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us stock market, trend trading stock
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05/04/05 Investment House Daily
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Investment House Daily Subscribers:
MARKET ALERTS:
Target hit alerts: None issued
Buy alerts: HUM; TUP; ASD; WYE
Trailing stop alerts: None issued
Stop alerts: None issued
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SUMMARY:
- Big GM buy, mergers help spark upside that gained strength to the close.
- US to issue 30 year treasuries, finally cash in on lower financing rates.
- Oil and gasoline inventories surge as oil recovers $50.
- ISM Services soften, but less than expected.
- Stronger volume, good breadth, solid price move, leadership; looks like a pretty decent though modest follow through.
- A good start ahead of Jobs report, and we will take advantage of it, but this does not mean the market has turned over a new leaf.
News from a different quarter gives market a new outlook on life.
Earnings couldn't do it and the economic data certainly was not doing it with the Fed ready to continue its rate hikes and oil hanging onto $50/bbl. Change was in the air, but the market could not make that push to get over the hump and put together the interim rally we were looking for that would set up the next test to really set a good bottom.
Wednesday a rich, smart investor with a proven track record offered $31/share for about $28M worth of GM stock. With GM closing at 27.77 Tuesday, the offer turned heads. It also turned heads attached to the legion of hedge fund managers that have massive short positions out on GM. They were quick to say that at 87 Kerkorian had lost his mind, something of a rich, eccentric investor. With $6B in the bank, however, we are ready to defer to his judgment, particularly given his track record with autos. When the big money starts talking you have to pay attention even if you think it is wrong. It can so wrong it is laughable, but the big money drives the market and when it starts moving it behooves you to pay attention.
It was this new idea that perhaps laughable GM with its pension and credit problems was a value investment that provided the impetus the market needed. It did not change the character, but it did give the market the push it needed after the big struggle last week between the buyers and sellers as volume ratcheted higher. Earnings and slowing economic data were old hat versus an active Fed, but this was different. Someone with some weight came in and very publicly put his money on the table. He probably wanted the show because it will help him get his investment to do what he wants, but the result is the same. It gave the market a new outlook on life ahead, and that prompted a modest follow through session.
It was no rip roaring race higher. There were solid moves but it was not an all out, b- - ls to the wall surge. It was a follow through on the first day we were looking for one, and coming off the short double bottoms it provides some upside leadership that will allow the market to make that higher bounce we wanted to see off of this sell off. To be a really good bounce it needs to be more than the two weeks shown thus far. That two week double bottom has set up the current move that we anticipate will lead to a test lower and form a larger double bottom that will set a much better bottom. It could always continue higher from here as stocks did in August 2004 (NASDAQ), but with summer coming we think there is going to be a test ahead before a run toward the January highs. Either way we are participating in the move, and again the Wednesday action was a good next logical step to the action shown the past two weeks.
THE ECONOMY
Treasury finally looking into refinancing our debt at low rates.
They are in the business of watching our money, yet they wait until interest rates start to rise (or at least threaten to) to refinance our debt into lower interest vehicles. We had a surplus in the late 1990's that siphoned off too much investment capital from the economy and helped trigger the slowdown when the Fed dried up the money supply. The economy was already starting to slow from the high drain those tax surpluses took from the economy, and when the Fed let the water out of the pool, the economy hit bottom.
Many feel those surpluses were some security blanket. They were, but only for Congress because they gave Congress a big piggy back to break open and spend, spend spend. What those surpluses mean is that we were taxed too much. We were told in 1994 that we had to raise taxes to pay for Congress' spendthrift ways. It was not put that way, but that is what it was all about. No one, and I mean no one, was expected the boom from the 1980's to reignite the way it did after the 1991 recession slowed it down.
