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world stock market, us stock market
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4/28/05 Stock Split Report
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Stock Split Report Subscribers:
MARKET ALERTS
Targets hit alerts: None issued
Buy alerts: JCI
Trailing stops: NMGA
Stop alerts issued: None issued
The market alert service is a premium level service where we issue intraday alerts relating to the general market conditions, when stocks hit action points (buy, stop, target, etc.), and when we see other information impacting the market or our stocks. You can sign up for Stock Split Report alerts at the following link:
http://www.investmenthouse.com/alertssr.htm
SUMMARY:
- Weaker economic data still rattling the market.
- GDP slows as inflation picks up a bit.
- Bond curve flattening on expectations of weakness a la Fed.
- Sellers rise to challenge, push stocks lower on rising volume.
- MSFT does not totally disappoint, but it was no blowout.
Earnings an afterthought to a market worried about economic future
The tennis match continued. After buyers and short covering pushed stocks higher on rising volume Wednesday in the face of the Tuesday higher volume selling, the sellers were right back at it, volleying a shot back at buyers on even stronger trade. Advantage sellers. The downtrend continues so the market character has not changed, particularly with another volume selling session.
Stocks do remain in the recent lateral range though NASDAQ is hanging on by its teeth to the 2005 lows. This back and forth action on stronger volume does indicate that the selling is in its death throes, but it is not there yet. This up and down action will have to yield to some quieter consolidation or a big cathartic sell off and recovery. As noted last night, the former is more likely in the latter based on historical norms.
Thursday was really no different from any other session of late. Earnings by the plenty were solid. Guidance was not bad. Economic data, however, continued weaker while inflation showed some more life signs. That put a stake through the Wednesday volume rebound attempt. Earnings from Q1 don't mean much to a market worried about the economic future. Stocks started weak, rebounded a bit to the open prices, but then rolled over and sold into the close. A modest post lunch rebound was even weaker than we anticipated in the lunchtime alert, but the result was the same: stocks rolled back over and sold into the close.
Oil's action did not help either. Oil sold below 50 once more as expected, and as expected as well, buyers stepped in and bid it back up. It moved back over 51 on the close, and as it rose in the late morning and afternoon stocks weakened commensurately. The key now is whether this reactionary bounce to a second quick test below $50 stalls and oil really collapses. The way oil stocks are action we expect that to be the case, and it is very important for the economy's future in 2005 that it makes the drop and moves down at least to the mid-forties. That would inject some confidence into prospects about the future, something this market really needs.
THE ECONOMY
GDP dragged lower by energy costs, expiration of tax incentives.
The 3.1% initial Q1 reading was below the 3.5% expected and the 3.8% 'slowdown' in Q4. That was the slowest growth reading in 2 years, but it was due to imports. Imports were high once again thanks to rising oil prices, and imports are deductions from GDP. That trade deficit sliced 1.49% off the final number. What an import/export deficit means is the US is strong and buying goods. Look at our history since WWII; when we have a strong economy we consume a lot of domestic and foreign goods. That is what a high standard of living will do for you. Problem is, the rest of the world sans China and India is weak. They are not consuming their own goods but shipping them to the US. Indeed, they have built their economies around that model the past twenty years. That is why when we suffer they suffer right along with us. Their lack of domestic demand exacerbates the trade gap and that gets everyone worried they will lose interest in dollars. The reality is they want the US to consume their goods because that is what their economies are built around. May change some day, but not simply because there is a trade gap.
Thus with that trade imbalance there was weakness built in even if the economy remained strong otherwise. Problem is it was not altogether stellar as it was in Q4. Of course, that was a hard comparison with the strong investment due to expiring fiscal (tax) incentives.
Activity was down across the board as inventories build. Q1 inventories rose $80.2B (annual rate) compared to a $47.2B bump in Q4. While imports are subtracted from GDP, inventories are add-ons because they are the result of production. An inventory build, however, can bolster reported GDP growth above the real strength of the economy. During recovery times that is good. When the economy has enjoyed expansion and growth is flattening, that is bad. The reason is it shows all that production is stacking up, going unsold. That has several implications. It shows consumers, both individuals and businesses, are not buying as much. That has a snowball effect as producers then produce less. Less production can mean fewer hours worked, some layoffs, even some plant idling. As in 2000, it can mean disaster. That is getting pretty draconian and we are not saying that is the case now. The market, however, always overreacts to news in the short run as it ponders worst case scenarios; this data fuels that speculation.
