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world stock market, us stock market
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6/23/05 Technical Traders Report Update
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Technical Traders Report Subscribers:
Next full report issues Saturday.
MARKET ALERTS
Targets hit alerts: NTES; DO
Buy alerts: ASH
Trailing stops: XXIA
Stop alerts: None issued
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SUMMARY:
- Stocks looking good until shrill anti-trade rhetoric, oil at $60/bbl provide a 1 - 2 punch.
- Existing home sales ease off recent record.
- Congress ready to kick the sleeping dog regarding Chinese trade.
- Only one lick of commons sense in Congress regarding China.
- Stocks going to have to test bottoms of recent ranges & regroup after this hit.
Nice action is set back by protectionist talk.
Once more NASDAQ was back at 2100, breaking above that level to 2108 and doing so on some decent trade. Even as existing home sales fell a bit and oil was up early, jobless claims were lower and techs like a good economy with low interest rates. When Greenspan and Snow gave their prepared statements re China the market was rallying. Not bad and it was encouraging after a soft start after FDX missed earnings and UPS said its volumes were declining. Nothing is better than a slow open and then a rally that overcomes some bad news along the way. That shows the buyers are looking at a bigger picture than the day's events.
As seems to be the case at times, just as the market appeared ready to make a definitive move with NASDAQ breaking through 2100 on better volume, it gets hit by something totally unexpected. The hyperbole from our fearless leaders made it clear that the senate has an axe to grind with respect to China with many supporting the insane 27.5% tariffs against China to bring China in line with intellectual property, floating the yuan, etc. It won't work, but it is the kind of legislation they can point to when constituents ask them what they are doing about jobs going to China. It won't change that, but they can thump their chests and talk about what they have done for their constituencies next week. When senator after senator brushed aside reasoned, historically based arguments to not succumb to emotions and instigate tariffs and ranted about how unfair trade was with China, when it was clear that the Senate was ready to kick the sleeping dog, the market recalled history lessons where we have done this before, and it started to sell off.
Stocks sold with vigor. NASDAQ and NYSE volume rallied as stocks sold through near support. There was no breakdown of the recent consolidation, but some serious damage was done with the price losses and the high volume. This kind of momentum typically does not reverse on a dime. Thus a test of the bottom of the recent trading ranges seems almost a given, and the catalyst was not stocks
Disappointing indeed given the solid action to this point. Stocks had rallied and leaders have been breaking out followed by pauses that lead to further gains. Volume was low overall, and that was the one real Achilles heel as noted Wednesday night. With the Senate ready to do economic battle with China, a battle we really don't want any more than the Chinese, the one weakness of the market was exploited. Big money, well aware of past episodes of tariff and currency wars (i.e., forcing China to float the yuan), started bailing out of stocks. What was a hint of trade war in the spring is growing in the summer, and the market is now taking it seriously. These things can go on for some time and many institutions were unloading stocks Thursday versus waiting. We were doing some selling ourselves. Yes, disappointing because it the selling was not due to what many pundits were saying, but because the US appears set once again to go down the road of protectionism and subject you and me to higher prices in the form of a tariff tax.
THE ECONOMY
Existing home sales fall 0.7%, but remain quite strong.
7.13M annualized units was less than the 7.15M expected, but at this point it is pretty much like horse shoes: no record but damn close to April's 7.18M record. In short, the housing market is doing what we expected: the growth is slowing but it is not crashing.
Indeed, the average price for existing homes sold was $207K, not shabby at all. The housing inventory rose by 4.9%, putting the supply at 4.3 months. That is still considered tight by historical standards. Thus the housing market remains solid though not exploding higher as it was in the past few years.
As for bubbles, we talk to people all over the country on a daily basis. California is very hot once more after being very cool just a couple of years ago. We know of people walking contracts during that time of the tech decline. Now houses that sellers were afraid would not close are selling for $1M over the asking price at the time. The point: markets heat up, markets cool down. As long as the economy is solid overall that will be the case.
Another case in point is in Texas as well as many other states outside the ones we always hear about such as California, New York, Florida. In Texas there are pockets of strength, e.g. Dallas, and others that are cool, e.g. Houston, east Texas, and central Texas outside of Austin. Many people we talk to laugh about a housing bubble; to them the market is as it always has been, that is decent but no lines forming to buy their homes.
