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world stock market, us stock market
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8/17/05 Technical Traders Report
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SUMMARY:
- Modest bounce on solid trade as indices hold 50 day MA, try to set next bounce.
- PPI prices rising faster than consumer prices.
- Oil inventories plummet but so does oil as August usage falls 3%.
- Philly Fed may be a sleeper economic indicator as stocks try to rebound off of support.
Stocks show some backbone even as one leadership group breaks support.
Producer prices were higher than expected overall and at the core level (though auto prices were aberrantly high) and that knocked futures back briefly, but the buyers returned before the bell and continued buying during the regular session. Stocks were again rattled by the oil inventories that saw a big drop in crude build and a massive drawdown of gasoline (-5M bbl versus -1.2M expected), but once more they shook off the news as oil prices continued their decline despite lower inventories. Retail sales were shaky as well with lowered guidance from many marquis names such as DKS, ANN; ARO and FD. The market shook that off as well.
By the close the indices were holding onto modest gains led by SOX and NASDAQ on AMAT's and HPQ's better than expected outlooks. After clearing resistance at 2151 and 1225 on NASDAQ and SP500 over lunch, however, the market lost its drive and wandered into the close. SP500 gave up 1225 in the early afternoon and failed a late test. NASDAQ tried to hang on in the last hour, but it was slipping away when a sell program hit in the final minutes and dropped the index 4 points on the close.
They could not hold a break over some key levels, but it was not a failure of a session. The major indices held above the 50 day EMA, posting gains on some rising volume. On the heels of the higher volume Tuesday selling, seeing buyers right back in the game is a good sign. Now a lot of that volume was related to high turnover in the oil and gas stocks as they sold off; that is not a positive as a market leading sector broke down. On the other hand, the major indices held a key support level and bounced modestly on rising volume, SP500 showing a nice hammer doji at the 50 day.
In addition, though the leading energy sector sold through near support, many, many leaders held up just fine in their tests of the last leg of the rally. While we were not in love with the lack of internal strength the last rally leg showed, we do like how the indices are holding the 50 day EMA and how many leaders are holding near support and preparing for the next move higher.
THE ECONOMY
PPI jumps on rising energy, auto prices.
July producer prices rose twice as much as expected (1% versus 0.5%) and the core was stronger as well at 0.4% (0.1% expected). Energy was the big factor with a 4.4% rise, the largest since October's 5.7% jump. Jet fuel jumped 16.8%, gasoline 10.9%, and natural gas 7.4%. Autos rose as well; sellers saw their prices increase as buyers saw a decline in prices. Something of an aberrant situation that helped push the PPI higher overall (core was up 0.2% without the autos factored in).
Whether you keep the autos in or toss them out you have to look at the bigger picture: energy costs are impacting producers, but as of yet they have been unable to pass them through to consumers. Indeed, with this spike in prices producers are seeing faster price increases than consumers. The issue always associated with producer prices is whether they will be passed to consumers. If they cannot do that then producers have to find some way to offset them. Producers can buy additional equipment to improve efficiency (increasing productivity, but that has limits and diminishing returns), get more out of current workers, they can eat the costs, or they can pass them along to the consumer.
Producers have been adding productivity enhancing capabilities ever since the recovery began (productivity over people). There may be more juice to squeeze out of that lemon, but it is getting pretty dry. What we are seeing is eating some of the costs and passing along some of the costs. With producer prices rising faster than consumer prices, however, it is clear there is more eating ongoing than passing along.
With companies purportedly flush with cash this can be absorbed to a certain degree, but as prices continue to rise faster than they are passed along to consumers then profits start to deteriorate. The primary catalyst for the market rally is profits, and one reason the rally has continued is the series of upside surprises in profits even through the last quarter. If the expansion starts to wane the profit erosion accelerates.
This profits pressure has a direct impact upon the market. If profits get squeezed, stocks stop their upside move because price gains are based upon profits growth. If this divergence between producer and consumer prices continues to widen profits will be impacted because the consumer is already adjusting buying habits due to high energy costs. In short, the consumer is not going to tolerate much rise in prices before he or she further alters spending. That leaves producers in a tight position where they can pass on a modest amount of the price rise but not enough if prices continue to rise. If the economy was booming it would have a better chance, but the rising oil prices are already impacting consumption across the board as discussed in the Tuesday report.
Retailers already showing the effects?
