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us stock market, trade stock
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11/03/05 Investment House Daily
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SUMMARY:
- Plethora of good news gaps stocks higher, but buyers step back in afternoon as oil jumps $2.
- October same store sales hot despite a hot October.
- Productivity jumps as labor costs drop.
- ISM services index surges, prices paid fade.
- Greenspan speech innocuous but lectures Congress on spending.
- Stocks were hungry for more good news Thursday afternoon to keep moving, look to jobs report provide additional fuel.
Stocks continue rally on wave of good news but struggle to hold on.
Strong productivity and falling labor costs helped quell some Fed fears even as October same store sales, thought to have dragged due to warm weather and hurricane hangovers, posted a strong 4.4% gain. The ISM services then posted a strong showing with prices paid dropping. Greenspan spoke but his comments were viewed as innocuous. MRK won the second Viox case. Plenty of pro market news to further stoke the recent market gains.
Indeed, NASDAQ gapped sharply higher and rallied through the morning session. The market did take a pause and gave back some gains when Greenspan started speaking, but when he spoke in rather moderate terms the market started back up.
The indices moved through next resistance and further, but in the afternoon the market lost its way as oil, recently threatening a break of its uptrend, spiked up off the trendline, gaining over $2/bbl. That put a lid on the upside action and stock gains eroded all afternoon, managing a modest bounce into the close.
The market still finished with gains, but well off the highs and with not a lot of strength. Volume was up again, good on the early rally and good overall as stocks closed positive, but you always get a little uneasy when volume remains high as stocks reverse. The volume did not jump sharply on the selling in the afternoon, however. It was more a situation where the buyers simply closed the checkbook when oil started jumping off the trendline.
The internals were sluggish as well. Breadth finished barely positive, and NYSE breadth was negative in the last hour as small caps, an important component with NASDAQ in the recent break higher, finished the session flat, lagging all other indices.
Basically the market was already a bit winded after a week of good gains, and as we said Wednesday, it was going to be due for a breather near term. When oil started to spike and the good news train hit the station for the day the buyers lost momentum. The indices finished with dojis on the candlestick chart, another indication they are a bit tired near term. A sudden switch from bearishness to bullishness (as indicated by the financial stations) also seems to have hit the market at the same time.
Thus a confluence of factors merged, most notably a strong run higher, and the market pulled back off of its highs. It could easily finish the week with a bit more softness while still holding much of the move. NASDAQ did after all gap higher and at some point will close part or all of the gap; better to do it right after the move than later. The market started to rally when the news looked bleak and it continued Wednesday when it was not any better. Thursday it fed on the good news. Friday may give it something else positive to chew on with the jobs report: decent jobs growth with low employment costs would be just what the Fed wants to see along with the other recent data suggesting that wages and other employment costs are not exerting any inflationary pressures (as if they ever do, but that is another economic reality the Fed does not ascribe to).
THE ECONOMY
Same store sales jump 4.4% year/year.
A hot October and continued storm and energy worries were supposed to quell sales. That was not the case as the usual suspects over the past few years, namely the teen retailers and specialty stores led the charge higher with much better than expected results. AEOS, URBN, CWTR, KSS, CHS, CLE, etc. all posted strong results. Again, the usual group of leaders.
WMT did as it said, posting a 4.3% gain for October. More than that, WMT announced November would shift the range from the usual 2% to 4% to 3% to 5%. A bounty of good news, at least for WMT. What it tells us is that consumers are still buying - - have you checked the malls lately? They are packed. Consumers are buying, but they are also still a bit cautious about the future, and thus they are also heading to WMT to continue making that dollar stretch when it comes to the necessities. In other words, buy the toothpaste, toilet paper, DVD's, detergent, etc. at WMT, then treat your family to something nicer with respect to clothes, electronics, etc.
Consumers may be a bit worried as indicated by the falling sentiment readings, but as is usual at these levels, consumers are still buying. The stores are a bit smarter this year as well. They know that the last two years shoppers tried to wait them out for sales. Now they are priming the pump with some decent early season sales. Have to say I have already partaken in some of them. Retailers also know that gift cards have been huge and that most are redeemed in January. They can sell them and then have them redeemed at times when prices are not discounted, improving their margins. Sweet deal.
