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world stock market, understanding the stock market
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08/09/05 Investment House Daily
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SUMMARY:
- Fed stays the course, market puts in a modest upside session.
- Fed says inflation is contained, raises rates as expected.
- National Association of Realtors says housing market "close to a peak."
- Market will have to show something after mediocre bounce, CSCO guidance.
Stocks rise into FOMC announcement then get on the rollercoaster.
Stocks kept with recent tradition, rising into the FOMC decision as opposed to continuing lower with the recent selling. As soon as NASDAQ undercut the 18 day EMA it was bouncing back, to test that breach. SP500 rose as well, moving back to test its former support that it just fell through on Friday and Monday.
When the Fed decision indicated the usual 25 BP hike and no real change in the language (keeping measured pace, inflation remaining in check) stocks immediately moved higher, adding to the pre-announcement gains. That was short-lived, however. The market basically got what it wanted, i.e. no increased hawkishness, but at the same time it also saw no relief down the pike. After that early bump stocks turned over and sold to session lows on NASDAQ. Then in the last half hour they turned back up and recouped half of the losses, closing right where they were just before the Fed announcement. Talk about a middle of the road decision.
That also describes the session. Volume was mixed, higher on NYSE but lower on NASDAQ. Some accumulation but it was not market-wide. Indeed breadth was mediocre at best (1.3:1 NYSE, 1.1:1 NASD) as stocks rallied back but faltered at all of that support they just fell through on this selling. At least the downside volume was not all that strong and at least NYSE volume was stronger on this rebound to match the above average volume on the prior selling.
Again, the action was very middle of the road, very indecisive as not a whole lot was decided today. Stocks bounced and NASDAQ and SOX may have some toehold to try and bounce further from the close, but they will have to show more investor conviction. Oil was lower but is still over $63/bbl ($63.07) and the Fed remains more or less in the same mode, not giving much of an indication one way or the other as to its next steps. Add onto that some in line results from CSCO after hours (and it sold on those earnings), you don't have a lot driving stocks upside heading into Wednesday.
THE ECONOMY
The Fed did as everyone expected, raising the Fed Funds rate 25BP to 3.5% and keeping the 'measured pace' language it has used now for 10 consecutive meetings in describing how it intends to raise interest rates. The Fed kept to the script, noting that aggregate spending despite high energy prices has strengthened once more and that the labor market continues to gradually strengthen. With respect to inflation the Fed stated core inflation is relatively low in recent months, longer term inflation expectations remain well-contained, but that 'pressures on inflation have stayed elevated.' It concluded noting again that with the appropriate monetary policy action, price stability should result (i.e. if it keeps raising rates).
This is basically the same language in the last statement with the Fed noting three times that inflation remains contained. Some view this as dovish, others are saying its more of the same old Fed. Underlying all of this is the language about 'appropriate monetary policy action' (the Fed rate hikes) that is supposedly keeping this wonderful state of affairs from exploding into an inflationary binge.
First, note that the Fed refers to 'pressures on inflation' being elevated and not inflation being elevated. All of the economists ignore this now, having been conditioned like a pack of Pavlov's dogs. It is, however, what we have been discussing as a key problem with the Fed's approach to the economy: it makes up inflation indicators every time it feels it needs to justify taking action when its mandate, i.e. long-term price stability, is not in jeopardy. In other words, prices were stable in 1999 and 2000 and are relatively stable now (definitely so from a long-term perspective), but the Fed is taking action based on indicators that may or may not lead to inflation.
For instance, the Fed again talks about aggregate spending being strong, and while it views that as good, it also views it as inflationary because the Fed frets about rising wages that when placed in the hands of consumers lead to more spending. Former Dallas Fed president McTeer noted, however, that the strong aggregate spending or demand is not necessarily inflationary. He said the Fed should also include language that aggregate supply was strong as well and thus inflationary pressures were low. McTeer believes the Fed focuses too much on demand in making its decisions, and that forces it to use the stick rather than looking at the big picture and determining if there is balance between supply and demand.
