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us stock market, understanding the stock market
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07/06/05 Investment House Daily
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SUMMARY:
- After new money Tuesday, sellers use the bounce to sell on stronger volume.
- Services sector surges higher.
- Big company layoffs spike in June: big corporations shed employees as they are no longer growth companies.
- Rally may find new legs and continue higher with earnings, but distribution action after testing resistance makes us skeptical.
Stocks try to rally from soft open but upside move sparks volume selling.
After the Tuesday first of the quarter rally on some modestly higher volume Wednesday started nice and soft, giving market makers a chance to accumulate some shares to sell. Buyers used that early dip to start accumulating shares again and the market popped right back up from that weaker open. The ISM Services index came out well ahead of expectations and that added some fuel to the upside move.
It did not last long, however, as sellers used the rebound to sell into. NASDAQ managed to hold the early session low and then rallied once more. It could not hold the gain, selling back to below the flat line. Once more, however, it rallied as lunch wound down, posting a sharp rebound to the morning highs over an hour's span. Solid move, and with volume running a bit higher it looked decent. For the second time in the session, however, the sellers came out and used a rally to sell into. NASDAQ, SP500 and SP600 folded up and dropped sharply to session lows. That has been the story of late: scratch out a gain and then watch it get blown apart by a quick round of selling. That took the juice out of the buyers and the market ended weakly with a close at session lows.
That left NASDAQ holding the 18 day EMA and SP500 back at the 50 day EMA (spending way too much time in this bad neighborhood), both selling on rising volume. Indeed, NYSE volume rose to above average as it sold toward the 50 day, its downside volume coming in higher than the volume gain Tuesday as NYSE stocks rallied. They are still in position to hold their recent ranges and continue the consolidation to set up the next test of resistance, but the rough going upside (they keep getting thrown back) and the distribution once more showing up is eroding the consolidation process.
Many leaders hardly noticed the drop, but there was some definite softness overall. Energy spiked higher early as Cindy made it to shore and the next storm out in the Caribbean Sea looks to turn into a hurricane and run through the gut of the Gulf. Oil hit a new high in current dollar terms ($61.28/bbl, +1.69) on worries of a Gulf production shutdown, but energy stocks could not hold the early surge. After a strong few sessions they mostly took a breather. As with the other leading stocks, no breakdown, just a breather for now.
That is one of the keys to this rally surviving this consolidation: leaders holding up. Ever since NASDAQ tapped at 2100 and faltered once more the large caps have struggled. The small and mid-caps breezed higher, but the big names have struggled and stumbled around. More than that, there has been a return of distribution, that higher volume selling that shows more institutions are selling stocks than buying them. The failure at resistance, distribution, upside met with selling; those are not great attributes of a consolidation that leads to a breakout. If the leaders start to cave we are not going to wait around too long. Maybe it will be a head fake and resume the rally, but there are enough warning signals to suggest trouble if the leaders start to show some of the same distribution action.
THE ECONOMY
ISM Services leaps ahead.
With the 62.2 reading (58.0 expected), the services sector is attempting to lead the economy out of the soft spot from Q1 (though with 3.8% GDP growth it was not that soft). There was plenty to cheer the market with employment at 57.4, up sharply from the 53.4 in May. New orders held just about steady at 59.5 (59.7 in May) while prices paid rose to 59.8 from 57.9.
While manufacturing has struggled services appears to be hitting stride once more. Even manufacturing showed more life than we expected in June as it reversed its move toward 50. With restaurants, hotels, airlines, health clubs, etc. doing well, that indicates a consumer still very willing to spend money even with oil prices at $60. We still feel this rise in price and the weekly drain on consumer's wallets will have its impact ahead. Indeed, as discussed Tuesday, we feel the resurgence in WMT sales is directly related to this: when consumers start feeling a pinch they go to the discounters more. Right now they are continuing their spending but using WMT's cheaper prices as a safety valve to keep spending high.
Layoffs spike in June.
Big companies reported a 35% jump over May in layoffs, announcing 110.9K for the month. That was the highest level since January 2004 and up 75% year/year. Challenger reports more and more what it calls 'mass layoffs', i.e. where companies announce large numbers of cuts at once. We have seen it all year from IBM, Alcoa and other big names.
