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world stock market, us stock market
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04/26/05 Investment House Daily
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SUMMARY:
- Stocks reverse Monday, start strong, finish weak, higher volume.
- New homes sales roar back . . . again.
- Consumer confidence waning, at least in word.
- NASDAQ, SP500 peel back on rising volume, looking weak of character once more.
- AMZN disappoints. Safe to say earnings are not doing it versus the Fed and oil.
No late rebound to save the day.
Tuesday soft but then turned negative futures on their head when investors decided the surging new home sales outweighed the weaker consumer confidence. Once more there were some good earnings pre-market, but once more they failed to rally the troops. There were a few days last week where earnings finally had an impact, but that was after the market was hammered lower on volume; the earnings that came along then were basically fortuitous in timing as they caught the relief bounce higher. That made them look like heroes, the market saviors, but that notion was snuffed out a bit more on Tuesday as stocks turned over again with a rising volume kicker.
It was not huge, blowout volume, but it was rising volume on the selling, showing that the sellers were growing a bit in strength once more. Definitely stronger than the weak Monday upside but lower than the stronger Thursday upside move. Sellers were back into the market but they were not putting the hammer to it. With a modest rebound attempt just underway, however, that really jeopardizes the chances of success.
Looking at NASDAQ and SP500, they are pictures of weakness. NASDAQ never showed a stronger upside last week as it rallied on lower volume. Tuesday it fell back from the 18 day EMA after tapping that level on the high. The SP500 did the same, though it also tested the neckline to its head and shoulders base as well. Both fell on that rising trade, and a failure at the 18 day EMA sure makes this looks like a continuation of the downtrend as opposed to building off of the rebound attempt. SP500 has yet to follow through as did SP600, and the higher volume selling prior to a follow through session (higher volume buying) is often a rally attempt killer. Again, these two took a turn weaker Tuesday after testing and failing to move through key levels.
THE ECONOMY
March new home sales scorch expectations.
A 12.2% gain (1.431M units) blew past the expected 2.8% drop in home sales. Fence sitters fearing higher rates, improving weather, continued affordability, and maybe a bit of speculation shot units higher. New home sales are calculated a bit differently from existing home sales; they are booked when the contract is signed whereas existing home sales are booked at closing. Thus there can always be some flex in the number if some contracts are walked, but unless the market collapses that is rare.
Very strong, but it is another example of volatility in the housing market results the past several months that have seen big ups and big downs. That is always a sign of change in an existing trend. With the current demographics, it does not suggest a collapse anytime soon. As we have said the market will most likely continue to flatten in a broad peak and then decline gradually to lower levels.
Why not a big collapse? Because that takes a lot of speculation, and it is not apparent in this market. Over the past three years we have watched the market in many areas and saw what looked to be the start of speculation. In Galveston, Texas just over a year ago we noted that there were many purchases of second homes were made with the idea that they could be immediately sold for a gain if necessary. That is a sign of speculation, though not rampant speculation. In the following year the market remained strong, but the past three months it has slowed considerably with some high dollar houses sitting empty, looking for a buyer. The market has hardly collapsed; it is just taking longer to sell where before they were often sold before completion.
In Los Gatos, CA and the hinterlands thereof the housing market was very strong in the late 1990's, but then suffered the slump after the high tech bust. No surprise there. Many homes that were under contract were walked while others just got by with the closing. Now that area is enjoying a strong market once more. A house that sold for $1.5M in 2002 just sold the other day for almost $2.5M. That market has seen boom, bust, and now resurgence.
We keep hearing talk about speculation in the market, and there are people buying houses with the specific intent to sell them for a profit. Is that investment or speculation? In some minds that is automatic speculation; to others it is simply investing in a good market. The key is, as with all indicators, when it gets extreme. Has it become a serious alternative to other forms of investment? Not many have the understanding and patience to go through the closing process, market a property, and then go through closing. It is done, but it is not something that everyone can just switch to as opposed to investing in stocks or commodities.
Another consideration is whether it is raw land, new houses, or 'fixer-uppers.' In Austin, Texas back in the mid-1980's there was a real speculative bubble in real estate. It got extreme when the speculators moved from buying and selling houses to buying and 'flipping' raw land to Californians and others from out of state. Land would 'flip' 5 or 6 times in rapid succession, the price rising with each transaction with nothing being done to the land at all other than new 'for sale' signs being put up (sometimes). Shortly thereafter the market crashed in the great real estate bust and S&L collapse. That land remained the domain of rattlesnakes, scorpions, and dwindling horned toads until the resurgence the past 7 years as Austin became more of a silicon destination and again attracted outside dollars. Those lands are now developed and more development continues. Still, it is not the frenzy it was back in the 1980's.
