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world stock market, us stock market
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6/30/05 Stock Split Report
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Stock Split Report Subscribers:
MARKET ALERTS
Targets hit alerts: None issued
Buy alerts: DO
Trailing stops: AEOS
Stop alerts issued: None issued
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SUMMARY:
- Stocks find no solace with Federal Reserve.
- Fed hikes as expected but is more hawkish on inflation, giving no indication of any end in sight.
- Fed looks to be tilting against housing market a la stock market back in 1990's.
- China to float yuan in near future so tariff bill is shelved for now.
- Earnings announcements and pre-announcements are not providing much comfort.
Market bumps higher into Fed announcement, sells off on the fact.
The rate hike was baked into the cake, but the Fed indicated that inflation pressures 'have stayed elevated' despite longer-term inflation remaining in check. It still said it would remove the policy accommodation at a measured pace, but it was the talk about near term elevated inflation levels that investors focused on. Much of the recent data indicates inflation pressures have hit a plateau and have even backed off. That was part of the fuel feeding the 'one and done' argument. The Fed effectively laid that to rest for now as it signaled, if anything, there was no end to rate hikes as far as it was concerned.
Stocks were soft but rallied into the announcement as they typically do. They waffled after the announcement, showing the usual volatility. Once the initial reaction was through, however, they sold off and continued to do so into the close. Volume expanded in the afternoon selling as SP500 undercut the 50 day EMA and NASDAQ fell through the 18 day EMA on its way to the 50 day as well. Breadth had held positive on NYSE thanks to the small caps, but when the selling finished even the small caps were under water.
That higher volume was another distribution session to add onto the selling last week, rebalance or no on Friday. NASDAQ looks ready to head down to the 50 day EMA and all indices look ready to test the bottom of the recent range. That is not great action having just been down at that level recently and with a so-so relief bounce Tuesday.
The indices have not broken down and many leaders are still easily holding near support. The selling in response to the Fed was the knee jerk reaction and it will take a session or two for it to work through the market. Thus if leaders hold support after this initial reaction there is some potential for more upside. With the higher volume selling, however, we are not going to give stocks too long of a rope. The market has been betting on the Fed being just about done; it may be just that, but it was not tipping its hand Thursday and stocks were selling on rising volume. If the Fed is continuing its hikes that will not be good for the market. It is never good to fight the Fed, and with questionable economics and the Fed still apparently on the rate hike path we don't want to let positions erode.
THE ECONOMY
The Fed is set to hike into an economic slowdown.
The Fed hiked for the ninth consecutive session, raising the Fed Funds rate to 3.25%. The statement gave no indication that the Fed was finished and even ratcheted up the inflation rhetoric a bit more. The market took that for its face value, avoided the Christmas rush and sold off. The Fed Funds Futures contract is pricing in a 100% certainty for another 25BP hike and is well over 50% for one after that. That would push the rate up to 3.75%. Bonds did not fall on the news but rallied, driving the yield even lower. That has basically flattened the yield curve; if it continues to act as it has (falling as the Fed hikes rates) then it will invert at the next Fed meeting and hike if not sooner. It is also important to note that the Fed Funds Futures contract now indicates two more rate hikes, but it indicated two more rate hikes before today's raise. The point is, the further out you go with the FFF contract the less certain it is.
There are signs the Fed should seriously consider pausing its hikes. First, as noted above inflation pressures have not increase but have leveled off and are even decreasing of late. When the Fed said they were elevated many economists were scratching their heads. The manufacturing sector has been slowing its expansion and it is getting close to contraction. Freight levels in Europe and Asia have dropped sharply this year. Commodities prices have peaked and have been sliding back down. Business investment is tailing off, dovetailing with the declines in the manufacturing sector (the Chicago PMI came in at 53.6 versus the 54.0 expected). The yield curve, perhaps the most reliable economic indicator despite Greenspan's 'conundrum' and others attempting to explain it away, is flattening and threatening to invert.
Why keep hiking?