Indeed, the economy was already in recovery mode well before these tax hikes, and the tax revenues would have mushroomed anyway. Indeed they would have been even stronger because the higher taxes bled money from the economy that would have been invested in the economy not in Congress' pork. What Congress should have done when those surpluses came in is say we made a mistake and raised taxes too much; here is your money back. Instead they acted as if it was theirs in the first place, and indeed they still do, bemoaning the lost surplus. The ONLY thing that the lost surplus did is prevent Congress from spending like a drunken sailor even more. Instead that money was turned back and put into the economy via tax cuts. Without that fiscal stimulus to jumpstart the economy, the debt would be even worse today: the surplus would have evaporated just as quickly as tax revenues plunged even more than they did. Now revenues are up 10% and growing; that beats the hell out of a continued recession. You know as well as we do that there was NO investment ongoing in the US economy until the tax cuts were passed that gave incentives to invest where none existed before.
The point is that there is moaning about how the reissue of the 30 year bond is an admission that the deficit is here to stay. So what? Is it better to not admit we have a deficit and issue higher yield bonds that cost more to retire? NO! Deal with reality. It is a good move even if it is almost two years late. Why not consider 50 year bonds as well? Again, let's face reality. Corporations used to issue 100 year bonds. This is not new ground and it can save us all money.
Oil recovers over $50/bbl even as crude and gasoline inventories surge.
Crude inventories jumped another 2.6M bbl and gasoline reversed last week's fall and rose 2.2M bbl, both well above anticipated levels. Oil continues to leak out of the ground here in the US, but that is not pushing price lower, at least it is not giving up easily.
Oil had dropped below $50 again after a rebound to test the prior break lower, and that typically indicates deeper selling ahead. Even with the jump in inventories once again, after initial selling, oil rebounded to close back above $50/bbl (50.13, +0.63). It is being very sticky at the $50 level and we still feel that in order for oil to start having a positive impact on the economy (or more accurately, a less negative impact), it needs to dip well into the forties. Right now it is not doing it, though the move is still underway.
ISM Services declines less than expected.
Services were down along with manufacturing in April, but it was no collapse. At 61.7 (61.2 expected and 63.1 in March) the service sector is still humming along quite nicely. That is good for the US as the services sector is the bulk of what we do. As with the manufacturing ISM, all categories were lower: employment 53.3 (57.1 prior); new orders 58.8 (62.1 prior); prices paid 61.9 (65.6 prior).
This is no real surprise with the general weakening in the economy from March that bled over into April. It is still a strong reading and suggests continued GDP growth, but the concern facing the market is whether this is a new trend brought on by the pairing of Fed rate hikes and higher energy prices. After all, the Fed has a poor batting average in managing the economy (and that is really what it tries to do with its consideration of so many different inflation indicators), with 8 recessions out of the 10 last rate hiking rounds.
That is keeping the market on edge, but you have to wonder if the move seen of late is some sort of recognition that the Fed may be closer to the end than it thinks or lets on. We have discussed the Fed funds futures contract indicating just two more hikes despite what the Fed says about a continuing measured pace on into the future. The bond market seems to think the Fed will have to stop or if not, drive the economy into recession. The move in the stock market was a start, but it is much too early, and there is still much too much ground to cover and overhead resistance to wade through to know for certain. You just have to do what the market tells you, and with bond yields refusing to move higher and stocks starting to rally with some better pop, you have to go with that.
THE MARKET
Stocks pieced together better volume, breadth, price, and leadership to provide a follow through on the forth session since the rebound attempt started anew last Friday. The volume could have been stronger on NASDAQ and the price gains could have been stronger as well; that would have provided a clearer, stronger follow through. Nonetheless, the move was better than the last attempt where only SP600 flashed the right credentials. This time around SP500, SP600, SP400, NASDAQ and DJ30 all posted follow through. One of the most important features was not bad as well, i.e. leadership. It was not just a session where beaten down stocks recovered on short covering. There most certainly was short covering as GM rocked a lot of short sellers' worlds, but stocks in strong patterns were breaking higher as well. That is a very necessary part of any rebound.
Again we don't believe this is the bottom of the selling, at least not the end of the overall selling before a firm bottom is put in place, but we know that you don't know that until you play the hindsight game. When you see follow through and solid stocks making their moves you have to act. It does not hurt when you see a high volume slugfest after a hard sell off. As we noted at the time the market was showing some signs of a season change, and this follow through move builds on that fight between the buyers and sellers.
