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us stock market, understanding the stock market
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08/01/05 Investment House Daily
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SUMMARY:
- Stocks mixed on low volume, solid ISM data.
- ISM posts second consecutive rise with strength across the board.
- Construction shows the flipside of ISM, posting second consecutive down month.
- Economy trying to show enough strength to drive stocks higher regardless of Fed action.
When in doubt, drift higher (stocks rise once more but more on a lack of selling than new buying).
After the Friday profit taking stocks were set to rise pre-market even with some so-so earnings and oil rising on Saudi Arabia's King Fahd's death (hit over $62 intraday). As has been the case most of the past month, when in doubt stocks drift higher in a continued melt-up.
NASDAQ rallied through the January 2005 high (2191) once more early on, gave it up, but then rallied into the afternoon session to reclaim that level. SP500 followed as well but was merely shadowing NASDAQ all session, showing no leadership of its own. The small caps were out in front with NASDAQ, matching the techs step for step. They were not powerful steps, however. NASDAQ rallied up to last week's high (2201) but could not advance further. Indeed two tries at that level in the afternoon failed, forming an intraday double top that sent NASDAQ down to close mid-range for the session.
On the close NASDAQ held above 2191 but it lacked strength. As is often the case, the action can be traced back to volume. Friday trade was low but Monday was even lower as NASDAQ made another attempt at a new high. No distribution Friday but no accumulation Monday as NASDAQ and SP500 posted a gain. You want to see volume rise on new highs as it shows continued strong sponsorship of stocks as they move higher and higher. If the volume dries up there are fewer buyers carrying the load up the hill. They eventually run out of strength.
That is something that we will continue to watch develop the next few sessions as one low volume drift higher when trying for a new high is not an indication of imminent peril. What Monday did show was the continued upside bias as stocks drifted higher despite very low trade. It was still unsatisfying with modest breadth, few new highs, and a close well off of the intraday high. When there are few sellers in an uptrending market, however, the trend tends to stay in place.
Thus the bias remains upside but the action was tepid even after the higher volume move mid last week. The market is trying to find a new catalyst to send it higher after a raft of earnings helped push it to this point. Economic data is the likely focus, but the lukewarm reaction to the solid ISM news Monday suggests some of this economic data is already built into stock prices. At this point the market likes the economic data, but it is also factoring in further Fed action as a result of stronger than expected economic growth.
THE ECONOMY
July ISM beats expectations.
How can growth be stronger than expected when the Friday Q2 preliminary GDP was less than expected and 0.4% less than Q1? Because as noted Saturday, without the sharp inventory decline GDP growth was near 5.8%. That low inventory level suggests more production in Q2 to replenish inventories, and many of the big house economists Monday were raising Q3 growth expectations to 4% to 5%.
That is a strong view of growth, and it was in part backed up Monday with the July ISM. Chicago surged as seen in Friday's results, and while the national figure did not post a proportional rise, the 56.5 reading easily topped the 54.1 expected and was the second consecutive rise in the reading since hitting 51 in May after a long decline. It was also the highest reading since December. It walked the tightrope of going negative (below 50 and thus in contraction) but looks to be coming out stronger for the wear and tear.
New orders rose 3.4% to 60.3. Prices fell 2% to 48.5, showing contraction for the first time in 40 weeks. Employment rose 3.3% to 53.2 after some weak sub-50 readings the past two months. Pretty solid moves in the right direction, and while they do not translate automatically into 4%+ GDP gains, they definitely show the business side of the economy coming back well after its flirtation with contraction to start the summer.
Good news for the economy, and it comes at an important time for the market after it digests the earnings parade and is looking for something else to rally about. Stocks did not surge higher on the news, but given the rally on earnings to this point, the fact that it did not trigger selling helps further build up the support for stocks based on future economic growth.
Construction posts its fourth straight decline.
Spending fell 0.3% versus the 0.5% gain expected. For the second straight month construction turned in a negative result (0.9% in May). That marks 3.1% in declines since February.
The breakdown of the decline is telling. The housing market may still be strong, but it is showing topping or a plateau. Private residential construction fell 0.4%, the fourth consecutive decline. Private nonresidential construction, i.e. business construction, rose 0.2%. We want to see the business construction continue expanding as that suggests companies adding to that needed supply to service the consumer. We need more supply to feed the demand and thus stave off inflation. The June data was a start, but it was a modest start and not likely to make the difference anytime soon.
