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understanding the stock market, trade stock
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7/16/05 Stock Split Report
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Stock Split Report Subscribers:
MARKET ALERTS
Targets hit alerts: None issued
Buy alerts: CAKE; KERX (bonus); ANDS (bonus)
Trailing stops: BEN; AGP
Stop alerts issued: None issued
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SUMMARY:
- Stocks start soft but show same resilience and finish higher again.
- PPI even less inflationary than CPI.
- Inventories are lower, production and capacity are higher, more evidence the economy is strengthening again.
- Stocks hanging tough as earnings start, but expecting more of a large cap pullback before next upside begins.
Stocks testing the move but refusing to give up ground.
Stocks started slightly weaker Friday despite some more strong economic reports released pre-market. PPI was very tame, inventories were lower, production was strong and utilization was the best in over a year. The good news was not enough to lift stocks on the open and they faded midmorning, but easily held above near support with SP600 tapping at the 10 day EMA on the low. This was more of the test we were looking for, the test the market had been signaling the past few sessions despite the hiccup higher Thursday on the very positive economic data and some surprise earnings.
The market would not stay down, however, and began a slow steady rebound that gained speed in the late afternoon session. Once more this rally showed its strength, coming back from some selling. Volume did not show strength, however, coming in much lower and well below average even on the July expiration.
That low volume kept NASDAQ and SP500 from clearing the next key resistance points (1229 on SP500 and 2163 on NASDAQ) after they made a run at them in the late afternoon. Breadth was flat, just slightly positive, another indication of the overall blas performance on the day. Stocks managed to rebound from negative and post modest gains, but once more the breadth was stagnant and Friday the volume was low. Just no strength in the move.
It was a solid, solid week, but the move higher is definitely losing steam as the upside gains grow smaller and volume overall is weaker after the big surges that started the rally on its way last week. At the same time it has yet to really give up any ground; indeed it has posted 7 consecutive upside sessions on NASDAQ and SP500. You have to like a market that refuses to give up its gains, fighting back from intraday weakness. That kind of stingy market is a sign of strength even as the move slows its advance.
The large cap indexes may be able to hold up after just slowdown and sidestep here without much of a pullback, but we still feel there is some downside ahead before they continue higher. Not a big plunge, but more similar to the downturn in the SP600 and SP400 that just tapped their 10 day EMA on a very orderly pullback to test the breakouts to new all-time highs.
Indeed, those indexes already appear set to continue their moves higher. SP500 and NASDAQ could follow them up from here, but the large cap indices do not appear to have completed their rest period. The small caps were the leaders on the way up, and they made the first test. They will likely lead on the way back up while the large caps make their test of near term support. That is more of that healthy rotation we discussed the past week where one sector rests while the other moves higher. Very much a characteristic of a bull market.
THE ECONOMY
PPI shows little signs of price rises in the pipeline.
Prices received by farms, factories, refineries and mines held flat in June, well below the 0.4% gain expected. After the 0.6% drop in May this was confirmation of very modest pricing pressure. The core, excluding food (-1.1%) and energy (+2%), fell 0.1% as it posted the first decline in four months. The core fell as auto prices declined due to the 'me too' employee pricing helped the dealers as well.
The decline in prices reached even further back in the pipeline as crude goods slumped 3.3%. Intermediate goods edged higher 0.1%, but core intermediate goods declined.
Combined with the flat CPI (core +0.1%) reported Thursday, it appears prices are well contained after a bout with inflation early in the year. As discussed Thursday, the dip in economic activity and consumption during Q1, though transient, was enough to help supply close the gap on demand and alleviate much of that pricing pressure.
Capacity utilization climbs to a 4.5 year high and production jumps as well.
Of course the Fed does not view supply in the same way it works in the real world. The Fed worries about bottlenecks and if demand is holding up because no matter how much it talks about free markets it still believes in the Phillips Curve view that too much prosperity automatically leads to inflation.
Thus we view the climb in capacity utilization to 80% (79.6% expected), the strongest showing since an 80.3% reading in May 2000 (that was back before the economy collapsed) as a real positive because it shows the supply side ramping up production to meet and get ahead of demand. That is what keeps inflation at bay, i.e. a supply side with the incentives to really produce, create and invent. In that way it makes the products consumers know they want, it creates new technologies the consumers don't even know they want yet, and at the same time those creations improve supply productivity as suppliers use the devices they create.
