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10/25/05 Investment House Daily
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MARKET ALERTS:
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SUMMARY:
- Low volume Monday gain melts away as oil surges back.
- Consumer confidence slides modestly but let's put it in perspective.
- Gold and short end TIPS rise, suggesting inflation pressure is doing the same.
- Just when stocks were overcoming Fed-speak & dealing w/earnings, oil bounces off trendline.
It won't be a Bernanke love affair.
If Monday's rally was attributable to the Bernanke nomination (dubious given the market flat lined for 3 hours after the official announcement), then the Tuesday action indicated Bernanke was not going to receive any special treatment. Stocks opened softer, typical after a strong finish, and started back up. Before they could get their feet under them, however, consumer confidence came in less than anticipated (85 versus 88).
That did not stop stocks either, however. After ten minutes stocks bottomed and over the next half hour rallied to a new session high, pushing all but NASDAQ and SOX back to positive. This looked good; strong price rally to close out Monday, a soft open Tuesday, but then overcoming some obstacles to move ahead once more.
Then the rug was jerked out. More accurately, it was slowly slipped out from under the market. The culprit: oil started to rise off of its trendline. Oil has threatened to break down for the past week similar to what it did back in late 2004. As it did at that time, oil found strength and rebounded over $2/bbl Tuesday.
As oil made its upward progress stocks started to lose theirs. NASDAQ slipped below the 50 day EMA and SP500 fell back below 1200 after taking that level in the morning recovery. The slide continued through lunch and into early afternoon where SP500 found support at 1190 and NASDAQ at 2095. There they both formed intraday double bottoms and rallied into the close, taking back roughly half of the session losses.
Volume edged higher on both NYSE and NASDAQ, while breadth was modestly lower (-1.5:1 NYSE). The indices tapped at resistance, but as oil rose the buyers lost strength and they could not punch through. On the other hand they did not break below near support, actually rallying back from an intraday break below those levels. The rising volume shows distribution, i.e. higher volume selling, and that can lead to further selling.
You could say this was a negative session as stocks tried near resistance but failed after a low volume move Monday. The bigger picture, and the more accurate one, is that the market continues to try and set the bottom for a year end rally despite less than inspiring earnings and guidance, and despite continued high energy prices. The market showed a strong follow through session last week and has continued higher since. It has not shown great strength and stalled Tuesday at next resistance. There is still a lot of work to do, but there is also some solid leadership still moving higher with energy stocks coming back as well. Indeed, it is important to note the market rallied in the afternoon despite oil spiking over $2/bbl. Still, we do have to be very alert with respect to oil prices as the market made progress the past two weeks as oil flirted with breaking its uptrend.
THE ECONOMY
Consumers remain down but not out, and history suggests we toss the number out the window.
October confidence fell to 85.0 versus the 88.0 expected (87.5 in September, revised up from 86.6), the lowest level in 2 years. The Conference Board said its survey revealed worries regarding the impact of the hurricanes, high gasoline prices, and a perceived weakening in the labor market. With over 500K jobs missing after Katrina alone, it is no wonder there is concern about finding jobs in the future.
The modest drop comes after a big plunge in September (an 18% drop) which was the largest since October 1990. Some put the two together and said that confidence remained at levels that would impact the holidays. That is nonsense. It certainly did not rebound sharply yet, but it did not continue with a significant slide that would start putting it at levels to fear, e.g. in the low sixties to fifties. The fact that it did not continue to break lower after the big drop was a positive. After all, it was not expected to rebound much at all, and the modest miss was not a renewed downside onslaught.
Two years back (October 2003) confidence hit 81.7, and this was the lowest since. Let's see. At that time we had entered Iraq in the spring. We were in the process of the aftermath and were finding out that the natives were not rising up to join us with open arms. In fact some were taking up arms against us. That is what happens when we failed to stand by them after Desert Storm and let tens of thousands die at Saddam's hand. In any event, given that background consumer confidence was not surging at all.