There are a lot of reasons not to continue with rate hikes right now, but the Fed preferred to cite what it called a 'firm' expansion and an improving labor market as reasons to hike rates. The expansion is not so firm and the labor market is improving just modestly. Those hardly outweigh the litany of issues cited above, at least as a reason to continue hiking interest rates.
What is the real reason? It just might be the Fed taking on what it sees as another bubble in the economy, this time in the housing sector. Greenspan has reversed course on this over the past four months, first laughing off a bubble in front of Congress and now suggesting there are a lot of 'mini-bubbles.' The Fed has started talking about housing in its minutes. Fed governors are talking about bubbles.
This sounds very familiar to the late 1990's when the Fed started talking frequently about asset bubbles, i.e. the stock market. The Fed denies it to this day, but it is clear that it was not raising rates to stave off inflation (which it admits was non-existent but just around the corner) but to slow down the stock market. This is just what the central bank in the late 1920's did in strikingly similar conditions, and the result was the same: a market crash followed by a world economic recession. Not on the same scale, but the cause and effect were the same.
There were some inflationary pressures this year, but as noted they have been slowing and even starting to fall. Without a doubt the real rate of inflation, the PCE index (at 1.6%), and other indicators show very tame inflation. How can the Fed call this 'elevated' when it is below long-term norms?
No, the Fed is once again talking one game while playing another. The Fed is trying to slow down the housing market to avoid a collapse. Of course it is highly speculative that there would be a collapse if left alone. We have noted many times the past few months that the housing market is cooling off on its own. For every 'mini-bubble' area you can point to ten that are not and indeed have been cooling off of late.
What the Fed seems to be fearing is a further reduction in long term rates that will set off another refinancing boom and overheat the market. It is thus raising rates in order to increase mortgage rates, but in the paradox of the market, longer term rates are falling even as the Fed raises rates because as the Fed hikes the bonds see the chance of an economic slowdown increasing. In other words, the bond market does not see the economy as strong as the Fed does, and believes the Fed's attack on money supply is only going to weaken it further. That makes money out in the future less valuable because there will be less demand for it. Talk about a conundrum; that is the real problem with the bond and the Fed.
The Fed does have something of a point with the housing market. After all, 70% of the recent mortgage initiations have been for no interest ARMS (adjustable rate mortgages). Does this represent a wave of new buyers who are trying to buy more house than they can afford? No. These are the speculators who are buying to flip. They don't want to put any money down or pay any principal because they are going to turn it over rapidly. Thus a lot of the market right now is involved in speculation, but just how big is this market? In relative terms it is not as big as it was the past few years when the average Joe was refinancing or buying a new house to live in. As we said before, when the worm turns in the market it will be the fringe that gets hurt just as in every market.
We don't view that as a bubble, just the normal course of a market that runs its course. The Fed, however, continually goes beyond its mandate of long-term price stability and meddles in the workings of every market whether it is the stock market or the stock market. Hell, it would get involved in soybeans if it felt there was a bubble there. The Fed has no business trying to micromanage the housing market and thus impacting the entire economy as a result.
The Fed may say it is worried about inflation, but that is what it said in 1999 when there was none to be seen. We all know better about that episode, and we know better about this move as well. The Fed has amazing credibility for having no credibility. Once more mainstream economists are being blinded by their faith in Greenspan even as he takes off on another tangent outside of the Fed's mandate. The signs are there that the Fed should get off of the economy even if it wants to slow housing. Heck, housing is in its ninth inning right now and is ready to fade away. If the Fed keeps jacking up rates and draining money supply into a slowdown it is going to cause a sudden drop just as it did back in 2000.
China set to float the yuan.
Late in the session the authors of the 27.5% Chinese tariff shelved the bill after assurances from Greenspan and Snow that China said it was going to float the yuan 10% to 15% over the next few months. Seems as if there was the right combination of events to get China to move and forestall a tariff and trade war. Sounds hopeful at least in the sense we could avoid a trade issue that would work to hurt US consumers as well.
