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world stock market, us stock market
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10/05/05 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Target hit alerts: CRXL
Buy alerts: None issued
Trailing stops: FTO; HAWK; VMC; GLBL
Stop alerts: APA; CCJ
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SUMMARY:
- Stocks start weak, finish weaker.
- ISM Services plunges as energy prices spike.
- After a year into rate hikes, Fed has the blinders on once more, focusing on a predetermined target and is making up reasons to get there.
- Downside momentum is strong, but market will try to pick up the pieces here at key support.
Stocks don't even pretend to rally Wednesday.
One of the ways you can tell any move is getting overdone near term is when stocks don't even give the pretense of concern for the other side of the trade. In other words, when stocks started to the downside Wednesday without even a rally attempt as it had the prior sessions you knew that the selling was in full bloom and you start looking to see how extreme the sentiment and internal indicators are getting. They don't ring a bell as to an exact turn, but they start to clue you in to how extended a move is.
There were plenty of issues to mull before the open with Wendy's (WEN) warning Q3 sales would fall 5% due to gasoline and weary consumers. ADCT warned as well. There will be more to come because the storms provide the perfect cover for management to push off a lackluster quarter on an outside event. If you have a great quarter you crow about how well you did despite the storms. If it is mediocre you still cite the storm, saying you could have done better without the storms, but what a great job you did to even keep things going. And if you really stunk the place up you throw up your hands and claim 'act of God', and we all know from Pharaoh's woes in dealing with Moses, an act of God can be brutal on business.
Warnings were somewhat offset by a continued drop in oil prices, and the market has performed better lately when oil declines. This relationship between overall modest moves in oil (modest because it will take a drop into the low forties to make a real difference for the economy) is on again/off again. It controls when nothing else is in the hopper to drive stocks. That wasn't the case Tuesday afternoon, and it was not the case all day Wednesday.
Market wakes up to Fed's intentions.
There was a clear driving force at work once more: the market's sudden awareness that the Fed has been raising rates for a year and is acting like the Fed always does when it is in a long term hiking campaign. Specifically, it became clear the Fed has a certain goal in mind and it is going to lie, cheat and steal (also known as make up reasons) in order to get to its goal despite the facts. This happened in 1999 and 2000, and it has happened just about all of the times the Fed has pushed us into recession with its rate hikes (8 of the last 10).
The 'emperor has no clothes' awakening by the market was fostered by more Fed governor comments about the need to rein in inflation. Nothing wrong with that, but it is what the Fed is citing that makes the market breakout in cold sweats. More on that latter, but the gist of it is the Fed is making things up again to support its hiking in the face of high energy prices that act as a tax on the consumer, businesses, and thus the economy. The Fed is again appointing itself as the economy, budget, stock market and savings czar in a kind of 'father knows best' view of itself.
Selling remains ugly but internals are getting extreme.
That was a hard, cold slap for the market as it continued its selling. NASDAQ and SP500 blew through next support and landed at very key levels on further strong volume. We were looking for SP600 and SP400 to provide some leadership. They did, but it was to the downside as the small caps tossed out a 2.8% belly flop. Only SOX was left holding its 50 day EMA, keeping it in decent position while the rest of the market flops around like a carp on hot pavement.
An ugly day of continued distribution does not look good from a technical standpoint, but we note that the market internals are getting more extreme. High volume cut of support, downside breadth ballooned past 4:1, downside breadth exploding past upside trade (5 to 1 on NASDAQ). The October scare we discussed recently took no time showing up. It has not hit the panic stage but the internals are indeed getting extreme and that is often an indication a move is getting worn. Doesn't mean the selling is over, but it does indicate a rebound to at least grab some breath is taking form.
Small consolation for a session that saw small cap and mid-cap leadership fall on the knife while NASDAQ and SP500 made very quick tests of key support. The market has gone from clear base building to desperately hanging on to support just so it can continue to try and base. That is part of ratcheting up the anxiety needed to turn the market. It is not there yet, however, and thus we can expect to see more even if the market manages a rebound from this point.
THE ECONOMY
Service sector feels wrath of storms, energy prices.
The September 53.5 reading was way off the 60.0 expected and the 65.0 from August. You could say it was still above 50 and thus shows expansion, but that is like saying an ugly rose is still beautiful because it is a rose. With services making up 80% of the economy, that drop (nothing similar since early 2003) was ugly. Jobs fell (54.9 from 59.6); new orders plunged (56.6 from 65.8); prices paid soared (81.4 from 67.1).
