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us stock market, understanding the stock market
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08/08/05 Investment House Daily
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SUMMARY:
- Early relief bounce fades as NASDAQ breaks 18 day MA and closes at session lows.
- It's not the level of rates right now, its just the Fed's track record that makes sober men take pause.
- Market not acting as if it wants to rise into FOMC announcement this time.
Third session of selling pushed NASDAQ, SOX below the 18 day EMA.
Hope renewed to start the week with futures higher and stocks opening higher out of the gate. They gave back some gain but then started right back up. All of that occurred in the first half hour, however, and after that the bid left the market and stocks slid lower. A mid-morning to lunch consolidation tried to set up an afternoon bounce, but as on Thursday and Friday, the consolidation failed to break upside. Stocks slid lower all afternoon, closing near session lows.
There was some rumor of Cisco buying Nokia and that helped spark the early interest. With oil jumping near $64 and the Fed meeting Tuesday, however, investors quickly returned to last week's concerns about oil and the Fed issuing a rate hike too far. NASDAQ and SOX joined SP500 and SP600 in breaking through the 18 day EMA, a key short term support level that a rally will typically hold if it is going higher near term. As it is, this joinder by NASDAQ and SOX indicates one of the periodic tests of the 50 day EMA is more likely. That does not end the rally, it just resets it for a continued move as long as buyers return at that level.
Indeed, volume was lighter on the session with NASDAQ volume remaining below average and NYSE trade falling below average as well after four sessions of above average trade. On NASDAQ at least this shows there is no real dumping, just a lack of bids heading into the FOMC meeting that allowed stocks to slump for the third consecutive session. No dumping means the big money is not unloading stocks in anticipation of a further fall, and that does not gut a move higher. It is more a case of uncertainty causing some profit taking and closing of wallets by others until some of these near term issues get built into the market. As noted over the weekend, this selling ahead of the FOMC meeting appears to be the type where a recalcitrant Fed is being built into stock prices. Then if the Fed comes out and gives the same measured pace talk the market can then recover some losses.
Whether that happens remains to be seen given oil prices are really spiking here. At $2.25+/gallon on the national level, gasoline prices are high enough and have been high long enough to start changing some habits. We have already noted that with the increasing WMT monthly sales and the longer prices stay high the more habits change. Hopefully we won't get a nasty storm in the Gulf that threatens or damages supply capabilities; that would really spike prices.
The market is walking a narrow line right now though it is still in its overall uptrend and volume is mostly lower on the selling. For now this looks like a periodic test lower during a continuing uptrend. That is healthy and the market can put in another bounce from here to add to the rally given the lack of aggressive downside volume on the selling. If oil prices keep moving toward $70, however, there is going to be a real psychological as well as financial toll starting to take hold and that will put the continued rally in jeopardy. As we have said, the market has yet to really deal with rising oil prices and a potentially overaggressive Fed; both of those are a damper on the economy and thus the market. This pullback is recognizing those issues once more, but as noted, as of Monday the pullback has not shown any dumping that would signal the rally is over.
THE ECONOMY
It is hart to argue that rates are too high here at 3.25%; in a healthy economy rates should rise a certain extent. The problems involve everything that typically accompanies Fed rate hiking campaigns: the Fed tries to force rates higher when they are finding reasons to remain low (the Fed is once again trying to lead the market and manipulate it versus letting the market set prices); the Fed dries up the money supply, the Fed becomes agenda-bound and hikes to reach a goal regardless of what the data or the market suggests.
Indeed, as one reader put it, Greenspan wants to get the rate to neutral (wherever he sees that as but certainly at least 4%) for the next Fed chairman. That gives him three shots to do that; at 25 BP each that is 4%. We could very well see the Fed raising more than 25BP at one of the meetings, and that is one of the market's fears. The Fed is trying to lead the market despite what the compilation of all relevant knowledge (the market) says the rates should be. Whether it is to achieve neutral, to reach a certain comfort level so the Fed has the ammunition to fight the next crises, or really in the belief it has to fight off inflation, the Fed has a history of getting too impatient or too myopic in its vision to see when there is trouble on the horizon. Ironic as the Fed says you have to act before you see signs of inflation, yet it will keep raising rates even when a look ahead shows prices are under control.
Thus it is not a rate hike to 3.5% or 3.75% or even 4% (the Fed Funds futures contract has 4% priced in with a small percentage of 4.25%), but whether the Fed will stop before it does irreparable harm, or at least the kind of harm that causes the economy to significantly slow and of course stocks to sell as an indication of the slowdown to come. If the Fed could give an indication that the hiking was just about over then the market could handle it whether it is 4% or 4.25%. Now the Fed cannot invert the yield curve but it can come close to it and stop if it lets everyone know it is done. Otherwise there is trouble.
