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us stock market, understanding the stock market
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8/03/05 Technical Traders Report
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SUMMARY:
- Stocks churn a bit as investors ponder oil new high and Fed's designs versus the economy.
- ISM Services still very strong though off June levels.
- A second 100K+ month of layoffs.
- Fed purportedly on troublesome mission to tighten until it forces long-term rates higher.
- Market remains resilient with intraday recovery, but finding it difficult to string together gains.
Stocks run in place, unable to build upon Tuesday rally.
The market showed some weakness Wednesday on the heels of the solid volume Tuesday upside move, something we noted Tuesday night that often occurs after a solid advance. The weakness started early with investors finding little to move them to renew the buying that marked the Tuesday session. Some more earnings were out, a deal to acquire RBK was announced (of course, RBK was moving higher on volume Tuesday, tipping everyone that something was up), but they were countered by rising oil prices moving to a new high and a WSJ article that put in a major paper what we are saying: the Fed has fallen into an agenda-driven mode as it always does.
These same old conflicts stymied the rally and buyers basically at out the session. Some sellers came in to see what they could do, but after an hour and a lower open stocks started to climb back up once more. An afternoon setback was met with another recovery though the bell rang before all of the indices could get back to positive.
The best the major indices could do was a stalemate with the recent highs, leaving SP500 yet to join NASDAQ by clearing its June peak. No big deal being somewhat expected as noted. Volume, however, was stronger on NASDAQ as that index basically held steady; that is called churning, i.e. high volume turnover with little movement. What is happening is stocks are changing hands fast and furiously with buyers and sellers evenly matched. When it starts showing up after a decline it is a sign that the buyers have started to move back in and challenge the sellers. When it occurs after a run higher it is a sign the sellers are becoming stronger vis- -vis the buyers.
One day of churn means little, particularly after a big upside volume move such as Tuesday. The fact that NASDAQ did not reverse and sell off on high volume but instead managed once more to recover before the close shows the resilience remains. NYSE volume was strong but slightly lower as the NYSE indices were mixed; similar action to NASDAQ but not technically any distribution. Just a bit of churn after reaching toward new post-bust highs.
So the day was more or less typical after a strong bounce higher (though you would prefer to see the market string together a few solid gains before pausing, something it is finding difficult to do). The question is whether it can continue higher after this session of indecision where investors were slapped with some reality (the Fed's tunnel vision, oil prices that won't quit rising). Up to today the overall action has been solid, and Wednesday, while not a positive session, was not a rout by any stretch. It did not change the character of the move, but as with any day that shows some churn it deserves watching.
THE ECONOMY
ISM Services strong again.
It was not as strong as expected (60.5 versus 61.0), but it was close, continuing a renewed string of solid service expansion. As we all hear ad nausea, we are in a service economy and thus this is very important, etc. New orders rose to 61.9 from 59.5, but prices zoomed to 70.3 from 59.8 and employment declined to 56.2 from 57.4.
While not as strong as hoped, it was no slouch for July with the service sector continuing to expand at a brisk pace the past few months. This mirrors other data points of late that also indicate renewed economic strength after a lull in late Q1 and early Q2. It no doubt caught the Fed's eye, and the fact that prices paid posted a sharp jump gives it no reason to stop its current hiking.
Another 100K+ layoffs.
Of course, the Fed is getting something it wanted back in 2000, i.e. more lay offs. Who can forget Broaddus' comments about how the unemployment rate needed to be higher to stave off inflation. Just last night we talked about the 'burn it to save it' mentality at the Fed, and this was a classic case: in order to promote full employment, employment had to be less. Excuse me while I go outside and scream.
Indeed, that is where many workers are feeling as the second consecutive 100K layoff month was logged (102,979 to be exact). After months and months of 100K+ layoffs after 9-11, the economy actually got out of that mode back in 2004. It took that long for layoffs to start drying up. Challenger (the compiler of the data) says that it is seeing layoffs increase the pace once more even as the economy appears to have found its second wind.
When you look down the roster of companies announcing layoffs (EK, KMB, etc.) it is no growth picture you are seeing. These are mature companies in mature industries trying to improve the bottom line by cutting back on expenses and overhead wherever possible. There is no big ongoing innovation, just maximizing gains from cash cows. We have discussed this before, but it is something the major media does not pick up on. The economy could be booming but these layoffs would continue because the companies are not growth stories and can only grow earnings by cutting costs. Thus the big names in the smokestack type companies continue to lay off workers, cutting overhead and also looking to where they can farm out the tasks to lower labor cost markets. Without solid growth and with energy and materials prices rising, cutting the overhead is the only way they can continue to improve the bottom line.
Fed looks more and more agenda driven.
