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world stock market, us stock market
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7/21/05 Stock Split Report
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SUMMARY:
- Market bombarded by news, holds up decently all things considered.
- China takes first step at 'floating' yuan.
- Leading indicators jump past expectations after the economy has already started to strengthen.
- Stocks head into the weekend with NASDAQ at resistance with some distribution.
Tidal wave of news and events creates indecision.
With the deluge of news from within and without the financial arena some uncertainty arose, and as we know investors hate uncertainty. Rallies are often born in the midst of great uncertainty and angst, but when issues crop up after stocks have put in a good run and a key leader is sitting at important resistance (NASDAQ), the uncertainty tends to have the opposite effect. Thus stocks were under pressure Thursday from the open and ended up selling off on some rising volume.
It was not an all out sell off from the open though there was enough news to do just that. China announced it was going to 'float' the yuan against a basket of currencies that includes the dollar, some Asian currencies, the Australian dollar, etc. It is a controlled float ('float' is a misnomer); the yuan can fluctuate 0.3% per day and China will announce each day what the yuan closed at. In other words, despite a supposed mechanical calculation of what the value should be each day, China will have the last say regardless of what happened with the other currencies. Thus it is a tethered float with a China veto.
There was also another London bombing episode but fortunately this time the bombers were unable to detonate their devices. Four attempts and four misfires. Once more there were comments about a 'coordinated' and 'sophisticated' attack as with the bombings two weeks ago today. I think they give these guys a bit too much credit. How sophisticated does a small group have to be to set off a nail bomb (one of the devices today) or other explosives you learned to make on the internet at the same time? Four wrist watches set to the same time and the ability to get to your target on time are pretty much it. Hell, the guys from Delta house in Animal House were able to do it.
There was also the usual barrage of earnings, but with the other overriding events it was really feast or famine and limited to the individual issues reporting. If you beat the numbers handily and guided higher you were rewarded. If you were in line or worse or could not muster any improved guidance you were roughed up. With the new issues presented Thursday investors were not willing to give any fence sitters the benefit of the doubt. In a way that is some of the 'saturation' discussed in the Wednesday report. Investors have heard a bunch of good news, and good news starts to have diminishing effects after a while. With the bombings and yuan issues stirring the pot, unless you were clearly a winner you were getting hit with some selling.
Accordingly, stocks started weak but then came back over lunch to claim new session highs with NASDAQ turning positive over lunch. Then stocks faltered as NASDAQ could not push the breakout over 2191. With the confusion over the impact of the yuan, stocks overall sold off in the afternoon, holding just above the lows on the close.
Volume rallied again, showing some distribution that had disappeared after the London bombings two weeks back. Given the flux in the world that was not too surprising. Given the potentially transient nature of the two major issues (London and the yuan), the distribution is not too alarming.
The only issue that makes you take pause right now is the strong move to this point and NASDAQ at its 2005 high. We were already anticipating some sluggishness as a result, and with these two issues added to the mix the slump was accelerated some. Some selling after such a good run to next resistance is expected. Now we have to see how well stocks absorb this news and hold the uptrend. The Thursday action was distribution, but it did not put any of the indices into danger.
THE ECONOMY
China revaluation will have more impact on inflation than the trade balance.
This is one of those issues that can be argued from either side by those wanting free markets. The manufacturers demand China float its currency in order to bring it more in line with what it is believed market forces would achieve, i.e. a stronger yuan and a weaker dollar versus the yuan. In theory that would make US goods more attractive and help manufacturers sell more. At the same time that would make Chinese goods more expensive and might crimp US demand for those items. That is supposed to help the trade balance right itself, thus killing two birds with one stone, i.e. helping US manufacturers and bringing the current account more in line.
The other side of the argument is that there is nothing wrong with US consumers getting cheap Chinese goods and that in reality the divergence between labor costs in China and the US will not be overcome by a mere float of the currency even if it was a full float.
That brings us to the actual details. As noted above, it is not really a float. It is something called a 'dirty' float where it is limited in range, it is set against a basket of selected stocks, and worse, at the end of the day China can set the yuan at whatever it wants regardless of what the basket did. Thus those expecting a lot of change soon and were rushing around Thursday to position themselves for it will likely not see major changes any time soon.
What is likely to happen is a quick revaluation to 7.7 yuan to the dollar, the same exchange rate between the US and Hong Kong (Hong Kong was 'floated' similarly a couple of weeks back). Right now it takes 8.1 yuan to the dollar, so it would not take long (about a month) to get it on par with Hong Kong.
US to import inflation.
This likely won't change the landscape much with respect to the trade balance, at least not at these miniscule levels. What will be more noticeable to us here in the US will be higher consumer prices as the US imports suddenly higher priced Chinese goods and as China buys less dollars.
