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10/08/05 Stock Split Report
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Stock Split Report Subscribers:
MARKET ALERTS
Targets hit alerts: None issued
Buy alerts: CLE; GPN; HAR
Trailing stops: None issued
Stop alerts issued: None issued
SUMMARY:
- After a pounding, stocks bounce tepidly.
- Jobs report not as bad as expected, prior months better than expected.
- Economic data on balance stronger for the week, keeping Fed on track to kill off economic expansion.
- Back end loaded economic week, but earnings warnings will play key role as market struggles to find support.
Modest relief bounce as sellers take a breather.
A rough week for stocks was capped by a modest, almost apologetic Friday relief bounce. NASDAQ lost 2.9% on the week, SP500 -2.7%, and SP600 -3.3%. Seems the leaders that had held out on the selling up to Monday took the hardest hits last week as the selling broadened out. It was not a takedown, but it pushed NASDAQ, SP500, SP600 - basically all indices - below key support levels.
Friday NASDAQ managed to build a little off a Thursday rebound that saw it recover from undercutting the 200 day SMA. The other indices bounced modestly as well, holding some price support from earlier consolidations, but also still below key support levels. The bounce was led by a rebound in energy after a major blood-letting through Thursday. Retail also provided some lift as a holdover from the 'not as bad as feared' retail sales results that started coming in Thursday.
About all you can say for the move was that it was a relief bounce. There was no rush back in. There was some nibbling on beaten down stocks, but a sharp drop in volume and very modest breadth are the attributes of a relief bounce versus a run by buyers sensing a bottom near at hand. Now many leaders are still holding up quite well, but many have also fallen down to the 50 day EMA and even the 200 day SMA; the latter indicates there is no near term rebound ahead for them as they have to work on a base to remove some of that overhead supply built up from the buying right before the steep declines.
No near term surge to new highs as action has significantly weakened the market.
It all points to no near term general market surge, but a more stretched out basing process. There very well could be further declines after that sharp leg lower. Stocks were working on their bases and then still were racked by heavy selling. That indicates the sellers are still very active. It also leaves the market in a technically weak position once more as we discussed in September. The late September bounce had some promise, but that was all pillow talk as the market melted lower. NASDAQ is holding the 200 day SMA, but SP500 looks like a real dog. So much for the advice from numerous pundits this year to buy the large caps based on the idea they just had to start performing better. No, a dog is a dog even if it stops barking.
You can always tell a weak market (as if you couldn't from last week's action) when it hates all news, good or bad. Good news is considered bad because it may bring down the wrath of the Fed or some other governmental agency while bad news is bad because, well, it's bad news. The market can behave like a child in the terrible twos: no matter what you do at times it is just not consolable and has to cry itself out. The strong ISM report Monday could not provide a buying boost. The weak ISM services report fueled further selling because it was a sign the economy was slowing. The strong factory orders only pushed more sellers into the market. The stronger than expected jobs report sent futures lower on Friday.
Reason for market's concern: October and the Fed
The market kind of has a reason for the limbo. Stronger economic data keeps the Fed on track for more rate hikes (just as the Friday employment data will do) while weaker economic data suggests that the Fed will go too far and cause another economic decline. The economy is showing strength and weaknesses just as it did in 1999 and 2000. The consensus of the financial stations is that the economy is strong, indeed stronger than most think. In 2000 the consensus was the economy was never going to stop growing; this current view is an offshoot of that. Thus the market is justifiably schizophrenic at this point because an overall healthy economy is getting stressed by serious storms inducing shortages, the Fed, and concerns that the tax cuts that helped bring about the expansion are going to get axed or at least sunset.