It was the latter that added to the inflation fears and stoked market selling. Gasoline and energy prices are seemingly impacting the service sector more than the manufacturing sector. Wages are not surging so it cannot be laid off on that. Energy spikes are having their impact on sentiment in the service sector even as it has recovered in the manufacturing sector as seen in Monday's ISM report.
Service sector sentiment (say that fast three times) has far outpaced manufacturing all during the recovery and expansion. You could thus read this as a signal of a changing trend. Given the economy is still taking in data with respect to the storms, we view this as more of a hiccup in sentiment as opposed to signaling a new trend lower. We have to remember that this is basically a popularity survey gauging sentiment about what managers feel and believe will happen. Thus it is subject to major upsets as seen from the storms. Again, that is what this looks like here.
Federal Reserve has the blinders back on.
We warned of this all last year, even from the start of the Fed's current rate hiking campaign: despite all of the good rhetoric about only acting with respect to what the numbers show, the Fed ultimately falls victim to its own goals and targets regardless what the current conditions are. Indeed, it will bend and color the conditions to rationalize its relentless pursuit of its goal.
Is it doing that? You make the call. We first called foul in November 2004 when Greenspan met with world central bankers and stated that the Fed may have to raise interest rates further in the US in order to make investment in the US more favorable in order to keep foreign investors pushing money into the US. A few months later Greenspan testified in Congress that the trade gap would likely take care of itself. Maybe things had changed significantly. They had, but the trade gap was not getting better, it was worse. Greenspan was trying to support his claims the US had to do something re social security and Medicare, and it was expedient to blow off his comments in November when Congress tried to fit all of the pieces together in deciding how to proceed with deficit issues. This was the first sign Greenspan would do what the Fed always does, i.e. turn an issue in any way it needed to suit it.
Housing: once a friend of the Fed in the recession, now a foe.
Then there was the housing bubble that was but was not but then was again. Some Fed governors pondered whether housing was in a bubble during 2004. Greenspan appeared before Congress early this year and literally laughed off the idea the housing market could be in a bubble. Not three months later minutes of the FOMC meetings show extensive discussions of what the Fed was calling a bubble. Greenspan later told Congress there were 'mini bubbles' in the US. Later FOMC minutes showed the Fed was not thinking of the housing market as a series of small bubbles but a big one similar to its view of the stock market in the late 1990's. It became clear that one of the Fed's targets was indeed the housing market. It denied it as it denied targeting the stock market in the late 1990's, but when the Fed talks of imbalances in domestic savings and markets in public and discusses the housing market in detail behind closed doors, it is pretty clear what it is thinking.
Now it is also clear that the housing market, as we have been saying for awhile, is cooling off rather nicely, with mortgages dropping (down 1.6% this week again), inventories rising, the high end cooling off, etc. So what do you do in that case? Come up with another reason, one so unknown due to its rarity that it is virtually foolproof to us. What is it? Well if it is good enough for business executives to use, it is good enough for the Fed: the hurricanes.
If it's good enough for businesses, its good enough for the Fed: blaming the storm.
Yes, on Wednesday the new Fed pitch in the late innings of its rate hiking campaign was that the storms in the Gulf and the resulting binge of government spending is going to cause inflation and thus the Fed has to keep on raising those rates. Indeed, the Fed funds futures contract has now fully priced in not just two more 25BP hikes but a third one to bring the Fed funds rate to 4.5% by early 2005. Not anything really new there from our perspective, but the Fed itself is signaling that may not be enough given this new and potent distortion of fact and history.
There are many, many misconceptions floating around about deficits, spending, interest rates and inflation. Many are taken as fact, but they have major problems, mainly the historical, empirical evidence just does not back them up. One is the idea that deficits lead to higher interest rates that ultimately 'crowd out' investment. You hear this a lot the past few days with talk of budget busting spending after Katrina and Rita as Congress tries to figure out anyway it can not to cut its spending. The liberals want to end the tax cuts, saying if we don't the deficit will be too high, interest rates will surge, investment will decline, blah, blah, blah. Robert Ruben advocated this and Greenspan does as well . . . DESPITE the historical evidence that shows rates fell during deficits in the 1980's and rose as deficits turned to surplus in the 1990's. Rates did the same thing in the latest recovery though the second half (surpluses) has not materialized despite an explosive surge in tax receipts (stronger than any of the Clinton years) because, just as with Reagan, the government cannot stop itself from spending all of that money the tax cuts generated.