What we are seeing in many areas are cycles within the overall cycle much as we cycles within the overall economy. During an expansion there are periods of rapid growth and there are periods of slower, sometimes flat, growth. All the while the trend remains in place. Even with the tech crash of the early 2000's, we see real estate in San Francisco and the Silicon Valley hinterlands resurging. It survived a crash and is still moving back up. That is the power of low interest rates, demographics that support strong buying (boomer second homes and low end houses for immigrants) and a redirected outlook toward the home after 9-11. Yes Americans are traveling once again, but 9-11 altered attitudes and priorities as to what is important. It is not always overt, but it is there. They buy beach or mountain houses as their main getaways.
There may be a day of reckoning ahead when low variable rate mortgages suffer rate spikes, but what we are hearing from most mortgage brokers is that those entering the market that need to get over the threshold are using the adjustable mortgages to get into the home and then moving into a fixed rate note. Not all, but that is what many are wisely doing. Despite most pundits who grew up with an overly strong federal government and thus, like the federal government, look upon most of us citizens as ignorant sheep, US citizens are smart and end up making good economic decisions. How else do we get the amazing productivity and economic growth we get compared to the rest of the world? It is not by sitting on our butts watching the world go by. Over 70% of the businesses in the US are small businesses. You don't have that with a population of mouth breathers. Thus there will be a continued slowdown in the housing market as the demographics shift from the current favorable environment, but without a major economic collapse in the rest of the economy as well, the market is not at a speculative crescendo and ready to tank.
Consumer Confidence fades further but still nowhere near critical levels.
As usual there was much howling about the flagging consumer after the April 97.7 reading missed expectations (98.0) and was well below the 103.3 in March and 104.0 in April. That was 5 month low. Expectations, the view 6 months down the road (do consumers actually look that far ahead?) fell to 87.2, the lowest in about 2 years (93.7 prior). That as well is not at a critical level, i.e. in the sixties, where it significantly influences consumption. Indeed, the housing numbers would confirm that as the case as do the answers regarding buying major appliances, where the majority of the respondents said they were going to do just that in the next 6 months.
As for current conditions, they were down as well but at 113.6 (117.0 prior), they are even less of a concern. Those thinking jobs are 'hard to get' eased, but so did those thinking jobs would be more plentiful in the months ahead. As with the expectations, they are nowhere near levels that indicate altered behavior.
The driving factor behind the drop is concern over gasoline prices and what impact they will have further down the road. Everyone talks about spending $40 or more to tank up. Gasoline is something the vast majority of US citizens cannot get by without. That price increase along with higher food, medical, and school costs is not offset by falling non-essentials such as PC's, large screen televisions, and other electronics. While you cannot really call a PC a non-essential today, you still don't have to buy one every week. You don't even have to fill up its memory every week. Heaven knows they would make you do that if they could, but for now that is not in the cards.
This reading may raise some eyebrows, but unless it starts showing a severe downtrend it does not mean much. Confidence has flattened as gasoline prices have climbed. Now talk of a 'slow patch' in the economy is exacerbating the flagging levels, but thus far the big ticket items have not seen much of a slowdown. We will know more with the durable goods report on Wednesday, but historically the current confidence levels are not enough to send the consumer into hibernation deep enough to disrupt the economy, at least from a consumption standpoint.
Yield curve is flattening once more.
After the 10 year bond started to rise following Greenspan's 'conundrum' jawboning, it looked as if a modestly flattening yield curve was on the mend. It was. Then Greenspan said everything was working out jut fine with respect to rates, inflation, and the trade gap, and that took the heat off. The curve started adjusting back to apparently where it wants to be, i.e. flatter than what is a 'healthy' curve.
Right now there are just 61 basis points between the 2 year and the 10 year treasuries. That makes the current curve the flattest in 4 years (2001). That was back in recession times. Before you start cleaning out the bomb shelter and preparing another economic downturn, it does not mean the yield curve is indicating a recession. An inverted curve is the sure sign of recession. A flatter curve shows uncertainty about the economic strength ahead, and it is often encountered during Fed rate hiking campaigns as the lower end is jacked higher and the long end has to play catch up.