It is of course October, the bewitching month (at least in the lore of the market) where many a crash and indeed bottom have occurred. With the market starting the month with a dive lower and a raft of uncertainties at the door, the market has been reduced to a bowl of Jell-o for now; you know, an undeterminable glop of quivering mush. It is also earnings season, and we can expect more warnings given the absolute perfect cover that the twin storms provide. Moreover, the Fed could push the economy into ruin, and no doubt with the harsh Fed speak this week the market was absorbing that prospect. A Fed funds rate of 4.5% , however, probably won't do it; it will come close, and that is the reason for the sloppy market, but again, it likely won't do it. What we expect, and as we did as September ended, is to see some wild times as we just saw last week, all the while putting in a bottom for a run to the end of the year.
After that we see who Greenspan's replacement is and whether he or she is a disciple of Greenspan (a free market talker but a Phillips Curve wimp at crunch time), a true free market champion, or just another one-dimensional inflation hawk ('inflation bad, high rates good. Grunt.'). That leaves 2006 wide open economically, meaning it could go either way. If the Fed goes too far as is its habit, the way the economy goes is going to be lower. It already has strains on it, and in fighting inflation the Fed has to be cognizant that a moderately sick patient is better than a dead patient.
THE ECONOMY
Jobs down but not out after Katrina.
It may not be the definitive statement on jobs following Katrina and Rita. After all, the polling method had to be a bit broad given the massive displacement: if a business did not answer the phone it was counted as all jobs being lost.
Thus the 35K drop (-150K expected) was much better than believed. Sure it was the first decline since May 2003, but when you basically take out the southern half of two states and one major port you are going to get a major disruption in jobs. Not only are those in the area lost, but plans to hire in other regions of the country are tabled, even if only temporarily, just to see what the impact is. We saw the Philly Fed report show very weak business confidence right after the storm. A couple of weeks later, however, the Chicago PMI and the national ISM showed a resurgence in optimism. Thus the better than expected report. Down but not out.
Indeed, July and August were revised 77K higher. August went to 211K from 169K. The overall unemployment rate, the household survey, however, rose to 5.1% from 4.9%. That is not in line with the non-farm payrolls, and it might be the truer reading of what happened. Indeed, we will probably know more about the month in the October report once the data and situation gels a bit.
The biggest decline was in retail (-88K). Seems logical in the affected areas, but the Labor Department said those losses were not storm related. Leisure and hospitality lost 80K given tourism loss in the Big Easy (speaking of which, why not conduct tours of the place now it is a ruin? There are enough folks out there morbid enough to pay to see it - - just as long as they have a 5 star hotel to retire to in the evening). Other parts of the Gulf coast were basically flat in jobs. Temporary workers jumped 32K, likely in response to the clean up effort. Construction rose 23K, just about average for the sector.
With respect to Fed action, wages rose only 0.2% ($0.03). That was right in line with forecasts and put wage gains at just 2.6% year/year, less than the 3.6% rise in consumer prices during the same period. Wage pressure is one of the Fed's flash points (wrongly so, but it still impacts Fed action), and it is how showing any indication of 'pushing' inflation as the Fed likes to think it does. Wages have nothing to do with inflation. If there are no restrictions on supply, wages can shoot higher and supply will still meet demand. Indeed it will be even more ready to do it in order to cash in on the higher wages seeking goods.
Fed Remains on Inflation Warpath.
Unfortunately the Fed is not just looking at wages. It will view the overall benign (and indeed surprisingly good report given the July and August revisions) as no impediment to hiking rates. Indeed, it will likely take it as a sign of an economy that remains too strong for its own good (as if such a thing existed; strong is always better. It is when we start trying to manipulate or fine tune it when we create the imbalances), and thus consider it all the more reason to keep on track with rate hikes.
As noted, the market fears both good and bad economic news. It fears a slowdown in activity, but it also fears the Fed in the event the economy stays strong and thus the Fed continues to bear down on it. It is similar to making a lot of money: you like it but it also attracts the IRS.
