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us stock market, trend trading stock
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5/03/05 Stock Split Report
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Stock Split Report Subscribers:
MARKET ALERTS
Targets hit alerts: None issued
Buy alerts: UNH
Trailing stops: None issued
Stop alerts issued: FTO
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SUMMARY:
- Stocks rebound late on Fed omission, but can only close flat.
- Factory orders surprise upside.
- Layoffs fall to 5 year low.
- Fed hikes 25BP, ready to continue at a 'measured pace,' and inflation is, by the way, still contained.
- SP500 still below neckline resistance while NASDAQ looks ready to continue its downtrend.
- Fed says it remains data driven and now market looks to the Friday jobs report.
Stocks sell post-Fed, rebound late on omitted language.
The major indices were basically flat heading into the FOMC announcement with the usual obligatory bump higher into the number as shorts covered at the last minute. When the results were released the Fed raised by 25BP, kept in the 'measured pace' language, but left out a statement that energy costs were pushing through to the consumer and a statement that longer term inflation expectations were well contained. The omissions indicated a slightly more hawkish Fed not to mention the holdover of the 'measured pace' language; the latter means that there will certainly be another 25 BP hike. No 50 BP, but no end of the hiker either.
The omissions brought in sell programs and the market got dragged around the next hour and forty minutes. Then the Fed issued a mea culpa at 3:55ET, saying it inadvertently left out the 'longer term inflation expectations remain well-contained' language and stuck it back in. Stocks shot higher in the last 5 minutes, managing to close basically flat.
Will it make much difference for Wednesday? That language alone does not change the landscape. In other words nothing really changed except the Fed may be a bit more hawkish because it omitted other language regarding the pass through of energy costs. With that omission the net is a bit more hawkish outlook. With that, the market's stance has not changed.
That left SP500 below resistance at the neckline of its head and shoulders base and NASDAQ still in its downtrend, hugging the 10 day EMA after an intraday spike to test the 18 day EMA. NASDAQ has the look of an index still in a serious downtrend with this game of footsy at the short term moving averages. It did not get much better elsewhere either, with the SP600 showing a doji at the 10 day EMA and closing just below the 200 day SMA.
Volume was up as stocks traded light into the number and then the program trades hit after the result, driving volume higher by the close. Stocks basically ran in place on some higher volume, the definition of churning, but you cannot put too much into that given all of the external influences. Perhaps the late bump is indicative of a rebound Wednesday. As noted, however, the net from the Fed is a bit more hawkish stance, and that is not good for equities, particularly those expecting the Fed to back off some in the near future. It could still just have two more 25 BP hikes and then stop, but that does not change the outlook for tomorrow.
THE ECONOMY
Factory Orders Surprise to the Upside.
Just when the economic data was scaring most deeper into cover to hide from a soft patch, the late March data and the April data are starting to show positive signs. Construction data released Monday was big once more. The ISM equated to 3.8% GDP growth; hard to get too upset about that. Then Tuesday factory orders post a gain when they were expected to fall 1.2%. Is this something to change the economic character?
Despite the gain, probably not. Non-defense capital goods orders less aircraft fell 4% on top of a 2.1% drop in February. After the first of the year when the tax incentives started expiring, so did investment by business. That does nothing to help rectify the problem of demand outstripping supply during this recovery/expansion. That is what gave rise to the inflation we are seeing now. Yes consumer demand can fade and that would help bridge the gap, but if capital investment is fading as well, it is not going to catch up and get ahead of demand. To us this is a bad number just for that reason.
Want more? Nondurable orders (half of all factory orders) were up 2.8% after falling 1% in February (revised lower from -0.2%; hate those downside revisions as they show the real trend forming). These are orders on the 'demand' side of the economy, the part that is sparking the inflation.
Orders indicate continued inflationary pressures, and that keeps the Fed in the game.
