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us stock market, trade stock
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04/20/05 Investment House Daily
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SUMMARY:
- Earnings try to overcome hotter CPI, fail.
- CPI shows costs moving to consumer, confirms Fed Beige Book.
- Fed still set to raise rates but FFF suggests not that many more are ahead.
- Oil inventories fall but oil fails to rise.
- Another break lower on stronger volume truncates relief bounce.
- Today's earnings not enough to overcome tomorrow's rate hikes.
Stocks hit the wall after just two upside sessions.
SP500 tried the 200 day SMA once more after the three attempts on Tuesday. This time it failed and rolled over on stronger volume. That pretty much sums up the day: an early attempt to continue the two day bounce and then the floor opened up and stocks continued their decline.
The pre-market looked decent on the back of the INTC, YHOO, CAT, MER, JPM, etc. earnings that were better than expected and boasted of improving business looking down the road. That positive attitude continued as futures rebounded once more after a hotter CPI knocked them back. Seemed as if there was some resilience there.
There was. The morning session saw stocks gap higher and hold gains into lunch. They survived a dive in oil and gasoline inventories and even rebounded in that report's wake. SP500 cleared the 200 day SMA and was looking good on some solid volume. Then the buying stalled and the selling started. Stocks sold through lunch and into the bell, a familiar picture when this market has been selling, and that has been more often than not of late.
Earnings finally came to the market's rescue, but they only provided temporary relief from the ongoing heartburn of a Fed raising rates and higher energy prices. The Fed Beige Book released an hour before the close was not so upbeat on the economy, noting that higher gasoline prices were already dragging consumer demand down, but it also noted that manufacturers were able to pass along prices to customers, i.e., more inflation. That mixed report slowed the selling for about 5 minutes and then the market turned and sold into the close.
Higher volume, very weak breadth, failing at resistance in the face of good news. Those are just about as classic of negative indicators as you can get. We were looking for a rally to run higher for a week or more. Looks as if it is hardly ready to do that as the SP500 breach of the 200 day SMA brought in a few buyers, but it is being quickly overwhelmed.
THE ECONOMY
CPI and Core CPI show prices are passing through to the Consumer.
The PPI held out some promise and helped stocks move higher Tuesday, but the CPI dumped cold water on notions inflation was calming. The consumer has weakened but not enough to keep prices down. The CPI rose 0.6%, greater than the 0.5% expected. The core was the shocker, however, rising 0.4% versus the 0.2% expected and February's 0.3% gain. You have to go back to August 2002 to see a larger core price increase (0.5% back then). Gasoline rose 17%, hotels +8%, restaurants +3.2%. You can pretty much pick your item and it rose.
This confirms the Fed Beige Book released Wednesday afternoon that noted price increases were sticking, passing through to the end user. At the same time the Beige Book was not as sanguine on the overall economy. Growth was described as solid to uneven in the 11 different districts. Price increases were rising but the consumer was already showing weariness from gasoline prices in March and April. Higher prices and slower demand has the smell of stagflation, but it is too early to make that call.
Year over year overall prices rose 3.1%, the core up 2.3%, both almost outpacing the 2.6% rise in wages. One thing the Fed fears is so-called wage driven inflation, i.e., where higher wages would spark inflation because the extra money would push demand past supply. It is one of those ideas that sounds good in theory but in reality has no empirical evidence to support it.
That was one of the snipe hunts the Fed was on back in 1998 and 1999, one of the reasons it used to hike rates until and even after the market collapsed (sound familiar?). Inflation was not there, however, because the economy was working well with minimal restrictions. In other words, supply was unfettered and was easily able to meet demand. That is how a healthy free market works: money flows where it is needed to meet demand. Problems arise when our government thinks it knows best and starts regulating certain aspects of the economy. Then things get out of balance and there is inflation.
Another possibility, as seen in 2000, is when the Fed steps in and creates the inflationary environment. The Fed warned of 'imbalances' in the economy in the late 1990's and 2000 as it hiked rates when there was no inflation, just prosperity. What it did was create the very imbalances it warned of when it dried up the money supply, killed off capital investment, and crashed the market and then the economy. We have inflation today because the impact of the dramatic plunge from 8% economic growth to contraction in just a few quarters left businesses with massive inventory hangovers, at least for those that were able to survive the crash. Those that did make it have been extremely reluctant to expand to meet demand because they know the Fed can turn on them again or the government can reverse favorable investment incentives. Thus demand has led supply this entire recovery cycle, and therefore we have inflation. It is not driven by wages; that is clear because wages are lagging. It is driven by misguided policies that promote demand over supply even as demand, as seen in the recession, never collapsed as it typically does (thanks to 9-11 and the subsequent 'cocooning' as opposed to investing in the growth of business in the US).
