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us stock market, understanding the stock market
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09/29/05 Investment House Daily
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SUMMARY:
- Same old morning chop gives way to afternoon rally, indices start breaking resistance.
- Smattering of 'old' economic data, suspect jobless report fails to influence market.
- Congress eyeing windfall profits tax again as a way to avoid spending cuts.
- Some real time economic reports to hit Friday but quarter end shuffling may not take notice.
Stocks take on a better tone heading into end of quarter.
The morning saw the same old choppy trade below resistance and above support, the final Q2 GDP report and jobless claims unable to change the investor mindset. GDP was as expected though the deflator (how much GDP is propped up based upon inflation) was a bit higher. Jobless claims were 356K, lower than the 420K expected. The GDP news was old news and the jobs report was suspect. Neither had any impact on stocks.
Then the natural gas inventories came out and the market started lower, breaking through the early lows. After a week of lateral moves below resistance and above support, that was the final flush out, at least for Thursday. Stocks turned and rallied with SP500 and NASDAQ both clearing the 50 day EMA (SP500 even went further to take out the 50 day SMA). SP600 used the 50 day EMA as support and posted a nice jump off that key level.
All of the indices held the gains into the close. Volume was up on NASDAQ and NYSE. Breadth was better at 2:1 on NYSE, but just a so-so 1.5:1 on NASDAQ. Strength on NYSE (led by the small and mid-caps), somewhat mediocrity on NASDAQ. Overall, however, this was a positive. We said Wednesday night that it was showing tenacity despite the headwinds and that the end of quarter shuffle could result in unexpected moves. After moving laterally for a week and stubbornly refusing to give in that tenacity and the end of quarter shuffle helped jump stocks higher.
We also said that despite the way things seem to a rational mind (whatever that is), you have to take the lead from the market and follow the leaders. Many leaders bolted higher Thursday afternoon. This can be window dressing; funds sell dogs and buy into leaders to show they have their portfolios stocks with winners. SNDK, ENER, REDF, AAPL, HAE, BER, CDIS, CERN, CNVR, DNR, ESV, NBL, NTES, PDE, RMD, RS, SRZ, VMC, WFMI, WITS all jumped back up the past sessions as the leaders were doing what they do, leading. They jumped up late in the quarter as the market broke higher. What funds wouldn't want these in their portfolio? Many deny there is quarter end shuffling, but when you see this kind of action each quarter it is pretty clear what is going on.
What we noticed as the session wound down was that stocks tended to stick to their current trend. KLAC, INTC, GLW, DELL, LEN (and other homebuilders) were up on the session, but they were simply rebounding from an already weak position and did not alter their trends. On the other hand the leaders that have held the market up to this point while the other sold made solid upside moves Thursday. When the laggards joined the leaders, the indices were able to punch through the near resistance at the 50 day MA. Whether the move holds depends upon whether those Dell's et al can continue higher or if they fade after the end of the quarter.
There is a rule in physics that a body in motion tends to remain in motion. Applied to trends, a stock in a trend tends to want to remain in that trend. It takes some other force to alter the trend. The leaders are already trending higher and as a result the end of quarter shuffling pushed many sharply higher. That same influence helped push up some of the big names that have been laggards up to now. Again, the issue is whether they will continue to contribute to the upside or fade after the 'force' of quarter end window dressing subsides. We are not all that hopeful they will continue higher.
Thus despite the higher volume move Thursday that pushed NASDAQ and SP500 through the 50 day MA the action was no call to buy the market broadly. Leaders have to be our continued focus as the market continues to confront the headwinds of energy prices, Fed action, a weakening consumer, and a weaker time of year for the market. As seen of late, they hold up the best while the market struggles and then they really take off when the market in general starts higher.
THE ECONOMY
GDP final for Q2 in line but deflator rises.
The 3.3% growth rate was as expected, a solid rate of economic growth. It was pre-Katrina and Rita, however, and thus it has little bearing going forward. What is important is the chain deflator, at 2.6% versus the 2.4% expected. The deflator is the amount you have to 'deflate' the growth by to get an accurate nominal reading. The higher the deflator, the higher inflation is that you have to adjust for.