Now you will rarely, rarely, rarely hear us bemoan prosperity. Prosperity is what we are all about. We want you to make a ton of money and go out and be the good American consumer you are. The problem is demand is still stronger than supply and supply is ebbing without having closed the gap on demand. That means more modest inflationary pressures that we have seen. Not huge, not stagflation, but the kind that the Fed is worrying about, and the Fed is in control of the game right now.
Now you can see how all of this is linked together: factory orders are up and that is good. Yet with the Fed in the game and tilting against inflation, that keeps the Fed active. An active Fed typically means the economy slows because the Fed goes too far. That weakens the market as we have seen for the past year since the Fed said it was going to start raising interest rates. The Fed may have all the good and benign intentions on earth. Indeed, many financial pundits commented that Greenspan was very aware that the Fed often goes one step too far (just one?). Be that as it may, the Fed cannot help itself. Greenspan is now dealing with one side of the FOMC that says hike faster and another that says stop hiking. When Greenspan is gone who will win? That is a sobering thought.
Challenger layoffs fall to a 4.5 year low.
At 57.8K it still seems high, but compared to the March 86.3K it was a solid 44% reduction. Compared to the past few years with 100K+ per month layoffs it seems like springtime. It isn't, but the numbers try to make it feel that way. After several years of layoffs and outsourcing there may not be much more to cut. Not entirely true; we continue to see big companies announcing new layoffs this year, and there are still plans to continue outsourcing. That is very hard on us here in the US right now. Eventually it leads to a higher standard of living as the next wave of technologies and industries spark the cutting edge jobs - - IF we continue to invest in the US and don't go into hibernation. Companies have been investing their profits, but as the factory orders and Q1 GDP show, the amount of investment has dropped off since the first of the year.
It is always good sign to see layoffs falling; it just is not the greatest sign. After all, jobs are a lagging indicator, and many of the more leading have shown a slowdown that we saw in the first of the year. Thus even if layoffs are slowing they could continue if this slow patch turns into a real slowdown compliments of high energy prices and a Fed that is definitely finding itself in a hard place.
The Fed's Gaffe (just one?).
Fed raises rates, keeps measured pace alive, implies energy costs are passing to consumer, and, oh yea, notes inflation is still well-contained.
The Fed raised rates to 3% and kept its statement pretty much the same. The same, that is, after it reinserted the statement that long term inflation expectations were well contained. That was omitted from the early press release and that added to the slightly more hawkish tone of the announcement. The fact that the pace will remain measured is in itself something of a surprise; the Fed was ready to take it out after last month's change. The Fed really does move slowly.
The market was perturbed by the Fed keeping to its measured pace. On the one hand that means there won't be any 50 BP hikes sailing in from right field and whacking the market and economy, at least not yet. Still, it also virtually guarantees another 25 BP rate hike at the next meeting. That is not such bad news; after all the Fed Funds Futures contract had priced in 75BP more in hikes (25 at a time), and Tuesday was simply the first of the group. Of course come June investors are going to be watching closely to see if 'measured' is taken out. Things will get kind of itchy if 'measured' stays in the next statement because as we discussed Monday, 'measured' has to come out before the Fed is going to stop its hikes. It is hard to not raise rates if you say you are going to do it even if it is at a measured pace. With just one more hike priced in after the next meeting there will be a lot of pacing with respect to that next and hopefully final hike to 3.5%.
That remains to be seen. What is clear is that the Fed is going to keep raising rates for now because it still sees inflation as a problem. Even with the reinsertion of the language that long term inflation expectations are well contained the Fed is still going to raise rates again. As noted, it also took out the sentence about rising energy costs not passing through to the consumer. We don't know if it will stick that back in tomorrow, but if it does not it implies that the Fed sees the costs making it into the consumer's wallet. Despite energy being a tax on business and the consumer, the Fed tends to view rising consumer prices as a result of energy costs as inflation, and it tends to fight inflation the only way it can, i.e. with the interest rate club. Thus more rate hikes.
