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world stock market, us stock market
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08/20/05 Investment House Daily
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SUMMARY:
- Another flat finish on the 50 day EMA has some positive undertones.
- Economy is solid to this point, but again, with energy and Fed, how long?
- The battle the Fed is actually fighting.
- Market on its own this week with earnings basically over, economic data slow, and a tough time of the year ahead.
Market reveals little with another close at the 50 day EMA.
Stocks rallied early but had no volume and gave the move back. By the close the major indices were right back at the 50 day EMA, holding that key support and again showing little direction. With oil rising more than $2/bbl back to $65.35, the market certainly had reason to give back the early gain. The light summertime Friday volume, the moderate breadth, and no movement did not answer many questions about where the market is going, but that in itself showed something.
After some distribution knocked the indices, particularly NASDAQ, back to the 50 day EMA, they have held there in a narrow range on the close, consolidating and otherwise catching its breath. Moreover, leading stocks (e.g. AAPL, AMT, CTL, BAX, FIC, NTGR, NVDA, ODP, SGMS) held up well once more, checking up at near support (typically the 10 and 18 day EMA) on lower volume. The fact that the indices and leading stocks are holding the line at key support on low volume, consolidating and stemming the selling, is a good indication. It is not definitive, but it shows some strength returning that had left during the pullback from the early August high.
Still formidable headwinds as we look to the market for economic clues.
Oil and the Fed remain the key factors for the market. The economy is the underlying driver of stock prices overall, but those two influences are directly impacting the economy. We have already seen how the consumer is being hit as more than a dozen leading retailers lowered Q3 sales guidance last week, citing higher gasoline prices. That won't let up as the driving season ends; natural gas prices have tripled in the past 3 years, and most of the country heats with that product. That means continued pressure on the consumer into the fall and winter.
The market foreshadows economic moves, rallying before it is clear the economy is recovering, topping and selling off before the crowd suspects there is trouble. In October 2002 the market bottomed from the bear market as the economy continued to languish. Recall how many commentators were saying even after the market showed the double bottom and follow through break higher that the market would only recover AFTER the economy showed it was recovering. They were wrong because the market bounced sharply through the end of 2002, tested the move through March 2003, and then took off as the Iraq war was underway and long before the rest of the economy gave definitive proof it was recovering. There was evidence that was the case as we pointed to at the time, e.g. the rise in business capital investment that had been dormant for three years, but the mainstream economists don't focus on that; they only see a recovery when everything says there is a recovery. By that time NASDAQ had rallied from 1100 to 1650, half the move to date.
Same story in 2000. During 1999 we were convinced the Fed was on the path to stall the market and would not stop until it had done so. We participated in that huge run, but we were extremely concerned the Fed was not only going too far but that the Fed should not be acting at all given the coming demographics the next 20 years when the baby boomers would retire and start dying. We needed to keep our technological edge maxed out, i.e. keep the boom going so as when the boomers retired our lead would be so great the rest of the world would become our boomers, coming to us for the technology they needed. The Fed hiked rates and dried up the money supply by March 2000. We came up with the supertanker analogy that every one uses today, i.e. how the Fed could not turn the economy the other direction on a dime, saying the Fed had gone too far and that the damage had been done. As many in the spring of 2000 were calling for more rate hikes to cool off the 'red hot' economy and 'white hot' jobs market we knew the seeds had been sown. The market pitched over in April and started the fall. Even then, however, the Fed did not see what it had done and threw in a last 50 basis point rate hike in May. Just burying the economy deeper in our eyes.
The Fed committed one of the greatest transfers of wealth the world has ever seen and will see. It not only vaporized trillions of dollars in retirement funds, it helped the US venture capital market and thus technology R&D go completely bone dry. There was no investment in the US for three years. During that time the technological lead we had amassed through the 20 years of unprecedented capital investment started by the Reagan investment tax incentives was given away (in some cases quiet literally as the Chinese walked away with blueprints and secrets via their free access to high levels of our government). As our economy and research lay dormant, overseas R&D continued. Instead of being China's, southeast Asia's, and South America's source for technology, we are not on even par with them and have no great consumption engine here at home to drive us higher in the future. The great giveaway the bust will thus continue on into the future as they reap what we should have.
What is the market suggesting now?
That makes this 50 day EMA test a critical one as a window into the economy and of course the market. If stocks rebound and can continue the uptrend, it is telling us there is still enough strength in the consumer and business investment to drive the economy a bit further in spite of the oil prices and falling money supply. If the indices break down through the 50 day EMA and cannot recover relatively quickly, it is telling us that the pressure from oil prices and the falling money supply is slowing the economy faster and that earnings will not keep up.
