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us stock market, understanding the stock market
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07/28/05 Investment House Daily
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SUMMARY:
- Stocks start soft but rally once more into the close.
- Jobless claims post another low week I the wake of more layoff announcements.
- Economic data to take stage again with GDP, Chicago PMI, Employment Cost Index.
- Earnings on balance driving stocks higher but Friday afternoon following a few good sessions could see a bit of profit taking.
Melt higher gains some steam, particularly on NYSE.
Stocks were sluggish early and after opening modestly higher they gave back the bump higher. That early morning dip was all it took, however, to get the buyers back into stocks as more money continues to chase stocks at higher and higher levels. The move sent SP500 further on its breakout from the recent consolidation and pushed NASDAQ past its 2005 high to its own 4 year high. The small caps keyed the move as they came back to life with a market-leading 1.3% gain that pushed it to a new all-time high.
Earnings were unable to ignite stocks early on, but all session more and more earnings hit the market, and they were quite good after some mixed results the prior two sessions. As stock after stock reported, the market found more and more traction as more and more money was dragged in from the sidelines. It did not look as if a breakout was going to take hold, but sure enough the upside bias won out with NASDAQ joining the other indices with its breakout.
Volume was up on NYSE once more as those stocks jumped, but NASDAQ trade did not run higher as it broke through its old high. Volume was not bad; it was again above average, but it did not surge on the move. NASDAQ has been lagging a bit lately; the large cap NASDAQ 100 has yet to break through its December and January highs. NASDAQ is not languishing, but it is not showing the same leadership from earlier in the year.
Worrying over NASDAQ's slight lag is likely a lot of meaningless hair splitting given the broad volume moves across the market. Leaders continue to post solid gains and the index is moving higher on solid above average trade. It is still somewhat extended even after the short rest stop the past week, and it certainly has the look and feel of money chasing after gains. It is hard to argue with the move as it comes on higher volume and it accompanies a break through resistance. Indeed, fighting the upside has been a fool's mission as there is simply too much liquidity driving stocks as more bearish money has turned bullish. Eventually that ammunition runs out but thus far the market's attributes remain positive.
THE ECONOMY
Jobless claims still shrinking.
Weekly jobless claims flirted with 300K for the second straight week with a 310K reading (320K expected), rising just modestly from last week's 305K (revised from 303K). Pretty darn low readings that would typically indicate pretty good employment levels (as does the overall unemployment rate).
Back in 1999 and 2000 the Fed was beside itself as weekly jobless claims held near 300K per week. The Fed was adamant the labor market was just too tight and some people needed to lose their jobs to hold off inflation. The Fed dare not say that this time around because the non-farm payrolls reports have never really surged and it would be a huge public relations gaffe to suggest there was too much employment in the current environment.
Nonetheless the Fed is raising interest rates again as it once more talks of inflation but cannot really point to any threatening surge in higher prices just as it could not in 2000. It even says that oil prices won't hurt anything until they get north of $60 and even to $80/bbl. No one we know of believes that (and as pointed out last night and on other occasions, some spending habits are already changing), and not even the Fed it seems because it is talking about higher energy costs as inflationary in the same breadth it says they would ultimately be debilitating to the consumer. In the truest sense high energy costs do more to slow the economy than increase prices. The consumer ahs to spend more on fuel and that keeps the consumer from spending elsewhere. Yes the cost of products made with energy rise in price, but the harsher economic impact is the diversion of funds from consuming discretionary items to paying for higher fuel costs. Even if the consumer wanted to pay the higher prices for goods the ability to make the purchases is limited because more discretionary funds go to fuel purchases.
This time around the Fed has found other reasons to support raising interest rates, but it is pretty clear it is raising rates in order to get them higher, kind of a 'because it's there' mentality. The Fed wants higher rates because it feels they need to be higher so if there is a big emergency it can make the symbolic gestures of cutting rates. Greenspan has bolstered this move with his recent comments to Congress that the bond yield curve does not mean what it used to mean for the economy. He cited 1995 as proof when the curve flattened but no recession followed. He conveniently left 2000 where the curve flattened and then inverted and recession was locked in. The Fed is agenda driven at this point in the process, and it is going to raise rates until it hits a level it is comfortable with, likely in the 4.5% range. The only issue for us is whether it causes an economic slowdown in the process.
THE MARKET
MARKET SENTIMENT
Sure did not take long after we heard the comments about how the market was topping when it started right back up. Just as when we heard the old 'it is different this time' in October 2002 and knew a rally was coming, this talk of a top while everything else remained positive was a sign that gut feelings were in control as opposed to sound observations of the market.
VIX: 10.52; +0.16
VXN: 12.61; -0.15
VXO: 9.74; +0.25
Put/Call Ratio (CBOE): 0.78; -0.02
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: +12.22 points (+0.56%) to close at 2198.44
Volume: 1.744B (-4.13%). Volume remained above average though it backed off as NASDAQ broke to a new 4 year high. Somewhat disappointing to see volume back off as NASDAQ broke to that high, but trade was very solid as it bounced up off the 10 day EMA Wednesday. That makes three solid volume sessions back to back as NASDAQ posted gains. Trade cannot grow each session over the next indefinitely; thus a good week of volume coupled with overall solid price/volume action (up on rising volume, down on falling volume) is an indication of solid accumulation.
Up Volume: 1.047B (-39M)
Down Volume: 671M (-26M)
A/D and Hi/Lo: Advancers led 1.75 to 1. Breadth was rather modest on the gain though it was improved over Wednesday levels. Another indication that NASDAQ's move is not quite as strong as you would want on a break to a new 4 year high. Not enough to look at the move with disdain, but you have to keep your eyes open to the actual data so you can better evaluate any sudden headwinds that may arise.
