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us stock market, understanding the stock market
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7/09/05 Stock Split Report
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Stock Split Report Subscribers:
MARKET ALERTS
Targets hit alerts: AGP; BEN; FLO
Buy alerts: USPI; CNC; MSCC; RMD; IMGC; TOL
Trailing stops: None issued
Stop alerts issued: ESRX; DGX
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SUMMARY:
- Investors shrug off terror attack and the weekend, push NASDAQ through 2100.
- Jobs come in lower than expected again as unemployment rate falls again.
- Weaker non-farm jobs report belies economic strength showing up of late.
- Stocks breakout in anticipation of earnings, and now they need to deliver.
Impressive follow through to Thursday reversal pushes NASDAQ to join SP600, SP400.
We had concerns about the market's ability to continue with the Thursday comeback given the weekend and the potential for another terror attack elsewhere. The majority of investors did not harbor the same concerns, however. That became very apparent as the market moved higher early, made a full test of the move, and then never looked back. When we saw the futures higher pre-market, we said in our pre-market alert that a successful test of the early surge would be the key to the session.
That was just one of the keys, however. The other was what NASDAQ was going to do with 2100 if it made it that far. By lunch it had rallied to that level and moved laterally for 1.5 hours. It started the afternoon session with a breakout over 2100, and it never came back to that level. In doing so a large cap index finally joined the small and mid-cap SP600 and SP400 with a breakout past resistance. NASDAQ did not move to an all-time high as did the smaller and mid-caps (it would have to more than double to do that), but it made that important move above 2100 that had slammed the lid on the upside since January this year.
With the large caps joining the move, breadth was excellent. Sector after sector scored gains. About the only weaknesses were in the energy stocks, but they had a good run ahead of the rest of the market and are taking a breather while the other sectors play catch-up. Classic, healthy rotation where money moves to other areas after one sector or sectors get a bit overbought. SP500 rallied as well, but it was unable to make the break over the June highs and clear that recent resistance marking the handle high in its base. Thus NASDAQ made the move but the SP500 is still lagging despite its nice gain. That is about typical, however, as SP500 has been reluctant to take on a leadership role; it gave it up to NASDAQ in April when it was ready to breakout but then collapsed. Thus NASDAQ's leadership here is more important than SP500, but SP500 does have to follow along just as it did Friday.
It was not all roses of course. The same problem that has confronted the market the past several months is still present: overall low volume. Volume rallied some on NASDAQ, moving up to average, but volume tailed off on NYSE. As seen earlier in this rally, a lower volume move can continue, but as soon as adversity strikes low volume moves are tossed into the hamper like a dirty shirt. Thus you have to take the move with the same trepidation as on the last move.
But maybe not quite as much. After some distribution the market is doing a good job of working it off. Nice dip and shakeout Thursday followed by the volume rebound. Friday volume was up to average on NASDAQ, showing some accumulation resuming. Moreover, given it was a Friday in the dead of summer it was not bad volume at all, at least on NASDAQ. Heck, even NYSE was not that bad; after all, it posted above average volume while NASDAQ could barely scratch average trade on its breakout move. Volume was thus not blowout, but the likelihood of it being so at this time of the year was slim. All in all it was not bad, and many leaders were moving on strong trade.
That leaves stocks in rally mode just ahead of earnings. Now they have to put up the goods to justify this move and keep the breakout working.
THE ECONOMY
Non-farm jobs miss mark but revisions take out sting along with unemployment rate.
Traditional jobs continue to grow, but they have never hit stride, sputtering up one month and then down the next. Overall jobs are being added (172K per month average for past 12 months), but the economy is definitely not spewing out the traditional jobs most think of when they think of new employment. Specifically, jobs came in at 146K, well below the 195K anticipated (though the weekly jobless claims and the Challenger reports showed insufficient improvement to warrant strong gains). May was revised higher to 104K from 78K and April was revised as well, adding a total 44K jobs previously unreported.
