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world stock market, us stock market
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10/27/05 Stock Split Report
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Stock Split Report Subscribers:
MARKET ALERTS
Targets hit alerts: ESRX; BRO (interim option gain taken)
Buy alerts: JCOM; BCSI
Trailing stops: WFMI
Stop alerts issued: CLE; CRDN; CMTL; UPL; HOLX; TECH
SUMMARY:
- No pretense to rally as NASDAQ and SP500 fall to test recent lows.
- New home sales solid but slowing as Fed continues its assault.
- Durable goods orders slump 2.1%, led by aircraft order drop
- Weakening rally attempt to tell us if time to stick a fork in market and the economy.
Failure to take out resistance leads to dump lower toward early October low.
There were many reasons for the market to stall out the past two sessions and turn lower. Uncertainty regarding Fed nominee Bernanke and his views. Earnings hits and misses with either massive reward or nuclear meltdown. Both sides of Congress ready to tax companies they feel make too much money. Oil prices still holding the uptrend. Miers withdrawing here name and opening a hornet's nest in DC. The long bond moving through 4.50%. Possible indictments of Bush administration officials. Back in 2000 during the election contest we commented about the Chinese curse 'may you live in interesting times.' Seems the times just keep getting more and more interesting.
Stocks ran into resistance Wednesday and found no relief by virtue of earnings or economic data Thursday. New home sales rose but at a slower rate while durable goods orders thudded lower on aircraft sales. Earnings were all over the map as investors dodged bomb craters and scorched earth left after some missed their results. Toss on top the Meirs withdrawal and calls to tax 'excess' oil profits and you have a mix ripe for indecision.
Stocks sold through near support and then lower support (NASDAQ 200 day SMA, SP500 the August 2003/August 2004 up trendline) as the day wore on, making a lower high and resuming the downtrend that started in August. Breadth was quite negative (-3:1) as they sold off. Volume was a faint silver lining as trade backed off as the indices dove lower and closed at session lows. That is not much compared to the overall price losses (NASDAQ -1.7%, sp500 -1%), but it is an important point to hold in mind as the indices head lower to test the early October lows.
This looks to be the test where the indices either show a bottom or not. After the initial October decline a modest bounce for a couple of days gave way to a quick intraday test of the early October low. Possibly a bottom, particularly as that day showed a big reversal and was the follow through session for the new rally attempt. The market's recent test of key resistance after a two week move, however, looks to be a much better set up for an attempt to put in a bottom here in October. If volume had zoomed higher Thursday it would look pretty grim. As it is the rally is still alive despite the drop and despite the fall through key support.
Certainly the rally looks threadbare at this juncture with all of the obstacles confronting the economy and new perceived problems cropping up every day. That is, however, the way bottoms are made. Pessimism is very high on this test back. VIX is rebounding (still has a way to go, but a further test will take care of that) and the sense of imminent failure is high. Even eternal optimist Larry Kudlow is now down in the dumps. Lower volume and high pessimism even as indices are still above the recent lows. That is what double bottoms are made of: the fear and anxiety ramps even higher on the second test lower.
That is still very much a 'half full' look at the action. The indices are still in the August downtrend and just made a lower high. They broke through some key support on the close. Earnings are treated at opposite extremes, always an indication of a weak underlying market. This is definitely a case where the market will have to show us it means to hold the line. There is still some leadership holding up, using this selling to test earlier breakout moves, holding up well. There is also lower volume on that selling that is driven by a world of negative issues.
Doesn't seem like much to hold against the tide of trouble for the economy, but we will just let the market show us what its read on the economy is. We said back in early October that it would show us its view of the economy to come by either holding the test and forming a second bottom or blowing on through on rising volume. The market always looks like junk and facing insurmountable odds when it bottoms Looks like the test is on that will give us the answer.
THE ECONOMY
September new home sales rise slows as housing market continues its nice top.
Sales rose 2.1% but the 1.22M annualized units was lower than the 1.25M expected. Some say tomato, some say tomato. Housing is still in its nice easy peaking process, evidenced by September's sales 0.1% less than those in September 2004.
We keep hearing talk of a collapse, but that is not happening. Supply edged up further to 4.9 months from 4.7 months in August. Median prices rose 1.9%, but that is a lower rise than the 3% to 4% gains up to this point. This points to a slowing increase as opposed to a sudden drop. Other signs: Centex (CTX) is offering a 5% discount on sales price for houses in certain parts of the country. It is also willing to waive a 1% loan origination fee if you let CTX finance the home. You don't start seeing these types of incentives if the market is still expanding at gangbuster pace. Instead you are seeing a progressive slowdown over the past year.
