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us stock market, understanding the stock market
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7/14/05 Stock Split Report
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Stock Split Report Subscribers:
Jon Johnson is traveling again this week, once more visiting companies for investment opportunities. This week he is in the Austin area. The reports may be a bit abbreviated, but as always he is sending in his market commentary and play selections.
MARKET ALERTS
Targets hit alerts: URBN
Buy alerts: PFCB
Trailing stops: HOC; FRK; POT; COG
Stop alerts issued: PDS; PLCE; URBN
The market alert service is a premium level service where we issue intraday alerts relating to the general market conditions, when stocks hit action points (buy, stop, target, etc.), and when we see other information impacting the market or our stocks. You can sign up for Stock Split Report alerts at the following link:
http://www.investmenthouse.com/alertssr.htm
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The new seminar series is scheduled to be ready in July, and we are closing out the inventory on the current series CD's at fire sale prices. Save on the best technical analysis, stock splits, covered calls and options seminars and enhance your understanding of market and stock moves and learn straight forward strategies to put that understanding to work and make more money. A great bargain.
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Seminar Series Sale!
SUMMARY:
- Market gets too excited on new earnings, CPI, retail sales, lower oil and gaps higher but then waffles.
- CPI flat, core barely ticks higher.
- Retail sales driven by 'me too' pricing on autos.
- Despite the volume gains Thursday, still expecting stocks to make a pullback.
Earnings, economic news gaps stocks higher but gains fade as key elements don't participate.
This is the action we didn't really want. Stocks had already posted a nice rally and where showing signs of wearing thin, ready for a pullback as they hit the next important resistance. Then some strong earnings (AAPL, AMD) and favorable economic news (low CPI, solid retail sales) reignited the buying excitement. Stocks gapped higher and pushed through resistance on solid trade. The first 10 minutes were the zenith, however, and stocks spent the rest of the day giving back much of the move.
Stocks did not close negative, at least not the large caps. The gap higher was used to sell into, however, as often happens after a good run wears thin and then more good news hits. SP500 moved to a new post-crash high above 1229.11 while NASDAQ cruised up to the mid-December closing high. That move could not hold and they sold back. They still held the break above near resistance (1225 and 2151), but they gave a good chunk of the move back in action that still looks like that you find with a tired index (dojis on both NASDAQ and SP500 after a strong run higher).
Technically the gains on volume was accumulation, but you have to factor in where the market is in this cycle. As noted it has put together a good move the past two weeks and was already showing signs of needing a rest. Add to that the small caps and mid-caps, the market leaders in this move, were lower all session and closed significantly lower (-0.6% and -0.3%) on that same higher volume, it is hard to frame the Thursday move in glowing terms. Energy stocks, also leaders in this move, jerked lower to near support as oil weakened and the most recent hurricane's track was adjusted out of the prime oil producing areas in the Gulf of Mexico.
Simply put, stocks rose on stronger volume, but they show classic signs of topping on this move even as the good news rallied stocks. As noted Wednesday, they could continue to rally after this gap; strong moves will just take quick breathers and keep going. May happen but in all likelihood we are going to see the market continue the test that was starting Tuesday. The likely leaders in the test will be the small and mid-caps: they were the leaders on the upside, the first to breakout and hit all-time highs, the first to start to come back. The fact that they continued to sell Thursday despite all of the hoopla about great earnings and economic data indicates stocks are still going to come back. SP600 and SP400 will test the 10 day EMA and then likely be ready to continue the run, and they will do it ahead of the rest of the market that was still trying to rally Thursday. That will set up some great entry points for next week. Time to be a bit patient, tend to positions that are getting into trouble, let the others test near support, and be ready to move in when the move back up starts again.
THE ECONOMY
CPI shows prices remain under control.
