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us stock market, stock prices
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11/07/05 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Target hit alerts: IRIS
Buy alerts: IDXX, IIJI, NTES, COHU
Trailing stops: FLO
Stop alerts: None issued
SUMMARY:
- Market melts higher again on a vacuum of news.
- Consumer credit declines modestly after big gains.
- Considerations on how precarious the consumer is.
- Drift higher will need more support.
Another pause that was not a pause Monday.
The market continues to take a breather after its strong rally the past week. We say it is taking a breather because the buyers are taking one. Volume remains very low on NYSE, failing to come close to average even as those indices advance. Those indices are simply drifting higher on light volume as there are no sellers, just a few buyers; thus the drift.
NASDAQ actually showed some rising though just average volume Monday. That provides a bit better support for its move as it butts up against resistance at 1278. It moved through that level in the afternoon only to sell off and then rebound to kiss that level on the close. Not enough to punch it through, but definitely still decent buying ongoing in the tech sector, the leader of this move.
It was a slow session all around, but a slow session with gains. There was no real catalyst to drive stocks further now that the bulk of earnings season is in the books and the economic data is light this week. Oil was lower, dropping $1.11 on the session and cracking just below $60 once more ($59.47). It certainly did not hurt the Monday stock advance, but with oil still holding its up trendline it was not a major driver.
Indeed, it was just part of the now bullish bias in the market that allows it to rise in a vacuum of news and reports as opposed to selling as it would have done just last month. There are no sellers to push stocks lower, and there is no real catalyst to bring back the buyers after a strong run higher. Thus the drift on mostly low volume and narrow breadth (1.28:1).
We would prefer to see this 'breather' occur with a modest pullback. Low volume tests set up strong rebounds that continue the buying. A low volume drift higher shows stocks and the market overall is stronger, but it tends to lead to a sharper pullback when one comes. We would thus prefer to see a modest dip on low volume, but a stingy market is a good market, and NASDAQ, the leader in this move, was up on that stronger trade. In short, NASDAQ may just go on up from here given that stronger volume Wednesday.
NASDAQ is not all alone either. Despite the narrow breadth and low NYSE volume, there were many solid stocks moving higher and moving on solid trade. A market is made up of stocks, and leaders tend to lead all stocks. Thus when we see leaders moving and stronger NASDAQ volume you have to view that as a good technical signal. At the same time you like to see the buying spread out; that can come on the next strong move, however, after the majority of buyers take their rest. In the interim the continued positive movement overall and the solid leadership in the absence of the strong volume seen last week tells you that the market remains on good footing. A low volume rise can always lead to a test, but again, that stronger NASDAQ volume gives the Monday move some strength.
THE ECONOMY
Consumer credit posts first decline in September in 10 months.
The -$0.1B reading was much lower than the $5.8B expected and was dwarfed by the upwardly revised levels from July and August ($9.96B and $7.9B, respectively). Those gains were revised higher, driven by strong auto sales in response to the 'me too' financing campaigns. Those ended and the auto sales fell off the table, helped by spiking gasoline prices that left a lot of SUV's and 'Hemi' powered trucks sitting on the lot. Non-revolving credit, the type of auto loans, fell 2.8%, and that was the bulk of the decline. That was after a 4.6% increase in August and 9.3% in July.
On the other hand, credit card debt rose 4.7%, the largest gain in 3 months. Sounds great at first blush, but consider gasoline hit over $3/gallon that month and you realize there was a lot of credit card usage to pay for those $50+ fill ups.
After all of the analysis of the numbers, the total level of consumer credit was $2.16T, just off a record high. Remember, this does not include mortgage debt or any debt secured by real estate. This is pure credit for 'stuff.'
There are two ways to look at consumer credit, and it depends upon what side of the fence you sit. Traditionally strong consumer credit levels are considered a positive for the economy: consumers are confident and willing to spend on credit because they feel the job is secure and that they won't have a problem handling the debt load. Basically, it is a sign the consumer is in good humor and willing to go out and consume.
On the other hand, the high debt load coupled with many more people sporting mortgages due to the low interest rate housing boom suggests that consumers are vulnerable to any economic slowdown and/or a rise in interest rates. With credit at record levels and mortgage debt at record levels it is easy to conclude the consumer is strapped and set up to fail if there is any hiccup in the economy.
The US consumer tends to always carry a high debt load though many cite that it has risen dramatically in the past 10 years while the savings rate has declined. The conclusion is there is no well to tap if things don't go well, so to speak. There are serious problems with this analysis, problems that may not totally negate the arguments, but that do seriously undermine them.
