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us stock market, understanding the stock market
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9/28/05 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Target hit alerts: FIC
Buy alerts: VTIV; WITS; VLO
Trailing stops: PCZ; WSSI
Stop alerts: None issued
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SUMMARY:
- Another flat session as stocks churn below resistance.
- August durable goods orders surge after the July slump: typical durables action.
- How much to spend and from where does the money come?
- Stocks start Thursday little changed, hanging on below resistance.
- September has been down but hardly out.
Stocks bump resistance early, spend another day in narrow range.
Futures were up and stocks rebounded once more, looking for a catalyst to send them to a breakout above near resistance. Foreign markets rallied sharply, giving US investors another reason for a bit more optimism. Unlike Tuesday that momentum held up through the first hour and into the second. Oil inventories were released and showed a surprise build in gasoline (+4.4M bbl). Oil and gasoline prices fell and stocks continued to move higher.
Then NASDAQ bumped near resistance at 2129 and SP500 at 1221. They tried for a half hour to move through that level but then folded the tent at that point. Oil had turned higher and started what was a $2+ rise per barrel. As with other sessions, when oil rises stocks fade. Stocks spent the rest of the morning and early afternoon selling down to support on SP500 at 1210. That triggered a modest rebound into mid-afternoon before a last hour fade. Overall a very narrow trading range bracketed by key resistance on the upside and next support on the downside.
Volume rose on both NASDAQ and NYSE. With NASDAQ losing ground and the NYSE indices basically holding flat it was not an accumulation session. Higher volume with little movement below resistance indicates churn, i.e. high volume turnover that shows sellers using the move back to resistance to unload shares. That prevents the indices from gaining traction and moving through resistance, and that is what happened Wednesday. In addition to volume, breadth remained weak (flat on NYSE where the indices showed gains) as the market internals continue to show the same struggle as the overall market.
While the indices are unable to advance through resistance, they are also not rolling over and diving lower. The market leaders continue to find support, hold the line, and even advance the ball. Energy stocks, medical appliances and equipment, business services, and even some internet service companies are performing nicely as groups. There are many other individual stocks also performing well even if they are not part of a pack from the same sector. This strength in leadership is underpinning the overall market's ability to hold the line and avoid a sell off.
Of course when you have energy as a consistent leadership group that is traditionally not the best market. Energy thrives when prices are high and high prices sap the consumer even if they do not pass through from the business side to the consumer. We saw that even before Katrina when consumer spending habits and then actual spending levels shifted. Energy stocks are still enjoying a great run but at some point it is too much for the economy. The rest of the market signals that is happening with a sharp sell off.
Is this that sharp sell off? It looks more like a basing process ongoing since August as the April to August rally needs some consolidation. There has been distribution, but that is not unusual as a base starts. Thus far NASDAQ and SP500 have held key support on this last leg lower. It may turn into a downside rout at some point, but it has been a more orderly decline thus far, something you would expect after a strong run and given that it is September, one of the traditionally weaker months of the year that sets up a lot of bottoms in October.
With all of the headwinds facing the market (high and sustained energy prices, the Fed bent on further rate hikes, major natural disasters creating shortages and pressuring inflation, potential runaway spending in response, potential removal of tax incentives as a result), intuition would tell you to be on the lookout for serious selling. The market is struggling no doubt, but it is refusing to sell off as it again and again finds leadership. We ultimately have to go with what the market is telling us. Right now it looks to be in a basing process despite all of the headwinds, and that means leaders are breaking higher and making good moves. That can all change, but right now the process is ongoing. Even though the market is near term in a technically weak position, this is also part of the ongoing basing process. Again, given the time of the year this is not terrible action but part of a bigger picture basing process to put in a new bottom for a year end rally. It seems improbable with the high energy prices, but the market and its leadership dictates the course of action.
THE ECONOMY
Durable goods orders surge in a sharp rebound from July.
It was still pre-Katrina, but it was good to see the August orders jump 3.3% (4.2% ex-transportation). That was the largest rise since March 2004 and well above the 0.7% expected and the 5.3% drop in July (revised from 4.9%). Business spending (non-defense capital goods excluding aircraft) rebounded sharply, rising 3.6% after the 3.3% July decline. Metals orders jumped 9.2%, machinery +3.5% (-7.1% in July), computers and electronics +5.5% (-6.5% in July). It was a strong rebound from what is a very volatile report month to month.
It of course is discounted following Katrina and now Rita, but it shows the economy was not necessarily on its last leg heading into those events. The consumer was struggling as we saw pre-storms, beaten down some by the high energy costs and the Fed drying the money supply, and that was starting to show up in business investment as well. The August report does not wipe all of that away, but it does indicate that the economy was not diving heading into the storms.
