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us stock market, understanding the stock market
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08/23/05 Investment House Daily
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SUMMARY:
- Stocks give up modest Monday gains, still working at the 50 day EMA in sleepy action.
- Existing home sales slip more than expected but still in top three.
- TGT sales projected at high end while WSM, PIR guide lower: discounters winning out.
- Market looking for a reason to bounce in a weak time of year, but not finding anything thus far.
Another day at the 50 day EMA.
Stocks did little to change the recent action. Monday was modestly higher on low volume, Tuesday was modestly lower on low volume. Yes NYSE volume ticked higher as SP500 edged below the 50 day EMA, but it held the up trendline on the close and volume was still very low and well below average. Once more an up one day, down the next day move as the major indices try to consolidate as they did in late June and early July where they moved laterally for two weeks and then broke upside to resume the rally.
Right now the market is in its first week of such a move, holding key support on low trade. Things are set up to make the move higher, but the market needs some catalyst to continue the rally as stocks head into a typically unfriendly time of the year, i.e., September and on into October.
There was certainly no news Tuesday to excite investors. Some more retail warnings show the consumer continues to cut back on spending. No market incentive there. Existing home sales softened some as well, but not enough to make a difference in the Fed's campaign to raise interest rates above 4%.
That left stocks wandering around all session, trying to move higher at the open, but then falling into a down session that tested near support at the 50 day EMA and the up trendlines once more. A rebound that started at lunch showed promise, but volume was still lackluster, and in the last hour half of that move was given back. NASDAQ had cracked positive, but with the late pullback could not hold any gain. SOX was leading once more, but by the close it too was dragged back to close flat.
The action is just the process of working through all of the economic data, company data, oil prices, and Fed purposes to get to a point where stocks can make a definitive move. The low volume consolidation has taken on a more positive aspect as the indices and leading stocks hold support, but as we have said often, until we see a breakout it is just a good-looking picture with potential. Tuesday did little to change that picture as volume remained low, breadth was modest, and stocks basically held steady in what can be best described as a dull market.
When stocks are consolidating at support, dull is not bad. It takes some patience and we passed up some potential plays where there was just not enough volume to show any real accumulation. We want to see leading sectors and stocks continue to hold up during the test as that is where the rebound will emerge. Housing and retail continue to struggle, and with those two leadership groups out of the picture the market has found it hard to advance. Indeed, their weakness is a main reason the market fell into this consolidation. The market is looking for some leadership to assert itself, and as noted Monday, it still looks as if the semiconductors may help provide that leadership. They tried Tuesday but could not pull the train. They are still set up, however, to try again as the week continues.
THE ECONOMY
Existing home sales pace slackens in July, but not enough to impact the Fed.
Existing home sales make up 80% of the sales market but they don't get any respect. The reason is that new homes are considered more of an economic impact because new homes supposedly need to be furnished from top to bottom with new furniture, televisions, etc. Right. As if no one buys new stuff when they move into an existing home. Ask my wife about that when we moved into our last home that was an 'existing' home. Nothing we had before seemed good enough for the new digs.
July sales dipped 2.6% to 7.16M (7.25M expected), once more giving rise to commentary that the market was ready to crash. Overall, it was the third highest level ever; hard to call that a major problem. The western US leading the decline with a 7.5% drop. Perhaps the combination of price and rates is having its impact on some of the hotter markets.
Indeed, the median sales price was $218K, up 14% over 2004. Inventory rose to 2.75M or a 4.6 month supply. Both of those suggest a gradual peak in the market after years of hard running, just as our analysis has told us over the past several months. It is still overheated; a 'healthy' or 'well balanced' inventory as suggested by NAR is around 6 months.
What this tells us is that the market is continuing to adjust to higher prices and several years of strong growth. We have suggested the market would peak on its own and not bust in general, but enter a decline path. Sure there will be areas that bust, namely the same areas that always bust after they get overheated. In general that does not happen. Of course if the Fed is in fact targeting the housing market as it did the stock market in 1999 and 2000, you can bet it will make sure the housing market is well on its way down before it takes its foot off its throat. That is the Fed's way; it goes too far in cutting and it goes too far in hiking. Unfortunately, market moves are exacerbated by its actions even though the Fed is convinced its actions help mitigate the ups and downs. An alcoholic has to recognize he or she has a problem before he can hope for recovery. The Fed is no different.
Target gains as other retailers lose.
There is talk on the financial stations about how different Wal-Mart is from Target, but they are missing the bigger picture. Both WMT and TGT are in the discounting business. TGT may discount a higher quality level of products, but it is nonetheless a discounter just as WMT. With respect to retail right now the issue is how strong the consumer is, and on Tuesday TGT gave further indications that the consumer is having to cut back in the face of rising gasoline prices.
