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us stock market, understanding the stock market
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9/01/05 Stock Split Report
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Stock Split Report Subscribers:
MARKET ALERTS
Targets hit alerts: ADSK; FTO; MINI
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Trailing stops: None issued
Stop alerts issued: HRB
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SUMMARY:
- Stocks tread water as indecision surfaces again.
- ISM fades back toward 50 after July bounce, indicating economy already slowing ahead of Katrina
- PMCO says Fed is through, but it needs to raise at least 1 more then pause.
- Congress to add $10B to debt. Why not repeal pork riddled highway bill instead?
- Jobs report up for Friday, but the key is additional data post-Katrina
Mixed market on continued stronger volume.
Wednesdays upside strength turned into Thursdays indecision. Stocks were up and down all session, bounced up and down by economic data that was weaker even before Katrina, better news regarding the energy infrastructure, and slightly weakening oil prices. That was not the case for gasoline, however, as NYMX futures hit yet another new high and gasoline topped $3/gallon in most markets with it approaching $6 in parts of Georgia. It was bad enough that President Bush made another television appearance telling all of us to conserve, not to buy gas unless necessary, etc. That was hard for the market to get a grip on. Of course, the magnitude of this disaster close to impossible to get a grip on. Indeed the economic impact is being underestimated as the neighboring states take on the refugees to house, feed, educate, and employ the homeless. That is going to place a huge strain on all of the southern states.
By the close the market was basically flat. It held most of the gains from Wednesday, keeping the indices in good position to continue higher if the read on the economy is good enough for investors. Volume was lower but still above average and quite strong on NYSE. Breadth was flat, matching the price moves. There were solid moves from leadership, some with volume, some without. Basically Thursday was just another session of wait and see as the market moves in starts and stops as it weighs each new day of data. Once the Labor Day holiday is over and investors see how gasoline prices react, then we should see more direction. Right now the market is giving hints it wants to go higher, and we are moving into strong stocks as they flash a buy indication. Thursday was unable to build upon Wednesday, but importantly it did not give that move away and leaves room to build higher.
THE ECONOMY
ISM falls short of expectations, flirting with 50 once more.
Everyone breathed a sigh of relief in July as the ISM manufacturing index rebounded from its flirtation with 50 in June. Expectations were for a build to 57.0 from 56.6. Instead the ISM slipped to 53.6 and the market felt its pain. Stocks slipped into the red on the news though they managed to post a mixed recovery by the close.
You can break the number down into all of the sub-indexes, but the key is this: similar to housing market the trend in the manufacturing expansion is faltering some. It is not collapsing, but with two out of the last three reports coming closer to 50 than 60, there is definite topping action suggesting at a minimum a plateau. Given that this was pre-Katrina, it was somewhat sobering. The economy was already slowing. With three southeastern states basically at a standstill due to major income generating regions wiped out and the rest focused on relief efforts we are going to see this number fade further.
For example, New Orleans contributes roughly $50B to GDP. It has a big port that we need to have operating. There are over 200 barges with tons of grain ready to offload but they are stacking up with nowhere to go. That grain won't get sold. That effect runs upriver to grain silos, grain producers, etc. In short, New Orleans' direct contribution to GDP is 1% to 2%. That will be bad enough. When you factor in the ripples of it going offline and there being no big port on the Mississippi, the impact magnifies.
Bond curve still flat as a board as speculation about rate hikes ratchets up.
The 10 year actually recovered some Thursday after flirting with closing below 4% Wednesday. Bush and Greenspan supped together and purportedly discussed Katrina's economic impact. No real details were revealed and likely Bush was just asking Greenspan what the chairman thought the impact would be. He surely asked what might be the impact with the rate hikes, but Greenspan probably only gave scenarios and no concrete answers. They were not kissing and telling in any event, and both came out with the company line we heard from the Fed Wednesday: economy strong, Katrina will be a temporary impact, God bless America. The usual.
You bet Katrina will be temporary. But what is temporary? To a geologist that is about 100,000 years. To Greenspan it is about the same. To a second term President it is about 3 months. A bit of a dichotomy there, and frankly that is the way it often works with elected officials versus those such as Greenspan. Ever since presidential terms were limited the executive branch has been somewhat of a eunuch. Senators who have been in Congress since the Civil War know they can outlast a President they don't agree with. The three 'equal' branches of government are way out of balance. In order of power it is know judiciary, legislative, executive. Thus after this meeting Bush probably knows no more than he did before.
Wednesday we discussed how things were worse than what a lot of people were discussing. Energy is what everyone focuses on but there is so much more with now a legion of homeless. It is enough for PMCO, the big bond fund, to come out and say that the Fed is through with its rate hikes for now, taking a pause for a few months to see the impact. Sure sounds like the prudent thing to do as the Fed is great at underestimating impacts on the economy.
