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world stock market, us stock market
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08/10/05 Investment House Daily
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SUMMARY:
- Market just gets comfortable with Fed and then an oil spike reverses the action.
- Oil/Fed combination within realm to derail economy.
- Earnings are over, seasonally tough time approaches, and some distribution is cropping up.
Intraday reversal from a good start as oil climbs ever higher.
Stocks started solid, building a second day of gains after three downside sessions. Volume was solid, running higher than Tuesday and indicating there was accumulation. Breadth was very strong with NYSE running better than 4 to 1. Seems that the market heard enough from the Fed to give investors reason to take heart that it would not go too far with the rate hikes. The Fed Funds futures have a 4.25% rate built in right now, and a few more hikes seemed to be livable much as we discussed in Tuesday's report.
Problem is, rates are just part one of the 1-2 punch facing the market, i.e. interest rates and oil prices. The second punch hit over lunch as oil inexorably climbed toward $64/bbl and the financial stations started taking polls about when oil would hit $75/bbl. The market slipped, and then some sell programs hit. NASDAQ stalled at the 10 day EMA and then fell through the 18 day EMA. By the close it was struggling to hold some support at 2151 from early 2005. SOX struggled as well (-1.2%), falling back below the 18 day EMA after just one session back above that level. These leaders in the recent rally are struggling after poking their heads to new highs.
Volume told more of the tale. That strong early volume was good but when stocks turned to selling and the volume did not back off the market gave us that old higher volume reversal that typically indicates a rally attempt has met its match. Buyers were in the market early on, but when they paused the sellers took over in earnest, using the rebound to sell into. We were concerned the Tuesday move with its weak internals was just a relief move, and the sellers on Wednesday certainly treated it that way, particularly on NASDAQ.
SP500 and SP600 (small caps) fared a bit better. SP500 lost only 0.2%, holding near the 18 day EMA on the close and still on relatively safe ground, but it did not escape with glowing accolades. It rallied to 1242 on the high and shed 12 points from there on the close. Big doji known by the moniker tombstone, and the name says it all. Coupled with the higher volume it was clearly an intraday reversal on SP500 as well though the close did not send it past recent lows as on NASDAQ. SP600 closed positive. Before any sighs of relief, its candlestick pattern showed similar action to SP500, i.e. that big reach higher (up to the 10 day EMA) and then a drop into the close. We note also that SP600 tapped the uptrend that started in May and then fell back. It was not a banner session for the small caps either though the damage was more limited.
Oil is particularly pernicious and that is also contributing to the strength of punch number two in addition to the obviously high price. Inventories were released and crude rose 2.8M bbl, much larger than the 500K build expected. Distillates were strong as well at 2.6M bbl. Gasoline fell 2.1M bbl, but that was just about in line with expectations. Oil faded from its early session highs, but it never turned negative. It then marched right back up and pushed the highs once more. Tuesday OPEC says there is much more supply than demand in the world yet oil hangs tough. Wednesday shows inventories building nicely yet oil laughs and moves even higher. That left many baffled at its strength, and with talk of $75/bbl crude and the Fed still going to raise rates into what could be a slowing economy, stock investors knuckled under.
As for where the market stands at the Wednesday close, those intraday reversals are one of the stronger signals a stock or index can give you. One side was in control and doing well, then the other side comes in and just slaughters them, not only stalling the move but also shoving it back the other direction with force. When they occur below resistance the statement is even more emphatic. Thus we were not too enamored with the action, particularly after the recent selling. Recall that NASDAQ and SOX both came back to the 18 day EMA on lower volume and were set up the best to rebound. They were unable to do hold and indeed started to lead the downside move. That makes the near term outlook not favorable in the sense of getting a quick rebound back up to push to new highs.
THE ECONOMY
Economy is strong, for now.
With the low Q2 inventories reported recently in the GDP, Q3 is expected to be a barn burner with close to 5% GDP growth. This even with the Fed hiking rates 250 basis points over the past 13 months and oil holding in the $55/bbl to $60/bbl range for months and months. That has led many to believe the economy is bullet proof to rates and oil prices at these levels.
What we know about rate hikes and oil prices, however, is that time is not our ally. Rate hikes take 11 or so months to work into the economy. Thus we are really only now starting to feel the impact of the first rate hikes. There are ten of them already in the pipeline and the market expects 3 more 25BP hikes as of today. That is a significant amount of drag coming the economy's way, and to say the market and economy have absorbed them already is simply wrong.
As for oil, history shows the longer it stays at levels that are considered high, the more damage is done. It is a cumulative effect because the consumer and other users have to pay more month after month. If prices continue to rise it not only wears on the wallet but the psyche as well. We have already discussed how the jump in Wal-Mart's sales the past two months (from 2% to 4% - 4.5%) shows consumers altering their spending habits already. After the recession WMT sales steadily fell as consumers felt better and went shopping at higher end stores. Now they are returning. The consumer is not feeling as well as he or she did.
Indeed, at these levels oil by itself is recessionary in our view. Our economy is not as dependent upon oil as it used to be, but prices have doubled in a year and that is a lot of extra burden on the consumer, and if oil holds its ground it is only going to grow. Consumers can hold out short term against spikes, but if prices are stubborn the consumer eventually has to change consumption habits.