The second misconception, the one the Fed is using, is so wrong it strains belief that anyone buys it. The Fed is arguing that the government spending surge is going to cause inflation as the government pumps dollars into the economy for construction, etc. That is right out of the Marxist handbook on big government. Somehow it is reasoned that if the government taxes Peter, takes its usual cut (a nice way of putting it wastes a good chunk of the taxes collected), and then pays the rest to Paul that will cause inflation. No, that is only moving money around, money that was already there. Indeed, it probably causes disinflation because there is less money in the system after the government takes its cut. After all, inflation is more dollars chasing the same amount of goods or the same amount of dollars chasing fewer goods.
The latter is the real issue because we had asset destruction in the storms, specifically with the ability to produce oil and gas. That has left more dollars chasing fewer energy goods. Also, the port closures have kept some goods from getting into the US and around to US markets. That can cause inflation as well. It is not spending by the government, but more money than currently available goods.
It is also a temporary phenomenon. When production ramps back up, when ports get mostly functional, the shortages will remedy themselves. Sure the Fed has to be vigilant during that period to keep inflation under wraps, but that is short term versus the 'federal spending causing inflation' nonsense that was spewed today. It dovetails with Fisher's comments two weeks back however, about government profligacy.
Fed set to stay the course through January.
In using the storm and the federal government's response, the Fed is tying things together with Greenspan's November 2004 deficit comments: federal deficit spending is forcing the Fed to act, kind of a 'devil made me do it' mea culpa. Only those economists clinging to old school, historically disproved economic theories buy off on this, but the sad fact is there are still those out there who are on the airwaves backing up the Fed just as they were in the late 1990's before the Fed kicked us off the cliff. We have a very bad feeling that the Fed is going to keep on tightening right on through the short term inflation pressures from the storm-induced shortages.
Still, that only gets us to the January 31 meeting that Greenspan moved up so he could participate in. As we discussed before, it is highly likely he did that so he could take the credit (blame?) for that rate hike that takes the rate to 4.5%, the idea being he does not want the new chairman to have to raise rates as his or her first act. The recent Fed speak could simply be the troops circling the wagons around their leader (don't you love mixed metaphors?) before he leaves. Maybe. Hopefully Bush appoints a Fed leader that is pro market and has a thorough and intense disdain for the Phillips Curve. With all of the PC governors on the Fed right now that is going to be imperative. In the interim we have to hope that the additional 75BP in hikes won't be too much for the economy as it confronts the sustained pressure of energy prices.
THE MARKET
MARKET SENTIMENT
VIX: 14.55; +1.35
VXN: 15.86; +0.95
VXO: 14.69; +2.13
Put/Call Ratio (CBOE): 0.98; +0.16
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: -36.34 points (-1.7%) to close at 2103.02
Volume: 1.99B (-3.49%). Volume was lower but still strong and well above average as NASDAQ dove lower toward the next important support level. Strongest consecutive volume sessions since mid-July.
Up Volume: 300M (-590M)
Down Volume: 1.532B (+398M). Five to one downside volume leadership. That is getting pretty intense.
A/D and Hi/Lo: Decliners led 4.03 to 1. That is pretty extreme.
Previous Session: Decliners led 1.54 to 1
New Highs: 83 (-64)
New Lows: 84 (+41)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
NASDAQ gave up the 50 day EMA (2137) in the first half hour of trade and it never looked over its shoulder. It tried to hold up for 4.5 hours during the middle of the day, then crumbled in the last 1.5 hours to close right on key support at 2100. It has made several highs and lows at 2100, and that means it grooved that level pretty good and will try to find some support there. It might undercut it initially and head toward the 200 day SMA (2077) for a test, but it will try to make a stand around that level. From there it will try to move laterally and continue the work on the base. Indeed, even if the index cannot hold up and continue the base, after a test to the 200 day SMA NASDAQ would typically rebound from such rough selling. If indeed the index fails to hold the rebound attempt after this selling and breaks the 200 day SMA, we are watching the up trendline connecting the August 2004 low and the April 2005 closing low. That trendline is now at 2000; quite a drop from the Wednesday close. It is part of a large, 21 month triangle that has formed on NASDAQ. That is longer term bullish for the index.
SOX (-1.4%) sold as well but managed to hold the 50 day EMA (465.15). That keeps it in its 10 week lateral range between 450 and 485.60. This test of the 50 day EMA and down to 458 is a key level for SOX to hold the line and key for the market as well.
SP500/NYSE
Stats: -18.08 points (-1.49%) to close at 1196.39
NYSE Volume: 1.906B (+10.52%). Volume surged even higher as the NYSE indices dove even lower. Real venom in this move as the upside volume session last Thursday was completely trashed.
