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world stock market, us stock market
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5/02/05 Stock Split Report Update
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Stock Split Report Subscribers:
Next full report issues Tuesday.
MARKET ALERTS
Targets hit alerts: ADBE
Buy alerts: EW; CVH; MSCC; SRX
Trailing stops: None issued
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:
- Stocks drift higher on low volume ahead of Fed.
- Construction spending hits a record.
- National manufacturing slows but still a solid pace.
- EU typifies US trade problems as its manufacturing contracts.
- SP500 rises to key resistance point, trying to set up for a follow through.
- Fed dominates market psyche as investors weigh slowdown and Fed versus future economic progress.
Stocks hold gains in volatile, low volume session.
For the first session in five volume did not climb past the prior session trade. With the sharply lower and below average volume, stocks were subject to some volatility, and they did not disappoint. Some upgrades in chip equipment overshadowed downgrades of the major brokerages, and stocks were set to open higher. They rallied on the open, but then started to waffle as oil climbed from the Friday sell off, moving back above $50/bbl (50.92 close). As oil rose stocks started to fall.
The construction data at 10ET shot stocks higher; a record level will do that. As quickly as they went up, however, they came back down as the ISM manufacturing report showed unexpected weakness. Still strong, but being that it is just before a Fed meeting and investors are viewing the Fed as a primary source of further slowdown, stocks lost their bid and turned lower. They sold the next four hours until SP500 tapped the 200 day SMA. That triggered some covering, and that snowballed into the close. When the bell rang everything but SOX was positive (-0.1%) with the small caps leading the way (1.3%).
Volume was low, typical ahead of the FOMC meeting, but with a follow through session still not in prime territory until Wednesday, no real complaints about the volume. Breadth was positive but modest; again no complaints. Leadership was solid with some good volume moves despite lower overall trade. This was classic 'drift' ahead of the FOMC meeting, and often that drift is higher.
Indeed it will likely drift higher Tuesday into the meeting itself, but there is a big and important resistance point immediately ahead: SP500 has rebounded to the neckline of its head and shoulders breakdown, the key point in the attempted double bottom rebound by the large caps. If the Fed says 'we are done' then you have a big breakout above that level. As that is not likely, most likely you get a test back from that level. How it rebounds from that pullback later in the week tells the story as to whether this nascent double bottom attempt has any staying power.
THE ECONOMY
Construction spending hits a record high.
The 0.5% gain topped expectations (0.3%) at $1.05 trillion. That is a solid indication that CEO's are putting their confidence in the economy into practice. Of course, construction spending has made a series of records since February 2004, so this was no earth shaking news. Private construction rose 0.5% while private residential construction rose 0.3%, both hitting new record highs.
The key was private nonresidential building, rising 1.1% after falling 1.4% in February. That is the sharpest gain since October 2004. It does not bring construction spending out of the woods into a new sprint higher, but it does show that after a really harsh February weather-wise, many projects got the go ahead. In the big picture capital spending is still quite solid even as the housing market continues to flatten.
National ISM weakens but continues to expand.
In a soft patch things slow down. In April manufacturing sentiment slowed to 53.3, below expectations (55.0) and at a 2 year low. New orders fell to 53.7 from 57.1. Employment dropped slightly to 52.3 from 53.3. Yes things slowed and it was a 2 year low, but still the twenty-third straight month of expansion, the longest expansion in the sector since a 3 year run that ended in April 1989. Impressive.
What is more impressive? One of the big worries in the Q3 GDP report released last week was the inventory build that indicated slowing sales and thus lower future production runs. That can snowball and result in an even faster slowdown. Well, before the GDP report even cooled off the April ISM already showed inventories declining. At 47.9, down from 54.1 in March, inventories showed the largest decline of any component. March was the biggest slowdown month of Q1, but already in April companies were turning inventories around. The new inventory management systems are pretty amazing. Just 10 years ago it would take another quarter at a minimum to make significant inventory adjustments, and now a month hence they are already well on the way to reaching adjustment levels. As a kicker, prices paid fell to 71.0 from 73.0. Not a windfall decline, but another step in the right direction after running near 80 in Q1.
The most impressive reading: 53.3 corresponds to a 3.8% GDP growth rate. Thus even in a 'slow patch' the economy is still producing a very nice growth rate. I discussed this past weekend about how the economy was being maligned as a result of recently softening data. We saw this slowdown earlier in the year, and it is no surprise given the Fed raising rates and oil prices above $50/bbl. This is not a major slowdown in the economy, however, as it stands. The real concern is what the Fed does and whether it pulls a repeat of prior campaigns where it hiked us right out of prosperity and into an economic slowdown or even recession.
