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world stock market, us stock market
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08/15/05 Investment House Daily
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SUMMARY:
- Stocks rebound to hold near support but low volume relief move ahead of CPI.
- Gasoline hits $2.50/gallon, WMT sales range stays high: consumers getting gas.
- Fed tightening to fend off potential inflation, but worry should be potential slowdown.
- CPI to dominate Tuesday early action as Fed response to energy gains remains a big question mark.
Decent price gains, little substance.
Stocks continued lower early on, following the Friday weakness with a bit more downside. That is what we were looking for in part, though the early declines were modest, and then they rebounded. NASDAQ held the up trendline, SP500 held 1225 on the lows and staged a mid-morning rebound off a higher low. The move held into the afternoon session where a fade into the finished failed to take much off of the move.
Not bad action at all, and basically what we had wanted to see, but the moves higher were on light volume (1.1B NYSE) and mediocre breadth (1.3:1). Indeed NASDAQ tried to move through the 10 and 18 day EMA, but without the trade they could not hold that move. There was some leadership in the semiconductors that kept the market moving higher even as a recent leader, energy, took its lumps on some lower oil prices.
Not that oil prices posted any kind of big decline. At $66.27 they were down just 59 cents on the close, hardly a tumble. After the torrid advance last week in both oil prices and energy stock prices the pullback is normal. Most all leading energy stocks easily held above near support in a modest volume dip. Nothing really atypical about that.
The indices did more or less what they had to do, i.e. bouncing up from key support levels (NASDAQ off the up trendline, SP500 off 1225) after a week of trending lower. They did no more than that, however, shown by the low volume, modest breadth, and spotty leadership. That kept the current rally alive, but whether it can continue with more strength will get a test Tuesday when the CPI is released. That provides more insight into the inflation versus slowdown forces in the economy.
We feel there is more threat of a slowdown than a spike in inflation, but what we feel has no sway over the Fed. Thus we have to look at the market with respect to what the Fed is likely to do as opposed to what it should do. The market has priced in a 4.25% Fed Funds rate, meaning 3 more 25BP hikes, but we also note that the FFF contract originally had the Fed stopping at 3.5% then at 3.75%. While it could still do that, barring a major economic calamity no one believes the Fed is stopping at either of those levels. If it did the market would shoot higher and that is one thing the Fed fears despite its denials.
If the Fed raises to 4.25% and the yield curve does not bump significantly higher by the first of the year, as noted in the weekend report that would bring on a significant economic slowdown based on historical episodes. Of course the Fed also has a history of going too far and causing recession. The market is being optimistic now in that it is thus far holding its rally even with the FFF rate at 4.25% by the first of the year. It is in a pullback now, consolidating the move and contemplating the Fed and oil. The Monday rebound showed some resilience, but it lacked the strength to answer the question as to whether it is ready to resolve the issue to the upside.
THE ECONOMY
Gasoline continues its climb, pundits speculate over impact.
It is somewhat amusing to hear the financial station pundits discuss whether or not gasoline prices are impacting the consumer and business spending. Most of the discussion centers on whether or not the high prices will alter consumer spending. Well, it is already doing that. We have discussed this over the past two months when we noted that Wal-Mart's sales suddenly jumped up to 4% in June and repeated the gains in July.
Now gasoline has hit a national average of $2.50/gallon and there is no slowdown in the rise to WMT's sales. Indeed it is anticipating a 3% to 5% gain in sales in August (that puts the midpoint right at 4%), bumping up the higher end of the range. Now some will crow that this shows the strength of the consumer growing as WMT is the world's largest retailer. What it really shows is that consumers are readjusting their spending habits once more as they are impacted by economic forces. During the recession WMT sales far outpaced other retailers. When the recovery progressed WMT's sales growth fell into the 2% range, lagging far behind the specialty and higher end retailers. Now that gasoline prices are biting hard, WMT's share is rising and as we have already seen, sales at SKS and JWN are sagging. There is an impact already.
For now the result has been mostly a reallocation of dollars as there are fewer in the wallet to buy other items after paying more for gas. We receive lots of information from consumers and businesses around the country, and many consumers are complaining loudly about the cost of gassing up. It is starting to impact decisions on whether they make a trip or not. It is not limited to lower income; upper income people are balking at $60 to $80 to fill a Hummer or other SUV.
That money comes from the wallet, and if it is spent on gasoline it is not spent on something else. Moreover, when gas prices get high enough that starts getting consumers thinking about holding back on other expenditures because they are unsure of how high prices are going and what impact that will have on the economy. Thus as with many economic impacts, the effects can snowball once the consumer psyche gets involved. Spending habits are already changing, and as gasoline climbs toward $3/gallon nationally it is only going to change more regardless of whether the rise is demand driven due to other nations' growing economies or not.
Inflation or not inflation? We know the Fed's stance.
The Fed views higher energy prices as inflationary. The Fed also feels that 'pressures on inflation' remain elevated near term. That gives it the ammunition it wants to continue hiking rates toward 4.25% or more and a flat to inverted yield curve. Of course the Fed says an inverted yield curve means something different this time. You bet.
