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world stock market, understanding the stock market
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10/20/05 Investment House Daily
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SUMMARY:
- Volatility and bottom attempts go hand in hand as stocks answer Wednesday follow through with a flop.
- Oil cracks $60/bbl intraday and its 2005 trendline as natural gas prices fall on huge supply. Just rotation or forecasting economic trouble?
- Leading economic indicators slump for third month
- Philly Fed rebounds sharply but price gain hits 24 year high.
- Semiconductors ready to rumble Friday on a bevy of strong earnings reports.
Market belly flops the day after a follow through move as market still trying to find the bottom.
Over the weekend we said to expect volatility and that is exactly what the market is delivering. Every time the market tries to transition from one direction to another you typically get volatility, particularly when the market is trying to put in a bottom. Back and forth sessions are common; as we have discussed before, April 2005 and October 2004 showed similar up and down action to what we are seeing now and both of those yielded bottoms.
The earnings flood as usual yielded all manner of reports, but on the whole they were strong enough to prop up Wednesday's follow through session. After a softer open stocks bounced and looked ready to continue the Wednesday run. NASDAQ tapped toward resistance at 2100 and SP500 at the 200 day SMA and that was the extent of the gains. They rolled over, faded and then slide lower all session.
Some thought that oil, continuing its fall and even cracking below $60/bbl, should turn stocks back up. It didn't. Nor did a huge build in natural gas (+75BCF). Oil looks to be peaking as evidenced by the big energy companies selling off as well as crude starting to crack its 2005 up trendline. These are good starts, but as we said last week, until oil breaks down toward the forties, it is not going to change the outlook much.
Leading economic indicators slumped for the third month, and that did not help the market hold its early gain. It didn't really hurt, but it certainly did not give much reason to cheer. Lower indicators could conceivably mitigate the Fed's 'tough love' stance, but we doubt the Fed even looked at them. It is much too focused on what it sees as dangerous inflation building in the system. That is all consuming to the Fed, just as it always is late in a rate hiking series. Instead of learning not to back-end load rate hiking campaigns as former Dallas Fed president McTeer assured us, the Fed will get caught (is caught?) in the emotion of the time and go too far. Greenspan points to the one instance it did not do that, i.e. in 1994, as proof the Fed knows what it is doing re rates and the yield curve. That is the one time an inverted curve did not yield a recession. In all others it did, and the Fed has caused a recession in 8 of the last 10 hiking sprees. Do you want to lay odds with your hard earned money that the Fed will somehow duplicate the 1994 scenario? Not many are.
The end of the session found NASDAQ below the 200 day SMA and SP500 cracking its up trendline on the close. The silver lining is that volume faded on the selling. In short, accumulation and a follow through was not met with stronger volume selling. It was not a great session with the strong prices losses and the horrid breadth (-3:1 NYSE). Without the distribution, however, the action was not bad and as noted above, it is very typical of a bottoming process.
Further, much of the selling was related to a rotation in the market. Big money is rotating out of energy, the leader in 2004 and 2005. There was heavy selling in early October, and the heavy selling is starting up again. At the same time sectors within technology are holding up well and even advancing. Financials look decent, though there is still quite a bit of work to do there. This rotation is a sign of health: money is not leaving the market, just moving around to greener pastures. The Fed and high energy prices can still kill off everything, but the action this week indicates the market is making at least a good faith effort at putting in a bottom. With semiconductors leading the charge after hours Thursday based on some very strong earnings reports, we could easily see those stocks help bring the market right back Friday.
THE ECONOMY
Oil showing signs of serious weakness. Is it just a drop in price or is it forecasting economic trouble?
Earlier this week we discussed the huge selling in XOM and other oil stocks as indicative of big money moving out of the sector ahead of a further fall in the sector and in the product supporting the sector, i.e., oil. Today CVX was sold on high volume as well as another big integrated oil company was hammered.
Oil itself was on the ropes, breaking below $60/bbl intraday for the first time since the summer. That also pushed it below its 2005 trendline. It did not hold on the close as oil finished down just over $60/bbl (-$1.49). Moreover, natural gas inventories rose an almost shocking 75BCF and sent natural gas futures down 5%.
The selling in the energy stocks, threatening the trendline, plummeting natural gas. All of that indicates the sector just got too hot. A market led by energy stocks is never your best market; energy stocks gain when energy prices are high, and high prices bleed away economic life. Prices got too high and demand balked.