At this juncture it is not baked into the cake though the oven is hot and the pan is warming up. The yield curve continues to flatten as the Fed raises the short end but the long end continues to rally (long rates fall). Right now the Fed Funds Futures contract is pricing in three more 25 basis point hikes (putting the Fed funds rate at 3.5) with an additional 25BP hike after that as a wildcard. Greenspan still has a conundrum to figure out, but frankly, no economy or market feels comfortable with oil at $50/bbl and the Fed raising rates. Thus the 'conundrum' is really more of a historical understanding of what bothers the market. You can have all of the strong economic data you can muster and those two items will make any market take pause. That is exactly what this market and economy have been doing, though the market is worried about further down the road than the recent batch of economic data as the market is more a predictor of economic growth than a reactionary to it.
Thus the issue is not so much of a current serious economic slowdown, but what the Fed's role is in shaping the economy down the road with rate hikes even as gasoline is set to rise to $3/gallon on average this summer. You can desire some extra maneuvering room in the form of a higher Fed Funds rate so you can cut rates in the future if you have to, but using interest rates to fine tune the economy is similar to the Forest Service using controlled burns to limit future fires. As we saw last year in New Mexico, a fire can get out of hand and burn down a lot more than intended, particularly when there is an ongoing drought. With a weaker economy and rising gasoline prices, raising interest rates in order to have more maneuvering room in the future seems to be, well, playing with fire. Problem is, it is us, not the Fed, that gets burned.
EU manufacturing contracts.
The US takes a lot of heat abroad and here at home for its trade gap. The US consumes much of what it produces and a lot of overseas goods as well. When it is healthy, as it has been for much of the past 25 years, we consume a lot more. That raises the sniping about how our economy is out of balance, how a 'day of reckoning' will come, how we all must be some kind of bad actors because we like to enjoy our prosperity and consume goods.
As I have discussed before, however, one of the very factors that makes us so out of balance is that most of our trading partners outside of China and India don't have strong enough economic engines to consume any of their goods. Indeed they have built their economies the past twenty years on feeding the US consumption engine. With those circumstances it is easy to build up a big trade imbalance.
A case in point continues to be Europe and its union. A week ago Germany announced its GDP was going to miss expectations of already puny growth. Monday the EU announced its equivalent to the ISM was less than 50, meaning that the EU manufacturing sector was shrinking. No wonder with high unemployment and regulations on just about everything you can think of and then a few more just for good measure. I reported before that after the EU formed and global regulations were written to supplant local regulations, instead of declining due to streamlining and cutting duplication, the number of regulations actually rose. A bureaucrat's dream no doubt.
The EU is just one example of strangled economies that are lagging in economic production, exacerbating a trade gap. That continues the argument that they will dump US assets at some point because the US becomes some kind of bad risk investment, but when you think about it, does common sense really bear this out? First, they want the US to buy from them as their economies depend upon it. Thus they are not about to do anything that would undermine our consumption of their goods. Second, with their economies and most others in the world in the toilet, stagnant, or heading the wrong direction (e.g., Russia and its move away from the rule of law other than the law of the KGB), are they really inclined to exit the economy with the system that continually churns out innovation and growth? Yes China will get investment dollars as will India, but the US is not going to be shunned. The grass is always greener, and in this case when compared to their own economies and most others in the world, it truly is.
THE MARKET
Last week the buyers and sellers slugged it out on rising volume session after session, and in the end the upside enjoyed a slight margin. Monday they eked out another gain but on very low volume, basically Fed watching. It was positive to see stocks recover from afternoon selling and rise into the close, but with the low volume and potentially big news out Tuesday afternoon it was not much to get revved up about.
Indeed, the move left SP500, the putative leader of the recent move with its short double bottom formation the past two weeks, trying to break past the neckline of its head and shoulder breakdown almost three weeks ago. If it can make the breakout above that level on some improving volume that supports a more substantial rally. All of the back and forth swings on volume last week indicated an attempted shift in character, and now SP500 is going to have to show it.
We cannot overlook the SP600, however. It undercut its 200 day SMA Thursday, made a further drop Friday, but then recovered. Monday it led the market higher with its 1.3% gain; no other index was close. It too has formed something of a double bottom, not an uncommon pattern after the past three weeks, and with its strength Monday it too could provide some leadership. It has been sold hard, something it is not used to, but this could have shaken out the quick sellers and set up a bounce. If both the large and small caps can lead, that is a much more powerful combination.
MARKET SENTIMENT
After spiking up last week during the back and forth action, the sentiment indicators settled down on the second consecutive upside session.