Thus the higher deflator is the more inflation pressure there is. That is the consistent theme in this entire recovery: decent inflation but more pressure than in prior recoveries. This all started with the type of stimulus first passed to get us out of the recession. The consumer was never really beaten down, i.e. demand remained solid. The first stimulus was all demand side; all it did was push demand higher, sowing the seeds of inflation. It was not until the tax cuts and incentives were passed did supply start up and the expansion start.
This was before Katrina and Rita. The supply shortages since have only piqued inflation pressures. As we have noted of late, that leaves the Fed with little choice but to keep raising interest rates while the shortages persist. Otherwise the inflation pressures that were in control before the storms will threaten to run out of control as the same amount of money chases a declining supply. Textbook inflation and not a lot the Fed can do about it.
Windfall profits tax eyed by Congress as a way to avoid spending cuts.
There is a groundswell of grassroots support for cutting spending to pay for the storm costs. The way Congress is acting is predictable: who dares question a spending bill once it is passed. They tend to treat it like the Ten Commandments with only an act of God able to overrule it. Congress won't cut spending on its own; that will have to come from us and from the executive branch just taking a pen to the budget and performing Reagan-like rescissions. The Bush administration simply does not have it in it to do that sort of tough work. Bush is the only President to never veto a bill. A threat to veto is like an invitation to tea; would you like some scones with that?
To avoid cutting spending Congress has dredged up a 1970's relic, the windfall profits tax. A new bill is proposing setting anything above $40/bbl as excess profit to be given up. Now the senators are saying 'returned to citizens' but we know what a tax is: it goes into the government coffers to be spent anyway those gutless wonders feel. You can bet you won't see any extra jingle in the pocket. Moreover, when you tax something you will create a shortage of that item. Let's see, we have a shortage of gasoline that comes from oil. Let's tax what the gasoline comes from and see how much more gasoline we get. Lands sakes we have solved the problem. It worked in the seventies just like that, right? Wrong. The seventies was a time of economic wretchedness. Idiotic ideas were put in place such as wage and price controls, windfall profits taxes, higher income taxes, WIN buttons, etc. If we learned anything from the seventies it was that nothing from the seventies worked.
The rationale for the tax is that it will force companies to explore for more product or pay the tax with the gains from oil above $40/bbl. Basically Congress is saying companies are making too much money. Congress says by taking action they are merely working to even out a market that is not free because OPEC controls the supply. First, OPEC is not controlling price necessarily. We just opened the SPRO and OPEC made another 2M bbl/day available and prices didn't flinch. Supply is not really the issues. Second, if it is OPEC propping up prices, does it make sense to beat US corporations over the head about it by using a windfall profits tax? That is like beating your son because you don't like what the neighbor is doing.
Some also say the oil and gas is owned by the government or individuals, and thus it is only right to add this tax to benefit the rest of us. So it is okay to rewrite the contract the government and individuals made with the oil companies that go out and take the risk to explore for, drill for, and produce the product? As we have seen, it apparently is.
What then is there to stop Congress from rewriting any contract or any deal? As the recent Supreme Court ruling re eminent domain shows us, nothing. If it is in the so-called 'public good' we will go ahead and bend the Constitution or local law to fit the good of the many. Welcome to the USSR, comrade. What about those capitalist pigs in the dot com era that sold their companies at that top of the market for sums that in hindsight we see were grossly inflated with respect to actual assets and earnings? Well hell, they ought to give the 'excess' back. It doesn't matter they worked hard, built up the business, had some foresight and good luck to be in the right place at the right time and grabbed the American dream. Let's just void the deal or rewrite it by making them pay investors (via the government of course) the excess above what the government deems the business was really worth.
