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world stock market, us stock market
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10/06/05 Investment House Daily
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SUMMARY:
- Fed's Fisher-king slams stocks once more, but a late rebound signals a relief move.
- Fisher may be candidly refreshing, but as with all Fed members, he should shut up.
- What can the Fed do about the price of oil anyway?
- Retail sales slower in September but not as bad as expected versus sentiment drop.
- Jobs report on deck as market sets up for a relief move after getting decked for three days.
Stocks sell again on Fed comments.
After two hard selling sessions stocks sold a bit more but NASDAQ and SP500 then turned up with NASDAQ retaking 2100 while SP500 moved back over 1200. That was an expected further bump lower and recovery. Stocks tested that move and were in position to rebound in the afternoon session. After 2.5 days of selling, that was pretty decent action, setting up a relief move.
Then in the early afternoon Dallas Fed president Fisher spoke up once more (is he on some sort of whirlwind speaking tour?). We will give the specifics later, but he basically called inflation a 'virus' that could not be allowed to infect the 'blood supply' and generally indicated the Fed would do whatever was necessary to avoid sparking 1970's-like inflation in the face of rising energy prices.
Whether it was the words or the mere fact that Fisher found it necessary to speak up yet again, the market took umbrage and dove lower. 2100 and 1200 were gone in a blink. A pause in the action tried to hold the line mid-afternoon, but that was torpedoed at the start of the last hour.
Volume shot higher as investors sold in response to Fisher's ongoing road show, and it continued into the last hour as stocks started their second dive after the Fisher statement. We were talking with some floor traders and market makers and they said they were getting margin selling action in that last hour, meaning some folks had to sell to meet margin requirements after 3 sharp down sessions. With just under a half hour left the selling ceased and some buying started. There was short covering and some bottom fishing. NASDAQ had been down over 30 points as it plunged from 2100 to 2068 in the afternoon. The late rebound took back 16 points in a flash. NASDAQ recovered the 200 day SMA on the close. SP500 took back 10 points, recovering two-thirds of its losses.
That left the market negative on the close but with a potential reversal on its hands. A lot of stocks cashed in their chips Thursday, breaking support and making no effort to recover with the market late in the day. Others held their ground, leaving them in solid shape for any rebound move. Breadth was very modest compared to the -4:1 showing Wednesday. Was it a key reversal or just a turn after almost three days of sharp selling? More than likely the latter; there were not any Hummers driving over cliffs during the session, meaning there was not a rampant amount of fear.
Either way we cleared out stocks that were selling through support and not rebounding while hanging onto those that were holding up and have the ability to mount strong rebounds. After almost 3 sessions of selling stocks were ready to rebound. They were ready earlier in the session pre-Fisher. They sold off on those comments, but then rebounded from further down the totem pole. That tells us stocks were ready to rebound once the live ammunition pinning them down was used up. The selling did them no favors, causing a lot of technical damage. While we expected a rebound we do not expect it to be the bottom. The selling has left some leaders in buy positions at support, and we will take advantage of rebounds because relief bounce or key reversal, they held up during some nasty selling, proving their worth.
THE ECONOMY
Fisher shoots from the hip, but he changes hips often.
It was in June that Fisher called the game in the late innings. He should have waited for the fat lady to sing or at least her equivalent, i.e. Alan Greenspan, to give the okay. After those first comments the chairman sent the other FOMC members out to tamp down the flames Fisher started. We called it refreshing, others called it a rookie mistake. Either way we didn't expect to hear much outside the party line from Fisher in the future.
Fast forward to this week with Fisher Wednesday commenting on inflation being at the high end of the tolerance level. Is that Fisher or is that the Fed talking? Only Alan Greenspan knows. It was a 180 from the June comments, Fisher apparently worried the storms would cause inflation due to high government spending, or 'profligacy' as he termed it earlier. The market didn't debate Fisher's status in the FOMC pecking order. It sold on the chance that Fisher might represent the Fed's thinking. That is certainly easier to believe given Greenspan's record than the Fed being in the late innings.
