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us stock market, understanding the stock market
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08/30/05 Investment House Daily
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SUMMARY:
- Late rebound takes a little of the tarnish off a weak session.
- Consumer confidence very high pre-Katrina.
- FOMC minutes show a Fed with some worries about oil. It should have a lot of worries.
- Older economic data means little now that Katrina has hit. Oil inventories to focus attention.
Stocks resumed selling after relief bounce, saved from a rout by some late short covering.
After the low volume bounce Monday as everyone watched Katrina come ashore and smash the Mississippi coast and 100 miles inland, investors started to assess the damage implications. Monday no one could really see what was going on in the really hard hit areas because there was no power to get the signal out. Tuesday the pictures started to come in and it was devastating. The Mississippi coastline is a ruin, and the destruction carried miles and miles inland and over many states. There is still a lot of uncertainty as to the extent of the destruction. Indeed the only certainty is that there was incredible, major damage.
The ramifications started to hit home, however, and stocks outside of energy, construction, and related post-storm necessity areas sold off. A soft open gave way to a rebound that failed early on. Oil was up and gasoline started to take off, and that started the serious selling. SP500 held above support at 1200 on the run lower, and that helped trigger a mid-day rebound. Stocks were looking pretty good coming out of lunch, but then they rolled over to new session lows. SP500 still held above 1200 and oil opened the afternoon session softer than the early close, however, and when that happened for the second time in the session that brought in some short covering programs. Stocks rallied back and recovered that afternoon tail kicking.
Stocks rebounded on that weakening in oil, but that did not last. Late Tuesday oil was back over $70/bbl, easily recovering the afternoon weakness, so the logic for the afternoon rebound is undermined. Volume was stronger on the selling and was pretty strong on the late rebound. Overall trade was up, and was back above average on NYSE. You can view that as a bad thing or a good thing. The bad: volume was higher on the selling, and the market closed lower; that means there were more sellers than buyers and sellers have been outnumbering the buyers of late. The good: stocks rebounded late and there was volume associated with that as well, and that shows some more serious buying. The ugly: that late volume was some short covering after a good break lower and SP500 holding the 1200 level for the second session. That would indicate that late recovery bounce will not last.
SOX again showed relative strength, selling off early and late, but recovering to hold the 18 day EMA once more. NASDAQ sold, but it also recovered most of its losses, closing where it opened. It is trying to hold near the 50 day EMA, but was unable to take that level back again as it did Monday. They are trying to set up to lead higher, but SP500, SP600 and DJ30 are all still struggling below key resistance levels in toppish patterns. It will take a lot of leadership to drag them higher.
That said, the indices are not in full retreat even given the Katrina news piled on top of already high oil prices, the Fed rate hikes, and softening consumer data in the face of the adversity. There is some underlying strength that continues to support the market overall. It is sinking lower but it is making a stand at each support. Unfortunately, it has been unable to hold earlier support levels; that's what happens when the market sells. Now it is trying to hold the next level and bounce once more as it weighs all of the issues confronting it, the latest being Katrina. Showing some resilience as it holds next support the past two sessions, but still in toppy patterns on the NYSE indices that don't look as if they are done with their selling.
THE ECONOMY
Consumer confidence jumps in August despite oil, changing habits.
The Conference board reported 106.5, better than the decline to 101.0 expected (103.6 prior). This was a surprise, especially on the heels of Katrina. Of course, Katrina was just a wisp of water vapor when this report was completed. The Conference board attributed the strength to jobs, indicating that jobs trump all. If gas is $2.50/gallon the consumer will grumble but as long as he or she has a job the consumer will continue to consume.
That is very true. We are consumers; always have been, always will be. The problem with consumer confidence runs both ways: it never really reflects what the consumer will really do until it gets to an extreme level. In the case of the downside that is down in the fifties, maybe the sixties. No where near that pre-Katrina. Indeed, we won't get there after Katrina as well, at least not right off the bat.
The consumer is already changing its habits despite what the confidence report shows. Increased sales at discounters and then the discounters noting that gasoline was going to impact even their sales down the road if it remains high. We have seen this retail cycle: bad or weakening times means higher sales at the discounters. Good times means higher sales at the specialty and higher end stores, the 'anti-discounters.' As gasoline prices rise and have done so for months on end the consumer is changing buying habits.