How to pay for and what to pay for after Katrina and Rita.
The health of the economy is going to be key as we look to jumpstart the rebuilding efforts in Mississippi, Louisiana and Texas (and Alabama and Florida). The Louisiana governor just asked for $250 billion dollars for just about everything anyone in Louisiana ever wanted. It was a shameful wish list for all projects Louisiana ever wanted, as if suffering the storm entitled them to it. We don't begrudge anyone a hand in getting back on their feet, but the first question is do we want to rebuild a city below sea level when all studies show it will eventually result in an island in the Gulf even if it is successful? Sure the Army Corps can build levees to withstand a cat 5 hurricane, but with the current rate of coastal erosion there will be walls around an island in the Gulf after about 50 years.
After that we have to look at the dollars requested. Frankly, Louisiana would not contribute $250B to the US economy in the next 250 years. Further, after living there for a few years and having other family members live there longer, there is no way I would trust Louisiana to spend $10 of federal money appropriately. The state prides itself on its graft; they re-elected a governor who had done time for his unlawful ways and brags about his womanizing and drinking. That is great. Go to it. But don't expect the rest of us to fund it. And don't expect the grotesquely arrogant request of $250B to be anywhere near what you will get.
As for what is paid out in hard dollars and that is not part of what should be a rebuilding effort funded by incentives to build and hire in the area (tax-free zone, etc.), where should it come from? There is a lot of talk about trimming other areas of the budget, but as we surmised three weeks ago, talk is cheap. When push comes to shove only one senator has agreed this is a good idea while the others either dismiss it as lunacy (give back money? Are you crazy?) or take a 'if you get rid of yours I will get rid of mine' attitude. The senator who garnered $3M for a transportation museum in his state said bluntly when asked that he would invest the $3M in that museum versus any other investment available. Now that is lunacy. The question should have been asked if he would rather put the money into a museum versus help build some homes for those wiped out in Mississippi. Then we could have really seen what a jerk he is (as if we don't already know).
The point is what the federal government should pay for with our tax dollars as opposed to what can be done creatively to recreate a vibrant business and social environment in the affected areas. There are many ways to foster investment to rebuild the area in a rational, common sense manner that do not involve taking dollars from you and giving them to Louisiana officials to spend as they see fit (the same officials that instead of strengthening levees bought a casino and a $40M jet to fly around in). There is too much thinking inside the box as opposed to being creative. Even if new roads are needed who says the Feds have to be the ones building them? There are dozens of projects nationwide where private interests are building roads and other infrastructure.
It is time to be creative and come up with a plan to really revitalize the region with a mind to what is practical versus just a 'we will rebuild it' mentality. The latter will sap the economy too much and send us into economic decline. Why? Because to pay for it many will require the tax cuts to be phased out. We are collecting more in tax revenues now than any year in the Clinton boom years. Problem is, we are spending more than then. This is just what happened in the Reagan years: unprecedented tax revenues from the tax incentives, yet unprecedented spending at the same time. If you cut the tax incentives the economy will start to fold up even more than it already is. Of course Congress won't cut its spending; look how petulant they are being about cutting the pork from the highway bill. Who cares if it is just $50B or $75B; it is money that can be more effectively used elsewhere.
We have serious issues ahead. We have to realize that the federal government cannot be the big benevolent father that doles out unlimited amounts of aid. We don't have the resources to do it, and a lot of us are not going to pay for any more wasteful and unconstitutional spending. It is going to come to a head soon, and the cavalier attitude of the Louisiana officials in asking for such an extravagant amount of our tax dollars is going to be a rallying point for all of us who are sick and tired of the 'oh let the federal government pay for it' attitude. That is an injustice to our forefathers and it is a crime against our heirs if we let this go unchecked.
THE MARKET
MARKET SENTIMENT
VIX: 12.63; -0.13
VXN: 14.35; -0.04
VXO: 12.09; -0.1
Put/Call Ratio (CBOE): 0.73; -0.08
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: -1.02 points (-0.05%) to close at 2115.4
Volume: 1.743B (+5.08%). Volume rose as NASDAQ posted a modest loss as it continues to bump against near resistance. Technically distribution as NASDAQ continues its base.
Up Volume: 862M (+165M)
Down Volume: 835M (-82M)
A/D and Hi/Lo: Decliners led 1.39 to 1. Modest downside breadth as NASDAQ posted a modest loss.