A/D and Hi/Lo: Decliners led 4.43 to 1. As with NASDAQ, that is getting there with respect to extreme levels. This type of reading helps sow the seeds of a rebound move.
Previous Session: Decliners led 1.94 to 1
New Highs: 73 (-150)
New Lows: 158 (+68). Lots of work to do here on the downside to get extreme (500ish).
The Chart: http://www.investmenthouse.com/cd/^gspc.html
SP500 imploded, falling through price support and the 200 day SMA at 1200, closing on the low as volume spiked. It blew through the August low and has totally given back the July breakout from the March to July base. Two vicious downside moves and a little more follow through Thursday will set up a rebound to test the 1200 level it broke with relative ease. Large caps are really dying on the vine. They were picked to lead for the past year by the pundits but they have done no such thing. They are leading now; lower.
SP600 (-1.8%) dove lower, not even trying to hold the 50 day EMA (345) and the up trendline (343). It is not ready to test the bottom of the current 13 week range at 335. That keeps it above the March through June base and allows it to continue to move laterally and base out more. That is the best case scenario for now after this move.
DJ30
The blue chips undercut 10,350 that proved support in August and September. It is holding above the 10,250 to 10,300 range from June and July. That is about all you can say as DJ30 falls along with the rest of the market, following as it does so well.
Stats: -123.75 points (-1.19%) to close at 10317.36
Volume: 266M shares Wednesday versus 301M shares Tuesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
THURSDAY
Well, what new morsel can the Fed throw out tomorrow? It will likely take a rest; after all it has peeled off several billions from the stock market so it will feel that some of its work is getting done. Despite Greenspan's admission in 2001 that the Fed did not really know if such a thing called the 'wealth effect' really existed, he is still not going to take any chances. Better to burn a few more retirement accounts than risk being tagged as his last act as an inflation instigator.
Initial jobless claims is the only scheduled economic report; it is not that trusted right now in the wake of the storms, and thus it does not move the market. We should expect more warnings as October moves on; as noted above, the storm is too fortuitous to pass up. Good results will get touted ahead of time and bad results will be shoveled out with the mud from the storms.
The action the past two sessions has shredded any near term breakouts from the bases that are forming. The indices have been pushed to the bottom and that means more work ahead to try and shovel out. Lots of stocks tumbled, but lots of strong stocks held up just fine. If the selling continues it will eventually take everything down. That would take sustained selling. That could develop from this nasty downturn; we do like the triangle pattern NASDAQ is showing kind of as a safety net.
Nearer term the market is going to try a bounce given the internal indications that are getting stretched to the negative side. That tends to snap back with a rebound to test the support levels that were broken. Some more downside follow through Thursday, preferably a sharp drop at the open, would set up the rebound. More than likely, however, the market will not drop sharply but will waffle around and try to bounce early. That will take the pressure off and give the sellers another opening to push stocks lower. You want to see the selling remain sharp and sustained to really shake out the market and set a rebound move.
Even with the selling there are, as noted, stocks still holding up well, trying to move higher. A market rebound will move them higher. There are also some stocks still set to fall, but if you did not fall today there was something else up. We will look for a rebound to test the old support that was broken before we look at a lot of downside. For Thursday we will look at those stocks that have held up during the selling, coming back to near support after strong moves. There are many that rallied that are making this first test, a great entry point. Of course we need to see the rest of the market continue the basing on the rebound; that gives the support for the leaders that are still moving higher even as the overall market goes through the machinations of base building.
Support and Resistance
NASDAQ: Closed at 2103.02
Resistance:
The 50 day EMA at 2137
2151, the early December closing high and highs from January 2004
The 50 day SMA at 2153
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:
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 1196.39
Resistance:
1210 is some support and held in late September on the close.
December 2004 high at 1219 and June high at 1220
The 50 day EMA at 1220
The 50 day SMA at 1225
March 2005 closing high at 1225 and intraday high at 1229.11
The September high at 1243 and 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:
1200 is solid price support but it is being broken
The 200 day SMA at 1200 is failing but watching for the test.
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 10,317.36
Resistance:
10,350 turned out to be support in the recent pullback, and it held again on the last Thursday low.
The May high at 10,406 and 10,400, the bottom of the November/December range
The 10 day EMA at 10,465
The 50 day EMA at 10,514
The 200 day SMA at 10,533
The 50 day SMA at 10,544
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:
10,250 held in the June and July lows.
10,200 from April.
10,175 from the July intraday low.
10,000 from the April low.
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): 53.3 actual versus 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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