Tuesday unleaded gasoline futures shot higher, jumping up to the $0.25 limit that forced the closing of the market. When it was reopened they increased the gain to $0.41, up 20%. It took longer than we expected, but gasoline prices are starting to show the impact of Katrina, and they are going to come close to $3/gallon as summer gives its last hurrah over Labor Day. The issue is how long will the consumer hold up under $3/gallon gasoline. It is psychological as well as monetary: the longer prices stay high and you have to tank up at twice the cost of last year, the more it wears on you and the more inclined you are to pass up impulse purchases, put off big purchases, and otherwise just wait and see what happens. That 'wait and see' attitude is how recessions are born.
The key to prices and confidence is how sustained they are. With Katrina's damage still not fully known, there won't be a lot of relief near term. We are in one of those situations where a good outcome is that prices don't go any higher near term. Then perhaps they settle lower when the Katrina damage is more fully understood. As we saw today, however, the more information we received on damage, the more upside pressure built on prices.
Fed may mull holding off on rate hikes.
The August 9 FOMC minutes were released Tuesday afternoon and the market reacted by continuing its mid-afternoon sell off. Basically the Fed saw the economy still in good shape, but it did spend a lot of time talking about what the impact of higher oil and gasoline prices would be upon the consumer. It did not stop the Fed from raising rates, but we agree, even more so after Katrina, that the Fed needs to be extremely careful here.
The last time we had a real oil shock the Fed flooded the economy with money (called 'monetizing' the price increase). That was back in the early 1970's with the Arab oil embargo. Price doubled overnight and the Fed, fearing an economic meltdown due to high prices, pushed money supply higher. Not a bad plan, but as is usual, the Fed went too far. The flood of money hit, but it was too late for an already weak economy that was slipping into recession. The money did not spark new investment in the US to jumpstart the economy and produce our way out of the mess. With top marginal tax rates over 70% most money was locked up in tax shelters; it would have taken tax reductions (as done in 1981) to unlock that money. Thus all the flood of Fed money simply put more money into a stagnant system that was producing less and less goods. Inflation exploded as a ton of new money chased a stagnant amount of goods. Stagflation it was called.
The Fed does not want to do that, and it has help in a stronger economy than in the seventies and there are still a few tax incentives around to get that extra money put into the system as investment in capital goods as opposed to just chasing existing goods and causing inflation. It still has to walk a very fine line, however, because with a consumer that is already changing buying habits, if it removes too much liquidity the investment there is by business will dry up along with consumer hunger for goods. Too much and the excess not invested in the economy simply works to increase prices even as oil prices slow the economy. Whiffs of stagflation, but just a whiff. Again, we are in much better shape today than in the 1970's both in economic strength and in the tax code (though it is hard to call the current code better; let's just say rates are more favorable).
This means the Fed walks a very fine line. Some say there is a difference this time, not in the economic strength, but in what is causing the problems, i.e., oil prices are demand driven (China, India, US consumption) versus artificially inflated via cartel action. Let's think about that. If OPEC raises prices, the Fed is not going to get them lower by raising interest rates. It might have an impact tangentially if the US economy were to slide into deep recession and its oil demand thus drops.
If prices are high because China and India are also requiring more and more oil for their economies, will raising rates change that either? No! As with cartel price hikes, it may impact the price if the Fed puts the US into recession and our usage drops. But the Fed would be a doomed body if its policy were one to slow the US economy into recession with the result being China and India keeping their expansions alive with the aid of lower oil due to slack US demand. In other words there would be a lynch mob in Washington if we took a recession and all it did was lower prices for our economic competitors (they enjoy the fruit of our pain) and they narrowed the technology and standard of living gap even more. We already did that with the missteps in 1999 and 2000 that led to that bust, and we can ill afford to give away any more of our slim lead on the world.
Tough job for the Fed, and we doubt that any group of humans is smart enough to do the job. Markets are better at adjusting to such situations, but that is not going to happen this time around as we are hostage to the Fed and its decision-makers. That does not exactly leave a nice warm feeling within.
THE MARKET
MARKET SENTIMENT
VIX: 13.65; +0.13
VXN: 15.36; +0.06
VXO: 12.3; +0.35
Put/Call Ratio (CBOE): 1.05; +0.06. Back over the 1.0 level on the close, the ninth time this month. There is a lot of hedging going on and that has pushed the ratio higher. It does show speculation as well.
Bulls versus Bears:
Bulls: 56.8%. A second down week in a row, falling from 57.3% last week and 59.1% the week before. Still no major change in the trend higher since the low was hit in May at 43.5%. This marks the fifth 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: 25%. Up from 22.5% last week that saw bears break back above the 20% level considered bearish. After one week below 20% it rebounded above that threshold. Hit a high for the year at 30% in early May. At this rate it won't take too long for it to reach that May high.
