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world stock market, us stock market
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8/04/05 Technical Traders Report Update
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Technical Traders Report Subscribers:
Next full report issues Saturday.
MARKET ALERTS
Targets hit alerts: BOOM
Buy alerts: CUTR
Trailing stops: NSM; SKS
Stop alerts: HGSI; FSH; WIND
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SUMMARY:
- Investors mull economy versus Fed ahead of jobs report as stocks lose their bid.
- Retail sales stumble as hot weather makes fall lines unbecoming
- Jobless claims holding at low levels but Friday non-farm payrolls not likely to reflect it.
Stocks cannot hold early week move as economy's strength only strengthen Fed's conviction.
What was a promising, solid volume move early this week on signs of a very solid economy fell prey to that very economic strength and how the Fed will view it in the continuing rate hiking campaign. Economic news that was celebrated earlier was undercut by comments mid-week that the Fed was determined to push long term rates higher as its end game, once more using a strong economy as cover to do so even when there is really no need to lead the market (where rates are trying to stay low) to higher rates. It did this in 1999 and 2000 and it splashed the market and then the economy. Not surprisingly many in the market view growth and prosperity coupled with low rates as signs of a truly solid economy, and by gosh, they are right. Just look at our most prosperous periods: growth, low interest rates and golly gee, prosperity.
Given the reports regarding the Fed's agenda and with the jobs report due out Friday, the concerns were enough to cancel most bids. Stocks accordingly fell. Fortunately volume backed off some on both NASDAQ and NYSE, indicating it was more of a wait and see induced selling session as opposed to a rush to get out of the market. Thus there is a bit of 'Fear of Fed' working back into the market as more and more this week are talking about the wisdom of fighting the Fed. If the Fed wants to it can stop any economy. History is replete with such instances starting back in the 1920's and running through 2000. After another solid series of earnings and with some renewed strong economic data this week, news the Fed is determined to get rates higher has been taken by more than a few that the gauntlet is officially thrown down and that Greenspan is getting impatient with his 'measured pace.'
As we have written all year, this is typically the case. The Fed taps the market/economy with a rolled up newspaper over and over and it does nothing. Finally after a period of modest beatings the Fed kicks the crap out of the market/economy with its boot and investors run away screaming. Despite all of the rhetoric, however, the Fed may not be ready to do that just yet. The market is not racing away as it was in 1999 (thanks to the Fed flooding the market with Y2K money back then) so the Fed has no real poster child to knock down. In other words it can keep raising rates modestly while the economy remains solid without having to start with the 50 basis point hikes that really kill the market and then the economy. Greenspan can get another three hikes in before the end of the year and push short term rates up another 75 basis points sticking with the 25BP per hike 'measured' pace. If he does that and then the Fed stops, the economy may be able to hang on. It is when the Fed gets impatient as it typically does that the damage is really done.
Thus the big issue Friday is not the jobs report itself, but how the Fed ends up viewing the results. A strong report may give Greenspan incentive or the temptation to raise rates faster as the market moves into a 'good economic news may not be good economic news' mode.
The end result was a down session that sold early, tried to consolidate twice, but failed to make anything happen upside both times. Stocks sold into the close with the recent leaders (SP600, NASDAQ and SOX) leading the downside. At least volume was lighter so there was no dumping. It was more along the lines of canceling bids than dumping shares given the lighter volume. There were not many places to escape, however, as downside breadth was 2:1 or better. Energy posted some gains, but outside of that area the upside moves were very spotty.
For now this looks like another routine test after a solid run higher though some of the internals were quite negative (namely breadth). SOX and SP600 have broken through their 10 day EMA and look ready for a deeper test, but that is still within the norm. The indices are still in their uptrends as are most leaders, holding near support levels. On the flipside we don't like how easily the move from earlier in the week was turned back in. At some point the market is going to have a showdown with the Fed if the Fed does not shut down the current hiking round with just a couple more hikes. The market always losses those 'showdowns,' so we can only hope the Fed is a bit wiser this time. Of course that goes along with hoping the Astros win the World Series, Lance Armstrong decides to go for number eight, Congress cuts spending by 50% on its own, no crappy movie sequels (or prequels) are made again, etc.
THE ECONOMY
July retail sales get a bit dicey.
After a series of very strong months, retail sales did not live up to expectations and the retail stocks sold. The company line was hot weather made fall fashions and related items cool commodities after retailers had already cleared much of the summer inventory via the prior strong sales.