First, the government's savings definition has not changed in decades (savings are what you put in savings accounts, CD's and other money-based accounts). At the same time we all know of the 'investor class' that has arisen the past 20 years. Now more and more households, aware that traditional savings accounts are not going to pay for college or retirement, put that money into mutual funds and other equity or debt related securities. The investor class views savings as building for the future as opposed to just putting cash in a heap in a savings account where it basically lies stagnant. Thus you have the government and Greenspan bemoaning the lack of savings, but in reality those 'savings' are in securities as consumers try to do the smart thing and save for the future by investing in vehicles that can return more that a few percentage points (and not even that the past 10 years). To us that means there really is not a lack of savings, just an outdated method of determining savings.
Second, there is this belief that just because someone bought a house they are now more at risk of going under if there is a change in the economy. Sure you have a longer term commitment with a mortgage, but is there really that much difference with renting? When you rent you sign a lease obligating you to pay for a set period; if things go bad during that period you are still liable. But a lease is not subject to rising interest rates as are adjustable loans, right? True, but we do know that rents are on the rise again now that the housing market is cooling, and you can bet that rents will typically go up each lease term versus down now that the cycle has turned. Thus the two are not as different as some would have you believe. If a person is vulnerable due to rising rates, he or she will be vulnerable to rising rents as well.
The real issue is whether jobs will be there and if wages can rise to top inflation. The jobs market has not been stellar, but we also see that consumers continue to buy. That indicates that there is enough confidence in the jobs market to hold up the consumer. Wages are an issue. They have not risen with inflation; indeed, wages have lost ground to inflation the past year. That tends to erode buying power regardless of consumer confidence. Thus we need to get out of this low wage growth environment, but that requires continued economic expansion. The Fed fears higher wages and it is trying to slow things down with over a year of rate hikes already in the bag.
What we need to do is encourage increased supply, i.e. business activity, and thus relieve some of these inflation pressures as well as create more employment opportunities. The Fed, however, cannot do that with monetary policy. That has to come from the fiscal side, and right now there is such rancor in Washington that no one will agree to anything even if they feel it is right. The environment is one of blame, blame among the parties, blaming oil companies for making profits, etc. Sadly we won't get much of anything done, and the tax reform proposals simply are not radical enough, e.g. a flat tax or sales tax, to get any support. Moreover, with the relative prosperity under the Greenspan tenure, many in Congress incorrectly conclude it is the Fed that makes the difference in the economy, and thus they leave it up to the Fed instead of doing their job of promoting economic growth. That is one of the major downsides of the Greenspan era, i.e. the idea that Congress does not have to worry about economic matters.
Thus the outlook for 2006 remains very 'iffy' given the high energy prices and a Fed that feels the only thing it can do is raise rates. As noted, that is all it can do when it perceives a problem. As we have seen time and time again, raising rates does not solve anything. It creates a slowdown or a recession, and then Congress has to act. Of course, by that time it is too late to help anyone or prevent the decline.
THE MARKET
MARKET SENTIMENT
VIX: 13.17; +0.17
VXN: 15.18; -0.47
VXO: 12.51; +0.14
Put/Call Ratio (CBOE): 0.88; -0.05
Bulls versus Bears:
Bulls: 46.4%. After a month-long decline to 44.8%, bulls started back up on the heels of the bottom and the gains put in since. Never got as deep as the May low at 43.5%, but good enough to get this move started. Bottomed in May at 43.5%.
Bears: 26.8%. Sharp drop in bears as well, down from 29.2%. Hit a high for the year at 30% in early May.
NASDAQ
Stats: +8.81 points (+0.41%) to close at 2178.24
Volume: 1.786B (+2.16%). Volume came on late and moved higher to average levels as NASDAQ tacked on another gain. The volume shows some additional accumulation, but it was not a powerful session compared to last week. All in all, however, it was a positive to see volume rise as the index rose.
Up Volume: 906M (-144.664M)
Down Volume: 784M (+718.479M)
A/D and Hi/Lo: Advancers led 1.28 to 1. Very modest upside breadth.
Previous Session: Advancers led 1.04 to 1
New Highs: 127 (+30). Going to need to see better new high gains as NASDAQ continues its move.
New Lows: 45 (-13)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
NASDAQ gapped higher at the open and rallied to resistance at 2178. It faded, filling the gap, and then rebounded in a steady move through the last hour, moving to 2182 on the high. It faltered in the last hour, however, and had to recover late to close at that 2178 resistance. Volume moved back to average, a decent indication given the comeback and given NYSE's low volume. NASDAQ is sitting right at the January 2004 high, one of the several tops it has to negotiate to get to the August high (2220). So far it is knocking them down as it reaches each one, but we still see that gap from last Thursday, and this move has lost strength as it continues. Still a solid advance, but this low volume rebound does leave it open to a sharper drop to test that gap.