While the cumulative statistics show a slower expansion to more sustainable levels, this does not mean the housing market is safely tucked out of reach of any problems. We still expect housing to slow and decline. It is an early cycle sector that started even earlier than usual after 9-11 turned everyone into homebodies for a couple of years. It remains remarkably strong because interest rates have remained remarkably low.
Interest rates are on the rise, and as they are up, mortgage applications have started to erode. Low rates open up all kinds of markets to home ownership. First time buyers can afford houses they could never have managed without low rates. Second home ownership has surged for the same reason: low rates allow buyers to qualify for that additional note. It is a great benefit of this expansion that so many have been able to move into homes as opposed to apartments.
As rates rise, however, affordability starts to decline. Rates are still historically low, but for those on the margins to begin with, any rise takes home ownership out of range. There will be trouble with the variable rates if long term rates continue to rise; many who qualified because of low variable rates will get hurt if they did not convert into low fixed rate mortgages. There will also simply be fewer applications because ownership starts to run away from the lower end and those having to stretch to buy that second home. Now with discussions about eliminating the deduction for second homes as part of an income tax system 'fix,' that market could really suffer. It could also boom before then, however; if Congress gets serious about tax reform (almost feels foolish to write that), then there may be a rush to buy if the deduction elimination is limited to new purchases (not that likely, however).
Will the Fed leave the housing market alone?
The big issue is what the Fed does with respect to housing. As we wrote the past few months, it is apparent that the Fed is targeting the housing market as an excess or bubble similar to the stock market in the late 1990's. From comments by Greenspan and FOMC members it is clear housing is high on the list of perceived problems as they raise interest rates. Inflation or potential inflation is always the headline for rate hikes, but it always does this because it feels something is overheated. Housing is the key here.
If the Fed is targeting housing, the most recent numbers won't give it much consolation. As with the market it will continue hiking until it makes a notable change in its target. In 2000 that was the hard sell off to start the year. Unfortunately Greenspan put in another 50 BP hike in May after the sell off, adding more injury to the damage already done.
The one saving grace of sorts for housing is that Greenspan leaves January 31. It is pretty clear rates will be raised another 75 BP through that meeting, bringing the Fed funds rate to 4.5%. Unless there is a major meltdown prior to that we can expect that level. After that Bernanke takes over and the Fed's goal now is to leave the chair in a position to at least be able to pause before further rate hikes are pursued.
Indeed, Bill Gross of Pimco opined Thursday that Bernanke would be cutting rates in an attempt to stave off a recession that would be shaping up at that point. As we have said, the market's actions on this test will tell us more about the economy's future before that point. Either way, the yield curve will be close to flat if not flat or inverted at that point if the market starts sniffing out a recession or serious economic slowdown ahead.
September Durable goods orders drop 2.1%.
Volatile is the name of the game with this report because transportation orders are highly volatile month to month. In August durables jumped 3.8% in part on strong transportation, and in September transportation fell 4.7% due to a Boeing strike. Even taking out transportation, however, durables fell 1% versus an anticipated 0.8% rise.
It was a pretty weak report any way you slice it. Business investment dropped 1.2% (non-defense capital goods excluding aircraft) after a strong gain in August. Computers and electronics fell 3.6%. Electrical equipment orders lost 3.5%. Definitely a pause to end Q3, and that could impact the GDP preliminary number released Friday before the open.
The report is not all that surprising given the twin storms plowing into the Gulf, displacing businesses, workers, jobs, energy production, and raising energy costs across the nation. In light of this uncertainty (that showed up in the NY and Philly PMI reports for September), it is no wonder businesses held off any significant purchases during the month.
The issue is how well it will bounce back in October where there was just one storm. August was strong and was revised even higher (3.8% from 3.4%). Thus we can be pretty confident October will be stronger though likely not a blowout as consumers, individual and business alike, step back into the purchasing game.
THE MARKET
MARKET SENTIMENT
Pessimism is racing back up even as the market makes its first move back down after the early October low. That is exactly what you want to see: optimism never really took off on the rebound and when the market starts back down pessimism has a running start so to speak. That allows it to spike higher. We want to see VIX spike and bearishness jump as well as the news stories remain negative. That could happen Friday if the potential indictments are handed down. If they are not and the targets are no-billed that could spark a rebound IF we can get some further downside before that happens to jack up negative sentiment a bit more.