Yet, during Q3 2003 GDP grew 7.2%. It added another 4% in Q4 of that year. Yet, consumers were glum, as glum as they are now. Of course the Fed was not sitting on the economy, hurricanes were not raking the Gulf cost, and energy prices were not nearing historic highs. But consumers were dealing with the Iraq situation and continued worries about the jobs market not being strong enough. Regardless of the number, retail sales did not suffer in Q4 2003 even with this 'low' sentiment reading with November sales a strong 1.2% despite this sentiment reading that was even lower than that for this October. It was not until January of 2004 did confidence really start to move.
The point: the consumer failed to recognize what kind of economic growth was occurring or at least did not admit in the surveys that he or she felt better about the future. Retail sales were strong even as sentiment fell. Housing continued to roar even as sentiment fell. In short, unless sentiment gets to the low sixties or less, it is not going to be weak enough to throw us into recession.
Real inflation pressures or just a 'Bernanke is soft on inflation' response?
The 10 year bond tapped at 4.5% last week then turned and ran like a scalded dog. The Fed has pushed up short term rates but long tern rates have only grudgingly moved higher.
Then Bernanke is nominated to replace Greenspan. The market jumps for a day, but bonds are not so sure. Tuesday the market had some second thoughts, but the bond market didn't. Bonds sold again, and yields rose again, closing at 4.53% Tuesday. It is done. 4.5% has been breached. Why when it just turned back so sharply last week?
The scuttlebutt on the floor is that Bernanke is seen as less of an inflation hawk and there are is the perception among some that he will let inflation get out of control. As if Greenspan didn't do that by holding rates so low for so long. Man what I wouldn't do to have that kind of press coverage that would defend at all costs: blame the guy who has not even taken office as opposed to the guy who has held it for the preceding 18 years (and still does). That is some kind of good will built up.
One component of interest rate increases is an inflation expectation. If the market expects inflation, rates will rise. That is why when the economy was recovering and there were still fears of deflation, a bit of upside in interest rates was viewed as positive: rising rates meant a little inflation and thus less chance of pernicious deflation. Even with Fed rate hikes, however, long term rates have hung low. They started to rise the past two months, but suddenly they breached a key level in a quick turnaround. Hard to call it coincidence.
Gold was also backing down from a run earlier in the year, but it has doggedly returned. Gold is an inflation indicator as well because it rises when there is fear of inflation as it is used as a hedge, i.e. a store of value when paper currency is inflating and losing value. More seek it out in such instances and voila, gold prices rise.
It is more than just gold, however. The short term TIPS (Treasury Inflation Protected Securities) are also rising now. If there is no fear of inflation there is no demand for these instruments. When the concern starts rising, so do they.
When you add these up you get the sense there is price pressure AS PERCEIVED BY THE MARKET. That is the key. It is the market that has to do the talking, not the Fed, not the Congress, not the talk show hosts. When the market starts to indicate a trend or event, then you can be pretty certain that is the truth because the market represents what everyone with any monetary interest at all in securities thinks. Whether this is a short term 'Bernanke bounce' or something more tied into actual conditions remains to be seen. The fact that the 10 year treasury broke through 4.5% on the close (4.53%) suggests it may be more than just a short term phenomena over Bernanke's nomination.
That means what? It means the Fed is going to raise rates over the next three FOMC meetings (November, December, and January 31) by 25 BP to put the Fed funds rate at 4.5%. It is now very clear that the supposedly 'no target' Fed had targeted that level as we speculated back in the spring and summer. The Fed is targeting inflation rates and a Fed funds rate. We don't have a problem at all with the latter, just the methodology. Instead of the slow drip method of rate hikes, why wouldn't a transparent Fed say this is our target we plan on getting to unless something major happens. That would allow investors and business planners actually make rational decisions and would not lock up capital as the players await each Fed edict. Sure the market figures out what will happen eventually, but why have the speculation when it is not needed? A confident Fed that says 'this is the spot' would have a positive impact on markets and businesses. But as the Oak Ridge Boys used to sing, 'Dream On.'
THE MARKET
MARKET SENTIMENT
VIX: 14.53; -0.21
VXN: 15.28; +0.05
VXO: 13.71; -0.03
Put/Call Ratio (CBOE): 0.88; +0.17. Modest gain as the market eased back. It did not spike right back up, indicating that some of the anxiety generated in the prior three weeks has dissipated.