The big question now is whether they break down, and if so whether they are forecasting an economic slump. With the Fed governors in a daily and indeed almost unconscionable diatribe regarding inflation and the need for more intensive rates hikes, one can only look at 2006 and really worry about whether the market and economy will manage to hold up. We may very well get a year end rally, but as we are seeing with the earnings guidance, a lot of businesses are worried about the coming year.
Leading Economic Indicators drop hard in September.
With Katrina and Rita it was understandable a drop would occur. Problem is, it was the third straight after a 0.1% decline in August. These indicators look 3 to 6 months down the road and thus suggest that the economy will slow in the future. While that comports with the idea that high energy costs will dampen the economy, we also have to take much of the LEI with a grain of salt. LEI started this dip even as the economy was strengthening.
Philly Fed jumps, but prices jump more.
After a rather pathetic showing in September (2), the Philly business sentiment survey staged a strong recovery in October to 17.3 (10.0 expected). It had tumbled in early September on worries the hurricane damage was going to really impact the entire economy. As the Chicago PMI showed later that very month, the worries were overblown as it was much stronger.
As with the rest of the economy, energy costs are imposing significant burdens on manufacturers as well as consumers. Prices paid hit a 25 year high at 67.6. Prices for final goods rose as well, suggesting some pricing power and that those prices were being passed along to customers. Indeed the prices received index rose 24 points for the month alone to the highest reading in 12 months.
Aside from prices the index was strong. New orders rose to 18.6 from -0.5 in September. Employment surged to 17.0 from 2.7. Only the Fed would view that increase in employment as something to be feared. Of course it plays the game scared of its shadow as the Phillips Curve is ascribes to views signs of prosperity as inevitable signs of inflation.
All in all you have to like the report. It shows strength in all categories, and with oil prices at $60/bbl or better it is hard to avoid that problem. From what this report shows, however, it is not impacting or crimping business yet.
THE MARKET
MARKET SENTIMENT
VIX: 16.11; +2.61. Surging back up toward 18 and beyond. That is what we wanted to see on this bottoming process as that shows more the level of fear necessary to put in a bottom.
VXN: 16.35; +0.78
VXO: 15.98; +2.18
Put/Call Ratio (CBOE): 1.05; -0.05. Another close above 1.0, making almost two weeks of such readings in the same period of time. Lots of options activity as the market struggles: people are buying protection and speculating on market moves.
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: -23.13 points (-1.11%) to close at 2068.11
Volume: 1.874B (-3.22%). Volume remained above average but was lower as NASDAQ turned back down. That avoids distribution and keeps the bottoming process alive.
Up Volume: 535M (-846M)
Down Volume: 1.329B (+822M)
A/D and Hi/Lo: Decliners led 2.15 to 1. After a lukewarm showing on the follow through Wednesday once more breadth spread out to the downside as the market resumed selling. The weak breadth was its Achilles' Heel and we are still watching this for improvement on the next trip back up. With this volatility there will be another upside move.
Previous Session: Advancers led 1.86 to 1
New Highs: 59 (+13)
New Lows: 101 (-43)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
NASDAQ tapped at 2100 resistance and then faded back below the 200 day SMA (2073). Volume backed off so no distribution, just the volatile up and down action anticipated as the index tries to set another bottom in October for a rally to year end. Overall the tech index looks similar to the other indices that are more heavily burdened by energy stocks that are in the process of selling off under heavy distribution. It was no breakdown. Many are bemoaning the lack of 'follow through.' The follow through was Wednesday. Thursday was a low volume dip but no violation of the basing process. We like how tech is forming up despite of all the negative views. Indeed, because of the negative views along with the other sentiment indicators we are starting to like it more.
SOX turned in the only positive performance for the session and it is really putting in a good bottom here over the 200 day SMA (433.88). After hours there was a bevy of solid earnings in the sectors: BRCM, SNDK, FLSH. Despite the INTC drag, semiconductors are ready to make a move, one of the reasons we really like the tech sector as a whole.
SP500/NYSE
Stats: -17.96 points (-1.5%) to close at 1177.8
NYSE Volume: 1.967B (-4.27%). Volume fell back on NYSE as well, good to see as both SP500 and SP600 had tougher sessions than NASDAQ or SOX. Still strong volume so these indices are going to be an important part of any bottom. They need to hold while NASDAQ and SOX lead higher.
A/D and Hi/Lo: Decliners led 2.97 to 1. With the small caps and even the large caps giving back most of their gains from Wednesday, breadth was going to be lower. As with NASDAQ, downside breadth remains too strong versus upside breadth.