Consumption was indeed lower. After a 4.2% gain in Q4, consumer spending rose 3.5%. That is down even from the average of all 2004 (3.8%), though that was the highest level since 2000. Those higher prices at the pump are making an impact, and this initial GDP reading does not have all of the March increases factored in yet. Business investment (construction, equipment, software) rose 4.7%; not bad you say, but compared to the 14.5% gain in Q4 it was paltry. As we surmised last summer, there was a Q4 buying binge as the tax incentives expired followed by a comparative desert of spending in Q1. Breaking that down further, spending on equipment and software rose 6.9%, well below the 18.4% in Q4. The only positive in the spending was a slowdown in government spending to 0.6% from 0.9%. Yee ha.
Signs of the slowing consumption impacting production already showed up in Q1. Ford cut production by 9.9%. It plans to cut Q2 production another 1.2%. Inventories are a major problem for Ford and GM. They have to sell them so expect some sweeter deals other than the ones seen the past six months, e.g. offering higher incentives after raising the price first. They are going to have to really deal to get those who just bought new vehicles the past two years to get back in. That is harder for GM as it has not had any significant change in its light truck line, one of its best sellers the past few years. Without some major change in the lineup it is hard to get someone back in without putting them in at least the same financial position with a new vehicle. That is tough to do.
GDP Deflator shows inflation picks up speed, leaves Fed with the club at the ready.
The economic data was not bad; 3.1% is a lot better than the 1.9% in 2001. Inflation, however, remains a growing though still relatively small problem. The deflator is what is used to adjust GDP to inflation. The lower the number means there is not as much adjustment needed because inflation is lower. A higher number means more adjustment because dollars are inflated. The Q1 deflator rose 3.2% from 2.1% in Q4, the strongest rise since late 2001. Take out oil, however, and it was up 1.9%, a very manageable level. If oil breaks down things could still be salvaged. The personal consumption expenditures price index ex food and energy, a favorite of the Fed, grew 2.2% versus 1.7% in Q4; that was also the fastest gain since Q4 2001.
This indicates continuing inflation pressures even as the growth slows down. That has the gulls on Wall Street calling for stagflation. We talked about stagflation a lot earlier in the year as we saw things slowing as prices kept rising. It is a threat, but we are a long, long way from the real stagflation from back in the 1970's. Inflation is a problem because demand continues to outstrip supply as it has this entire recovery. Demand is backing off now, but there are signs (e.g. the autos) that supply may do so as well. What is really needed is a kicker, some incentives renewed to get more business investment right now. That would increase economic growth, catch supply up with demand, and right the imbalance that exists between supply and demand.
Unfortunately that has about as much chance of occurring in this political climate as a snowstorm in Galveston this month. Instead we are relegated to the Fed dealing with the problem. After all everyone assumes inflation is the Fed's job. Problem is, the Fed only has one trick in its bag to deal with it, and it is to economics what leeches were to seventeenth century medicine: you have to drain off the bad to get reinvigorated growth. Sometimes it might work. Most of the time the patient gets worse, maybe even dies.
The Fed meets next week and with its pet inflation gauges showing increasing inflation despite slowing economic activity, it is going to keep its rate hiking campaign going. It won't go 50 BP due to the slowing and the still high gasoline prices, but it won't be able to justify not raising rates. It also wants more ammunition to in the event it has to start cutting rates again. That is the irony: it has to hurry and raise rates so if the economy slows too much it can have room to cut them. Reminds me of 'Cool Hand Luke': Luke, what is all that dirt doing in Boss's yard? After he digs the hole: Luke, what is this hole doing in Boss's yard? He fills it back up. The scene repeats several times. In the end it broke Luke, and we are afraid it is going to break the economy without some more fiscal stimulus. The Fed uses its one size fits all club to 'fix' all problems. Too slow? Club. Too fast? Club. Inflation? Club. Trade gap too wide? Club.