Now it is not really true that the Fed has only one weapon. Money supply is another, and some would argue it is more important than rates. After all, rates can be extremely low as they were in 2001, but if the Fed does not pump up the money supply it is like having a sale without having any of the goods on hand. You would buy at that price but gee, there is nothing to buy. Until the Fed pumped up the money supply to a level that was synergistic with the rates, the economy was stuck. Money can be cheap, but there has to be money or else it does not matter what rates are.
Right now the Fed has sucked away the money from the economy once more. The Fed Funds rate may be 3%, but its policy is much tighter. Rates have risen 200% and at the same time money supply growth has dropped to 2% from 10%. While it is not draining the pool it is roping off parts of it. Some are saying this is very much like 2000 when rate hikes were not stopping the economy as fast as it wanted. The Fed simply pulled the plug on the money supply and called back all of the loans for Y2K. That money had to be taken out of the stock market (that is where it went since there was no liquidity problem as some thought there would be). When that happened the market bucked and started the collapse. The economy followed.
As money leads the economy by about 12 months, the Fed is in the same game as with rate hikes: the impact will be felt well down the road and the Fed has to guess how much brake to apply and see how it comes out on the other side. Very inaccurate method to use to micromanage the economy. Educated guessing is the best label we can give it. It reminds us of dropping water balloons out of a building and seeing what poor sap wanders by and gets hit, if anyone. From the time the balloon is dropped to the time it hits a lot can happen: the wind can blow it off course, the target can move, another can take its place, the cops can show up and throw you in jail. The result is pretty much the same; in the end the balloon splats on something. Kind of like the economy did in 2000.
In sum, the Fed has locked itself into a 25 BP hike at the next meeting as it retained the 'measured pace' language. It also emphasized inflation a bit more by removing the phrase regarding energy cost pass through. It is more concerned with inflation than with any slowdown. It still sees the current Fed Funds rate as fostering expansion. The Fed may be very aware of its sins of the past, but for now it stands ready to continue raising rates. It may get it right this time, but history is not on its side. Thus as long as the Fed is hiking the market remains scared. Just look at the past 14 months from when the Fed started talking about raising rates to actually doing so: the market has moved basically sideways. The only relief it enjoyed was the end of 2004 when it looked as if the Fed may have been finished and oil was trying to roll over. Neither came true and now the market has given back what it took in the late 2004 rally, and it threatens to give more back.
THE MARKET
The late burst of energy brought the indices back up to flat as word hit the Fed reinserted the line that inflation prospects remain contained. Basically that brought the statement almost back to where it was though as discussed above, still a bit more hawkish. Thus we don't see that as providing any lasting catalyst. The market is trending lower under this language in part because of uncertainty with respect to how far the Fed will go; that was not cleared up Tuesday, and thus we can't really expect this statement to change the market character.
Now the market has been trying to make a turn with the back and forth volume fight last week, action more typically found at the end of a selling bout. In response SP500 has rallied up to the neckline of its head and shoulders base (1164), trying to break through. Other indices have tried to form some short double bottoms similar to SP500. As of yet they are unresolved, and we still think they are too short to provide a true bottom; some solid upside yet, but a long term bottom is not likely off of these.
NASDAQ looks questionable. It too is trying a short double bottom, but it is also still locked in its downtrend below the 18 day EMA (1944) since breaking lower out of its January to early March trading range. Downtrends that follow the 10 or 18 day EMA are pretty entrenched. NASDAQ has to show something here to the upside.
Indeed, starting Wednesday all of the indices will be on the clock to show a follow through session, i.e. a high volume upside move with strong price gains and breadth in the 2:1 or better (preferably better) range. This time we need to see it from more than just SP600. SP500 is the logical choice given it has rallied back up to key resistance. It could very well struggle a bit here and then give a follow through. That remains to be seen but we are keeping a close eye on NASDAQ; as noted it has the look of a continuing downtrend that is ready to continue.