That is the story more often than not in this country. There is no massive bubble about to burst because of housing sales surging out of control. Housing runs with the economy, and if the economy continues housing will more or less follow along, but it is going to continue to slow because housing leads economic cycles. Despite what you hear on television, most refinancing transactions were not cash out transactions (the oft used clich 'treating their homes as ATM's') where the owner takes all of the equity out of their homes. No, most were just getting lower rates and thus lower monthly payments, putting them in financially better position than they were with the higher rates. Those that are cashing out are literally doing so by selling, banking the profit, and waiting for the market to cool. That is what we are hearing as the way people are taking advantage of the gain in appreciation over cashing out the equity. Most people still view their house as their primary asset and are not stripping it of the equity by a cash out refinance.
Now there will be some hurt when the economy turns down. Those are the fringe of the market, those who were able to buy in only because of these no down payment, interest only, adjustable rate mortgages. They could not afford the homes in the first place but for this creative financing. When things turn sour they will get crushed. That, unfortunately, is always the case in any move in any market be it equities, housing, gold, bonds, etc. That is the major issue facing us but it is not the pervasive issue made out to be. The bulk of the housing market in the US is not the fringe but still treats homes as highly valued assets.
Lack of common sense in Congress.
You might as 'so what is new'? You are right: nothing. Congress rarely relies on facts and history in making its decisions, and thus Congress makes the same mistakes over and over again.
The mistake it is about to make once more is trade barriers and forcing other countries to destabilize their currencies. A little bit of history repeating as the song goes. A tariff is a tax on you and me. That is all it is. Tariffs are how governments fight without bullets and bombs. It wrecks trade and the uncertainty along with the tariffs raise prices. They do not bring about the change wanted, they just hurt the populations of the two warring countries.
The tariffs envisioned, the 27.5% hikes against Chinese goods, are only going to raise costs to us here in the US. Well, they could do more. When the world economies are struggling as they are now, trade barriers tend to keep economic activity lower because buying starts to dry up. The reason a lot of countries sell to the US is because their domestic demand cannot pick up the slack and buy the goods. If the US stops buying because prices jump 27.5%, then those economies start to stagger and fall. Congress might feel that teaches them a lesson, but it also hurts our economy because we have the government raising our taxes and controlling our spending choices by forcing us to buy from whom the government says we should buy. That is not the US. That is the now defunct and failed USSR's approach to economics, an approach that we are coming closer to even as the former countries comprising that train wreck are moving to free economies. History repeating itself.
Looking to more recent history than tariffs, however, is the push to force China to float the yuan. For some reason we keep calling for this as a cure to our trade imbalance. Yes if the yuan floats the balance will start to correct; it cannot do so now because regardless of what the dollar does, the yuan does it as well and thus there is no incentive to stop buying. Float it and all of the sudden Chinese goods are up by 30% or whatever it rises to. That is an overnight tax on the US and automatic inflation. We have been getting low cost, high quality good and we want to impose higher costs for the same goods on our citizens.
That is bad enough, but then there is the history lesson to learn. Back in the 1990's many other Asian countries pegged their currencies to the US to give their systems some stability and allow for investment in a saner environment. Robert Ruben and friends browbeat them as well as Venezuela to float their currencies. They did so, their currencies began to fluctuate wildly once more, hyperinflation resulted given the instability, their economies started to dive, and the world teetered on the brink of global deflation.
China's banking system is primitive; we are talking stone knives and bear skins here. By tying the yuan to the dollar China and thus getting a surplus of dollars, it is effectively importing the US banking system, Fed and all. That is a major stabilizing effect on China and allows it to continue its economic development. While some don't want that, the best thing for our future is a more democratic China, and free markets and trade are a way to get it done. That is much preferable to a situation such as North Korea where we have a mad man running around in pajamas who has nuclear weapons and rockets to carry them to the west coast. Keep your enemies closer and work to change from within. It is a gross, gross, gross misunderstanding of cultures to try and browbeat the Chinese into doing things our way. Work with them through the market to get what we want.
One ray of sanity in the Senate.