We have said it many times this year and last, and Wednesday the Wall Street Journal picked up the ball regarding the Fed's agenda driving its actions at this point. In short, the Fed can say all it wants to about viewing the data and not knowing what it is going to do at each meeting, but more and more realize, as does the bond market by the way, that in almost every Fed hiking round the Fed moves from considered weighing of the data to a 'ends justify the means' mentality.
We said it to start the year in our first of the year analysis: the Fed can have the best intentions and talk the best talk, but it eventually loses patience as rates, the economy, the market, the consumer, etc. don't do what it thinks they should do. Its mandate of long-term price stability is twisted and tortured into a pretzel as the Fed starts looking under every rock for signs of inflation so it can justify its current undertaking. That is how we got a Fed in 1999 and 2000 that saw growth and prosperity as a sign of impending inflation. That is how we got a Fed in 2004 and 2005 that views a flat yield curve as the market having it all backwards and the Fed knowing what is really going on.
Whenever anyone thinks they are smarter than the totality of information that makes up a market, that is a frightening prospect, particularly when that person wields the power to directly impact the markets and our lives. The Wall Street Journal article on the Fed today discussed some inside sources claiming the Fed is not going to stop raising rates until it forces longer-term bond yields higher (the Fed only controls short yields; it raises or lowers and hopes the longer term bonds will follow).
The Fed wants them higher because it feels low rates are inflationary because that encourages more consumption. The Fed is right, but the consumption it promotes is investment in the US economy, and that builds up supply and thus heads off potential inflation. Low rates simply show that there is no inflation pressure in the economy (and also that bonds fear the Fed), i.e. that the system is working and that supply and demand are getting close to balance. That is why the Fed has been unable to impact long rates, pushing on a string as many like to phrase it.
There is absolutely nothing wrong with long term rates naturally holding at lower levels. After the boom took hold in the mid-1980's and through the 1990's, rates fell or remained historically low even as the economy grew. Why? Because there was no inflationary pressure. When the market is speaking the Fed should listen. Instead the Fed is trying once again to force the market to its bidding, trying to put the economy where it thinks it needs to be as opposed to where the universe of knowledge as condensed in financial markets tells us all where it should be.
We closed out last night's report contemplating whether the economy and thus the market could withstand a Fed that was bent on raising rates as it was in 1999 and 2000. If the Fed is in fact going to raise rates until long term rates rise, then it is going to damage the economy and that will hurt the market long before we see the economic problems. That is what happened in 2000; by the time the damage was apparent and before the Fed ceased hiking rates, the market had already pitched over in a violent fit of distribution and volatility. That is in large part why the market closed at a standoff Wednesday as investors contemplated the ramifications of the Fed once more looking to achieve a specific result regardless of what the market is telling us all. Danger, danger, danger.
THE MARKET
MARKET SENTIMENT
VIX: 11.83; +0.08
VXN: 13.72; -0.23
VXO: 10.92; +0.18
Put/Call Ratio (CBOE): 0.88; -0.07
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: -1.34 points (-0.06%) to close at 2216.81
Volume: 1.829B (+1.98%). Volume posted another strong session Wednesday, coming in above average. NASDAQ, however, could not continue the advance, and after a run higher this higher volume running in pace shows churn where the late comers are buying heavily while the ones that have been earlier are selling. If it continues it is a clear indication the market is heading lower.
Up Volume: 842M (-425M)
Down Volume: 964M (+469M)
A/D and Hi/Lo: Decliners led 1.41 to 1. Mediocre upside breadth on the Tuesday gain and negative breadth that almost equaled that Tuesday breadth shows the move lacks some internal strength as NASDAQ seeks new highs.
Previous Session: Advancers led 1.55 to 1
New Highs: 161 (-54)
New Lows: 17 (-3)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
NASDAQ ran in place Wednesday as volume remained overall strong and above average. A day of indecision and churn as investors pondered the Fed's next step and oil's rise to a new dollar high. NASDAQ remains in a solid uptrend above the 10 day EMA (21.91), having just broken to a new recovery high after the crash and doing so on strong volume. Thus we don't want to put too much emphasis on a day of churn, the second official distribution session in the past two weeks. That is not enough to alter the character or sink the move. If it continues it shows that buyers are leaving and selling to the latecomers and that a decline of some form is ahead. For now we take it as a day of indecision with rising oil prices and concerns about the Fed's true intent. It makes the risk/reward ratio a bit tighter for now, but again, it does not alter the current solid uptrend.
SOX sold off early but rebounded for a modest loss though it was almost market leading (-0.4%). As with the other indices, a modest pullback after a strong break higher is typical. Indeed, if we saw a lighter volume pullback a bit further and then a rebound would really be a good entry point.
