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us stock market, understanding the stock market
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08/02/05 Investment House Daily
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SUMMARY:
- Renewed economic optimism drives stocks higher.
- Income, spending, factory orders and vehicle sales add to solid economic data.
- The problem with a growing economy: Fed views growth and inflation synonymously.
- SP500 needs to follow NASDAQ, SOX, and SP600 to continue the move.
Stocks find their catalyst.
Over the weekend we said stocks would have to find their catalyst, and with earnings winding down that meant the economy. While the preliminary GDP report slowed the action Friday, it did not stymie it. An ISM number suggesting 4+% GDP growth rates for Q3 on Monday and solid personal spending and income, factory orders, and auto sales Tuesday helped jumpstart the next move in the market.
Good news all around on the economy, but it didn't take much to get the market running again. After a brief pause and a nice lateral consolidation on SOX, stocks were ready to move and the economic data provided the trigger. It was a hair trigger at that. Lots of money that was not investing back in May, June and early July as you and I were doing, back when things were not so clearly bullish, is now chasing the gains and pushing the market higher. Throwing money at something is a time honored American trait. It is particularly true when a lot of hedge funds and fund managers fell they are missing the boat.
That money pushed volume up on both NASDAQ and NYSE, breaking NASDAQ to a new post-bust high, sending SP600 to yet another all-time high, and blasting SOX higher from a tight, lateral consolidation. The clear leaders were in the stocks whose companies produce the basics the economy uses, i.e. the commodities. When companies such as Masco (MAS) and Tyco (TYC) report disappointing earnings and blame the cost of their materials, you can see that the growing economy is going to benefit those that supply the basic building blocks to the rest of the world. In other words the energy companies, metals, cement, and the like are getting the price increases and their materials costs don't make up as big a part of their business. That means money in the bank as the energy companies have been showing us with the recent earnings.
It was not all basic materials and the like as the move did have some breadth to it. The semiconductors were leaders and techs were solid as well. Money is rotating around the market, seeking new opportunities as an improved outlook on the economy pushes more cash into the market. Improving economy should mean improving earnings, and new money is out seeking stocks.
Stocks finished the day near session highs, managing to rally in the last half hour after a 3.5 hour lateral move that started over lunch after the initial surge. The fact that stocks held their gains into the close was a change from the prior two sessions; buying volume sure makes a difference in how the market finishes a session. In sum, it was a solid session with new breakouts from several indices and sectors with some new money going to work once more. Volume was strong, showing more accumulation than any recent selling, continuing the positive price/volume action and even putting an exclamation point after it. Breadth was so-so, particularly with respect to NASDAQ. Thus it was not an unmitigated break higher, but as we have noted on many occasions as this market has come back from reputed death, nothing is ever perfect in the market.
THE ECONOMY
Income and spending rise in line with expectations while PCE indicates inflation still under control.
The lower Q2 GDP inventories go hand in hand with the June spending figures released Tuesday, i.e. a 0.8% gain in spending. Inventories were sold off as automakers slashed prices. That pushed autos sales levels for Ford and DCX over 30%. Accordingly, consumer spending was up as consumers went after those 'join the family' offers from the car makers. Great deals and consumers with more money (incomes were up 0.5%) equates to buying. Always has, always will.
That spending bump pushed the savings rate to 0% for the month. Oh no the end is coming. Greenspan is squirming in his chair because of the lack of investment in real assets. Problem is, we are investing in real assets. Savings is not measured just in how much you have in a cash account. It should also include what you are 'saving' for the future, and for most of us who are not 65 or even 70, that means investments in stocks, bonds, real estate, etc. How do we save for the future? Any retirement planner who is worth a damn will tell you that you will live longer and need to 'save' by investing heavily in equities, bonds, etc. If you don't, you are not going to have enough 'savings' to pay for retirement.
