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us stock market, understanding the stock market
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08/16/05 Investment House Daily
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SUMMARY:
- Indices cut thru near support, heading toward 50 day EMA.
- WMT sees slowdown ahead as next step in oil impact starts to hit.
- CPI shows impact of gasoline and energy price rises: on consumers not inflation.
- Production and capacity fall: where is the expected increase?
- News calms down with just PPI on Wednesday agenda, but market ahs a date with the 50 day EMA.
Investors don't like the mix of economic data and deliver another day of distribution.
It was what Wal-Mart said about Q3, it was what lower production and utilization said about business activity, it was about the impact of prolonged high energy costs, and it was about the Fed inverting the yield curve. In short, investors found very little reason to buy stocks Tuesday, and indeed were selling them with more vigor than they showed on the Tuesday upside session. Investors simply did not like the mix of economic data as it suggests that despite overall mild inflation, oil prices are starting to slow consumer and business spending even as the Fed continues to raise rates and move toward a flat yield curve.
Stocks started weak and sold all session with NASDAQ putting in its third distribution day in five sessions and some sharply higher downside breadth. Retail was weak, techs were weak, and energy was weak; wherever you looked there was selling. Energy was selling on lower volume and mostly holding support, however, taking a pause from the recent surge. Not all sectors were that fortunate.
Though volume was up, it was still below average as NASDAQ and SP500 undercut some important support (2151, 1225). That drop puts SP500, NASDAQ and SP600 right over the 50 day EMA in a test of that significant support level. If institutions are still in the accumulation mode or mindset they will step in and start buying shares at that support point. Moreover, as a stock or index runs higher it will make periodic tests of the 50 day EMA to consolidate some gains and get the fluff out. Though NASDAQ has shown distribution in the recent selling, the volume overall is low as the indices make a relatively low volume periodic test of this support level, a positive. In addition, many leaders are merely testing their near support on this pullback. On the other hand, deterioration of the internals on this last move higher versus the prior moves in this run along with the distribution counterbalance the modest positives. At this point the move lower is not overly nefarious but again, there has been weakening of the breadth, new highs, and some distribution. Whether it holds once more as it did in late June and early July and delivers a rebound will be a real test of investor resolve in the face of high oil prices and the Fed raising rates into a softening economic expansion.
THE ECONOMY
Wal-Mart sees slowing sales in Q3 due to gasoline prices.
Wal-Mart forecast decent sales for this week and month on Monday, but on Tuesday it lowered its Q3 guidance given what it sees with respect to impacts on the consumer as a result of higher gasoline prices. WMT reported a strong quarter but retailers were hit hard as it prognosticated about its future sales in the face of these higher gas prices.
Monday we talked of the pundits speculating about whether a change would occur based on these rising prices. We noted that change had occurred as consumers were returning to WMT, the de facto choice slower economic times. Tuesday WMT suggested the next step was already emerging: not just a reallocation of disposable funds to WMT, but a curtailment of funds expended even at WMT. We posited that consumers would hit the choke point at $3/gallon gasoline; it looks as if the throat it tightening some here at $2.55/gallon (a 70 cent rise this year). An unscientific poll on Kudlow & Company viewers stated 62% were cutting purchases because of high gasoline prices.
CPI up on energy, core posts a modest 0.1% gain while industrial production starts to falter as business' skepticism of the Fed continues.
Prices rose 0.5% (0.4% expected) and the core was up 0.1% (0.2% expected). Higher on the energy end, lower with respect to most other areas. Outside of oil there is almost a modest deflation, and if oil prices continue to rise that is only going to grow more pervasive. What it shows us right now is that rising oil prices are not pushing prices higher in other areas, and with consumers already balking at current prices, any increase is only going to reduce consumption more and more.
It is not just the consumer that is being impacted. Industrial production rose 0.1% versus the 0.5% expected. Capacity was 79.7% with 80.3% expected. June was revised lower as well (0.8% from 0.9%; 79.8% from 80.0%). Remember, this is supposed to be the start of a strong Q3 from a production standpoint as automakers ramp up their production to replace inventories sold in June. Auto production was down 3% in July. That is not an auspicious start to a quarter where inventory rebuild was going to lead to 5% GDP growth.