What the real inflation indicators and not just the 'pressures on inflation' are showing is that the trend in inflation is flat. The CRB spot commodities index has been flat since July 2004. Gold has been flat in a lateral range since December 2004. The 10 year note is averaging 4.22% over the same period and is trading in a flat range as well. The three big inflation indicators are showing inflation has peaked and is trending sideways even as world growth continues: China industrial growth up 17% from this time last year, the US going to hit 5% GDP growth in Q3. With this growth the real inflation measures are moving flat in a range. That is the real story, not some made up indicators of potential inflation.
That leaves you asking the question what impact higher gasoline and energy will have on this flat trend. The Fed thinks it will cause inflation as noted. The reality as discussed in the prior session, however, is that rising energy costs alter consumption patterns; consumers don't just go on buying as if prices were not higher. First, they cannot do that because finances are limited. Second, they start worrying about the future and further adjust spending habits.
Is that stronger than the inflationary impacts of rising energy prices (through higher gasoline, higher prices of products, etc.)? Typically it is. As prices climb, buying habits adjust. The fact that prices have been high for months on end already and that the inflation indicators have flattened during that time shows that the first side to cry uncle is likely going to be the consumption side.
That means the Fed should be cautious as it moves forward. Nothing new there, but we mean really cautious and not 'Fed cautious' where it talks about being patient and moving slowly yet all the while has an agenda in mind and will get there no matter what arises outside a major economic threat. That means the Fed should heed history and not raise rates into a flat yield curve. It should at least pause and see what rates do. With the real indicators of inflation flat, it should not be so concerned about what might happen with inflation; it should be concerned about what has always happened with an inverted yield curve and be damn certain it does not dance with that devil. We are tired of Fed theories about what might happen (does the 'wealth effect' really lead to inflation? The Fed bet incorrectly that it did in 1999 and 2000 and broke the market and put us in recession) and are more interested in what history tells us will happen if the Fed raises short term rates right into longer term rates.
In short, the Fed is willing to gamble with a flat or inverted yield curve to get rates where it wants as opposed to playing it safe and not challenging what history shows will happen. It is ironic that the Fed says it is being careful and cautious in its approach to rate hikes yet it is willing to risk a flat to inverted yield curve on Greenspan's 'conundrum' theory. What is the more cautious and careful approach from a reasonable person's standpoint? It is not a tough call, not nearly as tough as it is made out to be.
THE MARKET
MARKET SENTIMENT
VIX: 12.26; -0.48
VXN: 15.07; -0.56
VXO: 11.9; -0.17
Put/Call Ratio (CBOE): 0.66; -0.62
Bulls versus Bears:
Bulls: 59.1%. On a steady rise since hitting a low in May at 43.5%. Third consecutive week above the 55% level that is considered bearish. After the buyers are gone there is no one to keep coming in. Bulls bottomed in early May at 43.5%.
Bears: 19.3%. Sharp drop to below the 20% level that is considered the threshold for bearishness in the market. First week below 20% in six weeks. Hit a high for the year at 30% in early May.
NASDAQ
Stats: +10.14 points (+0.47%) to close at 2167.04
Volume: 1.389B (-16.46%). Big fade in volume as NASDAQ rebounded off the up trendline. Not an accumulation session and it did not wipe away the distribution from last week by any stretch.
Up Volume: 841M (+372M)
Down Volume: 493M (-652M)
A/D and Hi/Lo: Advancers led 1.36 to 1. Very modest upside breadth as the large cap techs held a slight advantage in the move.
Previous Session: Decliners led 1.77 to 1
New Highs: 98 (+19). We were not expecting good new highs on this move as NASDAQ is still below its prior high, but the new highs really lagged in July as NASDAQ moved toward the post-bust high. That is not a sign of broad strength, and NASDAQ has struggled since.
New Lows: 38 (-2)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
NASDAQ tested lower again, but did not undercut the Friday low before rebounding to hold the April up trendline (2161) but unable to move through the 18 or 10 day EMA (2170, 2172). Without the volume NASDAQ had little chance of making the move stick. It is now going to try and hold the trendline or the 50 day EMA (2131) to keep the rally alive and work on the next upside move. It has experienced weakening breadth and new highs on the last move, and now some distribution last week. That shows a deteriorating move and means NASDAQ will have to find new buyers to continue the rally from here. Seasonally tough time to really breakout and run, particularly after a solid move to this point.
NASDAQ 100 managed to overtake its 10 day EMA, but the low volume shows little conviction in the move. As with NASDAQ, the top 100 held where they needed to and are rebounding. Just no strength on the move yet.
SOX moved off 460 support, leading the market with a 1.1% gain (it typically leads or lags). Nothing really strong here either as it tested the 10 day EMA (469.15) on the high and backed off to close. Held where it had to as well and is waiting for another catalyst. It led the market but that does not mean it was bubbling over with strength.
SP500/NYSE
Stats: +3.48 points (+0.28%) to close at 1233.87
NYSE Volume: 1.175B (-9.87%). Very low trade as well as the NYSE indices posted gains but basically traded within the recent range of the past week. Trying to work laterally and consolidate the move, but still early in the pullback and the selling volume has outpaced the buying volume the past three weeks.