MARKET SENTIMENT
Volatility gapped sharply higher on the open, back up to 17.89. That did not hold for long as VIX turned over and dropped over 3 sticks.
VIX: 14.53; -0.59
VXN: 20.14; -0.66
VXO: 14.62; +0.18
Put/Call Ratio (CBOE): 0.85; -0.11
NASDAQ
NASDAQ tapped the 18 day EMA on the high and fell back below the 10 day EMA. But for a late bounce of about 5 points the close would have been a really weak doji.
Stats: +4.42 points (+0.23%) to close at 1933.07
Volume: 1.881B (+17.64%). Higher, slightly above average volume as NASDAQ rallied to tap the 18 day EMA and fell back. Kind of a hard session to read given the FOMC meeting and the program trading afterwards, but you still have to see the bigger picture: downtrending, failing at near resistance on rising volume.
Up Volume: 1.148B (+281M)
Down Volume: 709M (+30M)
A/D and Hi/Lo: Decliners led 1.08 to 1. Pretty flat, matching the action.
Previous Session: Advancers led 1.19 to 1
New Highs: 41 (+12)
New Lows: 126 (-14)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
Rallied to the 18 day EMA (1944) on the high and then faded on rising, slightly above average volume. NASDAQ is struggling at key resistance in its downtrend that became established after the March breakdown from the lateral consolidation from late January to early March. It is trying to set up a double bottom and rebound similar to SP500 with last week's undercut of the 1900 level and intraday reversal. The break above the 18 day EMA will be a key move if it can do it. Tuesday it had the look of an index ready to resume the downtrend. We have to see how the late bounce on the Fed correction plays out, but we are not counting on it.
NASDAQ 100 demonstrated similar action as it too tapped the 18 day EMA (1436) and faded on that rising volume. It is in a downtrend and trying to set up for another run higher, but has to clear the near resistance.
SOX tapped the 10 day EMA again on the high and closed flat. It is trading, on the close, in a narrow range, holding above its trading range low at 380 as the 10 day EMA moves down on top of it. Trending lower, trying to hold its trading range as well; a resolution is coming and unless the overall market breaks higher, it is looking at breaking below its trading range.
SP500/NYSE
SP500 rallied above the neckline in its breakdown from the head and shoulders pattern, but it could not hold the move after the FOMC announcement. Key area that holds the key to the next move.
Stats: -0.99 points (-0.09%) to close at 1161.17
NYSE Volume: 1.671B (+6.82%). Volume was up as SP500 churned at resistance (no real gain on higher volume after a move up). The volume was skewed by the FOMC decision, and the volume last week grew on the upside. There has been some accumulation, but it will have to show a breakout in the form of a follow through.
Up Volume: 1.013B (-278M)
Down Volume: 1.13B (+492M). Dead heat.
A/D and Hi/Lo: Decliners led 1.04 to 1. A dead heat as well. The NYSE indices are preparing for a move right at resistance.
Previous Session: Advancers led 1.86 to 1
New Highs: 50 (-19)
New Lows: 48 (-3)
The Chart: http://www.investmenthouse.com/cd/^spx.html
SP500 moved up through 1164, the neckline of the breakdown from the head and shoulders pattern. The breakdown occurred just three weeks back in that heavy volume break lower, and SP500 has fought its way back up to this level. As noted, there was some accumulation volume on the way back up, giving the move some strength a typical relief bounce does not have. With the Friday rebound on strong volume SP500 is now in position to provide a follow through move; what better one than to break through a key level with strength? We don't think it would do it Wednesday, but instead will test back toward the 200 day SMA (1155) and even undercut it some before making the rebound. SP500 is one of the best positions to make such a move, but as with any market under distress it will have to show us the breakout move.
