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trading system, money investment
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10/04/05 Investment House Daily
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SUMMARY:
- Market rallies on diving oil, but Fed comments usher in a volume reversal.
- Dallas Fed president Fisher steals the show again, this time sparking selling.
- August factory orders strong, but that seems ages ago.
- Chain store sales hanging in there.
- Market set to struggle near term again as it tries to right the SP500.
Another decent start gets scuttled.
Stocks started modestly, managing to overlook LXK's Q3 warning and subsequent 30% plunge and put together a decent move through lunch. Volume was rallying and leaders were making their moves. There are more warnings to come in the aftermath of Katrina and Rita (what a perfect excuse to cover up for other management shortcomings), but with oil plunging $2/bbl stocks had an opening and they were taking it. NASDAQ moved through near resistance at 2163 as technology, chips, small caps, and mid-caps were leading. That is how the market has moved upside over the past two years; when those are leading the market performs.
Energy stocks were tanking on the 'big' drop in oil, and it did not hurt that natural gas was falling as well. Homebuilders were also struggling as there were stories about softness in the high end of the NYC housing market. Technology fed off the weakness in energy with NASDAQ jumping and rallying over 12 points with the opening provided by those weaker energy prices.
As noted the leaders were making solid moves on volume, paving the way for the market to follow. BRCM, MRVL, FLSH, IRIS, FIX, CYTC, HYSL, JOYG, etc. were moving well when Dallas Fed president Fisher, a.k.a. 'late inning' Fischer commented that most of the liquidity in the financial markets was removed ahead of Katrina (many of these kept on moving after the comments). That sounds pretty good, but the market took it poorly and straight down all afternoon in a classic dive lower, fading each time it rebounded to test the 10 minute moving average.
Volume remained strong and even picked up the pace as the selling accelerated. SP500 sliced through the 50 day EMA on that rising volume, nearly giving back the solid Thursday rally. SP500 may have tried to start a handle at the 50 day SMA, but that imploded quickly with the Tuesday dump lower. NASDAQ, SP600, SOX and SP400 all managed to hold above their 50 day EMA, keeping their base building efforts in the top half of their two month ranges alive. NASDAQ is holding, but it is hanging on at that level, it too selling on strong volume. It needs to hold to keep the base building effort shorter as it and the smaller caps and semiconductors are once more pressed into service as the leaders given they are the only indices in position to do just that.
One thing is clear from the Monday action: the market was not ready to yield a breakout. It was in the process of carving out a nice move when it turned and ran when adversity showed up. It has been battling the Fed and energy prices all along and the market even overlooked LXK's warning (and the possibility of more to come). When the Fed specter was raised in a different light Tuesday, however, the market did not have the stomach for it. It retreated to stew about the Fed's role a bit more.
This was not the scare we alluded to in the Monday report, i.e. where October will bring about some downside tests to shake out more sellers. This was a turn around tail kicking, an indication that stocks were not ready to continue higher at this juncture.
THE ECONOMY
Fisher sets the market off again, this time to the downside.
A few months back Dallas Fed president Fisher sparked a rally when he opined on CNBC that the Fed was in the late innings of its rate hiking game. That was debunked by the Fed overall and as we have seen, stocks have again come under pressure as they ponder the number of Fed moves and money supply levels in addition to the impact of these continued higher energy prices. As noted above, Tuesday Fisher was commenting again, and this time the market took the news hard.
The Fed has indicated that Katrina and Rita are causing shortages, but Fischer says the liquidity that could produce inflation effects is not there because the Fed had already removed it form the system before the first storm hit. As noted, that appears a friendly statement given the fear that the post-storm shortages could lead to inflation if there was any excess liquidity in the economy. No liquidity, thus no inflation pressures even though shortages crop up. Kind of like no brain, no headache.
Then he said that inflation was at the high end of what the Fed views as the tolerable range. In context of the other statement this seems pretty good as well: liquidity that could cause inflation is gone and inflation pressures are still in the tolerable range. That is one 'glass half full' view.