Somewhat plausible, but equally plausible and quite probably additional causes are as follows. First, retail sales have ranged above expectations for months as consumers continue to surprise everyone with their strength. Two, gasoline prices are averaging $2.25/gallon and above, and that is redirecting where some money goes. WMT once again posted strong sales, the second month to do so, and we are convinced the return to WMT is the result of the need to stretch dollars further given more of them are going into the gas tank. This was bolstered by sales outside of WMT where some perennial leaders this year and beyond started to stumble. Indeed, overall only 39% of those reporting beat estimates while 59% missed. JWN missed. SKS missed. Even some that did not miss still sold off because they did not beat expectations by as much as they have in the past (e.g. ANF, ARO). Dollars that were going to these stores are being reallocated to go further now that more dollars are going into the tank. That means discounters are getting more business. Hence WMT sales surprised to the upside the last two months.
High energy prices have a cumulative impact. Everyone focuses on where oil and gasoline are right now. Ask any economist, however, and he or she will tell you it is not a snapshot of prices that determines what consumers spend, but the amount of time prices remain high. That is why the longer oil prices remain at current levels, the more we will see money diverted from other areas. If it goes higher it only gets worse. Consumers can bridge a spike in prices, keeping the spending going while the prices rise then fall. If they stay high then habits start to change until a significant change in the underlying prices comes about.
THE MARKET
MARKET SENTIMENT
VIX: 12.52; +0.69
VXN: 14.94; +1.22
VXO: 11.59; +0.67
Put/Call Ratio (CBOE): 1.05; +0.17. The ratio has remained high of late, moving above 1.0 on the close Thursday. That starts indicating a bit of extra speculation on the downside and that can help foster a rebound. As this one is just starting it likely does not indicate an immediate turn back up, but it does suggest that it won't take much to turn the market back up once the current indecision clears up.
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: -25.49 points (-1.15%) to close at 2191.32
Volume: 1.648B (-9.92%). After some churn Wednesday, volume backed off to below average as NASDAQ dropped to the 10 day EMA. Wanted to see trade lighten up if it kept selling and that is exactly what it did.
Up Volume: 413M (-429M)
Down Volume: 1.201B (+237M)
A/D and Hi/Lo: Decliners led 2.3 to 1. Pretty ugly on the internals as techs sold across the board, large and small. Biotechs, healthcare, you name it and it was likely lower.
Previous Session: Decliners led 1.41 to 1
New Highs: 128 (-33)
New Lows: 24 (+7)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
A pretty good price thumping sent NASDAQ down near the 10 day EMA (2191) and the early January highs on the close. Pretty good double layer of support there, and good to see volume dropping off as it started a pullback in earnest. Since breaking higher off the 50 day EMA (2119) in early July, NASDAQ has held the 10 day EMA on its tests. Momentum is downside though volume is lighter. A test of the 18 day EMA (2173) on an intraday basis over the next couple of sessions would be a good set up for a continued move. Thus far no renewed distribution, indicating a more normal pullback. Want to see things remain orderly on any further selling.
SOX is already on route to its 18 day EMA, having dropped easily through the 10 day EMA (475) as it closed on the lows Thursday. Chips were down 2.4% as leaders took the hits from the recent runs. A nice break higher Tuesday out of a sweet lateral move has been completely given back. Not a good sign to see breaks higher over resistance met with selling that completely undoes the move. Maybe a harbinger of more tech troubles but thus far no distribution helps.
SP500/NYSE
Stats: -9.18 points (-0.74%) to close at 1235.86
NYSE Volume: 1.502B (-0.76%). Volume eased ever so slightly, but not enough to really give you comfort there is no selling. Basically a strong upside session, a bit of a churn, then selling on continued solid trade. Given SP500 has been trying to work laterally and consolidate, the higher volume is not a positive; you want to see volume calm down as a stock or index tries to consolidate.
Up Volume: 560M (-417M)
Down Volume: 1.393B (+383M)
A/D and Hi/Lo: Decliners led 2.04 to 1. With small caps one of the downside leaders it was clear breadth would be weak. It was.
Previous Session: Decliners led 1.11 to 1
New Highs: 167 (-186)
New Lows: 20 (-1)
The Chart: http://www.investmenthouse.com/cd/^spx.html
SP500 has bounced back and forth the past week, mostly showing good price/volume action, but showing a bit of a distributive bent the past couple of sessions. SP500 broke higher last week and then gave it back Friday. It rallied again Tuesday on volume but then gave it back again on Thursday. It is running in place here with volume moving higher as it does. That is more indicative of churning as volume shows rising turnover as SP500 struggles to clear 1245. When an index churns for a week or so, it is a sign that the foundation is eroding some. When it is done the bottom of the range can fall out. SP500 has lagged the recent breaks higher as it could not clear its late July highs. It is still in the uptrend but we are watching this action here closely given the churn. Broke through the 10 day EMA (1236) on the close, and looks to be heading to the 18 day EMA (1231). That puts it in the middle of the late July consolidation; from there it shows us if it has anything left and can continue higher or its slips into a deeper pullback
The leading SP600 sold 1.4%, eclipsing NASDAQ's drop, moving through its 10 day EMA (352.31) and toward the 18 day EMA (349.50). It did this three times in July and this is the fourth time. SP600 is getting long in the tooth on this move and how it holds or does not hold the 18 day EMA on this test will point the way to how much of the market handles its continuing test. This is a leading index. Maybe its time is over and the large caps take over as suggested for the past two years by many television pundits. If SP600 does not hold, however, we think the rest of the market will be hard pressed to hold as well.