Thus we have inflation and we have the Fed doing battle with inflation in the only way it knows how: make the economy just sick enough to kill off enough demand to fix the excess demand imbalance. The grand irony in all of this is the Fed created this very imbalance way back in the late 1990's and in 2000 when it turned from favoring free markets and growth oriented ideas to playing prevent defense to avoid a collapse. In other words, it started to fear we were too prosperous and took action to fight what it thought had to be coming inflation that would lead to a collapse. In reality it facilitated the collapse by trying to fix something that was not broken. It had the same mindset and took the same action as the late 1920's central bank when that bank crashed the stock market ahead of the Great Depression.
We are suffering the lingering effects today just as the post-Depression economy did, and the inflation is, as discussed above, tied to the series of events that the Fed initiated when it decided we had too much prosperity. The Fed is raising rates to try and stall inflation by stalling the growth in demand and the economy. That is the old 'burn the house down to kill the termites' idea, and as history shows, it is very clumsy in getting the desire result. In the vast majority of rate hiking campaigns the Fed ends up going too far and stalls the economy. It manages to quash inflation for the time being because demand is stifled, but it is 50-50 whether it returns because the Fed then has to flood the money supply to get the economy moving again.
The sure way is to promote growth of the economy not just the demand side. The strongest, longest, and most inflation-free recoveries we have start with fiscal policies that promote investment in the US. That creates the new ideas and products that not only meet existing demand but create new demand by developing new markets, e.g. the personal computer.
CPI gives Fed more ammunition to raise rates, but FFF contract says it's not indefinite.
The stronger CPI put back on the table a bit higher odds for Fed action, but not nearly as much as you would expect. After the PPI was released bonds continued their recent rally, pricing in just three 25 BP rate hikes in the next four FOMC meetings. After the CPI, bonds were selling off but then they recovered nicely. The result? Still pricing in just three 25BP rate hikes in the next four meetings. As discussed Tuesday, the bond market is weighing all the germane factors (e.g., economy, market, Fed propensities) and for now it is concluding the Fed is going to have to stop its rate hikes before the end of this year.
This far out the numbers lose some of their accuracy, but the fact that they have made the shift to start indicating this potentiality is very significant.
Oil Inventories Drop for the First Time in Nine Weeks.
Inventories were expected to rise but they went south, and they did it big. Oil dropped 1.8M bbl when inventories were supposed to rise 1.2M bbl. Gasoline hit the bottom of the tank at -1.5M bbl, not even close to the 200K gain expected.
Now oil and gasoline spiked on the news. Oil, however, gave back most of its gains (52.44, +0.15). Gasoline was a bit stingier. What this shows us is that oil prices are still ready to fall through $50/bbl. After the jaunt to near $60/bbl this spring they have come back to test the psychological $50 level. They undercut it slightly Monday but then bounced. As with a stock or index at support, an undercut brings in short covering. After this bounce we anticipate it will fall through $50/bbl; the reaction the much lower inventory levels indicates the lack of upside pop left in the product right now.
The key is how far below 50 it falls and for how long. It needs a sustained rest in the lower forties to really make a difference in product pricing, not just of oil and some gasoline, but also all products that are manufactured, shipped, etc. Basically everything we buy. Oil was ready to collapse in late 2004 but it recovered. A fall through 50 into the forties will likely provide another holding pattern until another scare sends it on another flare higher or a perception that supply if under control sends it to forty.
THE MARKET
Two days of relief swept away by one session that showed the conviction of stronger volume. Overall the selling resumed in earnest after a very short relief bounce that was nowhere near the length needed to stabilize the market and set up the second down leg to test the recent low. Instead you have SP500 and DJ30 diving to a new low for the year and leading the other indices right back down to the recent low in a quick move. The downside is like that; what is scratched out to the upside is swept away when the selling resumes. Fear of selling is a strong emotion, much stronger even than greed. Greed may be good as espoused by Gordon Gecko in 'Wall Street', but it cannot hold up against a health dose of fear.
Now the market is back to finding that first bottom in this selling leg after a short relief bounce. The move higher was just not enough. The ability to take good news and sell on it is another sign of market weakness. It is almost a good sign because it means the selling will continue and start flushing out the pipes and setting up the rebound once all of the sellers are done. VIX jumped back up again, and the sentiment indicators are still coming into line. As noted before, however, sentiment works at the extremes and it is not a good timing device. It can let us know conditions are getting ripe for a turn, but we still have to see the move resume. The little bounce to start the week had no strength and we know it was not going to be the 'one' anyway. It was not even the precursor, however, in that it gave up without any fight.