THE MARKET
MARKET SENTIMENT
VIX: 12.08; +0.51
VXN: 14.38; +0.51
VXO: 11.31; +0.24
Put/Call Ratio (CBOE): 0.94; -0.05. The ratio remains at high levels even as stocks put some upside moves in the can. We note that the ratio has remained high just as the VIX has remained low. The former more bullish, the latter more bearish, but they do take a back seat to price/volume action and leadership.
Bulls versus Bears:
Bulls ran right back up after a dip last week. Bears edged lower. Both are showing a lot of bullishness in terms of investment advisors, and that is historically a problem for the market. If everyone is a bull then where does the new money come from?
Countering that is still an underlying revulsion for the market by a lot of investors that still have money tucked in money market accounts. Indeed last week equity mutual funds showed an outflow of cash. The market is in a 12 week rally and money continues to leave. That is a contrary indicator as well, but it is more bullish.
In short, the sentiment indicators are pointing in different directions. They are usually the most powerful when they all line up in one direction. And of course they always take a back seat to the actual price and volume action as well as leadership. They give us a heads up re potential problems, but they are not what you want to base your investing decisions upon.
Bulls rose to 55.9% from 52.7%. The attempt to trend lower failed pretty miserably. Bulls bottomed in early May at 43.5%.
Bears fell to 22.6% from 23.1%. That broke a three week rise from 21.1%. That still keeps them above the 20% after dipping to 19.1% four 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: +10.55 points (+0.48%) to close at 2195.38
Volume: 1.508B (-6.92%). Volume was even lighter Monday than Friday's lower and below average trade. NASDAQ is not getting the trade it needs to push to a new high and make it stick. There was good volume two weeks back when NASDAQ jumped off the 10 day EMA toward that point, but it then moved laterally and other than one strong upside volume session, volume has lagged, particularly when it tries to make a breakout over the January high stick. Overall price/volume action has been decent though volume is lower overall. Thus no immediate threat of a reversal, but if NASDAQ cannot attract more volume as it makes new highs the ability to hold those highs will slight.
Up Volume: 901M (+383M)
Down Volume: 587M (-488M)
A/D and Hi/Lo: Advancers led 1.24 to 1. Very modest upside breadth on very modest price gains.
Previous Session: Decliners led 1.16 to 1
New Highs: 243 (+17)
New Lows: 17 (0)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
NASDAQ tried 2201 for the second straight session but was again unable to make the move stick. Lower volume Friday and Monday undercut the attempts to move through that level as NASDAQ tapped at new post-crash highs. Overall the price/volume action remains in decent shape though the volume level overall has disappointed on much of the move. With the lack of movement and low volume NASDAQ may need to come back a bit more toward the 10 day EMA (2178) to set the upside move attempt once more.
SOX held flat once more, moving laterally in that narrow range above the 10 day EMA (470.97). Showing three consecutive dojis as SOX moves laterally in a flying plateau, a positive consolidation pattern for the semiconductor index.
SP500/NYSE
Stats: +1.17 points (+0.09%) to close at 1235.35
NYSE Volume: 1.326B (-4.56%). As with NASDAQ, volume declined Monday on top of the Friday below average volume showing. Strong trade Thursday as SP500 broke to a new post-crash high. It has given that move back, at least on lower trade that indicates no serious selling attempts. For now the price/volume action is overall positive.
A/D and Hi/Lo: Advancers led 1.21 to 1. Even with the small caps leading the NYSE indices with a 0.5% gain, breadth was mediocre at best. Very much in line with the overall session.
Previous Session: Decliners led 1.45 to 1
New Highs: 311 (-33)
New Lows: 15 (-5)
The Chart: http://www.investmenthouse.com/cd/^spx.html
The large caps posted a very modest gain on very low volume, holding over the 10 day EMA (1232) the recent lateral consolidation range. The strong Thursday break higher has been turned back in and now SP500 is trying to hold up as support for a continued move higher. Still in the uptrend, still holding onto support. This is where you want to see it hold after the strong volume Thursday move as that would show it is still ready to build on that move as opposed to a return at best to the consolidation and requiring more basing. One shows some strength, the other some weakness moving in here at the new highs.
