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us stock market, understanding the stock market
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9/08/05 Stock Split Report
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SUMMARY:
- Stocks take a pause, hold support on mixed volume.
- Fed-speak says Katrina increased inflation threat.
- Signs of slowing both because of and in spite of Katrina.
- Stocks likely to continue the pause ahead of the weekend.
Sluggish session ends where it started.
After a solid week we were looking for a bit more upside before a pause, but investors sat out Thursday as stocks started soft, attempted a modest rebound, then faded into the close. They held support on the opening weakness and again on the close, not covering much ground in between. It was simply a sluggish session where investors found few catalysts to react to. Wholesale inventories were lower than expected (-0.1% versus 0.6% expected), oil inventories were way down but were better than anticipated (-6.4M bbl crude, -4.3M bbl gasoline), the Fed appears ready to continue rates hikes, and oil finished basically flat. That was not enough to excite investors one way of the other.
Stocks thus drifted below the flat line most of the session. Volume moved lower on NYSE as those indices moved lower but it rose to above average on NASDAQ as it posted a modest loss. Some churn or slight distribution in the techs at this point, but we also note that the semiconductors were very active ahead of the TXN and INTC quarter updates. That contributed to most of the increased trade on NASDAQ. Thus sluggish is the best way to describe the action as investors really did not respond to any of the data or news coming out.
Again, we were looking for a bit more upside than just two sessions after a good test of the jump off the August lows. It wasn't going to happen Thursday, and Friday might not see much more action given the weekend ahead after a short week. Overall, however, the recent action has been quite positive with good leadership, a solid rebound and follow through from the major indices, and new life in the small and mid-caps. Those bode well for the market even as it continues to deal with serious issues of high energy prices, signs of economic slowing pre-Katrina, Katrina costs and expenses, and the Fed still hiking rates. As noted Wednesday, it is still looking beyond these issues at the anticipated reconstruction boom. The market has the final say, and thus far it has responded to the disaster in a positive way.
THE ECONOMY
Two Fed officials fear Katrina inflation.
Moskow and the San Francisco Fed chair both indicated that inflation threats are increasing in Katrina's aftermath. Moskow is a Phillips Curve FOMC member, i.e. one of those who believes high employment leads to inflation, so this is nothing new for him. It does sound, however, much in keeping with the Fed and its tunnel vision to stay the course barring any major calamity, something we have written about a few times this year.
Of course, Katrina is a calamity with far-reaching economic impacts. Some say it is going to be nothing but a boon for the economy because in past hurricanes the rebuilding effort has resulted in booms. Others point to the high costs associated with the unprecedented number of dislocated survivors, the unprecedented rebuilding tasks ahead in terms of damage done and just how to go about rebuilding New Orleans (how, where, and at what cost), and the undoubtedly higher deficits as a result (because Congress will not cut any spending). Either way there is a short term detrimental impact that could turn into a longer term detrimental impact.
So why won't the Fed take the foot off the brake? Because it should not. There were signs of weakening before Katrina hit, and without Katrina we would argue the Fed would need to ease up over the next few months anyway if that slowing continued. With Katrina, however, there are real shortages of goods and services. Prices for lumber, gasoline, coffee, etc. have jumped in response. If the Fed were to pause that would maintain the overall relatively high level of liquidity in the economy. Indeed, in effect it would be a rate cut because another 25BP is already factored into the financial markets.
When you have too much liquidity when there are shortages you get the textbook definition of inflation: more money chasing fewer goods. If the Fed pushes more money into the system that would allow inflation to get a better hold on the economy. Moreover, if that liquidity stays while the federal government pumps billions into the economy with relief and reconstruction efforts there is even more money in the system to push prices higher. As we have said, the Fed has to be very careful here because it can assume a lot about what the response will be, but Congress can come up with many alternative methods to help finance the reconstruction.
Builders seeing some areas slow even as rates remain low.
HOV, a homebuilder with a lot of exposure in California and the northeast, reported that its sales prices moderated in Q3. That is in line with other reports we noted in July; prices are flattening some and indeed the median price has fallen. Moreover, HOV lowered its 2005 and 2006 guidance, something that is a precursor to more of the same.