Tuesday night we discussed WMT's guidance and how it saw energy impacting its future sales. Wednesday more retailers were providing guidance, and a lot of it was lower than expected. DKS missed earnings and guided lower Tuesday; ANN, ARO, and FD all lowered guidance today. Consumers are indeed altering their buying habits at $2.55/gallon gasoline. Moreover, retailers are finding themselves having to reduce guidance because of those altered habits as well as the growing price gulf between producer and consumer prices. If they raise prices they will only hasten the slowing consumption. It is an ugly scenario when you cannot push prices through to the end user.
Of course companies have overall enjoyed some excellent returns for the past three years. After falling through the floor in the recession and bust, the recovery has been stronger than expected due to the utilization of productivity enhancing systems. Profits have thus surged beyond expectations. The inevitable result of spiking energy prices is a decline in profits because spiking energy prices do more to damage consumption than they do to increase inflation. Fortunately prices have not hit the choke point where the consumer says 'no mas.' Instead they are at a point where the consumer says 'not today, but maybe next week.'
Oil prices fall even as inventories fall, driven by a drop in usage.
Maybe next week prices will indeed be better. Oil inventories fell sharply (crude gained 300K bbl when a 1.2M bbl gain was expected; gasoline plunged by 5M bbl versus the 1.2M bbl decline expected) but oil prices did not. They jumped on the news along with the energy stocks, but then they rolled over as the price of oil rolled over shortly after the initial rush higher. At the close oil fell 4.28% or $2.83 to 63.25/bbl. A significant one-day drop and maybe starting a trend lower, but it still has a long way to go to really give the consumer a positive psyche boost.
The wrinkle that makes a further drop likely is how the price is ignoring the inventory levels again. During the run up, prices rose even as supply posted gains much larger than expected. In short, price ignored the supply on hand and moved higher even as supply grew. Right now price is falling even as key components fall, i.e. crude and gasoline inventories. Price is ignoring the supply issues once more, this time in reverse. Of course overall the world remains flush with supply, so a drawdown in the US in one week is not going to be the only factor. Gasoline is another issue; there is not enough refining capacity to meet demand. The only thing that can happen with respect to gasoline is that the summer driving season ends and less demand helps even out the imbalance with supply.
Indeed world supply remains high with current levels exceeding demand. Speculation about future usage, however, had helped spike prices as fears of where the next barrel would come from once these barrels were burned. What it takes to impact that mindset is a reduction in demand from big users, e.g. the US, China, India, etc.
That news came Wednesday as US usage to this point in August is down 3% from the same period in 2004. While one month is not a trend, usage during the expansion had been on a steady climb. A fade in usage shows some adjustments in consumption and production. Again, this is not a trend, but it was part of the reason oil prices fell over 4% even as supplies came in lower than expected.
THE MARKET
MARKET SENTIMENT
VIX: 13.3; -0.22
VXN: 15.57; -0.63
VXO: 12.39; -0.57
Put/Call Ratio (CBOE): 1.02; -0.04. Dropped but still held over 1.0 on the close, the fifth 1.0+ close in the past three weeks. This can signal a turn in the making, and with the indices at the 50 day EMA it is definitely something to note as we look for stocks to rebound on stronger volume.
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: +8.09 points (+0.38%) to close at 2145.15
Volume: 1.565B (+0.75%). Volume edged up as techs showed some leadership Wednesday. Higher volume on an up session versus the Tuesday down session is good to see, particularly as NASDAQ held above the 50 day EMA. Still below average so still not a lot of conviction, but it could have been a lot worse after the Tuesday selling. As it is we get an upside session on better trade. Still something left here.
Up Volume: 1.019B (+616M)
Down Volume: 509M (-623M)
A/D and Hi/Lo: Advancers led 1.06 to 1. Breadth was not convincing, barely cracking positive as the large cap techs nosed out the overall index in gains. Given the modest gain and the compression on top of the 50 day EMA, we are not too broken up over the lack of breadth Wednesday.
Previous Session: Decliners led 2.71 to 1
New Highs: 56 (-7)
New Lows: 37 (-7)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
Rallied in the afternoon to challenge 2151 resistance, but could not hold the move into the close even with some slightly rising volume. As it turns out, NASDAQ easily held above the 50 day EMA (2128) on the low and managed a bounce well above that support level. It is doing what it has to do at this point, but not a lot more. Volume was better, a good indication, but no suggestion yet that buyers are going to swarm again. This is where they did just that in early July, but it took over a week of lateral movement to decide that one. Thus it may take into next week or more to resolve this test if it is going to do so. Right now we can be patient because many leaders are holding near support, consolidating the same as NASDAQ, only at higher levels. When they rebound we enjoy the ride back up and we also use it to acquire more positions in winners.
