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us stock market, understanding the stock market
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6/21/05 Stock Split Report
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SUMMARY:
- Another good session of rest with NASDAQ, SOX edging higher.
- Bonds rally as Pimco's Gross says Fed almost done, no recession, will cut rates in 2006.
- More attempts to resurrect Social Security reform start to appear desperate.
- Market keeps ignoring oil, setting up for next move.
- Watching for leaders to start back up.
Volume perks up some as NASDAQ, SOX edge toward next breakout.
Another pretty sluggish session, the kind that most television pundits malign as directionless or lacking follow through, giving the impression there was nothing good about the day. Far from the truth. While the major indexes finished mixed with NASDAQ and SOX nudging higher and the NYSE indexes nudging lower on some slightly higher volume, the overall picture is shaping up nicely. Last week SP600 and SP500 broke higher from their lateral range after NASDAQ led them up to that point. NASDAQ cleared some important near resistance as it set up for the next move to take on key resistance at 2100.
This week the action has been subdued with volume falling back from the high Friday expiration level. Tuesday was similar to Monday, up and down, a narrow trading range, continued modest volume, holding near support. It may appear to be directionless, but the bigger picture is very good as the market takes a breather on overall low volume while it holds its gains and prepares for the next leg. You have to like a stingy market that refuses to give back much of its gains. In addition we started to see some leaders heading higher again on Tuesday, and that is often the precursor to the next leg higher. And as one final note, it did not hurt that NASDAQ, the leader that got this move going, showed relative strength along with SOX. After some rotation last week, if NASDAQ is ready to go the market will follow.
THE ECONOMY
Theories about what the Fed is going to do and where the economy is going are pretty common right now given that the market is 'directionless' and the financial stations need something to fill airtime with. When Bill Gross of Pimco talks, however, it is worth a listen. When Greenspan was first talking 'conundrum' this year and many were expecting interest rates to rise sharply, Gross suggested the 10 year treasury would hover around 3.5% despite Fed rate hikes.
Well, today Gross was back in the prognostication business Tuesday (some would call it attempting to sway the market), predicting that the Fed would raise rates just 50 more BP as reflected in the Fed Funds Futures contract given the economic conditions (e.g. weakening ISM, low CPI, etc.), the economy would not fall into recession, and that the Fed would actually start cutting rates in early 2006. That induced a bit of a bond rally, at least early on, but stocks were not buying into it.
Not buying into it, at least not today. Stocks have been pricing in the notion that the Fed is only going to raise rates 50 more BP since the late April low and the rally off of that level. That is when, despite the major uncertainty at that time given Greenspan's 'conundrum,' stocks started to rally. With oil still in the fifties, the economic data mixed, and the Fed-speak very pro rate hikes (this was before Dallas Fed president Fisher's "eighth inning" comments), stocks started to rally. As usual, they started to move before things were clear. Thus Mr. Gross' comments did little to ignite additional upside. Stocks are in the process of consolidating a move made in anticipation of such views, and they are looking further down the road, maybe already anticipating those rate cuts Gross opined about.
Social Security is not dead yet, unfortunately.
Two more 'rescue' plans hit the Hill today, one from democrats and one from republicans. Neither includes private accounts that would keep the money out of the hands of the Feds. That is really the key to any plan: keep the Feds from spending our retirement money on the Cowgirl Hall of Fame and related pork. The problem is, the money goes into the Treasury and it is already spent before it gets there. There is no pile of cash in the Treasury, just a pile of IOU's in the form of treasury notes that will have to be paid someday, and that money comes from our taxes.
One plan provided for what is supposedly a true 'lockbox' (not the Al Gore version) where individuals would own Treasuries after paying into the government. Nice try but it is all slight of hand because if it all goes into Treasuries then it is just a difference without substance. Supposedly we would own the treasuries, but a treasury note is nothing more than a promise to pay. The government can still spend the money and issue more 'IOU' treasury notes without having to cut spending. If private accounts were allowed and everyone bought treasuries, well, there would be no difference and the government could keep on spending as it always does and just print more treasury notes. In reality investors with private accounts would put their money to work in many different investments depending upon their stage in life and where they need to be by retirement. Thus the government could not rely on everyone buying treasuries and could not spend what it did not have (though that has never stopped the government before). Because the government would still have the money heading into Treasuries, this 'new' plan is really nothing but a sales job trying to repackage the transfer system that is already in place. Of course it raises the income levels subject to SS taxes, and that is the real source of the income to 'fix' social security.
Indeed, that is what most politicians want right now regardless of what they say about private accounts. They want to pass a modest tax increase now and then again the next time someone mentions SS is in trouble. That way they can soak those who pay for all of the social programs bit by bit as opposed to a big 20% tax hike in 15 years when the shortfall really hits. It is easier to raise taxes slowly than a big steroid jerk higher all at once. The latter would cause a tax revolt.