That would not mean it is clear, however, that a bear market and recession are coming. The market could slip into another consolidation as it did in 2004 and again this year with stocks pulling back in price while the economic activity recovered and tried to set up a foundation for the market to rebound off of. Alternatively it could indeed mean that the Fed has overdone it with its drying up the money supply and high oil prices taking their toll on the consumer and corporate profits. A sharp, high volume break lower would suggest that.
Volatility is one area to keep an eye on as a key to the market action. It is not the definitive indicator, but at key tops and bottoms it typically plays a role. Now most will be thinking, yes, volatility is too low, indicating too much complacency and thus the potential for a sell off. That can be the case in a modest sell off, but at a key market turn either from a high or a low volatility tends to spike. It spiked in the 1998 bear market, and when the selling got underway in the early 2000 market top it spiked again. Very significantly, volatility started to run higher into that selling, rallying even as the market made its last high and in the very early stages of the selling.
Recently volatility as bumped higher, but it is still on a long decline very similar to the 1991 to 1995 run in the stock market. All during that move volatility fell as stocks rallied. Only after 1995, a big year of advances for stocks, did volatility start to rebound and climb with stocks and eventually spike with the 1998 bear market and again as stocks sold off in the start of the 2000 bear market.
Holding a good pattern.
Volatility does not suggest a top despite its low levels. Technically what we have is a pullback to a key support level after a breakout from a 7 month cup with handle base on NASDAQ and a 7 month reverse head and shoulders on SP500. This follows a 10 month base in 2004, kind of a base on base pattern. The market has moved upside, but it has not been a straight shot higher, instead backing and filling along the way. That allows a steady build higher as opposed to a flare that races higher and then fizzles.
The bigger technical position is thus overall positive with the indices holding key support after a breakout. Supporting that are the leading stocks holding near support on a rather orderly pullback though showing some distribution. That suggests a rebound is feasible to continue the move higher. The weak link are the small caps, a leader in the rally. The SP600 has broken below its 50 day EMA, though just slightly; it is still holding another level of support. A crack in the technical armor, however, and we are keeping an eye on it.
The issue remains just when and how hard oil prices and the Fed are going to impact the economy, and before that the market. It could still happen on this pullback; stocks always have to show you the move or else it is just a pretty chart. If the yield curve inverts toward the end of this year or early 2006 and oil prices remain where they are, the market will likely roll over before then. Right now we are focusing on what the market tells us about the next move, ready tot go whichever way the market takes us.
THE ECONOMY
Economy showing good results though slipping recently.
The Philly Fed report on Thursday was a shot in the arm to what have been some weakening indications. The consumer is a problem as we have discussed the past couple of months, first with a reallocation of funds to discounters and now with the Q3 guidance from retailers, a drop off in purchases thanks to high energy prices.
The list of accomplishments is impressive. Even as oil has moved from $30 to $65 from the end of 2003 the economy has posted strong numbers. GDP 3.7% average growth per quarter. Consumer spending up 3.7% per quarter. Business investment averaging 12.4% growth per quarter. The 10 year note yield averaging 4.25% the entire time. The core chain CPI rising just 2%. Those are impressive numbers and a good run.
The question is whether these figures or even the expansion itself can hold up in face of sustained high energy prices (oil and natural gas) and the Fed's rate hiking and money supply curtailment.
The Fed's real fight.
That brings us to the Fed's real fight. Is it really inflation led by rising oil prices as it suggests in the many statements by the Fed chairmen and various governors? If it is oil-based inflation that concerns it and is prompting the rate hikes and shrinking money supply that raises some serious questions. Namely, if the Fed slows the US economy (which is what rate hikes and falling money supply do), will that have that much impact on oil?
The Fed itself has said that oil prices would not hurt the US economy unless it moved to the $80/bbl range or better, supposedly because the economy depends less upon oil now and is more efficient in its usage. The recent data suggests that sustained prices above $50/bbl is already making an impact, however, as consumers cut back. Core inflation has remained steady as indicated above, but the consumer is pulling back. It does not appear there will be much if any oil-led inflation if consumers are already cutting back while the CPI remains under control. That will only diminish pressure on prices.
Moreover, what if the Fed's goal was to slow the US economy because oil prices were too high and it truly feared inflation from that source? Would slowing us down here in the US help lower oil prices? Perhaps marginally, but China is the main driver of oil prices based on growth in consumption, with thus far only 25% of its population taking part in its economic boom. Slowing the US a bit is not going to alter that significantly. The US would have to be pitched into a full recession to really impact world demand.