The market did not take it that way. It was obviously ready to view all Fed news short of an express interest rate armistice as half empty. Instead it read the comment as showing inflation that was ready to get out of hand: the liquidity was gone but inflation was still pushing the upper edge of comfort. If that is the case, the Fed has little power here and if inflation pressures continue then there is a threat of stagflation. The market also knows that if they Fed fears inflation it will raise rates regardless of the perceived liquidity. That is the Fed's Pavlov-like response to inflation: raise rates.
At the same time, however, we note again as we did Monday night that money supply has improved the past three months. Thus does the Fed think that too much liquidity was drained off ahead of Katrina and now it is pumping it back up? That is contra to a fear of inflation. If the Fed feared inflation from shortages it would not let money supply rise one nickel. Mixed signals, but that is nothing new from the Fed despite the supposed transparency. We know who is on the FOMC, we get to view the minutes, we get the statements after the meetings, and we get a lot of speeches, all of which shed little light on where the Fed is going. You can call that transparent but the most important issues are still well-guarded. The one thing that is certain: the Fed funds futures contract shows 50 BP more in hikes and is starting to price in another 25BP. That is the surest method for gauging Fed action, but it is a long way out and its accuracy grows as the meeting draws near.
August factory orders post strong gain.
The 2.5% gain was much stronger than the 2% expected and swamped the -2.5% showing in July (revised down from 1.9%). Durable goods orders, goods lasting 3 years or more, rose 3.4% while non-durables rose 1.6%. Excluding transportation durable goods rose 4.2%. Manufacturing orders rose 2.7%, the largest increase since May 2004's 7.3% jump. The business side (non-defense capital goods orders rose 3.1% following July's 3.9% drop. The inventory to sales ratio fell to 1.18 months, the lowest level since December 2004.
This was the third rise in four months for factory orders. It was pre-storms so we have to see just how it holds up afterwards, but it shows a continued robust recovery after an early year slump in the economy. The inventories are something to note, and you can bet the Fed is watching all things to do with inventories. The low inventory to sales ratio points to some potential shortages that could cause inflation. Of course if the excess liquidity is gone the risk is reduced. You can be, however, that the Fed is not going to ignore this type of data as its remains on inflation watch.
Chain store sales holding their own.
Many predictions about a dying consumer given the high energy prices and falling sentiment reports. There is no question that consumer habits were changing even before the storms, evidenced by the rise in WMT sales even as stores overall were reporting slowing sales. That simply shows that consumers were feeling some of the heat from the high energy prices and were adjusting accordingly. This is something we can expect each time we get shifts in the economy, something we started to see during the last recession when WMT and the discounters cornered the market on retail sales. Once the recession waned the buying spread out to higher end and specialty stores. Now something of a shift back.
After softening up immediately following the storms chain store sales bounced 0.6% through October 1 after a 0.1% gain the prior week and losses the two weeks before that. This was the largest week/week gain since July 30. Year over year sales were up 3% on the heels of the prior week's 2.8% gain.
That is not chopped liver. Sales were hurt by the storms and displacement of residents throughout the country. In addition, September 2005 was one of the hottest on record, and that killed off fall clothing sales. Thus there was some pent up demand ready to unleash a bit, and that is what the past two weeks have shown.
The issue, of course, is whether the demand can sustain itself moving into the holiday shopping season. Consumer sentiment is on the decline but not at levels that indicate potential recession. They can always keep falling and pull spending with it, but for now the jobs outlook remains decent, and bottom line that is what drives consumer decisions. Energy prices play a role; as seen Tuesday, GP is shedding 1100 jobs due to high costs. Energy maintains the pressure on consumers as dollars are diverted from discretionary spending into the gas tank. Again, if jobs hold then consumers may cut back on spending but they won't go into hibernation mode.
THE MARKET
MARKET SENTIMENT
Still not showing us a whole lot on this front as VIX remains low (that in itself means little historically) and the put/call ratio is holding well below 1.0 on the close. Maybe bears will rise and bulls decline again this week.