Thus even with some pretty solid economic growth job cuts continue. The first reaction you hear from most (particularly the politicians) is outsourcing to overseas labor markets. Well, Challenger says that is simply not the case. Only 6% of the cuts in June were due to outsourcing, and many of those went to IBM where companies cut their computer or IT departments and outsourced the work to IBM and its business services section.
The real culprit it the continued change in the economy and in those businesses that were the growth companies of the 1980's and 1990's now becoming mature, dividend-paying cash machines. That means they have a product or line of products they sell the hell out of (the cash cow) to generate cash, but there is no real growth and no real innovation. Microsoft sells the hell out of Windows, and while it is developing the next generation of that operating system that new system is not going to dramatically transform MSFT into a growth company once more.
When these companies no longer grow as before they have to shed those sections that are no longer geared toward supporting the cash cows or that can be more efficiently outsourced to other companies. The game becomes maximizing profits on your sales as opposed to plowing money back into a lot of new R&D. That is what happens in mature industries. The innovation is just not there anymore and the focus is maximizing shareholder return through cost cutting. Employees are a major, major cost to a business. It is said that $1500 of each GM auto pays for employee healthcare benefits. If GM could it would get rid of this massive overhead, but it has those union agreements where its hands are tied when it comes to making basic and critical management decisions regarding the future of the company and its ability to compete globally.
Thus while it is hard form some to reconcile the economic strength with the increase in layoffs, it is really just a function of former growth companies still streamlining into mature cash generators. They will continue to do that into the future. The new job growth will have to come from the new businesses that started during the last bust cycle. As of yet they are not generating the big jobs surge; it is still too early. Recall back in the 1990's jobs exploded because all of that groundwork laid in the 1980's with technology investment hit its sweet spot as those struggling tech companies in the early 1980's became the big growth areas in the late 1980's and into the 1990's.
We gave away a lot of our technological lead when Greenspan and friends purposefully slowed our economy shortly thereafter, and now we are struggling to generate the new businesses and corresponding jobs because we started from a standstill after the recession. We gripe about outsourcing, but it got its roots firmly established when US businesses were slammed with massive inventory hangovers when the Fed dried up the money supply in just a few short months, the market vapor locked, investment capital dried up, and innovation dried up shortly thereafter. It took us a long time to recover what with 9-11, corporate malfeasance, etc., and we are paying the price now as those foreign countries filled the void we left. We will be paying for this colossal blunder for decades to come.
THE MARKET
MARKET SENTIMENT
VIX: 12.27; +0.59
VXN: 14.77; +0.27
VXO: 11.71; +0.78
Put/Call Ratio (CBOE): 1.12; +0.43. Another boost in the ratio on a round of selling. Saw this happen last week and the market responded with a bounce. Thus far it has not been enough to send the market to sustained gains as stocks still struggle to get through the consolidation and flirt with a breakdown on SP500.
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: -10.1 points (-0.49%) to close at 2068.65
Volume: 1.604B (+10.62%). Volume was still below average but it bumped higher on the Wednesday selling as NASDAQ fell to the 18 day EMA. That makes 4 certain and maybe 5 distribution sessions in the past 9 sessions. While the recent trade has been below average, it still shows more selling than buying, and that erodes the foundation right out from below the consolidation attempt.
Up Volume: 700M (-298M)
Down Volume: 844M (+427M)
A/D and Hi/Lo: Decliners led 1.38 to 1. With SOX and the techs holding up the best, NASDAQ breadth was rather modest to the downside.
Previous Session: Advancers led 2.03 to 1
New Highs: 133 (-26)
New Lows: 28 (-14)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
Stretched up to 2085 on the high, but two attempts to push past that level failed and NASDAQ closed at the session low. Sounds ugly, but the point loss was not that bad and the selling was not that severe with NASDAQ holding above the 18 day EMA (2067) on the close. That puts it smack dab in the middle of its 5 week handle and still trying to consolidate laterally and make another run at 2100. Ever since the twp taps at that level in June NASDAQ has struggled, fading to the 50 day EMA before making the rebound Tuesday. It is still in position to continue the lateral move and make another run at 2100; the distribution has us concerned, however, and there is weakness in many of the large cap techs (MSFT is setting up a downtrend below the 50 day EMA) as the NASDAQ 100 looks as if it is going to fade from the 200 day SMA after struggling to retake that level for the past two weeks.
