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world stock market, us stock market
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10/18/05 Stock Split Report
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Stock Split Report Subscribers:
MARKET ALERTS
Targets hit alerts: None issued
Buy alerts: IWM; STJ (bonus)
Trailing stops: None issued
Stop alerts issued: VLO; BER
SUMMARY:
- Stocks turn back down after 3 day bounce, unable to weather earnings, Fed-speak, inflation fears.
- PPI jump matches 30 year high on the back of surging energy prices.
- Greenspan talks of a permanent energy drag while Yellen talks about a 5.5% Fed funds rate, implying an inverted yield curve.
- Big name earnings after hours are not turning the tide.
- Some signals market may put in a bottom despite all of the issues?
Bounce starts to fade as indices turn down on rising volume.
After three upside sessions on low volume we were anticipating the move would start to run out of gas. Tuesday the market was struggling from the get go what with a surging PPI, earnings or guidance that were either bad or were simply unexciting in the current environment, and more Fed speak regarding how the Fed is going to continue the guessing game with our economic futures. Regarding earnings, American Standard missed the street and forecast crappy growth (pun intended); Lazy Boy and Cooper Tire revised their guidance lower. With all of that to swallow, no wonder the market threw up its hands and fell back.
All major indices fell back from their test of near resistance. SP500 could not break through the 10 day EMA, the lowest level of resistance you can find. NASDAQ tapped at the 200 day SMA for a split second midmorning; if you blinked you missed it. A midday rebound tried to advance the ball, not bad given the low volume rally to this point, but with the big earnings reports still to come there was no buying support for the move. Stocks turned back south and eroded all session, dropping hard into the close. Not a bullish finish.
Volume rose, a sign that distribution started anew. Trade was still below average on NASDAQ but NYSE saw volume move back above average as the NYSE indices sold off. In short, there was more volume dumping of shares. As we have been discussing, this is the kind of action you can see when a market is trying to put in a bottom to rally off of. Back in April stocks sold hard, bounced a couple of sessions, sold off on high volume one session, and then rebounded again with back and forth action day to day until topping and rolling over for the test of the earlier low. Thus we could see the market rebound from here and still try for the next level of resistance, but we were taking some downside positions today because even if that happens there is almost always another drop to test that first low.
In addition to volume, breadth was lopsided to the downside on both NYSE and NASDAQ. Once more the market shows another side of its weakness: weak breadth when it advances, sharply negative breadth when it sells. That works to corroborate the poor price/volume action the market is displaying. In short, both the primary and secondary indicators point to a continued negative bias. Doesn't take rocket science to see that, you just look at the action. Down on hard volume, lower volume rebound, and now likely a slugfest between bears and bulls as the market descends for another test lower. This latter part can get ugly and bystanders can catch a stray bullet during the fight.
Overall, however, the trend is lower as the market action itself suggests as well as history suggests. Leaders are still holding up but will be tested once more in the next drop back down. We fully expect a second drop in this current selling bout. That will either help set the bottom or it will just plow lower and continue the selling. That is how the market will tell us if it is done with the selling, i.e. if it shows us another bottom near the prior and then rebounds and delivers a follow through. The action of leaders will show us signs as well; if they hold up and start higher as the market tries to hold another low that indicates the market is going to try to rebound as well.
THE ECONOMY
PPI growth rate mirrors another period of high energy prices.
September producer prices jumped 1.9%, the strongest growth rate since November 1974 when the Arab oil embargo sent oil prices skyward. That topped the 1.2% climb expected and the 0.6% from August.
The jump is not surprising; the storms have shut in most Gulf production, and prices have risen accordingly. The debate is over the impact. The general idea is that high producer prices eventually move into the consumer side, 'passed along' as a cost of doing business. In the 1980's it did not happen, nor did it happen in the 1990's. In the 1970's inflation was spiraling out of control as the economy sank into the mire. Stagflation was the word coined to describe it, and it had Phillips' Curvers scratching their heads: how can you have such high unemployment, low economic output and yet double digit inflation with interest rates over 20%? Why? Because the Phillips' Curve doesn't work in reality, but most of the Fed abides by it. Any wonder why we feel Greenspan's replacement is one of the most important appointments Bush is going to make?