Just as WMT had jumped its monthly sales the past two months before it lowered guidance for Q3, TGT has jumped its monthly sales gains forecasts to 4% to 6%, the high end of the range. At the same time more boutique, higher end, or specialty retailers are lowering their sales guidance. Tuesday WSM and PIR joined the long list of retailers that have lowered their sales forecasts for the coming months based upon the consumer squelching spending given high gas prices.
Once more we are seeing the shift in retail sales based upon economic factors. Remember back during the holiday seasons of 2000, 2001 and 2002 where there was so much complaining about how poor sales were with respect to the breadth across many different retailers? WMT and the discounters were getting the lion's share of the sales to the detriment of the other retailers. Fast forward to 2003 and 2004 and you see the specialty shops, higher end retail, etc. performing much better to WMT's detriment. Indeed, it was not until gasoline prices spiked after remaining high for months that the shift back to WMT started. We see TGT getting more of the sales as specialty retailers lag, and we may even see TGT lower its forecast as well if gasoline prices continue to climb.
Combine the two pieces of data and you see a picture forming.
These economic reports are often taken in isolation. Retailers have warned sales are falling. Consumer surveys explicitly say that consumers are cutting back because of higher gasoline prices. Yet we look at the housing report that shows slowing and say 'but it is still at a very strong level.' It is. Whenever there is a boom in housing it is at a high level before the boom ends. Just because existing home sales are at the third highest of all time does not mean they are going to stay that way. As consumers become more concerned about their finances and thus more concerned about their employment, they will curtail spending and will think twice about and even put off a home purchase.
Just as high energy prices are cumulative, these indications of slowing are cumulative. You can cherry pick any statistic you want, but some are leading and some are lagging. Employment is lagging. Housing can be leading and lagging. It is an early recovery sector when the economy is rebounding. It is also tends to fade before the rest of the economy starts to fade. Thus if housing is showing signs of stalling out, that is an indication that down the road other sectors will get long in the tooth.
Right now consumer confidence is at a level that does not suggest any problems as far as consumption. We want to see the trend, however, and the revised Michigan report Friday will be worth a look. Right now the economic data suggests the recovery is getting older, and it is beyond its years a bit because of spiking gasoline prices. It is not teetering on collapse because of this, but it also does not need to have more of its life bleed from it by lowering the money supply too rapidly or too much. High energy prices have an impact, and it is not inflation we worry about, but the drag on consumption and business investment.
THE MARKET
MARKET SENTIMENT
VIX: 13.34; -0.08
VXN: 15.57; -0.37
VXO: 12.08; +0.08
Put/Call Ratio (CBOE): 1.04; +0.15. Put activity jumped again on a slight downside, the seventh time in the past three weeks. There is a lot of put selling ongoing as investors sell for premium in a dull market. Put sellers are speculating the market is not going anywhere and that this is a way to put the time on their side. This is just like excessive speculation in buying puts as well: when too many think one thing is going to happen then that usually does not happen.
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: -4.16 points (-0.19%) to close at 2137.25
Volume: 1.372B (-1.9%). Volume backed off but it was so low overall once more that up or down it made little difference. It was another very low volume consolidation session above the 50 day EMA, showing no distribution and no accumulation. Just another standoff without too many showing much interest. When everyone losses interest it will make its move.
Up Volume: 587M (-265M)
Down Volume: 753M (+268M)
A/D and Hi/Lo: Decliners led 1.26 to 1. Did we mention breadth was modest?
Previous Session: Advancers led 1.4 to 1
New Highs: 69 (+5)
New Lows: 47 (+1)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
NASDAQ once more traded in a relatively narrow range above the 50 day EMA (2132.87) on once again very low volume. A week has gone by at this level, and you have to start thinking about the effects of hanging around in a bad neighborhood; at least it is on the upside of the 50 day and that keeps it on the good side of the tracks. It is working to overcome the distribution that took it down to this level. The higher volume selling showed some dumping of shares, but the ability to hold this level for a week after the selling is working off that dumping. Still has to show us the move to the upside, clearing 2151 on some strong trade.
SOX tried to make the jump and lead the market Tuesday, but it ran out of gas as no heavy buyers came in. Not bad action, however, as SOX held above the 18 day EMA (466) on the low and holding, showing a doji. Still looking for SOX to try and lead higher, but Tuesday it was ahead of its time.