We know Greenspan is not going to give that kind of heads up, but we can use a little common sense here. Three more meetings during Greenspan's tenure as chairman, and he likely wants to leave office with the new chairman not having to raise rates and having enough in the tank to lower if he needs to do so down the road. Thus we have a 4% FF rate with 25BP hikes and 4.25% with Greenspan's favored approach, 25 BP at a time and then a nasty 50 BP kicker at the end. Kind of a 'one to grow on' lick. Thus we are looking at a 4% to 4.25% FF rate by the end of the year and likely that the Fed is done at that point.
The market can live with that, and we think that after Tuesday when investors see the Fed's statement it will start to figure that out once more. This pullback has been pretty modest in terms of downside volume, indicating no dumping as noted above. Greenspan won't provide this information, and that leaves it up to investors to read between the lines. With the Fed's track record that makes it hard to accept the Fed will stop, but the changeover in the chairmanship is an uncommon wrinkle. With the low volume selling stocks are still in favor and in position to rally after this slightly deeper test. The market will likely figure this out, but of course, oil prices remain a second wildcard that have proved hard to get a handle on other than expecting they will rise further.
THE MARKET
MARKET SENTIMENT
VIX: 13.21; +0.73
VXN: 15.95; +0.55
VXO: 11.89; +0.19
Put/Call Ratio (CBOE): 0.89; -0.26. After two closes above 1.0 the ratio backed off Monday as the market continued selling. The put covering was winding down from the recent put sales on the last spurt higher.
Bulls versus Bears: Last Week
Bulls rose to 57.3% from 55.9%, the second straight session over the 55% level that is the level considered bearish. As we noted Wednesday and Thursday, the buyers had become exhausted and when that happens there is no ammunition left to push stocks higher. Bulls bottomed in early May at 43.5%.
Bears fell just a hair to 22.5% from 22.6%. Bears continue to dance just above the 20% level considered the crossover into bearish territory. With bulls running through the 55% level it is just about close enough for horseshoes. Dipped to 19.1% five weeks ago. Hit a high for the year at 30% in early May.
NASDAQ
Stats: -13.52 points (-0.62%) to close at 2164.39
Volume: 1.502B (-0.97%). Volume backed off a shade but it remained low and below average for the third consecutive session. No dumping on this pullback but no one willing to commit to the upside yet.
Up Volume: 510M (+39M)
Down Volume: 963M (-51M)
A/D and Hi/Lo: Decliners led 1.5 to 1. Improved somewhat, and given the point loss matched that of Friday, a good improvement that shows the downside action was less intense.
Previous Session: Decliners led 2.07 to 1
New Highs: 82 (+14)
New Lows: 35 (+4)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
NASDAQ broke through the 18 day EMA (2173) as it joined SP500 and SP600 in breaching this support you want to see hold on a continued rally higher. Volume was lighter on the selling and as noted that indicates no dumping. Nonetheless there were no buyers to put in a bid and that allowed prices to drift lower and lower. The breach of the 18 day EMA is not fatal to a rally, but it typically means a deeper test as the near term momentum has waned. As long as volume remains under control and leaders don't crumble the rally has a good chance of resuming. Spiking oil prices are a problem as is the Fed. There is some support at the 2150 range, but after that it is not too hard for NASDAQ to revisit the 50 day EMA (2123). If NASDAQ cannot hold at 2150 after the Fed announcement a deeper test is likely. The key will be if there is a pickup in volume on any selling and if many of the solid tech leaders start to break near support. Thus far they are holding up well.
NASDAQ 100 broke through the 18 day EMA as well though on the same low volume. There is some support at 1569, the early June high and the neckline of NASDAQ 100's reverse head and shoulder. Important test of that level looks to be upcoming.
SOX was leading early, showing a solid gain. That did not last as it failed at the 10 day EMA and undercut the 18 day EMA (468.59). It needs to recover quickly now that 3 days of selling are put in or it looks like a date with 450 and the 50 day EMA. There is some support at 460 on the way and we can expect to see it try to hold there.
SP500/NYSE
Stats: -3.29 points (-0.27%) to close at 1223.13
NYSE Volume: 1.352B (-9.63%). Volume finally backed off on the selling, falling below average for the first session in five. Volume had declined the prior two sessions but the fall was marginal and it remained above average. That was part of the small cap selling from what we see. Not dumping but three was some distribution ongoing that was not taking place on NASDAQ.
A/D and Hi/Lo: Decliners led 1.7 to 1
Previous Session: Decliners led 3.43 to 1
New Highs: 123 (+43)
New Lows: 42 (+7)
The Chart: http://www.investmenthouse.com/cd/^spx.html
SP500 is coming up to some support at the 50 day EMA (1215), the June high (1217), and an up trendline from the April bottom. That gives the large caps a good thick block of ice to land on, and if volume remains low, after three days of selling ahead of the Fed meeting, a further early test to these levels will set up a rebound on the Fed announcement.