VIX: 13.2; +0.74
VXN: 14.91; +0.94
VXO: 12.56; +0.93
Put/Call Ratio (CBOE): 0.82; -0.09
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: -16.07 points (-0.75%) to close at 2139.36
Volume: 2.063B (+10.1%). Volume was up as NASDAQ rallied early, but it was even stronger late as NASDAQ rolled over and the sellers took over. Strong volume reversals, the strongest volume since the rebalance last month, are not good indications of upside to come. The buyers are in the lead at first but then they are overwhelmed by sellers. In short, the buyers were trying to flex their muscles but the sellers just ran over them.
Up Volume: 890M (-153M)
Down Volume: 1.134B (+348M). The up to down volume ratio was not really lop-sided. Somewhat a testament to the early buying strength.
A/D and Hi/Lo: Decliners led 1.54 to 1. Did not get out of hand, but that was thanks to the 12 point early gain before the 28 point swing from high to low.
Previous Session: Advancers led 1.14 to 1
New Highs: 147 (-14)
New Lows: 43 (+1)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
Techs rallied 12 points, clearing the 50 day SMA (2154) on the steady morning rally. NASDAQ moved through 2163 as well, hitting 2167 on the high. Then it turned over and sold to the close, posting a 16 point loss and 28 point reversal. It closed at the low. Volume surged. Those are some pretty big negatives. It did managed to cling to the 50 day EMA (2138) on the close, hanging onto the vestiges of support. From here it will try to make Tuesday a one day event and continue forming its double bottom base. With SP500 already hitting the 'dive' button and torpedoing its 50 day EMA Tuesday, it will be up to NASDAQ and the other leading indices (SOX, SP600, SP400) to hold the line and make a higher low near this support. Not a bullish end to the session, and NASDAQ has its work cut out for it. If it fails here it does not mean the base will fail. There is still support at 2100 and down to the 200 day SMA (2077). That makes the basing process longer.
SOX rallied as well, tapping at 480ish once more on the high, coming in just short of the September high as well (485.60). It continues in its 10 week lateral range between 455 and 485. It has sold to the May/July up trendline, and holding that level or even the 50 day SMA (470) would keep it in the process of forming a handle to its attempted double bottom.
SP500/NYSE
Stats: -12.23 points (-1%) to close at 1214.47
NYSE Volume: 172.484M (-88.84%). Volume surged but it was still lower than the expiration and rebalance sessions leading up to and including expiration in September. Interesting, but the strongest volume sessions in the past month have occurred on downside sessions. Thus NYSE is still undergoing some distribution as it struggles in its 10 week base. That tells you it is not ready to make a breakout anytime soon. Duh.
A/D and Hi/Lo: Decliners led 1.94 to 1. Downside breadth was much more pronounced than on NASDAQ. Large caps suffered the most damage technically, but the small caps were actually the downside leaders Tuesday.
Previous Session: Advancers led 1.25 to 1
New Highs: 223 (-7)
New Lows: 90 (+33)
The Chart: http://www.investmenthouse.com/cd/^gspc.html
Volume surged as SP500 tried a weak morning rally and then rolled over and cut through its 50 day EMA (1221). It made a lower high at the March peak (1229.11) and then dove through the 50 day. Lower highs are never good, and this is its second straight after the September peak fell short of August highs (1246). There is some support at 1210 where SP500 held the line in late September to make a higher low, but the rush lower Tuesday was strong with SP500 closing on the session low after an intraday reversal. In short, it has a lot of momentum as it rushes toward 1210. We will see how it checks at that level; if the downside is as strong as it appeared Tuesday SP500 is more likely to visit price support and the 200 day SMA at 1200. Again this does not mean the base is dead, it just sets the timetable back as it is obvious the buyers and the sellers have not decided the direction just yet.