Thursday Fisher was out firing live ammunition again, calling inflation a "virus" that could not be allowed to "infect the blood supply." He came back to the medical theme again saying inflation was "poison to the system" and showed "little inclination" of declining after rising toward the high end of the "tolerance zone" (2% on a core basis). He concluded noting that we did not want to "face 1970's-like inflation again."
This may not be anything new and it may just be Fisher's take on things as he blows like a tumbleweed in the winds of economic storms. Given that it somewhat echoed what other Fed governors are saying (adjusted for the somewhat colorful, colloquial Fisher-speak), the market took it at face value (if that can really be determined), avoided the Christmas rush, and sold once again.
Is Fed going past neutral to fight inflation?
This continual barrage of 'comments' from Fisher and other Fed members is, in the market's view, suggesting the Fed may push rates past the neutral level Greenspan said it wanted to get to as oft stated during this campaign. There is even talk of a 50 BP kicker as the last move just as in May 2000, though some current and former Fed members say that Greenspan learned his lesson about back loading rate hike runs. Of course they also said the Fed was not going to go past neutral.
What is neutral anyway? Greenspan plays coy with Congress, stating he will know it when he sees it. That is a take on the famous Supreme Court rulings regarding obscenity when Justice Stephens said he would know obscenity when he saw it. Humorous but hardly helpful. Historically the Fed raises rates when the 90 day T-bill exceeds the Fed funds rate. It lowers rates or stops raising rates when the 90 day T-bill falls below the Fed funds rate. Whether the Fed acknowledges this or not, historically this is what occurs. Right now the 90-day treasury has just moved below the Fed funds rate. By historical standards that suggests the Fed does not have much more tightening to go.
Perhaps then the Fed is merely doing what it tried to do in the last half of the 1990's, i.e. jawbone the markets so they do its work for it. It didn't work then and it likely won't work now. What we have instead are markets roiled by a barrage of comments from various Fed members with the guessing game as fever pitched as it ever was. So much for transparency. The Fed members need to get over this need for rock star status with speeches and interviews and 'off the cuff' comments. The Fed needs to articulate a policy more clearly than the obscenity standard and let financial markets move in an orderly manner in accord with that policy. When you have businesses trying to make decisions that will impact that business for years down the road it would help to know where the Fed is going as opposed to playing the guessing game and wondering if the Fed is going to abide by its historical moves or go overboard yet again (which, I suppose, is its historical move).
In short, shut up with the off the cuff commentary, sit down and get a well thought out policy in place, and then let everyone know what that policy is. That way we can plan and make rational decisions instead of playing the Fed's crap game using the Fed's loaded dice. Given the Fed's history and the cloak and dagger nature of the Fed, once can only guess as to whether the Fed is going past neutral in its effort to kill the 'virus' of inflation. Give me a break.
Fed is worried over energy, but what can it do other than hurt us?
The Fed continues to grouse over energy costs and of late, excess government spending. As discussed Wednesday, the latter is baloney; big fatty baloney the Fed made up to justify its continued rate hiking and coy guessing game.
As for energy costs, if you take them out of the equation then inflation is basically steady, rising modestly at less than 2%. You cannot remove energy from the equation, of course, but on the other hand, what can the Fed do about it? Energy is in a demand squeeze because there are some big users out there (US, China, India). If the Fed raises rates to fight any effects of higher energy prices is that going to make China or India use less? Is it going to make OPEC lower prices to $30/bbl?
It won't, but the Fed is proceeding along those lines. It can impact US usage and that could impact the world price eventually. But to keep inflation down as the Fed says it wants to do the Fed would have to somehow lower prices in all of the other areas outside oil. How does it do that? By stomping on the economy's throat. It would have to send us into recession to bring other prices down or deter oil demand enough to bring its price down (or some combination of both). Either way it is bad for us.
And it would be great for China and India. The Fed could cut US demand by choking off the economy, but that would only benefit the other big users, giving them lower priced energy, allowing their economies to grow more profitable and with less inflation pressures. In other words, we fall on the knife for the benefit of others. No thanks. Why should we take one for the team? Again, no thanks. We did that in 2000 when the Fed purposefully hobbled our economy that then plunged into recession. It did it to narrow the gap we had on the world. Been there, done that. The Fed needs to be stopped before it does it again. But, of course, there is no one to stop it. Similar to the federal judiciary, it does what it wants without any oversight. Further, Congress doesn't have a clue as to even understanding what the Fed is doing. With many referring to Greenspan as 'maestro' still, there is little chance they will stand in the way of its actions. Thus we have to sit and watch this potential train wreck unfolding once more.
