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money investment, day trading
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05/07/05 Investment House Daily
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Investment House Daily Subscribers:
MARKET ALERTS:
Target hit alerts: UTHR (took half of options as an interim target.
Buy alerts: CRYP (bonus); WBSN; TKTX
Trailing stop alerts: None issued
Stop alerts: None issued
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SUMMARY:
- Market jumps on strong jobs report, has second thoughts, closes out week quietly.
- Jobs data surges past expectations, puts emphasis back on what Fed will do.
- Tax revenues surge, indicating the economy is stronger than most think
- Pessimism about ability to continue move higher rises, improving odds rally will continue.
- Were jobs too strong for the Fed? Facing the same old struggle ahead, but near term market still set to rebound.
More jobs? Great news! Well, maybe not.
There is tension in the market that is distorting what is good news and what is bad news. Typically prosperity is celebrated by Americans and the market. Problem is, this is one of those atypical times when the Fed is actively raising rates to take on inflation and fight prosperity. The market wants it to end as soon as possible because the Fed acts as a governor, an inhibitor on the economy and thus the market.
Indeed, it is often the catalyst of serious economic problems. In eight of the last ten rate hiking campaigns the economy subsequently tanked into recession. The Fed's most recent triumph was the 2000 crash, yet many still bow to the Federal Reserve building when they walk by with some Manson-like belief that Greenspan and company actually saved us from disaster. With trillions of dollars in lost retirement savings as a result, it is fairly incomprehensible that some believe the outcome was a good thing. If Greenspan wants another job after the Fed he could always work as a weatherman. Being right 20% of the time would make him a giant in that field.
Thus a surge in non-farm payrolls and upward revisions to February and March by a net 100K had little impact in the end. Sure futures jumped on the news, but they, like the market later, backed off after the initial move, an indication of some of the undercurrents about just what this news meant. The market rallied early, but the initial surge in the first 15 minutes was the zenith. It was all downhill after that.
An afternoon rebound helped bring the indices back to flat to positive on the close. Volume, after running higher early on the jobs news, backed off and closed significantly lower. Breadth was flattish. The indices held above support and below resistance. Oil was up but it too weakened in the afternoon. It was a very slow session where the big money basically got squared up for the weekend.
To us that left the market in very god shape. A nice follow through session Wednesday confirmed the strong move higher on SP500 the prior Friday. The light trade and modest losses to end the week did not do anything to undermine that move. Indeed, it worked to set up the next move higher.
What remains, however, is the Fed, as well as some pesky oil prices that are not giving up $50 as easily as we would like. The stronger economic data of late appears to indicate any March or Q1 slowdown is fading. That gives the Fed all of the ammunition it needs to continue its rate hiking. Bonds sold off on the news and then came back some, but they were also wrestling with what the Fed would do with the more recent stronger data, pricing back in a bit more rate hiking, but not enough to alter the outlook of two more 25BP hikes. The question the market will still wrestle with is how far the Fed will go and whether stocks can go ahead and price in a Fed that is almost done.
THE ECONOMY
Non-farm payrolls surge past expectations.
Thursday we indicated that a 200K+ report might be in line, and April's 274K topped expectations by about 100K while February and March were revised up 93K (February revised to 300K from 243K). That puts the three month average at 240K and 211K year to date. Gains were solid across the board with no one sector overly dominating (though services was still far and away the leader). The average hourly workweek rose to 33.9 (+0.2 hours), 40.5 in manufacturing. Average weekly wages rose $4.88 (0.9%), the largest percentage gain since 1997. The average hourly wage rose 0.3% to $16. These are getting to levels indicating the current staff has been stretched about as far as they can go. In short, they appear to be 'productivitied' out.
Is the move sustainable? The upside revisions are always very positive, but there was another 3-month stretch early in 2004 where jobs grew at 240K per month, and that did not last. Moreover, oil prices are still stingily holding onto gains and the economic data remains mixed though showing some signs of improvement. One thing to remember: employment is a lagging indicator. Businesses may have finally started to hire, but did they do it just in time for the slow down? That would not be a first.