SOX continued its Tuesday move off of the 200 day SMA (415) but it did close well off of its intraday high (434, 430 on the close). If NASDAQ is dragged by the NASDAQ 100, SOX is going to find it very difficult to carry the move past 440 resistance.
SP500/NYSE
Stats: -10.05 points (-0.83%) to close at 1194.94
NYSE Volume: 1.419B (+4.39%). Volume was up Tuesday but below average as NYSE stocks gained. Wednesday volume was up again and right at average as NYSE stocks sold off. Distribution once more, making 4 out of 10 as with NASDAQ. Given SP500's inability to move off the 50 day EMA, this distribution is clearly taking its toll.
Up Volume: 599M (-606M)
Down Volume: 1.242B (+702M)
A/D and Hi/Lo: Decliners led 1.35 to 1. Basically the same as NASDAQ as the large and small caps suffered in the Wednesday action.
Previous Session: Advancers led 1.89 to 1
New Highs: 322 (-31)
New Lows: 28 (-7)
The Chart: http://www.investmenthouse.com/cd/^spx.html
After looking pretty sharp Tuesday with the higher volume jump off the 50 day EMA (1193) that cleared the late June lower high, the large caps gave it right back up, fading back to close just over the 50 day on rising, average volume. More distribution, more stuck in the mud action at the 50 day. The inability to put together a bounce off of that level that sticks is indicative, along with the distribution, of the weakening nature of the move. It has not broken down yet, but it is having the ground eroded out from under it. Once more SP500 is going to have to test and hold the 50 day EMA and deliver a rebound. The more it hangs out here in this neighborhood the more likely it won't be able to get back up.
After plowing into new high territory Tuesday the small cap SP600 gave up a chunk of the move though it still managed to hold an all-time high on the close (366 was the former high, closed at 337.43). Still holding up well as it tests the recent move. The market leader. Will it control the large caps or will the problems and distribution in those stocks drag SP600 back down with them.
DJ30
The blue chips turned lower on some rising though barely average volume. DJ30 broke below the 200 day SMA (10,446) in late June. It waffled the past two weeks below that level and then turned down below the 10 day EMA (10,364) Wednesday on that stronger trade. The picture of weakness and looks ready to head further downside.
Stats: -101.12 points (-0.97%) to close at 10270.68
Volume: 237 million shares Wednesday versus 235 million shares Tuesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
THURSDAY
Earnings season gets its 'official' kickoff Thursday with Alcoa announcing first. Stocks have waffled ahead of the season but they have not broken down yet except for DJ30 and many of its industrial stocks struggling as oil prices rise. Aside from earnings there is the weekly jobless claims report just ahead of Friday's monthly jobs report. The Challenger report splashed some cold water on hopes for a stronger report. Modest growth once more is what we expect given the changing nature of the US job market.
Earnings will be the key near term issue, and if they are stronger than expected (7% growth overall on S&P is anticipated) and the guidance is good they may very well rescue a waffling consolidation attempt, giving the market new life for another run at resistance. After all, the small and mid-caps just move to new all-time highs and leaders have not collapsed and indeed are easily holding near support for now. As long as the leaders are solid the market can continue its consolidation.
With the distribution of late and the struggle in the large caps, however, we have a healthy dose of skepticism with respect to the consolidation and will play defense. Wednesday most stocks held up nicely and did not move into jeopardy, and as long as they do that we will be fine with the action. With the distribution, however, we know that the market is losing its footing and will need a resumption of the buying. The fact that a fairly decent move Tuesday was basically flushed (at least with respect to the large caps) on Wednesday with higher volume tells a lot of the story. New money was put to work Tuesday, but then Wednesday others took their money off the table. The market needs to show continued strength by the leaders and then some stronger upside volume to resume laying the foundation for another move toward resistance.
We have taken positions on stocks when they showed us the moves higher but we are not going to assume this move will continue given the distribution. We will remains moderately defensive moving ahead until we see a return to the accumulation, i.e. upside moves on stronger volume.
Support and Resistance
NASDAQ: Closed at 2068.65
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 2047
Early April high at 2021, February lows at 2023.
The April high at 2022 was the higher high point.
The 200 day SMA at 2034
S&P 500: Closed at 1194.94
Resistance:
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 1228
The March 2005 high at 1229.11
Support:
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 10,270.68
Resistance:
10,400, the bottom of the November/December range
The May high at 10,406
The 18 day EMA at 10,404
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): 62.2 actual versus 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): 195K 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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