Leaders are still holding up, testing their 18 and 50 day EMA. Some are even powering ahead without regard for the overall market. That is a leader for you. If they start breaking down, however, there will be more selling to come. Indeed, what we may see here is a break by the leadership as well but as with the discussion of the 200 day SMA Tuesday night, we might see them turn right back up. There were a few leaders pulling that whipsaw last week. Makes for a bumpier ride. For now many are still holding up at key support, acting as a modest governor on the downside action.
They will have to hang in here, however, because the Wednesday action indicates further downside as SP500 continues its downside move after breaching and testing the 200 day SMA. NASDAQ, SOX and SP600 are still holding over their recent lows, holding some modest promise for another quick rebound, but that is something they will have to show us given the volume on the Wednesday turn lower.
MARKET SENTIMENT
Volatility jumped along the lines of last week, making a higher low and closing in on 18.50 where it topped out last week. It needs a run into the twenties to give an indication the uncertainty (hesitant to call it fear at such low historical levels) is enough to help sentiment trigger a rally. It is worth noting that the highest volatility rose in all of 2004 was near 23 and the market was not really strong enough for a strong breakout and sustained rally. Historically VIX is considered extreme near 50.
VIX: 16.92; +1.96
VXN: 20.23; +1.12
VXO: 16.83; +2.4
Put/Call Ratio (CBOE): 0.98; 0. Holding at a high level but not showing another spike as we want to see. The key with the sentiment indicators is to get them all getting to higher levels together. The PC ratio has been there for awhile.
NASDAQ
The 10 day EMA was enough to stall NASDAQ as it just about filled the gap lower from last week.
Stats: -18.6 points (-0.96%) to close at 1913.76
Volume: 2.098B (+10.89%). Volume was solidly above average as NASDAQ turned lower once more. Distribution once more.
Up Volume: 685M (-758M)
Down Volume: 1.388B (+957M)
A/D and Hi/Lo: Decliners led 2.22 to 1. Breadth is playing a flip flop game with the index moves, but negative breadth is outweighing the upside.
Previous Session: Advancers led 2.34 to 1
New Highs: 21 (-8)
New Lows: 144 (+28)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
Gapped higher on the earnings news posted a 1% move, but could not hold it. The 10 day EMA (1949) stalled it, and when a stock or index is in a weak position it tends to fail at the 10 day or the 18 day EMA. Turned over on high volume, ready to take out the recent lows and try support at 1900, the lows of the October 2004 lateral consolidation. Questionable if that will hold. Next in line is 1876 At this point NASDAQ is still trying to find its bottom on this leg.
As with NASDAQ, the large cap techs are heading right back to the recent lows at 1405 where there is some support. NASDAQ 100 could get no help from YHOO and INTC as the move did not instill much buying outside of the names that announced good results.
SOX also turned over at the 10 day EMA after gapping higher on the INTC results. The bottom of the trading range is 380, and without much upside on the recent bounce it is ready to test that level again. There is some support at 375 from some interim lows last summer.
SP500/NYSE
Dove past the recent low on strong volume, resuming the downside run.
Stats: -15.28 points (-1.33%) to close at 1137.5
NYSE Volume: 1.773B (+4.54%). Not the strong volume of last week but increasing trade as the selling resumed. Rising volume means more dumping. No cessation or turn in price/volume action yet indicates even more downside.
Up Volume: 342M (-1.235B)
Down Volume: 1.852B (+1.305B). Downside volume is really outstripping upside trade. Lopsided downside is another indication of extreme action. It reached abut 8 to 1 intraday. Getting there.
A/D and Hi/Lo: Decliners led 2.93 to 1. Would like to see a 5:1 session in the near future selling.
Previous Session: Advancers led 3.01 to 1
New Highs: 16 (-2)
New Lows: 104 (+37)
The Chart: http://www.investmenthouse.com/cd/^spx.html
The large caps are struggling, hitting a new low for the year, breaking through the June and October 2004 highs at 1144-42. It is heading for 1125, still trying to find its bottom after the head and shoulders pattern broke lower. Bottom of that breakdown puts SP500 near 1105. Again, it is still trying to find its bottom as the large caps are being sold hard.
The small cap SP500 was shelled as well but it is trying to hold its 200 day SMA (305.26) and stem the selling. Some decent support at 301 from the October high. It needs to hold in this range or it really sets up further downside to 290 and into the summer 2004 base.
DJ30
DJ30 could not find any help even with CAT and INTC. It broke to a new 2005 closing low, just managing to hold 10000. Volume was up as it distributed, suggesting the symbolic 10K level is going to give in. After that breach it will probably try a test, but 9988 is easily in jeopardy. After that 9933 to 9900.