SOX (1.3%) did not come any closer to its 50 day EMA (454.10), gapping slightly higher and rallying with a market leading gain. It hit the 18 day EMA (466.65) on the high and stalled, however, continuing the string of lower highs in this pullback. No big deal at this point; it is making a good test, holding above the 50 day EMA in an orderly pullback, and it will show us it is ready when it makes the move back over the 10 and 18 day EMA (466.65).
SP500/NYSE
Stats: +0.9 points (+0.07%) to close at 1220.24
NYSE Volume: 1.418B (+3.22%). Volume rose further on NYSE as the Tuesday
selling was met with some buying that provided a modest gain on SP500. That was offset, however, by the loss on SP400 and SP600 as they fell on rising volume due to the large number of smaller energy stocks that were selling on stronger trade Wednesday. Thus a mixed picture with respect to volume on the NYSE as a leading sector sold off on rising trade.
A/D and Hi/Lo: Decliners led 1.18 to 1. An up session for the large caps, but breadth fell as the small and mid-caps suffered a downside session. Still shaky on the inside.
Previous Session: Decliners led 2.36 to 1
New Highs: 68 (+7)
New Lows: 29 (+2)
The Chart: http://www.investmenthouse.com/cd/^spx.html
The large caps showed a hammer doji on the candlestick chart, holding just over the 50 day EMA (1218) as they did. Rising volume coupled with the doji and the proximity to a key support level are good indications a bounce may take shape off of this test. Definitely was not ready to undercut the 50 day with two consecutive tests of that level the past two sessions. SP500 is showing the indications it wants to rebound from here above the 50 day and above the up trendline (1216).
The small caps continued to struggle, but they have now made the test of the 50 day EMA (341.43) that we had been looking for. Now we see if it has the ability to rebound and lead the market higher as it did in late June as it made a 2-day test at that level back then. With the energy stocks selling it will be hard-pressed to rebound unless they reverse as well. Thus making the test we anticipated but now it has to overcome the higher volume selling and rebound through the 10 and 18 day EMA (346.81).
DJ30
DJ30 gapped below the 200 day SMA (10,532) but then rebounded. It made it to the 18 day EMA (10,595) on the high but as with the other indices it faded into the close and finished at the 50 day EMA (10,550). Even with HPQ and its earnings the blue chips continue to struggle to hold the lateral consolidation that has formed below resistance at 10,700.
Stats: +37.26 points (+0.35%) to close at 10550.71
Volume: 235 million shares Wednesday versus 232 million shares Tuesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
THURSDAY
Jobless claims and the Leading Economic Indicators are out Thursday, but the report likely to get the most scrutiny is the Philly Fed regional manufacturing report. There are disturbing indications we have been noting the past couple of weeks with respect to the economy, the most recent being the alteration of some consumer habits, the lack of any build in inventories in July as expected, and now the decline in oil usage in the US. This is likely the cause of a combination of events including high oil and gasoline prices and lower money supply. The Philly Fed will give a more real time reading of what the manufacturers are seeing.
Wednesday the market did what it needed to do, i.e. hold the 50 day EMA. There was somewhat of a bonus with NASDAQ and SP500 rising on rising volume and showing dojis over key support. On the other hand the small and mid caps sold off, albeit modestly, on rising volume. The latter was attributable to the problems with the energy stocks, so the door is open for NASDAQ and SP500 to rebound.
We are not overly confident of a sustained rebound. They may indeed bounce, but the sustainability will be the issue. They will definitely have to show some better internals, and in this environment where the consumer is being impacted by energy prices that remains to be seen.
There are still many solid leaders that have pulled back and held near support, ready to rebound. These are key to the market and any rebound it has. The energy stocks started breaking lower this week but tech and other sectors held up well. We look to these on Thursday and Friday to show some leadership and want to see them move with volume. If they do not move on volume any rebound is suspect and likely to turn back down.
Support and Resistance
NASDAQ: Closed at 2145.15
Resistance:
2151, the early December closing high and highs from January 2004
2163, the mid-December closing high
The 18 day EMA at 2164
The May/July uptrend at 2164.
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 2132
2100 was key resistance on the way up.
S&P 500: Closed at 1220.24
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 1218.63
December high at 1217
The April/July up trendline 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 10,550.71
Resistance:
The 50 day EMA at 10,550
The April high at 10,557
The 18 day EMA at 10,595
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 10,532.
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): 1.0% actual versus 0.5% expected and 0.0% prior
Core PPI, July (08:30): 0.4% actual versus 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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