VIX: 16.02; +1.43. VIX is on the rise again, moving back toward the 18 level we feel at a minimum is needed to show, in part, that the market is trying to set a bottom. We would love to see a move over 20, but we note that the more recent bottoms, e.g. April, have found footing after three spurts that hit 17 to 18. A good spike on a test of the early October lows by the indices would help cobble together a bottom attempt here in the final days of October.
VXN: 17.7; +1.83
VXO: 15.91; +1.72
Put/Call Ratio (CBOE): 1.13; +0.2. Back above 1.0 on the close after a couple of closes below that level. This is on the heels of almost two solid weeks of closes over 1.0. This indicator is being skewed a bit by the explosive growth of derivatives hedge funds and individual investors incorporate them more and more into their investing and trading strategies.
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: -36.24 points (-1.73%) to close at 2063.81
Volume: 1.786B (-5.7%). Volume fell back below average as NASDAQ knifed lower. It is easy to overlook given a 1.7% drop in price, but we are looking for a second low here to try and set a bottom here in October. It is good to see volume fade on the initial selling and then see it spike on an undercut or test that rebounds. In that sense the move was not terrible.
Up Volume: 244M (-380M)
Down Volume: 1.523B (+286M)
A/D and Hi/Lo: Decliners led 3.3 to 1. Heavy downside breadth, easily outstripping the upside breadth as NASDAQ moved higher on the recent bounce. A quick turnaround that does show the index' weakness but at the same time goes hand in hand with ramping up the anxiety on this second October decline.
Previous Session: Decliners led 1.48 to 1
New Highs: 42 (-36)
New Lows: 128 (+54)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
NASDAQ continued the turn back from the 50 day MA, gapping lower and selling through the morning. It tried an intraday double bottom, flirted with a break higher, but failed and then the selling took over in the afternoon with two big down legs to end the session. It undercut the 200 day SMA (2073), tried to retake it late, but failed. Pretty much a downside session from the get-go and it built up momentum for further downside in the form of a full test of the early October low (2025) as opposed to a higher low at the 200 day SMA. This is a more traditional 'scare them out' scenario, and with that you want to see the gloom continue and the sentiment indicators continue to grow uglier. Many would view this as overly optimistic and there is no doubt the index still has tremendous issues to deal with as it heads lower. The low volume Thursday was a positive for the session, but we will continue to watch as it continues lower and how volume reacts when NASDAQ tests the October low (along with what price does).
SOX (-2.7%) undercut the 200 day SMA (434.79) and closed on the low. It is above the intraday low from two weeks back (425.13) but this is its first close below the 200 day SMA since early May. After a hard break lower a stock or index rebounds to test the breach. SOX is still at some support in the 420 to 430 range, and it may test lower again before give a look at the 200 day SMA again.
SP500/NYSE
Stats: -12.48 points (-1.05%) to close at 1178.9
NYSE Volume: 1.783B (-2.36%). Volume fell on NYSE as well as its indices turned lower. It was still well above average on the downside so it was not a big drop off in trade that is as clear an indication that the selling is lightening up on the fade. As SP500 and SP600 continue toward the early October lows we will watch volume to see if it spikes higher. If they blow thru the prior lows on strong volume without a reversal attempt the market is telling us something bad about the economy's future.
A/D and Hi/Lo: Decliners led 2.76 to 1. Strong downside breadth but not at the level of NASDAQ even with the small cap dump lower.
Previous Session: Decliners led 2.05 to 1
New Highs: 40 (-22)
New Lows: 229 (+48)
The Chart: http://www.investmenthouse.com/cd/^gspc.html
SP500 sold through the August 2003/August 2004 up trendline (1181), its second modest close below this level in the past two weeks. It rebounded right back on the last test. This is just a skip away from the October low (1168) and is set to make that test. Important point approaching and SP500 looks quite weak heading into it. SP500 is not the entire litmus test for the market; NASDAQ is stronger right now. It will have to find and hold support as will all of the indices. Lots of downside momentum and a tall order as SP500 has been much weaker than NASDAQ and does not have the internal leadership strength that NASDAQ has shown. It will likely come down to a match between NASDAQ's strength and SP500's technical and internal weakness.
Small cap SP500 is diving as well, cutting through the 200 day SMA (330.80) and heading toward the October low (322.92). It is a double date with SP500 at the October lows that will tell us more about the prospects of the economy next year. Again, NASDAQ will also pay a key role in this.