Expectations were for a 0.3% gain but prices were flat overall. Take out food and energy and prices rose 0.1%, also below the 0.2% rise expected. That puts the core's rise at just 0.1% the past two months and before that it was flat in April. Year over year prices are up 2.5% overall with the core at just 2%. Compare that with the 3.5% rise a decade ago when the Fed was starting to get all fudged up over the threat of inflation. We said it just a couple of weeks back: the Fed has worked itself up over inflation that might be once more long, long before the recovery has really hit its stride. The economy has not reached the point where it is generating the traditional job growth most would like to see (and supposedly the Fed as well as it says it buys into the non-farm jobs as its primary indicator of employment) and yet the Fed is putting the brakes on.
Of course the Fed will take credit for keeping inflation under control just as it took credit in the early 2000's for preventing a major plunge. If that was a soft landing and not a plunge (from 10% GDP growth to negative in a drop over the economic cliff) we may need to put some new definitions in the economics textbooks. Inflation was acting up at the first of the year because demand was still leading supply just as it had done from the start of the recovery thanks to the backwards approach to stimulus: consumer over capital investment. All that did was gin up already solid demand and put more inflationary pressure in the pipeline because businesses were not yet ramping up to meet demand due to the third degree burns they were still nursing from the 'soft landing' in 2000 and 2001.
Not until real capital investment incentives were passed did supply start to recover, and even then inflationary pressures remained. As we noted at the end of Q1 in this report, that slowdown in demand was apparently letting supply catch up with demand and alleviate some of the inflationary pressures that were building. That conclusion appears to be correct based on the benign inflation data the following three months despite rising energy costs.
Given that equilibrium between supply and demand is close one would think the Fed could let up with its rate hikes after one more to get the Fed Funds rate up to 3.5%. Unfortunately when the Fed gets to this point in a rate hiking round it is not thinking about supply side anymore, the theory it ascribes to during times of economic calm. Instead it reverts to the 'if things are too good something must be wrong' theory also known as the Phillips Curve. Basically that theory says if you get a lot of people employed because businesses are doing well and hiring workers then you have to have inflation. In short, prosperity equals inflation, so too much prosperity is to be avoided. That is why we heard asinine statements from FOMC members in the late 1990's and in 2000 about how unemployment needed to be higher. Next time they feel that they could forfeit their jobs and I doubt anyone would be too upset.
Thus, even with inflation incredibly tame the past quarter we cannot expect the Fed to back off on its rate hiking and we will see at least one more hike and likely two. That may or may not break the economy; the stock market is factoring in growth down the road and that means the Fed gets out of the rate hiking business before too long. Of course, the Fed can always disappoint as it often does. Hey, it doesn't boast an .800 batting average for nothing (that is, 8 recessions out of the last 10 rate hiking rounds).
Autos push retail sales higher on 'employee discount' promotions.
Retail sales surged past expectations in June, rising 1.7% versus the 0.9% gain expected. That helped offset May which was written down to a 0.3% gain (0.5% originally reported). Take out autos and sales rose a still healthy 0.7% (flat in May and a 0.5% gain expected).
Sales were up across the board, but auto sales rose 4.8% versus the 1.3% drop in May as consumers took advantage of the employee pricing. It was a big hit but one wonders what the labor unions think of this; they implicitly run the company via the absurd labor contracts they have, and it is surprising they would want to share one of their perks with the common consumer. That aside, the program worked and US automakers sold a lot more cars because of it.
The issue everyone is talking about is how $2.25/gallon national average gasoline prices are going to impact consumers. We believe the signs are already there that it is starting to eat into consumption decisions. Consumption is not lower, but consumers are more conscious of where they spend their finite number of dollars now. That is why we see WMT sales rising of late as consumers return to WMT for their staples after abandoning it once the recession ended. We still feel gasoline will hit $3/gallon before the summer is over, and that will only exacerbate the pressure on consumers to reallocate their disposable income. $3/gallon is likely the point where the consumer starts to fold up consumption, and thus impact the economy. We don't want to see $3/gallon gasoline, but there is not a lot near term to stop it.
THE MARKET
MARKET SENTIMENT
VIX: 10.81; -0.03
VXN: 14.21; -0.67
VXO: 10.75; -0.05
Put/Call Ratio (CBOE): 0.72; -0.04. No big move lower on the rally, and not surprising as the market bounced but then sold into that gap higher at the open.