How do we work with them through the market? As we said, tariffs and trade wars are how governments fight wars without bullets and bombs. In the end no one will win this war because the US and China are too big and strong to fail. Thus the losers are the citizens who pay higher prices and risk losing their jobs because the war slows the economy on both sides. In the end the tariffs end, everyone does what they did before because they are just concerned about putting the pieces back together.
Why not let the market solve the problem as only it can? Senator Ron Wyden from Oregon (democrat) had a decent idea: have the information available to US consumers with respect to each product from China as to whether the Chinese manufacturer violated any intellectual property rights, copy rights, or other laws in manufacturing and selling the product. Then let the US consumer make the decision, based on this verified information, as to what product he or she wants to buy. In short, let the consumer speak with the wallet. That is how you get the Chinese to do what you want. The buyers wield the power in the market, and one of the problems we have right now is a lack of information to the buyers about just who is violating what law. Armed with that knowledge buyers will make informed decisions, and a lot of those decisions will be to opt out for those doing things by the book. Not all, but enough to start forcing change.
This is the kind of out of the box thinking needed in Congress. Tariffs don't work. History is littered with failed tariff policies that only brought economic strife to the instigator. Yet Congress champing at the bit to go down the same road. Senator Wyden's solution won't do it by itself, but it is a non-sanction method to help resolve the issue using market forces. When China realizes it is the consumer and not the government that is the cause of the lower sales it will change its habits rapidly to match what the consumer of the goods wants. That is the law of supply and demand as opposed to trying to regulate supply and demand. Again, the Soviet Union proved that does not work. Why we want to go down a road paved with failure is absurd. As is almost always the case, it is not different this time.
THE MARKET
MARKET SENTIMENT
VIX: 12.13; +1.08
VXN: 15.07; +1.03
VXO: 11.56; +1.21
Put/Call Ratio (CBOE): 0.77; -0.11
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: -21.37 points (-1.02%) to close at 2070.66
Volume: 2.063B (+20.43%). Volume was running a bit higher Thursday as NASDAQ broke above 2100 for the second consecutive session, moving past the Wednesday high. Then the carping about trade started, and volume really started to ramp higher as stocks sold in the afternoon. NASDAQ trade surged close to expiration volume. With the rollover from a break above 2100, that is not good action as the big money was bailing out of shares on this renewed wrinkle of a threat to the economy.
Up Volume: 636M (-157M)
Down Volume: 1.411B (+534M)
A/D and Hi/Lo: Decliners led 2.34 to 1. Very weak breadth even as NASDAQ and SOX were relative strength leaders.
Previous Session: Advancers led 1.12 to 1
New Highs: 140 (+2)
New Lows: 56 (+12)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
NASDAQ broke to 2107 on the high and on stronger trade, looking on the verge of an important move. It reversed during the Chinese barbecue session in Congress and sold off to close near the session low. Volume spiked and it undercut the 18 day EMA (2072). Not a major breakdown but a nasty intraday turn of fortunes. NASDAQ was ready to pull out into the lead when Congress ran off the sidelines and tacked it. It is still within the range and above 2051 that marks the bottom of the lateral move. With this higher volume it will likely test that level in a major test of this move to this point. Problem for NASDAQ and the market in general is that these kinds of fights between the US and China take a while to work through the system. Still in the pattern and but for today good action. It needs to rescue itself in this range but it has some rebuilding to do after this session unless there is an immediate snapback on stronger trade. Not impossible; that is what it did in April.
SOX surged to 446 on the high, clearing the handle at 440. It then reversed with the market and gave the gain back, managing a 0.4% gain. Very nice pattern, but it too is bucking the headwinds from outside the market. Semiconductors are holding their ground; if they can provide leadership, that will be very important to the rest of the market.
SP500/NYSE
Stats: -13.15 points (-1.08%) to close at 1200.73
NYSE Volume: 1.514B (+12.43%). Above average trade as the NYSE indices peeled back from the nice tests of last week's move. Higher priced dumping as industrial large caps felt the sting of $60/bbl oil. This is not a continuation of the good price/volume action, and it will need to rectify itself quickly.