We play this fiction all the time and wring our hands over it. This 'savings' we don't have that is supposedly not buying real assets to help further our standard of living, is doing just that. When we invest in companies for our future retirement we are saving for the future. At the same time that company has a better market capitalization and can use that money to buy more capital equipment, do more R&D, etc., thus making the investments critical to our futures and our children's futures.
Factory orders advance once more.
Factory orders rose 1% in June, in line but that does not take away from its strength. On the heels of a big 3.6% gain in May (2.9% originally reported), this was a potent one-two punch. Take out transportation and June's gains were 1.3%.
Non-defense capital goods ex-aircraft, the crown jewel of this report, rose 3.9%, the largest advance since January. After a dearth of investment in early 2005 after the expiration of the 2004 tax incentives, business investment is coming back, a sign of belief that the economy is strong enough to produce gains from those investments.
That is always the key in our or any free market economy: is there enough reward given the level of risk you have to undertake to attempt to achieve that reward? The resurging business investment is a good indication companies are coming to the conclusion business is good enough to warrant spending some money in order to make more money. Again, that is always a key factor in our economy; when businesses are ready to spend money in order to make more money our economy does well. We get more investment, more consumption, and more supply. All of those are just what an economy needs. Hopefully this trend will continue and we will get plenty more business investment to go along with the consumer spending.
Inflation up more than expected the past two years but not surging.
The GDP report released Friday showed inflation was running a bit hotter than initially thought, no surprise to people who buy food, education and healthcare every day as opposed to buying a new television, computer, or other electronics on a daily basis. Overall, however, the rate of inflation is still historically low.
In June the PCE deflator, one of Greenspan's pet reports, was flat as economists expected the core rate to rise 0.1%. Year over year the PCE is up 1.9%, near the Fed's tolerance level, but in a historical sense not bad at all given the amount of continuing economic activity. The deflator is how much has to be subtracted to account for inflation. Thus a lower rate means lower inflation. While the Fed wants to nip any price climb in the bud, this level, as noted, is not historically high or even moderate given the level of economic activity.
Fed bending meanings once again.
All of this growing economy news is great, but still out there, whether anyone wants to admit it, is the Fed in a rate hiking campaign. You can look at the inflation indicators and conclude there is some inflation, but it is not nearly debilitating and it is not growing in intensity.
Inflation could hold steady or even decline, however, and the Fed would not stop raising rates. Why? Because the Fed has once again obfuscated growth and inflation just as it did back in the late 1990's and early 2000. The Fed has gone from looking at prices and trying to insure long-term price stability (that is its mandate) to looking at potential causes of price instability. If it can somehow cause price instability then the Fed views it as an inflation indicator. It does not have to produce inflation, it just has to get to a level where the Fed believes it can cause inflation. Then it is a threat and rates have to be raised.
That is how in the late 1990's the Fed came up with all of these inflation indicators everywhere in the economy. Anything that was indicative of a solid economy was a potential inflation trigger, e.g., good wage levels, strong employment, stock market gains, stock market options, consumer spending. None of these are inflation in themselves at any level, and at that time they were not causing inflation because there was no inflation. Nonetheless because the Fed was focusing on anything that could possibly indicate inflation, it started viewing indicia of a healthy, growing economy as implying imminent inflation.
Thus we had a series of rate hikes that grew in intensity even as the Fed drained money supply and the economy was already showing signs of slowing. The economy was still strong, but it was slowing just as it often does during an up cycle. The Fed attacked growth and prosperity as potential inflation, and it hit the economy at the wrong time. It tripped it, and it fell from its lofty heights and we have all paid a high price that we will feel for decades to come (as we gave away much of our technological lead).
Right now the Fed is engaged in raising interest rates with a backdrop of modest inflation. There is more than there was in 1999 and 2000 due to the demand led recovery we have had, but it is not a serious threat and in any event, slowing the economy is not the way to cure inflation. Indeed, many of the indicia of inflation the Fed looks to are signs that the economy could free itself from inflation. If supply can grow at a faster rate as business gain confidence and invest more in their business then inflationary pressures drop.