The Fed is on the warpath against inflation, something that became painfully obvious to the market last week (finally) and the economic data is still strong enough to keep the Fed on course. The market is pricing in more rate hikes (not factored in at 4.5% on the Fed funds rate) and also weighing the possibility that the Fed once again goes too far against inflation, acting with blinders on or with the same emotion we chide the 'crowd' of investors for using as the Fed gets caught up in the moment as opposed to being the stayed, methodical, and reasoned body it fancies itself. We warned at the start of the year that the Fed would get too focused on a goal and start ignoring the economic data. The recent spate of justifications for rate hikes we have heard (discussed in Wednesday's report) is the latest sign of that tunnel vision.
Odds don't favor the Fed.
Given this we are becoming more bearish on the economy in 2006. With the Fed initiating recessions in 8 of the last 10 rate hikes and significant slowdowns in 13 of 15 hiking campaigns you almost have to go with the odds when you see the kind of rationalization the Fed engaged in last week when it blamed anticipated government spending ('governmental profligacy') for future inflation pressures. As discussed Wednesday, that is so wrong it gives you a headache, but no one is calling the Fed on it just as no one (at least no one in Congress where it mattered) called BS on the Fed in 1999 and 2000.
It really hurts that oil prices have remained so high for so long. It is not that we think they will lead to inflation, but they were impacting consumer spending before Katrina and Rita and we see it still that way with last week's initial retail sales results showing the discounters pulling in big gains after a long drought. High oil prices are a tax on the economy, and once the temporary shortages due to the storms are over and the inflation fear from that subsides, their impact on the economy will continue to be detrimental and more a fear than inflation.
The Fed is determined to fight the effects of oil (as Fisher said it does not want to face the problems of the 1970's), but as we noted last week, if the Fed slows the economy enough to really make a dent in oil prices, or on the other hand, keep other consumer prices low enough so the CPI remains low, the US economy will be in shambles. China and India will benefit from the lower price but we won't.
Fed speak hurts near term, but it cannot stop the market.
The Fed is trying to talk to the financial markets, particularly the bond market, into getting rates higher so the Fed won't have to. The problem as seen in the 1990's is that the market will do what the underlying fundamentals tell it to do UNTIL the Fed takes the action that kills it off. In other words, the market tends to work things out based on what is really happening until the Fed thinks it knows more than the markets and stops it. Thus the Fed talk this week will make the market take pause just as it did, and as it did in 1996 as well when Greenspan uttered the infamous 'irrational exuberance' phrase. It won't stop the market on its own, however. Thus the Fed will have to continue to take action if it wants to slow things down.
There are signs of the Fed's desired slowing. The housing market is slowing as mortgage apps fall, inventories rise, the high end market is weakening in some areas. Consumer spending had altered its path pre-storms. Sentiment is lower. Credit card delinquencies are up. Those are not necessarily good things for all of us who live and work in the US, but the Fed sees them as a positive in its fight against inflation. The Fed does not think they are slow enough, particularly given the storms and the shortages that have occurred, and thus it is going to keep going.
At the same time business investment remains pretty solid, something we want to see as that keeps supply strong and helps reduce inflation, particularly with weakening demand. Unfortunately the Fed does not view things the same way. It focuses on demand. That would work to a point as long as business investment remains strong and the Fed does not go too far. Of course that is like hoping for a rain storm in July in Phoenix.
THE MARKET
MARKET SENTIMENT
VIX: 14.59; -0.37
VXN: 16.62; -0.17
VXO: 15.04; -0.24
Put/Call Ratio (CBOE): 0.95; -0.15. Spiked to 1.1 on the CBOE Thursday and 1.0 overall (all options markets) as well. That can signal a turn is in the making, but it has not been as accurate the past year. It takes more readings of 1.0 or better on the close.
Bulls versus Bears:
Bulls and bears continued their positive turns for the second week. More work to do, but heading in the right direction again.
Bulls: 49.5%. Big 3.7% drop from 53.2%. Second down week after three up weeks. It never reached the 55% level considered bearish. Bottomed in May at 43.5%.
Bears: 27.8%. Solid rise from 26.6%. Second week 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: +6.27 points (+0.3%) to close at 2090.35
Volume: 1.486B (-30.62%). Volume tumbled well below average Friday on the modest bounce. No accumulation, no answer to the harsh distribution mid-week. Just low volume relief bounce-type volume.
