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us stock market, understanding the stock market
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8/31/05 Stock Split Report Update
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Stock Split Report Subscribers:
Full report issues Thursday.
MARKET ALERTS
Targets hit alerts: JOYG
Buy alerts: WTW; PCZ; RMD; LAF (bonus); JEC (bonus); FLO
Trailing stops: None issued
Stop alerts issued: None issued
The market alert service is a premium level service where we issue intraday alerts relating to the general market conditions, when stocks hit action points (buy, stop, target, etc.), and when we see other information impacting the market or our stocks. You can sign up for Stock Split Report alerts at the following link:
http://www.investmenthouse.com/alertssr.htm
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SUMMARY:
- Stocks recover sharply after feds swing into action.
- Market saying recovery will add more to economy than disaster is taking away from it.
- Fed to remain 'flexible' but sees continuing strong economy. Bond market is still not convinced as 10 year tanks.
- GDP, Chicago PMI show more pre-Katrina weakness
- Impressive recovery, and now we see if market can build on it.
Feds help turn the tide as stocks rally back on strong volume.
Stocks weakened in August as the economic data was fading as gasoline and energy costs strengthened. When Katrina came through and threatened $3/gallon gasoline and major supply shutdowns the market was on the brink as SP500, SP600 and DJ30 were ready to fall into much longer bases and drag NASDAQ with them.
Stocks were not giving up, however, and it was not just energy stocks. NASDAQ and SOX were showing good relative strength as they attempted to hold the line. A strange bed-partner with the energy stocks, but it showed some underlying strength in the market. That is why we believed that while the market might continue to sell, it would be more of a basing event than a sharp decline preceding a recession.
Stocks were still not out of the woods Wednesday as the Monday rebound was again waffling in response to some weaker than expected GDP and Chicago PMI results and continued rising oil and gasoline prices. Then the Fed swung into action. The energy department announced that SPRO would be opened starting Thursday. The EPA suspended regulations on gasoline blending in various regions of the country, thus allowing a 'one size fits all' refining approach to allow product to get shipped wherever it needed to go without having to blend it specially for that area. The Transportation Department lifted limits on truck drivers' hours to allow shipments of goods needed in the disaster areas as well as other parts of the country.
In addition to federal action there was other good news. The LOOP system starting shipping oil. BP announced its Pascagoula refinery was undamaged; it had no power, but it was undamaged.
Oil prices started to fall, and as they did, stocks started to rise. At first it was the usual suspects, the stocks that were rallying earlier in the session: energy, construction, materials, engineering. As the afternoon continued the rally spread out, however, with the entire market participating. Breadth shot higher as did volume (1.79B NYSE, 1.71B NASD). The small caps, a leader on the way up, threatened a breakdown from its head and shoulders pattern, but it reversed and led the market higher, blowing apart the topping pattern. SOX continued its rebound from its recent test, continuing its leadership role as well. Impressive turn of events.
Market starting to look past the near term issues.
The Wednesday action suggests investors via the mouthpiece of the market are thinking that the rebuilding effort will provide more stimulus for the economy than the disaster is taking away from the economy. History suggests this is the case; hurricane Andrew in 1992 demonstrated this, and even some brokerages were touting this today. That in part explains the surge in the construction, materials, and engineering stocks early on, but also the other sectors that started to rally as the move spread out.
It is always important to look at history to help us deal with the present and future, and readers know we are big believers in learning from the past. You have to be careful and compare apples to apples, however. There is certainly going to be a massive cleanup and rebuilding effort: 80% of New Orleans is under water, and that does not even count the rest of the adjacent parishes to the east that are completely under water. And then there is the Mississippi gulf coast which sadly appears to be a total loss.
There are big hurdles to jump before we get to the stimulus of recovery. First is $3/gallon gasoline. Oil may have faded after the federal action and good news elsewhere, but gasoline futures continued to rise with unleaded hitting almost $3 on the NYMX. Gasoline is moving over $3/gallon all over the US. We are hearing reports of consumers buying just $10, $5, or $20 worth as opposed to filling up the tank. That is how consumers deal with a short term spike: they cut back on how much gas they buy and drive shorter distances. It is when prices remain high that real problems start.
That is if you can get gasoline. We are already hearing of shortages and outages in the Midwest. With refining capacity down 1 million bbl/day and Labor Day this weekend we could see outages spread, particularly when the time-honored habit of diverting gasoline from areas with fuel to those without takes place. What you end up with is two areas with critically low supplies instead of just one.
Second is mass of unemployed left by the storm. The economy is going to have to absorb all of the people from those areas who will have no jobs. New Orleans is dead. There won't be jobs there other than salvage for months. Reconstruction will be all there is, but not many who worked at the businesses before the storm can do the reconstruction work. That is an impact that other storms have not left, at least on such a massive scale.