What dogs the longer end is what has dogged the market (along with higher oil): will the Fed go too far and cause a recession? Thus the very act of raising rates flattens the curve by directly raising the short end AND stalling the long end with fears of economic slowdown due to an over-aggressive Fed. That is why in past history it has taken an acknowledgment by the Fed that its rate hiking days were over before the market and the long end would resume their climbs.
Another factor to consider is the Fed Funds Futures contract. It continues to show just 75 basis points in hikes over the next 4 meetings. In other words, it is currently factoring in just three more 25 BP rate hikes by the Fed. The next meeting is next Tuesday, so one of those could be off the table that quickly. That and the 'measured pace' language will likely be gone as well as the Fed positions itself for a more flexible approach in the coming months. It is not just to allow it to raise rates faster than 25 BP per meeting, but it would also allow the Fed to stop raising rates if it feels that the economy has slowed too much. That is the opposite side of the coin, but that is so far from how things typically work out that no one is giving it much thought.
Improbable, yes, but worth keeping in mind if the yield curve continues to flatten. There is NO way that Greenspan is going to let the curve invert during his victory lap last year at the helm. He wants to put the next Fed chairman in position to not have to hike rates as his or her first order of business, but that does not mean he wants to get tagged with tightening the US economy into another recession as his last act. That would make his record consistent, and he may not be able to help himself, but that is not what he wants.
No, he wants to remove the 'measured pace' language this meeting so he can then stop hiking if need be during the last 9 months or so of his reign. It is just a precaution at this juncture; from what we hear there is no inclination to stop, but there is dissention on the FOMC. The most recent FOMC minutes show the Dallas Fed wanted hikes to cease (McTeer's former post is still the maverick of the 12 regions) while one of the Midwest banks wanted a 50 BP hike. As with anything else, when there are such disparate views, some would call it volatility, there is change underway. The Fed wants to get to 3.5% at least, and a 25 BP hikes at the next three meetings would do just that. From there it could call it quits with a clean conscience that it has left enough maneuvering room for the next Fed. Hopefully that won't be too much for an economy that is suffering a slow patch with a market that is really struggling.
THE MARKET
The market is the best forecaster of future economic activity, though it does stand to the left and back of the bond market in that game. Still, it is very sensitive to what is down the road for the economy. The market is not pricing in the current slow patch; that is happening now as opposed to 6 to 9 months down the road to where the market is looking now (at a minimum). In 2005 the market is engaging in pricing in some weakness, likely due to the Fed and higher gasoline prices. The selling at the start of the year may have been forecasting the current slow patch, but the stock market is still weak right now, and if it cannot bottom here, that means even more economic weakness down the road.
The two big uncertainties remain, oil prices and the Fed. The Fed is giving no hint of slowing yet even if the FFF contract is suggesting this is the case. Oil prices might not be going much higher (Saudi Arabia said today that oil over $50/bbl was not good for anybody, something the Fed cannot seem to understand or at least admit publicly), but gasoline is not slowing down at all. It is sure to hit $3/gallon on average this summer unless oil falls well into the forties and does so rather quickly.
This uncertainty showed up again Tuesday as NASDAQ and SP500 peeled back form the 18 day EMA as if it was some really serious resistance. Volume rose as they tapped at that level and reversed to close at the session low. When a stock or index finds the 18 day EMA as resistance (or as support on a breakout run), that is an indication of the strength of the trend. Seeing the two reverse from that level on increasing volume damages the attempt to continue the recent relief bounce higher to better set up a the test of the recent 2005 lows.
They aren't dead yet, but they still don't look very healthy. Volatility remains higher as NASDAQ and SP500 continue with the negative character following the SP600 (small cap) follow through session. They are still have to show us some kind of upside strength here. We are not asking for a powerful run higher, but a climb higher, pretty or not, to make a test of the recent lows more credible. May not happen, particularly if this distribution continues; distribution often begets more selling. At least they are still in their recent range and have not yet broken once more to new lows for the year. Small consolation, similar to saying at least a the dam hasn't burst even as floodwaters race all around it.
MARKET SENTIMENT
As noted over the weekend, the sentiment indicators came more into line together, hitting levels that spurred the upside moves in the 2004 trading range. They were not overly powerful indications other than the put/call ratio. This move thus far has been less than powerful and is threatening a failure with the Tuesday distribution. If it does we will need to see the sentiment indicators reach more traditional levels to help foster the next move, and those levels are still a significant way off.
VIX: 14.91; +0.29
VXN: 18.68; +0.1
VXO: 14.26; +0.47
Put/Call Ratio (CBOE): 0.78; -0.02. Lower on a down session.