The housing market has been flattening for the past several months even as long term interest rates remain low. This is a first during this housing cycle that has its roots back in 2000. All during that time low rates have driven record after record in both new and existing homes. Now sales prices are falling even as rates remain low. Houses have become too expensive on the whole, and combined with the growing age of this cycle there is not the same demand. That does not mean the market is imploding, but it is a definite sign of the continuing flattening of the housing market.
Katrina-related issues continue to crop up.
The reports after Katrina fall on both sides of the ledger. WMT still sees sales in the 2% to 4% growth range despite closing over 120 stores during the hurricane. On the other hand, YELL, a trucking company, warned for the current quarter given the backups and infrastructure problems related to Katrina. This is something we are going to see more of as companies get a better handle on their business post-storm.
This is a pullback of necessity due to logistics. It is not a pullback due to lack of demand. When the issues are resolved these businesses could see a huge surge in business. Think of it as a recession that ends and a lot of pent up demand is released. There will be demand to be quenched when the roads are opened, and the activity will get pretty hot. The key for the economy is how it fares in the interim with the high energy costs pecking away at consumers and businesses each day.
THE MARKET
MARKET SENTIMENT
VIX: 12.93; +0.41
VXN: 14.7; -0.2
VXO: 11.71; +0.41
Put/Call Ratio (CBOE): 0.86; -0.02
Bulls versus Bears:
Bulls: 51.1%. Third down week in a row falling below the 55% level considered bearish. Definite improvement but would like to see a mid-forty reading again. It has been a steady decline: 56.8%, 57.3%, and 59.1%. Starting to challenge the trend of blatant bullishness that emerged after the number bottomed in May at 43.5%.
Bears: 27.3%. Third week above 20%: 25% last week and 22.5% the week before. Bears are on the rise, breaking back above the 20% level considered bearish. Just spent one week below 20%. Hit a high for the year at 30% in early May. It is running toward that level.
NASDAQ
Stats: -6 points (-0.28%) to close at 2166.03
Volume: 1.638B (+6.17%). Volume moved above average again as NASDAQ stalled out after two upside sessions. Not the best action, but again, a lot of the trade was in semiconductors that saw a solid upside session. You don't want to rationalize away any potential problems, but you also have to be cognizant of what caused the action. With TXN and INTC updating after the close, there was more action in the chips. Still something to watch; you don't like to see selling start with a volume jump.
Up Volume: 801M (-113M)
Down Volume: 797M (+239M). Up volume actually outpaced the down volume, giving us an indication that the trade was not as negative as the volume increase on a down session suggests at first blush.
A/D and Hi/Lo: Decliners led 1.48 to 1
Previous Session: Advancers led 1.2 to 1
New Highs: 116 (-24)
New Lows: 36 (+5)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
NASDAQ held support at 2163 twice Thursday, once at the open and another in the last hour. Both tests led to a rebound, and NASDAQ cut its losses almost in half in the last half hour. The volume was the issue given the overall loss on NASDAQ; NASDAQ 100 dropped just 0.1%, however, so there was not a lot of bloodletting. After a solid surge the past week NASDAQ churned a bit but is thus far holding its ground. Not getting too worked up about this higher volume given the good action in the semiconductors.
Speaking of semiconductors, SOX (1.1%) moved well, bouncing off the 18 day EMA (469.76) on the rising NASDAQ volume. SOX has shown relative strength and now leadership, forging ahead as the rest of the market waffled Thursday. Now we will see if that leadership can hold after INTC tightened its guidance range but kept its midpoint the same. It was down after hours. TXN on the other hand was up. It raised its profit and sales targets.
SP500/NYSE
Stats: -4.69 points (-0.38%) to close at 1231.67
NYSE Volume: 1.44B (-3.56%). Volume fell but remained above average Thursday as the NYSE indices led the downside move. Not took excited about this action; it is basically in line with what we would expect from a pullback after a good surge higher.