Thus the oil-led inflation argument is pretty farcical. What the Fed is really targeting is something else just as in 1999 and 2000 when it was supposedly worried about the jobs market and wage-led inflation when it was really trying to slow the stock market (as was the 1929 Fed which succeeded in doing that as well as plunging the US and world into depression). It saw what it though was a bubble and panicked, attacking the stock market as the symbol of the alleged bubble. It dried up the money supply it had grossly overinflated in the six months leading up to Y2K. It yanked all of the money out of the system cold turkey, the market vapor locked as it saw the impact on the economy, and later the economy followed. Quite a nasty outcome as we all only too well remember.
The Fed thus equates perceived bubbles with that outcome. It does not view its actions as detrimental or even the cause of the ensuing collapse. That is a dangerous viewpoint. This time around it sees housing as a bubble. At first it was denied, but the Fed has made more and more comments about housing both in its testimony to Congress, its FOMC minutes, and the comments from regional governors. Once more the data does not support the Fed's reasons for tightening, and indeed the recent guidance among retailers confirms our thesis that oil price increases outstrip any inflationary tendencies from the rise. The Fed has other plans that include slowing down housing and getting the Fed Funds Rate to better than 4% to provide some maneuvering room for any future problems.
The irony is it is likely creating the very problem it is raising rates to try and combat at some future date. The housing market is already peaking as we have discussed the past few months; without intervention it was going to have a gentle plateau and decline. If the Fed goes too far on top of high oil prices it is going to have a nastier drop and more people will get hurt. It will have some higher short term rates it can lower to combat the problem but that is about it.
We have nothing against the Fed raising rates after it pushed them so low in a vain attempt to start the economy (that did not happen until investment tax incentives were put into place). The issue we have now is that with sustained and still climbing oil prices the Fed is going to go too far. It typically always goes too far; the combination of oil price spikes accompanying rate hikes is a great unknown given the 'new' economy and its resilience to shocks creates an environment where the Fed will tend to be too aggressive. Hell, Greenspan has already said he is not afraid of a flat or even inverted yield curve because this time it is different. As we said a month ago, danger, danger, danger.
THE MARKET
MARKET SENTIMENT
VIX: 13.42; 0. See above discussion for the volatility relation to the current market.
VXN: 16.16; +0.87
VXO: 12.5; -0.29
Put/Call Ratio (CBOE): 1.05; +0.01. Seventh close above 1.0 in two weeks. MRK helped the put action in the afternoon with the verdict against it, but still a high level of put activity for a sustained period. That indicates a lot of speculation on the down side of the market.
Bulls versus Bears:
Bulls: 57.3%. Down slightly from 59.1% last week. Not a major change in the trend higher since the low was hit in May at 43.5%. Fourth 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: 22.5%. Recovering back above the 20% level considered bearish after a 19.3% last week. After one week below 20% it rebounded above that threshold. Hit a high for the year at 30% in early May.
NASDAQ
Stats: -0.52 points (-0.02%) to close at 2135.56
Volume: 1.243B (-13.08%). The lowest volume since the July 4 holiday. After three distribution sessions in five the price/volume action has improved as NASDAQ holds above the 50 day EMA and tries to regroup.
Up Volume: 572M (+121M)
Down Volume: 652M (-306M)
A/D and Hi/Lo: Advancers led 1.11 to 1. Not bad given NASDAQ was down on the session, but internals were weak on the last leg, suggesting this pullback may have something more ahead. That is whey we want to see strong upside breadth on any break higher from this level.
Previous Session: Decliners led 1.62 to 1
New Highs: 40 (-8)
New Lows: 39 (-6)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
Still holding the 50 day EMA (2132) on very low volume as NASDAQ continues the test of the 50 day and thus its breakout from its January to early July cup with handle base. There was some distribution on the way down but volume has backed off on this test. No change from Thursday, and how NASDAQ reacts off this level will tell us much about its near term future. Technically it looks like a normal pullback though there were some issues with the last upside move (low new highs, weaker breadth) and the pullback (3 relative quick distribution sessions). Tech is still showing signs it wants to resume leadership, and this consolidation is working on setting it up for the next move if it can get the catalyst.
SOX tried the 18 day EMA (465.69) on the intraday high but could not punch through. Still a very solid, orderly pullback for the chips, having easily held above the 50 day EMA (454.69) on this test. Another sector whose stocks are trying to show some leadership.
