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world stock market, us stock market
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10/03/05 Investment House Daily
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SUMMARY:
- Early, new money rally gets spun around by stronger than expected ISM.
- September ISM reveals some post-storm strength as business sentiment improves.
- Domestic truck sales tumble, WMT sales not that bad, construction in line.
- Bush administration now touting conservation.
- Market still working on base despite sluggish session.
Market starts strong, cannot finish it off.
You have got to be a closer, and that is particularly true in the stock market. That is why we always like to see stocks finishing strong. Any stock can get a few early orders and look impressive, but it is the ability to attract buyers all session long that shows you the kind of demand it takes to drive a stock higher.
Stocks started strong as some new money entered the market to begin the new quarter. Volume was running higher early on as well, giving the move a bit more respectability despite the early hour of trade. Oil was trending lower, and as seen of late, when oil goes one way the stock market tends to go the other. Not entirely true of course because if it did then overall the stock market would not have risen at all this year. It has hardly been a breakout year, but stocks overall have not trended lower as energy prices continue their strong advance.
In any event, oil was not really a factor and stocks were performing well with NASDAQ clearing near resistance and taking on the next level (2163). That is when the September ISM index hit and it was a much stronger 59.4 versus the 52.0 expected. At that point investors forgot about oil and focused on the other Achilles' heel, i.e. the Fed. Strong manufacturing even after Katrina and Rita indicates the perceived continued need for the Fed to clamp down on rates and money supply. So oil may not have been a factor Monday, but the Fed certainly came to the fore.
Stocks moved lower, giving up most of the gains, and then traded laterally into the close. Oh, they also faded in the last hour to finish near session lows. Bonds were selling, driving up yields and pricing in a Fed funds rate of 4.25% and starting to work on another 25BP hike to bring it to 4.5%. Greenspan moved the February meeting to January 31, his last day on the FOMC. He likely did that to add one more rate hike as a result of the Katrina and Rita shortages and to take the heat off of his successor having to start his career with a rate hike. It was Greenspan's first act as FOMC chairman to raise rates and bring about the 1987 crash. He has only in the past 5 years or so removed that collar and became the 'maestro;' he doesn't want the next chairman to wear that collar as well.
The Fed has allowed money flow to rise over the past 13 weeks, and money flow is the lifeblood of the economy and thus the market. The Fed is raising rates and likely to go to 4.5%. At the same time it is softening the blow with rising money supply. It is a dangerous game with the Fed having to worry about inflation with shortages after the storms.
Even with the worry over the Fed and the lower close, there continued to be stocks moving higher on solid trade just as they have done during most of the recent market base-building action. Further, it was not just the energy sector that enjoyed the gains. No broad move as breadth was weak, and it was not a strong move as volume was so-so. It was more of the base building action, however, that has yielded solid buys and gains. The session itself was nothing special to the upside, but there were good individual moves. Nothing new there as this market continues its attempt to set up and deliver the next breakout move heading into year end.
THE ECONOMY
September ISM shows optimism picking up in the manufacturing sector.
The 59.4 reading (52.0 expected and 53.6 prior) after the weak Philly September report showed what a difference timing makes. The Philly report was shortly after Katrina and the sentiment was gloomy. Now that some time ahs passed and the manufacturing sector has a better handle on the damage, sentiment is better. It does not mean no damage was done, but it does mean that a massive slowdown has not occurred and indeed there is already a pickup in activity based upon the recovery efforts.
New orders jumped to 63.8 from 56.4. Employment moved higher to 53.1 from 52.6; that means it was still expanding though at a relative slow rate. Backorders rose to 55% from 51%. Those are all positives. Of course prices rose as well, surging to 78 from 63 as energy prices exploded post-storm.
Even with the higher energy prices, however, optimism not only was undamaged, it improved. The ISM and regional manufacturing reports are basically sentiment surveys where the purchasing managers try to gauge demand, etc. Their own outlooks thus play a large role. The time lapse between Katrina and Rita has definitely helped that outlook.
Is it thus illusory as it is mostly based upon sentiment? No. If purchasing managers feel better about business conditions they will more readily make the necessary expenditures to facilitate meeting the demand they foresee. Thus somewhat different from consumer sentiment, business sentiment is much more germane in gauging actual business expenditures to come. Therefore the Monday report was a good sign for continued business spending.
Domestic truck sales and Wal-Mart.