The small caps (-1.1%) tied SOX with the dubious downside leadership Tuesday, but technically SP600 remains in decent shape. It held above its 18 day EMA (347.41) that is basically congruent with the 50 day SMA. If it can hold in this area it can still form a handle to the current 9 week double bottom. It was one of the leaders to this point, and it is going to have to be the NYSE leader along with SP400 (mid-caps) if the market is going to avoid a more extended basing process.
DJ30
The Dow dove lower from the 200 day SMA (10,535) on a strong shot of above average volume, making a higher low at 10,600 and now ready to test 10,350, the level that held on the last two tests (late August, late September). A tower of weakness or ambivalence. The Dow is an index that has truly diversified itself into mediocrity. Looking at the pattern the past 5 months you can see something of a trading range, but it is also a broad umbrella shaped top of sorts, even a head and shoulders. The sharp break lower does not bode well. 10,350 can hold, but 10,200 might be the next visit.
Stats: -94.37 points (-0.9%) to close at 10441.11
Volume: 301M shares Tuesday versus 239M shares Monday.
The chart: http://www.investmenthouse.com/cd/^dji.html
WEDNESDAY
ISM services are out, and after a strong ISM report expectations are for a pretty solid showing. Warnings season has also started as LXK shows. That is another layer of worry, or another brick in the wall of worry if you will, that the market faces. Add that to the Fed, energy, post-storm worries, tax policy change concerns, Iraq; you know, the usual suspects dogging the economy and market the past year. The market tends to find its bottom during the midst of what seem the worst of times.
Judging from the Tuesday action, however, the market has not found the bottom. We talked over the weekend and Monday about some tests in October that would likely put a real scare in the market. Tuesday was not a scare, just a butt kicking. A scare is a hard, fast drop that ramps up the fear. Are times bad enough to justify a turn from here? Probably not. Just the other day the financial stations were heralding a positive September and the best Q3 in who knows how long. That does not sound like a lot of worry just yet.
There are many concerns, but thus far fear has not spiked and the selling has not been intense. The market is still working on a base. The bottom has not threatened a drop out yet. If SP500 where to dive lower and undercut the 200 day SMA that would get fear running. Then we could look for a rebound and would have to judge if it had the quality to indicate a bottom was put in.
Fear can also take other subtle forms, i.e. apathy. Apathy is often talked about as a bad thing for the market, but a market can scare you out, grind you out, or bore you out. Apathy is the last, and it often crops up when a market goes nowhere or appears to make yet another attempt higher only to fail. Investors give up. October is known for its big drops, but after a decent September October may turn into a grind that disappoints investors as it fails to uphold the promise of September.
For Wednesday we are going to be gauging the intensity of the sell off. It was clear that the energy selling was frenzied. Oil fell $2/bbl at the low but it was not a collapse. There were some earnings scares with BP saying its sales were down because of the Gulf shut ins. No one really doubts that energy companies are not going to post strong gains because oil is not falling to $35 anytime soon. We suspect we will see more downside as follow through momentum, and then see what kind of bottom fishing develops. Again, the energy selling indicates to us that the downside was overdone. We will see if some of the leaders making a pullback check up at near support and set up for another move. The selling could turn into something ugly, but that will mean the leaders collapse. We will be watching how they perform and that is what the market will take the key from.
Support and Resistance
NASDAQ: Closed at 2139.36
Resistance:
2151, the early December closing high and highs from January 2004
The 50 day SMA at 2154
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 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 1214.47
Resistance:
December 2004 high at 1219 and June high at 1220
The 50 day EMA at 1221.50
The 50 day SMA at 1226
March 2005 closing high at 1225 and intraday high at 1229.11
The September high at 1243 and the recent August high at 1246
The April/July up trendline at 1247
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 and held in late September on the close.
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 10,441.11
Resistance:
The 50 day EMA at 10,522
The 200 day SMA at 10,535
The 50 day SMA at 10,549
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.
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): 2.5% actual versus 2.0% expected and -2.5% prior (revised from -1.9%)
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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trading system
money investment
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