SP500/NYSE
Stats: -4.14 points (-0.34%) to close at 1217.59
NYSE Volume: 1.272B (+4.79%). A slight bump in volume as SP500 and SP600 sold modestly. Technically some distribution, but a very low volume session overall and the rebound by SP500 to hold the trendline on rising trade suggests a modicum of buying to support it at that level. In short, not a lot to get worked up about.
A/D and Hi/Lo: Decliners led 1.26 to 1. With the small caps leading the downside, NYSE breadth was modest.
Previous Session: Advancers led 1.69 to 1
New Highs: 71 (-10)
New Lows: 30 (+5)
The Chart: http://www.investmenthouse.com/cd/^spx.html
The large caps edged below the 50 day EMA (1218.76) on slightly rising volume, but after undercutting the April/July up trendline (1217) intraday, it closed holding that level. Volume was still well below average, and though slightly higher, the rebound to hold support was not bad. Showing some selling but holding the trendline as the large caps continue their lateral move as well.
SP600 was one of the downside leaders (-0.4%), but it too rebounded from an intraday test below support to hold its 50 day EMA (341.45). It is also holding above some support at 340 as well, trying to shake off a 6 week head and shoulders pattern that threatens to send the index lower toward 325 (the general rule of thumb is a drop of the same magnitude as the height of the pattern) just as that type of pattern send SP600 to its 200 day SMA in April and May.
DJ30
DJ30 continues to struggle under its own weight, falling through the 200 day SMA (10,538) on the close though managing to hold some support at 10,500. Volume remains below average on this test, and DJ30 has not broken down through the bottom of the range though it is knocking on the door. This is where it needs to hold or fold.
Stats: -50.31 points (-0.48%) to close at 10519.58
Volume: 210 million shares Tuesday versus 215 million shares Monday. Volume remains well below average as the blue chips fumble along in their 6 week lateral move.
The chart: http://www.investmenthouse.com/cd/^dji.html
WEDNESDAY
A bit more economic data dribbles out Wednesday with new home sales, durable goods orders, and a speech by FOMC member Moskow. In itself it is not likely to move the market tremendously without some major unexpected results, but the data continues to build a picture as to the overall economy. The idea is that perhaps some softening overall data will convince the Fed that it needs to go soft for awhile and see how the economy recovers from the jump in energy prices. We don't believe that is likely, and it would be hard to fill a small room with people who believe that, but it is not what we think but how the market reacts that is the key.
The market is holding near support as it consolidates and mulls the recent earnings, the economic data, oil prices, the Fed, and how all of that fits together. It is looking for a catalyst to send it higher off of this support, but that combination of data is not lighting a fire under buyers. The pullback is solid, holding support on low volume in a periodic test of the 50 day EMA, but with September just around the corner buyers have not seen what they need to take the wallet off the hip.
That leaves the market in a good pullback and in position to rebound but also dealing with a lower quality move higher in the last part of the rally, higher energy prices sapping the consumer, and a days away from September, historically a rough month for the market. We still see a lot of solid stocks holding support and thus in position to rally if the market can find reason to look beyond September and rally. SOX is trying to lead higher, and if it can make the move NASDAQ is likely to follow. The strength of that move as measured by volume and breadth will clue us in on the likelihood of a sustained move as seen in the earlier legs of the rally. For now we are ready to move into additional positions if they show the right price and volume action, but we also have to be ready for a rally attempt that fails to show the volume that demonstrates the move ha some staying power.
Support and Resistance
NASDAQ: Closed at 2137.25
Resistance:
2151, the early December closing high and highs from January 2004
The 18 day EMA at 2155
2163, the mid-December closing high
The May/July uptrend at 2177
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 1271.59
Resistance:
March 2005 closing high at 1225
The 18 day EMA at 1226
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 1218.76 is trying to hold.
December high at 1217
The April/July up trendline at 1217.50
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 10,519.58
Resistance:
The 200 day SMA at 10,538
The 50 day EMA at 10,550
The April high at 10,557
The 18 day EMA at 10,578
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:
Some support at 10,500
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): 7.16M actual versus 7.25M expected and 7.35M prior (revised from 7.33M)
August 24
Durable Goods Orders, July (08:30): -1.5% expected and 2.8% prior
New Home Sales, July (10:00): 1328K expected and 1374K prior
FOMC: Moskow speech.
August 25
Initial Jobless Claims, 08/20 (08:30): 315K expected and 316K prior
Help-Wanted Index, July (10:00): 38 expected and 38 prior
August 26
Michigan Sentiment-Rev., August (9:45): 92.5 expected and 92.7 prior
FOMC: Greenspan speech
End part 1 of 3
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us stock market
understanding the stock market
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