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5/28/05 Technical Traders Report
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SUMMARY:
- Stocks overcome early weakness, continue their bullish ways.
- Spending lighter than expectations, but inflation indications remain low.
- Gasoline prices help consumer sentiment.
- SP500 heads into next week at next key resistance.
- Summer officially to start Tuesday, and volume already low.
Upside drift takes over once more for another upside week.
Stocks opened soft on a mixed personal spending and income report, but a very tame personal consumption expenditure deflator (PCE) added some confirmation to the low core CPI reading earlier in the week. That along with a bit better than expected final May Michigan sentiment report started a slow, steady melt higher that left stocks overall higher and closed out another upside week, the fourth in a row for the new leader NASDAQ.
Stocks simply refused to give up ground despite the rally to this point and despite taking little rest on the month long advance. When they do get a bit weak they still end the day rallying back up to session highs. You love to see that in stocks when they are trending higher and you are playing that trend. Despite the overall low volume, the price/volume action has been good (up volume on up days, lower volume on down days), and that shows more buyers than sellers. That gives stocks the tenacity to hold onto gains that we have seen. When they do sell, in general they are holding near support, taking a breather, and then bouncing back up on better trade. How long this can go on given the rise to this point and the slow overall trade remains to be seen, but the fact that stocks are performing in this bullish overall and intraday fashion tells us that the rally still has good foundations even if it takes a pause at this point.
All of this got started back in late April. At that time we wrote extensively about the high volume slugfest ongoing in the market. Each session, up or down, saw higher volume. One day stocks rose on high volume just to sell the next on higher volume. Then another up session on even stronger volume. We noted that type of back and forth fight between the bulls and the bears typically signals a season change taking place. Given the sell off that would mean an attempted bottom setting up. A quick double bottom the last two weeks of April, capped by a high volume reversal the last day of that month set the stage. Stocks followed through on that reversal on the fourth session, and that is when NASDAQ took over the leadership from SP500.
At the time we were not sure if this would be enough of a bottom to support a sustained rally, and we were looking for another test of the April low. Four weeks later that has not really happened. SP500 did sag back down in the second week of April, coming within 10 points of the April intraday low. That may be all the test the market needed of that prior low. At this juncture NASDAQ is certainly showing no signs of needing such a test, and as the now weaker SP500 made a decent stab at that level, that may be all she needs.
Thus we saw a season change and are now four weeks into that new season. That may mean time for another test already. We worry a lot about what the indicators are showing, but that is what a good investor does, i.e. does not become complacent. While price/volume action has been good, overall volume has been weak. That shows the buyers are in control, but it is more of a plurality as opposed to a clear majority with respect to investors. In other words if all investors came back into the market they could overwhelm the bullish bias shown by the participants in this rally. Kind of like the nice traffic you enjoy on the way to work during the summer when many are out on vacation and then you get hit with the traffic jams again when school starts back up and everyone is back at it.
That keeps us on our toes, particularly with SP500 approaching its next test at 1200 and NASDAQ coming up to some key resistance at 2100. SP500 tapped at 1200 in the last 20 minutes of trade Friday and then beat a hasty retreat as if it was repelled from that level. That is something that caught our attention and it is going to be an important point this week. SP500 is not the leader right now, but it is one of the drivers in this move higher. If it stumbles it puts a lot of pressure on the rest of the market, especially with NASDAQ near important resistance as well. With oil back over $50/bbl and the Fed still talking tough love with respect to interest rates we feel these two issues will have to be revisited again by the market, and that would mean some softness.
Thus these twin resistance levels could lead to more of a traditional test than the day off taken last Wednesday, and of course it could always lead to deeper selling than that. Anything is possible. Right now, however, there is that good price/volume action showing buyers outnumbering sellers and actually accumulating shares even if doing so in moderation. What is very key to the market is the continuing leadership that is setting up and moving higher in waves. That is sustaining this rally and keeps it coming back even on the days that start softer.
THE ECONOMY
Personal income and spending rise, inflation tame.
According to government figures, incomes are still rising and so is spending, just not at the expected pace. Further, another inflation indicator put together by the Feds shows inflation remains tame. Good for the economy in more ways than one. Good that it shows growth continuing and the consumer not only spending the money but also making the money to do so. Lower inflation gives the consumer more buying power and very importantly at this stage, helps keep the Fed on a 'measured' pace as opposed to getting antsy and pushing for 50 basis point rate hikes.