We have really turned down the wrong path in this country. If someone uses his wits and guile to come up with an idea and get in the right position to make a sack full of money we used to applaud that person. Now we point fingers at him or her and say it is unfair that you should enjoy such excesses while the rest of us struggle; give us a chunk of it you 'rich', uncaring capitalist. Work hard, make things happen and make some money for your family and you are now viewed as not doing your part for America. Well, with fewer at the low end paying taxes and tax revenues higher than EVER, even than under the Clinton boom years, guess who is still paying most of the taxes? We view others' success as something to be bled to pay for 40 years of failed social programs called the Great Society. The writings of those who make it out of poverty detail how they made it out IN SPITE of the social programs that work to keep chains on the underprivileged. We need to listen to them (such as judge Janice Brown from California) as to how to work to make all citizens productive instead of wards of the state. Imagine how economically powerful we would be if we could get those people to be productive entrepreneurs or workers. No one wants underprivileged; we just have to take a different tact than the giveaways and reverse incentives propagated during the past 40 years. Certainly targeting those who are able to enjoy the American dream is not the way.
Now big oil companies are not small enterprise and their hands are not entirely clean. The real crime is the disparate treatment independent station owners are receiving from the company owned stores. They cannot compete because the field is severely skewed in favor of the company owned stores. The problem we have is a big mixed message. We want to be energy independent but we foster policies that promote companies to buy one another to increase reserves versus exploring for reserves. If it is cheaper to buy existing reserves or existing refineries rather than exploring or building, that is what will be done. With the regulation of the energy industry in the US the past 50 years that is the result. It may not be a bad thing; if we want to protect certain areas from exploration then that is our choice. We have to realize the result, however, and act appropriately to achieve the goal that is most important to us.
The key is getting our goals in line with our policies and regulations. As seen with the Great Society, the goals have been thwarted at every turn by policies that promote dependence and reverse incentives as opposed to getting people up on their own two feet. Time to scrap the failed policies and start with programs that promote what has always worked in the US: entrepreneurship, the idea that you can get ahead if you are willing to work hard and take responsibility. That is how the US has always maintained its economic leadership. Again, just imagine how strong we would be if the billions spent on these failed programs went to policies that promoted ownership of homes, businesses, retirement accounts, etc. Get people into productive society instead of paying them to be poor. Novel idea.
THE MARKET
MARKET SENTIMENT
VIX: 12.24; -0.39
VXN: 14.37; +0.02
VXO: 11.62; -0.47
Put/Call Ratio (CBOE): 0.78; +0.05
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: +25.82 points (+1.22%) to close at 2141.22
Volume: 1.846B (+5.94%). Volume remained above average and improved, helping trump the higher volume Wednesday as NASDAQ churned below resistance. Thursday NASDAQ punched through the 50 day EMA as volume rose, a good start to a recovery attempt.
Up Volume: 1.325B (+463M)
Down Volume: 506M (-329M)
A/D and Hi/Lo: Advancers led 1.75 to 1. Not great but definitely not bad breadth.
Previous Session: Decliners led 1.39 to 1
New Highs: 99 (+7)
New Lows: 76 (-7)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
NASDAQ moved back through the 50 day EMA (2137) on rising above average volume as it tries to make reality of a potential double bottom. It is just now trying to rebound to complete the second leg after undercutting the August low (2112). It still has a long way to go to consummate the base (2187) is the 'hump', but it was a decent start as the laggard big cap techs joined in to give the leaders a boost. If they continue to pitch in there is a chance for a breakout. Those stocks will have to overcome their downtrends and otherwise set up and break higher, but with the Thursday follow through session to last Thursdays reversal session, there is a possibility for just that. By follow through we mean a solid, higher volume rally 4 to 7 days after the reversal off the bottom of the selling. That is exactly what has happened. Now we see if it can continue the move with the 50 day SMA (2156) ahead as well as that 'hump' in the pattern at 2187.
SOX (1.5%) led the move higher, moving back through the 50 day EMA (464) and is heading back toward the up trendline at 471. Similar follow through as on NASDAQ, and with SOX helping the techs have some supporting cast members.
SP500/NYSE
Stats: +10.79 points (+0.89%) to close at 1227.68
NYSE Volume: 1.628B (+3.39%). As with NASDAQ, NYSE volume jumped further above average as the NYSE indices posted solid gains. Good accumulation but also some window dressing volume as winners were bought and losers were dumped to spruce up the portfolios.