Stats: -115.05 points (-1.14%) to close at 10012.36
Volume: 323 million shares Wednesday versus 286 million shares Tuesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
THURSDAY
Some good earnings have been unable to stem the selling. Stocks might not get a lot of help tomorrow either with the QCOM earnings that missed on revenues. EBAY was up on some good results after hours, but the higher volume of late has occurred on fears of economic slowdown. CEO's in earnings calls may be upbeat about the future, but we have to remember that they were pessimistic as the economy was turning back up. They are more contrary indicators than true harbingers of what lies ahead. Thus the market does not put a whole lot of stock in what they are saying. Sure it will impact individual stocks, but overall the market looks at the bigger picture outside of the positive comments of CEO's.
Thus it looks as if the market, after a very short respite, is back to selling, back to trying to find the bottom of this leg lower. We talked quite a bit about what is the next potential support level when discussing the indices. That is just to point to places where the market or index might find a bounce and could possibly try to hold for the next move. It is not bottom picking. When there is selling such as this the indices have to attempt a rally and then provide a follow through a week or so later. That shows the buyers/short coverers stepped in and then the buyers came back in later even as the market held its reversal. You also need to see leaders setting up and making the breakout moves, basically leading the market higher.
The point is not to get too wrapped up in what is support, but to look at it as signposts of how weak or strong the market is. Thus far the indices have been popping support levels on high volume, an indication of a lot of weakness. How they treat each potential support level is something of a litmus test as to how virile the selling still is. It can start getting us ready for a rebound and follow through, but it is not the 'green light = buy' indication some way it is. Indeed we heard one commentator today say that this was the bottom. Maybe it is, but with SP500 diving to a new 2005 low on rising volume, 'gutsy' is the mildest adjective that comes to mind.
We wanted more upside to better set up the further downside. It did not come so we will continue to look for select downside plays while we also continue to nurse some leaders through this selling and watch others set up for the next move. We love to see strong stocks use overall market selling just to make nice, easy tests of breakouts or finish their bases. That is leadership and shows us the stock will be running when the selling pressure backs off. Now if the selling gets too intense, i.e. if this is going to turn really ugly, we will start to see everything get taken down. Right now there are plenty of stocks that are holding up very well, showing that excellent relative strength. They will be tested from the looks of SP500 and its drop Wednesday, but the strong survive.
Time to remain patient and pick our shots. For some of the strong stocks that are ready to take a breather maybe we sell some near term at or in the money calls, let the stock test near support, then buy them back. If the stock keeps selling we sell it and buy back the calls, pocketing the call money. That is one way to make you patient and very cognizant of your stocks. It makes you evaluate them and better understand their support and resistance and how they move. That is one way to practice discipline and makes us some money as well as the market tries to find its bottom.
Support and Resistance
NASDAQ: Closed at 1913.76
Resistance:
1946 is the recent gap down point.
The 10 day EMA at 1948.
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 and the March low at 1973.
The 200 day SMA at 1990
The 50 day EMA at 2009
Support:
1900 from October 2004, March 2004, October to December 2003 (consolidation range bottom) held on this last test.
1876 from the May 2004 low and November 2003 low.
1860 from the late September 2004 low.
S&P 500: Closed at 1137.50
Resistance:
The 200 day SMA at 1154
1154-1157 tops from early 2004.
The 10 day EMA at 1159.
1163 is from January is trying to hold.
1175 second high in that double top that spanned late 2001 and early 2002 is trying to hold
The 50 day EMA at 1180
March 2003 up trendline at 1189
The 50 day SMA at 1189
1196, the mid-January high and the early December peak in the left shoulder.
1200
Support:
1129 to 1125
1100 to 1095
Dow: Closed at 10,012.36
Resistance:
10,065 from March 2004 lows.
The 10 day EMA at 10,234
Some price resistance at 10,250.
The 200 day SMA at 10,376
10,400, the bottom of the November/December range
The 50 day EMA at 10,499
Price consolidation at 10,600
10,754 is the February high
Support:
9988 from September 2004.
9933 to 9900
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
April 19
PPI, March (08:30): 0.7% actual versus 0.6% expected and 0.4% prior
Core PPI, March (08:30): 0.1% actual versus 0.2% expected and 0.1% prior
Housing Starts, March (08:30): 1837K actual versus 2090K expected and 2229K prior (revised from 2195K)
Building Permits, March (08:30): 2023K actual versus 2094K expected and 2107K prior (revised from 2107K)
April 20
CPI, March (08:30): 0.6% actual versus 0.5% expected and 0.4% prior
Core CPI, March (08:30): 0.4% actual versus 0.2% expected and 0.3% prior
April 21
Initial Jobless Claims, 04/16 (08:30): 329K expected and 330K prior
Leading Economic Indicators, March (10:00): -0.3% expected and 0.1% prior
Philadelphia Fed, April (12:00): 10.0 expected and 11.4 prior
End part 1 of 3
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