Indeed, just one 50 BP hike at this juncture basically flattens the yield curve, and that is a sign of economic slowdown. This is because of what the free market in bonds is telling us (the 10 year note) versus the controlled end of the bond market (the 2 year treasury): the Fed is pushing up the short end, the only level it can control, yet the free market longer end is saying no hikes are needed because investors are not requiring more risk money for their investment in longer term bonds. A lower 10 year is a classic sign of low inflation and potentially slowing economic growth, the latter particularly if coupled with short term rates that match or exceed higher term rates. Thus we remain very worried that the Fed is hiking into slowdown, or at least hiking into an economy that is showing us it is just fine and has no inflationary tendencies. Very similar to 1999 and 2000, and we know what that outcome was.
Thus the market took some heart Friday when consumer spending, while still strong, was a bit softer than expected even as incomes rose 0.7%, better than expected and topping a solid 0.5% reading in March. When you account for taxes and inflation, spending rose just 0.2%. Year over year spending rose 6.9%, the best since late 2000.
Income growth was the best thus far this year, and they are up 7% year over year excluding the big Microsoft dividend, another best showing since late 2000. The 0.7% rise in wages and salaries was knocked back to 0.1% when you account for taxes and inflation. That is not a great growth rate; doesn't take a Phd in economics to figure that out. The savings rate fell 0.4%, hitting a 3 year low.
Thus the income and spending numbers were not that great when you factor in real buying power and spending, but the Fed's inflation watch received some good news with the PCE rising 0.4%. That was not great news, but the core, the one Greenspan watches, rose just 0.1%, a very anemic 1.6% year over year gain. That put some more credence in the earlier CPI report that showed very tame core inflation. The combination of those back-to-back reports puts little pressure on a Greenspan Fed to raise rates faster than 25 BP. It won't stop, but it does not need to jack up the pace.
Fed still looking for excuses to raise.
What is damn worrisome, however, is that even with tame inflation data from the government data the Fed relies on to determine whether it hikes rates, the Fed is out looking for other reasons to raise interest rates just as it did in 1999 and 2000. Back then I wrote with alarm how the Fed was making up new inflation indicators as justification for hiking rates further while none of the economists were challenging it as to the validity of these new 'indicators.' Basically, anything that was showing prosperity became a potential source of inflation simply because the Fed considered it 'too hot.' Prosperity then became something to fear, but it was not until the Fed wrecked the economy did anyone really take the Fed seriously.
The Fed converted from a free market Fed to a Phillips Curve Fed. The PC says that if you get too low unemployment and too fast GDP growth you get inflation. It seems that one day Greenspan was rummaging through his desk and found an old, faded copy of the Phillips curve, studied it in for a few minutes in non-recognition, and then suddenly became alarmed. He then ran to his fellow FOMC members and revealed this new threat to the economy. While there was no inflation anywhere to be found, there HAD to be inflation coming because the economy was so strong. Thus the Fed had to do something (raise rates to slow the growth), but it had to convince everyone what it was doing was right given the lack of inflation. That was the genesis of the new inflation indicators and the rate hikes that came faster and more intensely. We know the results.
Now the Fed appears to have the blinders on again, ignoring the real economy and focusing on where it wants interest rates to be. Heck, Fed governor Gramlich just delivered a speech on the desirability of targets. With the inflation data coming in milder even as the economy moves past a soft spot, it is being pressed to justify continuing rate hikes. The bond market is pressing it. The gold market is pressing it. The mild inflation is pressing it. Many pro-growth economists and business leaders are pressing it. What to do? Come up with another indicator.
That indicator is housing. Just a month ago Greenspan was telling Congress that there was no bubble in housing. He even did so laughingly. Now he is talking about a series of mini-bubbles as he starts the process of turning a positive into a negative to support more rate hikes. They started talking about housing in the Fed minutes for the first time, laying the groundwork. Vice chairman Ferguson was out Friday talking about "relatively high" prices when compared to "conventional valuation measures." Translation: the housing market is showing 'irrational exuberance.'
