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us stock market, understanding the stock market
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09/27/05 Investment House Daily
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SUMMARY:
- Up and down session below resistance as relief bounce coming up short.
- Consumer confidence drops sharply in confirmation of earlier Michigan statement.
- Pre-Katrina new home sales tumble 9.9%.
- Still looking for a test of lower support as stocks waffle below resistance.
- Basing action to continue, and that will continue to provide opportunity.
Stocks lack any upside punch to take on resistance.
Oil was a bit softer once more and that gave stocks a toehold to try and continue the relief bounce and take on near resistance at the 50 day MA. Then consumer confidence for September was released and that put an end to the morning attempt to put on a good face. Stocks sold into lunch with SP500 once more testing 1210 and once more holding.
That kept the market in the game for a bounce, and when Greenspan's speech to the business economists was released, the rah-rah tone was enough to send stocks higher in an afternoon rebound. The speech said nothing about current Fed policy. It was a pro-market, free enterprise speech, just the kind of 'keep the faith brother' language you would expect to hear from Greenspan as he takes his victory lap after twenty years at the helm.
The rally on the speech had about as much substance as the speech itself. Accordingly in the last hour the market gave all of that 'Greenspan' bounce back. The indices finished well off of their lows, but NASDAQ and SOX closed negative on higher volume while the NYSE indices closed modestly positive to flat on lower, average volume. None of the indices gave any serious challenge to resistance. SP500 again tapped at the 50 day EMA on the intraday high, but it was in no mood to really give it a run. NASDAQ once more did not come close, rolling lower after a weak test of the 10 day EMA Monday. It was simply a session without any conviction.
Technically that leaves the market in the same weak position, going into the 'flop' with deuce high and no hope of a straight or flush. NASDAQ selling on rising volume, breadth leaning to the negative side even with the NYSE indices flat to slightly higher, treading water below resistance after a low volume bounce. Not a great foundation to build upon.
That does not mean it is going to crash; it can lose this hand, sell down toward the next support, and still set up for the next move higher from there. Simply put the market is marking some time, trying to build a base during September and apparently on into October to try and put in a bottom next month. During this time it is weighing the continuing troubles facing the market such as sustained high energy prices, natural gas (the primary winter fuel) going through the roof, the Fed bent on raising rates further (Fed governor Yellen made that clear early Tuesday), consumer confidence flagging, and billions of relief dollars and their impact on taxes yet to be determined. Oh yes, and there are the continuing conflicts in Afghanistan and Iraq. Same old full docket facing the market, and bigger picture it is amazing the market is holding up this well.
Indeed, there is still leadership that manages to hold near support and then rebound higher. It is getting thinner as noted over the weekend and Monday, but it is still there, providing some solid underpinning to the market. That continues to provide a silver lining, but leadership is not a guarantee of an imminent rebound. We can see leaders hold support all during a longer base and then lead the market higher once the basing process is over. A handful will also ignore the market and go about rallying without any concern for what other stocks do. We are definitely looking at those stocks, but we also have to recognize that the market has to show something more here to turn the current situation into a near term rally. The market is still holding up and is forming a new base; we simply have to recognize that when we are looking at entering new positions.
THE ECONOMY
Confidence falls to 86.6 (95.0 expected), down from 105.5.
The Conference Board gave us another look at confidence, and it continues to flag. This was heralded as the largest drop in 15 years, back when Iraq was invading Kuwait ahead of the first Gulf war. The size of the drop is often associated with a big event such as Katrina, 9-11, etc. It did not help that energy prices have held high levels for a year and only look ready to move higher. That is taking its toll on the consumer as worries about high gasoline costs and whether that will impact jobs is starting to take precedence.
The actual number was the lowest in almost two years. Even with the large drop it is still at levels that do not indicate a recession is at hand. That is typically found when confidence falls into the fifties or sixties. After a big shock confidence will drop but then rebound. It will, that is, unless there is something stalling it out. That something could be the continued high energy prices and their impact on employers. That is the crux for consumers: will their jobs be safe?