The Fed looks a lot at the jobs report and wages; it believes in wage-driven inflation no matter what the economic conditions. Thus even if supply is strong as it was back in the late 1990's and early 2000 and there is no hint of inflation, the Fed gets jumpy when it sees wage growth. It was wrong back then. Today there is a bit of inflation because demand has exceeded supply in this recovery. Thus we have a Fed pre-disposed to hiking rates in these situations, and this data gives it no reason to doubt its conclusions.
Tax revenues surging, deficit shrinking, yet tax rates are lower. Now just reign in spending.
It was a farcical argument made back when there was a push for the current tax cuts, i.e. that tax cuts were just another form of government spending. Spending? Where did the money come from? Taxpayers. It is their money, not the government's, yet that simple precept is glossed over daily in Washington DC. The Feds told us they needed a lot more money to pay for all of their spendthrift ways and hiked our taxes in the mid-1990's. Turns out they got a lot more money than they intended because the boom that started in the 1980's was not over. Yet when revenues surged past anyone's expectations, instead of giving the excess back they kept it. They took more of our money than they said they would need and the refused to give it back. The rhetoric regarding the tax cuts was incredibly bitter (e.g., 'welfare for the rich') when you consider who paid the money in the first place. It is the same as a contractor saying he will charge you actual costs and gives you an estimated amount for the job; if it is less you will get the excess back. It costs less but he blows you off and pockets the extra to pay for his own lifestyle.
Beyond being downright absurd the argument was wrong. If it was spending we would simply be further in debt with a few more boondoggle programs to show for it. What has happened, however, is that the money that was given back to the consumers and entrepreneurs was invested in the US and fueled the economic recovery. Some still deny the economy has recovered even as GDP has come in well above what the Fed views as its potential; at a minimum the critics find several faults with the recovery.
Sure it is not perfect, but we have been saying all along that the recovery was demand led, and that has given us the less than perfect inflation picture right now. Even with that, however, the economic and fiscal posture is vastly improved. Tax revenues are up 29% over 2004. In that year the deficit was 3.6% of GDP. This year the deficit has dropped to a projected $395B down from $427B in 2004. That is down to 3.2% of GDP. The oft referred to 'nonpartisan' Congressional Budget Office now projects the deficit will fall below 2% of GDP in 2007. That puts it below its 40 year average in relatively short order.
So much so that the April to June quarter is expected to turn an expected $12B deficit into a $42B surplus. That is on top of a $30B surplus for the first quarter. Lower tax rates = rising economic activity = higher tax revenues. The data shows that tax revenues related to the dividend tax reductions and cap gains tax reductions have leapfrogged tax receipts on those assets. Lower rates but more revenues. More dividends are being paid out because the rates are lower. The individual investor benefits in getting the dividend and at a lower tax rate. That money goes back into the economy as opposed to sitting in the corporate treasury. Lower capital gains taxes unlock money stashed away in investments hiding the money from being taxed. Lower rates pry open the wallets and get money circulating in the economy; that is the lifeblood for economic growth.
How this works: toss out the Phillps Curve and start 'Laffing.'
Tax revenues don't rise unless there is more money in the pockets of citizens and corporations. Moreover, a lot of the revenues are coming from dividend and capital gains taxes. But those were lowered along with income taxes. That can only mean that there is a lot more economic activity to generate more tax revenues than higher rates were able to do. That is the history of tax cuts.
The Laffer curve states that at lower tax rates economic activity expands to such an extent that tax revenues actually increase. Raise taxes too much and tax revenue falls because of lack of investment. You can also lower them too far and revenues will drop as well due to diminishing returns (you get less bang for each $1 taxes are lowered). Here in the US we have successfully shown what rates will lead to falling economic investment and lower tax revenues. We have yet to find how low they can go before tax revenues fall off. This last reduction has produced a surge in economic activity and jumped tax revenues, so it is clear we have not reached the equilibrium point where economic growth is maximized and tax rates are at the minimum levels. In other words, we can cut taxes further and still generate more economic growth.