It shows us that businesses are not rushing to gin up inventories as they suffer from higher fuel costs they are having a hard time passing along, and it also shows a general pullback in business spending given the continued uncertainty the Fed adds to the mix with its continued rate hikes even as the signs of energy induced slowing emerge. This is a scenario we have seen before back in 2000. Perhaps it is just one month's slowdown, but when oil prices get to the choke point it takes something significant to turn them back on. Remember, it takes a while to get to this point as it is the cumulative impact of rising energy costs that ultimately alters consumption and investment. That means unless oil drops off and the Fed says it is done there is not likely to be any significant renewal of consumption and investing if July's weakness bleeds over into August.
There are many who say inflation has remained low thanks to the Fed's rate hikes. As we noted in the Monday report, the CRB spot index, gold, and the 10 year treasury have been flat since well back in 2004. If the Fed's rate hikes are the cause, kudos. Just as important, however, is knowing when to quit. Lance Armstrong knew. Michael Jordan knew. Wayne Gretsky knew. Unlike those greats, Greenspan has had many practice rounds as to when to call it a day. Maybe this time he will get it right. With oil starting to slow the economy, the threat is not from too hot an economy but keeping it going as oil and gasoline sap more and more strength from it.
THE MARKET
MARKET SENTIMENT
VIX: 13.52; +1.26
VXN: 16.2; +1.13
VXO: 12.96; +1.06
Put/Call Ratio (CBOE): 1.06; +0.4. A jump right back above 1.0 on the close, making it 4 such closed in the past two weeks. As the indices test the 50 day EMA, this may be a contributing factor if they hold that level.
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: -29.98 points (-1.38%) to close at 2137.06
Volume: 1.553B (+11.84%). Rising volume gave NASDAQ its third distribution session in five. Volume remained below average but in an overall lighter volume market that was still distribution. The lighter overall trade can be good as it shows not a lot of participation in the selling, but with respect to those that are in the market, they were selling again Tuesday.
Up Volume: 403M (-438M)
Down Volume: 1.132B (+639M)
A/D and Hi/Lo: Decliners led 2.71 to 1. Breadth lagged on the upside and then it got downright ugly as NASDAQ turned down and sold close to the 50 day EMA. One positive: you like to see these indicators get really out on the edge when they do move as that shows things are getting nearer the end. Not there yet, however.
Previous Session: Advancers led 1.36 to 1
New Highs: 63 (-35)
New Lows: 44 (+6)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
NASDAQ cut through some support that had been holding at 2151, and with that it was on the road to the 50 day EMA (2131). It closed on the low and still above that level, but it is just a morning opening away. HPQ announced some stronger than expected results and was sharply up after hours; that may provide NASDAQ some upside impetus, but a test of the 50 day looks in hand. This will be an important test, the second since this rally started in late May. From the standpoint of its overall position in the rally, that gives NASDAQ still plenty of upside. The internal indicators (A/D, new highs) did not follow the last price peak, however, and that makes this test of the 50 day EMA a key one. NASDAQ broke its up trendline from May on the move, and this test of the 50 day is important. A breach opens the door to some pretty solid support at 2100.
SOX led the market lower as usual with a 2% drop that put it just 4 points away from the 50 day EMA (453.70). SOX remains in its uptrend even with the test of the 50 day; its trendline from late April to the July low is at 445.
SP500/NYSE
Stats: -14.53 points (-1.18%) to close at 1219.34
NYSE Volume: 1.374B (+16.93%). Rising though still below average volume as NYSE stocks sold back. While lower than the prior volume seen in the first two weeks of the month, it was clearly higher volume selling, showing some dumping of these stocks, particularly the small caps as they led the NYSE downside.
A/D and Hi/Lo: Decliners led 2.36 to 1. A bit better than NASDAQ, but clearly stronger than on the recent upside attempts.
Previous Session: Advancers led 1.42 to 1
New Highs: 61 (-59)
New Lows: 27 (+9)
The Chart: http://www.investmenthouse.com/cd/^spx.html
The large caps were not the downside leaders, but SP500 was the first to make it to the 50 day EMA (1218.57). A dubious honor as the selling was on higher volume. The 50 day marks a price support level as well from the June highs. Still in the uptrend formed by the April, May and July lows (1215) but it is going to be tested as the internals on the SP500, similar to NASDAQ, weakened on the last run higher that peaked in early August.
SP600 has breached the bottom of the recent lateral move and is heading for the test of the 50 day EMA (341.41). After the breakout and run up the 18 day EMA (347.39) the index was ripe for a test. It is getting it and now we see what it can do with it. In late June it made a quick test and rebound to continue the run. This time the internals have weakened on the last move and the ability to test, hold, and rebound is problematical this time around.
