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us stock market, understanding the stock market
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07/27/05 Investment House Daily
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SUMMARY:
- Market starts soft, holds 10 day EMA, and rebounds again on solid trade.
- Durable goods orders rally for third consecutive month.
- New home sales post new record (again).
- Oil inventories decline in line with expectations but are restaurants telling us something?
- Market still overall solid but good stocks getting rocked for the slightest earnings disappointment.
Intraday action improves as stocks post second consecutive gain.
Stocks started a bit softer, held easily above the 10 day EMA, and then once more started an afternoon rally that pushed them to a higher close for the second session. Volume rallied on NASDAQ and was basically flat on NYSE, but the trade was solid once more as stocks posted gains. NASDAQ moved up to the top of its recent range while SP500 broke through on a closing basis. Good action as stocks started soft and finished strong while adding gains on higher volume. Thus even though the gains were modest, it was not a session of churning that happens at the top of a run where volume runs higher but stocks run in place. The indices are still working on their lateral move above the 10 day EMA, and that continues the good action seen thus far.
SOX and SP600 (small caps) lagged the action with SOX posting a 0.7% loss. It was worse intraday as the chips undercut the 10 day EMA on the low, but the rebound was pretty impressive. SP600 showed the same action, undercutting the 10 day EMA on the low and rebounding to the close. These two leading sectors have lagged recently, but they are putting in some good consolidation, reaching lower to flush out the sellers and then buyers stepping in to push them back up.
We are also hearing some talk of a market top crop up as the television traders get impatient as the market has ceased rising. That is what happens when a gain is tested or consolidated. It is true that NASDAQ has hit next key resistance and has stopped rising. We expected that. What we have been watching is how it reacts after hitting that level. Thus far it has done what we would want, moving laterally, showing good price/volume action, refusing to give up its gains. In short, it is not showing signs of internal deterioration that would suggest a top as opposed to a breather after a run higher. Add to that the talk of a market top and you have a good combination of technical and psychological indicators aligning.
THE ECONOMY
Durable goods orders rise instead of fall.
June orders rose 1.4% versus the -1% expected, and May was written higher to 6.4% from 5.5%. This was the third consecutive rise, and it showed some positive internal strength as well. Excluding transportation, orders rose 2.6%. Non-defense capital goods ex-aircraft (business spending) jumped 3.8%, reversing the 0.6% May decline (and that was revised higher from the -2.5% originally reported).
Good to see the business side improving. After the tax incentives expired at the end of 2004 business investment slowed as we expected it would. This bump higher in Q2 buying (3 months in a row) holds promise that business, the missing link in the last recession, is not drying up. We need plenty of business investment to keep the supply side moving so it can keep up with demand. That is how we beat inflation because you have to have businesses improving their delivery capability, improving technology for manufacturing, etc. in order to meet our demand. Otherwise we get demand outpacing supply and that is the root of inflation.
New homes sales rise 4%.
The rise to 1.374 million annual units was another record, capping the record in existing home sales reported Monday. This data is newer than the existing home sales because these are measured when the contract is signed versus closing. A bit fresher, but it shows the same continuing strength in the market fueled by low mortgage rates.
The chink in the armor is that prices are starting to soften with the median price falling 5.5%. Year over year prices are unchanged; from March, however, they are down 10%. After that spike earlier in the year they are settling back down but thus far they do not show signs of crashing as many are calling for.
We have discussed this before, but it is being borne out now: the market is still trending higher but it is showing signs of slowing gradually. Prices spiked but are coming back down. The inventory is right at 4 months, still quite tight. Regions of the country are very pricey, but they are the ones that get pricey with each housing rise. Many parts of the country are currently experiencing softening in prices with sales times lengthening. Again, no crash but a gentle fade thus far.
The market could always crash if interest rates spike. Interest rates have been the driver of the market to this point. If something sends them sharply higher the market cracks overnight as homes suddenly become less affordable.
Oil inventories are in line but there are signs gasoline prices are taking a bite.
Consumer confidence was lower than expected in the Tuesday report, but it was not at levels that suggest any trouble. After trending lower for several months it was good to see confidence rise the prior two months even in the face of high energy costs. A trend tends to stay in place unless something breaks it up, and what were okay confidence numbers could eventually get ugly. Eventually, but that was still a long way away.
