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world stock market, us stock market
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10/19/05 Stock Split Report Update
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Stock Split Report Subscribers:
Full report issues Thursday
MARKET ALERTS
Targets hit alerts: None issued
Buy alerts: TEVA; CIP; SBUX; FLO; AAPL
Trailing stops: SNDK; CERN
Stop alerts issued: CHRWD; RTH
SUMMARY:
- Stocks sell early, use oil inventory build as catalyst for high volume reversal.
- Housing starts resume their climb.
- Gasoline sales, crude production fall to multiyear lows.
- Greenspan may have sounded a conciliatory note, but Fed governors not following suit.
- Follow through session lends credence to setting the bottom, but past bottoms are typically volatile before the trend is set.
- Big name earnings not providing after hours stimulus, but market rallied Wednesday without a lot of concern for earnings.
Market posts a strong intraday reversal as oil inventories jump.
The market started soft, continuing the Tuesday return to higher volume selling. SP500 undercut the up trendline and NASDAQ fell below the 2050 support level. That did not stop the selling. SP500 fell close to last Thursdays intraday low (1168) early on, bounced, but then started to roll back over. Then the oil inventory data hit, and with a surprise build of 5.6M bbl the market caught some wind in its sails. It wasn't an immediate 1% surge, but it transitioned a lot of the selling into buying/short covering.
That led to an early afternoon breakout from an intraday cup with handle pattern on NASDAQ and SP500; no matter what time period you look at whether intraday, daily, weekly, etc., the chart patterns are the same. That pattern yielded a strong breakout and the big indices rallied into the close. Indeed, the small cap SP600 led the move with a 2% rally after it too tested close to the recent intraday lows and shot back up through the 200 day SMA.
Volume jumped big time. The selling volume Tuesday on NASDAQ was stronger than Monday, but it was also still below average. Wednesday trade shot back above average. SP500 trade exploded to the strongest session since the early month selling. Trade was strong on the selling as well; it was not all just buy, buy, buy. Indeed, if you looked at the market intraday you saw NASDAQ, SP500, and SOX negative on strong volume. It was not until the rally started in the afternoon did the market take on a bullish tone. Until then it was still questionable as to whether the market would holds its comeback as SP500 was still trading below its up trendline it broke earlier in the session.
That break higher pushed both NASDAQ and SP500 through the near resistance (200 day SMA and 10 day EMA) that stalled out the rebound attempt Monday and Tuesday. Volume continued to climb as the market moved higher, showing the selling volume early had converted to short covering and longer term buying. How can you tell? Because the leaders were moving up again on solid trade as well as those stocks that have been sold off hard that were making rebounds following their declines. It was enough to push SP600 up almost 2% and NASDAQ up 1.7%. Breadth was decent at 1.8:1 on both NYSE and NASDAQ.
Those are good enough credentials for a follow through session to last Thursdays rebound. A follow through shows continued buying that follows the initial rebound rally; it is important because it shows buying other than just short covering driving the move higher. If the market move is strong enough, broad enough, and has leadership, the move indicates buyers are returning to the market. It is not a certainty that a rally will succeed, but historically it is a prerequisite of all successful rallies. That said, the price gains were strong enough and the leadership was solid; breadth was not quite there. You want to see at least 2:1, preferably more. That leaves a question mark with respect to the move but not a huge one.
Even with the follow through we note that the bottoming process can still be quite volatile. Last October the selling was followed by a relief bounce and then some sharp back and forth sessions before the rebound got on track. Indeed it took several 'lead changes' before the bottom was set and the market rallied out of that dip. Same thing in April with several back and forth, up and down sessions before the bottom was established for good. It may be ready after this test lower on SP500 and SP600; it was a strong move. Other bottom building periods have seen several strong moves as well, however, and they were strong both directions as the market violently resolved the bull/bear debate. Thus the upside move looks strong and ready to continue, but we also expect some continued volatility as well.
THE ECONOMY
Housing starts resume their climb, keeping the Fed's eye.
Starts jumped 3.4% and permits hit a 32 year high. Mortgage applications snapped back 6.1% with new mortgage applications rising for the first time in five weeks. The housing market is topping but it is hardly slipping into oblivion. Inventories are rising and prices are softening some, all good signs that the market is easing in an orderly manner.
That might not be orderly enough for the Fed. As we reported in September, the Fed has clearly set its sights on the housing market similar to the way it targeted the stock market in the late 1990's. Greenspan went from laughing off the idea of a bubble to seeing bubbles in various markets. His henchmen have taken that further, saying the market had a bubble 'element' in it; others have simply called it a bubble. We know what that means: deflate it before it hurts us.