THE MARKET
MARKET SENTIMENT
VIX: 12.04; +0.27
VXN: 14.46; 0
VXO: 11.35; +0.52
Put/Call Ratio (CBOE): 0.77; -0.01
Bulls versus Bears:
Bullishness is rising and bearishness if falling. Both ends of the spectrum have pushed to what are considered bearish levels. With the summer slog ahead and earnings, this is another weight upon the market and is taking on more importance as the market struggles with key resistance.
Bulls rose to 55.1% from 53.9% last week, the seventh consecutive weekly gain, up from 47.95% just a few weeks back. Bulls bottomed in early May at 43.5%.
Bears fell to 19.1%, below the 20% level considered the bright line for bearish implications. This follows a steady erosion of bearish views (20.2% from 20.3% from 20.9% from 25% from 26.1%).
NASDAQ
Stats: -11.93 points (-0.58%) to close at 2056.96
Volume: 1.732B (+2.71%). NASDAQ volume rose above average as the index turned lower and closed at session lows. Another distribution session, three in the past 6 sessions if you count last Friday and the Russell rebalance. At this point we don't want to split hairs; there is higher volume selling after NASDAQ tested 2100 resistance and fell back. It is coming up to a key test of support at the 50 and 200 day SMA.
Up Volume: 470M (-420M)
Down Volume: 1.184B (+419M)
A/D and Hi/Lo: Decliners led 1.27 to 1
Previous Session: Advancers led 1.08 to 1
New Highs: 119 (+2)
New Lows: 34 (+1)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
Very modest internals (breadth, new lows) but NASDAQ made a lower high Thursday and sold into the close on rising, above average volume. It has yet to get on track after the jitters ignited by the trade war issues, and the Fed's concern about elevated inflation was piling on. Weaker oil prices and shelving the trade bill did not even help. In any event NASDAQ logged a third distribution session in six and is heading toward the 50 day EMA (2045) once more with the 200 day SMA (2032) just below. It is still in its larger 6 month cup with handle pattern, but this distribution in the handle stage, i.e. higher volume selling, is not an indication of accumulation heading into a breakout. It is still in decent shape and can still settle back, regroup, and then move toward a breakout. It has simply made things more difficult as big money gets rid of some tech stocks given the uncertainty about whether the Fed is close to done or not.
SOX slipped through the 50 day EMA (421.32) Thursday as it posted a modest 0.5% loss. For once it was not leading to the downside, but it did crack the 50 day and looks ready to try the 200 day SMA (414.33) before it can make any attempt at the upside.
SP500/NYSE
Stats: -8.52 points (-0.71%) to close at 1191.33
NYSE Volume: 1.437B (+9.45%). Volume moved up to average as SP500 turned back down and fell through the 50 day EMA. More distribution, the third in six sessions just as on NASDAQ.
Up Volume: 647M (-226M)
Down Volume: 1.406B (+603M)
A/D and Hi/Lo: Decliners led 1.13 to 1. Advancers led much of the session as the small and mid-caps held positive, at least until the late dive.
Previous Session: Advancers led 1.35 to 1
New Highs: 211 (+9)
New Lows: 32 (-3)
The Chart: http://www.investmenthouse.com/cd/^spx.html
The large caps failed at 1200 where there is some resistance, making a lower high and falling to a key test of the 50 day EMA (1192) once more. Higher volume selling shows more dumping of the big stocks though with average volume it is hardly wholesale dumping. Distribution does not always have to be on high volume, however; if selling volume is higher than buying volume it erodes the market. This second quick test of the 50 day EMA is not good action, particularly as volume has started to rise and as there was a lower high below the June high. A double top is a serious problem and this lower high and rollover on stronger volume is indeed a poor sign for the upside.
Not surprisingly the small cap SP600 held up the best with a 0.2% loss. It was positive most of the session before sliding late in the selling into the close. Showing a tombstone doji over the 10 day EMA (331.68) and below the recent June high that matched the March top. We were concerned about a double top and this lower high just below that level is a warning.
DJ30
After a rebound to test the 200 day SMA (10,445), DJ30 has collapsed from that test on rising, above average volume. Industrials, cyclicals and pretty much everything in the index was under pressure. DJ30 has been as weak as light beer, making a lower high, selling off through key support, making a weak test of the breach, and then selling off on stronger volume. Back at 10,250 where there is some support, but not expecting it to hold this time.