Incentives started to run dry on domestic auto sales in September. True to form domestic sales tumbled for GM (-24%) and F (-19%). DCX managed a 4% gain. What was the difference? GM and F rely heavily on their truck and SUV sales to boost profits. Those sales have swan dived in response to the rising energy costs post-Katrina and Rita. They were already faltering, and that spurt in energy prices coupled with the cessation of incentives drove a stake into the sales.
Despite this dismal showing GM and F posted gains (pathetic gains, but gains nonetheless) on the session. In short, the plunge in September sales was anticipated.
What was not anticipated was a 3.8% sales showing from WMT for September. It did not blow out the top of the range (indeterminately stuck at that 2% to 4% level), but it was much better than expected. Here is what is going on. WMT was worried that its sales would drop because its customers are forced to pay more for gasoline and thus cut back on their purchases of other items. First, WMT sells a lot of gas now through its WMT and Sam's Club stores. WMT customers tend to buy gas where they shop. It was $2.56/gallon last week where it was $2.78 elsewhere. I filled up at WMT. In short, WMT is selling a lot of gas and while margins may not be great, it is not losing those sales to other gas stations. Second, WMT is underestimating the shift that occurs when the economy starts to slow. More people switch to value shopping. Those not regular shoppers start buying at WMT to make the dollar go farther, particularly with respect to staples. Call it the recession shift or whatever you want, it is a phenomena that has evolved the past 7 or so years. Thus while WMT may not have expected it, the results are not that surprising.
Bush administration: time to don the sweaters and conserve.
Man, the similarities to the Carter administration are growing with sickening speed. Hints of stagflation coming down the road with induced fuel shortages is just one similarity (though still far from becoming reality). The latest is the call to conserve energy. This, of course, from an administration that stated conservation was not a viable method of meeting energy needs.
Of course this is intended as a short term fix to the problem. Once the severe problems are over one assumes it will be pump as usual and burn fuel as if there is no tomorrow. I cannot agree with that; we should all take advantage of what is out there to conserve such as solar battery chargers, geothermal HVAC systems, etc. It is clear that with our size economy, however, that you cannot conserve your way to prosperity. Conservation is part of an overall plan, but it is not the answer as some would have you believe. You can cut back to a certain extent, but then there is an economic price to pay.
The Sierra Club was scoffing at the call to conserve, calling it too little and too late. I guess there is only a certain window of opportunity you have to effectively conserve. Listening to the S Club debate the issue today you realize it has something of an 'at any cost' attitude toward environmental issues. We recall the debate over oil spills and how best to prevent them. The S Club wanted double hulls, extensive regulation, extensive licensing, etc. for US flagged ships and US companies shipping oil. What happened when parts of these regulations were implemented is that we started to see the most ramshackle vessels carrying millions and millions of barrels of oil past our sensitive reefs and beaches. Not exactly the outcome the S Club had in mind, but that is what happens when you regulate to the 'nth' degree: you drive out the reputable transporters that have the better vessels and the means to pay for a disaster if one occurs. That is a basic of economic law: too much regulation and you drive out those that are legitimately in the game for a profit and act responsibly.
The S Club also complained that the US has just 5% of the world population but burns 25% of its energy. Yes, but we also account for 25% of the world economic output. What does that mean? We are massively efficient generators of economic output and have a high standard of living. Indeed, without our massive economic output the world would be much, much worse off with weaker foreign economies (no big US to buy their goods) and much less US largesse to go around as giveaways in times of disaster (the tsunami) or just in our general billions and billions of dollars in hand outs each year.
The more moderate argument points to the need to fully enact the provisions of the energy bill that provide for incentives to buy hybrid autos, to use alternative methods or more efficient methods to conserve (solar, more efficient appliances, HVAC systems). Incentives are the key to any program. As a part of our spending, energy costs are still very small compared to Europe and other countries. Riots in Indonesia over fuel prices are common lately because fuel makes up a much greater percentage of their incomes. Thus we don't "feel their pain" as much as President Clinton perhaps would.
That means we really do need incentives to conserve. If you want more efficient vehicles sold then give a tax credit to buy one. Same with appliances and heating/cooling systems. The cost of a new vehicle or system versus the cost savings in energy is often not enough to make a consumer act. Throw in a tax credit and you will get action because it costs you money in taxes and extra fuel. Get a credit and enjoy lower cost fuel or pay your same high taxes and higher energy costs as well? It does not take much smarts to make that choice. Even John Travolta's character in 'Urban Cowboy' (Bud) could figure that one out (after all, he has 'smarts real good').