Unfortunately there is nothing to significantly drop energy prices soon. The summer driving season is ending, but with so many commuting long distances to work the end of the driving season won't provide a lot of relief. With seven refineries down and in different levels of disrepair (some are simply waiting on power to be restore), fuel prices are not going to fall dramatically near term. The best hope for the consumption end of the economy is prices falling toward the end of October. That is possible. OPEC has offered more oil but there are no takers. The US has opened the SPRO but the response has been very low. Supply of raw product is not the issue. Getting it cracked into its various components is the issue. There is a bottleneck between supply of raw product and the completed products ready for sale. That puts a lot of pressure on the price of the end product because demand is still exceeding the limited ability to produce supply.
Businesses also suffering from a confidence crisis.
The consumer is only half of the equation. We all hear it is two-thirds of the economy, but as the recession in 2001 showed, if business is not investing the economy will not function. Business confidence is also getting hurt by the high energy costs and the uncertainty about what is going to happen to tax policy.
Daily salvos from some members of Congress about repealing tax cuts for the 'wealthy' and removing corporate 'welfare' have a lot of small businesses extremely concerned. Most people have this idea the corporations are some huge entity that chews up workers and spits out quarterly reports for shareholders. As I had to point out to my mother, I am a corporation, her other sons have corporations, here nephews have corporations, etc. The US is made up of small businesses and when we talk about taxing the 'rich,' much of that burden falls upon small businesses, the ones that do the investing in capital equipment and create the majority of jobs.
We have to get some clarity with respect to what the tax policy will be. When the bill to make the tax cuts permanent was tabled that sent a shudder through small business. We all know that if not acted upon those rates will expire and we will have higher rates in the future. That automatically causes business to assess each expenditure in light of higher future taxes. That acts as a governor on business investment in the future, and that is the last thing we need now. We need investment to get supply to levels that meet or exceed demand. Then we have a strong, vibrant economy without the inflation pressures we see now with the demand over supply situation we are in now.
New homes sales drop 9.9% in August.
Existing home sales rose 2%, but we have to remember that existing home sales are booked at closing, and that is 30 to 90 days after the contract is signed. New home sales register when the contract is signed. Thus the existing sales were holdovers from May, June and July; the new home sales were from August, and they took a hit.
This hit was before Katrina, and it shows that the housing market was continuing its rather orderly correction even before the natural disasters hit. Since then the Fed has kept pushing interest rates higher and this time longer term rates are indeed rising. Low interest rates have kept the housing market alive. Rates are still low but they are rising. With the economy slowing banks are more cautious with their loan criteria, and higher rates mean fewer qualifications. If confidence continues to drop to recession levels (50's, 60's), that will splash some more cold water on the housing market.
There will be some rebuilding down the road. The Mississippi coast was scraped clean. Cameron, Louisiana suffered the same fate. I used to stomp around both of those states in an earlier time in my life, and I cannot imagine them not coming back; the people there just don't know how to quit. That means there will be rebuilding. That will help offset the other factors impacting the housing market, but it is not a one for one offset. Overall the housing market is contracting, having enjoyed 5 years or more of solid expansion. In short, some regions that are overheated are going to fade as they usually do. Others are going to see a boom as the homes are rebuilt post-Katrina and Rita (and hopefully no more).
THE MARKET
MARKET SENTIMENT
VIX: 11.22; -1.82
VXN: 14.58; -0.24
VXO: 10.84; -1.26
Put/Call Ratio (CBOE): 0.8; -0.43
Bulls versus Bears:
Disappointing to see the bulls rise and bears fall even as the market caps a two week slide that saw distribution. Not a good sign that the market will be able to make much out of this relief bounce.