DJ30
The blue chips have cracked below the 200 day SMA (10,529), holding near 10,500. Volume was up to average on the selling. Tricky time for the blue chips; if they fail to hold here 10,250 is the last support level that held. HPQ announced some surprising upside results after the close and this may give DJ30 a boost to hold at this level.
Stats: -120.93 points (-1.14%) to close at 10513.45
Volume: 232 million shares Tuesday versus 173 million shares Monday.
The chart: http://www.investmenthouse.com/cd/^dji.html
WEDNESDAY
HPQ came out after hours with some strong results that pushed the stock up $2 from the close. That could give a nice spark to techs early on, but will it last beyond the open? There is not much more to add to HPQ as the economic data takes something of a breather Wednesday with the PPI released before the market opens. The Fed does not look too hard at PPI, however, as its concerns are what passes through to the consumer level. The Fed will likely view the CPI as inflationary as the overall number was strong and the Fed views higher energy prices as inflationary versus a drag on economic activity.
That along with oil is the real drag on the market as one feeds on the other if you view things with a touch of realism versus theory. Oil is not going significantly lower, at least in a manner that will put consumers at ease, anytime soon. That keeps the Fed worried about oil leading inflation. That is not a healthy environment for the market.
That makes this test of the 50 day EMA a very important one for the market and the economy. The market has lost some strength and not just on the recent selling; it was eroding internally as it made the last move higher. Further, the market leads the economy, showing the weakness that is to come. It is lick log time as the indices test the 50 day EMA. With oil prices starting to impact consumption on both the individual and business side and with the Fed still in the game of rate hiking and money supply shrinking, things are going to come to a head. Again, the first indication of how this is going to pan out is this test of the 50 day EMA.
The volume overall has been low, but the market has had a summer rally and is heading into a time of year that is historically challenging. That is in addition to the oil and Fed pressures. We feel a test of the 50 day EMA, even if stocks bounce Wednesday on the HPQ news, is in the cards. We may likely see that level undercut on this test and that typically leads to some immediate selling and then a quick rebound to test or recover.
The market is weighing some heavy factors right now and the outcome is uncertain. Uncertainty is often the breeding ground of rallies. In this case the rally is already underway and it is contemplating whether it continues or fails. We have not been pleased with the internals on the last move higher, but that does not mean a 50 day EMA will fail. It does typically indicate that a 50 day EMA test will occur as we have postulated the past few weeks. That is what is happening and now the focus shifts to what it does at this level.
We have to see what the market does with the test, whether rebounding quickly, consolidating for a week or so as in late June/early July, falling into a longer base, or selling off further as the tough time of the year for stocks rolls in. It is a positive that thus far the leaders are holding near support well above the 50 day EMA. While the overall indices test the 50 day EMA, the market leaders are testing near support. That is a sign there is still very strong leadership in charge of the market, and it improves the odds of a positive resolution. Now we watch the test and how the big money responds ad we act accordingly.
Support and Resistance
NASDAQ: Closed at 2317.06
Resistance:
2151, the early December closing high and highs from January 2004
2163, the mid-December closing high
The 18 day EMA at 2166
2178 is the January closing high and is trying to hold
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:
The 50 day EMA at 2131
2100 was key resistance point.
S&P 500: Closed at 1219.34
Resistance:
March 2005 closing high at 1225
The March 2005 high at 1229.11
The 18 day EMA at 1231
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 June high at 1220
The 50 day EMA at 1218
December high at 1217
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 10,513.45
Resistance:
The 50 day EMA at 10,550
The April high at 10,557
The 18 day EMA at 10,600
Price consolidation at 10,600
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:
The 200 day SMA at 10,529 is cracking.
The May high at 10,406
10,400, the bottom of the November/December range
10,250 held in the June and July lows.
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): 0.5% actual versus 0.4% expected and 0.0% prior
Core CPI, July (08:30): 0.1% actual versus 0.2% expected and 0.1% prior
Housing Starts, July (08:30): 2042K actual versus 2025K expected and 2045K prior (revised from 2004K)
Building Permits, July (08:30): 2167K actual versus 2104K expected and 2132K prior (revised from 2111K)
Industrial Production, July (09:15): 0.1% actual versus 0.5% expected and 0.8% prior (revised from 0.9%)
Capacity Utilization, July (09:15): 79.7% actual versus 80.3% expected and 79.8% prior (revised from 80.0%)
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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us stock market
understanding the stock market
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