NASDAQ
Stats: -7.89 points (-0.37%) to close at 2129.76
Volume: 1.499B (+17.66%). Volume jumped back up toward average but fell short. Only 4 sessions above average this month, a sign of the real summer doldrums. Next week summer officially ends, and we may see some money put to work briefly. NASDAQ is showing more resilience, and this volume on the rebound was not a bad sign on this index that did not show high volume as NASDAQ slipped through the 50 day EMA.
Up Volume: 603M (-357M)
Down Volume: 824M (+541M)
A/D and Hi/Lo: Decliners led 1.56 to 1. Recovered from -2:1 in mid-afternoon.
Previous Session: Advancers led 1.43 to 1
New Highs: 67 (+8)
New Lows: 45 (-6)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
After recovering the 50 day EMA (2132) Monday, NASDAQ gapped down Tuesday and fell to 2118 on the low. It held above the Tuesday low and then rebounded in the afternoon to close just below the 50 day EMA. NASDAQ remains in its pullback to held this support level from the 50 day EMA down to next support at 2100. It has not really tested 2100 on this trip, a good indication of relative strength. Still think it is going to make that test on this trip lower, however. As noted the past few reports, that is not a breakdown but a base building process to set up the next move. This is what it is doing as the market assesses Katrina and its added impact on the issues facing the economy. It could still fail, but for now it is continuing its base building process.
SOX showed similar action. It fell below the 18 day EMA (466.50) but then rebounded to hold easily above that level. Trying to make a higher low to lead higher. Not sure it can do it alone but it is showing great strength.
SP500/NYSE
Stats: -3.87 points (-0.32%) to close at 1208.41
NYSE Volume: 1.448B (+18.85%). Volume returned above average for only the second time in three weeks. Volume was higher as it sold off, and it was strong as it rebounded late. Some buying of energy stocks populating NYSE helped push the total higher as well as some late short covering.
A/D and Hi/Lo: Decliners led 1.28 to 1. Small caps were stronger all session and that kept the breadth from really ballooning on the selling. The late rebound helped as well (duh).
Previous Session: Advancers led 1.73 to 1
New Highs: 116 (+32). Not too bad, but you know who the new highs were: energy stocks.
New Lows: 47 (-6)
The Chart: http://www.investmenthouse.com/cd/^spx.html
SP500 tapped at 1200 on the intraday low for the second consecutive session and then rebounded to significantly cut its losses (from -11 to -3.87). Good show of support at 1200, and indeed that along with the lower oil prices in the afternoon crude session helped trigger the last hour rebound. That keeps SP500 alive above 1200 and the 200 day SMA (1195), but still below some key resistance at the 50 day EMA (1217) and the up trend line now near 1122. Big rounded top by SP500 on questionable volume at the peak back in late July/early August. Trying to bounce here but what that is likely to do if it does rebound is test the 50 day EMA and form a right shoulder to a head and shoulders with a left shoulder in June and the head at the early August top. We are still looking for a more extensive test of 1200 and the 200 day SMA.
The small caps showed some relative strength of their own during the session, trading in a narrow range, bunching just below the 50 day EMA (341.26). May be showing some relative strength, but it is still struggling to try and recover the break below the neckline of its 7 week head and shoulders pattern after breaking sharply below that level Friday. The small caps have been in this pattern on several occasions during their run higher. Sometimes it have overcome them, sometimes (as in March and April) it has not. Given the breadth on the last run and the current headwinds for the market and economy, it looks as if SP600 is going to try to test the next trendline at 332 or the 200 day SMA (326), the latter giving the index a drop that roughly equals the height of the head and shoulders pattern.
DJ30
The blue chips were sucking air as well in the afternoon, falling to equal the Monday low (10,350) once more. They managed to rebound along with the market as SP500 led a bounce off of its near support. Volume was up on the selling and on the rebound. Still very weak as it is still below the 10 day EMA (10,481), the first level of resistance below a logjam from 10,500 to 10,538 (the 200 day SMA), and that just gets it back into the July to August range where it tried to consolidate. Could rebound from here, but not counting on it.
Stats: -50.23 points (-0.48%) to close at 10412.82
Volume: 234 million shares Tuesday versus 203 million shares Monday.
The chart: http://www.investmenthouse.com/cd/^dji.html
WEDNESDAY
Another read on Q2 GDP and the Chicago PMI on Wednesday along with the weekly oil inventory. The latter will be a major catalyst Wednesday. Reports indicated nine refineries in Louisiana and Mississippi were off line but coming back on. Problem is, two that are back online have no oil to refine because the infrastructure is so damaged they cannot get the oil to them. That is just a small issue. The mouth of the Mississippi is not open; it has to be surveyed. A major oil port is not open. New Orleans is being evacuated again. Wal-Mart closed 123 stores and still has 75 that cannot open yet. Hundreds of thousands of refugees. As one Mississippi public servant said, 'this is our tsunami.'