With gasoline, time is the key. How long prices stay high directly impacts consumers' wallets. High prices and shortages or other supply problems also impact consumer psyche; a molehill can become a mountain with enough airtime on the news stations. That is where we run into problems with economic slowdowns. With the Wednesday move the market is looking past this issue. It was a strong start but if investors are just thinking of reconstruction, they are missing a huge part of the issues ahead.
THE ECONOMY
Fed comments on Katrina, to remain as 'flexible' as always.
You can say something and mean it, you can say something and not mean it, or you can say something and mean another thing altogether. Thus when a Fed representative commented on the economic impact of Katrina you could pretty much expect the latter, i.e. saying one thing and meaning another. The Fed says it will remain flexible in the wake of Katrina, but in the same breath noted the economy was strong and would likely remain strong despite the obstacles. In short, the company line. In short, the Fed plans to keep raising rates unless something really bad shows up. That is what we have said all along, and of course by the time something bad shows up it is too late for the Fed to do anything.
It certainly did not hurt stocks; they seem to agree that the economy will weather this, at least if you base that decision on the action Wednesday after sizing up the disaster for about 3 days.
The bond market, however, is the key. The 10 year note fell to 4.01%. The two and three year treasuries inverted for a time. In short, the yield curve is very flat and the Fed Funds Futures are pricing in a 4% rate as opposed to 4.25%. Bonds are either saying they have complete and absolute trust in the Fed delivering low inflation growth or they are pricing in economic slowing. It is dangerous to ignore a flat curve and if it inverts it is even more imperative to take action. Bonds may be saying we have finally found economic nirvana, but that would require things to be 'different this time,' and history is littered with the ruins of disasters where it was thought things were different
In sum, though we like the action in the market on Wednesday, the bond market is not signaling an all clear that the economy is going to continue without missing a beat. We are unconvinced that the bond market is endorsing the Fed's policies. We will happily be proved incorrect. In the interim we will let the market give us the cues as to how to invest.
GDP, Factory orders disappoint.
Q2 GDP was revised lower to 3.4% growth (3.5% prior and 3.8% in Q1). At least inflation was lower at 3.2% versus the 3.3% previously reported. The core price index rose just 1.6%, down from 1.8%. Corporate profits remained a bright spot, growing 6.9% after taxes versus just 0.1% in Q1. That solid profits growth is what will continue to fuel earnings gains and thus stock prices. Consumer spending fell to 3%, solid, but below the 3.3% first reported. Business investment was weaker than at first blush as well, coming in at a still very solid 8.4%. Imports rose and would have taken a bigger bite out of GDP but for stronger exports and government spending. You hate, however, to have to rely on government spending to prop up your GDP.
For now the results remain strong, but they are now in the rearview mirror, particularly after Katrina hit. The Fed seems to think it won't hamper the economy, but the surging gasoline prices remain a major issue for the economy; how long they stay high will determine how much damage is done to the consumer and businesses.
Chicago PMI sinks to 49.2 versus the 61.5 expected. Why the Fed should not tinker.
The Midwest activity slowed sharply in August, the lowest reading since April 2003 back when the economy was just trying to deal with the Iraq war and get on track. That indicates contraction in the Midwest. That was before $3+/gallon gasoline and shortages started hitting that area as a result of Katrina.
This may have been an outrider, i.e. an aberration in an otherwise strong trend. It is just one data point and does not break the trend. It can be an issue, however, with the gasoline prices. This is the problem we have discussed over and over when the Fed hikes: there is always something unexpected that upsets the best laid plans to tinker with and fine tune the economy. What may have been a one month slowdown can become the trend. That is why we ALWAYS bristle when the Fed starts tinkering either in cutting or raising interest rates. It acts as if it is working in a vacuum, but when it weakens the economy to prevent inflation it makes it susceptible to other diseases. The economy was already slowing ahead of Katrina yet the Fed was set to keep raising. According to its spokesman today, it is still ready to keep raising rates. Doctors won't perform an operation if the patient has a cold; the doctor will wait until the patient recovers and is as close to full strength as he or she will get. Right now the Fed is operating on a strong economy that has a cold that is threatening to turn into pneumonia. It needs to wait.
THE MARKET
Wednesday was a good recovery day. It was also the last day of the month which means it was the day before the start of a new month. As we have seen this year, the end of and beginning of months see money put to work. We saw some of that Wednesday and are likely to see more on Thursday as the new month starts. After that we may see the lull start once more. After all, it is September.
MARKET SENTIMENT
VIX: 12.6; -1.05
VXN: 14.71; -0.65
VXO: 11.78; -0.52
Put/Call Ratio (CBOE): 0.84; -0.21
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: +22.33 points (+1.05%) to close at 2152.09
Volume: 1.725B (+15.02%). Volume jumped above average for only the fifth time this month. It was well-timed, however, as NASDAQ moved back above near resistance on the solid trade.