Should the Fed stop cold turkey? There are many betting that will happen, but more likely than not the Fed is going to hike in September to 3.75%. Why? Because that is already priced into the market. It is the move to 4% that the Fed Funds Futures are waffling on now after giving up the move up to 4.25%. If the Fed said it is not going to hike now that would have the effect of a rate cut, and the Fed does not want that. The Fed has been telegraphing a steady move higher, and it is going to have to telegraph it is going to pause. That means some prep work, and with the statements from the Fed Wednesday and Thursday it is not at that point yet. We can expect the tone to change if it is going to go into a pause.
The Fed has that other concern: it does not want to monetize the energy price increase and spark inflation. Gasoline is in short supply. Prices are spiking and outages are popping up near term. If you add liquidity to that situation all you do is have more money chasing a finite amount of product. Textbook inflation. Only if that money goes into investment that produces goods and services does it not drive prices higher. The Fed cannot lower rates, and thus it cannot skip the September rate hike as that will have the same impact as discussed above.
The question is just how much liquidity is in the economy right now? Is it already too much and will thus drive inflation higher? The fact that people are willing to forego buying a full tank of gas (as reported earlier in the week) is a good sign; they are doing without. Unfortunately, panic can set in after a disaster and then everyone feels the need to tank up just in case. It becomes a situation where they feel they have to buy at any cost.
That should just be temporary, but the futures are saying temporary is December. At that point the futures prices drop back to pre-Katrina levels. During that time the Fed has to avoid pumping too much money into the economy but it also has to balance that with enough to keep the economy from falling into malaise as a result of those very high energy prices that act as a major drag on consumption and investment. With the economy already slowing ahead of Katrina, we don't think there is too much money in the economy right now.
THE MARKET
MARKET SENTIMENT
VIX: 13.15; +0.55
VXN: 15.07; +0.36
VXO: 12.61; +0.83
Put/Call Ratio (CBOE): 0.89; +0.05
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: -4.19 points (-0.19%) to close at 2147.9
Volume: 1.676B (-2.8%). Lower but still solid, above average volume. It was not an accumulation session, but marginal losses that held support indicate it was not destructive.
Up Volume: 691M (-647M)
Down Volume: 959M (+597M)
A/D and Hi/Lo: Advancers led 1.01 to 1. Matched the overall action.
Previous Session: Advancers led 2.26 to 1
New Highs: 143 (+26)
New Lows: 41 (0)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
NASDAQ managed to rally higher but it could not hold the move. It was not a reversal, however, as it tapped and bounced off of the 50 day SMA (2141) on the low and closed mid-range for the session. SOX was not helping out Thursday, and that weighed on NASDAQ along with the large cap techs (-0.3%). Overall not a bad session, and in line with the recent action: up Monday, a pause Tuesday, rally Wednesday, a pause Thursday.
SOX lost its nerve Thursday after some weaker outlooks from some chip stocks. Semiconductors were a drag all session but SOX held above the 18 day EMA (467), a good near support level for this index that has tried to help lead stocks out of this decline.
SP500/NYSE
Stats: +1.26 points (+0.1%) to close at 1221.59
NYSE Volume: 1.67B (-6.97%). Volume was lower but was still strong and well above average. Unlike NASDAQ, we do not like this action where SP500 jumped higher but then gave most of the gain back. It needs to power through this level and this is not the best action.
Up Volume: 1.231B (-712M)
Down Volume: 987M (+574M)
A/D and Hi/Lo: Advancers led 1.57 to 1. Not bad, matching the market gains.
Previous Session: Advancers led 3.25 to 1
New Highs: 288 (+84)
New Lows: 27 (-10)
The Chart: http://www.investmenthouse.com/cd/^spx.html
SP500 broke through the up trendline (1224) on the high at 1227, but it could not hold the move, fading back below the trendline by the close. Volume remained high. It did manage to bounce up off the 50 day EMA (1217) on the low, but that is not the determinative move for the session. SP500 is trying not to form the right shoulder to a potential 12 week head and shoulders pattern, and a doji on high volume just below the trendline is not a great day. Still not out of the woods as far as the pattern indicates and of course as the economic data continues to roll in. Critical point for SP500.
Small caps were up again but the move did not have much power after the strong Wednesday move. As noted Wednesday, it still needs to clear 350 to put the head and shoulders completely to bed. A pause after such a strong move is not atypical, and we not that it posted a decent gain and held most of the gain on continues strong NYSE volume. The small caps are trying to lead once more and the Wednesday move put them in good position to do so. Looks as if the large caps will need them.