It is always a danger signal when the Fed starts talking about prosperity being bad. The Fed's mandate pursuant to the Full Employment and Balanced Growth Act of 1978 is to "promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates." The first in the list is maximum employment, and that is achieved through prosperity. It is no less important than the other two goals, and indeed the others are not that important if employment is weak because the economy is likely weak as well.
The economy is nowhere near maximum employment as we continue to climb out of the hole created when the Fed last took on prosperity. At the same time inflation is very tame. Interest rates are holding, on their own, at very low levels, showing little future pricing pressure. Yet the Fed is now taking on prosperity once more, fearing what can only be classified as modestly solid growth is going to lead to inflation. It did not do so in the 1980's to 200 in that long expansion, and it is not doing so now given that the expansion is now reaching a point where supply is starting to match demand due to investment incentives in the US economy versus in pumping up demand.
Thus the economy is on good footing to continue to expand and to do so without a lot of inflation IF it is left alone. At the same time we are on incredibly unstable ground. Oil prices are back above $50/bbl after a brief sojourn. Sure they have been spooked by the Saudi king's illness, but $50/bbl is $50/bbl. We don't go to the gas station and say 'oh, it is okay that prices are rising because the Saudi king is ill.' We say 'oh crap, prices are rising again. What am I going to not buy this week because of that?' That is a direct tax on us and the economy. On top of that you have a Fed that is going to flatten the yield curve because Greenspan and his henchmen think it is a 'conundrum' that will be resolved if the Fed keeps up the pressure on the low end.
In short, the Fed ONCE AGAIN thinks it is smarter than the bond market, the gold market, the stock market, and it is going to show the world it is right. What it is likely to do is show the world it once again ignored clear market signals and went too far. Once again it is going to step outside its mandate and worry about other areas it has no business being involved in. Once again it is going to show the world that if you try to regulate and fine tune an economy you end up driving it into the ground. The last point is not what the Fed intends, but the Fed often brings about what it does not intend.
If the Fed stops at 3.5% there is a good chance the economy can continue on. 3.75% it starts getting problematical. The 10 year rates would have to rise at least 25 basis points to keep the curve flat if the Fed goes an additional 75 basis points in hikes (to 3.75%). Speculation as to what the Fed will do runs from being done (about the likelihood of another supply side tax cut right now) to 4.5%. Anything from 4% and above kills the economy. The Fed Funds Futures market puts the odds at 100% for 50 basis points in the next two meetings, and is building in the likelihood of another 25 BP hike on top of that in the third or fourth meeting out. That is the even money right now, but this far out it is subject to significant fluctuation.
More significant is the market action. This summer will mark the year anniversary of the start of this current rate hiking campaign. After a struggle in 2004 and a sell off in early 2005, stocks are now rallying back. This is similar action to 1984 and 1994 when the Fed went on year long rate hiking campaigns. Before the end of each campaign the market started to rally. With the bond and gold markets showing no signs of inflation, stocks are starting to point toward future prosperity. That move presupposes the Fed will not strangle the further expansion, but the market has a way of sniffing these things out. This time, unlike in late 2004, we hope the market is correct.
Michigan sentiment improves off of early month reading.
The other piece of data Friday that encouraged investors was the Michigan sentiment final reading for May. It topped the initial reading, coming in at 86.9, but was still below the prior month. It also hit a two year low. As we have said before, at these levels consumer spending will hold up just fine as they are not at the critical readings in the sixties where consumer spending starts to reflect confidence. It is a sentiment indicator, and as we know, sentiment is only really important when it hits extreme levels.
The big driver was lower gasoline prices. Problem is, oil is back above $50/bbl and the summer driving season kicks off this week. Many are saying gasoline won't hit $3/gallon now, but we are not convinced. If oil does not return to low levels it is going to be touchy as the summer progresses. If that occurs sentiment will fall and the trend lower will continue.
THE MARKET
Light volume persists and it is not likely to improve this week as summer kicks off. Light volume has not necessarily been bad for stocks this past month; after a high volume fight the bulls won and stocks rallied. Key high volume sessions pushed the indices through important resistance levels on the advance. Kind of like getting just enough rain at strategic times to keep things green while still running an overall rain deficit. Now SP500, no longer the leader, finds itself at 1200.
That leaves another week of trying the next resistance level and trying a stronger move. Making a higher high last week and then holding that level with a lateral consolidation was a good start as the market got just enough when needed to keep the move going. With leadership still looking strong the prospects remain positive.