Given that demand is still outpacing supply and thus causing the inflation we are seeing now, it would behoove our leaders to cut taxes more and thus generate more supply and fuel further economic growth. Tax revenues would rise further and go toward cutting the deficit. It is the best of both worlds, but in Washington political careers and indeed political parties are staked against this historical concept. Thus reality denial will continue.
Tax revenues, ECRI indicate economy is still solid
Higher tax revenues speak for themselves. When tax rates are lowered and tax revenues rise, there has to be a lot more economic activity to not only make up the difference but add to tax receipts.
This jibes with what the Economic Cycle Research Institute's (ECRI) weekly economic indicator. It is a very reliable leading indicator, ferreting out several recessions and recoveries. It suggests that the economy is closer to the end of the slowdown if not past it. The FIG (future inflation gauge) shows inflation trending slightly higher still, but it is not indicating the Fed needs to get really aggressive, i.e. start with the 50 BP rate hikes. While the FIG is at a 25 month high, ECRI indicates the rise is due to energy. ECRI says there needs to be more than just oil for a serious inflation rise. ECRI has a good track record; hope they are right. If only the Fed followed ECRI.
An improving economy leaves the Fed on pace to continue its rate hikes. No pause, no slowdown, just continued hiking at a 'measured' pace until the Fed feels it has got it right. As we have chronicled often of late, this more or less gut feeling by the Fed as to when it has things right is what puts fear into the market. Sometimes that is what the Fed wants; as we have said, the Fed has turned into more of a Phillips Curve watcher and that makes it fear prosperity. While this may not be raging, roaring twenties style prosperity, the economy is doing much better. Above trend growth scares this Fed, however, and that keeps us at risk of Fed intervention each time the economy recovers and expands.
THE MARKET
Not a lot happened Friday in the market. Basically flat, narrow breadth, low volume, holding support after a good move. Mostly some position squaring ahead of the weekend. That had a lot complaining once more about the lack of follow through after the Wednesday surge. We heard about resistance levels in the way, the Fed, oil prices; basically anything that could be thought of to complain about.
We were very pleased to hear this talk. It shows a lot of pessimism about the current bounce that has shown solid indications of change. SP500 held the up trendline, showed high volume back and forth trade, bottomed and rallied on strong volume, and then gave a strong, market-wide follow through Wednesday. The calmer action Thursday and Friday was just a breather, giving up little ground. Yes there is resistance here and yes it could turn the market back down, but after the strong rebound and follow through it has yet to show the sellers have returned.
We have seen many occasions in the market when a good move is met with cynicism. Not that it is an apples to apples comparison, but back in early 2003 the market consolidated the move off of the October 2002 low, pulling back on light trade with leaders setting back up for another move higher. This pessimism appears unwarranted, and to us it appears to be a contrarian indicator and is helping set up the next move higher in this rally.
The timing in the market is a bit atypical from the 'sell in May then go away' saying you often hear. Of course, last May was the bottom of one of the 2004 down legs with SP500 rallying 70 points before peaking and slipping into a late summer dive that set the bottom and the rally into the end of the year. In that respect the action is very similar to a year that was atypical in itself.
MARKET SENTIMENT
Bulls versus Bears: Bulls slid a bit lower last week, falling to 43.5% from 44%. This is the low point for the year, the lowest since the 40% hit in August 2004. Bears rose to 30.4% from 29.7%. That puts bears right at the level hit in August 2004. That August date is important because that is when NASDAQ, SP500, SP600 - - basically the whole market - - bottomed and rallied to the end of the year.
VIX: 14.05; +0.07
VXN: 17.58; -0.54
VXO: 13.3; -0.04
Put/Call Ratio (CBOE): 1.07; -0.06. The ratio remained strong on a very modest pullback in the market. As with the other indications of pessimism we saw and heard Friday, that is a positive for a continued rally.
NASDAQ
A modest gain on very low, below average volume. Cleared the late April peak, but still below some key levels.