Up Volume: 1.338B (+735M)
Down Volume: 362M (-462M)
A/D and Hi/Lo: Advancers led 2.26 to 1. Excellent upside breadth as technology, after showing some relative strength, started to rebound.
Previous Session: Decliners led 1.56 to 1
New Highs: 117 (+50)
New Lows: 41 (-4)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
NASDAQ moved back through the 50 day EMA (2133) and cleared some resistance at 2151 on the close. Held above key support at 2100, never really challenging it on the low on Monday before making this solid move higher. Volume moved back above average, this time on the upside, showing some accumulation after a four week decline that took NASDAQ back to its 50 day EMA. Technically a good move as it held above key support and then started higher on stronger trade. That shows buyers stepped in to start buying at a key level, and it also shows the ranks of buyers has grown.
SOX made a higher low this past week and then started up again Wednesday, breaking over the recent highs as techs rallied on volume. SOX has shown relative strength during this selling, never testing its 50 day EMA (458.34) before starting back up. Showed strength and is now ready to move back up.
SP500/NYSE
Stats: +11.92 points (+0.99%) to close at 1220.33
NYSE Volume: 1.795B (+23.91%). The strongest volume surge in two months as the large caps surged off support and are now challenging the up trendline. When buyers came back they did so with force.
A/D and Hi/Lo: Advancers led 3.25 to 1. It was no short covering move Wednesday. Breadth was colossal with the small caps leading the charge higher. Very impressive.
Previous Session: Decliners led 1.28 to 1
New Highs: 204 (+88). Given all of the selling, this was pretty impressive.
New Lows: 37 (-10)
The Chart: http://www.investmenthouse.com/cd/^spx.html
After holding 1200 support for three sessions the large caps leaped back up, clearing the 50 day EMA (1217) and moving up to challenge the up trendline (1224) it fell through last week. Still a broad top the past 7 weeks, but this action is trying to break up that top. It needs to clear the trendline and power through 1220 to break up the attempt to form a right shoulder to a potential 11 week head and shoulders top. This strong volume, broad move does wonders to help break it up, but it is not there yet.
The small cap SP500 led the market (2.1%) not only in percentage gain but in sheer power. It crashed through all of the near resistance levels, surging on strong volume and strong breadth. Money flow is spiking ahead of the small caps. This index was a key leader on the way up, and it is taking charge once more with this move. It still needs to clear 350 to really show strength, but this move was extremely impressive in and of itself, single handedly turning the breakdown in the head and shoulders into a rally.
DJ30
Similar to SP500, after tapping three days at the 10,350 level the blue chips jumped higher on strong volume, rallying to the 10 day EMA (10,512) on the close. Still below resistance at the confluence of the 50 and 200 day MA (10,527 and 10,538), a break it has to make just to get back into its July and August lateral consolidation. Still al lot of work to do, but DJ30 is following along.
Stats: +68.78 points (+0.66%) to close at 10481.6
Volume: 281 million shares Wednesday versus 234 million shares Tuesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
THURSDAY
Personal income and spending along with the national ISM reports issue Thursday though once again the reports have a big asterisk beside them (pre-Katrina). There is still a mass of information hitting the market, but as seen Wednesday, the market is starting to price in a recovery and continued economic strength despite the high energy costs and the new mass o refugees the economy will have to absorb.
We are going to take our cues from the market. There was strong buying Wednesday that was on top of the late short covering on Tuesday. There are many solid stocks trying to rebound off of support, and if these leaders get some volume we are going to look at moving into them. We want to see SP500 break higher and hold into the close, but you have to move when the leaders start to move. We are seeing them stirring once more.
Support and Resistance
NASDAQ: Closed at 2152.09
Resistance:
2151, the early December closing high and highs from January 2004 is being tested.
2163, the mid-December closing high
2178 is the January closing high
2191.60, the January intraday high.
Support:
The 50 day EMA at 2133
2100 was key resistance on the way up.
2090 is the February and March interim highs
2075 is the 200 day SMA.
2050 to 2045 from May and June
S&P 500: Closed at 1220.33
Resistance:
December 2004 high at 1219 and June high at 1220 being tested
The 50 day SMA at 1220
The April/July up trendline at 1224
March 2005 closing high at 1225 and intraday high at 1229.11
The recent July highs at 1245.15
Support:
The 50 day EMA at 1217
Some resistance at 1210
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 10,481.60
Resistance:
The 10 day EMA at 10,481. If it does not clear this it is going to turn over hard.
10,500 is some price point resistance
The 18 day EMA at 10,512
The 50 day EMA at 10,528
The 200 day SMA at 10,538
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
10,350 turned out to be support in the recent pullback.
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): 3.3 actual versus 3.4% expected and 3.4% prior
Chain Deflator-Preliminary., Q2 (08:30): 2.4 actual versus 2.4% expected and 2.4% prior
Chicago PMI, August (10:00): 49.2 actual versus 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 2
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us stock market
understanding the stock market
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