MARKET SENTIMENT
Bulls versus Bears: Bulls rose again to 46.7% from 46.2%. Bulls bottomed in early May at 43.5%. Bears dropped sharply to 26.1% from 28.6% after hitting 30.4% on the high in early May. That was the highest bearish level since August 2004.
VIX: 12.15; -0.09
VXN: 15.15; +0.15
VXO: 11.26; +0.25
Put/Call Ratio (CBOE): 0.81; +0.06. The put/call ratio spiked over 1.0 on Wednesday when the market weakened that one session.
NASDAQ
NASDAQ continues its market leadership, doggedly rising though on slack Friday volume.
Stats: +4.49 points (+0.22%) to close at 2075.73
Volume: 1.266B (-23.05%). Volume dropped off a cliff Friday given the long weekend. It remains overall bullish despite the below average levels, i.e. up on upside gains and down on losses. Not likely to see significantly more trade now that summer is here.
Up Volume: 739M (-570M)
Down Volume: 500M (+199M)
A/D and Hi/Lo: Advancers led 1.24 to 1. Very modest breadth after that nice resumption of gains Thursday. It was good to see Thursday breadth expand so well in the lack of really strong volume. It shows that money is still going to the entire market and is not lodging itself in just one small sector.
Previous Session: Advancers led 2.39 to 1
New Highs: 79 (-6)
New Lows: 31 (-14)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
Another refusal to give in by the leading index as NASDAQ started soft but after the first hour was on its session long rise. Volume was horribly anemic, but in the absence of trade or news you see NASDAQ rising. It is approaching significant resistance at 2100, indeed just a mere 24 points. That will start having an impact on NASDAQ this week as it tries to continue the advance. There are five distinct price tops or bottoms at that level just since November 2004. That makes 2100 a significant level of overhead supply. After this long, rest-free rally, NASDAQ will find it harder to make a quick or clean break through this level.
NASDAQ 100 again lagged overall NASDAQ slightly, posting a 0.1% gain versus NASDAQ's 0.2% drift higher. The large cap techs are approaching their key resistance at 1550. As with NASDAQ overall, that is where the rubber meets the road for the household name technology companies.
SOX turned and lagged Friday, falling 0.7%. The chips have started a good move, but they are still locked well within the 7 month trading range with the top at 450. They will likely continue the move higher until NASDAQ and SP500 run into resistance at their next tops and have to take a breather.
SP500/NYSE
Tapped at 1200 on the late afternoon high and had nothing to do with it.
Stats: +1.16 points (+0.1%) to close at 1198.78
NYSE Volume: 1.041B (-18.98%). Very low volume as well, the lowest of the move. Hard to attribute anything to the session based on that, but we note that NYSE volume has not been as clearly positive as the leading NASDAQ.
Up Volume: 844M (-389M)
Down Volume: 503M (+173M)
A/D and Hi/Lo: Advancers led 2.2 to 1. The small caps posted another market leading session and thus breadth was superior on NYSE.
Previous Session: Advancers led 2.35 to 1
New Highs: 101 (+6)
New Lows: 15 (-8)
The Chart: http://www.investmenthouse.com/cd/^spx.html
While Friday was basically a nonevent, there were some key aspects to note. First was the intraday bullish action with SP500 testing lower and then recovering from negative territory for a modest positive close. Nothing new there, but a continuing good sign. The more interesting action was in the last hour when SP500 actually reached up and tapped 1200. It recoiled from that level as if it was hot to the touch. That shows some significant resistance at this level that the large caps will have to deal with this week. They have managed to hold the break to a new higher high over 1192, and that gives them a narrow ledge to hold onto as they try and move through this resistance. With SP500 acting weaker than NASDAQ, however, it will be a struggle to make the move stick.
The small caps broke free from 320 on Friday, setting up a showdown with the early April high (324.64) and that higher high that NASDAQ and SP500 have booked. The small caps have come to life the past week, showing some leadership material once more. A solid break to a higher high will go a long way in solidifying that newfound strength.
DJ30
The blue chips barely participated Friday, managing to hold status quo on low volume. Hovering right at the April high (10,557), trying to set up for the breakout move.
