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us stock market, understanding the stock market
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10/01/05 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Target hit alerts: GLBL; REDF
Buy alerts: TLWT; JOYG; BOOM
Trailing stops: None issued
Stop alerts: MNTA; GIS; SBUX
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SUMMARY:
- Semiconductors surge, lead market higher to end quarter.
- 2004 and 2005 market action holds many similarities.
- Michigan sentiment, Chicago PMI decent, avoid worst expectations.
- August personal spending shows largest decline since September 2001.
- Yields rising, but yield curve is flattening again all the same.
- New money set to go to work this week as indices try to build on Thursday follow through and continue basing.
NASDAQ and SP500 joust with resistance, close higher for the quarter.
Stocks rallied once more Friday, continuing the Thursday surge that pushed them through near resistance. It was another back and forth session. SP500 and NASDAQ rallied to next resistance and faded back toward session lows. They rallied again in the afternoon, making it right back to that resistance. They again faded. A rebound in the last ten minutes closed them at the sessions highs. SOX and the mid-cap SP400 led the way (1.9%, 0.7%) with the other indices notching a 0.5% gain or less.
Volume was lower as stocks continued their advance, but it still managed an above average volume session on both NASDAQ and NYSE. Breadth was roughly 3:2; solid and matching the session but not the strong broad move of Thursday. In sum it was a solid session though not a great session. After the Thursday move a continuation of the rebound is about all you can ask for to end the week and the quarter.
Indeed, part of the continued strength is attributable to the quarter end swapping of stocks. Leaders such as AAPL, SNDK and ENER added to already strong moves as they were bought to bolster the front line of funds for the Q3 reporting cycle. There are those that say window dressing does not occur based on their discussions with fund managers. That is similar to asking a criminal if he did the crime; as they said in 'Shawshank Redemption,' everyone in the joint was innocent. Of course if you talk to the fund managers on the record of course they are going to say it doesn't happen. Talk with those handling the orders before and after the quarter ends and you will hear a different story. Look a the action in key stocks at the end of a quarter and you will see the different story.
Whatever the reason, the Friday move left the indices in good shape heading into the start of Q4. They rallied well to end Q3, turning a weakening position into a solid advance and follow through that continues the work of building the bases that started after the early August peak. The late week move was not a breakout; the indices are still in the process of working through their bases. It was a suggestion that accumulation started anew after the distribution the past three weeks, and that bodes well for the base building. The caveat is the end of quarter stock swapping played a role in pushing up the volume as the market rallied. There is always some additional buying pressure to start a quarter as new money is put to work. After that is over we will get a better gauge of the strength of this week's move.
Despite the additional burdens on 2005 market, it is shaping up very similar to 2004.
Both years had to deal with the Federal Reserve on a rate hiking campaign. Throughout history, rate hike sprees have the effect of stymieing a market advance. A year of rate hikes in 1984 and again in 1994 pushed the stock market into year long lateral moves. When the Fed said it was done the market started back up. The only real issue is whether the Fed goes too far and stalls out the economy as it has done in 8 of the last 10 rate hike campaigns.
As we noted in Q4 of 2004, the market had moved laterally for three quarters, consolidating the strong 2003 gain that took stocks off of their bear market lows. The lateral move was a good base, and the fact that the Fed hiked rates simply ensured the market would continue to consolidate. In Q4 of that year we speculated that the Fed might be finished with its rate hikes, and we saw the market surge into year end, posting all of the market's gains for 2004 in just over two months. When the Fed came out and made it clear it was not through hiking rates stocks went into a 4 month slide.
That slide took stocks right into yet another base that lasted through July until stocks broke out. After a one month rally they have slipped into another base as the market confronts high energy prices, horrific storms, and yes, continued Fed rate hiking in the face of threatened inflation due to shortages caused in part by the storms.
When you put the two charts side by side the resemblance is rather striking. What is even more striking is that the market has managed to break out and move higher not only in the face of continued and indeterminate Fed rate hikes, but also long-term high energy prices. As you recall, these were the two bugaboos for the 2005 market we cited to start the year. While the market has not surged, it has made headway. That is remarkable. Simply holding onto the 2004 gains would have been remarkable given Fed rate hikes and a doubling in gasoline prices and natural gas prices. Conventional wisdom would conclude those two events would undo the market.
