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us stock market, understanding the stock market
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07/05/05 Investment House Daily
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SUMMARY:
- Stocks shake off early jitters, rally into close
- Factory orders strong as transportation again provides the backbone.
- Dollar makes a breakout.
- WMT sales jump past expectations. Oil taking its bite out of consumer?
- Earnings warnings light thus far, encouraging investors even with oil pushing higher along with the Fed.
- Large caps have to step up and join the small and mid-caps.
Stocks snatch some momentum after late week selling.
Stocks were down pre-market as MERQ warned, reminding investors earnings season is straight ahead. It seems, however, that investors were expecting more to come on this Tuesday after the holiday (historically some bad things happen just after a holiday break), and when MERQ was not joined by any more warnings stocks staged a mini relief rally.
NASDAQ and SP500 held above their 50 day EMA, the large caps giving it a tap on the low, and bounced solidly. It was not just a morning bounce and trounce either. Stocks held their gains into lunch and into the close. The lion's share of the move was early, but stocks added to those gains all session. While NASDAQ and SP500 moved above their recent highs in late June (the weak prior bounce off the 50 day EMA), SP600 and SP400 (the small and mid-caps) posted all-time highs. Once more we see the smaller stocks leading the way higher while the large caps hang back, unable to show any real strength. Perhaps Tuesday was the start of something better for them.
If it is, volume would do good to improve. Trade jumped nicely, but after Friday's light pre-holiday volume that was no great shakes. NYSE volume rallied toward average as the small and mid-caps rallied, but it still fell shy of that mark. NASDAQ volume topped NYSE as usual, but it was farther below average. Stocks are definitely in a slow volume summer mode, but that is something they have shown since February with a couple decent months (barely) sprinkled in along the way. It is a low volume grind higher with some individual stocks and sectors getting most of the action. As we have seen stocks can move right on up with low volume, but all of that work can get pushed right back when a bigger issue hits the market as the China tariff issue did a couple of Thursdays back. The leaders tend to hold up better as they were getting the most buying, but when a low volume upside move is confronted with some real issues, there are few sacred cows.
It is going to be up to the large caps to move on up in support of the small and mid-caps that are setting the pace. NASDAQ was the early leader in the rally when it took over from SP500 that looked good but then had a major identity crisis. Techs led off that April low but have waffled after hitting that key resistance at 2100, moving laterally the past five weeks. Time to step up again and follow the small and mid-caps higher. The latter are being led in strong part by the energy related stocks that populate those indices. Thus their strength as the rest of the market tries to decide if it can swallow $60/bbl oil, a Fed still hiking rates, and earnings just out on the horizon.
THE ECONOMY
Factory orders ride to a nice gain on transportation orders.
May orders rose 2.9%, within spitting distance of the 3% expected. April was even weaker than first reported, however, with its 0.7% gain, written down from 0.9%. Durables led the move (+5.5%) with airplanes and airplane parts jumping 21.2%. Transportation has led the increases in all business spending the past two months. Non-durables were quiet, rising 0.1%.
Good to see factory orders strengthening even if it was based primarily upon rising transportation orders. It is easy to say if it wasn't for transportation the report would have been weak. No doubt. But, it was not weak, and we know that different economic sectors tend to invest at different times. Thus while transportation is hot right now in a month or two another sector could move to the forefront. If it doesn't, then we can start to carp about weak orders that are surviving only because of transportation orders. Well, we can still carp a little bit now. Business investment is just not blowing the doors off the economy; it is indeed declining while the consumer remains strong.
That is not good for a couple of reasons. First, it was the business side that was in the recession in 2000 and 2001, not the consumer. When business goes down a major part of the economic consumption goes with it. Also, if consumer demand continues to ramp up but businesses are not investing in their business, there is a better chance of inflation pressures as supply struggles to meet demand. When supply is ahead of demand inflation pressures are low. For these reasons we are carping a little about the figure less transportation. Want to see more investment by businesses.
Dollar looking strong.
The greenback continues to strengthen as the Fed continues to raise interest rates. That is what you would expect, but the dollar is showing even more than usual strength as the dollar index makes a breakout above resistance from last summer even as gold continues to drop. Indeed, gold is down significantly this year even with the rebound from May to July. For example the XAU (Philly gold and silver index); just failed at the 200 day SMA, making a lower high in a 7 month downtrend after the November top that looks like a big double top.