NASDAQ
Rallied up to the 18 day EMA after a weaker open, then turned over and closed at the low on rising trade. Not a good indication for the upside.
Stats: -23.34 points (-1.2%) to close at 1927.44
Volume: 1.731B (+15.29%). The only higher volume sessions in the past week have occurred on sharp down moves. NASDAQ has yet to show any accumulation since diving lower in early April, and the return of distribution Tuesday is a classic sign of continuing weakness.
Up Volume: 300M (-820M)
Down Volume: 1.412B (+1.064B)
A/D and Hi/Lo: Decliners led 2.32 to 1
Previous Session: Advancers led 1.57 to 1
New Highs: 36 (-3)
New Lows: 151 (+35)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
NASDAQ turned back from the 18 day EMA (1959), its first test of that level since breaking down below the 200 day SMA (1990) two weeks back. Failing at that point after a breakdown is a sign of weakness, and the higher volume selling is another sign of weakness as big money moves out of tech stocks. Volume was still below average so it was not an out and out slaughter, but the point was made with the second distribution session in 5 sessions with no intervening accumulation. This is NASDAQ's second lower high on this recent drop lower since March. It needs to hold at 1900 support and set up a lateral move to try again. This is the third leg down; a hold in this current range is needed.
NASDAQ 100 tapped the 18 day EMA and rolled over as well, falling on that rising trade as it too distributes again. The small caps and large cap techs are equally struggling. Support at 1400 is equivalent to NASDAQ support at 1900.
INTC was higher and that helped SOX post the lightest loss of the session. It too tapped the 18 day EMA on the high (399) and then rolled over, an 11 point swing, big for the index. It is languishing over support at 380, trying to hold that low that makes up the bottom of its 5 month trading range (380 to 450). Tempting to play the downside here, but with 380 support (the January low) still holding it is an aggressive move.
SP500/NYSE
Looked as weak as NASDAQ, failing at the 18 day EMA and the neckline on rising volume.
Stats: -10.36 points (-0.89%) to close at 1151.74
NYSE Volume: 1.562B (+9.64%). Volume moved up toward average on the selling, but still closed below average. Distribution nonetheless. Not as strong as the strong Thursday upside volume.
Up Volume: 410M (-980M)
Down Volume: 1.529B (+1.147B)
A/D and Hi/Lo: Decliners led 2.08 to 1
Previous Session: Advancers led 2.39 to 1
New Highs: 35 (-14)
New Lows: 84 (+32)
The Chart: http://www.investmenthouse.com/cd/^spx.html
SP500 rallied to its next resistance as well, basically recovering from a soft open to test that level at the 18 day EMA (1164) and the neckline to its head and shoulders pattern right at that level as well. It cut through the 200 day SMA (1155) on stronger trade. It did not offset the Thursday strong upside move, but any more distribution would likely do it. This market and this index are currently whipsawed each session by whatever side steps in. SP500 remains above the August 2003/August 2004 trendline where it bottomed last week, but this modest bounce off that level does not go very far in setting up a meaningful test. With the volatility, however, it is likely to rebound right back. Nothing to suggest that from the pattern, but just the indecisive trade of late, trade that still has a negative tinge as it has yet to show a follow through to last Thursday's strong upside move.
The small cap SP600 turned right back down as well, looking to once more test the 200 day SMA (305.77) that it has yo-yoed off of the past two weeks. It is holding that level, but the longer you hang out in a bad neighborhood the more likely you get caught up in some nefarious activities. In other words, the inability to get up off the 200 day SMA and make a sustained move opens it up to breaking down through that level. Right now the bulls and bears are fighting it out at that level and no one has the upper hand. The bears had it on the way down to that level, and given the index has been unable to rebound they still have the slight advantage. It is up to the index to show us the buyers are ready to win out by giving a strong move through the 18 day EMA (313).
DJ30
Turned lower below the 18 day EMA (10,284) without even touching it, basically stalling at 10,250. Volume was up but still below average as the blue chips again faded in their recent range from 10,000 to 10,250. The inability to make it up to the 18 day EMA when the 200 day SMA (10,375) was the more logical point (the bottom of the recent lateral consolidation) shows the buyers are on holiday.
Stats: -91.34 points (-0.89%) to close at 10151.13
Volume: 255 million shares Tuesday versus 231 million shares Monday.