Retail sales decent for September even as sentiment fell.
It is the typical paradox: retail sales do one thing, sentiment does the other. Stores were reporting sales that were lower, but they were not as bad as expected, and that gave some early life to stocks. It was not a great report card. It did show what we have been saying for the past three months: consumers have changed their consumption habits. Target sales rose 5.6%. COST +7%. JWN (high end department store) +4.1%, less than expected. In short, the discounters saw strong sales growth while the specialty and department stores started to suffer. This is the shift that takes place now when economic conditions shift. TGT and COST are discounters. WMT saw its sales jump thanks to its discounter Sam's Club with its discount prices and discount gasoline. Consumers are seeking the discounters as the economy gets a bit softer and uncertainty rises.
Thus as in the recession we see overall sales holding up pretty well while there are widespread disappointments in individual names. Consumers are still consuming, but they are changing locations for their consumption. That leads to the conclusion the consumer is going into hibernation, but that conclusion is wrong.
What about the falling consumer sentiment? It was a large drop last month, but as we saw, it did not prevent the consumer from consuming. It just changed venue a bit. It will take lower readings to totally bottle up the consumer and show that a recession is in the cards.
THE MARKET
MARKET SENTIMENT
VIX: 14.96; +0.41
VXN: 16.79; +0.93
VXO: 15.28; +0.59
Put/Call Ratio (CBOE): 1.1; +0.12. Three days of selling was enough to push the put/call ratio past 1.0 on the close, an indication that conditions are approaching a more extreme level. Good reading when coupled with Wednesday's negative breadth as well as the rebound late Thursday.
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: -18.94 points (-0.9%) to close at 2084.08
Volume: 2.142B (+7.61%). Volume shot higher as the market sold sharply once more, rallying after Fisher's comments and on the late bounce. It was the strongest volume of the move thus far, and with the undercut of the 200 day SMA and rebound, that is not necessarily a bad thing.
Up Volume: 602M (+302M)
Down Volume: 1.492B (-40M)
A/D and Hi/Lo: Decliners led 1.89 to 1. Downside breadth contracted sharply on the Thursday selling, indicating that the downside action was not as intense. Following the harsh selling, this softening of breadth shows the Thursday selling slowed.
Previous Session: Decliners led 4.03 to 1
New Highs: 61 (-22)
New Lows: 117 (+33)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
NASDAQ recovered 2100, tested the move, and looked ready to continue a rebound attempt before getting Fisher's statements. That took it below the 200 day SMA (2077) in some pretty intense selling in the afternoon. Volume was surging when the index bottomed at 2069 and rebounded into the close to retake the 200 day. That shaved 16 points off the low, and combined with the weaker downside breadth and the hold of support that NASDAQ is going to try to put together a rebound after a three day tail kicking. The key level on a rebound is 2100. Well, the first key level. After this kind of flogging each step is a difficult one as the index fights back. Still quiet a few good NASDAQ stocks in position to rebound with it.
SOX joined the other indices in smashing through the 50 day EMA (464.87) with relative ease. It bottomed at 454, near the late September intraday lows, and rebounded modestly to close. Hard to call this a strong reversal as SOX (-1.7%) was the downside leader Thursday.
SP500/NYSE
Stats: -4.9 points (-0.41%) to close at 1191.49
NYSE Volume: 2.135B (+11.97%)
A/D and Hi/Lo: Decliners led 2.02 to 1. Still strong downside breadth but not the harsh 4.4:1 reading Wednesday.