When you look at the real indicators as opposed to whether there are some regional overheated housing markets (how many times has California been overheated and busted, just to become overheated once more during the past twenty years?), you see any real 'pressures on inflation' are backing off and are not elevated. The world commodities index has been flattish for 19 consecutive months. The bond yield curve is flat as well. Gold is still making lower highs. Productivity remains at historically high levels (2.2% in Q2 versus the 2.0% expected; though this is not really an inflation indicator in our view). The real signs of inflation are not showing inflation, and that leads one to wonder just what the Fed is viewing as the pressures on inflation.
It all sounds just like the same double talk, though toned down, that we heard in 1999 and 2000 when the economists that should be scrutinizing the Fed's actions and comments are all too busy trying to improve their position in line for a job on the FOMC. Thus we continue to get a rubber stamp of the Fed's actions and comments without a significant amount of critical analysis. Thus the most powerful unelected body in the world is once more handing down its edicts that directly impact our lives and futures without any of the experts really taking them to task. When the fox is left in charge of the henhouse to do as he wishes, the results are not what the farmer wants.
That is leaving the market with the uneasy feeling that the Fed may once more go one step too far. Those fears were stirred last week with the WSJ report on the Fed's determination to get long term rates higher, and as seen from the response to the statement, investors were not feeling that giddy about the Fed slowing down and stopping soon. McTeer clearly stated Tuesday that Greenspan and the Fed are now very aware that the Fed typically goes one step too far (just one?), and that Greenspan knows the rate hikes need to be front end loaded and not back end loaded (meaning the Fed should start stronger and then taper toward the end). With 25BP hikes, one wonders how the Fed does that; jack them up by 50 BP and then lower them to 25 before stopping? Of course it won't do that, but even on the last rate hiking round before this the Fed did what it always does: slow steps but then got impatient and jacked it up to 50BP. Has the Fed learned its lesson this time? Is it different this time? We will believe it when we see it.
National Association of Realtors says 'sell now!'
Finally someone within the real estate industry is acknowledging that the housing market is peaking. NAR came out Tuesday and made some statements many did not expect. First it said home sales would trend down from these record levels, that the housing market was "close to a peak." Wow. That is some admission from inside the industry.
More than that, NAR suggested that now was a good time to go ahead and sell if you were thinking of doing it, taking advantage of the high prices. NAR then advised to wait a year, however, before buying your next home to get a better price when the market softens. That is pretty stark in its view of where the market is. Based on this, NAR is not saying it is close to a peak, it is saying the peak is here.
Should anyone follow this advice? We agree the market is peaking; we feel it has already peaked or at least the tracks are laid and it is starting down them. Not a major crash for the entire market as some seem to think; any crashes will be limited in area to those levels that got way overheated and typically see pretty severe swings in the market, e.g., parts of California, Arizona, Florida, New York, South Carolina, etc. Those markets heat up and cool down in faster cycles than the rest of the country. We recall stories from Silicon Valley back in 2001 where sellers were praying the deal would close because so many buyers were walking contracts as the tech boom further crashed and the nation struggled through recession. Those same folks are saying today 'if only we would have waited a year or so we would have made another million.' No kidding; we personally know more than a few that were in that position. The point: the majority of the markets that are considered overheated now are ones that overheat and cool off much more frequently than the rest of the country.
That leave you wondering. If you sell now and sit for a year, prices damn well better fall significantly if you are going to come out ahead. Why? Because rents are not dropping, and if you sign a year lease now you are not going to cut a great deal. You are going to lock in at a high monthly rate and burn up a lot of your profits paying rent. Thus prices better plunge in order for you to make out on that deal. In short, this strategy might work in those areas that are overheated and will fall harder versus the rest of the country where prices may soften, but they are not going to crash. That makes this a risky gambit for most would be sellers.
THE MARKET
MARKET SENTIMENT
VIX: 12.4; -0.81
VXN: 15.25; -0.7
VXO: 11.35; -0.54
Put/Call Ratio (CBOE): 0.91; +0.02
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: +9.8 points (+0.45%) to close at 2174.19
Volume: 1.488B (-0.93%). Volume was marginally lower, but it remained well below average for the fourth consecutive session. Good to see it on the downside as that showed no heavy selling of tech shares, but when the index bounces you want to see it show more strength to tell you the buyers have returned. That was not the case Tuesday as volume was lower moving into the FOMC decision it did not ramp up much afterwards. That puts the Tuesday gain in question even though it closed above the 18 day EMA.