A/D and Hi/Lo: Decliners led 1.61 to 1
Previous Session: Advancers led 1.12 to 1
New Highs: 158 (-62)
New Lows: 24 (+6)
The Chart: http://www.investmenthouse.com/cd/^gspc.html
The large caps sold back but held support at the March high and above the up trendline (1229). Indeed they tapped that support on the low and rebounded modestly to close. Volume edged lower; not a major drop but what you want to see on a pause in the index. Holding the trendline is the best action for SP500 at this juncture; it needs the higher low and return of upside volume to show the recent move has legs. Probably won't get that return to upside volume Friday, however.
The small and mid-caps were the laggards Thursday (-0.5%) after leading higher in the prior sessions. They led up, and as is typical, they led lower on a down day. Still in good shape after the strong moves higher, and look ready to make a higher low here and continue on.
DJ30
Modest pullback for the blue chips that easily kept them above the 200 day SMA (10,538) and within the July/August lateral range. Volume was lower once more falling further below average. DJ30 simply has not shown any leadership this year, and it is not doing anything to change that at this juncture.
Stats: -37.57 points (-0.35%) to close at 10595.93
Volume: 222 million shares Thursday versus 226 million shares Wednesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
FRIDAY
Looks as if investors are once more going to see a soft open they can take advantage of . . . if they want to. Lackluster action Thursday and the ho-hum INTC quarter update leave little to inspire investors on Friday of a shortened week. There is little economic data to report, at least the scheduled sort; we can always see more warnings along the lines of YELL today. While the market came out of Katrina initially to the upside, companies are still in the process of sizing up the quarter to quantify the impact on the bottom line not only from Katrina but from already high energy and gasoline prices. YELL was just one of many we are going to hear from.
Overall the indices remain in decent shape after a solid move higher, in good enough shape to pull back further and still hold support and make a higher low from where they can continue the new rally attempt. This market does nothing the easy way, but it has the underlying strength of leadership that, despite a 2 steps up, one step back approach, continue to find support and forge higher in this rally. After a week of good gains, a quiet end to the week won't be a major ordeal.
We want it to be quiet, however, i.e. a low volume pullback. We will have to see how the Intel story impacts the semiconductors Friday. They are a leadership group in this move, and thus they are needed for its continued success. We don't think it will derail the move given the strength to this point, and after some Friday grumblings about Intel's near term outlook the market should look again to the post-Katrina rebuild.
Support and Resistance
NASDAQ: Closed at 2166.03
Resistance:
2178 is the January closing high
2191.60, the January intraday high.
2192 is the mid-July high.
2220 is the August high
Support:
2163, the mid-December closing high
2151, the early December closing high and highs from January 2004 is being tested.
The 18 day EMA at 2151
2149 is the 50 day SMA
The 50 day EMA at 2138
2100 was key resistance on the way up.
2090 is the February and March interim highs
2076 is the 200 day SMA
2050 to 2045 from May and June
S&P 500: Closed at 1231.67
Resistance:
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 1-6-99 at 1272
Price tops at 1290 from 5-23-00
Price tops at 1364 from 1-29-01
Support:
March 2005 closing high at 1225 and intraday high at 1229.11
The April/July up trendline at 1229
December 2004 high at 1219 and June high at 1220 being tested
The 50 day EMA at 1219
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 1197
1183 - 1184 from November 2004 highs and July 2005 intraday low.
Dow: Closed at 10,595.93
Resistance:
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:
Price consolidation at 10,600 is trying to hold.
The April high at 10,557
The 200 day SMA at 10,539
The 50 day EMA at 10,531
10,500 is some price point resistance
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.
September 06
ISM Services, August (10:00): 65.0 actual versus 60.0 expected and 60.5 prior
September 7
Productivity, Q2 revised (8:30): 1.8% actual versus 2.1% expected and 2.2% prior
Fed Beige Book (2:00)
September 8
Initial Jobless Claims (8:30): 319K actual versus 315K expected and 320K prior
Wholesale inventories, July (10:00): -0.1% actual versus 0.6% expected and 0.4% prior (revised from 0.7%)
Consumer Credit, July (3:00): $4.4 actual versus $10.0B expected and $14.6 prior (revised from $14.5B)
September 9
Export prices, August (8:30): 0.2% prior.
Import prices, August (8:30): -0.1% prior.
End part 1 of 3
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us stock market
understanding the stock market
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