Previous Session: Decliners led 1.22 to 1
New Highs: 92 (+3)
New Lows: 83 (+26)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
NASDAQ suffered a mild distribution session (higher volume selling) as it continues to struggle below near resistance at the 10 day EMA (2126). Near term NASDAQ continues in a weak position, but it is also holding above support at 2100 as it works through the eighth week of its base. It still looks ready to test 2100 support and it may find the 200 day SMA (2077) before this is over, but for now it is moving laterally and lower in an overall orderly manner. It is likely to have a few wild sessions at some point before this bas is finished. For now it is holding up though it does not look ready to make any big upside move soon.
SOX led the market with a 0.5% gain, closing well off its intraday high that saw it tap the 50 day EMA (463.67) yet again before fading as oil prices climbed. It is in a more precarious position than NASDAQ as it is below its 50 day EMA with no real solid support until 440; there is some at 450 that will try to hold.
SP500/NYSE
Stats: +1.23 points (+0.1%) to close at 1216.89
NYSE Volume: 1.575B (+5.47%). Volume rose on NYSE as well, and SP500 posting a gain. Technically some accumulation, but with the slight gains occurring below resistance and no significant headway made, the price/volume action is more typical of churning, i.e. high volume turnover where the sellers use the moves up to resistance to unload shares. That impedes the progress through that point.
A/D and Hi/Lo: Advancers led 1.05 to 1. Very modest upside breadth on very modest upside gains.
Previous Session: Decliners led 1.36 to 1
New Highs: 159 (+68)
New Lows: 105 (-8)
The Chart: http://www.investmenthouse.com/cd/^gspc.html
SP500 again tapped at the 50 day EMA (1221) on the intraday high and faded. Another up and down session in a narrow range where the index closed right in the middle. It continues this rather dull action below resistance. As with NASDAQ, still a weak technical position, but it is also working on its base as well. The pattern suggests it still has a ways to go.
The small cap SP600 led the downside (-0.3%) as it again failed below the 50 day SMA (347), closing right on top of the 50 day EMA (344.56). It rebounded from the session low to make that close; decent action, but not really meaningful in the bigger picture. It is also working on its 8 week base, trying to set up a double bottom with lows along the April/May up trendline (342). A leader in the move to this point, we are watching to see if the small caps can complete the base and breakout to the upside once more. It looks to have at least two more weeks of work before it is ready.
DJ30
The blue chips rallied up toward the 50 day EMA (10,522) and then faded back with the rest of the market. Another modest gain as volume expanded to average, a modest positive. It has bottomed twice at 10,350 in the past month, trying to hold that support and set up its own floor to break higher. As for now it is still churning through its trading range from 10,350 to 10,700 with not much to indicate it is about to make a break higher.
Stats: +16.88 points (+0.16%) to close at 10473.09
Volume: 238M shares Wednesday versus 225M shares Tuesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
THURSDAY
The market has gone basically nowhere this week, trading quietly inside a narrow range below some significant resistance. As we have noted frequently, that is a technically weak pattern, but it has not sold off. Indeed the market is very quiet as we still see leadership post some good breakouts. A quiet market can be a prelude to an unexpected move. In addition there is the end of the month/end of quarter shuffle that will often cause unexpected moves in stocks.
Oil has put a lid on stocks of late with oil and equities moving inversely. That is what happens when the market has no real impetus; once it makes a decision it makes its own wake unless there is a major spike or drop in energy. The drop lower on increased volume and the breaking below support tarnished our view of the market, but we like the refusal to sell off. It may just be a prelude to a harder drop but with the leadership continuing to hold the line and move higher, the market is finding continued support. It does not look to be at a point where a break higher is imminent, but it continues to work on its base.
As we have noted, this action continues to produce upside breakouts from leaders that continue to work on their bases or consolidate strong earlier moves. That is what rallies eventually spring from. The market can still roll over from here and dive lower; it always can. It is in a building process and that can always fail, but right now it is not giving up, showing surprising tenacity in the face of many headwinds.
Support and Resistance
NASDAQ: Closed at 2115.40
Resistance:
The 10 day EMA at 2126
The 50 day EMA at 2137
2151, the early December closing high and highs from January 2004
The 50 day SMA at 2157
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 1216.89
Resistance:
December 2004 high at 1219 and June high at 1220
The 50 day EMA at 1221.63
The 50 day SMA at 1226
March 2005 closing high at 1225 and intraday high at 1229.11
The April/July up trendline at 1244
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 1199.65
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 10,473.09
Resistance:
10,500 is some price point support but could not hold.
The 18 day EMA at 10,500
The 50 day EMA at 10,523
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): 3.3% actual versus 0.7% expected and -5.3% prior (revised from -4.9%)
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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