It was the ninth time in the past year that actual results did not meet expectations. Everyone expects companies to start shooting out jobs, but they refuse to add overhead given what happened in 2000. With the Fed now raising rates once more as it did in 1999 and 2000, you can be damn sure that CEO's are very concerned Greenspan is going to poke another hole in another solid, low inflation economy. Thus they are in no hurry to add jobs. Indeed, as discussed earlier in the week, the big mature companies are still laying off to increase efficiency while the start-ups are not at the size yet to really start adding lots and lots of jobs to the economy.
Is the unemployment rate telling the real story?
Now the unemployment rate, also known as the household survey because they call you up and ask you 'are you working?', fell to 5% from 5.1%. Earlier in the recovery there was a lot of skepticism about this number given that the non-farm payrolls reports were as anemic as a human at a midnight vampire convention. Greenspan even joined in with his "in our experience the non-farm payrolls are more accurate" statement to Congress. Well, in most cases that may just be. With the kind of business collapse we had in 2000 through 2002, however, fundamental changes take place in the economy. When we emerge from dramatic upheavals things don't always go back to the usual 'experience.'
Specifically, in these situations there are no jobs because as we saw, businesses are not investing money in anything including new jobs, people have to do something. Necessity is the mother of invention, and many of those laid off and those emerging from school decided to start their own businesses. It beats not eating. This is exactly what I had to do when I got out of college in the early 1980's when we were in the throes of a nasty recession as we emerged from the black hole of the 1970's (and that was not just because of disco). I had great grades but no job so I went out on my own. Jobs and Wozniak did the same thing a bit earlier (though their success dwarfed mine) as did Michael Dell, etc. When there are no jobs Americans are incredibly ingenious at finding ways to make a living. That is where we really get our innovation as we saw, once again, in the 1980's.
All of this has given rise to talk that perhaps the non-farm reports are understating the actual jobs. Sure it reflects the so-called 9 to 5 jobs, but it does not reflect the other jobs, the jobs created as a result of there being no jobs as discussed above. If you work for yourself you don't get the employer survey but you might get the 'are you working?' call. As the unemployment rate has been steady and steadily declining while the economy continues to expand at a very decent pace (3.8% in Q1), more and more economists are coming around to the idea that in this economic environment (the bust following the boom cycle) the unemployment report is more accurate.
Strong economic data belies non-farms report.
After all, people are spending a lot of money. The same store sales and individual retail sales reported Thursday were strong. Even WMT is getting in on the action (but we feel that is because of high gasoline prices starting to have their impact). The ISM services sector is surging. The ISM manufacturing report started back up when it looked to be hitting the wall. Auto sales surged in June. We have our worries about how oil and the Fed are going to ultimately come down on the economy, but you do not get this kind of consumption unless people are working. The non-farm payroll numbers are barely enough to soak up the new entries into the workforce each month; they have not been strong enough except for few months here and there to alleviate any of the additional millions laid off in the Fed-induced bust. That means people are working at jobs the non-farms survey is not picking up. That means the declining unemployment rate is an accurate read on the jobs market.
It does not mean everyone is getting the job they want. As noted above, necessity means you doe what you have to do while you try to get to where you can do what you want to do. There is plenty of 'gripe room' with respect to the jobs being created, but it is all part of the process of getting through this bust to the next sweet spot. We are not there yet, and thus for the life of me I cannot understand the fixation with the Fed and others that we have to once gain hobble the economy. We owe those who lost their job a robust economy so they can work at jobs they want. This recovery was just getting started when the Fed decided to lock it down. Pure BS.
In sum, the spending levels and economic strength are such that the non-farm jobs report is underestimating the number of people working jobs in the US. That does not mean that the non-farms report is wrong, just that it does not count a significant portion of the actual jobs in the country. The US economy is based upon entrepreneurship not Exxon/Mobil. Indeed XOM started from humble beginnings (the Humble Oil Company; the pun was intended) itself; it was just successful and grew huge. See also, MSFT, DELL, AAPL, etc.