The small cap SP600 broke through its 10 day EMA (307.19) intraday but it closed back lower once more as it did in late March when it tried to move past that level but failed at the 18 day EMA (309.80). It closed just below its 200 day SMA (306.33), but without any real breakdown. SP600 made its own double bottom formation, a similar pattern in the indices of late, but it is also still in its downtrend below the 10 and 18 day EMA similar to NASDAQ.
DJ30
Big doji at the 18 day EMA (10,249) as the blue chips tried to move past this near term resistance that stalled a bounce off the 200 day SMA (10,376) back in early April. As noted before, a weak index or stock will stall at the 10 or 18 day EMA if it is going to continue its downtrend. Nonetheless, DJ30 is just a short trip to the 200 day that is coincident with the bottom of the late March/early April consolidation attempt. If it does make it that far that may be all she wrote before another test lower. That would set up a better double bottom: another couple of days to the 200 day and then a week or so back down to 10,000.
Stats: +5.25 points (+0.05%) to close at 10256.95
Volume: 277 million shares Tuesday, back up to average, versus 239 million shares Monday.
The chart: http://www.investmenthouse.com/cd/^dji.html
WEDNESDAY
The Fed is history for the moment though we still have to see how the late revision to the statement impacts stocks. They rallied in the last few minutes on that news, but at that point it really looked as if some investors were grasping at straws. The skinny is that the Fed is going to keep raising rates for now with another 25 basis points locked and loaded. After that most likely at least one more according to the futures contract.
The market is now moving into the zone from Wednesday to Monday where it can show a strong follow through to the high volume rebound last Friday. That first move starts the rebound and then the pause allows buyers to regroup. If they come back into the market and buy in numbers, that shows sustained interest and gives the upside some legs. High volume, strong breadth, leadership surging, and clearing resistance with strong price moves are the hallmarks. SP500 is poised to deliver such a move, but as noted, it may take a day or two off before doing so (if it does at all) just to drive out the remaining sellers.
The move back up last week was a fight with the back and forth volume, but it held and the stage is set to try for a follow through. We note that a downtrending market will periodically attempt to reverse, set up a follow through and then fail. After all the Fed is still active as per its statement Tuesday, and oil, while closing below $50/bbl again, has to drop another $8 or so to make a really positive impact. Thus this could be another head fake, but we have to let it make its play.
NASDAQ looks weak as do many techs and much of the market, but there is still leadership that is holding up well, ready to take up the torch. It is up to the broad market to lead the way, and of course that means the big money has to be ready to buy. Even with oil still near $50/bbl and the Fed still raising rates, the upside move has to start somewhere, and the market starts its moves long before the underlying drivers are clear to investors. That is why we have to watch for signs of change such as shown the past two weeks and then see if they can follow through with real change. As always we will take what the market gives once the market shows its hand.
Support and Resistance
NASDAQ: Closed at 1933.07
Resistance:
The 18 day EMA at 1944 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 1986 and the 50 day SMA at 1997.
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 1161.17
Resistance:
The 18 day EMA at 1161 is not totally broken.
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 1173
The 50 day SMA at 1181
March 2003 up trendline at 1197
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 10,256.95
Resistance:
The 18 day EMA at 10,249 is cracking
Some price resistance at 10,250
The recent April highs at 10,264
The 200 day SMA at 10,376
10,400, the bottom of the November/December range
The 50 day EMA at 10,407
Price consolidation at 10,600
10,754 is the February high
Support:
The 10 day EMA at 10,207 held on the Tuesday low.
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
Factory Orders, March (10:00): 0.1% actual versus -1.2% expected and -0.5 prior (revised from 0.2%)
FOMC policy announce (14:15): 25 BP rate hike and no drop of 'measured pace' language or keeping the same language. No mention of stopping the rate hiking, and indeed it locked in another 25 BP hike by keeping the measured language and taking out the language regarding energy prices not passing through to consumers, implying they are passing through.
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 3
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