Stats: +4.95 points (+0.05%) to close at 10542.55
Volume: 168 million shares Friday versus 194 million shares Thursday.
The chart: http://www.investmenthouse.com/cd/^dji.html
TUESDAY
A shortened week but one packed with economic data and some technical significance as well. The ISM, consumer confidence, productivity, factory orders, and the May jobs report all light up the marquis. In addition, SP500 tangles with resistance at 1200, SP600 tries for a higher high, and NASDAQ, if it can continue on, faces 1200. Excitement and intrigue. Who says the stock market does not provide it all?
As noted, late Friday SP500 made a pass at 1200 and was quickly rebuffed. After starting out as the leader off the April low it lost strength is struggling to make headway and hold that higher high. It has made that high so it is hardly an also ran. Other indices have yet to do that. Thus while SP500 may not be the out front leader on this move it is in second and that makes this week's test of resistance significant. It also just cleared the April high and tried to consolidate that move last week. It has a lot of balls still up in the air it is trying to keep aloft.
With leadership still strong, either holding support or starting new moves Thursday and Friday, the rally still has decent underpinnings. It could use more of a breather, and it may just get that if SP500 struggles at 1200 and NASDAQ draws closer to 2100. With leaders holding up at support and showing good action as the market bounced late in the week, we are going to continue moving into positions on good entry points. We will be looking at partial positions to start some moves, adding as they rally and make the next test. This way we build into continuing winners. We will also continue to bank some gain on our winners as well, using the market's money to fund our continuing positions and new positions in the strong market leaders. That way we play smart, banking gain and continuing to move into the strongest stocks. That is how you build your bank account, retirement account, college fund, boat fund or whatever, and at the same time capture the upside the market is offering. In short, you are taking best advantage of the move and still locking in gain as you do.
Support and Resistance
NASDAQ: Closed at 2075.92
Resistance:
2100 is a key resistance point.
2151, the early December closing high.
2163, the mid-December closing high.
Support:
2051 from February, March price points is still trying to hold.
The 10 day EMA at 2043
Early April high at 2021, February lows at 2023.
The April high at 2022 was the higher high point.
The 200 day SMA at 2006
The 50 day EMA at 2002
1974, the low in the March/April consolidation
Late 2003 highs from 1960 to 1970
1962 is the recent lower high in April.
1950 (top of October to December 2003 consolidation)
S&P 500: Closed at 1198.78
Resistance:
1196, the mid-January high and the early December peak in the left shoulder is giving but not totally broken.
Price resistance at 1200
The March 2003 up trendline at 1209
December high at 1217.
The March 2005 high at 1229.11
Support:
The April high at 1192.
The 10 day EMA at 1188
The early May high at 1178.
1175 second high in that double top that spanned late 2001 and early 2002
The 18 day EMA at 1182
The 50 day EMA at 1177
1164 is the January/March neckline to the head and shoulders pattern.
The 200 day SMA at 1164
1142 is the August 2003/August 2004 up trendline
1137 the recent April low.
Dow: Closed at 10,542.55
Resistance:
The April high at 10,557
Price consolidation at 10,600
10,754 is the February high
10,868 is the December 2005 high.
10,985 is the March high
Support:
The 10 day EMA at 10,459
The 200 day SMA at 10,409
The May high at 10,406
10,400, the bottom of the November/December range
The 50 day SMA at 10,405
The recent April highs at 10,264
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 31
Chicago PMI, May (10:00): 62.0 expected, 65.6 prior.
Consumer confidence, May (10:00): 96.0 expected, 97.7 prior.
June 1
Construction spending, April (10:00): 0.7% expected, 0.5% prior.
ISM Index, May (10:00): 52.2 expected, 53.3 prior.
June 2
Productivity, Q1 revised (8:30): 3.0% expected versus 2.6% prior.
Initial jobless claims (8:30): 323K prior
Factory orders (10:00): 0.7% expected versus 0.1% prior.
June 3
Unemployment Rate, May (8:30): 5.2% expected versus 5.2% prior.
Hourly earnings, May (8:30): 0.2% expected versus 0.3% prior.
Average workweek, May (8:30): 33.8 expected versus 33.9 prior.
Non-farm payrolls, May (8:30): 180K expected versus 247K prior.
ISM Services, May (10:00): 60.5 expected versus 61.7 prior.
End part 1 of 3
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