SP500/NYSE
Stats: +0.92 points (+0.07%) to close at 1245.04
NYSE Volume: 1.513B (-0.71%). Lower but still strong, above average volume as the large caps posted a modest gain and small caps posted a small but market leading loss Wednesday. Given that SP600, one of the clear market leaders, was down, we view the action very much the same as NASDAQ, i.e. some modest churn after a strong move, but still overall in good shape in this move.
A/D and Hi/Lo: Decliners led 1.11 to 1. Matched the NYSE action and not bad given the small caps led the downside action in the market.
Previous Session: Advancers led 2.06 to 1
New Highs: 353 (-51)
New Lows: 21 (+4)
The Chart: http://www.investmenthouse.com/cd/^spx.html
Ever so slight gain on every so slight lower volume. SP500 ahs continued a slow, steady move up the 10 day EMA (1236.49) on mostly positive price/volume action. It continues to struggle right at the late June high (1245.15), trying to continues its breakout move from last week that was turned right back over that Thursday. Still solidly in the uptrend, but a bit of hesitation and indecision here. We note it did not turn over and dive lower; it still has that internal strength with buyers still willing to step in when it is lower. Don't want to see it start to churn here but instead continue the move with continued solid trade.
The small cap SP600 fell 0.6% Wednesday, leading the market lower. No technical distribution as NYSE volume was lower, but it was still very solid. SP600 had a weak session; no question. It did not change its character, however, as it is still definitely in its uptrend over the 10 day EMA (352.62) as it continues its breakout. It is rallying after its third bounce following the breakout. A stock or index typically makes 4 to 5 such bounces if it is a strong breakout; after that it tests back deeper toward the 50 day EMA. In short, the move is getting a bit long in the tooth. A forth bounce does not mean a fifth will occur. Thus need to be careful and watch the volume and how the strong performers we have been playing continue to hold up.
DJ30
Still working laterally in the three week range above the 18 day EMA (10,609) and below resistance at 10,720 at the top of the recent range. Volume has jumped to average the past two sessions. It can make the breakout, but it is definitely lagging.
Stats: +13.85 points (+0.13%) to close at 10697.59
Volume: 237 million shares Wednesday versus 241 million shares Tuesday. Volume continues to hold at average for the second session.
The chart: http://www.investmenthouse.com/cd/^dji.html
THURSDAY
Not a lot of news Thursday, and with the employment report due Friday stocks may decide to take another day off before that data. One theme we heard repeated Wednesday was how a strong jobs report might be bad for the market because if the Fed is going to push rates, the last thing you want to give it is more ammunition to do so such as a surging jobs market to go along with a strong economy.
We doubt that will happen. The weekly jobless claims have dropped sharply the past three weeks, but the Challenger data shows the conventional non-farm payroll jobs the Fed puts so much faith in are not going to show big gains. Companies are still loathe to higher if not absolutely necessary and indeed would rather lay off and hire a machine as that machine does not require health care, one of the biggest expenses confronting employers. No one wants to take on that kind of overhead again, particularly with the Fed out on a rate hiking round once more. Last time it did that companies were stuck with billions in useless inventories that cast them into the recession and many into bankruptcy never to return.
The market showed a good move Tuesday and then waffled Wednesday. It was not just a blow off session, however, as NASDAQ churned and the small caps struggled with a market leading loss. It was not particularly damaging, but the market is going to have to show it can resume the positive action without throwing out more churn or distribution. It is still in very good shape, but it needs to reassert its strength.
Again, it may not do it Thursday ahead of the jobs data. If it does pause again we want to see the volume back off and it hold most of its gains. That sets it up for the jobs report and a continued move if it is not too hot, not too cold. Kind of in limbo until then in a risk/reward situation that is not really great. That means we will look at really good, juicy pullbacks from stocks that have recently broken out as our primary type of play for the remainder of the week.
Support and Resistance
NASDAQ: Closed at 2216.81
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 2191
The 18 day EMA at 2171
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 2116
2100 was key resistance point, and a successful test sets it up as support.
S&P 500: Closed at 1245.04
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 1236
The March 2005 high at 1229.11 and the 18 day EMA at 1230
March 2005 closing high at 1225
The June high at 1220
December high at 1217
The 50 day EMA at 1213 and the February intraday high at 1212.
1200 is some support
1196, the mid-January high and the early December peak in the left shoulder.
Dow: Closed at 10,697.59
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 10,645
Price consolidation at 10,600 is not totally broken
The 18 day EMA at 10,609
The April high at 10,557
The 50 day EMA at 10,531
The 200 day SMA at 10,498
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): 60.5 actual versus 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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