Consumers did not say much with respect to oil and its impact. Despite Greenspan and others saying it is not hurting the consumer at this level we disagree. At a minimum it is starting to alter some behavior. We previously discussed Wal-Mart's surprise jump in sales last month, taking everyone by surprise. It is not that the consumer suddenly became stronger. No, the consumer spent about the same as it has been all along. The change came in consumers going back to WMT for its discount prices as opposed to shopping higher priced stores. They are still spending the same, but they are getting more bang for their buck at WMT.
Further, we are starting to see some of the change in habits cropping up in the restaurant or 'eating out' sector. While there were good sales reports earlier in the month from YUM and EAT, we are starting to hear of problems. Wednesday PF Chang's met earnings expectations but warned that business was slowing. This could be an indication that the consumer is opting to cut out a meal out here and there. If you fill up an SUV once a week you put a family meal in the tank each month given the extra cost. People are not spending more, but given the higher gas prices they have to allocate their spending around the extra money that goes into the tank.
This is one of those potential problems hanging out there that could grow quickly if a hurricane hits the Gulf's production areas or a Gulf refinery. A spike in gasoline prices from already high prices could force the consumer, whether he wants to or not, to curtail spending. That would give supply a break and ease inflation pressures, but that is not the way you want to do it. That is the Fed's way: beat you with a stick until you stop. You would prefer to see supply grow on its own to meet demand, not have demand stall and come back to supply.
As this juncture these are not major issues, but beware of those who overlook the chinks in the armor and continue to prognosticate milk and honey forever or those who overlook them and continue to raise interest rates because the economy is in such good shape. That is what was said in 2000 right up to the precipice. Even after the economy rolled over it took the Fed a long time to see it and start taking remedial action. Blah, blah, blah. We all know the story and we are not going to recite the pain it caused us all.
THE MARKET
MARKET SENTIMENT
As noted above, we are hearing from some floor traders and the financial stations comments about a top being put in given the inability to advance the past week. This was a possibility we have discussed given NASDAQ has tested but failed to take out resistance at 2191. The other indices have taken out their highs, and they are not crashing back down. Similarly, NASDAQ has tested this level but has not rolled over or run away like a scalded dog. Instead they are showing solid consolidation and continued accumulation. Again, a nice bonus on the sentiment side as sentiment is a contrary indicator.
VIX: 10.36; -0.63
VXN: 12.76; -0.8
VXO: 9.49; -0.47
Put/Call Ratio (CBOE): 0.8; -0.05
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: +10.23 points (+0.47%) to close at 2186.22
Volume: 1.819B (+5.71%). Volume moved solidly higher once more, moving back above average as NASDAQ posted a solid upside advance. Other than that one distribution session last Thursday, the price/volume action has been solid. A rally can survive a session of sharp distribution here and there; it is when they start cropping up regularly you know the big money is unloading stocks.
Up Volume: 1.086B (+39M)
Down Volume: 697M (+126M)
A/D and Hi/Lo: Advancers led 1.15 to 1. Really poor breadth for a 0.5% gain in the index.
Previous Session: Advancers led 1.38 to 1
New Highs: 165 (+29). Really poor new highs for closing just 5 points below its January peak.
New Lows: 20 (-7)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
NASDAQ tapped toward the 10 day EMA (2166) on the low and then recovered to close near the session high on rising, above average volume. That is good action as it shakes out some sellers and shows buyers moving in on the dip. That mini consolidation took place in an overall larger consolidation the past week. NASDAQ is still below the top of its range with the resistance at 2191, but it is moving back up to test that level on rising volume and continued good price/volume action. It is still working on the consolidation and a few more lateral sessions would help it get over the news glut, get some more sellers fearing a top, and then make the break higher.
SOX was a loss leader Wednesday (-0.7%), but it made quite a comeback from the early low where it undercut the 10 day EMA (468.18). A solid rebound similar to NASDAQ that worked to shake out a few more sellers and give buyers an opportunity to move in. It too continues its lateral move below 480 as the 10 day EMA comes up to meet it. When the 10 day EMA moves up to meet it, that will probably push the next break higher.