All we have seen so far is a nice steady slowdown of the market. It is not a crash, and it is still expanding, but at a reasonable rate. It will eventually peak and start to decline. The Fed should declare victory and not specifically target the housing market in its monetary policy considerations. The Fed too often tries to micromanage markets as opposed to taking a broad brush approach to price stability which just so happens to be its mandate. When it starts to micromanage using a tool (the Fed funds rate) that is not made for fine tuning, the results often miss the mark. Think of using a chainsaw to thin slice roast beef. You get the ingredients for hash instead.
Crude inventories surge as US production hits a 60 year low and gasoline sales plummet.
Good thing crude inventories grew 5.6M bbl last week. US crude oil production fell to the lowest level since 1943 as Gulf production remains mostly shut in. That prompted a 9M bbl/day import rate last week.
A lot of people point to that and panic about relying on foreign oil. We view it as a positive and a negative, but mostly a positive. There is this idea that we have to PRODUCE most of the oil we use in the US. Why? We have billions of barrels in Alaska in ANWR, the National Oil Preserve and many other areas. We have billions on the Gulf and may start actually exploring off of Florida as well. That is a hot button issue, and we heard one environmentalist say no one would go to Florida to vacation if there was production offshore, implying no tourist dollars. There is production in parts of offshore California, in Texas, Louisiana, Mississippi, and Alabama. Don't tell Florida, but those states still get a lot of tourism. Will offshore production facilities make Florida's beaches any less beautiful? Will it make people prefer to go to the Texas, Alabama, Mississippi, etc. beaches instead? No. The argument is non sequitur.
Should we produce all of this oil instead of using foreign oil? In other words, should we drain America first? No. What we need to do is explore for, drill wells, and set production facilities in place to produce this oil. Then we need to leave it there and import all of the foreign oil we need. If someone gets the idea they don't want to import it to us, e.g. Venezuela and its rather precocious leader, we turn on the taps and send it down south. Then we have the SPRO and huge fields ready for production that can be used to blunt threats of an embargo or even unwarranted price hikes while at the same time draining others' reserves. It would also help us weather shocks such as the twin storms in the Gulf this summer because not all of our production capability is concentrated in one area.
We called the $3 mark for gasoline as the choke point early last summer. When it hit $3 in the Rita aftermath it appears to have indeed choked off demand. Specifically, gasoline sales fell 3.7%, the largest drop in 10 years. Consumers curtailed their driving, apparently following the President's pleas to drive less. In reality it probably had little to do with the President's plan but more with harsh reality: $75 to fill up a mid-size brings tears to the eyes. There goes lunch; there goes a round of golf, there goes the kids' allowances for the month. It infects the economy in many ways.
That is one reason we don't buy into the Fed's theory that inflation after Rita and Katrina is the biggest fear. High gas prices have a way of correcting spending that Fed rate hikes do not. As we have said oft before, Fed rate hikes don't lower gasoline prices, gasoline prices do that because when they get high enough consumers stop buying it. With lower demand, prices drop. Elementary my dear Greenspan, or so one would think.
Greenspan Henchmen still beating the inflation drum.
Greenspan may have sounded a slightly conciliatory note Tuesday when he spoke of energy prices being a drag on the economy 'from now on,' but if that was the case his cohorts did not get the memo. Or maybe they did but at this point in Greenspan's career they are more interested in moving up the ladder than paying homage to the so-called maestro. Look who was talking: Ferguson and Kohn, both of the names that were floated anonymously from the White House a couple of weeks back, both of which would be unmitigated disasters as head of the Fed given their Phillips Curve ideals.
Kohn gave a speech where he basically said rate hikes were coming for the indefinite future. He said inflation was the primary worry and he just did not know when the Fed could stop raising rates given those pressures. So oil is not much of a drag as Greenspan indicated, and it does not matter to Kohn that consumption fell off the table when gasoline hit $3/gallon. You can bet that the inflation numbers will drop significantly this coming month given the 28% drop in gasoline prices since early September. None of this seems to impact the Fed's thinking. As we have said before, the Fed gets into a mindset of reaching a goal, and nothing, not even facts, are going to get in its way.
Ferguson was also making speeches, and his took a different tack but they were no less hawkish. Ferguson brought up what we have feared from the beginning, but is something the Fed always does: it loses patience and ends its rate hike series with more intensive hikes. In other words it panics and hikes rates by 50 BP, back end loading the series just as Bob McTeer, now retired, said that Greenspan and the Fed would not do. Something about learning its lesson. Well, if history shows anything, the Fed has not learned much unless it actually wants to cause recessions. It has an .800 batting average in the last ten rate hike campaigns.