Bond curve will flatten further.
In response to the GDP data bonds did nothing. They have been rallying on the weaker economic data, indicating they don't believe the growth will sustain higher rates or more rate hikes. The Fed Funds Futures contract still shows just three 25 basis point hikes in the next four meetings. After the GDP data and the deflator bonds held steady because they see the inflation and they know the Fed (inflation? Club). The Fed will raise rates to fight inflation and to get to at least 3.5% regardless of the damage done. It will then worry about if it needs to stop or cut. History is replete with examples that this standard operating procedure by the Fed reacts too late for the economy. It causes a slowdown (at a minimum), and with oil prices that have held historically high rates for months and months and driving season not even here yet, the problems are not going to go away this summer.
Thus the Fed is going to keep raising short rates to fight inflation. At the same time the long end will remain flat because the bond market does not see the economic growth due to high energy costs, an already slowing economy, and the Fed raising rates into a slowing economy. That will lead to a flat curve, a curve that is already its flattest in three years. At this juncture its forecast of a recession is still very, very low, but if the flattening continues that percentage will grow. If it inverts a recession is a historically done deal.
The Fed is still walking the tightrope that we discussed back at the end of 2004, and the rope is getting narrower and shakier. It kept rates low an awfully long time to get everyone over the worry of deflation. That ended up being too long with all of the solid fiscal stimulus, and demand has outpaced supply. Now it is trying to play catch up and get rates higher while the economy slows. It is trying to slip them by us in 25 BP increments as it continues to talk about the strong economy when we all see that it is not so strong when we have to spend $40 to fill up, diverting $10 from other expenditures to pay for transportation. That is a big hit on the economy. The Fed is in deep once more and it is likely to drag us in with it.
Again, the thing that could save us would be fiscal stimulus in the form of limiting some of the pork our tax dollars are spent on and diverting it to investment credits for businesses and some for consumers. Pork you ask? How about federal money for the study of mariachi music? $6.3M for 'wood utilization' research. What, do they need to know that wood can be used for baseball bats, houses, desks, chairs, etc? How about $1.7M for the International Fertilizer Development Association? Just spreading fertilizer? In 2005 there are almost 14,000 special interest projects, up 31% from the 10,656 in 2004. Some argue it is a drop in the bucket compared to the overall budget, but this largesse with our tax dollars is an insult to every hard working taxpayer.
THE MARKET
Rarely do you see stocks surge back and forth on volume as they are doing now. Typically one side takes control and dominates the action. While the action remains negative given the current downtrend, the past week the action has tried to shift with some strong upside sessions to go along with the general negative tone. The small cap SP600 actually delivered a follow through session. That, however, has gone by the wayside as SP600 closed at a new low for 2005 Thursday. Thus that positive is gone and now the only strength is the volume flip-flopping where at least there are some strong accumulation sessions.
That is not enough at this point to turn the tide. There are signs, but until there is a rebound and strong, broad follow through (unlike the last) the negative character remains. What are indications of a possible turn? The back and forth volume moves are one. The high put/call ratio is another. Rising bearishness again. These are all signs, but they are not definitive. They tell us to watch for a change and to watch the leaders and see if they are starting to break higher. With the market still in a downtrend, however, we cannot count on these signs to lead to an upside breakout. The current downtrend is still in place and despite these signs, it is still strong as neither NASDAQ or SP500 has managed to clear the 10 or 18 day EMA since this break lower. That is a sign of weakness, or put another way, of strength in the downtrend.
MARKET SENTIMENT
Volatility 'shot' higher 2 points, nearing the recent high just over 18. This is a big move for the current volatility readings that are well below what was the norm for the late 1990's and early part of the 2000's. Spikes up to twenty in 2004 led to rebounds. We would love to see a spike up to 25 or 30 on this selling. Sound high? Well, when the fear side gets going it can spike volatility sharply. It tends to build on itself, with bigger and bigger moves as the fear remains high.