Up Volume: 768M (+166M)
Down Volume: 688M (-804M)
A/D and Hi/Lo: Advancers led 1.34 to 1. Very modest breadth on the bounce back up, another indication of just some relief moves from beaten down stocks.
Previous Session: Decliners led 1.89 to 1
New Highs: 48 (-13)
New Lows: 85 (-32)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
NASDAQ stemmed some of the bleeding, tapping at the 200 day SMA (2076) on the low, posting a modest gain. NASDAQ undercut the 200 day SMA Thursday intraday; important to hold this on a closing basis. Still below some important former resistance at 2100 and above the 200 day and some price support at 2050. It is still in its base that started in August, just making a lower floor for it but still holding above the February/March and June/July consolidation range. This is where it has to start holding and setting up a floor.
SOX rebounded to tap the 50 day EMA (464.73) intraday before settling with a modest 2.76 point gain. This keeps it above some support at 450 and in the 11 week lateral move. SOX will have to provide some leadership from here for the market to hold here.
SP500/NYSE
Stats: +4.41 points (+0.37%) to close at 1195.9
NYSE Volume: 1.605B (-24.81%). Volume dove lower but managed to hold above average on the modest gain. Just shows how harsh the selling was given such a drop off and still above average.
A/D and Hi/Lo: Advancers led 1.54 to 1. Modest at best. It was as good as it was because the small cap index led the charge.
Previous Session: Decliners led 2.02 to 1
New Highs: 38 (+4)
New Lows: 102 (-63)
The Chart: http://www.investmenthouse.com/cd/^gspc.html
SP500 rallied to tap the 200 day SMA (1200) on the high but then faded for a modest gain. The past two sessions SP500 has held some price support at 1190 on the close. Small consolation after crashing through some solid price support and the 200 day SMA at 1200. The large caps continue their struggle; they were don't the most last week but they had lagged to that point. With this dump lower the pattern has formed more of a broad top; with the move below important support that adds to some of the bearish aspects. Overall it is still trying to hold its range and set up a base, but the indications are more bearish than bullish near term. How it handles the 1200 level will be important.
SP600 led the market Friday (0.9%). It held 335 support on the Thursday close and started from that point Friday. This keeps it in a big lateral trading range or box the past 9 weeks as it tries to set up for another break higher. It was in good position but was overwhelmed in the selling as the small energy stocks were whacked and the leaders were sold hard. It has held where it had support and now has to work on recovering 345 to start the rebuilding process.
DJ30
Went nowhere Friday, showing a hammer doji in the midst of some support from June and July lows at 10,275. Making lower highs and lower lows the past month as DJ30 continues its weak overall pattern. As with SP500 it is moving in a range from 10,250 to 10,700 that has toppish indications with its broad top and lower highs and lows.
Stats: +5.21 points (+0.05%) to close at 10292.31
Volume: 237M shares Friday versus 316M shares Thursday. No interest Friday in Dow stocks.
The chart: http://www.investmenthouse.com/cd/^dji.html
MONDAY
A slow start to the week from an economic standpoint with most reports coming in late week. There are two wildcards of concern: Fed comments and earnings warnings. We saw what the Fed can do near term last week. There is likely little more damage it can do other then come out and say it is going to hike rates past neutral in an attempt to stall economic growth. That would likely spark a bit more selling. Barring that, there is earnings season approaching, and as discussed last week, with the cover of the storms, we are going to see some companies coming out and announcing 'just in case' earnings warnings, i.e. there may not be anything major, but just in case it does show up they are covered. Then they have also managed expectations a bit and can offer pleasant surprises with the actual results if indeed everything turns out okay.