Up Volume: 919M (+409M)
Down Volume: 506M (-457M)
A/D and Hi/Lo: Advancers led 1.1 to 1. Very mediocre breadth on a 0.5% gain in NASDAQ. Weak internals.
Previous Session: Decliners led 1.5 to 1
New Highs: 83 (+1). New highs never did ramp up much on NASDAQ even when the index hit a new high for the year last week. That was another indication that the move lacked much punch.
New Lows: 35 (0)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
NASDAQ rallied back, gapping higher and moving up to the 10 day EMA (2182) on the high. It could not hold all of that move, however, fading back to close just over the 18 day EMA (2173). Volume was anemic, indicating along with the fade off the intraday high the lack of conviction in the move. Given the low volume and weak internals this move can only be classified as a relief move, and unless it shows more volume and upside commitment it is not going to hold up.
NASDAQ 100 managed a it better with a 0.7% gain, it too closing above the 18 day EMA but unable to top the 10 day on the close. It held a key level, but it has to show some more volume.
SOX led with a 1.2% gain, typical as it often leads the market higher and lower as it is more volatile. Its move, however, as with NASDAQ, did not really answer the recent selling. It rallied up over the 10 day EMA (472.60) but closed below that level that is also a couple of weeks of price resistance from late July. Needs a strong move through that level to show it is back and ready to lead once more.
SP500/NYSE
Stats: +8.25 points (+0.67%) to close at 1231.38
NYSE Volume: 1.454B (+7.52%). NYSE volume responded better, moving just above average as NYSE stocks posted their gains. That shows there was some accumulation on the session, but we also note that overall volume was lower than the selling volume from the prior week. In other words, volume was up but the buyers were still outnumbered by the sellers from last week. Trade will have to step it up even more to show real conviction and a continuation of the rebound from the selling.
A/D and Hi/Lo: Advancers led 1.37 to 1. Small caps were up marginally, and thus breadth was weak for the 0.7% gain on SP500 and DJ30. Even with better volume than NASDAQ, breadth was not confirming the move.
Previous Session: Decliners led 1.7 to 1
New Highs: 101 (-22)
New Lows: 37 (-5)
The Chart: http://www.investmenthouse.com/cd/^spx.html
SP500 rallied through the 18 day EMA (1230) and the 10 day EMA (1232), but on the close it could not hold the move through the 10 day similar to NASDAQ. It did not sell further, posting a rising volume session after a three day decline. Some accumulation there but nothing to get worked up above. It held above some support at 1220 and is now bucking some resistance at 1230 to 1232 from the 10 day EMA as well as the lateral move in late July that led to the aborted breakout attempt over the past week and one-half. Trying to pick up the rally once more, but again, will have to show some more commitment and get some help from the small and mid-caps once more.
Speaking of the small caps, SP600 barely scratched Tuesday, holding at 345 with a modest 0.42 point gain. It has broken its 18 day EMA (348.32) that was near support as well as the up trendline from the May low. It likely will head down closer to the 50 day EMA (340.33) before this pullback is over. It rallied well after the breakout and it needs a bit of rest here to reset. We would like to see a bit more pullback here to set the move better, but we are also mindful that SP600 tested toward the 50 day EMA in late June, showed one session with a doji as here, and then rebounded without looking back. The overall market will have to show more strength, however, for it to manage that.
DJ30
Solid bounce up off of the 50 day EMA (10,538) on rising though still below average volume. DJ30 is bouncing back from the selling that took it out of its lateral handle that finished July and started August, trying to make a higher low and try the breakout over 10,700 once more. It is still a long way from even reaching its March highs at 10,985.
Stats: +78.74 points (+0.75%) to close at 10615.67
Volume: 207 million shares Tuesday versus 185 million shares Monday. Better volume but still well below average.