Same thing with industrial production. It posted a 0.9% gain, well ahead of the 0.4% expected and May's 0.3%. The more production, the more supply meets demand and the less inflationary pressures. Unfortunately production is still fairly meek with just a 2.1% year/year rise in Q2, the smallest increase since Q2 2003.
Thus there is still work to do in order to get suppliers producing more. As seen in the employment figures, suppliers are still loathe to really ramp up production and accumulate large inventories once more when the Fed is in a rate hiking mode. Everyone remembers what happened the last time the Fed raised rates during a period when suppliers were in full production mode, meeting the tremendous demand of a rapidly expanding economy. Then the Fed dried up the money supply and sent rates to the choke point and that is exactly what the market and then the economy did.
With that still fresh in their minds there is no way producers are going to stretch past the comfort level, and thus fully meet demand. That leaves the economy in the incredibly ironic situation of having the Fed raise rates in order to fight off inflation, but by doing this it is facilitating the very thing that causes inflation, i.e. supply lagging demand. With the Fed raising rates companies are refusing to get into positions where they could be seriously hurt with an inventory overhang if the Fed goes too far as it does 80% of the time.
Business inventories rise just 0.1% in May but the focus is on the wrong inventories.
That was the smallest gain since September 2004 and much of it was related to auto values sitting on lots declining by 0.6%. Still it shows that inventories are not running higher to meet demand. Most of the articles we have read and the economists we hear speak are discuss only autos with respect to inventories and how auto manufacturers and dealers needed to reduce bloated inventories. Well there is a reason inventories are bloated. Auto makers can shut down their plants, but if they do they still have to pay 80% of the wages the would if they were operating. What they do instead is keep them running to generate more product they can sell even if they have to sell it at a reduced price. Thus, auto inventories are hardly a representative part of business inventories as they are artificially high due to the outdated labor contracts the automakers have to live by.
Outside of autos, inventories have been thin. As stated, companies are not going to get caught in that same vice they were in back in 2000 and 2001 when the Fed torpedoed the economy and hundreds of billions of dollars worth of inventories had to be written off quarter after quarter. Remember each CSCO conference call each quarter? The big issue was just how much inventory remained to be written off. With that ongoing there was no way the price would stop falling.
The survivors of that black hole are not going to be caught in that position again and thus the lower inventory levels across the board. It pervades even to the consumer level. Gone into a Home Depot since that bust? You are lucky if you can find half of what you need in stock. I spend more time looking up at the overhead shelves to see if they have what I need up there than I do looking in the lower racks. Amazon.com is having similar issues. One order I placed in May was not filled for over two months and then I received the 'sorry but it ain't happening' email.
The point is the one made above: businesses know what can happen when the Fed is fighting inflation that not many are seeing anywhere, not even under the rocks. When you fight a shadow you never can beat it until the thing causing the shadow is gone (i.e., the light). If you are fighting inflation you think is there simply because the economy is growing at a good clip (even though no one can really see it), you are not going to beat it until the thing you think is causing it is not longer there. In this case it would be an economy expanding at 3.9% in the last quarter. Companies know that and they are going to err on the side of caution as opposed to leaving their necks out for the Fed to step on.
Thus the Fed's well know track record with respect to fighting inflation is helping exacerbate the inflation it thinks it sees. Companies are not going to really get creative and ramp up production across the board as long as the Fed is fighting inflation. Thus supply will remain tight even as demand remands strong, and that is the textbook cause of inflation: more demand dollars chasing a low supply of goods and services.
THE MARKET
MARKET SENTIMENT
VIX: 10.33; -0.48
VXN: 13.34; -0.87
VXO: 10.04; -0.71
Put/Call Ratio (CBOE): 0.75; +0.03
Bulls versus Bears:
Bulls increased slightly while bears did the same, maybe working to offset each other but still close to levels considered bearish for the market. This has taken them out of the clearly bearish levels of three weeks back, but again, still very close to levels considered bearish.