What happened in the 1970's was a combination of events the government and Fed had no idea how to deal with. The seventies saw an incredible surge in federal laws and regulations dealing with the environment, social programs, 'new' rights in the Constitution, the rise of foreign competition, and the effects of the dollar float. The Fed pushed a lot of money into the system to offset high energy prices. The economy still slowed despite the money, and that led to inflation. Inflation led to more slowing and locked up more and more money into tax shelters where it would stay until a friendlier environment for risk taking emerged. These factors produced a very unfavorable business climate and the US economy stumbled lower and lower as risk taking was not rewarded by the tax system nor by the incredibly high costs of capital. Not until the early 1980's when sweeping tax reforms and deregulation initiatives were passed was any investment made in the US. After those changes the coffers were opened up as the tax shelters were abandoned in favor of profit potential in a much more favorable economic climate.
The concern with the recent PPI is that costs will pass to the consumer and inflation will run even higher. With high energy prices also acting as a drag on the economy, the combination smacks of stagflation. That has the Fed worried and it has the market worried. The market is not so much worried about stagflation itself versus the Fed's response. The Fed does not want to monetize the energy increase (pump a lot of liquidity into the system), and thus it has adopted a tight money policy. It is not just tight money, however, that caused the problems of the seventies. The market fears the Fed getting too tight and going well beyond offsetting any inflationary effects of higher energy prices near term due to the storms and instead choking off the economy as well. The Fed has a very bad history of going not just a little too far, but way too far in its zeal to avoid inflation and micromanage the economy.
Greenspan acknowledges oil's drag even as XOM indicates prices may have peaked, but Yellen is simply talking crazy talk.
In a speech in Japan discussing energy, Greenspan talked of energy prices as a 'drag from now on' with respect to the economy. Man, from now on. Apparently Greenspan sees energy prices never going lower again. That is exactly what everyone, both within and outside of the energy industry, was predicting in the late 1970's. Oil was not only going higher, it was going to $100/bbl and it was not going to come back down. Indeed, look at what happened today: XOM was torched on high volume, tanking through its 200 day SMA as some big positions were unwound. The market tends to forecast movements in any commodity, the economy, etc. When oil stocks seriously break down such as this one that is a manifestation of perceived lower earnings. Earnings will fall if prices fall for whatever reason. XOM and other exploration and production stocks are suggesting the oil price has peaked on this move. By the way, does that $100/bbl figure sound familiar? That is the 'super spike' figure thrown out earlier this year by one of the major brokerage houses. Of course, $100/bbl oil in the late 1970's was nearer to $150/bbl oil today.
While we have serious issues with Mr. Greenspan's ability to forecast oil prices any better than energy experts (who are suspect themselves), this talk does have interesting ramifications. After reading the text we came to the conclusion Greenspan may be ready to acknowledge that yes in fact high, sustained oil prices can be at least as much a drag on the economy as inflationary. We see that Pimco's Bill Gross has somewhat the same read of this statement.
Is Greenspan trying to take back some of the tough talk that recently sent the stock market on a distributive binge? Our sources in DC say that Greenspan is very aware these days of how the Fed has overdone its rhetoric and tightening in the past though he won't admit that the Fed screwed the pooch and caused the economic upheaval that often resulted. He does not want to leave with inflation knocking at the door, but he also does not want to leave economic wreckage in the aftermath of another one of his rate hiking campaigns. Thus we view this statement as the start of a more moderate public stance with respect to inflation. The Fed speak has been hitting the inflation button hard. That spooked investors. Now Greenspan is going to take some of that back.
Is the Fed really thinking a 5.5% Fed funds rate is neutral?
Shortly after Greenspan uttered these words Fed governor Yellen was out on the stump, but she was still playing on the 'inflation is our worst fear' angle. She covered a lot of ground, prefacing everything with the usual 'inflation is well-contained longer term.' That standard 'all is well, remain calm' statement out of the way, she got down to browbeating the economy and investors once more.