DJ30
DJ30 is heading lower toward the October low as well (10,156) where it bottomed in July. There is some support there, but as with SP500 the Dow is weak and it could test 10,000, the April low, and from there try to establish a much larger double bottom. MSFT won't help matters Friday; again DJ30 has major issues to confront with one of its 30 stocks ready to sell (though MSFT was posting a modest recovery late in the session.
Stats: -115.03 points (-1.11%) to close at 10229.95
Volume: 236M shares Thursday versus 266M shares Wednesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
FRIDAY
Two important pieces of economic data tomorrow, Q3 GDP (and its deflator and employment cost index) and revised Michigan sentiment. GDP is backward looking but the Fed likes to look at the deflator and employment costs. The deflator is how much the GDP number has to be adjusted to account for inflation. The higher the number, the higher inflation. Employment costs are a Phillips Curve ingredient. Under the same theory that says if too many people have jobs inflation will follow, employee costs (particularly wages) are viewed as inflationary if they rise because they supposedly go out and spend that extra money. Of course if the economy is growing and working efficiently, then supply will meet that demand. Michigan sentiment will give the next read on how the consumer feels. As discussed Wednesday, however, the consumer is often very wrong in predicting economic direction (the October sentiment missed the 7.2% economic growth that quarter) until it hits levels in the low 60's or the 50's.
A potential issue for the morning is a miss on GDP (3.6% expected). Some of the data in September (e.g. the factory orders) show a late quarter slowdown that can bring the expected reading lower. At this juncture in the market, however, this is likely already factored into the market.
Earnings continue to be a key driver, and overall they are coming in less than in prior expansion quarters and the guidance is cautious, not surprising given the storms and energy prices. MSFT was down after hours, but it also managed to recoup some losses as the after hours session wore on. It was not a complete reversal, however, so DJ30, SP500 and NASDAQ 100 are likely to find themselves under a bit of pressure again on the open thanks to another DJ30 name with some earnings issues.
SP500 and SP600 are close to their early October lows while NASDAQ still has a ways to go. Thus we could easily see the prior two indices undercut their lows while NASDAQ is still just showing up at that level. We have seen that scenario before as well, with the stronger index trying to hold the line and turning at or above the prior low after other indices have undercut the level. Any way you slice it, it looks as a test of the October lows is ahead.
How the market handles the test tells us a lot about how it is weighing the economic prospects in 2006. The yield curve is still flattening, and the pressures on the economy are not letting up. Energy tried to break the trendline and once again oil bounced, holding above $60/bbl. It needs a major breakdown to have an impact; unfortunately, if we get one it will likely be because the economy is weakening into a slowdown or recession. At the same time the Fed is going to keep raising rates to try to slow inflation. The combination of the two is potent, and the storms and issues in DC just add some more weight on the economy.
See? You can weave a really good gloom story. It has to be a good one to shift the sentiment and set the bottom. There are some positives still left, but it is going to be a real struggle to hold and reverse. This is why we view this as pivotal time for the economy and thus the market in 2006. If the market folds on strong volume with NASDAQ breaks through the up trendline at 2021 that bodes poorly for the economy in 2006.
Support and Resistance
NASDAQ: Closed at 2063.81
Resistance:
The 200 day SMA at 2073
2100 was key resistance and support in the past
The 50 day EMA at 2110
The 50 day SMA at 2120
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
2025 is the early October low
2018 is the early April high.
The August 2004/April 2005 up trendline at 2021 that forms the bottom of the big triangle pattern
S&P 500: Closed at 1178.90
Resistance:
1183 - 1184 from November 2004 highs and July 2005 intraday low and a high way back in July 1998
1190 from prior prices
The 18 day EMA at 1193
The 200 day SMA at 1199
1200 was solid price support at one time
The 50 day EMA at 1205
1210 held in late September on the close.
The 50 day SMA at 1210
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:
1180.50 is the August 2003/August 2004 up trendline is in trouble
The October intraday low at 1168 is a key point to watch
1165 - 1155 from late 2001/early 2002 double top
1140 from the April low
Dow: Closed at 10,229.95
Resistance:
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 10,419
The 200 day SMA at 10,502
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 but is blowing out now
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): 4414K actual versus 5555K prior
October 27
Durable Goods Orders, September (08:30): -2.1% actual versus -1.2% expected and 3.8% prior (revised from 3.4%)
Initial Jobless Claims, 10/22 (08:30): 328K actual versus 340K expected and 356K prior (revised from 355K)
Help-Wanted Index, September (10:00): 39 actual versus 36 expected and 38 prior (revised from 35)
New Home Sales, September (10:00): 1222K actual versus 1250K expected and 1197K prior (revised from 1237K)
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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