VIX: 16.86; +1.99
VXN: 20.13; +1.37
VXO: 16.56; +2.66
Put/Call Ratio (CBOE): 1.13; +0.07. Again spending a lot of time at high levels, but it has been doing this for a long time. The other sentiment indicators still need to ratchet up as well to build on the anxiety and speculation to the downside.
It is important to keep these indicators in perspective. We like to talk of getting to a level to turn the market. These are secondary indicators, meaning they show us possibilities to turns, alerting us to potential change. The nuts and bolds of the market, e.g. price and volume, leadership, have to show the move is underway. The sentiment indicators are getting there, showing us some fear building, but the market has yet to turn the downtrend.
NASDAQ
New closing low for 2005 on rising volume, but still within the recent range. This is where it has to hold.
Stats: -26.25 points (-1.36%) to close at 1904.18
Volume: 1.925B (+5.45%). Volume climbed again, moving above average for the first time since last week. Once more a higher volume session as the day to day direction changed. More distribution, the second this week. The trend is still down and distribution is still in control. That means the downtrend is still in place and is still the stronger (kind of goes without saying).
Up Volume: 381M (-492M)
Down Volume: 1.527B (+595M). Heavy downside ratio
A/D and Hi/Lo: Decliners led 2.93 to 1. Very weak, but -5:1 would be more of an indication.
Previous Session: Decliners led 1.24 to 1
New Highs: 29 (+2)
New Lows: 217 (+14). 500 would be more of an indication of an index getting sold out
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
Held the recent lows in this range though still a new closing low for the year. The trend remains down as NASDAQ failed at the 18 day EMA (1950) early in the week, a signal of its weakness. This is where it needs to hold to keep the signs of a heartbeat going. It has the potential for a short double bottom here at the recent low hit two weeks back. That is grasping at hope at this point. The trend is down and it is falling on rising volume once more. If it holds and rebounds, great. If not we won't be surprised.
Same action on NASDAQ 100 though the large cap techs held above their prior lows hit two weeks back. The large cap techs were down 1% versus the 1.4% of the overall NASDAQ; the smaller caps really hurt the over index. Still in the downtrend, still below the 18 day EMA, and still looking for a bottom.
SOX turned lower at the 10 day EMA (390.86), unable to come close to closing above that level. That is a sign of weakness, but SOX still holds above the bottom of its 5.5 month range trading range. This is where it needs to hold (380); that seems to be the common theme for the indices with respect to any upside.
SP500/NYSE
Rolled over on rising volume. It is still within its recent range and above the near up trendline, but the distribution has returned, pushing it lower.
Stats: -13.16 points (-1.14%) to close at 1143.22
NYSE Volume: 1.75B (+3.65%). Volume rose, remaining above average. The distribution still holds sway this week as stronger selling volume has taken the index to a new low for the week. As with NASDAQ, the back and forth trade on strong volume is indicative of a change underway, but it has yet to show the upper hand.
Up Volume: 385M (-722M)
Down Volume: 1.774B (+769M). As with NASDAQ, lopsided up to down volume but not at anything not seen recently.
A/D and Hi/Lo: Decliners led 2.2 to 1. The small caps really hurt.
Previous Session: Advancers led 1.16 to 1
New Highs: 32 (-9)
New Lows: 144 (+20)
The Chart: http://www.investmenthouse.com/cd/^spx.html
Turned back below the 200 day SMA (1155) once more after making a lower high at the neckline from its head and shoulders pattern (1164). Volume rallied as the index fell as more stocks were dumped. SP500 is still in the downtrend and is heading for a test of the recent low (1136) and the August 2003/August 2004 up trendline (1138).
SP600 was out and pelted with rocks and garbage. It made a new low for the year, undercutting its recent low. It has tested its breakdown from the head and shoulders base and failed. It is at some support here at 301 from the early October high. Looks as if that is not going to hold, however.
DJ30
The blue chips have been hamstrung almost each session by a stocks that suffers a thorough beating. Thursday it was XOM; reported a 44% earnings increase but that was not in line with expectations. It was kicked lower on volume and DJ30 sold off on rising volume as well. Very similar to SP600, the blue chips have tested the breakdown from the head and shoulders base and have rolled over. Looking for a test of 10,000, the prior low in this selling.