With respect to housing she flat out said there was a bubble element in the housing market. We have documented in the past the Fed's metamorphosis on the housing market from Greenspan laughing off such questions from Congress early in 2005 to the current pronouncements of bubble status. What the housing market has done is show a nice, easy top and now is showing positive developments that indicate the slowdown is progressing but in a very orderly manner. Prices are peaking in some markets but not careening lower. Inventories have risen the past four months to what are called sustainable levels. Bidding wars are no longer the game plan in hot markets. The Fed should take credit for a job well done (though it has little to do with it) and back the heck off from taking on that market. We know what happens to a market when the Fed decides to lock horns with it: the Fed will not stop until the market cracks. Of course the market cracks when it is on the verge of falling. Thus by the time it does what the Fed wants it is already starting the death spiral. Back off and take credit.
Yellen went beyond housing, however, and of course went to the Fed's favorite pastime, dropping hints about what Fed funds rate is neutral. She stated that neutral was somewhere between 3.5% and 5.5%. Some quick (and rather simple) math would suggest Yellen was hinting at 4.5% being the Fed's 'target.'
While that might not be a bad target for the market and economy, two very important issues are raised. First, why is the Fed so caught up in forecasting targets using backward looking economic data? Why doesn't the Fed simply follow real interest rates with its own rate hikes if it is really interested in just being neutral?
The reason is found in the second point. The Fed isn't really interested in being neutral; it is interested in reaching a target it set some time back even though it claims not to have done this. We set that target at 4.5% back early in the year. What is worrisome about Yellen's comment (and you would assume it was carefully considered given it was relating to such a touchy issue) is that someone on the Fed could actually think neutral could be up to 5.5% with the 10 year note at 4.47%. Having the Fed funds rate at 5.5% (that would basically be the short term Treasury rate as the Fed sets the short end of the curve with the Fed funds rate) and the long end at 4.5% is what you call an inverted yield curve. This is the most reliable indicator in modern economic study of whether a significant economic slowdown or recession is coming. Greenspan downplayed this over the summer, but you cannot put any faith in that statement. The Fed is always convinced it is smarter than the markets; that is why it is so quick to choke off economic expansion because it does indeed believe in the Phillips Curve. Inverted curves are trouble, and yet one of the FOMC members is out there saying neutral can occur when the short end is higher than the long end. That is beyond neutral to extremely tight money.
Thus there are some mixed signals coming out of the Fed starting with the Greenspan speech. The Fed has been very hawkish on energy prices leading to inflation, so much so it spooked the market to start October. Greenspan looks as if he is trying to mitigate the position now that the market has dumped lower. If that is the case he needs to get the other Fed governors and president reading from the same script. Otherwise the resulting confusion will only create more uncertainty, and the market hates uncertainty.
THE MARKET
MARKET SENTIMENT
VIX: 15.33; +0.66. VIX started higher after a two day pullback. This time we want to see it spike above 18; 20 would be even better.
VXN: 16.48; +0.26
VXO: 14.96; +0.79
Put/Call Ratio (CBOE): 0.95; +0.08. Climbing back up and somewhat surprising it did not move past 1.0 again on the Tuesday selling. It spent 7 of 8 sessions above 1.0 through last Friday.
Bulls versus Bears:
Bulls and bears showed the jumps we were looking for though bears did not quite hit the 30% level seen in early May just after the market bottomed. There is still the next leg lower, however, to run that up and even past that level. Getting where they need to be to form a bottom here.
Bulls: 45.8%. The second consecutive 3.7 point drop (49.5% last week) pushed bulls close to their May levels when the market embarked on its last run. Third down week in a row after three up weeks, and the drops have been larger than the gains. Bottomed in May at 43.5%.
Bears: 29.2%. Did not quite hit 30% as we wished for, but a solid 1.4 point gain (from 27.8%) got it within spitting distance. On this last trip lower it easily held above the 20% level that is considered bearish. Hit a high for the year at 30% in early May.
NASDAQ
Stats: -14.3 points (-0.69%) to close at 2056
Volume: 1.531B (+17.15%). Volume moved higher as NASDAQ turned down from the 200 day SMA. It was still below average as it turned back from the relief bounce, but it was higher on the selling, indicating that sellers still remain in firm control of the NASDAQ action. For what it is worth, we note that once again NYSE volume was stronger than NASDAQ volume, and that is an indication that the more speculative NASDAQ is getting sold out. It is not a great timing device, but it is something to throw into the mix of market action and internals.