The chart: http://www.investmenthouse.com/cd/^dji.html
WEDNESDAY
No economic news other than the Treasury budget and oil inventories, but those inventories could move stocks some. Inventories have not really mattered to oil prices, however, because the view is that no matter what inventories are, demand will burn them all up and that means they have to be replaced, further straining the ability to produce enough hydrocarbons. That is why when OPEC came out and said current world supply greatly exceeded current demand oil faded less than a dollar. Heck, given the recent spike to $64/bbl, you would expect oil to fade back some anyway, OPEC statement or not.
Along with the ever-present high energy costs are Cisco's earnings released after the close. CSCO was in line at $0.25 with a 12% profit increase, and it was somewhat holding its own after hours until the conference call and the guidance. Then CSCO was knocked back about a dollar. Most comments regarding CSCO's results were positive, all but the market's. It managed a late bounce in late trading, but how it plays out remains to be seen. It certainly was not a clear cut victory for the tech sector come Wednesday, but John Chambers will have a shot at some rah-rah once more on CNBC Wednesday morning.
We were not too impressed with the action Tuesday, but it was a day dominated by the Fed so it was going to be skewed from the start. The Fed walked the middle of the road and that might be enough for stocks to continue the rally under the belief the Fed is going to go slow until it hits neutral and then stop. As discussed Monday, Greenspan has three more shots to raise rates (September, November and December), and if he goes 25BP as he is indicating given the Tuesday statement he will put rates at 4.25% by the end of his term. That is what the Fed Funds Futures are building in, and in all likelihood the Fed should be done then or at 4% (Greenspan's final Christmas present will be a no hike in December?). Thus despite all of the discussions and arguments over rates, logistics say another three at the most; the new chairman will not want to pull a Greenspan and jack rates up right after he takes over and sending the market lower and the economy into recession.
The market will likely figure this out in relatively short order now that the Fed has made its statement. While oil remains the variable as it could rise further and put more pressure on the market, if all things remain where they are today or better then the economy will likely be able to handle a 4.25% Fed Funds rate. The market will sniff this out fairly quickly and that will give this rally another opportunity.
May take a further dip to get the kinks worked out, however. SP600 could use a closer test toward the 50 day EMA to set up its next move, and NASDAQ and SP500 were not pillars of strength Tuesday. The pullback has not been viscous, i.e. no dumping of shares, but the buyers will need to return. A shakeout on the Cisco earnings would set it up to do that. QQQQ was lower with CSCO after hours, and thus some softness in the morning looks likely unless the analysts and Chambers can turn the tide.
Downside would not be a bad thing as another quick dip lower could set the stage for a rebound, acting as the final shakeout as noted. Many leaders are still in the pullback mode, holding above near support. On any pullback and rebound they will provide opportunity. We need to see upside volume return, and it might take another full session of downside to set the move. As long as volume remains tame on a continued move the outlook for a rebound remains solid because the big money is not dumping shares. When the current turbulence brought on by renewed Fed fears, spiking oil, and a void after earnings (news saturation) is shaken out, if volume has been light the leaders will be ready to move once more.
Support and Resistance
NASDAQ: Closed at 2174.19
Resistance:
The 18 day EMA at 2173 is not totally cleared.
2178 is the January closing high and is trying to hold
The 10 day EMA at 2182
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 2125
2100 was key resistance point, and a successful test sets it up as support.
S&P 500: Closed at 1231.38
Resistance:
The 18 day EMA at 1230 is not totally broken.
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 March 2005 high at 1229.11
March 2005 closing high at 1225
The June high at 1220
December high at 1217
The 50 day EMA at 1216
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 10,615.67
Resistance:
Price consolidation at 10,600 is not totally broken.
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 18 day EMA at 10,599
The April high at 10,557
The 50 day EMA at 10,538
The 200 day SMA at 10,512
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): 2.2% actual versus 2.0% expected and 3.2% prior (revised from 2.9%)
Wholesale Inventories, June (10:00): 0.7% actual versus 0.4% expected and 0.3% prior (revised from 0.1%)
FOMC announcement (2:15): 25 basis point rate hike. No change in statement as Fed wary of near term inflation and comfortable with 'well-contained' long term inflation.
August 10
Treasury Budget, July (2:00): -$56.7B 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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world stock market
understanding the stock market
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