Significance? A rising dollar makes foreign goods cheaper for US citizens and that means we don't import inflation. Moreover, gold's decline is an indication that inflation, despite the Fed's warning last week, is not a real problem. Gold is an inflation hedge. When it is trending lower as it has been, that shows big money is not moving into it but is moving out. In short, money is not seeking gold as a hedge against inflation.
Wal-Mart sales start to spike. Signal of economic strength? Maybe not.
The financial stations were talking about how maybe, just maybe WMT had its merchandising right and that the consumer was now finding WMT products more palatable after moving to TGT for supposedly more upscale items. Maybe, but probably not.
As we learned in the recession and then the recovery, discounters such as WMT do better when economic times are tougher, and it does worse when the economy recovers, consumers have more disposable income, and consumers basically feel better and want higher quality goods. What is likely happening is that gasoline prices have been high enough for long enough to start influencing consumers' buying choices. Cash is a little bit tighter and they are heading to WMT to stretch the dollar a bit farther. Confidence is still high so spending overall is not down, but it is being somewhat redirected to discount stores for staples and the like. The longer this goes on the more we will see this. It won't lead to a switch back to totally WMT as in the recession unless it results in a recession. At this point that does not look likely, but that is a bold statement given the Fed is still hiking (and we all know about its .800 batting average) and oil is not backing off from 60.
THE MARKET
MARKET SENTIMENT
VIX: 11.68; -0.09
VXN: 14.5; +0.04
VXO: 10.93; +0.1
Put/Call Ratio (CBOE): 0.69; -0.09
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.
Last week: 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: +21.38 points (+1.04%) to close at 2078.75
Volume: 1.45B (+16.44%). Solid bump in volume but from such low levels that does not mean much. Still below average and just a modicum of accumulation. It does not work to wash away the three higher volume selling sessions over the past ten trading days.
Up Volume: 998M (+470M)
Down Volume: 417M (-279M)
A/D and Hi/Lo: Advancers led 2.03 to 1. Very nice breadth improved late.
Previous Session: Advancers led 1.24 to 1
New Highs: 159 (+78)
New Lows: 42 (+6)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
Very nice price move off last week's tap toward the 50 day EMA (2046), moving back up through the 10 and 18 day EMA (2068) as well as the late June hump formed as NASDAQ moved off of the 50 day EMA a week back but then tumbled right back over. It needed this move to inject some life back in it as it tries to overcome the distribution, form up a new bottom in its 5 week handle, and take on resistance at 2100. The move did not shake off the distribution and change the character; it did make a needed move and continued the attempt to rebuild for that next attempt at resistance after getting dumped back from that level when the China tariff news hit the market.
SOX rallied 1.6%, in step with the small cap index. After moving down toward the 200 day SMA (414.71) last week and looking pretty squeamish, SOX jumped back through the 50 day EMA (421) as well as the 18 day EMA (425.64) in one move. It needed the bounce; as with NASDAQ it did not change the character, just stemmed the bleeding and gives it a chance to continue working on its recovery and a breakout try over 440.
SP500/NYSE
Stats: +10.55 points (+0.88%) to close at 1204.99
NYSE Volume: 1.359B (+10.76%). Volume was up sharply but still below average as the large caps and small caps rebounded from some distress last week. The volume may have remained below average, but it was just barely higher on the Thursday selling. In short the selling intensity was not that much stronger than the buying on Tuesday.
Up Volume: 1.205B (+210M)
Down Volume: 540M (-59M)
A/D and Hi/Lo: Advancers led 1.89 to 1. The small and mid-caps helped keep breadth at decent levels as the energy stocks that populate those indices enjoyed strong gains as a storm moved into the Gulf of Mexico.
Previous Session: Advancers led 1.74 to 1
New Highs: 353 (+159). Very nice showing on the new highs after quite a drought.
New Lows: 35 (+2)
The Chart: http://www.investmenthouse.com/cd/^spx.html
A second quick test of the 50 day EMA (1192.73) was risky (hanging around in that bad neighborhood), but SP500 managed a quick vault off that level on rising volume, just what it needed to do. It cleared the recent lower high (1204) as well as the 10 and 18 day EMA. Good start at a rebound off this dump lower to key support. It needs to continue showing stronger volume as it moves up. If it can keep the momentum into earnings, we doubt it will take out the recent highs at 1220 without a pause.