The point: a call to conservation is nice to hear but is about as effective as Alan Greenspan's 'WIN' buttons from back in the mid-seventies. Besides, who looks good in cardigan sweater anyway? If the government wants real, meaningful, 'make a difference' conservation it needs to back it up with incentives to conserve other than just saying it is the right thing to do. Heck, it is the right thing to do to give blood once a month, but how many actually do that? It is the right thing to crush your cans and plastic bottles before throwing then in the recycle bin, but again how many do it (for that matter, how many even recycle?)? We need to provide the incentive to act, not just a Colonel Henry Blake (from the series 'M*A*S*H') "and that's an order. Please?'
THE MARKET
MARKET SENTIMENT
VIX: 12.46; +0.54
VXN: 13.97; +0.66
VXO: 11.63; -0.06
Put/Call Ratio (CBOE): 0.91; +0.08
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: +3.74 points (+0.17%) to close at 2155.43
Volume: 1.873B (+9.96%). Solid volume session as NASDAQ posted a modest gain. Some start of quarter buying, but it would have been more convincing if NASDAQ held most of the gains.
Up Volume: 1.043B (-145M)
Down Volume: 786M (+296M)
A/D and Hi/Lo: Advancers led 1.14 to 1. Very weak breadth on a mediocre upside gain.
Previous Session: Advancers led 1.5 to 1
New Highs: 161 (+31)
New Lows: 42 (-16)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
NASDAQ surged early, moving through the 50 day EMA (2154) on the high but then barely hanging on to that level on the close. Rising volume looked good until most of the move was given back. Something of a tombstone doji after the Thursday and Friday move higher; that can indicate a pullback of some sort is coming. Coupled with the higher volume that gives the signal a bit more strength, but we are not reading much into it. The start of the quarter has still to play out, and a bit of weakness after moving through the 50 day EMA (2138) last week would be normal. Looking for NASDAQ to continue some sort of test higher to the early September high (2186) and then a pullback or rest period to shake out some more sellers and set a breakout attempt toward the end of October.
SOX was in the lead again, rallying easily over 1%, but it got caught in the pullback as well and ended up just gaining 0.6%. The upside move took it to 483, just below the early September highs. Don't like the way it came right back so fast, but still in decent shape here as it tries to lead the market higher and through the September high (485.60).
SP500/NYSE
Stats: -2.11 points (-0.17%) to close at 1226.7
NYSE Volume: 1.546B (+0.27%). Volume edged higher as the large caps posted a small lose while small and mid-caps posted a decent gain. Not a whole lot to take from this, but we recognize that SP400 and SP600 are market leaders at this point and focus more on their positive action.
A/D and Hi/Lo: Advancers led 1.25 to 1. As with NASDAQ, very weak action.
Previous Session: Advancers led 1.6 to 1
New Highs: 230 (+19). Getting there but a long way to go. Want to see it over 400 when the NYSE indices near that former high. New highs failed the index on the July move higher.
New Lows: 57 (+4)
The Chart: http://www.investmenthouse.com/cd/^gspc.html
SP500 rallied well early, rising to 1233 on the session high before it topped out and gave the move back. Managed to hold the 50 day SMA (1226) on the close, moving laterally over that support on slightly higher (indeed basically negligible) volume. Once more it found resistance at 1229, at least on a closing basis. A bit early to start walking laterally to form a handle; it needs some more upside. The doji on the candlestick chart is not the best indication, but we are not reading too much into that as it just made the bounce higher.
Small cap SP600 posted a solid 0.5% gain (SP400 a 0.6% gain) as the smaller caps once more led the market. They are fast approaching the early September high (354.67) where we anticipate some sort of consolidation to take place, likely the formation of a handle to its 8 week double bottom base. That could last to mid-October and provide a good shakeout to lead into a breakout that steers the rest of the market higher.
DJ30
DJ40 rallied to 10,600 resistance and then gave all of the move back and more, barely managing to hold near the 200 day SMA (10,536) on the close. Volume moved higher but was still below average, so no real damage done. Of course DJ30 is still mired right in the middle of its trading range between 10,350 and 10,700.