Bulls versus Bears:
Last week 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: 45.3%. Dropped slightly from 45.8%. After to consecutive 3.7 point drops bullish sentiment is leveling off. Wanted it to put in another strong drop to take it down to the May level. If the volatility continues this week it may get there. Bottomed in May at 43.5%.
Bears: 29.5%. At least the bears moved higher though just a 0.3% rise. Getting close to that 30% hit during the April/May bottom. Hit a high for the year at 30% in early May.
NASDAQ
Stats: -6.38 points (-0.3%) to close at 2109.45
Volume: 1.646B (+2.78%). Volume was running light early in the day as the market sold and then found a bit of strength in the afternoon as NASDAQ found bottom for the session and mounted a modest rebound. Hard to call it a positive volume session with trade rising as the index notched a loss, but it was equally not a weak distribution session.
Up Volume: 683M (-621M)
Down Volume: 923M (+635M)
A/D and Hi/Lo: Decliners led 1.43 to 1. Very modest downside breadth, something we finally get to see as the index posted a loss. Recently (very recently), upside breadth has started to show a lot of progress.
Previous Session: Advancers led 2.56 to 1
New Highs: 74 (-9)
New Lows: 63 (+4)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
Up and down then back up, just not enough to push NASDAQ positive on the close. It was unable to hold above the 50 day EMA (2111) on its early move, but it did hold above the 18 day EMA (2092) on the low (2095), and it recovered to close above 2100 support, rallying back on stronger volume. The candlestick chart pattern is a hanging man doji below the 50 day EMA, however, and that is not the best short term indicator of further upside. After two weeks of rallying with oil prices sliding, we need to be careful here with oil prices suddenly rebounding off the trendline and stocks lacking a lot of volume as they try to run off of a potential bottom from mid-October. We want to see NASDAQ hold above 2100 on the close as that is a key level, and a higher low at that point would be huge.
NASDAQ was not getting any help from SOX (-1.04%) as TXN's earnings took some other chips down with it. It was not a breakdown at all as SOX again held 440 on the low and recouped some losses. It also continues its two week lateral move above the 200 day SMA (434.45) as SOX works to set its own bottom as well.
SP500/NYSE
Stats: -2.84 points (-0.24%) to close at 1196.54
NYSE Volume: 1.716B (+4.27%). Volume rose on NYSE as SP500 and SP600 struggled at resistance, unable to make headway. That shows some churn, high volume turnover, at resistance, and that can indicate a near term pullback in the current range.
A/D and Hi/Lo: Decliners led 1.55 to 1. As with NASDAQ, a nice, modest breadth showing on a downside session, no doubt helped by SP500 et al rebounding late in the session.
Previous Session: Advancers led 3.19 to 1
New Highs: 56 (-9)
New Lows: 91 (+5)
The Chart: http://www.investmenthouse.com/cd/^gspc.html
SP500 broke above 1200 and further above the 200 day SMA (1199) early in the session, showing great resilience after the weaker than expected consumer confidence, but it could not hold the move, sliding 11 points to the session low. It too put in its own double bottom in the afternoon and managed to recoup almost all of the point loss. It was unable to recover the 200 day SMA or 1200, however, and similar to NASDAQ, showed a hanging man doji below that resistance. Not the best indication for a near term break higher, but SP500 did hold near support at 1190 (the 10 day EMA) and rebounded from there. It also continues working on setting its bottom above the August 2003/August 2004 up trendline (1181.50). Holding 1190 on this test would be a coup, setting a nice higher low.
SP600 was one of the leaders downside (-0.55%) as it also tapped at resistance (the 50 day EMA at 340) and could not punch through. It held the 10 day EMA (334.51) as well on the intraday low, rebounding to recoup much of the decline as with the other indices. Good move Monday, modest pullback Tuesday; a hold above the 10 day EMA and a move through the 50 day EMA would be a big move.
