Resistance:
1950 (top of October to December 2003 consolidation)
1954 from October as well.
Late 2003 highs from 1960 to 1970.
Early October high at 1971.
The 200 day SMA at 1991
The 50 day EMA at 2020
The 50 day SMA at 2032
2050-54, prior resistance and the June high is stronger
Support:
1900 from October 2004, March 2004, October to December 2003 (consolidation range bottom)
1876 from the May 2004 low and November 2003 low.
1860 from the late September 2004 low.
S&P 500: Closed at 1142.61
Resistance:
The 200 day SMA at 1153
1154-1157 tops from early 2004.
1163 is minor support from January is trying to hold.
1175 second high in that double top that spanned late 2001 and early 2002 is trying to hold
March 2003 up trendline at 1187
The 50 day EMA at 1185
The 50 day SMA at 1193
1196, the mid-January high and the early December peak in the left shoulder.
1200
Support:
1145 to 1142 from March and October 2004
1129 to 1125
1100 to 1095
Dow: Closed at 10,087.51
Resistance:
The 200 day SMA at 10,379
10,400, the bottom of the November/December range
The 50 day EMA at 10,554
Price consolidation at 10,600
The 50 day SMA at 10,642
10,754 is the February high
Support:
10,065 from March 2004 lows.
9988 from September 2004.
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
April 19
PPI, March (08:30): 0.6% expected and 0.4% prior
Core PPI, March (08:30): 0.2% expected and 0.1% prior
Housing Starts, March (08:30): 2050K expected and 2195K prior
Building Permits, March (08:30): 2080K expected and 2107K prior
April 20
CPI, March (08:30): 0.4% expected and 0.4% prior
Core CPI, March (08:30): 0.2% expected and 0.3% prior
April 21
Initial Jobless Claims, 04/16 (08:30): 330K prior
Leading Economic Indicators, March (10:00): -0.3% expected and 0.1% prior
Philadelphia Fed, April (12:00): 16.0 expected and 11.4 prior
End part 1 of 3
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