They may still do just that. The Fed is not finished raising rates as it has flatly told us the past week. But that does not necessarily undermine a rally based on whether the Fed is almost done. The Fed funds futures contract has priced in two more 25BP rate hikes that would take the Fed funds rate to 4.25%. That is baked into the cake and the market is making its moves with that scenario a given. Thus the issue now is whether the market is anticipating the end of Fed hikes at 4.25% or if it is just setting itself up for disappointment. The Fed can say it is not done, being perfectly honest about it, and the market could still be right about the Fed being nearly done.
Again, the issue for the market is how close is the Fed to being finished. The market is once more setting up a breakout from its current 8 week base in anticipation of rate hikes ending in the neighborhood of 4.25%. It apparently is also anticipating oil to top out at some point, perhaps already. Oil ran to $70/bbl on the Katrina aftermath and with Rita it did not run hardly at all. Now more data is coming out about Rita's impact on oil facilities being more severe that Katrina, but thus far even that information has not driven oil back toward $70.
As we have always said, the market is the best at sniffing out tops and bottoms, and thus we should follow its lead. It ended last week with a showing of unexpected strength even as it continued its basing process. It still has work to do before it can deliver a breakout, but it is doing what it needs to do to set up the next leg higher. Thus near term it still has its work cut out for it as it works through its base; longer term it is setting up for its next move higher despite the Fed and higher energy prices.
THE ECONOMY
Michigan sentiment below expectations but does not crash.
The final Michigan consumer sentiment report for September was lower than expectations (76.9 versus 78.0 expected), but the bottom did not drop out as the whispers feared. Thus the preliminary number actually held up; that is about the only time we are aware of where that has happened. Expectations and current conditions were both lower and contributed to the decline.
This is not an epitaph for the economy. Sentiment has to hit lower levels in the fifties, maybe the mid to lower sixties, i.e. more extreme levels, to send consumption to levels that result in recession. On the other side of the coin the trend is heading down toward that level, and if gasoline prices remain high and natural gas prices wallop consumers in the winter (now more than twice as high as last winter), the trend is not going to get better.
The key with all sentiment is consumer worries about jobs. Expectations is lagging current conditions (63.3 versus 98.1), and expectations partly factor in job concerns. This may be a short term blip as consumers obsess over the impact of two back to back storms on the Gulf coast. When the rebuilding efforts being in earnest, the consumer may see the jobs created as a real boon to the future and lift expectations right back up.
Chicago PMI returns to expansion with a large jump.
The September Philly Fed report earlier in the week was a gut punch, particularly on the already weak Chicago report from August. In August (pre-storms) Chicago manufacturing sentiment fell to 49.2, indicating that manufacturing in the Midwest started to contract. After the twin storms, however, the Midwest jumped back to expansion in a big way with a 60.5 reading (52.0 expected). New orders were the leading sub-index, exploding from 46.5 to 63.4.
We have to remember that these regional surveys are basically sentiment surveys on the business side. They do not measure hard numbers but represent what purchasing managers believe are the current conditions in a region. That means a lot of emotion goes into the numbers along with their interpretation of what they are seeing. Thus they are prone to swings when big events hit just as the consumer sentiment reports. That is why we think the Philly report early last week was so low; it was taken in the immediate aftermath of the storms and that had the region nervous about what the future held. The Chicago report saw the massive response to Katrina after a slow start, heard the talk of a massive rebuild, and concluded that things were going to be pretty good.
Personal spending dives lower.
It was pre-Katrina and pre-Rita, and it was low. The official number was 0.5%. Adjusted for inflation the drop was 1%, and that made it the largest drop since the 1% slump in September 2001 (and that was the largest drop since January 1987). Katrina hit on August 29; with the lead in to the actual landfall and the three days left to the end of the month, Katrina did have an impact on what was spent. Indeed, a lot of rental income and associated tourist buying was lost as the tourists obviously cleared out all along the Gulf coast. Thus it is somewhat inaccurate to say the drop was totally unrelated to the first storm.
Income was lower as well, dropping 0.1% versus the 0.3% gain anticipated. That is officially attributable directly to the storm as those rentals and tourist dollars were lost (to the tune of an estimated $100 million). Thus the income drop was not a major, entrenched problem. Indeed it did help raise the savings rate to -0.7% from -1.1%.