For now this was a good signal though not the strongest follow through we have ever seen. A follow through, however, only sets the stage for a rally; it does not guarantee a sustained move will take shape. It sets the table and it shows us the guests are starting to arrive (the leaders), but it is not a full blown party yet. This one has some strength, and will likely give us some decent upside before needing that next test lower.
MARKET SENTIMENT
VIX: 13.85; -0.68
VXN: 18.32; -1.82
VXO: 13.13; -1.49
Put/Call Ratio (CBOE): 0.99; +0.14. Jumped on an upside day. That is opposite of the typical action, but when the sellers have ruled and then there is a sharp change in direction, the ratio jumps as the shorts try to crowd out of the door all at once.
NASDAQ
Gapped higher and rallied to the late April peak as volume posted a solid, above average session.
Stats: +29.16 points (+1.51%) to close at 1962.23. The gain was solid and the minimum for a follow through though we would have preferred to see NASDAQ post a 2% gain given it can be quite volatile. That 2% gain would show it was serious. It still was serious.
Volume: 1.945B (+3.39%)
Up Volume: 1.5B (+352M)
Down Volume: 410M (-299M)
A/D and Hi/Lo: Advancers led 2.19 to 1. Decent breadth, just about the minimum for a follow through session.
Previous Session: Decliners led 1.08 to 1
New Highs: 51 (+10)
New Lows: 103 (-23)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
NASDAQ was not the leading gainer on the session but it was no slouch. It blasted through the 18 day EMA (1946), a resistance level that had turned NASDAQ back down in early and late April, and it did so on rising, above average volume. The move pushed it to the late April high (1962.41), but that will not likely stop the bounce. It the bottom of the recent range (1974), the 200 day SMA (1991), and the 50 day SMA (1996) as its immediate worries on the upside. When you are recovering from a tail kicking, you have to make it past the same old areas that where you got whipped. That is why you want to see some strength as you head back to those levels.
NASDAQ 100 posted a slightly larger gain (1.7%) as the beaten up large cap techs were covered by the shorts. That helped drive the action on higher volume. Blasted through the 18 day EMA and the late April high near 150. It too has to deal with the 50 day EMA (1467) and the 200 day SMA (1481) as the next clear resistance.
SOX led the market with its 2.4% gain, not unusual for this volatile index to lead the gains up and down. It came off the recent test of 380 at the bottom of its trading range, cleared the 18 day EMA (392.24) and is looking at the 200 day SMA (407) and the bottom of the late March/early April range at 410. Good start to the move.
SP500/NYSE
This was the move we were looking for as the SP500 rallied through 2 resistance levels on very solid trade. All of the NYSE indices sported solid, follow through caliber moves.
Stats: +14.48 points (+1.25%) to close at 1175.65
NYSE Volume: 1.798B (+7.58%). Very nice above average volume session as SP500 and friends posted a very respectable follow through session. Stronger volume as an index moves through key resistance points is a very good indication of the kind of strength needed to give the move legs.
Up Volume: 1.961B (+948M)
Down Volume: 317M (-813M). Strong 6:1 up volume over down volume. Stronger than much of the downside ratios.
A/D and Hi/Lo: Advancers led 3.23 to 1. Definitely follow through caliber as the small caps led the major indices higher.
Previous Session: Decliners led 1.04 to 1
New Highs: 76 (+26)
New Lows: 30 (-18)
The Chart: http://www.investmenthouse.com/cd/^spx.html
Strong move on volume as SP500 took out the head and shoulders neckline (1164), the 50 day EMA (1173), and 1175 as well. Technically this was a breakout move from the short three week double bottom base that formed off of the August 2003/August 2004 up trendline. The move gives SP500 some legs and sets up further upside to come as it rallies to set up a better downside test or just continues higher. We still believe the former is more likely, and we will keep close watch for signs of a rollover other than just a pause or rest stop. The move won't be straight up; the index will have to take a breather as all moves do. This was the type of move, however, that sets up further gains.