Up Volume: 456M (-294M)
Down Volume: 1.034B (+503M)
A/D and Hi/Lo: Decliners led 2.13 to 1. Weak upside breadth led by the large cap techs, strong downside breadth with all of the NASDAQ sectors participating in the drop. Both of these are more bearish indications.
Previous Session: Decliners led 1.12 to 1
New Highs: 47 (+2)
New Lows: 97 (+8)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
NASDAQ tapped at the 200 day SMA (2073) on the intraday high and then faded in the afternoon to close at the session low. Volume was up but below average. Nonetheless it shows buyers are still in the majority: low volume rebound and higher volume selling. That about says it all. With that NASDAQ turned back from the 200 day SMA, and while it still might bounce around for the next week as earnings come out and the bulls and bears fight it out, the likely result is another test lower that will either set a bottom and a rebound and follow through or will fail and the index will continue lower.
SOX fared no better as it fell back after a nice move off the 200 day SMA (433.55). We were looking for more leadership on this bounce but SOX never made it to the 10 day EMA (447.85) before waffling on the move. Compared to the other indices, SOX is still in good shape, holding easily above the 200 day SMA. Intel's results after hours were not doing it any favors, however, as INTC missed the street (0.32 vs 0.33) though it did hit on earnings.
SP500/NYSE
Stats: -11.96 points (-1%) to close at 1178.14
NYSE Volume: 1.624B (+6.97%). Volume jumped on the renewed selling and it also moved back above average, unlike NASDAQ. Above average trade always shows more conviction. Thus the NYSE indices are showing more conviction on their selling. Both markets, however, are back in the distribution mode.
A/D and Hi/Lo: Decliners led 2.55 to 1. Everything was heading lower on the NYSE with the small and mid-caps leading the way lower. Thus breadth was impressively negative.
Previous Session: Advancers led 1.18 to 1
New Highs: 26 (-5)
New Lows: 161 (+19)
The Chart: http://www.investmenthouse.com/cd/^gspc.html
SP500 turned down from the nearest and weakest resistance level (the 10 day EMA at 1189) and plunged all the way to the August 2003/August 2004 up trendline (1178). Volume was up and above average on the selling, indicating big money unloading stocks once again. That keeps the index very much in a negative bias. We note that SP500 did not violate this up trendline on the close in the recent test lower. Looks to be a pretty sure bet it is going to violate it again, and we will see whether it holds on the close or not. Odds are it won't, and that contributes to the shakeout effect of the second test lower.
SP600 was in selling mode again, moving lower on that rising NYSE volume and negative breadth. It breached the 200 day SMA (330) once more on the close, something it did just last week on the other test lower. As with the other indices we are looking for a test in the neighborhood of that recent low (322.92) to try and set the bottom. It really needs a few more sessions trading up near this level, i.e. some back and forth action, before it makes the test. That would make it more like two separate tests lower versus a continuation of just one.
DJ30
DJ30 made it a bit higher than the SP500, rallying to the 18 day EMA (10,352) on its bounce. The result was no different, however. DJ30 turned over and dumped lower on much stronger, above average volume than the prior three upside sessions. Same action as the rest of the market, and DJ30 is ready to head down to test the recent low (10,156) intraday with some support at the 10,200 level.
Stats: -62.84 points (-0.61%) to close at 10285.26
Volume: 297M shares Tuesday versus 242M shares Monday. Distribution ramped up again, but much of the trade related to a massive volume spike in XOM where Exxon broke sharply below the 200 day SMA as some big holders got rid of the stock. As noted above, we view that as indicating oil prices have likely peaked.
The chart: http://www.investmenthouse.com/cd/^dji.html
WEDNESDAY
We get another view of the housing market's orderly decline Wednesday with the September housing starts and permits, but it won't matter because the Fed has already made up its mind there is a bubble. In the Fed's world, a bubble is only over when the affected industry lies in smoldering ruins. That means the Fed won't really look at the numbers because it has deemed housing a bubble and bubbles have to be popped. Prognosis negative for housing.