The market may be somewhat sold out after that run lower, but it is not showing any strength. Buyers have not moved in to fill the void (they certainly were not there Friday), and it has not shown the ability to shake off any kind of news, good or bad. When the market gets to the point it can withstand bad news it is getting sold out. When it can rally regardless of the news you know it is on a strong move. The current market is in neither position, having just run lower on harsh selling.
Stocks are left to try and put together more of a rebound move after NASDAQ held support at the 200 day SMA, but it and SP500 are still below key resistance levels broken last week. As noted above, there is more rebuilding to do after the distribution sent the indices lower. Energy took major hits, and that took the indices lower as those leaders fell. How they bounce off of support will tell whether it was a short term setback or the start of new base building. As we saw with the homebuilders for a couple of years, they would post sharp sell offs and then build new bases even when most felt their move was over. Thus energy is likely doing the same thing.
The selling dropped some leaders hard through near support, sending them down to try and rebuild new bases. At the same many leaders continue to hold up well, using last week's selling to test their breakouts, pulling back to near support. We still see many patterns we like, but we also know that when the overall market is struggling under distribution it is harder in general for stocks to move higher. We are going to be ready on those leaders that have made pullbacks and pare providing good entry points, but we want to see strong moves to take positions.
As for the downside we would like to see more of a rebound to set up the moves. The problem is the weak move Friday showed really no buy side inclination immediately following the distribution sessions, and that can lead to further downside from here. Still, we want to see more of a low volume relief bounce on weak stocks to set up another strong leg lower we can play.
As you can gather, the market remains in flux right now after the hard drop, and there are stocks moving in both directions. The strongest have held their near support and those we are most interested in, but we also have to temper the enthusiasm for their patterns with the action of the overall market. That big 'M' makes it tougher for any stock to make sustained moves. Thus we look for good moves to enter, and we make sure those that have held support to this point continue to do so as the market action continues.
Support and Resistance
NASDAQ: Closed at 2090.35
Resistance:
2100 was key resistance and support in the past
The 10 day EMA at 2117
The 50 day EMA at 2133
2151, the early December closing high and highs from January 2004
The 50 day SMA at 2149
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 2076.82
2050 is price support from spring and summer 2005 consolidations
The August 2004/April 2005 up trendline at 2008
S&P 500: Closed at 1195.90
Resistance:
The 200 day SMA at 1200
1200 was solid price support
The 10 day EMA at 1209
1210 held in late September on the close.
December 2004 high at 1219 and June high at 1220
The 50 day EMA at 1219
The 50 day SMA at 1223
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:
1190 from May through July lows.
1183 - 1184 from November 2004 highs and July 2005 intraday low.
1176 is the August 2003/August 2004 up trendline.
Dow: Closed at 10,292.31
Resistance:
10,350 turned out to be support in the recent pullback August and September pullbacks
The May high at 10,406 and 10,400, the bottom of the November/December range
The 10 day EMA at 10,407
The 50 day EMA at 10,497
The 200 day SMA at 10,528
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 11
FOMC Minutes, September 20 (2:00)
October 12
Crude Inventories, 10/7 (10:30): -246K prior
October 13
Export Prices ex-agr., September (08:30): -0.1% prior
Import Prices ex-oil, September (08:30): 0.0% prior
Trade Balance, August (08:30): -$59.3B expected and -$57.9 prior
Initial Jobless Claims, 10/08 (08:30): 390K prior
Treasury Budget, September (14:00): $37.0B expected and $24.6B prior
October 14
Retail Sales, September (08:30): 0.2% expected and -2.1% prior
Retail Sales ex-auto, September (08:30): 0.6% expected and 1.0% prior
CPI, September (08:30): 0.9% expected and 0.5% prior
Core CPI, September (08:30): 0.2% expected and 0.1% prior
Industrial Production, September (09:15): -0.5% expected and 0.1% prior
Capacity Utilization, September (09:15): 79.4% expected and 79.8% prior
Michigan Sentiment-Prelim., October (09:45): 80.0 expected and 76.9 prior
Business Inventories, August (10:00): 0.1% expected and -0.5% prior
End part 1 of 3
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