What we need to do is encourage additional business investment in their businesses through incentives and thus ensure that these new businesses can continue to grow and achieve the size where they start significantly adding to the jobs pool. Right now we see business investment backing off once more for the same reason they are not hiring: they fear what the Fed and high oil prices will do to the economy. Small businesses have faced a 250% increase in the cost of money in the past year. With the Fed also drying up the money supply, oil over $60/bbl, and the expiration of many investment incentives, small businesses are getting squeezed once more even before they really get rolling. One of the biggest mistakes we can make right now is to have myopic vision and not realize that the future growth for the economy is not in GE, MSFT, CSCO and the like, but in the new companies coming up with new ideas and devices for the future. We squeeze them out of business and we squeeze ourselves right out of any economic leadership in the future.
THE MARKET
MARKET SENTIMENT
Despite the complacent levels of the sentiment indicators (other than the CBOE put/call ratio), the market found new strength and surged. The London terror attacks shook things up some but they did not spike sentiment indicators anywhere near what would be considered reversal points.
VIX: 11.45; -1.04
VXN: 13.8; -1.34
VXO: 10.82; -1.1
Put/Call Ratio (CBOE): 0.82; -0.24. Closed over 1.0 on Wednesday and Thursday, and that helped set up the move but it was the only indicator doing so.
Bulls versus Bears:
A bit of improvement in the bulls/bears sentiment indications with both ends moving to levels that are just below those considered bearish. Last week they were clearly in the bearish indications and the market sold. That cleared out some of the bulls and upped the bears, but they are still right at the bearish threashold.
Bulls fell to 53.9% from 55.1%. That put them back at the level of three weeks back and ended the weekly gains at 7 weeks. Bulls bottomed in early May at 43.5%.
Bears rose to 21.4% from 19.1% the week before. That puts them over the 20% level considered bearish. Quite a drop from the 26.1% a few weeks back and the 30% reading in early May.
NASDAQ
Stats: +37.22 points (+1.79%) to close at 2112.88
Volume: 1.693B (+4.08%). Volume moved up but still could not crack average as NASDAQ made its most important move in over a month. Still substantially weaker than the distribution volume in the third week of May, but volume cooled after that as it held the 50 day EMA as it recovered. Given it was a Friday after a terror attack in mid summer, this was not as bad as on first blush. Not great but there is an attempt to get back to some accumulation.
Up Volume: 1.443B (+515M)
Down Volume: 235M (-406M)
A/D and Hi/Lo: Advancers led 2.67 to 1. Strong breadth across the index.
Previous Session: Advancers led 1.03 to 1
New Highs: 182 (+93). No real surge in new highs as NASDAQ moved to its highest level in over 6 months. Need to see it ramp up as NASDAQ moves higher on this breakout.
New Lows: 20 (-10)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
Well NASDAQ finally made the break higher over resistance at 2100, making the breakout from the 6 week handle to its 6 month base. After two failures in June it did not strike out this time, rallying on stronger though not quite average volume. This is the move we have been looking for; would have been better if it was on stronger trade. Not bad action, however, as it works off the recent distribution, showing some accumulation as it cleared key resistance. Now we see if it can hold a test of the move. For now it held support, held its handle, and broke out on rising volume. If it tests and holds, then we will have more entry points on this move.
Chips were moving well Friday, posting a market leading 2.5% gain. They have come from the 200 day SMA (415) to start the week, rallying sharply and clearing the June closing high with this move over 440 (closed at 442.75). It still has to clear 450, its key resistance in its 8 month trading range. NASDAQ is making the breakout and SOX needs to follow it.
SP500/NYSE
Stats: +13.99 points (+1.17%) to close at 1211.86
NYSE Volume: 1.459B (-3.71%)
Up Volume: 1.505B (+535M)
Down Volume: 375M (-587M)
A/D and Hi/Lo: Advancers led 3.07 to 1
Previous Session: Advancers led 1.23 to 1
New Highs: 410 (+220)
New Lows: 17 (-26)
The Chart: http://www.investmenthouse.com/cd/^spx.html
SP500 did not break out over its recent highs, but given that it underwent some serious distribution in the recent selling, the volume and the strong price move were somewhat impressive. SP500 did what it had to do after the distribution that started with the Chinese tariff issues: it held the 50 day EMA (1193), consolidated, and then found strength after selling off Thursday on the terror strike. Both of the sessions were on above average volume, and that dip lower apparently accomplished more than we gave it credit for. Next resistance is the June highs at 1220, but it is working on breaking up that double top that tried to set up and forming a reverse head and shoulders base.