Bulls rose to 54.5%, back up after a one-week hiatus where the fell to 53.9%. Still below the 55.1% from two weeks back that put it above the 55% level that is considered a bearish indication. Bulls bottomed in early May at 43.5%.
Bears offset the bulls a bit, rising for a second week and moving to 22.2% from 21.4% the week before. That keeps them above the 20% level for the second week after dipping to 19.1% three weeks back. Below 20% is considered a bearish indication for the market. Hit a high for the year at 30% in early May.
NASDAQ
Stats: +3.96 points (+0.18%) to close at 2156.78
Volume: 1.546B (-18.31%). After the volume spike Thursday as NASDAQ gapped higher on the good CPI and earnings news volume peeled off again as it did Tuesday and Wednesday as NASDAQ started to show signs of slowing the strong move that started the prior week. Low volume for an expiration Friday, just another reason to look for a pullback from this good surge. When a stock or index runs out of volume after a run higher that typically presages a pullback as there are fewer and fewer buyers carrying the load up the hill.
Up Volume: 846M (-344M)
Down Volume: 680M (+31M)
A/D and Hi/Lo: Advancers led 1.08 to 1. Smaller gain than Thursday's point gain but breadth was positive versus the negative showing Thursday. The smaller cap stocks performed better Friday and that helped boost breadth.
Previous Session: Decliners led 1.25 to 1
New Highs: 99 (-56)
New Lows: 22 (+3)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
After gobbling up big chunks of real estate in the early days of this move (37 points, 22 points), the point gains have stalled just as NASDAQ reaches the next resistance at 2163 from the December 2004 closing high. Volume has tapered as well, and without that trade to drive it the price gains have started to sputter. Even the gap higher Thursday on the good news was stymied after the gap. All of this points to a slowing move that needs a bit of rest before continuing just as on SP600 where it came back to its 10 day EMA. Would like to see NASDAQ do the same (10 day at 2122) or at least make a wave that way in order to set up the next move. If SP500 takes off again, however, NASDAQ may simply follow it, taking just a pause to refresh as opposed to a deeper pullback. Techs are coming to life along with biotechs, and they are driving much of the market action now along with the small caps.
After surging the past two weeks off the 200 day SMA (417) with a 44 point move of its own SOX will need a rest as well. A good pullback to the top of its 8 month trading range at 450 would set that level as support and provide an excellent level to move in with more semiconductors and even picking up some SOX options and some SMH positions.
SP500/NYSE
Stats: +1.42 points (+0.12%) to close at 1227.92
NYSE Volume: 1.32B (-15.69%). Volume dove on NYSE as well, falling back below average as SP600 fell back to test the 10 day EMA and SP500 showed a doji with a modest gain. As with NASDAQ, volume has been tailing off as the move runs out of gas after that strong jump two weeks back.
A/D and Hi/Lo: Advancers led 1.04 to 1
Previous Session: Decliners led 1.19 to 1
New Highs: 127 (-148)
New Lows: 19 (-2)
The Chart: http://www.investmenthouse.com/cd/^spx.html
SP500 rallied once more to 1229, the March intraday high it rallied through on Thursday, but once more it could not hold the move. This is a key level for SP500 and its failure to move through in one fell swoop has many pundits calling for its failure and crash back down into the trading range. While the move has not been the picture of strength there are other forces at work as well. The small caps, mid-caps, NASDAQ and SOX have all made breakout moves. SP500 has been a laggard on the way up, so no surprise it has not made yet made its breakout. Further, it had to run a long way to get to this point, moving off of a tap at the 200 day SMA (1180) just 7 sessions back. After that run you would anticipate a bit of a pullback to rest and reset the move for another try higher.
After the higher volume selling on SP600 Thursday, it did just what we wanted, tapping the 10 day EMA (342.61) on the session low and rebounding for a modest gain. The pattern on the candlestick chart was a nice hammer doji; the way it jumped off the 10 day EMA shows buyers were ready to move back in quickly, picking up small caps off the nearest support level.
DJ30
DJ30 has rallied back to the June highs in the 10,650ish range, a level that has kept DJ30 in check on several occasions in the past. As with SP500, many pundits were panning the move, but it too has run far in a short period (465 points) from way down in the pattern (it held some support at 10,250 to start this move). While we are not enamored with DJ30's pattern (it is clearly a laggard), it is working to overcome the overhead supply. A pullback here to form a handle to the pattern would set up the breakout DJ30 sorely needed. The modest gain and doji on the candlestick pattern Friday suggests it is going to take a breather here.