Ah the savings rate. Greenspan and others rail about how the US saves nothing and how that is going to really hurt us. This is all doubletalk and semantics. We don't save in savings accounts because until the past few weeks rates were so low we put money elsewhere. And despite the market bust in 2000 and the resulting losses, US citizens still view the equities market, the debt market, the metals market, the housing market, etc. as stores of wealth, i.e. places to 'save.' We have an arcane view of investing as not saving. We are simply much more sophisticated now than in the past with how we manage our money. We have vastly more wealth than in the past; it is absurd to say that we are not saving simply because we put that wealth into vehicles other than savings accounts.
Indeed, that is the idiocy of some of Greenspan's laments. He testifies before Congress about needing incentives to invest in the capital resources that will produce the income to support the entitlement programs and enhance our standard of living given an aging baby boom generation. At the same time he berates the US citizen for not saving. Well, investing in the stock market and other financial markets is indeed putting money into the capital investments as Greenspan says we need. It is also how we chose to 'save.' There is nothing wrong with our savings rate. We work, we invent, we create, we save, we consume. We are pretty remarkable despite what the maestro and overly paternalistic members of Congress say and think.
Bond yield curve starts to flatten once more.
The 10 year note has fallen and the yield has risen the past week, the 10 year yield hitting 4.33% by the end of the week. Greenspan has wanted long term yields to rise and they are. Problem is, so are short term rates. The curve was flat but started to slope in a positive manner the past month. The past week the short end has risen faster than the long end. The 2 year note is now at 4.17%. The spread between the 10 and 2 year note is currently 16 basis points. It had stretched to near 30 BP over the past month but now it is returning close to the 10 BP it saw in the summer when the bond market felt the Fed and other issues confronting the equities market would stall the economy.
The recent action in the bond market shows a return to the concerns about the Fed being able to control inflation and simultaneously avoiding its propensity to choke the economy to death. The bond market is voting it has little confidence the Fed can pull it off. Nothing new there, but this is something we must keep an eye on as the market tries to move forward and put together the next breakout.
THE MARKET
MARKET SENTIMENT
VIX: 11.92; -0.32
VXN: 13.31; -1.06
VXO: 11.69; +0.07
Put/Call Ratio (CBOE): 0.83; +0.05
Bulls versus Bears:
Bulls and bears started heading in the right direction, finally, after three weeks of selling. Of course the late week bounce will probably bring out the bulls and squelch the bears once again.
Bulls: 53.2%. Bulls faded after three weeks of gains (down from 54.3%). It never reached the 55% level considered bearish. Bottomed in May at 43.5%.
Bears: 26.6%. Starting back up after a week off at 25.5%. Easily held above the 20% level that is considered bearish. Hit a high for the year at 30% in early May.
NASDAQ
Stats: +10.47 points (+0.49%) to close at 2151.69
Volume: 1.704B (-7.73%). Volume faded Friday as NASDAQ continued to move higher. Still above average and not a major drop off. Not bad for Friday and again, a decent continuation of solid volume on the heels of the Thursday rebound and follow through.
Up Volume: 1.188B (-137M)
Down Volume: 490M (-16M)
A/D and Hi/Lo: Advancers led 1.5 to 1. Pretty modest breadth after a so-so showing Thursday on that strong move. Would like to see more strength on the move higher from an internal standpoint and not just volume.
Previous Session: Advancers led 1.75 to 1
New Highs: 130 (+31)
New Lows: 58 (-18)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
NASDAQ continued higher, twice tapping at next resistance at 2151, managing to hold right at the level on the close. It still has to clear the 50 day SMA (2155) as a next step, part of the recovery process that will have to take it past the early September high at 2187 (the 'hump' in the potential double bottom pattern). It is coming back from a weak position; we will see this week how much the rebound has taken out of it. Good recovery but still has a lot of work to do.
SOX surged (1.9%), leading the market higher. A heck of a recovery, recapturing the up trendline (473) after testing lower to tap the top of the trading range it broke out of in early July. Not likely that it will be able to break through the August and September highs (486.34, 485.60) on this move, but it is keeping up its basing process nicely and leading the market as well.
SP500/NYSE
Stats: +1.13 points (+0.09%) to close at 1228.81
NYSE Volume: 1.542B (-5.3%). Lower volume as well on NYSE though still above average as the gains ranged from modest on SP500 to solid on SP400. No doubt some of the volume Thursday was related to position swapping to end the quarter, but it also accompanied a solid move to reverse some of the recent fortunes.