SP500/NYSE
Stats: +5.63 points (+0.46%) to close at 1236.79
NYSE Volume: 1.471B (0%). Volume held steady on NYSE with a solid above average volume session to compliment the Tuesday gain on rising volume. Even with volume virtually unchanged it was a solid session with the gains coming on again solid trade.
A/D and Hi/Lo: Advancers led 1.46 to 1. Even with the small caps lagging NYSE posted some decent breadth.
Previous Session: Advancers led 1.39 to 1
New Highs: 231 (+9). As with NASDAQ, pretty weak new high list even as SP500 hit a new 4 year closing high.
New Lows: 35 (+8)
The Chart: http://www.investmenthouse.com/cd/^spx.html
SP500 moved to a new post-bust closing high on continued above average volume. It is below its recent peak on the Monday spike (1238) and is still consolidating the recent moves as the 10 day EMA (1228.54) rises underneath it. As with SOX this is likely to provide the impetus for the next break higher if the conditions remain as they are now.
SP600 posted a 0.1% gain, lagging the rest of the market as it too tested lower, undercutting the 10 day EMA (347.75) on the low and then rallying back to close positive. Another shakeout and then a recovery as buyers used the selling to pick up shares. This is the general action in the market and it is an indication that the consolidation is still in progress.
DJ30
DJ30 posted a nice bounce off of the 18 day EMA (10,563) but volume again lagged as it made the move. DJ30 is trying to set up for its own break higher, but it is still in a following role at this juncture, and needs to clear the recent high (10,700) to break free and try for the March high (10,984.50).
Stats: +57.32 points (+0.54%) to close at 10637.09
Volume: 213 million shares Wednesday versus 220 million shares Tuesday. Moved higher but volume did not. That is pretty much the story of the Dow.
The chart: http://www.investmenthouse.com/cd/^dji.html
THURSDAY
Somewhat of a quiet economic session ahead of the Friday onslaught of GDP, Chicago PMI, Employment Cost Index, and Michigan sentiment. Overriding all of this is earnings, and this news is driving the market overall as they have been better than expected (and the market has trended higher even with this consolidation) though the major impact is felt in the individual stocks.
Those stocks are getting rewarded and torched depending upon their results. There is very, very little middle ground where a company reports and has no price reaction. The rewards are high and the punishment is as well. That tells us there is a lot of premium built into prices, and any disappointment is an invitation to slaughter. This is very similar to the climate in the late 1990's, and it is the best argument thus far that stocks may be getting too pricey. Expectations the past three quarters has been that earnings would slow, but each quarter they have risen beyond expectations. These violent reactions to earnings suggest that valuations versus future earnings are getting stretched.
That means we have to be vigilant with respect to market action, specifically price/volume (any distribution) and leaders (are they holding up?). Some leaders have gone down in flames as results have not measured up. We still see overall positive action in the market as it works on this consolidation, but there are a few chinks in the armor that could develop into problems.
Support and Resistance
NASDAQ: Closed at 2186.22
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.
The 10 day EMA at 2166
2163, the mid-December closing high has stalled NASDAQ recently.
2151, the early December closing high and highs from January 2004
The 18 day EMA at 2147
2100 was key resistance point, and a successful test sets it up as support.
The 50 day EMA at 2098
2075 to 2078
2051 from February, March price points.
S&P 500: Closed at 1236.79
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 10 day EMA at 1228 and the March 2005 closing high at 1225
The 18 day EMA at 1223 and the June high at 1220
December high at 1217
The February intraday high at 1212.
1200 is some support
The 50 day EMA at 1207.85
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 10,637.09
Resistance:
Price consolidation at 10,600 is not totally broken
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 18 day EMA at 10,563
The 200 day SMA at 10,480
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): 103.2 actual versus 106.2 expected and 106.2 prior (revised from 105.8)
July 27
Durable Goods Orders, June (08:30): 1.4% actual versus -1.0% expected and 6.4% prior (revised from 5.5%)
New Home Sales, June (10:00): +4%. 1374K actual versus 1300K expected and 1321K prior (revised from 1298K)
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 1 of 3
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us stock market
understanding the stock market
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