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us stock market, understanding the stock market
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7/25/05 Technical Traders Report
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SUMMARY:
- Stocks waffle to start week, continue consolidation toward near support on low volume.
- Existing home sales rise, defying expectations of declines.
- Fed still ready to raise rates to slow housing, gain some leeway.
- Consumer confidence set to rise once more despite gasoline prices.
- TXN reports solid earnings after hours, rallies the chips.
Low volume slide as stocks continue attempt to consolidate.
Stocks were soft ahead of the open giving buyers a chance to move in and continue the bounce from Friday. They did, but it was a lackluster attempt. Oil was lower but as it started to creep higher as the session progressed, stocks lost what little traction they had. NASDAQ took a swipe at 2191, but just over an hour into the session stocks lost their bid and started a session long slide.
There simply was not enough positive news to overcome the recent flood of news, mostly positive, that has helped push stocks higher. TEVA is buying IVX, more earnings, existing home sales surprised to the upside. With the current news glut this was simply not enough to goose the market once more.
Instead stocks stalled the early bounce, slipped lower, and closed near the session low. They have struggled the past week to advance the move, still trending higher above the 10 day EMA, but making a series of back and forth moves as the energy that rallied the market higher has waned. Stocks are not without upside support, they are simply struggling after running higher, trying to consolidate the gains in a somewhat orderly fashion.
That consolidation looked good Monday with a lower volume pullback that easily held the uptrend. After the Thursday higher volume turn lower, the resumption of lower volume selling is a plus. Last thing you want to see is stocks starting to log a series of distribution sessions (higher volume selling) after reaching an important resistance level on NASDAQ and just breaking past the 2005 highs (and making a 4 year high) on NASDAQ. Much better to see some low volume pullbacks as that simply shows the buyers are taking a breather as opposed to the sellers jumping in and actively selling stocks lower.
That leaves the market still in its uptrend but showing the same choppy action that suggests an interim peak in the current run as stocks continue to trend higher. Losses were rather modest with 0.4% (SP500) to 0.6% losses (NASD, SOX), but the leading small cap index took the hardest hit (-0.8%). This up and down action demonstrated of late is symptomatic of needing a bit of a breather, and thus far this is quite normal after the rush of good news and the move higher. Stocks need to digest some of the gains and investors need to absorb all of the news. While that happens stocks are not likely to advance.
We are thus looking for more testing of this move with a continued pullback to test near support either in the 10 day EMA or a bit lower. If it remains more of a buying pause than a start of selling (i.e. low volume on the pullback), that works to only strengthen the advance. It also works to set up new entry points for leaders that have broken out and are testing their move higher. TXN reported solid earnings after hours and that could push stocks higher as it and other chips were stronger after hours, but overall the market still looks like it needs more of a breather. We will let the market do the talking, however, and if we see strong stocks starting back up from a good test we won't turn away.
THE ECONOMY
Existing home sales beat upside expectations, but Fed is going to slow it down.
This market makes up 80% of the housing market, and June saw a 2.7% gain to 7.33M units, stronger than the 7.13M units expected. Once more the housing market defies expectations of a slowdown, at least to the extent expected. Sure existing homes sales rose, but the rate of the increase continues to slow.
Turn on any financial station and you hear of the pending doom for the housing market. We absolutely agree the market cannot continue to expand indefinitely. It is overdue for a slowdown more than just slowing its rate of growth. Problem with streaks is you just never know when it is going to crack.
There is tremendous demand for homes due to low rates allowing more access by more buyers and also allowing speculators to speculate in the market. You can bet that the housing expansion will stop when rates hit a point where it becomes too hard to move houses. Again, no one really knows where that 'affordability' level is. It has been pushed higher due to creative financing on top of the low mortgage rates, and that is a problem. There are going to be quite a few holding the bag when the last sale becomes one too many and speculators are stuck with a house (houses?) they did not want to hold and buyers find their interest only loans jumping higher. There will be losses and bankruptcies as a result. It always happens at the end of any cycle.
Does that mean we pull the Chicken Little act as some are doing? You can, but it is a bit more useful to recognize the inevitable while also knowing no one can pick the exact point when it will top. The Fed has clearly stated it is going to raise rates to cool things off all across the economy, and its discussions of housing before Congress and in the FOMC minutes make it clear housing is one of the areas of concern. Late last year Greenspan stated that market participants should be fully hedged in order to protect any downside. You cannot get any clearer than that.
Fed is not ready to quit soon.
That warning extends to all areas, and it is even more germane now that 8 intervening months have gone by. The housing market is still expanding and Greenspan, despite guesses to the contrary, has continued his position that more rate hikes are to come.