SP600 and SP400 shamed their large cap brethren with strong breaks to new all-time highs once more. The smaller caps are leading and now the large caps are attempting to follow with NASDAQ clearing 2100 and SP500 surging on stronger volume.
DJ30
The blue chips joined in the action Friday, rallying triple digits. The Dow made it to the 200 day SMA (10,448) on the close on volume that was average but lighter than Thursday. About all you can say is that the Dow was following the rest of the market higher. If we were only looking at DJ30 we would say this was nothing more than a relief bounce.
Stats: +146.85 points (+1.43%) to close at 10449.14
Volume: 249 million shares Friday versus 275 million shares Thursday. No real strength in the move.
The chart: http://www.investmenthouse.com/cd/^dji.html
MONDAY
This week provides a full trading week and it also provides a lot more economic data (retail sales, CPI, business inventories, industrial production). It also means earnings come into full swing. Stocks have pulled back and then rallied ahead of earnings; investors will be looking for continued good outlooks and even better than the 7% earnings growth forecast. The past two quarters companies have topped expectations, and this break higher suggests that investors are expecting stocks to top expectations again. What we often get in this situation is a good reaction to early earnings reports and then a saturation level and the breakout runs out of some steam.
For now we go with what the market is showing, and Friday it showed some good rotation with money moving out of energy stocks, giving them a break while investors put money to work in technology and generally everything else but energy. NASDAQ broke over resistance, SP400 & SP600 made new all-time highs, and volume improved. Pretty good credentials.
We have many positions we are allowing to run higher, positions taken all during this rally when stocks showed us they were getting the support from the big money. Given the breakout moves in NASDAQ and friends Friday we are going to let them run. We are also going to continue looking for opportunities as new waves of stocks line up for the breaks higher. As with energy, some sectors move higher then take a breather while others step up. That is a sign of a healthier market, and that is what this market is trying to accomplish here as it shakes off the recent distribution and breaks higher.
Support and Resistance
NASDAQ: Closed at 2112.88
Resistance:
2151, the early December closing high.
2163, the mid-December closing high.
Support:
2100 was key resistance point, and a successful test sets it up as support.
2075 to 2078 may be giving way.
2051 from February, March price points.
The 50 day EMA at 2051
Early April high at 2021, February lows at 2023.
The April high at 2022 was the higher high point.
The 200 day SMA at 2036
S&P 500: Closed at 1211.86
Resistance:
The February intraday high at 1212.
December high at 1217
The June high at 1220
The March 2003 up trendline at 1230
The March 2005 high at 1229.11
Support:
1200 is some support (18 day EMA is at 1200 as well).
1196, the mid-January high and the early December peak in the left shoulder.
The April high at 1194
The 50 day EMA at 1194
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 1177
Dow: Closed at 10,449.14
Resistance:
The 200 day SMA at 10,449
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.
July 13
Export Prices ex-ag., June (08:30): -0.4% prior
Import Prices ex-oil, June (08:30): -0.3% prior
Trade Balance, May (08:30): -$57.0B expected and -$57.0B prior
Treasury Budget, June (14:00): $28.0B expected and $19.1B prior
July 14
Retail Sales, June (08:30): 0.9% expected and -0.5% prior
Retail Sales ex-auto, June (08:30): 0.5% expected and -0.2% prior
CPI, June (08:30): 0.3% expected and -0.1% prior
Core CPI, June (08:30): 0.2% expected and 0.1% prior
Initial Jobless Claims, 07/09 (08:30): 319K prior
July 15
NY Empire State Index, July (08:30): 9.0 expected and 11.6 prior
Business Inventories, May (08:30): 0.4% expected and 0.3% prior
PPI, June (08:30): 0.4% expected and -0.6% prior
Core PPI, June (08:30): 0.1% expected and 0.1% prior
Industrial Production, June (09:15): 0.4% expected and 0.4% prior
Capacity Utilization, June (09:15): 79.6% expected and 79.4% prior
Michigan Sentiment-Preliminary., July (09:45): 94.5 expected and 96.0 prior
End part 1 of 3
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us stock market
understanding the stock market
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