Stats: -99.51 points (-0.96%) to close at 10274.97
Volume: 301 million shares Thursday versus 222 million shares Wednesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
FRIDAY
The Fed was the big news Thursday though personal incomes were weaker than expected (0.2% versus 0.3%) as was spending (0.0% versus 0.1%). As noted above, the PCE was 0.2%, just up 1.6% year over year. Initial jobless claims were also lower than expected, dropping sharply to 310K versus the 325K. Friday the news keeps its pace somewhat with the national ISM, the national manufacturing report, due out at 10:00ET. It has slipped dangerously toward 50 (51.4), and the last thing the economy needs is for manufacturing to slip back into decline.
Earnings are also on the table with PIXR warning of a big miss this quarter ($0.10 versus $0.15) and RIMM and MON failing to impress investors with their results. Lackluster early earnings reports, warnings from big names already popping up, new worries (recycled?) about the Fed and how far it will go, and some distribution are not a very savory combination to head into the Independence Day weekend. Some big money has been unloading some shares on the recent news and there is likely not a whole lot to get the buy side ginned up before a three day weekend.
Thus we are expecting some more softness and will be watching how leading stocks hold near support. Volume likely will not be a factor given the long holiday weekend that will see most traders and fund managers out the door long before the bell. It will likely be a session where the big indices hold up in their recent ranges without a lot of action to tell us whether the market is going to hold up or and try another recovery or continues with the selling. Given the distribution of late we are not going to give positions too much rope. We prefer to close them and then re-enter if they recover versus riding them lower. Time to be patient and let the market work through its current angst and set up the next move.
Support and Resistance
NASDAQ: Closed at 2056.96
Resistance:
The 10 day EMA at 2067
2075 to 2078
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.
The 50 day EMA at 2044
Early April high at 2021, February lows at 2023.
The April high at 2022 was the higher high point.
The 200 day SMA at 2031
S&P 500: Closed at 1191.33
Resistance:
The April high at 1194
1196, the mid-January high and the early December peak in the left shoulder.
The 10 day EMA at 1200 and price resistance at that same level.
The February intraday high at 1212.
December high at 1217
The June high at 1220
The March 2003 up trendline at 1226.50
The March 2005 high at 1229.11
Support:
The 50 day EMA at 1192 is trying to hold.
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 1175
Dow: Closed at 10,274.97
Resistance:
10,400, the bottom of the November/December range
The May high at 10,406
The 200 day SMA at 10,445
The 18 day EMA at 10,440
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 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 28
Consumer Confidence, June (10:00): 105.8 actual versus 104.0 expected and 103.1 prior (revised from 102.2)
June 29
GDP-Final, Q1 (08:30): 3.8% actual versus 3.7% expected and 3.5% prior
Chain Deflator-Final, Q1 (08:30): 2.9% actual versus 3.2% expected and 3.2% prior
June 30
Initial Jobless Claims, 06/25 (08:30): 310K actual versus 325K expected and 316K prior (revised from 314K)
Personal Income, May (08:30): 0.2% actual versus 0.3% expected and 0.6% prior (revised from 0.7%)
Personal Spending, May (08:30): 0.0% actual versus 0.1% expected and 0.6% prior
Chicago PMI, June (10:00): 53.6 actual versus 54.0 expected and 54.1 prior
Help-Wanted Index, May (10:00): 37 actual versus 40 expected and 39 prior
FOMC announcement (2:15): 25BP rate hike, sees inflation elevated, but still removing accommodation at a measured pace.
Jul 01
Auto Sales, June: 5.5M expected and 5.3M prior
Truck Sales, June: 8.0M expected and 7.8M prior
Michigan Sentiment-Rev., June (09:45): 94.6 expected and 94.8 prior
Construction Spending, May (10:00): 0.5% expected and 0.5% prior
ISM Index, June (10:00): 51.5 expected and 51.4 prior
End part 1 of 3
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