Stats: +11.94 points (+0.11%) to close at 10640.83
Volume: 239 million shares Friday versus 267 million shares Thursday. Not bad given that DJ30 posted a modest gain and looks ready to take a breather.
The chart: http://www.investmenthouse.com/cd/^dji.html
MONDAY
Not a lot of economic data compared to the past two weeks, but there will be some peaks at the economy with the Leading Economic Indicators and the Philly Fed regional manufacturing report. The LEI has been trending lower for several months, and it will be interesting to see if it starts to perk up some - - now that the economy has already done that.
Earning will be the spotlight, however, as they start in earnest. Surprise AAPL and AMD earnings helped propel the market Thursday, but thus far most of the move in this rally the past two weeks has come in anticipation of earnings, not to mention the Fed getting close to the end of its rate hiking.
Indeed, stocks have rallied in anticipation, and now are pausing just as the earnings season moves into high gear. A pause and rest sets the stage for a move higher if the earnings continue to surprise to the upside as they have done the past two quarters. Now many (nearly everyone) are expecting earnings growth to slow and thus stocks will halt their advance. Earnings can grow at a slower pace, however, and stocks can still rise. Growing earnings support higher prices, and it is up to investors to decide how high. Thus far they are anticipating continued growth such that stock prices can continue to rise.
All of this comes to a head over the next couple of weeks as the earnings peak and investors get the pulse of the economic activity to come. Thus far the market has built in positive news with breakouts from the small caps, mid-caps, techs and semiconductors. Those sectors are not going to perform well in an economy that is slowing or going into decline. The breakouts show that they are anticipating further expansion.
We still feel that the large caps are due for a pullback here to test the strong run the past 7 sessions, showing signs of slowing the last half of the week. A pullback could take most of the coming week if NASDAQ moves back to fully test the 10 day EMA. Money has been rotating around the market, and the small and mid-caps are set up to rebound even if the large caps fade back. Indeed with rotation this would be anticipated. Still, we will be watching for NASDAQ to follow along with the small caps if they make a break higher; both are in leadership mode now, and if one goes the other is likely to follow. Given that the small and mid-caps have already made their pullback we anticipate they will start their rebound this week and we will be looking to move into plays as they move off their near support.
Support and Resistance
NASDAQ: Closed at 2156.78
Resistance:
2163, the mid-December closing high has stalled NASDAQ the past two sessions.
2178 is the January closing high.
2191.60, the January intraday high.
Support:
2151, the early December closing high and highs from January 2004
The 10 day EMA at 2122
The 18 day EMA at 2105
2100 was key resistance point, and a successful test sets it up as support.
2075 to 2078
The 50 day EMA at 2068
2051 from February, March price points.
Early April high at 2021, February lows at 2023.
The April high at 2022 was the higher high point.
The 200 day SMA at 2043
S&P 500: Closed at 1227.92
Resistance:
The March 2005 high at 1229.11
Price tops at 1265 from 1-28-99 and 2-99 & price bottoms from 12-20-00
Price top at 1-6-99 at 1272
Price tops at 1290 from 5-23-00
Price tops at 1364 from 1-29-01
Support:
The March 2005 closing high at 1225
The June high at 1220
December high at 1217
The February intraday high at 1212.
The 10 day EMA at 1216
1200 is some support
The 50 day EMA at 1199
1196, the mid-January high and the early December peak in the left shoulder.
The April high 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 1180
Dow: Closed at 10,640.83
Resistance:
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:
Price consolidation at 10,600
The April high at 10,557
The 10 day EMA at 10,507
The 200 day SMA at 10,461
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 19
Housing Starts, June (08:30): 2009K prior
Building Permits, June (08:30): 2062K prior
July 21
Initial Jobless Claims, 07/16 (08:30): 336K prior
Leading Indicators, Jun (10:00): -0.5% prior
Philadelphia Fed, Jul (12:00): -2.2 prior
FOMC Minutes, Jun 30 (14:00)
End part 1 of 3
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