Bulls: 54.3%. Bulls continued to rise despite the market selling off the past two weeks. That is up from 53.2% and 52.1%, the third week in a row of gains. Disappointing. Still just below the 55% level considered bearish. Bottomed in May at 43.5%.
Bears: 25.5%. Bears fell to 25.5% from 26.6% after reaching 28.1% on the recent rise. Still above the 20% level that is considered bearish. Hit a high for the year at 30% in early May.
NASDAQ
Stats: -5.04 points (-0.24%) to close at 2116.42
Volume: 1.659B (+4.27%). Volume moved back up and above average Tuesday as NASDAQ gapped higher but could not hold the move. Low volume rebound from the prior selling and now selling picking up on the downside. That is price/volume action that favors more downside.
Up Volume: 697M (-170M)
Down Volume: 917M (+286M)
A/D and Hi/Lo: Decliners led 1.22 to 1. Not a horrid downside breadth session.
Previous Session: Advancers led 1.43 to 1
New Highs: 89 (-3)
New Lows: 57 (+19)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
The selling started almost immediately after NASDAQ gapped higher. On the upside NASDAQ never came close to testing the 50 day EMA (2138), and it did not even touch the 10 day EMA (2129) that turned it Monday. Lower volume relief move following distributive selling, and now a return of some higher, above average volume as NASDAQ turns back down after that bounce. Sure looks like classic distributive selling that is going to lead to a test of 2100 once more and then even the 200 day SMA (2078). Thus far this is all part of a larger base building process.
SOX (-1.2%) turned down from the doji at the 50 day EMA (463.85) and logged the largest loss of the well known indices. There is some support at 450, but the stronger support is at 440. Modest double top in August and early September, breaking below the 50 day EMA, low volume test of that move, and now rolling back down. Not good technical action.
SP500/NYSE
Stats: +0.03 points (0%) to close at 1215.66
NYSE Volume: 1.493B (-3.61%). Volume fell as the NYSE indices spun their wheels below next resistance. No have churning, just still running out of gas.
A/D and Hi/Lo: Decliners led 1.36 to 1. Decliners continue to hold sway, and upside breadth was weak on the recent relief move. Again, classic indicia of a relief bounce.
Previous Session: Advancers led 1.27 to 1
New Highs: 91 (-26)
New Lows: 113 (+45)
The Chart: http://www.investmenthouse.com/cd/^gspc.html
SP500 showed another tight doji on the candlestick pattern Tuesday as volume backed off to average. It is struggling below resistance at the 50 day EMA (1225.58), but we note it is not turning over and selling hard. It is trying to hold support at 1210 as well, again tapping at that level on the intraday low for the third straight session. Not showing the same intensity of weakness as NASDAQ but struggling and unable to move higher.
SP600 (small caps) showed a doji as well Tuesday after clearing the 50 day EMA (344.54) Monday. On the high it tapped the 50 day SMA (347.19), bracketed by those two levels on the high and low. A lower high in early September, and struggling to try and avoid a lower high here as well. The small caps are the ones to do it if it can be done, but right now there is a lot of weight on the indices overall. A test of 340 and even 335 again is not out of the cards.
DJ30
Tapped the 18 day EMA (10,503) on the high and then faded to a modest gain. Volume was lower and below average on the move; indicative of a failing bounce here after holding support at 10,350 on the low as it did in late August.
Stats: +12.58 points (+0.12%) to close at 10456.21
Volume: 225M shares Tuesday versus 234M shares Monday.
The chart: http://www.investmenthouse.com/cd/^dji.html
WEDNESDAY
Durable goods orders is the keynote economic report Wednesday. It is not likely to make the difference as to whether the market rallies or falls further. It is from August to boot, and that makes it quite dated; might as well be from August 2004 (that is a bit of a stretch). Another Fed official might always stick his or her snoot in front of the camera and talk about how the Fed has to be 'faithful' to controlling inflation, meaning the Fed is going to raise rates until something gives and demand for energy is not that great. You cannot like that scenario. When the Fed gets hell bent on a path, history shows it will hold the course until something breaks. History also shows it is the economy that breaks.