Not that the other plan is any better. It is the 'indexed' plan where benefit increases in the future are adjusted based upon income. If you made more in your working life then you get less upward adjustments later on. In short they are turning a marginally palatable unconstitutional program (because we all paid in the same and got the same out) into another welfare program that differentiates between the 'rich' and the 'poor.'
This is all in response to the baloney spread about regarding private accounts being so bad for us. Greenspan said over and over that we need to get off this transfer payment system and get into ownership so we can invest in the real assets we will need to fund our retirements when the US is no longer the consumption center of the world. That is going to happen because the Baby Boomers are going to start dying and won't be the great consumption engine they have been for the past 45 years. We will need the real assets and income generated by them to fund our standard of living, and investing trillions of SS money into various assets other than the current redistribution, transfer payment system we have now is the way to do it.
Further, we again heard the argument today that people are just too afraid of taking a 'guaranteed' SS benefit and putting it in jeopardy based upon the 'whim' of the market. Hogwash. If you get a private account you can choose what to do with it under even the most austere plans. If you don't want it in the market, keep it in cash. Or, why not put it where the government was going to put it anyway, i.e. in treasuries? If you believe the government is going to pay up on the current mile-high stack of IOU's in the Treasury right now, then you should not lose any sleep over it paying a few more. In short, you could put your money in the same place it would be even if it was still with the government; if you were comfortable with that then you should still be comfortable, plus you could then pass it along to your heirs as opposed to losing it all if you die. And don't get caught up in the argument that SS provides a death benefit. It is a pittance; if you started investing at a younger age you would far, far, far, far outstrip any death 'benefit' under SS.
In short, these plans to 'fix' SS are nothing more than band aides on a system that cannot work without continued tax hikes to pay for the rising number of recipients. Congress knows this and that is why they are trying another modest tax hike by us to get the masses to go along with some reform. Then when they need it again they will pass along another tax hike. At some point it will have to be about 20% to pay for the shortfall, and Congress figures it best to do it in gradual stages because if it is done all at once in 15 years there will be a tax revolt by those who have to foot the bill. I would much prefer to leave my sons and daughter a big private account as opposed to nothing with respect to that 15+% we give to the government each paycheck. If everyone could do this we would solve the solvency problem for the future with some near term debt taken on to cover the transition for those who don't have enough years left to build up an account. That is why the argument that private accounts do not solve the problem is absurd, and how it came to such prominence shows how good the spin doctors are in DC where the goal is, above all, to maintain the power base. If individuals keep this money and build up big accounts, how are they beholden to the government?
THE MARKET
MARKET SENTIMENT
VIX: 11.08; -0.39
VXN: 13.43; -1.27
VXO: 10.16; -0.37
Put/Call Ratio (CBOE): 0.98; 0
Bulls versus Bears:
Bulls rose once more last week, the fifth consecutive week of rising. Bulls hit 52.7%, up from 50.6%. Big gains of late (52.7%, 50.6%, 47.85) as bulls continue to grow at an expanding rate. Still below the 55% level considered bearish. Bulls bottomed in early May at 43.5%.
Bears fell once more, but the rate of descent slowed. 20.3% last week versus 20.9% the prior week. That followed a sharp drop from 25% the prior week and 26.1% the week before. As with bulls, the momentum is picking up as the market advance holds. Still barely holding above the 20% level that is considered bearish.
NASDAQ
Stats: +2.94 points (+0.14%) to close at 2091.07
Volume: 1.604B (+10.52%). Volume was up significantly, but still well below average as NASDAQ continued to probe 2100, posting a modest gain on the session. That continues the good string of positive price/volume action as NASDAQ sets up for its next attempt at 2100. That is very important because it shows modest accumulation as opposed to the big money funds and institutions getting rid of stocks.
Up Volume: 856M (+203M)
Down Volume: 693M (+2M)
A/D and Hi/Lo: Advancers led 1.04 to 1
Previous Session: Decliners led 1.41 to 1
New Highs: 114 (+17)
New Lows: 34 (-2)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
Despite the rising oil prices that are supposed to hurt technology stocks (basically all stocks), NASDAQ managed to post a gain Tuesday. It tapped halfheartedly toward 2100 (2095 on the high) and backed off but still held onto some modest gains. Volume was stronger, a decent indication though hardly definitive. What it tells us is that there is still some accumulation ongoing in NASDAQ, and that bodes well for a break higher out of this four week handle that has formed to its 6 month base. Setting up, looking good, but it needs to deliver the breakout move.
SOX held the 18 day EMA (428) and rallied back up through 430. Hardly a major move toward breaking through the top of the handle and resistance at 440, but doing what it needs to do at this support level to prepare for the attempted breakout. Again, SOX has traded in a range from 380 to 450 for almost 8 months, and it is making a higher low right now. That is typically the predecessor move to a breakout.