Bulls versus Bears:
Last week: 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 threshold.
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: +8.71 points (+0.41%) to close at 2152.82
Volume: 1.892B (+20.83%). Volume surged as NASDAQ gapped higher, ran up to the December closing high, but then slid back down, giving up over half of its gains on the session. Given the rise to this point and the doji on the candlestick chart, this looks more like churning (high volume turnover) than a solid accumulation session. The action suggests that after stocks gapped higher in excitement over the economic and earnings news with new buyers rushing in, the sellers then used the new money to sell into. After a rally to this point already the Thursday move on stronger volume had the characteristics of a last gasp before a test of the run thus far.
Up Volume: 1.19B (+226M)
Down Volume: 649M (+86M)
A/D and Hi/Lo: Decliners led 1.25 to 1. The index posted a gain but the breadth was negative. The generals were leading today but no troops followed. Breadth has not been a problem on this move, so we don't view this as a major problem, just indicative of the type of day and how this move is getting a bit tired.
Previous Session: Decliners led 1.23 to 1
New Highs: 155 (+23). Pretty darn anemic for challenging the December 2004 highs.
New Lows: 19 (-7)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
After a 100 pint run NASDAQ gapped higher, rallied to the December 2004 closing high (2163) and then slid back and relinquished over half of its 20 point gain posted in the first 10 minutes. Volume surged but as noted it is hard to call this accumulation as the index closed below the gap higher and the candlestick chart showed a tombstone doji, something that often occurs near the top of a run. It has been a strong move to this point and it may continue from here and take out the December high and then the January high (2191.60); that sometimes happens when a very strong move is underway. The negative breadth, the weakness in the smaller NASDAQ issues, and the technical pattern, however, suggest it is going to make the pullback it was just starting before all of this good news hit.
SOX did not slow down at all, surging again and leading the market with a 1.3% gain. The semiconductors were late to breakout, but they did just that and have not slowed one bit yet. That is what gave NASDAQ its strength Thursday to continue the move higher even as the majority of the tech stocks fell back. Cannot keep this move going forever, and when it makes the test over the next week it will set up another good upside move having proved up the breakout.
SP500/NYSE
Stats: +3.21 points (+0.26%) to close at 1226.5
NYSE Volume: 1.566B (+15.62%). Best volume in three weeks as the large cap indices posted gains. Similar to NASDAQ, however, SP500 closed well off of its intraday high and managed just a 0.3% gain. The important SP600 led the market lower with a 0.6% loss. This was not accumulation for them, and the move upside in SP500 was not accumulation as the index gave back a sizable chunk of its gain and showed a doji on the candlestick chart as well. That suggests churning, i.e. high volume turnover where the money that has been in the market uses the newcomers as cover to exit some positions and take gains.
A/D and Hi/Lo: Decliners led 1.19 to 1. As with NASDAQ, the negative breadth showed most stocks did not participate in the upside, something made clear as the mid-cap and small cap indices closed lower while the large caps posted gains.
Previous Session: Decliners led 1.23 to 1
New Highs: 275 (+24)
New Lows: 21 (-1)
The Chart: http://www.investmenthouse.com/cd/^spx.html
The large cap SP500 hit 1233 on the high, taking out the March intraday peak at 1229.11. That did not last, however, as it gave back 6.5 points or two-thirds of its early gain by the closing bell. A big tombstone doji sitting on top of a 51 point move suggests the index is ready for a pullback to test the run higher. No problem with that as it will test the move over the June high (1220) and give it the stepping stone for the next move higher.
The small cap SP600 told most of the story Thursday as it was down all day and posted a 0.6% loss as NYSE volume moved higher. It along with the SP400 were the main movers on the upside and when they were lower with negative breadth you knew the upside move did not have a lot of strength behind it. Looks as if it is going to make that test of the 10 day EMA (342.18) as anticipated, and that will set up the next run higher.