VIX: 15.12; -0.19
VXN: 20.8; +2.26
VXO: 14.44; -0.74
Put/Call Ratio (CBOE): 0.96; -0.05
NASDAQ
Low volume as NASDAQ gapped higher, tested, and then moved up to the 10 day EMA. Still very much in the downtrend with a lot to show before it can claim it is making some change of direction.
Stats: +7 points (+0.36%) to close at 1928.65
Volume: 1.599B (-24.54%). No volume to support the index as it bounces higher to the 10 day EMA following a high volume Friday reversal. That is not too big of an issues; after the reversal we won't really look for confirming strength until Wednesday, after the FOMC results are announced.
Up Volume: 867M (-546M)
Down Volume: 679M (+31M)
A/D and Hi/Lo: Advancers led 1.19 to 1. Very modest breadth.
Previous Session: Advancers led 1.5 to 1
New Highs: 29 (+3)
New Lows: 140 (-84)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
After hitting a new 2005 low intraday Friday and reversing on strong trade, NASDAQ melted higher Monday on low volume. It was back and forth all session with a modest positive bias. On the high it tapped the 10 day EMA (1932) and backed off to close. This keeps it locked in the downtrend that really got underway in early March when it failed to hold a break over the 50 day EMA and started trending lower below the 10 and 18 day EMA (1945). A weak stock or index trends lower below those levels. Thus NASDAQ's reversal suggests it could try to break up the downtrend, but it will have to show a strong break through the 18 day EMA. If it occurs the timing will be fortuitous as a follow through session could occur as early as Wednesday. We don't want NASDAQ to be a lone wolf, however. Other indices need to show the follow through as well to give it some breadth. Right now, however, it is still in the downtrend, testing the downtrend resistance on low volume. There are signs of change but there has not been any character change yet.
NASDAQ 100 rallied over its 10 day EMA as well but faded to close below that level with a modest gain. The 0.2% gain was lower than overall NASDAQ; the large cap techs were not in much demand either.
SOX actually closed lower. It undercut its trading range low at 380 on Friday, rebounded, but it too stalled at the 10 day EMA. Similar to NASDAQ it showed something of a double bottom with its Friday sell off and rebound; now it has to show something more or its just continues the downtrend.
SP500/NYSE
SP500 moved through the 18 day EMA and up to the neckline of its head and shoulders base. This is where it has to show some guts over the next few sessions, and we don't mean spilling its guts.
Stats: +5.31 points (+0.46%) to close at 1162.16
NYSE Volume: 1.564B (-16.73%). Volume fell off sharply on NYSE, coming in below average as the large and small caps continued their upside recoveries. That lower volume says fewer buyers. That will have to be rectified with the next strong price move, preferably when it moves through the neckline.
Up Volume: 1.291B (-319M)
Down Volume: 638M (-78M)
A/D and Hi/Lo: Advancers led 1.86 to 1. Thanks to the small caps the breadth was decent.
Previous Session: Advancers led 1.99 to 1
New Highs: 69 (+25)
New Lows: 51 (-86)
The Chart: http://www.investmenthouse.com/cd/^spx.html
SP500 used the 200 day SMA (1156) as support on the low and managed to recover with an afternoon rally that took it through the 18 day EMA (1161) and up to the neckline in the head and shoulders pattern (1164). It may be able to push up through that level on low volume, but holding the move without strong volume will prove difficult. Likely it will stall around this level waiting for the Fed's decision. After that it will have to show a volume break through this level sometime from Wednesday to Monday to give the short double bottom some legs. As with NASDAQ, we want to see some more indices show a follow through as well.
SP600 led the market Monday with a move back up through the 200 day SMA (306), stalling below the 10 day EMA (308). A double bottom of its own, and given this rebound it is better shape to move with the rest of the market. Still key resistance at 310 (18 day EMA at that level as well) before it even reaches the recent highs in the 'hump' of the potential double bottom (313). It is definitely potential at this stage.
DJ30
Rallying just over the 18 day EMA (10,248), stalling just below the recent highs at the 'hump' after the mid-April bounce (10,264). Decent second straight move though volume fell way off the table, coming in well below average. Trying to piece together a relief move up to the 200 day SMA (10,375) that also marks the late March/early April lows in that attempted, but failed, lateral consolidation.
Stats: +59.19 points (+0.58%) to close at 10251.7
Volume: 239 million shares Monday versus 303 million shares Friday.