The chart: http://www.investmenthouse.com/cd/^dji.html
WEDNESDAY
Neither earnings, nor economic data, nor the SP600 follow through could get stocks moving again Tuesday. Some good earnings reports and strong homes sales could not hold the gains. After hours Tuesday there was a dearth of strong earnings results with AMZN leading the charge of disappointments with light margins and tepid guidance. There were not many good stories, particularly in tech. Even the good stories of late, however, have been unable to provide sustainable moves higher. Maybe the other side of the coin will work now, i.e. bad earnings finally causing those hoping for earnings to save the day to throw in the towel. There may not be much help from the economic data either as the only report out Wednesday is durable goods, and that blows in the wind month to month.
That leaves the indices facing another distribution session after failing once more to take out near resistance and even attempt a recapture of the trading range they fell from two weeks back. The picture remains weak given NASDAQ and SP500 selling on rising volume. The volatility may pop them right back up as has been the cast the past week, but overall they technical position deteriorated Tuesday with the turn back from the 18 day EMA and the distribution. That keeps them in the recent range and makes the process of setting up a better test less likely.
It remains to be a 'show me' market for any upside moves, particularly after this action. We wanted a bounce to at least set up the downside better. Well, many stocks were falling back from near resistance similar to the indices; those without much support below will get our attention for potential downside plays. As for the indices, there is still some support below from the recent lows, the 200 day SMA in some cases, and similar potential support points. They will have to show they can hold, however, because thus far the levels have been popped like old rubber bands. That is why we look for a level to hold, bounce the index higher with a fairly significant move, and then a test. The bounce shows there is still solid support at that level, and if the test holds, that typically works to set the bottom in cement. Thus far, however, the market is still muddling through distribution, and that means it has not even secured the bounce from this first test.
The market never got a real blowout downside session in the recent downward plunge. It was just about one more harsh sell off from getting there. It may be trying to do that here, but all you can say right now is that it is weak, Tuesday's action skewed it a bit more to the weak side, but it is still holding the recent lows. With the recent volatility that leaves it an outside chance of rebounding once more.
Support and Resistance
NASDAQ: Closed at 1927.44
Resistance:
1950 (top of October to December 2003 consolidation)
The 18 day EMA at 1959 stalled it Tuesday.
Late 2003 highs from 1960 to 1970 and the March/April consolidation low at 1974
Early October high at 1971 and the March low at 1973.
The 200 day SMA at 1990
The 50 day EMA at 1999 and the 50 day SMA at 2012.
Support:
1904 is the April low.
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 1151.74
Resistance:
The 200 day SMA at 1155
The 18 day EMA at 1164.
1164 is the January/March neckline to the head and shoulders pattern.
1175 second high in that double top that spanned late 2001 and early 2002 is trying to hold
The 50 day EMA at 1177
The 50 day SMA at 1186
March 2003 up trendline at 1191
1196, the mid-January high and the early December peak in the left shoulder.
1200
Support:
1137 the recent April low.
1137 the August 2003/August 2004 up trendline
1129 to 1125
1100 to 1095
Dow: Closed at 10,151.13
Resistance:
Some price resistance at 10,250.
The 18 day EMA at 10,284
The 200 day SMA at 10,375
10,400, the bottom of the November/December range
The 50 day EMA at 10,454
Price consolidation at 10,600
10,754 is the February high
Support:
10,000 the recent lows.
10,065 from March 2004 lows.
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 25
Existing Home Sales, March (10:00): 6.89M actual versus 6.80M expected and 6.82M prior (revised from 6.79M)
April 26
Consumer Confidence, April (10:00): 97.7 actual versus 98.0 expected and 103.0 prior (revised from 102.4)
New Home Sales, March (10:00): 1431K actual versus 1190K expected and 1275K prior (revised from 1226K)
April 27
Durable Orders, March (08:30): 0.3% expected and 0.5% prior
April 28
GDP-Adv., Q1 (08:30): 3.5% expected and 3.8% prior
Chain Deflator-Adv., Q1 (08:30): 2.1% expected and 2.3% prior
Initial Jobless Claims, 04/23 (08:30): 320K expected and 296K prior
Help-Wanted Index, March (10:00): 41 expected and 41 prior
April 29
Employment Cost Index, Q1 (08:30): 1.0% expected and 0.7% prior
Personal Income, March (08:30): 0.4% expected and 0.3% prior
Personal Spending, March (08:30): 0.4% expected and 0.5% prior
Michigan Sentiment-Rev., April (09:45): 88.9 expected and 88.7 prior
Chicago PMI, April (10:00): 62.5 expected and 69.2 prior
End part 1 of 3
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