US retailers will see increased prices overnight. For instance, 90% of Wal-Mart's shoes come from China. Thos prices will start rising tomorrow, at least for WMT. How much they get passed onto the consumer remains to be seen, but given the razor thin margins a good part of the price increase will have to be passed on. Much of the lower end goods we receive from China will start to rise in price. As the yuan rises it will be enough for all of us to feel, but it won't be enough to make up the difference in the price of US labor versus Chinese labor. Even at parity between the dollar and yuan (that is where they float freely against one another), Chinese labor costs are so much lower that goods would still be cheaper and we will still import basically the same quantities. There are many jobs that simply are not going to 'come home' ever again because the labor price differences are so vast. All that will do is make our prices here higher.
Second, China won't have to buy as many dollars each day in order to keep the yuan pegged at a set rate. It will still buy a lot of dollars because the 'float' is a small one and not much will change near term. Over time, however, the amount is significant. In 2004 China bought $193B of dollars to maintain the peg. It will still buy a lot of dollars, but the amount will start decreasing. That means extra dollars will come back to the US. That means lower prices for the dollar (something that started Thursday with the announcement) and more dollars at home.
That is the second stage of the inflation. More dollars at home chasing the same amount of goods is the textbook definition of inflation. More dollars compete for a steady pool of goods. That bids prices up.
Thus we import inflation on two fronts: higher actual costs of goods coming in, then added inflation pressure with the repatriated dollars being used to buy those higher priced goods. The moral of the story: when you mess with market forces you eventually have to stop because you create imbalances that threaten the very stability you sought when you started the tinkering. Then when you remove desist from the actions that caused the problem there is a lot of pain as the adjustment is made. Decisions and positions were taken as a result of the tinkering, and those positions and decisions have to be unwound. That results in a lot of pain in the adjustment process. It remains to be seen if it is worth it, but in the short run the problems sought to be rectified are not likely to show much improvement.
Leading Economic Indicators advance dramatically.
The indicators for June rose 0.9% versus the 0.5% expected. May was revised to flat from the -0.5% previously reported. After a steady decline for 6 months the indicators that look forward 6 months are turning up. How accurate have they been? Well they indicated a slowdown coming but now that the economy has turned up they are turning up. Of course they started improving in May, but it took until July to realize this. Maybe the 'leading' should be excised from the title and just call them 'economic indicators.' It is interesting and somewhat discouraging to note that of the 10 items factored into the LEI, the only decline was capital investment. That is investment in business by US businesses, and that needs to continue to grow the economy and help keep inflation at bay. Unfortunately, that is the one area in the economy that has lagged the past four months.
THE MARKET
MARKET SENTIMENT
VIX: 10.97; +0.74
VXN: 13.47; +0.58
VXO: 10.57; +1.1
Put/Call Ratio (CBOE): 0.93; +0.02. Some uncertainty in the market and the options market comes to life, at least on the put side. Wednesday night we discussed an underlying negative view of the economic recovery and thus the market move by many who feel the economy and market never suffered enough in the downturn to completely flush the pipes of all the excess. That despite the low readings in the sentiment indicators, this continuing negative view had kept a lot of money on the sidelines, money that was not being dragged in as the indices one by one broke through old resistance levels. The put/call ratio has remained at the high end of the range for most of the market advance. It looks as if this ratio is somewhat of a reflection of that underlying negative theme as investors are quick to take refuge in puts at any sign of trouble.
Bulls versus Bears:
Last week: 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: -9.97 points (-0.46%) to close at 2178.6
Volume: 2.106B (+3.68%). After a strong upside volume session Wednesday, volume was even stronger Thursday as NASDAQ turned back down after trying but failing to take out resistance at 2191. Never like to see an index turn right back over on higher volume after a high volume move to try a new high or break resistance. It is only the first distribution day since the index jumped off of the 50 day EMA to start the month, and given the issues for the session we are not putting too much weight on it. Given it occurred at the last key resistance from this year, however, it cannot be ignored.
Up Volume: 965M (-270M)
Down Volume: 1.122B (+374M)
A/D and Hi/Lo: Decliners led 1.7 to 1
Previous Session: Advancers led 1.97 to 1
New Highs: 159 (-49)
New Lows: 13 (-4)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
NASDAQ recovered from the early weakness and posted a gain that took it over the January 3 high at 2191.60 by mid session. It could not hold the move and the sellers took it back down by the close. It was not a classic reversal session; it was overcoming some bad news and managed to do so at least for part of the session. In the end it was unable to hold the recovery, however, and closed lower on stronger volume. Technically a distribution session just as the Wednesday move was technically an accumulation session, but neither fall into easy classifications. As seen two weeks back, distribution based on transient events such as the terror bombs subsides in a market bent on rallying. With NASDAQ hitting the 2005 high after a strong run it was already primed for a pause. With the new issues confronting it Thursday it was pretty much a given. It still showed some strength with the intraday recovery, but it likely needs to reload anyway before making a lasting breakout. A test back to the 10 day EMA (2151) would be a good start.