DJ30
DJ30 led the NYSE indices once more with its 0.7% gain on rising, above average volume. Unlike NASDAQ and SP500, this actually was an accumulation session for these stocks as they rallied to the June highs (10,646 to 10,656). Doing some good work now in its base, showing some accumulation Thursday. Has a lot to do to break through and continue the base, but DJ30 is trying to come around as its tech components finally show some life.
Stats: +71.5 points (+0.68%) to close at 10628.89
Volume: 267 million shares Thursday versus 216 million shares Wednesday. A decent accumulation session following that reversal session the prior Thursday.
The chart: http://www.investmenthouse.com/cd/^dji.html
FRIDAY
More economic data hits the market Friday, but after the CPI and retail sales Thursday, it is likely to be anticlimactic. Sellers emerged on Thursday after stocks gapped higher and sold for some profits ahead of the weekend, figuring the news could not get much better in the short term than it was. As noted the small and mid-caps led the move lower as energy, homebuilders, and healthcare showed another session of weakness after leading the market earlier in the week.
We anticipate the market will remain soft heading into the weekend as stocks continue to come back to test the recent move, consolidate some gains, and prepare for the next run higher. While the action Thursday suggests stocks are overdone in the short run, we don't want to give the impression we feel they are ready to roll over and fold up. Energy looked wobbly Thursday, but it often looks wobbly as the underlying commodity bobs and weaves. The small caps sold back on the stronger index volume, but they made a good run and are pulling back as well, testing that good move. All of this is fairly normal action after a good run higher, just exacerbated a bit by the good news gap higher Thursday.
This pullback is what stocks need after a good rally, and if the rally holds as it looks it will do based on the better price/volume action and leadership on the way up, then it will succeed in setting up more entry points on leading stocks, particularly those small caps, as they make their tests. When we see them hold and start back up on rising trade we will start adding positions.
Support and Resistance
NASDAQ: Closed at 2152.82
Resistance:
2151, the early December closing high and highs from January 2004 is getting cracked but will likely hold near term as NASDAQ tests.
2163, the mid-December closing high.
2178 is the January closing high.
2191.60, the January intraday high.
Support:
The 10 day EMA at 2115
2100 was key resistance point, and a successful test sets it up as support.
The 18 day EMA at 2098
2075 to 2078
2051 from February, March price points.
The 50 day EMA at 2065
Early April high at 2021, February lows at 2023.
The April high at 2022 was the higher high point.
The 200 day SMA at 2041
S&P 500: Closed at 1226.50
Resistance:
The March 2005 closing high at 1225.
The March 2005 high at 1229.11
Support:
The June high at 1220
December high at 1217
The February intraday high at 1212.
The 10 day EMA at 1213
1200 is some support
1196, the mid-January high and the early December peak in the left shoulder.
The April high at 1194
The 50 day EMA at 1198
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 1179
Dow: Closed at 10,628.89
Resistance:
Price consolidation at 10,600 is breaking.
The June highs at 10,646 to 10,656
10,754 is the February high
10,868 is the December 2005 high.
10,985 is the March high
Support:
The April high at 10,557
The 200 day SMA at 10,458
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): -0.1% actual versus -0.4% prior
Import Prices ex-oil, June (08:30): -0.4% actual versus -0.3% prior
Trade Balance, May (08:30): -$55.3B actual versus -$57.0B expected and -$56.9B prior (revised from -$57.0B)
Treasury Budget, June (14:00): $28.0B expected and $19.1B prior
July 14
Retail Sales, June (08:30): 1.7% actual versus 0.9% expected and -0.3% prior (revised from -0.5%)
Retail Sales ex-auto, June (08:30): 0.7% actual versus 0.5% expected and 0.0% prior (revised from -0.2%)
CPI, June (08:30): 0.0% actual versus 0.3% expected and -0.1% prior
Core CPI, June (08:30): 0.1% actual versus 0.2% expected and 0.1% prior
Initial Jobless Claims, 07/09 (08:30): 336K actual versus 322K expected and 320K prior (revised from 319K)
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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