Rates may not be completely recessionary at this stage, but as discussed tomorrow, they are at levels vis- -vis the yield curve that slow growth considerably and put us at less than 2% GDP growth. Combine that with high oil prices and you have the combination that can easily deliver a recession later in 2006.
Murphy's Law for the Economy is at work.
We all know of Murphy's Law: if something can go wrong it will. It holds true with the economy when the Fed starts to raise rates. The Fed gets all worried that things are getting too heated when its sees those 'pressures on inflation' discussed in the Tuesday report. It feels it has to get involved to save us all from ourselves. It starts raising rates and draining money supply to cool things off. Problem is, without fail, something comes up that is a negative for the economy and exacerbates the Fed's actions, often with recessionary results for the economy.
Basically the economy will have its struggles and challenges even when it is strong. There is always something that comes along to challenge it. Indeed, that is one reason it is very rare for the economy to get so overheated it explodes into inflation. Even in 2000 the economy was showing signs of slowing even as the Fed was getting ready to deliver a 50 BP rate hike that put the final nail in the coffin. Sadly the economy was ready to slow down on its own accord when the Fed hit the emergency brakes. After that we know the other problems that arose: the election contest, 9-11, corporate scandal. There were plenty of obstacles that alone would have caused economic trouble. With the Fed crashing the economy ahead of time they only piled on top and delayed our return to prosperity.
It is no different this time. Many would argue the economy still has a way to go to get to the point where everyone can get the kind of job he or she wants and feel prosperous, yet the Fed felt the need to cool things off. Sure enough oil prices have moved through the roof, and about the only thing that will bring them down now is a recession. Ironically, that may be exactly what we get as the economy is getting whacked from two fronts now (rate hikes & no money supply as well as high oil) as opposed to just oil. The economy might have been able to handle higher oil if not hobbled by the Fed leading into this spike, but just as with other recessions and significant slowdowns following Fed action, the rate hikes on top of the other issues that arise unexpectedly are acting in combination to work on the economy.
Yes the economy is strong for now and 5% GDP growth is expected in Q3, but when talking rates and oil you look down the road. Moreover, the market will start showing us the problems long before the economy does. Moreover, who knows what else lurks ahead to impact the economy just as no one could have anticipated the election, 9-11 (well maybe almost no one), corporate scandal, etc.?
The point: the Fed will take credit for preventing a horrible economic meltdown though it is hardly clear if the problems would have arisen if the Fed had not got involved. You think we would have been in worse shape or better shape before the election, 9-11, and corporate scandals if the Fed had not taken on the market and our prosperity back in 2000? Much better off to go in strong than purposefully weakened. Something always happens in the world that impacts the economy. The Fed is much too active in trying to manipulate and fine tune the economy, and its track record shows its timing and methodology is abysmal.
THE MARKET
MARKET SENTIMENT
VIX: 12.38; -0.02
VXN: 15.67; +0.42
VXO: 11.86; +0.51
Put/Call Ratio (CBOE): 0.89; -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: -16.38 points (-0.75%) to close at 2157.81
Volume: 1.888B (+26.85%). Volume was up early on the gains and it was up late on the losses. Strong volume on an intraday reversal shows the buyers moving in were used by those ready to sell as cover. First day of distribution since NASDAQ showed that churn session 6 sessions back, but given that it was an intraday reversal from feast to famine we are weighting it considerably stronger.
Up Volume: 577M (-342M)
Down Volume: 1.236B (+730M)
A/D and Hi/Lo: Decliners led 1.26 to 1. Advancing issues were up almost 2:1 in the early going but that did not last in the face of the afternoon selling.
Previous Session: Advancers led 1.1 to 1
New Highs: 106 (+23)
New Lows: 45 (+10)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
NASDAQ tried to move through the 10 day EMA (2177) on the early rally but gave that up along with the 18 day EMA (2171) later in the session as it reversed a 12 point gain in a 28 point swing from high to low. It managed to hold above some support at 2151 from January 2004, but that was about it. Highest volume in four weeks as NASDAQ turn solid gains into even stronger losses shows the sellers were jumping in on the rebound attempt. It takes more than one distribution session to derail a rally, but NASDAQ can fall to the 50 day EMA (2126) and still be in an uptrend in the current rally. With NASDAQ reversing intraday and breaking near support on volume, it opens the door for a trip toward the 50 day. This move came after the Monday break through the 18 day and then the Tuesday relief bounce. That suggests it is going to give up this level and seek the next lower. Again, that does not mean the rally is history, just going through a near term pullback for now. Not that we want to ride it down and not that the Fed/oil story won't potentially cause something worse for the market. Time to exercise some caution as this leader struggles.
SOX (-1.2%) showed similar action, falling back through the 18 day EMA (468.57) after a 0ne-day recovery. Still in overall good shape, but looking at a test of near support at 460 and more likely at 450, the top of its seven month trading range.