Stats: -128.43 points (-1.26%) to close at 10070.37
Volume: 279 million shares Thursday versus 248 million shares Wednesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
FRIDAY
Despite a few signs of potential life we have to recognize that the indices are in downtrends and are continuing lower to test the recent lows after making another lower high following the breakdowns three weeks back. That is the overlay with respect to all actions within the market. There can be signs of change, but until the indices and leading stocks start to show a change there is no change. Leaders are still holding up, and that is a positive, but more and more are getting picked off by the selling as they fail to measure up to investor standards for whatever reason.
After hours MSFT announced its earnings and it was down then up and then flat. In short it provided no spark, similar to other earnings results this season. It is interesting to note that MSFT is making a lot of money with its aging Windows product. It is coming out with a new 'Longhorn' version in 18 months, but we doubt that will drive new growth; it is just trying to keep up with the competition. AAPL just introduced its new OS that we hear leaves Windows in the dust. Basically MSFT has a cash cow in Windows that it is trying desperately to keep selling in all world markets. Hence the settlement attempts with the EU. At the same time it is trying to develop the XBox further as its growth area. That says it all. MSFT is now looking to games as growth. Sugar water or change the world. Copy the Macintosh interface or make games. Kind of sad to see it happen.
The market is continuing to price in economic weakness. At the same time companies are posting their highest post-WWII profits in an environment that shows the lowest interest rates since WWII. Yet, stocks are at some of their lowest prices since WWII as well. Either the market is close to hitting bottom near term or there is something really ugly going to happen that is hidden to most everyone.
In the meantime we have the end of the month Friday. That could account for the back and forth volume this week. Friday may prove to be just as exciting as an expiration period. There are funds that have been dumping stocks to put on a better face to their portfolio as they try to get back to flat for the year. That is causing a lot of volume and volatility that we have seen of late. That has not, however, changed the trend as more are selling than buying.
The market needs to either bottom here at the prior lows and rebound or base further, quieting down the action, or it needs to sell off hard. Really hard. That is always the best solution but it rarely happens. We get to the edge of the precipice with sharply rising sentiment indicators only to rebound and relieve the pressure and fear. A sharp move through the recent lows and a drop to 9800 or so on DJ30 and 1100 may do the trick. It is not so much the level but the intensity and the fear it generates.
Friday we are going to watch for a test of the recent lows by SP500 and DJ30 and see how stocks react. The SP500 trendline will come into play as well. As with any level of potential support, a move through it often induces a rebound. The key here is how strong the rebound is; another modest bounce without strength or a massive run upside. At that level we doubt the latter. The former will set up more downside plays.
Support and Resistance
NASDAQ: Closed at 1904.18
Resistance:
The 10 day EMA at 1935.
1950 (top of October to December 2003 consolidation)
The 18 day EMA at 1951 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 1993 and the 50 day SMA at 2006.
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 1143.22
Resistance:
The 200 day SMA at 1155 is Swiss cheese.
The 18 day EMA at 1161
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 1175
The 50 day SMA at 1184
March 2003 up trendline at 1194
1196, the mid-January high and the early December peak in the left shoulder.
1200
Support:
1137 the recent April low.
1138 the August 2003/August 2004 up trendline
1129 to 1125
1100 to 1095
Dow: Closed at 10,070.37
Resistance:
Some price resistance at 10,250
The 18 day EMA at 10,254
The 200 day SMA at 10,374
10,400, the bottom of the November/December range
The 50 day EMA at 10,429
Price consolidation at 10,600
10,754 is the February high
Support:
10,065 from March 2004 lows.
10,000 the recent 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): -2.8% actual versus 0.3% expected and -0.2% prior (revised from 0.3%)
April 28
GDP-Adv., Q1 (08:30): 3.1% actual versus 3.5% expected and 3.8% prior
Chain Deflator-Adv., Q1 (08:30): 3.2% actual versus 2.1% expected and 2.3% prior
Initial Jobless Claims, 04/23 (08:30): 320K actual versus 320K expected and 299K prior (revised from 296K)
Help-Wanted Index, March (10:00): 39 actual versus 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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