Moreover, long term rates have not risen. Greenspan says this is a conundrum, but that is likely just double talk, He has already come up with reasons why it does not matter so he can stick to his course of action just as he did in the late 1990's. He wants to get rates higher to give the next chairman some maneuvering room. Laudable goal, but the problem is he gets frustrated with the lack of progress and then goes too far. Of course, every Fed since the late 1920's has gone too far and has acted with remarkable similarity. Rates are low because the Fed is raising rates and the bond market is concerned the Fed will overdo it. More than that, there are several billion Chinese who have not really participated in that country's growth yet. When they do that will exert a lot of deflationary pressure on the world. These are just two reasons bond yields have been lower. Greenspan, however, has an agenda that he will see through. The question is whether the economy will be strong enough to see it through as well and thus whether investors can fight the Fed this time around.
THE MARKET
MARKET SENTIMENT
Seems just last week we discussed how we heard talk of a market top and how given the good price/volume action and leadership such talk was likely a sign of a move higher to come. Tuesday stocks were making that move, and doing it on volume. Sentiment can be a good indicator of extremes if you listen for the right things.
VIX: 11.75; -0.33
VXN: 13.95; -0.43
VXO: 10.74; -0.57
Put/Call Ratio (CBOE): 0.95; +0.01. Still a lot of put activity even as the market moves higher. There is some put selling ongoing, i.e. anticipating further advances and selling puts to buy back at a lower price as stocks rise.
Bulls versus Bears:
Last week:
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: +22.77 points (+1.04%) to close at 2218.15
Volume: 1.794B (+18.96%). Excellent return of above average volume as NASDAQ cleared its recent small logjam at 2200. Not bad volume for a summer session as NASDAQ continues to show positive price/volume action, i.e. additional accumulation as it moves ahead.
Up Volume: 1.267B (+366M)
Down Volume: 495M (-92M)
A/D and Hi/Lo: Advancers led 1.55 to 1. Pretty bland breadth as the large cap techs fared a bit better than NASDAQ overall. That kept the tech action rather narrow compared to the rest of the market.
Previous Session: Advancers led 1.24 to 1
New Highs: 215 (-28). Pretty crappy new highs as NASDAQ hit a new 4 year high itself. Need to see this get better along with the breadth.
New Lows: 20 (+3)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
After bumping up at 2201 for three sessions NASDAQ put the wood to it and broke higher on a nice surge of above average volume. This move puts NASDAQ through its near resistance with ease, making a significant higher high on strong volume. It has now put away all of the near resistance points and you have to look back in 2001 to see what overhead still lies ahead. It has some room to run higher on this move, but as is often the case, after a bit more upside we can expect to see it come back to test this move.
SOX led the upside Tuesday with a gap higher and 2.5% run out of a two week lateral move above the 10 day EMA (473.75). This was the first real consolidation or rest point after the early July breakout from its 7 month trading range. Nice move from an important leadership group in techs.
SP500/NYSE
Stats: +8.77 points (+0.71%) to close at 1244.12
NYSE Volume: 1.524B (+14.92%). Solid volume returned to NYSE on an upside move, continuing the return to solid price/volume action after that one hiccup two Thursdays back. Solid action that helped push SP600 to a new all-time high.
A/D and Hi/Lo: Advancers led 2.06 to 1. Much better breadth as the NYSE indices all moved up together.
Previous Session: Advancers led 1.21 to 1
New Highs: 404 (+93). Much better new high list than on NASDAQ. When SP500 breaks through the recent highs and if SP600 and SP400 are still rising this number should top 500.