SP500/NYSE
Stats: -2.25 points (-0.18%) to close at 1229.13
NYSE Volume: 1.67B (+14.88%). NYSE volume jumped well above average and showed its strongest day in four weeks as the NYSE indices rallied and then reversed. Similar to NASDAQ, this is a reversal session on volume, and despite the positive close on the small and mid-cap indices, it was not an accumulation session.
A/D and Hi/Lo: Advancers led 1.38 to 1. Tumbled from a 4:1 advantage early in the session.
Previous Session: Advancers led 1.37 to 1
New Highs: 190 (+89)
New Lows: 38 (+1)
The Chart: http://www.investmenthouse.com/cd/^spx.html
SP500 rallied to 1243 on the high but stalled below the recent highs at 1246 and fell back to close negative for the session. It is still holding above the breakout point over 1220 from the June high and the March high (1225) and looks rather good compared to NASDAQ. The reversal, however, is a big black mark on the current chart and SP500 looks destined to test 1220 and possibly the 50 day EMA (1216) below that.
SP600 closed positive but it too reversed and gave back most of its upside move. It tried the 10 day EMA (348.59) on the high but faded as well. It is holding some support at 345, but it also is below the May up trendline, tapping at that level on the high before falling. That is action that indicates further downside ahead, and as we indicated more than a week ago, SP600 still looks ready to further pull back and test its 50 day EMA (340.56).
DJ30
DJ30 rallied to the highs in the recent handle at 10,700 and then peeled back 125 points to close lower. Volume jumped above average on this move for the first time in 4 weeks. Still in the lateral move, holding the 200 day SMA (10,516) on the lows and 10,700 on the highs. DJ30 is not leading by any stretch, but it is also not selling off as the other indices. Of course it has not broken out either.
Stats: -21.26 points (-0.2%) to close at 10594.41
Volume: 258 million shares Wednesday versus 207 million shares Tuesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
THURSDAY
The economic data machine turns back on Thursday with retail sales, jobless claims and business inventories. At this juncture, however, with the Fed raising rates to stave off 'pressures on inflation' (not inflation itself) and oil spiking higher and jeopardizing the economy, any signs of a solid economy are not likely to be heralded by investors. You have two opposing threats to the economy in the sense that the Fed sees the economy as too strong and is raising rates while the rising oil prices are going to slow the economy. The Fed, however, is throwing rising oil prices into the 'pressures on inflation' and is trying to turn an economic drag into an inflation threat. Something that slows the economy is something that is an inflation threat found in a rising economy. Hmmm.
It can be argued both ways, but the point is that strong data won't likely benefit the market. Slowing retail sales might, but it is a tough call at this point. If we see weakening retail sales already then there is much more damage to the economy than the Fed sees or is willing to admit in its drive to get rates over 4%.
The outcome of this fight may not come about for quite some time. Near term NASDAQ, one of the leaders upside, looks ready to pullback further along with the SP600. That can occur and the market remain in the current uptrend and in position to rebound and rally further once this last rally is digested. Further down the road the Fed/oil issues are going to come to a head of not somehow resolved, and we will likely see a much more significant pullback.
While many of our stocks and the market in general is still holding up very well, we prefer to play a bit defensively here as NASDAQ and SP600 make a further pullback. Almost to the day the indices made their recent new highs they came under pressure and started this current decline. A pullback to the 50 day EMA by both NASDAQ and SP600 would set them up for another rally though it might be a bit early to try and find a bottom. Stocks have taken a more typical path this summer with a summer rally, and that leaves them higher as they approach September, a historically weaker month for stocks. That leaves them vulnerable to a further pullback even if they move to the 50 day EMA over the next week and can rebound from there.
In short the risk/reward ratio here is narrowing though we still do see many stocks set up very well to move higher. As always we will let the market show us what direction it is going and direct our actions accordingly, but from what we see right now a further pullback to test toward the 50 day EMA on SP600 and NASDAQ is likely even if it is an up and down ride to that point. Thus we will be cautious with current positions and for new ones we will want to see strong sponsorship with solid volume on positions we are looking to enter. Again there are many stocks that are still set up very well to rebound from nice breakout tests, and sectors such as energy continue to perform well even if there is some shaky footing in other sectors. Time to be cautious and recognize the action has shifted the risk a bit higher. As long as we recognize that we can approach new and current positions with the right frame of mind.
Support and Resistance
NASDAQ: Closed at 2157.81
Resistance:
2163, the mid-December closing high has stalled NASDAQ recently.
The 18 day EMA at 2171
2178 is the January closing high and is trying to hold
The 10 day EMA at 2178
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:
2151, the early December closing high and highs from January 2004
The 50 day EMA at 2126
2100 was key resistance point, and a successful test sets it up as support.
S&P 500: Closed at 1229.13
Resistance:
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 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 10,594.41
Resistance:
The 18 day EMA at 10,598
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 April high at 10,557
The 50 day EMA at 10,540
The 200 day SMA at 10,516
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): -$52.8 actual versus -$56.7B expected and -$69.2B prior. The deficit is coming in smaller each month as tax receipts rise (spending is certainly not falling). Tax revenues rising, deficit falling, yet lower taxes. Once more the Laffer curve is proven.
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
us stock market
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