Stats: +5.55 points (+0.28%) to close at 1967.35
Volume: 1.549B (-12.57%). Volume was the lowest of the week and that is why NASDAQ had no real chance of sustaining the gap higher. Not as great of price/volume action as SP500, but hardly damaging to the move that is underway.
Up Volume: 967M (+48M)
Down Volume: 553M (-268M)
A/D and Hi/Lo: Advancers led 1.1 to 1. Very modest breadth, matching the price move.
Previous Session: Advancers led 1.03 to 1
New Highs: 46 (-11)
New Lows: 85 (+6)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
Gapped higher on the jobs data but could not hold the move. The opening move took it to the next resistance at the bottom of the late March/early April consolidation (1974). It faded back to the high or the 'hump' in the recent short double bottom. It held and rebounded into the close, right in the middle of the range. Showed some life at the hump, a good sign. Still has plenty of resistance ahead, including the 50 day EMA (1983) and the 200 day SMA (1992), but resistance is made to be broken on strong moves. It will have to be a strong move to clear that resistance as there are several layers of ice right at one level. A run to the 2050 level on this move puts it at the next resistance if it clears the 200 day, and that would be a good point for it to turn back to set the bottom for a test that sets the real bottom.
NASDAQ 100 showed the same action, tapping at the March/April range bottom and still well below the 50 day EMA (1466) and 200 day SMA (1482). As with NASDAQ, this is a formidable level to break through.
SOX was just fine Friday, rising off the doji above the 18 day EMA (393.72) and closing near its session high. Still well down in its base and well below the 200 day SMA (407) and price resistance at 410; it too has a lot of work to do. A move to 410 to 420 will be a good run on this bounce.
SP500/NYSE
A second tap toward the 50 day SMA and resistance at 1175 stalled on low volume, but still in very good shape.
Stats: -0.75 points (-0.06%) to close at 1171.35
NYSE Volume: 1.368B (-15.11%). Very low volume Friday as SP500 stalled out below the 50 day SMA. Another low volume session of consolidation after the reversal session and then the follow through on Wednesday.
Up Volume: 811M (-58M)
Down Volume: 826M (-268M). Dead heat.
A/D and Hi/Lo: Decliners led 1.07 to 1. A dead heat as well. Very good, quiet action.
Previous Session: Advancers led 1.13 to 1
New Highs: 78 (-4)
New Lows: 35 (+15)
The Chart: http://www.investmenthouse.com/cd/^spx.html
Tapped toward the 50 day EMA (1180) once more but then faded again to close below that level, 1175 price resistance, and the 50 day EMA (1173). This is some of the resistance that that the television pundits were moaning about Friday afternoon. Everyone knows it is there, but resistance or support levels don't mean a lot when a strong move is underway. This has yet to show it is really a strong move, but the follow through gives it some legs. It will have to stretch them to make a break through these layers of ice. It may take another day or two to move laterally and work this lateral move out. This resistance is causing a pause to regroup, but this move has a lot going for it: short double bottom at the August 2003/August 2004 up trendline, strong volume reversal off the low, follow through Wednesday. Now we wait for the next break higher through the 50 day SMA.
SP600 posted a modest 0.3% gain as it too basically moves laterally at the late April high after its own double bottom base off of the 200 day SMA (306.80). It probably takes another couple of days moving laterally over 310 and the 18 day EMA at the same level, then it takes on the 50 day EMA (315.51) up to 320, a range of price resistance (50 day SMA at 319.39.
DJ30
The blue chips got a boost from GE, well at least from the affirmation of its year. GE itself went nowhere. HON was up, however, ostensibly on rumors of yet another takeover by UTX. It banged into the 50 day EMA (10,401) again on the high and failed; volume was hardly enough to prop up the move. The 50 day EMA, the bottom of the March/April range,
and the 200 day SMA (10,380) all team up at this level. A couple more days of lateral movement gets the pessimism even higher and sets up the run at all of that resistance. A break above 10,546 (highs in recent trading range), would be a significant move.
Stats: +5.02 points (+0.05%) to close at 10345.4
Volume: 230 million shares Friday versus 236 million shares Thursday.