The Fed has a nasty habit of continuing its hikes until it sees real 'progress' with its work. Of course progress from the Fed's perspective is potential disaster from the markets' perspective. The reason is that by the time a rate hike actually shows it is working, there is a line of hikes behind it already in the pipeline from other rate hikes. Once the slowdown starts it happens quickly, but the Fed does not take back its hikes until it is way too late. In other words, the slowing starts but then the additional hikes keep piling on and ultimately pushed the desired slowing into a serious shutdown.
We discussed this frequently last year, i.e. how the Fed says it will carefully monitor the data to determine when it should raise more or stop raising altogether. It talks a good game but it gets blinders with respect to some goal it has and then ignores the data (or reads it the way it wants to such as with the flattening yield curve) or it keeps hiking (and even with more intensity) until it is painfully obvious (to all of us at least) that things have slowed substantially. Again, that leaves a string of rate hikes still out there with a target painted on the economy. They eventually hit the economy and do their damage. The Fed then takes its time reacting just as it did in this last debacle in 2000 when it took until January of 2001 to actually realize the error of its ways and cut rates. By that time much too much damage was done and some belated rate cuts had no effect.
Thus overriding the market right now is the Fed and its rate hiking. The market continued to rally into the rate cuts just as it is doing now, but the Fed finally won. Fortunately the Fed's agenda this time around does not appear as detrimental as it is not necessarily taking on the stock market and all indicia of success (though home ownership is a traditional American symbol of prosperity). It has stopped short of creating a recession in 2 out of its last 10 attempts. Gee, what a comforting thought. That means we have to keep watching for signs of the market topping with heavy distribution and rising volatility as those often signal the end of a run. Thus far the market is showing signs of health and accumulation as opposed to distribution.
THE MARKET
MARKET SENTIMENT
VIX: 11.1; +0.58
VXN: 13.58; +0.63
VXO: 10.43; +0.27
Put/Call Ratio (CBOE): 0.80; 0.00
Bulls versus Bears:
After a bump higher, bulls were down slightly last week while bears edged higher. They are both outside the levels considered bearish, but they are walking a thin line just this side of those levels.
Bulls fell to 52.7% after bumping up to 54.5% the week before. It is trying to trend lower after peaking the first week of July. Hit 55.1% at that time. Bulls bottomed in early May at 43.5%.
Bears moved higher to 23.1%, rising for the third week, up from 22.2% and 21.1% before that. That keeps them above the 20% level for the third week after dipping to 19.1%. Below 20% is considered a bearish indication for the market. Hit a high for the year at 30% in early May.
NASDAQ
Stats: -13 points (-0.6%) to close at 2166.74
Volume: 1.532B (-11.23%). Big drop in volume to well below average Monday as NASDAQ posted a loss. That indicates the sellers were in control of the session but not in control of the overall action. NASDAQ has shown signs it needs to test, and it is doing it. This low volume is what you want to see as it does.
Up Volume: 576M (-303M)
Down Volume: 932M (+135M)
A/D and Hi/Lo: Decliners led 1.63 to 1. Pretty modest just as the upside was pretty modest Friday.
Previous Session: Advancers led 1.74 to 1
New Highs: 173 (+29)
New Lows: 17 (+3)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
NASDAQ has bounced back and forth the past two weeks even as it maintained its uptrend. It has shown one day of distribution during this July rally (last Thursday), and the resumption of lower volume selling is a positive as NASDAQ pulls back once more and looks to be actually ready to make more of a test. That back and forth action even as it rose indicated the move was getting a bit weary and needed to consolidate some, particularly with NASDAQ below its next resistance (2191) after a quick run to that level. Still looking for a test of the 10 day EMA (2158) as the minimum pullback level to set the next move higher.
SOX posted a 0.6% loss on the session as it too has shown the back and forth action of late after a strong run. Indeed, Thursday it rallied to its breakout high (480.30) and then slid back to where it opened; posted a gain, but not the greatest action. Looks ready itself to make a pullback to test the 10 day EMA (464.64), and that would be a very good point to launch the next move and give us some good entry points. Of course TXN reported some very solid results after hours and was on the upside move; news trumps everything else, and if it is strong enough this may be all the test we get.
SP500/NYSE
Stats: -4.65 points (-0.38%) to close at 1229.03
NYSE Volume: 1.299B (-5.15%). Volume fell and was below average as it was Friday. SP500 rallied intraday, but without the volume it could not hold the move. Modest loss on lower volume, still holding above the 10 day EMA. Good action but this pullback is not over with this action.
A/D and Hi/Lo: Decliners led 1.7 to 1. With the small caps posting a 0.8% loss on the session breadth was expectedly downside. It was not a downside rout, however.