Previous Session: Advancers led 1.83 to 1
New Highs: 45 (+9)
New Lows: 159 (-76)
The Chart: http://www.investmenthouse.com/cd/^gspc.html
SP500 gave back all of Wednesday's stronger volume jump off the up trendline (1179). Volume was lower but still strong Thursday as SP500 fell back and cracked through the August 2003/August 2004 trendline on the close. As with NASDAQ the lower volume avoided an official distribution session, but it was still high. This is where the rubber meets the road for the large cap index.
SP600 fell back through the 200 day SMA (330.24) on the close, but it held rather easily above the recent lows that tapped around 325. It is not a picture of health, but this is the type of up and down action we anticipated as SP600 tries to make a bottom here near the 200 day SMA where other price support levels have converged with it. This was one of the follow through indices Wednesday, and it is never good to see one of those give the entire move back, but again, it is still working on a bottom here despite the turn back down.
DJ30
DJ30 tapped the 50 day EMA on the high (10,433) and then rolled over on a continued climb in above average volume. Tuesday it was XOM lending a hand to the selling. Thursday it was CVX getting bombed by some big money dumping the stock. A lot of money is moving out of the oils, and the NYSE indices have most of them. That is why they are struggling and DJ30 as well. Still holding above some support at 10,200 as it too tries to bottom from a less than pretty picture with a series of three lower highs the past 7 weeks.
Stats: -133.03 points (-1.28%) to close at 10281.1
Volume: 334M shares Thursday versus 316M shares Wednesday. Distribution Tuesday, accumulation Wednesday, and now more distribution Thursday. The oil stocks are hurting the big blues.
The chart: http://www.investmenthouse.com/cd/^dji.html
FRIDAY
No scheduled economic data Friday, but that is second fiddle. The big stories are the strong tech and chip earnings after hours and the trend watch on oil: will it or won't it break down through 60 and break its uptrend for 2005. Oh yes, and the daily bombardment of Fed-speak from the members of the Federal Open Mouth Committee (FOMC) will have its effect. With all of the negative 'we have to burn it to save it' talk coming from the Fed, investors may be somewhat immune at this point. What would make a difference is another Greenspan speech that again takes a more conciliatory tone as opposed to the Chairman wannabes making noise about how tough they would be against inflation. News flash guys and gals of the Fed: we are not worried if you will be tough on inflation; we are worried that you will do what the Fed always does, i.e. fight inflation right into the bowels of a recession. That is what has investors and CEO's worried at this juncture.
Indeed you can see it with stock split announcements as one indicator of sentiment. Earnings are strong and many stocks are at prior split levels or are at points where the rest of their sector has been announcing. Yet the announcements are down this October. We talk with companies, and while regulation FD keeps them from disclosing a lot of information, you can easily see the concern about the year ahead. They know what the Fed's history is when it is raising rates. They see and hear the same talk they heard in other rate hiking binges: at first they are calm and collected, but as things progress the FOMC members become more manic in their tilting at inflation. The Fed has supposedly learned so much from reviewing past decisions, yet emotions take over and they do the same damn thing again.
CEO's are where they are for a reason: they can negotiate their companies through all kinds of economic climates, and one of those climates is when the Fed raises rates. They are cautious right now, even more so now with Greenspan retiring and all of the others wanting to move on the ladder show the world just how tough they are. Again, we don't care about tough; we want smart and an understanding of how the economy works as opposed to the default Phillips Curve model that simply does not reflect reality.
Near term despite the turn back down Thursday, overall we view the market as still working to set a bottom this month for a move higher into year end. SOX and NASDAQ are really working on a bottom, and the chip stocks are going to try and lead things higher Friday. Not INTC and the old curmudgeons in chips, but the younger, faster, stronger growers that are in specialty areas (SNDK, FLSH, BRCM, NVDA, etc.). SOX and SMH look to have put in a bottom at the 200 day SMA. If they can take off to the upside over the next week that bodes well for the market to follow.
Friday the focus will be on SOX and NASDAQ, but also SP500 as it struggles to hold its up trendline. A market can always rally with a major index struggling, but if we want to see a real run into the end of the year it is going to take SP500 and SP600 at least making a token appearance. That means holding the trendline and bouncing higher in NASDAQ's and SOX' wake.
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
The 50 day EMA at 1209
1210 held in late September on the close.
The 50 day SMA at 1215
December 2004 high at 1219 and June high at 1220
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 3
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world stock market
understanding the stock market
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