The chart: http://www.investmenthouse.com/cd/^dji.html
MONDAY
Maybe the jobs number was too strong. 200K would have been good, but 275K? With the Fed not needing too many reasons to keep raising rates, the jobs report did not give reasons not too. That along with oil returning back up over $52 intraday (closed at 50.96, +0.13) was enough to make investors take pause before the weekend.
Thus we will enter the new week with the same eternal questions for the current market: how far for the Fed and how high (or how fast a fall) for oil. The jobs report only managed to put some brakes on the idea the Fed was done after the GM downgrade to junk status. There is a big difference, however, between no more rate hikes and just two more rate hikes. No more rate hikes was a pipe dream of the overeager. Two more rate hikes puts the Fed Funds rate at 3.5%, on of the Fed's original targets (up to 4%), and in line with the futures contract. If that is all the Fed does, that is super for the market: no major hikes and the end very much in sight.
The market is starting to price in a nearer end to the rate hikes. The beauty of what is happening now is that the economy looks to be revving back up even with the rate hikes. Of course the hikes still have months to fully impact the economy, so the fact that the action is picking up does not mean it will continue to do so as more rate hikes fall out of the sky. In short, the market can handle a couple more rate hikes, maybe even four more. It has to have a sense, however, that the campaign is coming to its end.
We think this recent move is factoring in some economic improvement and a couple more rate hikes, maybe even three or four. That gives it some more upside here. The indices are at key resistance levels and will have to clear them, but the move thus far is showing few weaknesses. It can fold up the tent next week and tank once more, but at this stage it has done what it needs to do to rally further, and the action and sentiment certainly appear to support a continued move higher. We still don't believe this is the bottom for the year; it will need a test lower in July to August, but it could come sooner.
Given the action to this point, however, for now we are looking at leaders ready to continue their moves. After a couple of quiet consolidation sessions and maybe another one or two to start the week, they will be ready to resume their breakouts. The first test of a breakout is our favorite entry point, so we could be seeing some good moves mid-week.
Support and Resistance
NASDAQ: Closed at 1967.35
Resistance:
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 1983
The 200 day SMA at 1992
The 50 day SMA at 1993
Earl April high at 2021, February lows at 2023.
2100 is a key resistance point.
Support:
1962 is the recent lower high.
1950 (top of October to December 2003 consolidation)
The 18 day EMA at 1949
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 1171.35
Resistance:
1175 second high in that double top that spanned late 2001 and early 2002
The 50 day EMA at 1173
The 50 day SMA at 1180
The April high at 1192.
1196, the mid-January high and the early December peak in the left shoulder.
March 2003 up trendline at 1198
1200
December high at 1217.
Support:
1164 is the January/March neckline to the head and shoulders pattern.
The 18 day EMA at 1164
The 200 day SMA at 1157
1137 the recent April low.
1139 the August 2003/August 2004 up trendline
1129 to 1125
1100 to 1095
Dow: Closed at 10,345.40
Resistance:
The 200 day SMA at 10,380
10,400, the bottom of the November/December range
The 50 day EMA at 10,401.
The 50 day SMA at 10,483
Price consolidation at 10,600
10,754 is the February high
Support:
The 18 day EMA at 10,279
The recent April highs at 10,264
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 09
Wholesale Inventories, March (10:00): 0.7% expected and 0.6% prior
May 11
Trade Balance, March (08:30): -$61.5B expected and -$61.0B prior
Treasury Budget, April (14:00): $50.5B expected and $17.6B prior
May 12
Retail Sales, April (08:30): 0.7% expected and 0.3% prior
Retail Sales ex-auto, April (08:30): 0.5% expected and 0.1% prior
Initial Jobless Claims, 05/07 (08:30): 329K expected and 333K prior
May 13
Export Prices ex-ag., April (08:30): NA expected and 0.4% prior
Import Prices ex-oil, April (08:30): NA expected and 0.3% prior
Business Inventories, March (08:30): 0.6% expected and 0.5% prior
Michigan Sentiment-Prelim., May (09:45): 88.0 expected and 87.7 prior
End part 1 of 3
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