More near term, a passel of big name earnings reports were released after hours. INTC again failed to impress and sold off. We had to marvel at some of the analysts after hours who wondered why INTC was not being rewarded for its steady, albeit unspectacular by historical standards, growth. Well, it is because it is no longer spectacular growth; INTC has joined the ranks of the mature companies that are too big and lack the big growth driver to enjoy those 50% gains in sales and earnings. YHOO reported earnings and the market yawned; it went nowhere after hours. MOT beat the street by 4 cents and blew away revenue estimates (9.42B versus 9.12B); that had the stock moving higher after hours by 63 cents (3%).
It was not a stellar earnings session, at least not the type that will excite investors into buying in the face of a Fed that could conceivably see 5.5% and an inverted curve as neutral and oil prices that have held above $50 for the entire year. Only in the Fed's world could money supply that is 100BP tighter than market rates be viewed as neutral. That has investors extremely nervous about the future and thus the selling.
That leaves us in this current test lower, trying to establish the bottom. With the facts and commentary outlined in this report one might wonder how in hell could the market bottom with the Fed and energy prices still out there sucking the life out of the expansion? Well you have to start looking in the corners and keep your eyes open as to what the market is doing. XOM imploded and CVX is following it lower through the 200 day SMA. BP is testing its 200 day SMA, selling to it on strong volume. The oil sector in general is far from breaking down as a whole, but these big names that have huge economies of scale look bad. The others can fall further and form new bases. If the big boys implode, however, the indication is that oil prices have peaked just when everyone, Greenspan included, says oil prices are going to be a drag from here to eternity.
That is how the market could bottom: peaking energy prices and a strong drop in them as well. Moreover, Greenspan's recognition of energy's ongoing impact on the economy. Not only does that suggest oil has topped now that Greenspan thinks it will keep on rising and causing trouble, but it also suggest Greenspan is reining in the Fed's recent tough talk and may signal it will stop on January 31.2006 at 4.5%, maybe even before then at 4.25%. Does that sound completely impossible to you? Well that is usually when the market starts to make its turns. Thus this very well could be the bottoming process that sets up a run into the end of the year. From there we have to see what Greenspan and company do as well as how oil prices behave.
Support and Resistance
NASDAQ: Closed at 2056.00
Resistance:
The 200 day SMA at 2073
2100 was key resistance and support in the past
The 18 day EMA at 2090
The 50 day EMA at 2115
The 50 day SMA at 2130
2154 from January 2004 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:
2050-51 is price resistance from spring and summer 2005 consolidations
2018 is the early April high.
The August 2004/April 2005 up trendline at 2016
S&P 500: Closed at 1178.14
Resistance:
1183 - 1184 from November 2004 highs and July 2005 intraday low and a high way back in July 1998
The 10 day EMA at 1189
The 200 day SMA at 1199
1200 was solid price support
1210 held in late September on the close.
December 2004 high at 1219 and June high at 1220
The 50 day EMA at 1210
The 50 day SMA at 1216
March 2005 closing high at 1225 and intraday high at 1229.11
The September high at 1243 and the recent August high at 1246
Support:
1178 is the August 2003/August 2004 up trendline.
1165 - 1155 from late 2001/early 2002 double top
Dow: Closed at 10,285.26
Resistance:
The 18 day EMA at 10,352
10,350 turned out to be support in the recent August and September pullbacks
The May high at 10,406 and 10,400, the bottom of the November/December range
The 50 day EMA at 10,441
The 200 day SMA at 10,510
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 17
NY Empire State Index, October (08:30): 12.1 actual versus 19.0 expected and 15.6 prior (revised from 17.0)
October 18
PPI, September (08:30): 1.9% actual versus 1.2% expected and 0.6% prior
Core PPI, September (08:30): 0.3% actual versus 0.2% expected and 0.0% prior
October 19
Housing Starts, September (08:30): 1975K expected and 2009K prior
Building Permits, September (08:30): 2075K expected and 2138K prior
Crude Inventories, 10/14 (10:30)
October 20
Initial Jobless Claims, 10/15 (08:30): 365K expected and 389K prior
Leading Indicators, September (10:00): -0.5% expected and -0.2% prior
Philadelphia Fed, October (12:00): 10.0 expected and 2.2 prior
End part 1 of 3
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