Anyway, Ferguson said that the Fed would raise rates at a faster pace if it sees inflation increasing. That is Fed doubletalk. The Fed has raised rates to fight 'increasing inflation' even when there was no inflation. Just look back at the late 1990's and early 2000. The Fed was sure inflation was about to erupt given all of the prosperity in the land: good jobs, high wages, soaring stock market. Inflation had to be just around the corner so better head it off. It did. It crashed the market and then the economy without ever seeing anything but what it thought was inflation's shadow. Oh yes, and it ended that series of hikes with a 50BP stinger. Everyone who believes the Fed has learned its lesson stand on your head.
That is why we are still very concerned for 2006. The Fed acts as if has not yet begun to fight inflation, and that is disastrous in its implications. The consumer is going to slow down and indeed has done so. As long as gasoline prices remain high and the talk of out of this world heating prices continues the consumer is going to get conservative. It may not happen until after Christmas when the holiday bills and the first real heating bill hits, but that won't save the market.
The economy will need some stimulus to keep going in the face of these issues. The tax reform proposals were thought as a way to accomplish this. They, however, have turned out to be a big disappointment. That, however, is an issue for another day.
THE MARKET
MARKET SENTIMENT
VIX: 13.5; -1.83. Tumbled to close on the 50 day EMA and back in the June to August range. Never hit as high as we wanted it to. This may have been good enough for a rally from here, but as for a bottom setting rally it lacked a real spike in fear.
VXN: 15.57; -0.91
VXO: 13.8; -1.16
Put/Call Ratio (CBOE): 1.1; +0.15. The ration closed back over 1.0 given all of the whipsaw in the market.
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: +35.24 points (+1.71%) to close at 2091.24
Volume: 1.936B (+26.51%). Soaring volume. Volume was stronger on the early selling, indicating distribution still ongoing, but it was also strong in the afternoon as the market rallied. That shows covering and some longer term buying as both beaten down stocks and leaders rallied on solid trade. Strong enough volume for a follow through session.
Up Volume: 1.381B (+925M)
Down Volume: 507M (-527M)
A/D and Hi/Lo: Advancers led 1.86 to 1. Not really great breadth for a follow through session. There was more breadth on the down sessions. Another chink in the armor that may limit the upside on this move though it likely won't scuttle the move itself.
Previous Session: Decliners led 2.13 to 1
New Highs: 46 (-1)
New Lows: 144 (+47)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
NASDAQ tested lower, cutting below 2050 support down to 2042. It never threatened the prior low at 2025 before starting back up. That may call for another test; that remains to be seen, particularly as SP500 and SP600 did come close to their prior lows. NASDAQ blew through the 200 day SMA (2073) halfway through the afternoon run to the close. That was a key move for the index as it surged through that resistance that pushed it back earlier this week, doing so on very strong volume. Good start to the move and now eying 2100 and the 50 day EMA (2114) just a fast opening run away.
SOX (+0.02%) managed to turn positive on the close after falling over 2% intraday as it reached well below the 200 day SMA (433.69) on the low (425.13) and then rebounding with the market in the afternoon. INTC was a heavy burden, but a lot of big name chips are very sluggish in their upside strength, fighting off a quick dose of overhead supply picked up this month. SOX held where it had to. Now we see if it can do something with this big time shakeout move.
SP500/NYSE
Stats: +17.62 points (+1.5%) to close at 1195.76
NYSE Volume: 2.055B (+26.58%). Honey, that is strong volume. NYSE indices undercut support and then screamed back up as short covering started the move and likely had a lot to do with the recovery of some energy issues that have been roughed up considerably the past three weeks. Some buying as well, but a lot of short covering.
A/D and Hi/Lo: Advancers led 1.83 to 1. The small caps led the session higher with a strong 2% gain, but breadth was extremely disappointing, particularly when juxtaposed with the recent downside breadth. As with NASDAQ, this is a chink in the move's armor.
Previous Session: Decliners led 2.55 to 1
New Highs: 36 (+10)
New Lows: 235 (+74). Not bad.
The Chart: http://www.investmenthouse.com/cd/^gspc.html
Unlike NASDAQ, this had more of the look of a test of the prior low and then a rocket shot back up. SP500 hit 1170 on the low, just above the Thursday intraday low at 1168. Both sessions undercut the August 2003/August 2004 up trendline (1179) and both times the index snapped back with considerable force. As with NASDAQ, SP500 is poised to take on next resistance at the key 1200 level where there is price resistance and the 200 day SMA (1199). That is the first test of this rebound, and we may very well see things get a bit volatile as it makes the test (as if this action has not been volatile already).