Previous Session: Advancers led 2.12 to 1
New Highs: 280 (+49)
New Lows: 26 (+6)
The Chart: http://www.investmenthouse.com/cd/^spx.html
SP500 tried to rally but as noted it lacked the volume to make it stick. Instead it posted a modest loss and still held easily above the 10 day EMA (1225.71) as it continues its trend higher above that support level. After a good surge off the 50 day EMA (1205) to start the month, SP500 has turned laterally, holding above the 10 day EMA and the March closing high (1225) as it trades in a tighter and tighter range below 1236. A few more sessions of lateral and slightly lower price action on low volume sets it up for the breakout move.
Small caps took the brunt of the selling with a 0.8% loss. As with the other indices, however, it held easily above the 10 day EMA (346.78) as it works through some choppy trade that has seen alternating up and down sessions the past week. Similar to SP500 it is also trading in a narrowing range below resistance at 352ish and above the 10 day EMA. Needs some more sideways movement to set up the next break higher.
DJ30
DJ30 posted a loss as well but held the 10 day EMA on the close. Volume was down sharply once more, turning in its second straight below average volume session. It is trying to form something of a handle at the 10 day EMA after its rally off support at 10,250 from early July. As with SP500 and SP600, it could use a couple more sessions of lateral movement to set up the next move higher.
Stats: -54.7 points (-0.51%) to close at 10596.48
Volume: 190 million shares Monday versus 231 million shares Friday.
The chart: http://www.investmenthouse.com/cd/^dji.html
TUESDAY
July consumer confidence is out Tuesday, and despite higher gasoline prices it is expected to post a very solid 106.2 reading, rising from June's 105.8. Just as with the housing market, this is giving the doubters plenty of fodder to pick at the economy and its growth prospects (or as they tend to put it, its crash prospects), e.g., how can confidence be high when job creation is crappy and gasoline prices keep rising? Conspiracy theories re government reporting to commentary as to how stupid the consumer must be are not uncommon.
While we don't have top confidence in the government reports, it does not take sensitive measuring devices to ascertain that the economy is doing pretty well. It does not take a lie detector to determine that the consumer is feeling decent even with $2.30/gallon gasoline. As we have said many times before, confidence does not impact spending until it is way down in the fifties or sixties. With readings moving back above 100 the past few months, that is not a risk right now. Get gasoline to $3/gallon nationwide, however, and you start to have a problem.
TXN reported some solid results after hours, and after an initial drawdown it rallied and spurred some after hours buying in chips and techs in general. Good results, but likely not good enough to turn the sluggish action of late into a new rally just yet. The choppy back and forth trade, a session of distribution, then some light trade after a solid run higher indicate there is some more consolidating to take place before the next move higher.
As of now the action still looks like more of a routine pullback ahead, and we are going to treat it accordingly. That means giving strong leaders a bit of room to test near support as long as volume remains light and overall market action is still constructive. At the same time we are not going to let any position get out of hand; if it struggles and breaks near support and cannot rebound, we are not going to see if it can recover. This is earnings season, and stocks get rewarded, left alone, or roughed up. Got to keep vigilant and in control of positions. If we sell out and a stock recovers, so be it; we will look at it as a new play at that point.
Support and Resistance
NASDAQ: Closed at 2166.74
Resistance:
2178 is the January closing high.
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:
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 2158
The 18 day EMA at 2138
2100 was key resistance point, and a successful test sets it up as support.
The 50 day EMA at 2090.56
2075 to 2078
2051 from February, March price points.
S&P 500: Closed at 1229.03
Resistance:
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 high at 1229.11
The March 2005 closing high at 1225 and the 10 day EMA at 1225.71
The June high at 1220
The 18 day EMA at 1220 and the December high at 1217
The February intraday high at 1212.
1200 is some support
The 50 day EMA at 1205
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 10,596.48
Resistance:
Price consolidation at 10,600
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 10 day EMA at 10,593
The 200 day SMA at 10,475
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 25
Existing Home Sales, June (10:00): 7.33M actual versus 7.15M expected and 7.14M prior (revised from 7.13M)
July 26
Consumer Confidence, July (10:00): 106.2 expected and 105.8 prior
July 27
Durable Goods Orders, June (08:30): -1.0% expected and 5.5% prior
New Home Sales, June (10:00): 1300K expected and 1298K prior
July 28
Initial Jobless Claims, 07/23 (08:30): 320K expected and 303K prior
Help-Wanted Index, June (10:00): 38 expected and 37 prior
July 29
GDP-Adv., Q2 (08:30): 3.5% expected and 3.8% prior
Chain Deflator-Adv., Q2 (08:30): 2.6% expected and 2.9% prior
Employment Cost Index, Q2 (08:30): 0.8% expected and 0.7% prior
Michigan Sentiment-Rev., July (09:45): 96.5 expected and 96.5 prior
Chicago PMI, July (10:00): 55.0 expected and 53.6 prior
End part 2 of 3
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us stock market
understanding the stock market
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