A/D and Hi/Lo: Advancers led 1.42 to 1. Overall modest breadth on NYSE as well as the market is lacking internal strength during the last high and on this pullback.
Previous Session: Decliners led 1.61 to 1
New Highs: 120 (-12)
New Lows: 18 (-12)
The Chart: http://www.investmenthouse.com/cd/^spx.html
A tap of 1225 and then a rebound for a modest gain on lower, below average volume. Volume has faded nicely the past three sessions after that high volume reversal session last Wednesday. SP500 has made a modestly lower high the past week, but thus far that is not critical. It has shown some weakness but is holding up rather well as it moves laterally on lighter volume. As with NASDAQ, it saw weaker internals on the last move higher, and that shows some erosion of strength, particularly with the stronger volume on the downside sessions than the upside. It is trying to work that off with this lateral move, but it is still early in that attempt.
The small caps posted a decent gain of their own (0.5%) as they held 344 again and rebounded. Trapped between 344 and 350 the past week, thus far making a lower high below the late July high (352) and the early August peak (358). A toppy looking pattern here similar to March where SP600 fell almost 40 points. Still anticipating a 50 day EMA (341.36) test, and that could prop it up and let it continue the consolidation to set up the next move. Not a position of strength here as it trends laterally below the up trendline that is now at 352, but it is also showing that continued resilience.
DJ30
Modest gain on very low volume as DJ30 tapped the 50 day EMA (10,552) on the low and rebounded. Still in the flat, lateral move of the past 5 weeks as it consolidates and tries to set up the breakout.
Stats: +34.07 points (+0.32%) to close at 10634.38
Volume: 173 million shares Monday versus 219 million shares Friday.
The chart: http://www.investmenthouse.com/cd/^dji.html
TUESDAY
So much speculation about what the Fed will do, how gasoline and oil prices will impact inflation, how they will impact the consumer, and of course how the economy will respond. More fuel will be added Tuesday with the Consumer Price Index (CPI) for July that is expected to rise a sharp 0.4% over a flat reading in June, mostly thanks to higher energy costs. On the other hand, estimates could be overblown as autos made up a huge chunk of July sales and the overall prices declined due to the favored pricing programs. That will show up in the difference between the overall and core readings.
The market has weakened on the last high and is sitting just below those levels with some modest at best internals. Leadership is still holding up and showing good moves, and that works to offset some of the weakening. It does not roll it back completely, and if leaders start breaking through near support, given the weaker internals and distribution we are going to assume the worst. If it turns out to be a mild pullback to the 50 day EMA we can always move back in.
We continue to see enough good moves to show us money is still moving into some stocks, and we are taking some positions as they show the moves given the resilience this rally has shown each time it gets a bit top heavy and fades some. One of the problems Monday was the weakness in energy, a market leader, and when they were lower the market did not have one of its standbys to turn to. Most energy stocks held near support, making a modest test after a good run. Nothing unusual about that, and we will likely see them return to prominence after a short breather. As long as stocks continue to hold near support overall and leaders keep breaking higher, the environment remains positive for a rebound. The overall strength will have to return after this test of the trendlines and the 50 day EMA, however, or those trying to lead will run out of followers and risk suffering the fate of Wylie Coyote when he runs out of road on the mountain pass.
Support and Resistance
NASDAQ: Closed at 2167.04
Resistance:
The 18 day EMA at 2170
2178 is the January closing high and is trying to hold
The 10 day EMA at 2173
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
2151, the early December closing high and highs from January 2004
The 50 day EMA at 2131
2100 was key resistance point.
S&P 500: Closed at 1233.87
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 1272 from 1-6-99
Price tops at 1290 from 5-23-00
Price tops at 1364 from 1-29-01
Support:
The 18 day EMA at 1231
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 1218
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 10,634.38
Resistance:
The June highs at 10,646 to 10,656
10,720 is the high in the recent lateral move.
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 10,610
The April high at 10,557
The 50 day EMA at 10,552
The 200 day SMA at 10,527
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 15
NY Empire State Index, August (08:30): 23.0 actual versus 20.0 expected and 23.9 prior
August 16
CPI, July (08:30): 0.4% expected and 0.0% prior
Core CPI, July (08:30): 0.2% expected and 0.1% prior
Housing Starts, July (08:30): 2025K expected and 2004K prior
Building Permits, July (08:30): 2104K expected and 2132K prior
Industrial Production, July (09:15): 0.5% expected and 0.9% prior
Capacity Utilization, July (09:15): 80.3% expected and 80.0% prior
August 17
PPI, July (08:30): 0.5% expected and 0.0% prior
Core PPI, July (08:30): 0.1% expected and -0.1% prior
August 18
Initial Jobless Claims, 08/13 (08:30): 310K expected and 308K prior
Leading Economic Indicators, July (10:00): 0.2% expected and 0.9% prior
Philadelphia Fed, August (12:00): 14.0 expected and 9.6 prior
End part 1 of 3
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world stock market
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