Retailers are also telling us that they are already seeing a phenomenon that occurs when there is going to be a good holiday season: the 'me too' or 'self-gifting' spending. This is when a consumer feels good enough when shopping to not only buy for others but to also include oneself, kind of a 'one for you, one for me' mentality. When that happens retailers enjoy their best years. It is starting well; if oil prices can break lower into the mid or low fifties and gas prices fall near $2/gallon it could be a great holiday season. Did we mention we still believe in Santa Claus?
Q3 Productivity jumps past expectations.
We all know how Greenspan trumpeted productivity over the past 6 or so years, using that as a reason the US was able to grow without inflation. Well, if he really believes that, Mr. Big should be pleased with the Thursday report. Productivity grew at a 4.1% annual rate, easily topping the 2.5% expected. Q2 was revised from 1.8% to 2.1%.
At the same time unit labor costs fell 0.5% when economists predicted a 2% gain. Talk about big swings in reality versus expectations. The rising productivity and falling labor costs are a one-two punch that helps companies keep costs lower in the face of rising energy costs.
This is the kind of report that, if it continues through the end of the year and into early next year, will eventually shut the Fed down, especially with Bernanke at the helm. If all of the flash points the Fed watches continue their current declines (e.g. core PCE deflator) then the Fed has no reason to raise. No reason, of course, other than its apparent attempt to rein in the housing market to what it considers reasonable levels. Thus we get the Fed-speak that conflicts with the actual data just as in 1999 and 2000, and that can be quite confusing to the financial markets.
ISM Services recover nicely and prices are lower.
September was a questionable month as the Service industry failed to come close to its expansion expectations, posting a 53.3 reading. That was getting close to where the manufacturing ISM hit two months back before rebounding sharply. Well, the ISM Services rebounded in October as well, posting a 60.0 reading, topping expectations at 57.0 and blowing away the previous month.
As services make up most of the US economy, the recovery was good to see. Prices paid fell from 81.4 to 78.0. Employment fell as well, however, from 54.9 to 52.0. Those lower costs were in part attributable to slowing employment growth and those lower unit labor costs. New orders posted a rise to 58.2 from 56.6
It was thus not a blowout report, but a solid recovery that saw some gains in the right places and some losses in the right places. One thing is certain: a 60.0 reading shows expansion almost as good as in the prime of the recovery when the index was showing readings at 62. It certainly does not appear there is a significant slowdown as the economy heads toward the end of 2005.
Greenspan likes what he sees but tells Congress he is worried about inflation upsetting the balance.
Greenspan said the economy is in good shape after the storms, but he warned of low supplies of natural gas and profligate spending as threats, along, of course, with inflation. Everything Greenspan said, while not expressly saying anything about monetary policy, came back to the concern about inflation upsetting the expansion.
Thus, as wit the recent Fed comments, there was no hint that the rate hikes are close to ending. Indeed, it would be foolish to expect some kind of resolution of this issue. The Fed wants to keep everyone basically guessing, and the best way to do that is talk tough for awhile and then shut up about it.
Even with the guessing games, the market took it in stride after an initial drop on the speech. After digesting the contents, the conclusion was this was more of the same we have heard for the past year: got to keep inflation in check to keep the expansion alive. It did not suggest more than two more hikes nor did it suggest two hikes would be the end. This is exactly the kind of guessing situation the Fed likes and promotes. Given there was nothing new from Greenspan and the promising productivity and employment cost data, the market did not change its view that two more hikes were certain, and with that the market went about its business.
Bonds breaking higher.
One thing that is likely giving Greenspan a bit more rest is the 10 year bond starting to breakout above its April high. The 10 year is 4.65%, ready to break through that prior top. If it does, the Fed will breathe easier as the bond curve will likely not invert, at least not as rapidly. Sure Greenspan has said in public that an inverted curve does not necessarily mean a recession as it has in the past, but you felt he had his fingers crossed behind his back as he spoke and that the rest of the FOMC was getting anxious.
So a higher 10 year could take the Fed off the hook so to speak, not only in avoiding an inverted yield curve, but also in slowing the housing market. Mortgage applications are dropping each week now, or at least posting modest gains. The Fed views the housing market as the bubble element of this expansion (does the Fed ever see an expansion without a so-called bubble?), and if rates continue to rise then a lot of its work is done for it.