DJ30
DJ30 sold as well, never clearing resistance at 10,700 on this lateral, 3 week consolidation. It has not broken down, but is back at the 18 day EMA (10,609) where it will try to hang on and continue forming up its handle to the current 5 month base. Volume was lower and below average Thursday, a decent sign. That is about all you can say for it at this juncture.
Stats: -87.49 points (-0.82%) to close at 10610.1
Volume: 230 million shares Thursday versus 237 million shares Wednesday. Lower volume on the selling is what you want to see.
The chart: http://www.investmenthouse.com/cd/^dji.html
FRIDAY
The jobs report as always is being highly publicized because it is so dear to all of us because most of us work. Thus it has a way of hitting home that other economic reports don't have. There is a disconnect in the data, however, as weekly jobless claims are low, the unemployment rate is low, but non-farm payrolls are sluggish. Friday non-farm payrolls are likely to suggest mediocre employment even in light of the other data.
Indeed, the Monster.com jobs report showed a 134 reading for July versus the 136 the month before. That continues a slide through the summer, and it has been reflected in the jobs reports. It covers the traditional jobs measured by the non-farm payrolls so it is no surprise they are reflecting one another.
The non-farm jobs are likely substantially underestimating actual jobs but not by huge amounts as some suggest. Yes there are a lot of new sole proprietorships and similar businesses out there that sprang up thanks to the market and economic crash that led to so many companies dying prematurely. They have not hit the point in their life cycles, however, where they are generating a lot of new 'traditional' jobs for the unemployed to land. Many are still working tooth and nail for survival and are small operations. If the economy stays solid and they are not taxed or otherwise regulated out of business, some will reach that point. Microsoft, Dell, and Apple all started with very little other than some dreams, good ideas, and guts.
The problem with the non-farm report is that it reflects in large part the bigger employers, many of which have shed employees the past three years and more, and are still doing so. Ford, Kimberly-Clark, Kodak, SUNW, etc. are just some of the companies that recently announced significant new layoffs. This downsizing to reduce overhead and pump up profits has not abated significantly since it started with the last bust. Workers are forced to make their own jobs. Again with the layoffs in the big companies and few companies creating new jobs yet, the report is not reflecting the job market. Greenspan and the Fed argued it was back in 2003, but once more the evidence is proving him wrong. Makes you take pause when you think about his most recent argument that a flat or inverted yield curve does not mean economic trouble anymore. Heaven help us.
In short, the jobs report likely won't be blockbuster (though with the way the government adjusts things it could turn out huge), and that may be good for stocks. As noted, it appears that one of the issues arising this week is a too strong economy, at least for a Fed trying to push rates up in an economy that is healthy and thus enjoys low rates. Greenspan is making a mountain out of his molehill conundrum. A weaker jobs report will give some comfort that the Fed at least is not going to start jacking up rates at a 50 BP clip. As the market has thus far lived with 25BP per meeting, that prospect will calm some investors down.
We don't think it likely that news will spark any rebound Friday. The market sure looks as if it needs a bit more testing on this trip. Again, SP600 will be key here in how it handles the 18 day EMA test. It broke out before all the other indices, and it will be the first to make a deeper test. If it breaks through the 18 day EMA and cannot get back up that will be significant for the rest of the market.
We are gong to play a little defense with our positions. If they hold the 18 day EMA on lower volume we will be happy with that. If the volume picks up and they cannot hang at near support we are not going to dwell on it. We would rather have to buy back in after a test than to wake up and find the market down 10%. Not saying it will do that; again, thus far the action shows continued strength in the uptrend with solid leadership and little higher volume selling.
Good move to this point, taking a breather, and likely to find support and make yet another bounce. If not, we will be ready to step aside and await the next opportunity. A bit dicey to take a lot of new positions at this juncture as the risk/reward is skewed to risk. That is why we have been somewhat quiet with taking many new positions. We will continue to look for opportunity because this selling is relatively tame and that can lead to pretty aggressive snapbacks once the near term issues are resolved.
Support and Resistance
NASDAQ: Closed at 2191.32
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 2191
The 18 day EMA at 2173
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 2119
2100 was key resistance point, and a successful test sets it up as support.
S&P 500: Closed at 1235.86
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 1214 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 10,610.10
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:
Price consolidation at 10,600
The 18 day EMA at 10,609
The April high at 10,557
The 50 day EMA at 10,534
The 200 day SMA at 10,501
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): 312K actual versus 315K expected and 313K prior (revised from 310K)
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 2
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