DJ30
Struggling at the 50 day EMA (10,421), bounding all around similar to the other indices. It tapped the 10 day EMA (10,327) on the low and rebounded to positive before a late dip turned it lower. Still trending lower similar to the other indices, struggling not to make a lower high here below the 50 day.
Stats: -7.13 points (-0.07%) to close at 10377.87
Volume: 247M shares Tuesday versus 263M shares Monday.
The chart: http://www.investmenthouse.com/cd/^dji.html
WEDNESDAY
Earnings along with oil will continue as the driving force, along with some hints regarding inflation prospects from the bond and gold markets. AMZN provided a less than rosy Q4 outlook, and it was getting resoundingly whacked after hours. Question is whether this is seen as an Amazon problem or a retail-wide issue. There is a lot of poaching of AMZN's online business; target online sales are up over 60% and WMT up 48% this year versus while AMZN is up just 25%. AMZN has issues all its own as the 'real' stores move deeper into its arena. Unfortunately, with the low confidence readings many will draw the incorrect conclusion that retail is in trouble.
Oil inventories are out after the first hour, and with oil on a new jaunt higher there will be some potentially important ramifications. Last week's surprising build helped push prices lower. The market needs another big jump to abort the current bounce. Oil will be quite important for the rest of the week. As noted above, the market started putting in a bottom when oil was threatening to fall through its trendline. As it rebounded sharply Tuesday stocks lost their nerve. Gasoline prices dropping down near $2.50/gallon has a potent effect upon sentiment and market perceptions. Oil needs to maintain its decline and hopefully a break through the trendline.
That leaves the market starting Wednesday on s few eggshells the fear of higher oil prices threw down in the market's path. Some modest churn below resistance after a low volume bounce Monday requires a push; oil inventories could give it one . . . either way.
We still like the overall bottoming action and the leadership of many stocks that are still holding pullbacks and are breaking higher. Earnings are the wildcard that is pushing individual issues around, and in the case of a TXN, it can push around a sector to a certain extent. We are going to stick with these stocks in good patterns and entry points. There have been a few solid leaders that gapped higher with earnings or other news. We typically are disinclined to jump in but like to wait for a test. This modest pullback after the solid move Monday, along with another early dip Wednesday, can give us some good entry points on those leaders making the test of the break higher.
Support and Resistance
NASDAQ: Closed at 2109.45
Resistance:
The 50 day EMA at 2111
The 50 day SMA at 2122
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:
2100 was key resistance and support in the past
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 2020
S&P 500: Closed at 1196.54
Resistance:
The 200 day SMA at 1199
1200 was solid price support at one time
The 50 day EMA at 1206
1210 held in late September on the close.
The 50 day SMA at 1212
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:
1190 from prior prices and the 10 day EMA (1190.35)
1183 - 1184 from November 2004 highs and July 2005 intraday low and a high way back in July 1998
1180 is the August 2003/August 2004 up trendline.
1165 - 1155 from late 2001/early 2002 double top
Dow: Closed at 10,377.87
Resistance:
The May high at 10,406 and 10,400, the bottom of the November/December range
The 50 day EMA at 10,422
The 200 day SMA at 10,503
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 25
Existing Home Sales, September (10:00): 7.28M actual versus 7.20M expected and 7.28M prior (revised from 7.29M)
Consumer Confidence, October (10:00): 85.0 actual versus 88.0 expected and 87.5 prior (revised from 86.6)
October 26
Crude Inventories, 10/21 (10:30)
October 27
Durable Goods Orders, September (08:30): -1.2% expected and 3.4% prior
Initial Jobless Claims, 10/22 (08:30): 340K expected and 355K prior
Help-Wanted Index, September (10:00): 36 expected and 35 prior
New Home Sales, September (10:00): 1250K expected and 1237K prior
October 28
GDP-Adv., Q3 (08:30): 3.6% expected and 3.3% prior
Chain Deflator-Adv., Q3 (08:30): 2.8% expected and 2.6% prior
Employment Cost Index, Q3 (08:30): 0.8% expected and 0.7% prior
Michigan Sentiment-Rev., October (09:45): 76.0 expected and 75.4 prior
End part 1 of 3
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