Previous Session: Decliners led 4.43 to 1
New Highs: 34 (-39)
New Lows: 165 (+7)
The Chart: http://www.investmenthouse.com/cd/^gspc.html
The large caps dove lower again after failing at the 200 day SMA (1200) Wednesday. They recovered that level intraday but as with NASDAQ, when Fisher's comments hit the wire SP500 hit the mat. It dumped lower to the July intraday low (1183) and the shaved 10 points off its low to the close. It did not recapture any major support/resistance level, but it did start what appears to be at least a relief move after three tough downside days. 1200 is the first test, but then there is 1210, the 50 day EMA (1220), 1230 - - take your pick. Coming back from selling is always a tough proposition with that overhead supply ready to sell into the strength and take it back down.
SP600 solid off further and rebounded as well, holding above the 200 day SMA (329) on the low (332) to close down 0.9% at 335. That keeps it inside the August low but in the very lowest reaches of its 9 week trading range. It looked good until Tuesday when the shredding started. Now it is in the process of rebuilding. The rebound Thursday late shows promise for a relief move to start the rebuilding process.
DJ30
DJ30 reached down to 10,200 support on the low and it too staged a last half hour rebound to cut its losses to just 30 points. Volume shot higher as DJ30 sold hard and then rebounded with the rest of the market. Hardly reassuring as it remains below the August and September lows (10,350) that mark the bottom of its summertime range. It will move with the market and can rebound to 10,400 to 10,500.
Stats: -30.26 points (-0.29%) to close at 10287.1
Volume: 316M shares Thursday versus 266M shares Wednesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
FRIDAY
The September jobs report is expected to show a loss of 150K jobs, but it is going to be widely dismissed because the method of screening had to change in light of the Gulf storms. Thus even a higher number will not get too much excitement because the necessary screening method is likely to significantly undercount jobs.
That leaves the market in the aftermath of three hard days of selling, trying to put together a late rebound to start a relief move. The market internals appear to indicate that is a possibility; after a hard beating the market tries to rise in response. The key is what it can do with the former support levels as it makes the rise. As noted above, we don't think the turn around late in the session could be classified as a washout that allows the indices to move higher. Indeed, we still think things will get a bit more exciting before the bottom is found. Of course if the Fed hikes too far the market crashes as it did in 2000. It is not there yet, but as the discussion of the 3 month T-bill indicates, it is getting close. If the Fed pushes rates to 4.25%, well, that gets problematic. THAT is what the market is obsessing over right now.
What we are watching for Friday are rebounds from leaders that held up rather well during the three day pummeling this week. A lot of stocks were weeded out in this action. We had to hack away the deadwood that undercut support and was not recovering. Some that we cut will manage to turn around again, but in general if a stock cannot hold up under fire it is not going to maintain any leadership role. There are still a good number of stocks that held the line and those are the stocks we want to focus on and that is what we are going to do.
Sure any rebound may just be a relief move that roles over. By moving into the stocks that have weathered this storm we are buying into some strength that has a good chance of holding up on the next test. If this is the end of the road for stocks in this expansion they will be taken down as well, but we don't see that at this juncture. The Fed is still within the game as far as not going too far, and there are still a lot of positives for the economy. Thus we are viewing October as we did coming in: a month where stocks and investors get some scares but that helps lay the foundation for a year end rally.
Support and Resistance
NASDAQ: Closed at 2084.08
Resistance:
2100 was key resistance on the way up and it held last week.
The 10 day EMA at 2123
The 50 day EMA at 2135
2151, the early December closing high and highs from January 2004
The 50 day SMA at 2150
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:
2090 is the February and March interim highs
The 200 day SMA at 2077
The August 2004/April 2005 up trendline at 2005.
S&P 500: Closed at 1191.49
Resistance:
The 200 day SMA at 1200
1200 was solid price support
1210 held in late September on the close.
The 10 day EMA at 1212
December 2004 high at 1219 and June high at 1220
The 50 day EMA at 1219
The 50 day SMA at 1224
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:
1183 - 1184 from November 2004 highs and July 2005 intraday low.
1175 is the August 2003/August 2004 up trendline.
Dow: Closed at 10,287.10
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 10,433
The 50 day EMA at 10,505
The 200 day SMA at 10,531
The 50 day SMA at 10,537
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): 390K actual versus 350K expected and 369K prior (revised from 356K)
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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world stock market
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