SOX faded as well after its strong run and recent break higher from a short lateral move. Intel did not take SOX down Wednesday, but Thursday it did not have anything left when confronted with the new uncertainties raised. As with NASDAQ, after a strong run SOX is ready to test after that short lateral move a week back gave it a quick breather but not a real rest. Looking first for a test of the near support at the 10 day EMA (460.26).
SP500/NYSE
Stats: -8.16 points (-0.66%) to close at 1227.04
NYSE Volume: 1.657B (+5.51%). Similar to the other indices SP500 fell back for a loss on rising volume, the strongest trade in a month after moving to a new 4 year closing high Wednesday. Strong upside move, stronger downside move. There were extraneous events causing the reversal for sure, but cannot ignore the immediate reversal on stronger volume after just setting a new closing high on a break through resistance. There were a lot of investors uncomfortable at these levels given the news hitting the market.
A/D and Hi/Lo: Decliners led 1.7 to 1
Previous Session: Advancers led 1.97 to 1
New Highs: 159 (-49)
New Lows: 13 (-4)
The Chart: http://www.investmenthouse.com/cd/^spx.html
SP500 broke through 1229.11 Wednesday on volume and then gave it up Thursday on stronger volume. After a fairly decent lateral move to set up the breakout, SP500 finds itself right back down to the 10 day EMA (1223), showing its first day of distribution since the 50 day EMA back in early July. Not in any imminent trouble but those immediate reversals are always something to watch.
SP600 led the downside (-1.7%), edging out SOX with the decline. It has led the move both in time and in gains, and thus it is typical for it to sell the most when the market sells. If fell right back to the 10 day EMA (345.22) the day after setting a new all-time high itself. Very similar to the other indices in its immediate reversal on high volume, but as with the others, it is not in any real danger at this juncture.
DJ30
DJ30 sold as well falling back into the recent resistance range it managed to take out this week. No real change for the blue chips, and unlike the other indices, volume was lower on this decline. That leaves it in pretty good shape after a wobbly session for the market.
Stats: -61.38 points (-0.57%) to close at 10627.77
Volume: 281 million shares Thursday versus 312 million shares Wednesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
FRIDAY
A quieter economic data week did not lack at all in news. After the wave of issues hitting the market Thursday investors are not likely to be overly enthusiastic about buying into the weekend. What remains to be seen is how transient the issues from Thursday turn out to be. The previous bombings stalled the market for a couple of weeks and then a solid break higher. The China revaluation is not as big, at least initially, as some of the reaction made it seem, and we suspect equilibrium will be found fairly soon with respect to that issue.
In addition to the news issues, NASDAQ is working on its next resistance with little rest. The China and London issues are good excuses for it to take a breather at this level, test back, and then make another run at resistance. Thus far this was just a news driven distribution session that did not disrupt the overall move. A rally can handle a stray distribution session or two and continue along just fine. With the nature of the spoiling issues Thursday and the fact NASDAQ had just run to next resistance makes this all seem rather according to some script.
Friday we are going to watch the volume and also watch how the leaders continue their pullbacks or tests of near support. We have a feeling the selling will be rather short-lived, but we also don't know if investors are going to want to move back in just yet given it is Friday. Of course the last time we thought this stocks jumped higher on Friday. Thus we will watch for stocks to make their tests and then rebound, giving us some good entry points on early tests of their breakout moves.
Support and Resistance
NASDAQ: Closed at 2178.60
Resistance:
2191.60, the January intraday high.
2215 is the June 2001 closing high.
2264 is the June 2001 intraday peak.
2313 is the 5-22-01 closing high.
2328 is the May 2001 intraday high.
Support:
2178 is the January closing high.
2163, the mid-December closing high has stalled NASDAQ recently.
2151, the early December closing high and highs from January 2004
The 10 day EMA at 2150.88
The 18 day EMA at 2129
2100 was key resistance point, and a successful test sets it up as support.
2075 to 2078
The 50 day EMA at 2084
2051 from February, March price points.
S&P 500: Closed at 1227.04
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 and the 10 day EMA at 1223
December high at 1217
The 18 day EMA at 1217
The February intraday high at 1212.
1200 is some support
The 50 day EMA at 1203
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
Dow: Closed at 10,627.77
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 10,580
The 200 day SMA at 10,470
The May high at 10,406
10,400, the bottom of the November/December range
The recent April highs at 10,264
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
July 19
Housing Starts, June (08:30): 2004K actual versus 2050K expected and 2004K prior (revised from 2009K)
Building Permits, June (08:30): 2111K actual versus 2085K expected and 2050K prior (revised from 2062K)
July 20
Greenspan speaks to Senate
July 21
Initial Jobless Claims, 07/16 (08:30): 303K actual versus 326K expected and 337K prior (revised from 336K)
Leading Indicators, Jun (10:00): 0.9% actual versus 0.5% expected and 0.0% prior (revised from -0.5%)
Philadelphia Fed, Jul (12:00): 9.6 actual versus 10.0 expected and -2.2 prior
FOMC Minutes, Jun 30 (14:00)
End part 1 of 3
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world stock market
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