The ramifications of this event are going to be felt throughout the economy for quite some time. We are all worried about gasoline and oil supplies, but hundreds of thousands are worried about water, shelter, food, relief from the heat. Then there is the insect population explosion, the risks of disease. The pictures are staggering, the death toll as well. It is hard to imagine, but it could have been worse but for the storm weakening by 20 mph just before landfall, but for a direction change.
The market's resilience will get a test again on Wednesday. The oil data could cause another spike, but frankly, the numbers will be viewed with great skepticism after Katrina. As we have said, what is there this week may not come close next week because the infrastructure is going to limit the delivery capability. Tuesday was a wild trading day in the oil market, and we can bet that Wednesday will be another one.
The market did show resilience in the comeback late in the session, but after a blow down to 1200 on SP500 once more, that rebound was some short covering. We still are looking for a test down to next support or lower, but we note that the market has fielded the line drives hit right at it and is still in a basing mode. That is a testament to the economic strength still in the system and the market is not yet giving up on the economy's ability to recover. It is hardly out of the woods, however, as more and more information from this storm
Treacherous going right now in the market as there is still a lot of news to come out the rest of the week. We are continuing to look play by play, stock by stock both to the upside and downside. As we saw today, as some groups and individual stocks are going to have their services in demand in the cleanup and aftermath of the storm, and those stocks are in demand. Others that are tied to the broader economy are suffering. That presents opportunities, but again, all are subject to the flow of news. Seeing surprising strength, but if the data continues to worsen, the extent of the economic impact will ratchet up and put more pressure on the market.
Support and Resistance
NASDAQ: Closed at 2129.76
Resistance:
The 50 day EMA at 2132
The 18 day EMA at 2144.
2151, the early December closing high and highs from January 2004
2163, the mid-December closing high
2178 is the January closing high
2191.60, the January intraday high.
Support:
2100 was key resistance on the way up.
2090 is the February and March interim highs
2074 is the 200 day SMA.
2050 to 2045 from May and June
S&P 500: Closed at 1208.41
Resistance:
Some resistance at 1210 is not holding it back.
The 50 day EMA at 1217.09
December 2004 high at 1219 and June high at 1220
The 50 day SMA at 1220
The April/July up trendline at 1222
March 2005 closing high at 1225 and intraday high at 1229.11
The recent July highs at 1245.15
Support:
1200 is some support
1196, the mid-January high and the early December peak in the left shoulder.
The 200 day SMA at 1195
1183 - 1184 from November 2004 highs and July 2005 intraday low.
Dow: Closed at 10,412.82
Resistance:
The 10 day EMA at 10,480. If this turns it back it is a weak bounce.
10,500 is some price point resistance
The 18 day EMA at 10,515
The 50 day EMA at 10,528
The 200 day SMA at 10,539
The April high at 10,557
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 May high at 10,406 and 10,400, the bottom of the November/December range
10,250 held in the June and July lows.
10,012 the April low.
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
August 30
Consumer Confidence, August (10:00): 105.6 actual versus 101.0 expected and 103.6 prior (revised from 103.2)
Factory Orders, July (10:00): -1.9 actual versus -2.3% expected and 0.9 prior (revised from 1.0%). Less of a drop than anticipated.
FOMC Minutes, August 9 meeting (2:00)
August 31
GDP-Preliminary., Q2 (08:30): 3.4% expected and 3.4% prior
Chain Deflator-Preliminary., Q2 (08:30): 2.4% expected and 2.4% prior
Chicago PMI, August (10:00): 61.0 expected and 63.5 prior
September 01
Auto Sales, August (00:00): 5.3M expected and 5.7M prior
Truck Sales, August (00:00): 8.8M expected and 11.3M prior
Initial Jobless Claims, 08/27 (08:30): 315K expected and 315K prior
Personal Income, July (08:30): 0.5% expected and 0.5% prior
Personal Spending, July (08:30): 1.0% expected and 0.8% prior
Construction Spending, July (10:00): 0.5% expected and -0.3% prior
ISM Index, August (10:00): 57.0 expected and 56.6 prior
September 02
Non-farm Payrolls, August (08:30): 190K expected and 207K prior
Unemployment Rate, August (08:30): 5.0% expected and 5.0% prior
Hourly Earnings, August (08:30): 0.2% expected and 0.4% prior
Average Workweek, August (08:30): 33.7 expected and 33.7 prior
End part 1 of 3
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us stock market
understanding the stock market
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