A/D and Hi/Lo: Advancers led 2.31 to 1. Solid breadth for a change on the upside.
Previous Session: Advancers led 1.05 to 1
New Highs: 186 (+27). Need to see this rocket as the NYSE indices move toward the prior high.
New Lows: 93 (-12)
The Chart: http://www.investmenthouse.com/cd/^gspc.html
Volume was up as SP500 moved through both the 50 day EMA and SMA (1221 and 1226). Those were the immediate impediments to the move and had stalled the index the prior week. Strong move through after holding support at 1210 all week as well. This works as a follow through as well, rallying on the sixth day after the reversal from the selling last Thursday. That sets the stage for a further rally, but we have to see how the index reacts after the month is over and the quarter ending and quarter beginning shuffling is exhausted.
SP600 looked like the smooth leader that it is, bouncing off the 50 day EMA (345) after making a second leg to its double bottom pattern that formed the past 8 weeks and used the April/May up trendline (343) as support on the lows. It has once more assumed its leadership status, having just briefly undercut the 50 day EMA before resuming its move. It still has resistance at 355 (the September high), but this is the index that will lead the rest of the market.
DJ30
The blue chips cleared the 200 day SMA (10,537), stopping at the 50 day SMA (10,556). Volume was lower and still below average as it made the move. All this does is push it into the top half of the range from 10,350 to 10,700. Still a follower at this juncture.
Stats: +79.69 points (+0.76%) to close at 10552.78
Volume: 236M shares Thursday versus 238M shares Wednesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
FRIDAY
Personal income and spending are out for August; that may or may not matter as it was pre-storms. The final Michigan sentiment report is out and so is the Philly Fed; both are more real time sentiment surveys and will give more insight to consumer and business mindsets after the storms and after enduring yet more sustained high energy prices.
Those have the potential of swaying the market, and expectations are not that they are going to show glowing results. Would that offset the quarter end buying? Not likely. Funds are positioning for the Q3 investor reports and they are going to go about that business first and worry about the reports later. The big money funds are what drive the market; when they get their portfolios aligned as they want then they will worry about the buys and sells for the next quarter as they relate to the economic outlook.
It is going to be very interesting to see how the market responds after the follow through session Thursday. Friday won't tell the whole story, however, as there will also be some start of quarter positioning as well. The volume Thursday was no question in part related to this window dressing. As outlined above, the movement of certain big names tells much of that story.
Thus, as noted above, that means we don't go off cocked to buy the entire market. We continue to look for well-positioned stocks ready to break higher from opportune entry points. We are also continuing to watch for this rebound to set up stocks that have rallied weakly back to resistance and are ready to turn back over once this added upside impetus from the quarter end shuffling is over. We got whipsawed by some of this Thursday but from the look of many of these patterns that story is not over.
Support and Resistance
NASDAQ: Closed at 2141.22
Resistance:
2151, the early December closing high and highs from January 2004
The 50 day SMA at 2156
2163, the mid-December closing high
2178 is the January closing high
2187 is the September high.
2191.60, the January intraday high.
2192 is the mid-July high.
2220 is the August high
Support:
The 50 day EMA at 2137
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 2077
S&P 500: Closed at 1227.68
Resistance:
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:
The 50 day SMA at 1226
The 50 day EMA at 1221.63
December 2004 high at 1219 and June high at 1220
1210 is some support.
1200 is some support
The 200 day SMA at 1199.77
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 10,552.78
Resistance:
The 50 day SMA at 10,556
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 200 day SMA at 10,537
The 50 day EMA at 10,523
10,500 is some price point support but could not hold.
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% actual versus 3.3% expected and 3.3% prior
Chain Deflator-Final, Q2 (08:30): 2.6% actual versus 2.4% expected and 2.4% prior
Initial Jobless Claims, 09/24 (08:30): 356K actual versus 420K expected and 435K prior (revised from 432K)
Help-Wanted Index, August (10:00): 35 actual versus 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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