SP500/NYSE
Stats: +0.69 points (+0.06%) to close at 1219.71
NYSE Volume: 1.214B (-12.96%). Low volume though not as low relative to NASDAQ. Not showing the same distribution as NASDAQ on the way down, and indeed Wednesday and Thursday volume rallied as SP500 held 50 day EMA, a good indication of buying support.
A/D and Hi/Lo: Advancers led 1.25 to 1. Breadth has struggled what with the small caps fighting to hold the 50 day EMA.
Previous Session: Decliners led 1.57 to 1
New Highs: 59 (+2)
New Lows: 26 (-6)
The Chart: http://www.investmenthouse.com/cd/^spx.html
Three consecutive dojis at the 50 day EMA (1218), Friday a nice hammer doji on the candlestick chart. SP500 is similar to NASDAQ in that both are testing the breakout from their bases that formed during the first half of the year. In that respect it is a good technical picture, sullied a bit by some distribution, but supported also by leaders that continue to hold up very nicely. Each test is a key one, particularly when there are issues with the consumer, oil prices, and the Fed. Holding up well with volume moving higher and showing some support coming in at this key level.
Two sessions below the 50 day EMA (341.39) but also holding above support at 340 and its breakout as well, just as with NASDAQ and SP500. The near term pattern in the test is a 6 week head and shoulders, and that is a technical indication that the small caps will be under pressure and have a harder time holding this level this week. If SP600 breaks down, the height of the pattern (17 points) suggests a drop to the 200 day SMA (325). Important week for the small caps.
DJ30
Big doji on the 50 day EMA (10,550) and just above the 200 day SMA (10,536) as DJ30 continues its 5 week lateral range from 10,500 to 10,700. That also keeps DJ30 in a 6 month base as DJ30 never made the breakout with the rest of the market. The MRK verdict pushed up volume slightly, and it will likely provide some more pressure Monday with some further selling.
Stats: +4.3 points (+0.04%) to close at 10559.23
Volume: 220 million shares Friday versus 214 million shares Thursday.
The chart: http://www.investmenthouse.com/cd/^dji.html
MONDAY
The week ended on a relatively quiet note (besides MRK and oil prices) with lower volume and no economic news. Monday is similar with earnings mostly over and nothing scheduled economically until Tuesdays existing home sales. The week is pretty quiet as for reports with the durable goods orders Wednesday holding the most interest for us with respect to the economy though the revised Michigan sentiment poll for Friday could give some interesting insight into the consumer; thus far the levels are not where they would impact spending to a recessionary degree. Indeed, they would have to drop 30 points or more to get there, but we can start watching for any trends given the rising energy prices and already some slowing in retail outlooks.
A key week as the major indices test the 50 day EMA further, but there might not be a resolution of the consolidation continues, something quite likely given the lack of economic data this week. We still see many strong stocks holding near support and those will be our focus on any upside break. Indeed they tend to lead moves higher so we will look for rising volume as the make any move.
With the indices teetering on the 50 day EMA we are also looking at continued downside plays. These tend to take place faster than upside, though steady moves lower in continuing downtrends are not unusual. The faster plays tend to come on a failed attempt to retake key support; when that fails the downside can occur quickly with the scramble to get out of the stock.
Thus we are going to keep our eye on the overall market as always while we look for signs leadership is rebounding. If leadership fails the market is going to be falling with it and provide some downside opportunity. It is a time to remain cautious given the modest distribution, the guidance from retailers, the continuing strong oil prices, and the Fed. At the same time we need to keep our eyes open to what the market is showing us and take what it gives.
Support and Resistance
NASDAQ: Closed at 2135.56
Resistance:
2151, the early December closing high and highs from January 2004
The 18 day EMA at 2158
2163, the mid-December closing high
The May/July uptrend at 2168
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 1219.71
Resistance:
March 2005 closing high at 1225
The 18 day EMA at 1227
The March 2005 high at 1229.11
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 1218.69
December high at 1217
The April/July up trendline 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 10,559.23
Resistance:
The April high at 10,557
The 18 day EMA at 10,587
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 50 day EMA at 10,551
The 200 day SMA at 10,536
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 23
Existing Home Sales, July (10:00): 7.25M expected and 7.33M prior
August 24
Durable Goods Orders, July (08:30): -1.2% expected and 2.8% prior
New Home Sales, July (10:00): 1325K expected and 1374K prior
August 25
Initial Jobless Claims, 08/20 (08:30): 314K expected and 316K prior
Help-Wanted Index, July (10:00): 38 expected and 38 prior
August 26
Michigan Sentiment-Rev., August (9:45): 92.7 expected and 92.7 prior
End part 1 of 3
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world stock market
us stock market
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