Previous Session: Advancers led 1.15 to 1
New Highs: 227 (+62)
New Lows: 19 (-1)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
NASDAQ broke over the January high (2191) as it tapped the 10 day EMA earlier in the week, setting up the next break higher. As noted, volume has been solid on the move though lower Thursday on the actual breakout. Good overall, somewhat disappointing on the key move. Breadth was sluggish as well. Basically NASDAQ is somewhat following the SP600 and SP500 higher. It did consolidate some to take some fluff out of the prior move; that helped. It won't take much more upside from here to get it extended again. That said, the uptrend is firmly in place and one sure losing position in this market has been betting downside against the techs.
SOX lagged yet again, barely able to scratch out a gain Thursday, having to come back late for a fractional upside move. SOX is putting in a pretty good lateral move here, reaching down to the 10 day EMA on the lows where it flushes out some sellers and then rebounds to the close. It is still setting up for its upside move and it was somewhat surprising it did not go with NASDAQ. It broke out ahead of the overall tech index, however, and thus this pullback while NASDAQ moves higher is not that out of sync. The market has been moving in rotating waves, a sign of health. Thus far SOX has been forming up its consolidation well just as with NASDAQ, and if the other indices continue their moves SOX is likely to resume as well.
SP500/NYSE
Stats: +6.93 points (+0.56%) to close at 1243.72
NYSE Volume: 1.555B (+5.74%). Solid advance in volume as SP500 kicked it into gear Thursday, extending its breakout move. SP600 was back in play, leading the move as money pushed into NYSE stocks.
A/D and Hi/Lo: Advancers led 2.79 to 1. Excellent breadth as the small caps were back in the game and leading the market.
Previous Session: Advancers led 1.46 to 1
New Highs: 417 (+186). Now new highs are finally getting respectable. This along with the breadth is what you need to see to show depth in the move. If the indices break to new highs but breadth is poor and there are few new highs then you know just a few generals are leading, and generals without troops cannot sustain a charge. Everyone is pitching in right now on the NYSE.
New Lows: 38 (+3)
The Chart: http://www.investmenthouse.com/cd/^spx.html
Three good sessions of volume have SP500 moving once more to new 4 year highs. The index built a base that took most of 2004 and broke out, and now it built a base that took most of 2005 thus far and it has just broken out. It is no moon shot rally, but it is steady. It has a bit of room to run here before next resistance at 1265, but it is likely to pause and fill in a little before making it to that level.
The small cap SP600 once more broke to a new high after another short pullback to the 10 day EMA (348.99) launched yet another bounce higher. Still upside here for the index as it continues to march higher building the small pyramids on top of near support, but after another 10 points or so it is going to be extended on this breakout and need a deeper test to regroup. For now it is once again the market leader and in front of the charge.
DJ30
DJ30 cleared its July highs (10,700) and a raft of resistance from 10,550ish to 10,700. It did not blow right through; volume was still mediocre. DJ30 is moving higher but it is following just as it has been doing all along.
Stats: +68.46 points (+0.64%) to close at 10705.55
Volume: 220 million shares Thursday versus 213 million shares Wednesday. Volume remains tepid as DJ30 works higher in its base.
The chart: http://www.investmenthouse.com/cd/^dji.html
FRIDAY
A whale of an earnings session is followed by a return of more economic data (GDP, Michigan sentiment, Chicago PMI, Employment Cost Index) Friday. Given the move to this point, if the data is in line or does not significantly disappoint we anticipate a further move higher and then some profit taking as the afternoon session gets underway. The hedge funds tend to take gains after a few solid upside sessions, and the weekend makes that more likely.
Some afternoon profit taking will not endanger the move to this point as the indices have established some solid uptrends. Indeed after a few good sessions you would expect some profit taking, and it often occurs after a breakout move along the lines of NASDAQ. We will be watching NASDAQ 100 and how the large cap techs respond. As noted, they have not yet moved past the highs established just before falling into the 2005 base. We are watching the 1625 to 1635 range from those highs as a point where NASDAQ 100 will find some resistance after this solid bounce up off the 10 day EMA.
All in all the market remains healthy with another solid rebound after a week of testing. Solid uptrends are in place and overall earnings and guidance are supporting the move. We continue to take positions as they present solid moves and we are also riding many positions initiated over the past several weeks. Another push higher and many will have solid gains. Indeed, if we get another good push higher Friday in the morning session and the action softens some we are going to look at locking in some gains along the way as we have been doing all along.
Support and Resistance
NASDAQ: Closed at 2198.44
Resistance:
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:
2191.60, the January intraday high.
2178 is the January closing high.
The 10 day EMA at 2172
2163, the mid-December closing high has stalled NASDAQ recently.
The 18 day EMA at 2152
2151, the early December closing high and highs from January 2004
2100 was key resistance point, and a successful test sets it up as support.
The 50 day EMA at 2101
S&P 500: Closed at 1242.72
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 1231
March 2005 closing high at 1225 and the 18 day EMA at 1225
The June high at 1220
December high at 1217
The February intraday high at 1212.
The 50 day EMA at 1209
1200 is some support
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 10,705.55
Resistance:
10,754 is the February high
10,868 is the December 2005 high.
10,985 is the March high
Support:
The June highs at 10,646 to 10,656
The 10 day EMA at 10,619
Price consolidation at 10,600 is not totally broken
The 18 day EMA at 10,578
The April high at 10,557
The 200 day SMA at 10,483
The May high at 10,406
10,400, the bottom of the November/December range
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): 310K actual versus 320K expected and 305K prior (revised from 303K)
Help-Wanted Index, June (10:00): 38 actual versus 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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