DJ30
The blue chips rallied up to the 18 day EMA, breaking back above 10,500, but they could not hold the move into the close. Volume was above average once more as DJ30 tried to make a break but did not have enough power. Still below the 200 day SMA (10,537) where the ice is very thick. Struggling still at this level, ready to follow wherever the other indices lead.
Stats: -21.97 points (-0.21%) to close at 10459.63
Volume: 279 million Thursday versus 281 million shares Wednesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
FRIDAY
Usually the jobs report would garner a lot of attention, and it still should get some even though the data pre-dates Katrina. It will give us some insight as to what the job market was doing before the storm. Remember, the rest of the economy was slowing. Of course, jobs lag the overall economy so a strong number is noteworthy but not a leading indicator.
We are going to see jobless claims spike in the future though not right away; you have to be able to file a claim, and the logistics of filing have no doubt yet to be worked out. That is the story of much of this disaster: the magnitude only grows and frankly a lot of what we are hearing on the news overlooks major issues.
There is going to be an energy induced slowing near term. Yes there will be a recovery in the rebuild, but with most of the greater New Orleans area under water for months, it is not going to happen anytime soon in that area. Indeed, there are questions as to whether New Orleans will be rebuilt. I am not too wild about sinking my tax money into rebuilding a city that is below sea level; this is going to happen again. What we need to do is let the Mississippi River avulse into the Atchafalaya River basin as it wants to do and go build a port there.
Meanwhile Bush is convening Congress for an emergency $10B in disaster relief. Why not repeal the pork-laden highway bill and use part of that money for the relief? They could then repeal the federal gas tax as well and still have money left over from the highway bill. Do we really need to spend several million dollars on a couple of transportation museums as contained in the highway bill versus spending that money on the disaster? Go down to the Super Dome steps and tell that to those people. I told my senators and congressman today they ought to think about that. Would they feel comfortable doing that? They would not get out alive and they know it. How about a $250 million bridge in Alaska that will service less than 9,000 people. Money better spent on this disaster relief?
What drives you crazy is hearing our leaders saying they are doing everything they can to get gas prices lower. They say we need to open ANWR, drill offshore, etc. Yes we could do that, but that won't help anyone for 10 years. The Feds cut repeal the highway bill, use $10B of that for disaster relief, and have more than enough left over to repeal the gasoline tax. That extra 20 cents per gallon would help a lot of people both inside and outside the disaster area. As noted above, neighboring states are housing, feeding, educating, all with no questions asked. Hey, it could have been us. It is, however, a tremendous strain on resources and we could all use the extra help. Stop wringing your hands and take action.
As for Friday it is the session before a three day weekend. We are going to see some volatility as positions are adjusted ahead of the weekend; there is too much information hanging out there and the hedge funds won't want to be exposed over the weekend. Some are assuming the news will only get better, i.e. that we have seen the bad pictures and heard the bad news, and any surprises will be how fast we get things back up and running. We do not doubt there will be some positive surprises along those lines. Indeed the Colonial pipeline was flowing more product than it had previously announced. When things start to come together they tend to come together at once and progress jumps ahead.
For Friday we will look for other leaders making good moves but we expect fewer of them given the weekend ahead. In this environment news trumps all, however, and that will drive the action. Everyone expects higher gasoline prices; if they don't spike higher that will be a positive. That is the kind of environment and the mindset we need to take on. It is like a company that goes into bankruptcy; typically any news you hear is good news and has a positive impact. Thus we are going to continue looking for quality stocks in good patterns and in good position to buy if they start to move. For now the market is showing good action in the face of adversity. SP500 is still a question mark and frankly none of the indices are out of the woods. We do see many good stocks still in good position, and that is a major plus for the market at this juncture.
Support and Resistance
NASDAQ: Closed at 2147.90
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 1221.59
Resistance:
December 2004 high at 1219 and June high at 1220 being tested
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 1196
1183 - 1184 from November 2004 highs and July 2005 intraday low.
Dow: Closed at 10,481.60
Resistance:
The 10 day EMA at 10,477. Tried to clear this level but failed on the close.
10,500 is some price point resistance
The 18 day EMA at 10,507
The 50 day EMA at 10,524
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
Initial Jobless Claims, 08/27 (08:30): 320K actual versus 315K expected and 317K prior (revised from 315K)
Personal Income, July (08:30): 0.3% actual versus 0.5% expected and 0.5% prior
Personal Spending, July (08:30): 1.0% actual versus 1.0% expected and 1.0% prior (revised from 0.8%)
Construction Spending, July (10:00): 0.0% actual versus 0.5% expected and -0.6% prior (revised from -0.3%)
ISM Index, August (10:00): 53.6 actual versus 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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