New Lows: 17 (+2)
The Chart: http://www.investmenthouse.com/cd/^spx.html
SP500 lagged Monday, and that kept it from moving past the recent highs (1245.15) even posting a solid move Tuesday. After the strong move Thursday that was quickly returned on lower volume, this upside, high volume move Tuesday is more of an affirmation of last week's break higher. It would really be an affirmation if it blows through the recent highs on continued solid trade. If it can move through it has room up to 1265. As with NASDAQ, a strong upside break is typically met with some softness in a couple of sessions just to see how serious the buyers were.
SP600 easily logs another new all-time high as it once more bounces up off the 10 day EMA (351.91) to continue its breakout run. It is now at the 356 level but is showing no signs of slowing. Another good session or two and it will want to rest a bit. It broke out ahead of the rest of the market and is thus more extended on this move. It likely will have to take a more serious breather after this bounce winds down.
DJ30
Volume was up to average as DJ30 rallied, but its move merely pushed it back up near the top of its recent three week lateral range. Some of the big techs, namely MSFT, gave DJ30 some legs on the session, but it still has yet to show a breakout.
Stats: +60.59 points (+0.57%) to close at 10683.74
Volume: 241 million shares Tuesday versus 192 million shares Monday. Finally volume returns as DJ30 comes near the breakout point over 10,717.
The chart: http://www.investmenthouse.com/cd/^dji.html
WEDNESDAY
What will the encore be? ISM Services is out at 10:00ET, and while a strong reading might goose the market a bit more, there is once again an awful lot of good news in the market as the realization that earnings were quite a bit better than expected and the economy is throwing off signs it is going to keep things humming right along barring an impatient Greenspan or 'mega-spike' in oil.
Earnings results continued to drive stocks after hours with some more great rewards handed out to stocks beating expectations. Plenty of upside momentum after this break higher by NASDAQ, SOX and SP600, but it will be incumbent upon SP500 to break through its recent highs for the market to make continued significant progress on this move.
Given the momentum and the breakouts by SOX and NASDAQ we are looking for more upside to this move though after a solid gain some weakness early is typical. That often simply sets the stage for the buyers to move back in. Accordingly we are continuing to look for opportune entry points from stocks that are making key breakouts or recovering from tests of prior breakouts. Money continues to move around the market, and that continues to provide opportunity to move into stocks that are in position to rally and make us money.
At the same time we will let our current positions run as much as they will and also take interim gains to lock in some profit where appropriate. That combination of looking for opportunity where it arises when the market shows it is time to buy along with letting positions run and locking in some partial gain keeps us buying into good moves, locking in profits, and otherwise keeping out of trouble with our current positions.
Support and Resistance
NASDAQ: Closed at 2218.15
Resistance:
2264 is the June 2001 intraday peak.
2313 is the 5-22-01 closing high.
2328 is the May 2001 intraday high.
Support:
2215 is the June 2001 closing high.
2191.60, the January intraday high.
2178 is the January closing high.
The 10 day EMA at 2185
The 18 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 50 day EMA at 2112
2100 was key resistance point, and a successful test sets it up as support.
S&P 500: Closed at 1244.12
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 1234
The March 2005 high at 1229.11 and the 18 day EMA at 1229
March 2005 closing high at 1225
The June high at 1220
December high at 1217
The February intraday high at 1212.
The 50 day EMA at 1212
1200 is some support
1196, the mid-January high and the early December peak in the left shoulder.
Dow: Closed at 10,683.74
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 10,634
Price consolidation at 10,600 is not totally broken
The 18 day EMA at 10,599
The April high at 10,557
The 50 day EMA at 10,525
The 200 day SMA at 10,494
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: 5.7M expected and 5.1M prior
Truck Sales, July: 8.8M expected and 8.9M prior
Personal Income, June (08:30): 0.5% actual versus 0.4% expected and 0.2% prior
Personal Spending, June (08:30): 0.8% actual versus 0.8% expected and 0.0% prior
Factory Orders, June (10:00): 1.0% actual versus 1.0% expected and 3.6% prior (revised from 2.9%)
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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