Stats: -33.22 points (-0.31%) to close at 10535.48
Volume: 239M shares Monday versus 222M shares Friday.
The chart: http://www.investmenthouse.com/cd/^dji.html
TUESDAY
Economic reporting slows the pace Tuesday with factory orders out at 10ET; they are expected to snap back sharply from a 1.5% loss in August. That may add more fuel to the Fed fires if that is the case, but the market is building in that third rate hike. It already has a good idea it is coming based on the Fed funds futures contract. As you can see, the stars of the continuing show will be the Fed and energy, trading off as the market continually tries to find out what ails it.
That is a bit strong. As discussed over the weekend, the market has not surged dramatically this year by any stretch, but it also has not faded away in the face of a second year of Fed rate hikes (calendar year) and sustained higher oil prices. Either one of those could go too far and deliver the death blow to the economy, but thus far they have not. Indeed, with the continual drumbeat that prices can only go higher one has to start thinking the contrary is likely to occur. Of course, as we said last year, that likely means the US economy goes down as well, not the type of resolution you want to see.
The market will also get a head start on any end to the Fed rate hiking campaign. As we have seen in other years of Fed hiking that did not result in a recession (and there are damn few of those), the market sniffs out the end before it gets here and starts higher. That gives us some inclination that we are going to get a breakout at some point in October after a bit more wandering and hand-wringing.
Now earlier we talked about the Greenspan moving the early 2006 meeting up to January 31 in order to make another rate hike, presumptively the last one in the series. Of course we know nothing as to his successor yet. What if it is an inflation hawk that is perceived as continuing the rate hikes even after Greenspan rides off in his limousine? Then the economy will likely get tossed into recession with the market crashing ahead of time, maybe on the announcement. It is not likely, however, that Bush will nominate a hawk. You would hope not, but you never know what is going to come out of this White House where strategy seems to be akin to a sandlot football team drawing plays in the sand while using sticks and bottle caps players. How else can you explain the botched handling of the Supreme Court nominees? Roberts was going to be a shoe in replacement for a perceived moderate. Then Bush could appoint a more conservative to replace Rehnquist. Now he has put a perceived moderate into a conservative's slot and will be forced to put a person left of Roberts to fill the O'Connor slot. Or, as seen today, he can nominate a complete unknown and piss off both left and right extremes. Another example of compassionate conservatism. Oh yes, and conserve some energy while you ponder his moves.
The small and mid-caps rallied toward their prior highs while SOX tapped at its high and backed off. Those are the leaders and we are thus looking for direction from them. With those moves they may be ready to set up their consolidations already. They have enjoyed three strong up sessions to get to this point. Last time NASDAQ and SP500 came close we were looking for a move through resistance and then a test. They avoided the Christmas rush and sold off ahead of time. With these leaders, however, we could see a move through those highs and then a test; that is a much stronger position.
During that test things could get a bit wild. October is known for its wild swings that work to set a bottom. As the small, mid-cap and semiconductor indices make their tests we could see the lagging SP500 and NASDAQ get a bit wild, not to mention the leading indices. That is the sauce that makes the stew for the end of year rally.
Overall the market continues to base, and as always we are going to continue looking for stocks moving well from solid entry points. Those are the leaders that will continue to make the wake for the market, and when the market breaks out they will have the head start and run the hardest as they typically do.
Support and Resistance
NASDAQ: Closed at 2155.43
Resistance:
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:
2151, the early December closing high and highs from January 2004
The 50 day EMA at 2138
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 1226.70
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 1221.80
December 2004 high at 1219 and June high at 1220
1210 is some support.
1200 is solid price support
The 200 day SMA at 1200
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 10,535.48
Resistance:
The 50 day SMA at 10,552
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 10,536
The 50 day EMA at 10,526
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
Construction Spending, August (10:00): 0.4% actual versus 0.4% expected and 0.3% prior
ISM Index, September (10:00): 59.4 actual versus 52.0 expected and 53.6 prior
October 04
Factory Orders, August (10:00): 2.0% expected and -1.9 prior
October 05
ISM Services, September (10:00): 60.0 expected and 65.0 prior
October 06
Initial Jobless Claims, 10/01 (08:30): 350K expected and 356K prior
October 07
Non-farm Payrolls, September (08:30): -150K expected and 169K prior
Unemployment Rate, September (08:30): 5.1% 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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