Up Volume: 595M (-394M)
Down Volume: 1.41B (+643M)
A/D and Hi/Lo: Decliners led 2.04 to 1
Previous Session: Advancers led 1.4 to 1
New Highs: 277 (+31)
New Lows: 42 (+9)
The Chart: http://www.investmenthouse.com/cd/^spx.html
SP500 was not about to breakout Thursday, but was holding its ground, ready to rebound for the next move. That never got off the ground as the market turned tail after oil neared $60/bbl and the China rhetoric ratcheted much higher. SP500 sold through the 18 day EMA (1203) and down to some support at 2100. With the move occurring in one session and volume ramping sharply higher it is unlikely it is over right here. SP500 may be en route to a test of the April high (1192). The 50 day EMA (1191) is right there, and that will be a very important test point for this index.
The small cap SP600 were second only to DJ30 on the downside with a 1.3% loss. It managed to hold the near support at the 18 day EMA (329.64) on the close and is thus still easily within its pattern. The nice, easy pullback, however, is not so nice and easy. SP500 has its work cut out to hold the 18 day EMA or the recent lateral range at 327 that it broke from last week.
DJ30
The blue chips were hammered lower as IBM, GE, DD, MMM and other industrials tied to oil (IBM and oil?) were pounded as oil brushed $60. Is this the first market hint that oil is going to hurt? Retailers are not showing it, the logical choice, but the smokestacks are. They face the higher costs and it is questionable if they can pass them along given the economy that frankly is not as great as the Fed thinks. DJ30 blew down through the 200 day SMA (10,444), and it needs to recover that level quickly or face some ugliness ahead (as if Thursday was not pretty homely on its own).
Stats: -166.49 points (-1.57%) to close at 10421.44
Volume: 288 million shares Thursday versus 199 million shares Wednesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
FRIDAY
Durable goods orders and new homes sales are out Friday, but the new climate of protectionism and $60/bbl oil will be the pervasive impacts on the market. We will see what this move is made out of. If it can rebound immediately as it has done in the past, the best case scenario, it can continue down to the bottom of the range and find support and continue to consolidate, or it can fold up the tent and collapse. If the first occurs the answer will be obvious. The second will take some time to sort out, but we will need to see lower volume as the selling continues. The third will take some time to pan out as well, but if volume keeps ramping up on further selling we will know that the big money is very uncomfortable with the future economic climate with a big trade war in the works.
It may all blow over. A lot of stocks were simply fading back to near support at the 18 day EMA after a nice rally. Volumes were mixed as they sold, but there were not a lot of huge volume spikes on these drops. If the leaders hold the line then the rally has a solid chance of continuing. Leaders lead, etc. You know the clich s. Basically, if you can pinpoint an event or story that causes the problem, i.e. an outside influence, there is a better chance of recovery. The market has been strong and the oil and trade war combination hit stocks hard. Again, if there is going to be a rebound it will either show up Friday or likely after a test of the near support levels that were not broken Thursday.
While we wait it out we will play some defense, lightening up some more if stocks threaten near support on rising trade. Given the momentum lower all afternoon Thursday you typically anticipate further downside Friday. With the story specific reason for selling, however, we may see stocks perk up early after some time to mull the issues between now and then. Of course you don't like the action Thursday, but we will see if the solid action up to this point can hold sway. At the same time we are not going to take a lot of chances with existing positions. We can always get back in if we get out , they sell a bit lower and then bounce.
Support and Resistance
NASDAQ: Closed at 2070.66
Resistance:
2075 to 2078
2100 is a key resistance point.
2151, the early December closing high.
2163, the mid-December closing high.
Support:
The 18 day EMA at 2072 is cracking.
2051 from February, March price points.
The 50 day EMA at 2041
Early April high at 2021, February lows at 2023.
The April high at 2022 was the higher high point.
The 200 day SMA at 2027
S&P 500: Closed at 1200.73
Resistance:
The 18 day EMA at 1203
The 10 day EMA at 1208
The February intraday high at 1212.
December high at 1217
The March 2003 up trendline at 1222
The March 2005 high at 1229.11
Support:
Price levels at 1200
1196, the mid-January high and the early December peak in the left shoulder.
The April high at 1194
The 50 day EMA at 1191
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 1173
Dow: Closed at 10,421.44
Resistance:
The 200 day SMA at 10,445
The 10 day EMA at 10,542
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 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): 314K actual versus 330K expected and 334K prior (revised from 333K)
Existing Home Sales, May (10:00): 7.13M actual versus 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 2
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world stock market
us stock market
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