The chart: http://www.investmenthouse.com/cd/^dji.html
TUESDAY
The FOMC meeting dominates the action again as investors wait to see what the Fed is planning for interest rates. The Fed Funds Futures contract tells us 3 more hikes for sure and a fourth 25BP hike has just a modest probability attached to it. Still a long way out and accuracy grows with proximity, but it gives us an idea that the Fed is going to stick to its hiking for the next four months. That helps put the Fed's statement into perspective as opposed to simply relying on gut reaction to what it says or does not say.
Stocks have shown a tendency to rise heading into the FOMC meetings, though last meeting there was some early weakness before stocks started to bounce ahead of the release. With SP500 facing key resistance at the Monday close, making headway into the Fed meeting will be tougher sledding. Maybe it will surprise us and jump right on through that level. In any event, the action after the meeting is the real story, starting after the knee-jerk reaction concludes.
Much depends upon what the Fed does with its statement and the 'measured' language. Speculation runs rampant about the change; we think after the last statement it is ready to remove 'measured' to give it more flexibility similar to it getting the Fed Funds rate higher to give it more maneuvering room to cut rates if needed in the future. That does not mean it is going to hike faster (though it could); it could also mean it could stop hiking because removing 'accommodation' at a 'measured pace' is saying the Fed is going to continue raising rates.
We are not saying it won't raise rates Tuesday; it will. What we are saying is that 'measured' has to be removed before the Fed can say it has stopped. It had to come out at some point, and this Fed likes to do things a step at a time: advertise the policy, enact the policy, advertise a change, talk about the change, then enact the change. The Fed is in the step where it has already advertised changing one step, and after this step it will have to advertise some more before it takes the next step, e.g. when it decides to stop raising rates. This process takes time, and unless there is a real emergency, the rate hikes are not going to stop in the next two FOMC meetings, an likely the next three (including the one Tuesday).
The Fed meeting will require patience to let things take their course, let the announcement come, and then see the reaction. There is some irrational hope the Fed will hike and say it is done. Maybe that will happen. Likely it won't, and that will crush some of that hope and it could be enough to stall this 2-day rebound attempt. The indices are still in downtrends and still have to prove up this move. Wednesday will tell more of the tale as that is the first day the market can show a follow through and that lets the Fed decision percolate through the market. Unless the Fed softens its stance some, it is hard to see the market taking the news as a big positive as the Fed and oil are what is keeping the lid on the market right now. Until the market gets clear sense the Fed is winding down, it remains on edge.
Support and Resistance
NASDAQ: Closed at 1928.65
Resistance:
The 10 day EMA at 1932
The 18 day EMA at 1946 stalled the last rebound attempt.
1950 (top of October to December 2003 consolidation)
1962 is the recent lower high.
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 1991
The 50 day EMA at 1988 and the 50 day SMA at 2000.
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 1162.16
Resistance:
The 18 day EMA at 1161 is cracking.
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 1174
The 50 day SMA at 1182
March 2003 up trendline at 1196
1196, the mid-January high and the early December peak in the left shoulder.
1200
Support:
The 200 day SMA at 1156
1137 the recent April low.
1138 the August 2003/August 2004 up trendline
1129 to 1125
1100 to 1095
Dow: Closed at 10,251.70
Resistance:
The 18 day EMA at 10,248 is cracking
Some price resistance at 10,250
The recent April highs at 10,264
The 200 day SMA at 10,375
10,400, the bottom of the November/December range
The 50 day EMA at 10,413
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.
May 02
Construction Spending, March (10:00): 0.5% actual versus 0.3% expected and 0.5% prior (revised from 0.4%)
ISM Index, April (10:00): 53.3 actual versus 55.0 expected and 55.2 prior
May 03
Auto Sales, April (00:00): 5.4M expected and 5.5M prior
Truck Sales, April (00:00): 7.9M expected and 7.9M prior
Factory Orders, March (10:00): -1.2% expected and 0.2% prior
FOMC policy announce (14:15): Expecting a 25BP hike and dropping the 'measured pace' language or keeping the same language where it basically eliminated the phrase already. No mention of stopping the rate hiking.
May 04
ISM Services, April (10:00): 61.0 expected and 63.1 prior
May 05
Initial Jobless Claims, 04/30 (08:30): 324K expected and 320K prior
Productivity-Prelim., Q1 (08:30): 1.8% expected and 2.1% prior
May 06
Non-farm Payrolls, April (08:30): 175K expected and 110K prior
Unemployment Rate, April (08:30): 5.2% expected and 5.2% prior
Hourly Earnings, April (08:30): 0.2% expected and 0.3% prior
Average Workweek, April (08:30): 33.7 expected and 33.7 prior
Consumer Credit, March (15:00): $6.0B expected and $5.6B prior
End part 1 of 2
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world stock market
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