The thing that has us worried is how markets tend to react to artificial pressure. If they don't want to move they resist moving. The Fed pushes a bit, pushes a bit more, then a bit more, and finally it either gets to the tipping point or the Fed loses patience and unloads with both barrels. Either way when the break comes it tends to come quickly and aggressively. You can get mauled by a lion and die quickly or you can get peaked to death by chickens over a long period of time; either way you are dead in the end. The Fed is moving in baby steps, but even baby steps will eventually walk you off a cliff if you don't stop in time. And once you are falling baby steps won't stop the plunge.
That is the history of the Fed: at least 80% of the time it goes too far. The market is betting, for now, on two more hikes with an outside shot at 3 when you look to the April Fed funds futures contract. The Fed is catching a break with rising interest rates, but when they break out, just how far are they going to go. The Fed's policies are often self-fulfilling. As always the Fed has to be careful as we approach an inflection point. As always, however, the Fed is going to make its planned moves in the next two meetings regardless of what the data suggests.
THE MARKET
MARKET SENTIMENT
VIX: 13; -0.48
VXN: 15.65; -0.17
VXO: 12.37; -0.45
Put/Call Ratio (CBOE): 0.93; +0.22. Lots of protective puts being closed out as the market moved higher early in the session.
Bulls versus Bears:
Last week's numbers:
Bulls: 44.8%. Down from 45.3%. Another solid decline but has slowed dramatically from the 3.7% declines to start October when the selling was strong. Bottomed in May at 43.5%.
Bears: 29.2%. Down from 29.5%, the high water mark on this cycle thus far. Hit a high for the year at 30% in early May.
NASDAQ
Stats: +15.91 points (+0.74%) to close at 2160.22
Volume: 2.346B (+5%). Volume continued its run higher on market gains. This is the strongest volume gain in a month and one-half, and we like to see it on the upside. Now NASDAQ showed a doji and that close off the high with strong volume can indicate a reversal, but in this instance we don't see reversal attributes; a pullback perhaps, but not a reversal.
Up Volume: 1.49B (-130M)
Down Volume: 836M (+264M)
A/D and Hi/Lo: Advancers led 1.23 to 1. Very modest breadth even with NASDAQ hanging onto a 15 point gain.
Previous Session: Advancers led 2.39 to 1
New Highs: 182 (+32)
New Lows: 50 (-16)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
NASDAQ gapped higher, clearing some resistance at 2150 and rallying over the October intraday high (2167). It could not hold that move, fading to the close but also hold the gap higher. Strong volume pushed the early action as investors continued to accumulate NASDAQ stocks. Now we see how they can hold up after giving back half the session gains following a 100 point move from last week. A bit of a breather here would not be out of place as NASDAQ tests 2150 and some of the gap higher.
SOX (1.88%) gapped higher as well and rallied through the 50 day EMA (451.01). It could not hold that break and closed just below the 50 day, showing a tight doji after a gap higher. It is likely it will test this move a bit more before it continues higher, having rallied 50 points from the Friday low. Looking for a test of the mid-October highs (447) down to 443. After that it will be ready to continue.
SP500/NYSE
Stats: +5.18 points (+0.43%) to close at 1219.94
NYSE Volume: 1.992B (+0.05%). Another upside volume session on NYSE as SP500 put in another solid session though it could not hold the move through 1220 resistance. Still ongoing accumulation in these stocks as well with sharply higher, above average trade as the indices move higher.
A/D and Hi/Lo: Advancers led 1.06 to 1. Breadth was actually negative in the last hour before ht elate bounce pushed it just above flat. The small caps were lagging, and this breadth is an indication that the move is a bit winded here.
Previous Session: Advancers led 2.86 to 1
New Highs: 180 (+11)
New Lows: 86 (-9)
The Chart: http://www.investmenthouse.com/cd/^gspc.html
SP500 continued its move above the September down trendline, clearing 1220 resistance on the high (1224.70) but unable to hold the move, ending up just below the trend and the June highs. Still a solid move with still a lot of work to do. It is, however, doing it one step at a time. Support at 1210 on any test lower from here.
The small cap SP600 (0.10%) lagged all session. They rallied to 348.89 on the high but gave it all back by the close. It approached next resistance at 350 on the high, but was not ready to take it on after a week of gains. Tombstone doji indicates a test toward the 50 day SMA (341.55) and price support at 340.