SP500/NYSE
Stats: -2.49 points (-0.2%) to close at 1213.61
NYSE Volume: 1.29B (+1.55%). Volume edged higher even as the NYSE indices lost some ground. Still well below average and still good consolidation action after the nice move higher last week that cleared the consolidation range.
Up Volume: 733M (-35M)
Down Volume: 958M (+67M)
A/D and Hi/Lo: Decliners led 1.08 to 1. The small caps and large caps were off their game, but very modest downside breadth.
Previous Session: Decliners led 1.49 to 1
New Highs: 222 (+22). Even with the down session the NYSE stocks posted more new highs.
New Lows: 35 (+13)
The Chart: http://www.investmenthouse.com/cd/^spx.html
Thus far this week SP500 has eased back on continued below average volume. Another very narrow range (5.5 points) as the large caps took a breather from last week's leadership role. Holding above the 10 day EMA (1208) will retreating some from the highs at the turn of the year (1217) and the up trendline (1220). A good low volume test of the 10 day EMA would set up the next move higher.
A very nice pullback is underway for SP600 as the small caps head back toward the 10 day EMA (332). A nice break higher to lead the market last week, it is making that test of the 10 day we were looking for, that test that will set up the index for the continued run in new high territory.
DJ30
Another index trading in a very narrow range (50 points), DJ30 eased back to tap at the 10 day EMA (10564) on the Tuesday low and rebounding for a very modest loss. Volume was better but still well below average. After clearing key resistance at 10,557 and thus making a higher high, this is a good test that sets up the next move. It gave up 10,600, but by a fraction. Still very nice but likely to follow the other indices. What is new?
Stats: -9.44 points (-0.09%) to close at 10599.67
Volume: 204 million shares Tuesday versus 173 million shares Monday.
The chart: http://www.investmenthouse.com/cd/^dji.html
WEDNESDAY
Still no scheduled economic data, but oil inventories will be out at 10:30ET, and of late those have had their impact upon oil prices and thus the market. Well, the latter is kind of a stretch. There is without a doubt an impact upon the economy with oil near $60/bbl, but as of yet the market is still building higher and higher as opposed to looking weaker and weaker. Thus far the market is not pricing in economic slowdown even with oil at these levels. As with the Fed and its rate hikes, the market is betting oil is not going to hold these levels and that no major damage has been done thus far.
Looking at the market action it is definitely building toward the next move higher. Anything can happen along the way to a breakout, but thus far not much is slowing it down. It is lulling everyone to sleep once more with this test back down this week after a decent upside gain. We hear comments about topping out, lack of follow through, etc. Love to hear that as the market digests a good gain and does so with solid price/volume action.
In addition we like seeing some leaders starting back up already. That typically bodes well for the market as the market in general tends to move after the leaders start heading back up. We also saw a lot of strong stocks test their near support and hold. That is also a good sign for the market, but it is just the first step. When we see them start back up on stronger trade we get some confirmation the move is ready to resume. That also gives us a chance to latch onto some of the strong stocks or add to positions on those we already have. Nothing bad at all about averaging up into strong stocks that we have already built a gain in.
Support and Resistance
NASDAQ: Closed at 2091.07
Resistance:
2100 is a key resistance point.
2151, the early December closing high.
2163, the mid-December closing high.
Support:
2075 to 2078 was some minor resistance that gave way Thursday.
The 18 day EMA at 2070
2051 from February, March price points.
The 50 day EMA at 2038
Early April high at 2021, February lows at 2023.
The April high at 2022 was the higher high point.
The 200 day SMA at 2025
S&P 500: Closed at 1213.61
Resistance:
December high at 1217.
The March 2003 up trendline at 1220
The March 2005 high at 1229.11
Support:
The February intraday high at 1212.
The 10 day EMA at 1208
Price levels at 1200
The 18 day EMA at 1202
1196, the mid-January high and the early December peak in the left shoulder.
The April high at 1194
The 50 day EMA at 1190
The early May high at 1178
1175 second high in that double top that spanned late 2001 and early 2002
The 200 day SMA at 1172
Dow: Closed at 10,599.67
Resistance:
10,754 is the February high
10,868 is the December 2005 high.
10,985 is the March high
Support:
Price consolidation at 10,600
The April high at 10,557
The 10 day EMA at 10,564
The 18 day EMA at 10,529
The 200 day SMA at 10,442
The May high at 10,406
10,400, the bottom of the November/December range
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.
June 20
Leading Economic Indicators, May (10:00): -0.5% actual versus -0.3% expected and 0.0% prior (revised from -0.2%)
June 23
Initial Jobless Claims, 06/18 (08:30): 330K expected and 333K prior
Existing Home Sales, May (10:00): 7.15M expected and 7.18M prior
June 24
Durable Goods Orders, May (08:30): 1.5% expected and 1.9% prior
New Home Sales, May (10:00): 1320K expected and 1316K prior
End part 1 of 3
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us stock market
understanding the stock market
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