Another new all-time closing high, this time by 0.01 points. Crack open the champagne. SP600 continues moving higher over the 10 day EMA (350.58) toward that 356 or so level that will likely see it need to take a deeper rest. It broke out in June and bounced higher along the 10 day EMA since. It has more upside potential here but after another solid surge higher it will be extended on this run and need some rest.
DJ30
DJ30 struggled for the second straight session but did not give up anything major, holding the 10 day EMA (10,623) on the close as volume faded further below average. Still working laterally in its three week handle or lateral consolidation, trying to set up for the breakout through 10,700ish that will take it out of this recent range.
Stats: -17.76 points (-0.17%) to close at 10623.15
Volume: 192 million shares Monday versus 215 million shares Friday. Continued below average volume lateral move above the 18 day EMA (10,589).
The chart: http://www.investmenthouse.com/cd/^dji.html
TUESDAY
The economy will continue to move more to the forefront Tuesday with autos, personal income and spending, and factory orders reports, all going to the heart of consumption by both the consumer and businesses. The economic data has been very solid of late, but the market has not been able to make much of it just yet given the rise into and during earnings season. Thus even with good economic data stocks have been stuck near their recent highs, unable to push forward. Too much waffling on low volume as NASDAQ tries for a new high will send it lower for another test. Eventually NASDAQ will have to get some volume as it pushes higher or suffer a larger downside move; again, new highs on persistent low volume signal no new buyers coming in and typically precede a test lower.
That said, stocks easily remain in their uptrends, showing no distribution other than two Thursdays back and not a lot of breakdowns in leadership. Groups of stocks continue to move to the forefront of each session and provide good breaks higher as overall solid earnings results and continued good economic data provide buyers. That buying will need to strengthen on NASDAQ if it is going to push to a new high from here, one that sticks.
With the overall uptrend and little sign of distribution, we are going to continue adding to winners that give us good entry points and look for breakouts as well. While breadth has eased off the past couple of sessions, stocks overall have moved higher as money has moved around the market, propelling most all indices to new post-crash highs. Until we see leadership deteriorate and the big indices start some steadier distribution we will continue to participate in those stocks that are able to produce us good gains and are in position to do so, i.e. at good entry points.
Support and Resistance
NASDAQ: Closed at 2195.38
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 2178
2163, the mid-December closing high has stalled NASDAQ recently.
The 18 day EMA at 2159
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 2108
S&P 500: Closed at 1235.35
Resistance:
The recent July highs at 1245.15
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 10 day EMA at 1232
The March 2005 high at 1229.11
March 2005 closing high at 1225 and the 18 day EMA at 1227
The June high at 1220
December high at 1217
The February intraday high at 1212.
The 50 day EMA at 1211
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 10,623.15
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:
The 10 day EMA at 10,622
Price consolidation at 10,600 is not totally broken
The 18 day EMA at 10,589
The April high at 10,557
The 200 day SMA at 10,490
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.
August 01
Construction Spending, June (10:00): -0.3% actual versus 0.7% expected and -1.7% prior (revised from -0.9%)
ISM Index, July (10:00): 56.6 actual versus 54.5 expected and 53.8 prior
August 02
Auto Sales, July (00:00): 5.7M expected and 5.1M prior
Truck Sales, July (00:00): 8.8M expected and 8.9M prior
Personal Income, June (08:30): 0.4% expected and 0.2% prior
Personal Spending, June (08:30): 0.8% expected and 0.0% prior
Factory Orders, June (10:00): 1.0% expected and 2.9% prior
August 03
ISM Services, July (10:00): 61.0 expected and 62.2 prior
August 04
Initial Jobless Claims, 07/30 (08:30): 315K expected and 310K prior
August 05
Non-farm Payrolls, July (08:30): 180K expected and 146K prior
Unemployment Rate, July (08:30): 5.0% expected and 5.0% prior
Hourly Earnings, July (08:30): 0.2% expected and 0.2% prior
Average Workweek, July (08:30): 33.7 expected and 33.7 prior
Consumer Credit, June (15:00): $6.0B expected and -$3.0B prior
End part 1 of 3
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us stock market
understanding the stock market
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