DJ30
DJ30 moved through the 200 day SMA (10,498), managing to hold that level on the close as volume ramped up sharply. Did not hurt that MRK won its second Viox suit. This pushes DJ30 further into the thick mass of overhead supply at from 10,400 to 10,700. It has a long way to go but it is finally getting some help from its components.
Stats: +49.86 points (+0.48%) to close at 10522.59
Volume: 320M shares Thursday versus 279M shares Wednesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
FRIDAY
The jobs report is the main event Friday, but it does not have the impact it had during the election. Given the storms it is still a very fuzzy number as data collection remains iffy at best. Still expectations for a 100K growth rate (-35K in September) are not grandiose, and it is possible the figure is topped depending upon how many have started the reconstruction effort. The federal spending numbers indicate it has started, and thus many more jobs will be showing up. As for 100K, well, that is simply a crapshoot. It could be anything.
A good number and continued low hourly earnings would be the combination the market wants to get another move higher under its belt. Again, however, we would have to watch for the staying power of an early move. The indices have run a long way and the Thursday afternoon action shows they were starting to look for a place to sit down. An early move out of the gate Friday on jobs numbers might just find the same afternoon fade as investors look at how far the indices have come in a week and given the weekend is ahead.
That leaves us with the same plan of action Friday, looking for stocks that are making a pullback from recent moves to hold near support and then rebound. Some of the early leaders were already doing that Thursday and those early leaders will likely be the first movers after the market takes a pause.
Again, we are not looking for any major pullback. The upside move was very strong with clear accumulation. There has not been a major change in the data since the rebound started; indeed, it has improved from an inflation standpoint. Thus a modest test back on lower volume sets up the next move higher. We will be watching the market Friday for those stocks that hit near support on low volume and show some rebound strength.
Support and Resistance
NASDAQ: Closed at 2160.22
Resistance:
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:
2154 from January 2004 high
2120 is the August downtrend.
The 50 day EMA at 2112
2100 was key resistance and support in the past
The 200 day SMA at 2074
2050-51 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 2024 that forms the bottom of the big triangle pattern
S&P 500: Closed at 1219.94
Resistance:
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:
1210 held in late September on the close.
The 50 day SMA at 1209
The 50 day EMA at 1205
1200 was solid price support at one time
The 200 day SMA at 1199.72
1190 from prior prices
1183 - 1184 from November 2004 highs and July 2005 intraday low and a high way back in July 1998
1185 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 10,522.59
Resistance:
The 200 day SMA at 10,497
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:
The 50 day EMA at 10,418
The May high at 10,406 and 10,400, the bottom of the November/December range
The 18 day EMA at 10,385
10,350 turned out to be support in the recent August and September pullbacks
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 31
Personal Income, September (08:30): 1.7% actual versus 0.4% expected and -0.9% prior (revised from -0.1%)
Personal Spending, September (08:30): 0.5% actual versus 0.5% expected and -0.5% prior
Chicago PMI, October (10:00): 62.9 actual versus 57.4 expected and 60.5 prior
November 01
Auto Sales, October: 5.4M expected and 5.7M prior
Truck Sales, October: 7.0M expected and 7.3M prior
Construction Spending, September (10:00): 0.5% actual versus 0.5% expected and 0.6% prior (revised from 0.4%)
ISM Index, October (10:00): 59.1 actual versus 57.0 expected and 59.4 prior
FOMC policy announce (2:15): 25BP hike to 4% and no change in the 'measured' or 'accommodation' portions.
November 02
Crude Inventories, 10/28 (10:30): +4.414M prior
November 03
Productivity-Prelim., Q3 (08:30): 4.1% actual versus 2.6% expected and 2.1% prior (revised from 1.8%)
Initial Jobless Claims, 10/29 (08:30): 323K actual versus 330K expected and 331K prior (revised from 328K)
Factory Orders, September (10:00): -1.7% actual versus -1.0% expected and 2.9% prior (revised from 2.5%)
ISM Services, October (10:00): 60.0 actual versus 57.0 expected and 53.3 prior
November 04
Non-farm Payrolls, October (08:30): 100K expected and -35K prior
Unemployment Rate, October (08:30): 5.1% expected and 5.1% prior
Hourly Earnings, October (08:30): 0.2% expected and 0.2% prior
Average Workweek, October (08:30): 33.7 expected and 33.7 prior
End part 1 of 3
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