New all-time high for SP600 with a solid surge closing at the session high (340.08, +1.5%). The small caps have led the move higher along with NASDAQ, and are now leading with the mid-cap SP400. They have broken up the double top that had formed, doing so on some better though not great volume. Doing the heaving lifting, and it could use some help along the way.
DJ30
Stronger though still below average volume as DJ30 rebounded as well. It tapped the 10 day EMA (10,385) on the high, and it is still below key levels at 10437 (50 day EMA) and 10446 (200 day SMA). Lots of work for the blue chips as they try to dig out of the hole they fell into two weeks back. Right now it has yet to show it has a big enough shovel to do it.
Stats: +68.36 points (+0.66%) to close at 10371.8
Volume: 235 million shares Tuesday versus 231 million shares Friday.
The chart: http://www.investmenthouse.com/cd/^dji.html
WEDNESDAY
ISM Services index is out at 10:00ET, but more and more earnings are going to take the center stage. Tuesday they threatened to cause trouble, but when it turned out there were hardly any, investors took heart. Indeed, earnings warnings are running on par with the last two quarters that saw solid earnings growth. Thus far only 25% of the S&P companies have warned and that is in line with the recent quarters where good results dominated. 7% earnings growth is expected, and while that is down from the 13% in Q1, it is still strong. Unfortunately some anticipate another upside surprise, and if that does not pan out we could easily see a late July stumble that gives us the usual summertime drop.
There are still a lot of issues confronting stocks, and earnings are going to grab the most headlines to come given that the Fed has done its hike and oil is holding near $60/bbl, i.e. not making any big moves. That does not take them off the stove, just pushes them to the back burners. Yes, stocks still have a lot of issues simmering as they try to shake off the recent selling and set up for another run at resistance.
With key resistance ahead, the failure at that resistance on a prior attempt, the Fed, high oil, and earnings growth slowing, you would think there is not too much chance of a breakout. Even with those issues, however, stocks continued to move up, and it is not just the energy stocks. They are clearly out in the front row, but they are not alone. As long as they continue to build their bases or make successful tests and rebound on volume we are going to keep pitching with them. A hallmark of this market is that it has not given in and indeed it its still building toward a breakout attempt. We are being cautious given the distribution sessions over the past two weeks, and as NASDAQ approaches resistance again we have to be really mindful of distribution recurring. If that happens it will likely kill the move, and that is why it is critical.
As noted above, the key will be how the large caps respond to the strong move in the small and mid-caps. The smaller issues have set the bar and it is up to the large caps that so many television analysts tout to pick up some of the slack. So, the large caps need to step up with some volume moves and they need to break key resistance after they do. That is a lot of work for the hot summer, but as of yet they are not giving in.
Support and Resistance
NASDAQ: Closed at 2078.75
Resistance:
2075 to 2078 may be giving way.
2100 is a key resistance point.
2151, the early December closing high.
2163, the mid-December closing high.
Support:
The 10 day EMA at 2068
2051 from February, March price points.
The 50 day EMA at 2046
Early April high at 2021, February lows at 2023.
The April high at 2022 was the higher high point.
The 200 day SMA at 2033
S&P 500: Closed at 1204.99
Resistance:
The February intraday high at 1212.
December high at 1217
The June high at 1220
The March 2003 up trendline at 1228
The March 2005 high at 1229.11
Support:
The 10 day EMA at 1200 and price resistance at that same level.
1196, the mid-January high and the early December peak in the left shoulder.
The April high at 1194
The 50 day EMA at 1193
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 1176
Dow: Closed at 10,371.80
Resistance:
10,400, the bottom of the November/December range
The May high at 10,406
The 18 day EMA at 10,420
The 200 day SMA at 10,446
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.
July 05
Factory Orders, May (10:00): 2.9% actual versus 3.0% expected and 0.7% prior (revised from 0.9%)
July 06
ISM Services, June (10:00): 58.9 expected and 58.5 prior
July 07
Initial Jobless Claims, 07/02 (08:30): 320K expected and 310K prior
July 08
Non-farm Payrolls, June (08:30): 194K expected and 78K prior
Unemployment Rate, June (08:30): 5.1% expected and 5.1% prior
Hourly Earnings, June (08:30): 0.2% expected and 0.2% prior
Average Workweek, June (08:30): 33.8 expected and 33.8 prior
Wholesale Inventories, May (10:00): 0.5% expected and 0.8% prior
Consumer Credit, May (15:00): $4.0B expected and $1.3B prior
End part 1 of 3
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us stock market
understanding the stock market
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