The small cap SP600 was the first to break its 18 day EMA (348.69), and it tapped that level on the Monday high before rolling back down to continue the move lower. There is no real support before the 50 day EMA (340.13) and an early July peak at 340, but that is not bad. As we noted a couple of weeks back, SP600 had rallied ahead of the market and had put in 4 bounces off the short term MA (10 and 18 day EMA). As long as volume continues to lighten up as it fades, SP600 has a good foundation to hold at the 50 day.
DJ30
Modest decline on very low, below average volume, holding at the 50 day EMA (10,535) and the 200 day SMA (10,508). Not bad all things considered, but the Dow is still hardly a picture of strength, ready to lead the market higher.
Stats: -21.1 points (-0.2%) to close at 10536.93
Volume: 185 million shares Monday versus 218 million shares Friday.
The chart: http://www.investmenthouse.com/cd/^dji.html
TUESDAY
Three downside sessions ahead of the FOMC meeting, and you can bet investors have been factoring in the potential of a Fed that may not be ready to call it quits soon. Mix in oil at $64/bbl and you have a pretty bad witches brew for stocks.
Typically over the past few FOMC meetings stocks have drifted higher ahead of the announcement, anticipating a further 'measured pace' statement. They will probably give us the same thing this time around, but there is not that much comfort now given the WSJ story last week and the Fed's concerns about oil causing inflation as opposed to being a tax on the economy that actually slows the economy down. The market is starting to ask questions such as 'when the hell are you going to stop raising rates' instead of trusting the Fed to do what is right or assuming the Fed was almost done.
Problem is, the Fed is not going to answer that question. Greenspan still revels in keeping everyone guessing even in this new transparent era. We know more but we still don't know the key issues such as when it stops, how high it goes, etc. We have said it several times before: if the Fed would say this is what we think is neutral given the data and then move to that point rapidly and openly, the market would be better off. It could always adjust as necessary, but there are many flaws with the slow and steady measured pace, one being the Fed's inability to remain cool and rational the further it gets in the process. It gets impatient with the apparent lack of impact and then sticks in a 50 BP hike late in the game that turns out to be the ton of bricks that breaks the camel's back.
Thus we may see more of fade lower tomorrow ahead of the number where SP500 and SP600 get closer to the 50 day EMA and NASDAQ tests lower to 2150. If volume remains low we then may see that drift higher into the announcement. So much depends upon whether investors continue to sell on light volume versus saying 'to hell with it' and just start clearing out of positions. That is what the water torture version of hikes can do to the market as well as the economy.
We are going to keep watching the leaders we are holding as well as others we want to get in on and see if they can hold their near support or slightly undercut it on low volume and then continue their moves. This is still a pretty low risk/reward level here as the indices have not completed the test to next significant support after falling through the nearer term support levels. Of course it is never time to buy when things are certain; you are certain to be buying too high. We do want to see how they treat the 50 day EMA, however, (at least on SP600 and SP500) to give us a good look at whether the buyers are moving back in and supporting stocks at these levels with some good volume. The indices are still in their uptrends and so are the leadership stocks. As long as they hold the trends and show good price/volume action the underpinnings of the rally remain in place.
Support and Resistance
NASDAQ: Closed at 2164.39
Resistance:
The 18 day EMA at 2173
2178 is the January closing high and is trying to hold
The 10 day EMA at 2184
2191.60, the January intraday high.
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:
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 2123
2100 was key resistance point, and a successful test sets it up as support.
S&P 500: Closed at 1223.13
Resistance:
March 2005 closing high at 1225
The March 2005 high at 1229.11
The 18 day EMA at 1230
The 10 day EMA at 1232
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 June high at 1220
December high at 1217
The 50 day EMA at 1215
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 10,536.93
Resistance:
The April high at 10,557
The 18 day EMA at 10,597
Price consolidation at 10,600
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 50 day EMA at 10,535
The 200 day SMA at 10,508
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 09
Productivity-Preliminary, Q2 (08:30): 2.0% expected and 2.9% prior
Wholesale Inventories, June (10:00): 0.4% expected and 0.1% prior
FOMC announcement (2:15): 25 basis point rate hike expected. No change in statement as Fed will be wary of near term inflation and comfortable with 'well-contained' long term inflation.
August 10
Treasury Budget, July (2:00): -$56.0B expected and -$69.2B prior
August 11
Retail Sales, July (08:30): 2.0% expected and 1.7% prior
Retail Sales ex-auto, July (08:30): 0.6% expected and 0.7% prior
Initial Jobless Claims, 08/06 (08:30): 315K expected and 312K prior
Business Inventories, June (10:00): 0.1% expected and 0.1% prior
August 12
Export Prices ex-agriculture, July (08:30): -0.1% prior
Import Prices ex-oil, July (08:30): -0.4% prior
Trade Balance, June (08:30): -$57.2B expected and -$55.3B prior
Michigan Sentiment-Preliminary., August (09:45): 96.5 expected and 96.5 prior
End part 1 of 3
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us stock market
understanding the stock market
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