A/D and Hi/Lo: Advancers led 1.6 to 1. Breadth was so-so, helped by the mid-caps that led the NYSE indices higher. Strong breadth Thursday, just what you want to see when an index makes a break higher.
Previous Session: Advancers led 2.31 to 1
New Highs: 211 (+25)
New Lows: 53 (-40)
The Chart: http://www.investmenthouse.com/cd/^gspc.html
SP500 added a modest gain on lower though slightly above average volume. It was unable to clear some resistance at 1229 at the March high. Trying to set up its own double bottom base, but for now just making the break above the 50 day EMA on strong volume is a solid step. Made a higher low holding support at 1210 the past week, followed by the stronger volume follow through Thursday. That keeps it in the game of building toward the next breakout.
SP600 added a modest gain of its own, continuing the break off of the 50 day EMA (345) on Thursday. Much stronger pattern than the large caps but it too still has work to do. It remains below the early September high at 355 that marks the midpoint of its double bottom it is trying to set up. A rally to that point and it will likely slide laterally to consolidate more before attempting the breakout to a new all-time high. That is down the road. For now it is doing what it has to do and is shaping up quite well.
It would be remiss not to mention SP400, the mid-cap index, leading the NYSE indices with a 0.7% gain. It cleared the 50 day EMA, and at 716 it is closing in on the September high at 720. Never got into trouble on this consolidation and is just about finished forming its double bottom base.
DJ30
DJ30 moved a bit higher but volume was lower and continued below average as the blue chips moved up slightly in their range between 10,350 and 10,700. The Dow gets a lot of press, but it is hardly where the action is in the market right now. It is mired in its trading range, following the rest of the market.
Stats: +15.92 points (+0.15%) to close at 10568.7
Volume: 222M shares Friday versus 236M shares Thursday.
The chart: http://www.investmenthouse.com/cd/^dji.html
MONDAY
The fourth quarter starts Monday and we expect to see some additional action related to portfolio shuffling, this time going to stocks the funds think will provide the gains during Q4. Last week it was buying and selling to make the portfolio look pretty and this week it will be to actually try and position for gains.
That will likely push stocks again on Monday. After that things might slow down some as the indices cleared some important resistance and need a breather, but the combination of funds looking for winners, new money, and a slowdown after the start of the week simply means we look for the leaders that are set to make the next move. As we have seen all during this base, the leaders hold up the best and then make the best moves. Thus we are going to stock with what works, dance with who brung us, etc., particularly as the market is still in the basing mode with quite a bit more work ahead of it.
Support and Resistance
NASDAQ: Closed at 2151.69
Resistance:
2151, the early December closing high and highs from January 2004
The 50 day SMA at 2155
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 1228.81
Resistance:
March 2005 closing high at 1225 and intraday high at 1229.11
The September high at 1243
The April/July up trendline at 1245
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 1221.59
December 2004 high at 1219 and June high at 1220
1210 is some support.
1200 is some support
The 200 day SMA at 1199.89
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 10,568.79
Resistance:
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 April high at 10,557
The 50 day SMA at 10,555
The 200 day SMA at 10,537
The 50 day EMA at 10,525
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.
October 03
Auto Sales, September: 5.3M expected and 5.6M prior
Truck Sales, September: 7.5M expected and 7.8M prior
Construction Spending, August (10:00): 0.4% expected and 0.0% prior
ISM Index, September (10:00): 52.0 expected and 53.6 prior
October 04
Factory Orders, August (10:00): 1.2% expected and -1.9 prior
October 05
ISM Services, September (10:00): 59.7 expected and 65.0 prior
October 06
Initial Jobless Claims, 10/01 (08:30): 400K expected and 356K prior
October 07
Non-farm Payrolls, September (08:30): -172K expected and 169K prior
Unemployment Rate, September (08:30): 5.0% expected and 4.9% prior
Hourly Earnings, September (08:30): 0.2% expected and 0.1% prior
Average Workweek, September (08:30): 33.7 expected and 33.7 prior
Wholesale Inventories, August (10:00): 0.4% expected and -0.1% prior
Consumer Credit, August (15:00): $5.0B expected and $4.4B prior
End part 1 of 3
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us stock market
understanding the stock market
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