That would be our economy, of course, not China's or India's. After all, higher rates and lower money supply in the US is not going to impact them. They will keep on going and get the benefit of lower oil prices due to decreased demand in the US while we suffer through a recession. Once more the US is going to fall on the knife for everyone else. The Fed has created some very serious issues for us here in the US during the past twenty years, and we are going to have to reckon with them at some point. The dam is going to break at some point, and by now the water is very high as the Fed has put more and more dirt on top of the dam to forestall the breach. Greenspan wants to get out of office before it breaks.
That is big picture. Near term we have a market that sold on volume, bounced on low volume, and Tuesday showed signs it is ready to turn back lower and sell to next support. That is the technical position of the market as of the close; some major news could change it, but that would entail something like gasoline falling to $2/gallon. Did anyone mention hell was freezing over?
That leaves the indices still top heavy at this juncture, ready to test lower and continue to work on the base. That is key: work on the base. That does not mean a rollover and tank into a new bear market but more of a typical September sell off that sets up a bottom in October. In short, completing the base it started building with the early August peak. That action means there will continue to be leaders that perform well even as the overall market continues to struggle laterally and lower in the basing process. We are going to look at those for our upside positions. There are also stocks that are trending lower in downtrends as well, and this rebound has put them in position for some downside. Time to be pragmatic and take what the market gives . . . as always.
Support and Resistance
NASDAQ: Closed at 2116.42
Resistance:
The 10 day EMA at 2129
The 50 day EMA at 2138
2151, the early December closing high and highs from January 2004
The 50 day SMA at 2158
2163, the mid-December closing high
2178 is the January closing high
2191.60, the January intraday high.
2192 is the mid-July high.
2220 is the August high
Support:
2100 was key resistance on the way up and it held last week.
2090 is the February and March interim highs
The 200 day SMA at 2078
S&P 500: Closed at 1215.66
Resistance:
December 2004 high at 1219 and June high at 1220
The 50 day EMA at 1221.21
The 50 day SMA at 1227
March 2005 closing high at 1225 and intraday high at 1229.11
The April/July up trendline at 1242
The September high at 1243
The recent August high at 1246
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:
1210 is some support.
1200 is some support
The 200 day SMA at 1199
1196, the mid-January high and the early December peak in the left shoulder.
1183 - 1184 from November 2004 highs and July 2005 intraday low.
Dow: Closed at 10,443.63
Resistance:
10,500 is some price point support but could not hold.
The 18 day EMA at 10,504
The 50 day EMA at 10,525
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. This is the key resistance.
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, and it held again on the last Thursday low.
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.
September 26
Existing Home Sales, August (10:00): 7.29M actual versus 7.11M expected and 7.15M prior (revised from 7.16M)
September 27
Consumer Confidence, September (10:00): 86.6 actual versus 95.0 expected and 105.5 prior (revised from 105.6)
New Home Sales, August (10:00): 1237K actual versus 1350K expected and 1373K prior (revised from 1410K)
September 28
Durable Goods Orders, August (08:30): 0.7% expected and -4.9 prior
September 29
GDP-Final, Q2 (08:30): 3.3% expected and 3.3% prior
Chain Deflator-Final, Q2 (08:30): 2.4% expected and 2.4% prior
Initial Jobless Claims, 09/24 (08:30): 420K expected and 432K prior
Help-Wanted Index, August (10:00): 39 expected and 39 prior
September 30
Personal Income, August (08:30): 0.3% expected and 0.3% prior
Personal Spending, August (08:30): -0.2% expected and 1.0% prior
Michigan Sentiment-Rev., September (09:45): 78.0 expected and 76.9 prior
Chicago PMI, September (10:00): 52.0 expected and 49.2 prior
End part 1 of 3
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us stock market
understanding the stock market
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