Similar to SP500, the small cap SP600 tested near last weeks low (325 today, 323 last weeK9 and bolted higher, moving back through its 200 day SMA (330) on that strong NYSE trade. It is approaching the bottom of its recent range, starting with some resistance at 337 and then a wall at 340. Its 1.97% price gain coupled with the volume was good enough for a follow through session along with NASDAQ. As with NASDAQ, however, the breadth was questionable. That can come back to bite it after a tussle with resistance.
DJ30
The blue chips surged as well, though outside of SOX its gain was the lowest percentage move. Volume jumped, just topping the Tuesday selling trade. Cleared 10,350 resistance and moving toward the heart of its trading range at 10,500 (200 day SMA at 10,508). Still in a very broad top that has formed the past 5 months.
Stats: +128.87 points (+1.25%) to close at 10414.13
Volume: 316M shares Wednesday versus 297M shares Tuesday. Met the distribution with even stronger buying; that is how you fight fire, i.e. with fire.
The chart: http://www.investmenthouse.com/cd/^dji.html
THURSDAY
As discussed earlier, the Wednesday move was strong and had most of the attributes of a follow through though breadth was notably light. These bottoming episodes can be quite volatile in their own right; with breadth a bit light we may indeed see some up and down action from here, particularly after NASDAQ, SP500 and SP600 run into the key resistance that is looming just ahead.
As for the near term, after hours a flood of new earnings hit the market, and with so many the market gets overload and focuses on what it considers key reports. EBAY was anticipated to be good and was though it warned of some acquisition costs. Some say it rallied into the numbers, but it has not done a lot of rallying the past two months. In any event it was socked after hours for a $2.50 loss. May turn out to be one of those AAPL stories where it takes a couple of days to figure out business is good.
Even with earnings on Tuesday that showed disappointments in key results, the market still rallied sharply. This is more evidence that the market is not trading on what is happening right now; that is factored in unless it was totally unexpected. The market is focusing on what is to happen down the road. That is why the market seemingly overlooked disappointing earnings and rallied. That is why it could do the same tomorrow; at the very least the market has the choice to pick between many good and many so-so earnings reports.
What the market is doing now is looking down the road at Fed tightening and energy prices, factoring in policy changes in DC, and even the weather, and determining whether to rally or sell further. The Wednesday action is a strong statement it is trying to put together a rally even in the face of strong energy prices and the Fed. Perhaps it has sniffed out a peak in energy prices and has distilled the Fed comments to mean 4.5% and done (not one more and done, but three and out?). That is seemingly a great leap, but as is always the case, by the time it is all sorted out the market is looking at the next issue ahead.
We still have a lot of issues with respect to the Fed and those will likely manifest after the first of the year. The move Thursday was strong, however, and we have to take the market for what it is telling us: solid rebound, strong volume, good leadership action. Breadth was suspect, and thus we still anticipate some up and down action as the market tries to bottom. With that up and down action we will still see stocks go higher and stocks go lower. There are a lot of stocks set up to rebound, but there also many still in their downtrends and the Wednesday action only bounced them higher in their downtrends. We will continue to look at both sides of the ledger, but the Wednesday action suggests the resolution will be to the upside for most of the market that is not buried in downtrends.
Support and Resistance
NASDAQ: Closed at 2091.24
Resistance:
2100 was key resistance and support in the past
The 50 day EMA at 2114
The 50 day SMA at 2128
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:
The 200 day SMA at 2073
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 2018
S&P 500: Closed at 1195.76
Resistance:
The 200 day SMA at 1199
1200 was solid price support at one time
1210 held in late September on the close.
December 2004 high at 1219 and June high at 1220
The 50 day EMA at 1209
The 50 day SMA at 1215
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:
1183 - 1184 from November 2004 highs and July 2005 intraday low and a high way back in July 1998
1178 is the August 2003/August 2004 up trendline.
1165 - 1155 from late 2001/early 2002 double top
Dow: Closed at 10,414.13
Resistance:
The May high at 10,406 and 10,400, the bottom of the November/December range
The 50 day EMA at 10,440
The 200 day SMA at 10,509
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:
10,350 turned out to be support in the recent August and September pullbacks
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): 2108K actual versus 1975K expected and 2038K prior (revised from 2009K)
Building Permits, September (08:30): 2189K actual versus 2075K expected and 2138K prior (revised from 2124K)
Crude Inventories, 10/14 (10:30): 5.6M bbl versus 1.07M prior
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 2
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