The small cap SP600 led the NYSE indices as it cleared its 18 day EMA (310). Good move off of its double bottom, but unlike SP500, it has yet to clear the 'hump' from late April (313). It also has the 50 day EMA (316) and the late March low at that same level to deal with, but another good start by SP600, and good to see it recover so quickly from the breakdown of the last follow through attempt.
DJ30
The blue chips were energized by GM, and the index rallied through the 200 day SMA (10,377) and is now at the 50 day EMA (10,406) and the bottom of the late March/early April range (10,400). Volume was so-so as it comes to its real resistance. May have to take a breather here as DJ30 has put together three solid moves in four sessions.
Stats: +127.69 points (+1.24%) to close at 10384.64
Volume: 275 million Wednesday versus 277 million shares Tuesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
THURSDAY
Q1 productivity is out Thursday and Greenspan is speaking as well. Greenspan looks hard at productivity in gleaning his 'speed limit' for the economy, and productivity declines of late are part of his concern about inflation sparking higher. There is a rather old and rather correct saying about inflation: it is a monetary event, i.e. are there more dollars chasing the same or fewer goods. Productivity, wages, the 'wealth effect' and all of the other indicators Greenspan thought up during his reign are basically BS. If you have more money chasing static levels of goods you get inflation.
You can attack it by draining away the money (Greenspan's approach), i.e. using a stick to correct the problem (and thus risking recession as history repeatedly shows), or you can use a carrot in the form of increasing supply to match or exceed demand, i.e. with incentives to invest in the economy. For inexplicable reasons our leaders typically use the stick and we all suffer versus using the carrot and we all benefit (through a better economy, higher tax revenues, more money to spend on the poor, education, etc.). Is it stupidity, politics, power? All three. If people are prosperous on their own they don't need the government, and that is very threatening to many in the federal government who are lifers.
Thursday Greenspan may give us more insight into his views about using the stick. I doubt he is going to do anything to alter the recent statement from the Fed. I also doubt this will have much impact on the market unless he really goes out on a limb.
Wednesday was a nice follow through and a good start to a leg higher. Almost immediately, however, the jobs report appears on the horizon, and that may start working on the market Thursday afternoon as positions are buttoned up ahead of that number and any potential surprise. Prior to that retail sales will starting hitting the wire and there is the IBM restructuring with its 10K to 13K planned layoffs; that was a positive after the market Wednesday as investors viewed it as a necessary step in big blue's recovery. As we discussed Tuesday re the Challenger layoff report, however, it only underscores the lack of creation in traditional 9 to 5 jobs by the household names. We are still trying to transition into an even newer economy, and the process is painful.
Thus we are anticipating more upside Thursday and then some softening Thursday afternoon as positions are squared ahead of the jobs report. That would be normal: good move, a bit further, then some rest is needed before the next rally. The moves come in spurts and we have been position into leaders as the market showed this change underway and as the leaders made solid moves. WE will continue to do that but not chase stocks that have already made strong moves, instead waiting for them to make the typical test of the break higher to provide a nice entry point.
Support and Resistance
NASDAQ: Closed at 1962.23
Resistance:
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 50 day EMA at 1985
The 200 day SMA at 1991
The 50 day SMA at 1996.
Support:
1950 (top of October to December 2003 consolidation)
The 18 day EMA at 1946.
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 1175.65
Resistance:
1175 second high in that double top that spanned late 2001 and early 2002
The 50 day SMA at 1181
The April high at 1192.
1196, the mid-January high and the early December peak in the left shoulder.
March 2003 up trendline at 1197
1200
Support:
The 50 day EMA at 1173
1164 is the January/March neckline to the head and shoulders pattern.
The 18 day EMA at 1162
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 10,384.64
Resistance:
The 200 day SMA at 10,377
10,400, the bottom of the November/December range
The 50 day SMA at 10,498
Price consolidation at 10,600
10,754 is the February high
Support:
The recent April highs at 10,264
The 18 day EMA at 10,263
Some price resistance at 10,250
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): 61.7 actual versus 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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us stock market
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