SOX (0.32%) gapped higher as well but it was all over the map, testing below the 50 day EMA (451) on the low and then rebounding to hold that level on the close. These lower intraday tests and then rebounds work to weed out the sellers and set a good foundation to move higher. Not the picture of strength, however, as it fights with the September low and the 50 day SMA (457.38).
SP500/NYSE
Stats: +2.67 points (+0.22%) to close at 1222.81
NYSE Volume: 1.468B (-4.34%). Volume skid lower below average as the NYSE indices posted modest gains. Friday was a good flat session with that reach lower and rebound. Monday's wander higher on low volume is not really what we wanted to see though it is hardly a tragedy.
A/D and Hi/Lo: Advancers led 1.28 to 1. Same as with NASDAQ, a modest breadth advance as most stocks found the going difficult.
Previous Session: Decliners led 1.13 to 1
New Highs: 95 (+25)
New Lows: 90 (+2)
The Chart: http://www.investmenthouse.com/cd/^gspc.html
SP500 was negative much of the session, but the late afternoon gaps higher took it to positive on the close despite that last hour dip it had to overcome. The advance pushed SP500 through resistance at 1220, but it faces a thick layer of overhead supply from this point on to 1230 and beyond. Without volume it is going to struggle to make the move stick, but as with the other indices, it is thus far refusing to give back its gains.
The small cap SP600 (+0.39%) managed to eke higher above 345 as it delves into that range of resistance from 350 to 355. This is still a lateral move the past three sessions after the strong Thursday break higher that took SP600 out of its short double bottom base. One of the leaders with NASDAQ, we look for SP600 to work laterally for another few sessions and then break higher.
DJ30
Almost shockingly the best move of the day as DJ30 put some distance on the 200 day SMA (10,499). Volume was higher but still well below average as it made the move. It is now at serious resistance at 10,600, and of course the top of the range at 10,700 (10,717 is the July high). Not expecting it to lead the way, but we note that DJ20, the Dow transport index, hit a new all-time high again after surging the past week. That is a very good indication for the market overall.
Stats: +55.47 points (+0.53%) to close at 10586.23
Volume: 241M shares Monday versus 230M shares Friday.
The chart: http://www.investmenthouse.com/cd/^dji.html
TUESDAY
Another day without a lot of scheduled data to influence the market. That means the market will be on its own, though with oil prices and Fed speakers there is always the prospect of some upset. Of late, however, oil has been threatening a breakdown and gasoline prices are at $2.38/gallon nationally, and that is not hurting the market. If it breaks down hard below $58/bbl that would be a boon; it would break the uptrend and open the door down toward $50.
With this overall low volume drift higher the past two sessions the action is more ambiguous. It is still solid: break higher on volume, strong run, good leadership, and now a slowdown as the buyers take a breather. It can launch right back up from here and indeed NASDAQ was showing stronger volume Monday on the gains. It will need the rest of the market to follow, however. Now SP600 is still in a good lateral test; it will be ready to move in another session or two and give NASDAQ some support.
Given the strong move to this point and now the relative drift higher without a real test we are going to go slower here. As always we will take action on strong stocks that are moving up from good entry points on volume, but we will be disinclined to give too much benefit of the doubt on stocks with so-so moves.
The market remains in very good shape overall. We would prefer to see a lateral or slightly lower move on this lower volume, but as we have oft said before, the market rarely gives you the perfect scenario. We will thus stick with the strong stocks that are set up to make good moves and are making them. If there is a test, those stocks are likely to hold up better.
Support and Resistance
NASDAQ: Closed at 2178.24
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
2121 is the August downtrend.
The 50 day EMA at 2117
2100 was key resistance and support in the past
The 200 day SMA at 2076
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 2025 that forms the bottom of the big triangle pattern
S&P 500: Closed at 1222.81
Resistance:
December 2004 high at 1219 and June high at 1220 is not totally broken
March 2005 closing high at 1225 and intraday high at 1229.11
The September high at 1243 and the August high at 1246
Support:
1210 held in late September on the close.
The 50 day SMA at 1210
The 50 day EMA at 1206
1200 was solid price support at one time
The 200 day SMA at 1200
1190 from prior prices
1183 - 1184 from November 2004 highs and July 2005 intraday low and a high way back in July 1998
1187 is the August 2003/August 2004 up trendline
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 10,586.23
Resistance:
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 200 day SMA at 10,499
The 50 day EMA at 10,429
The May high at 10,406 and 10,400, the bottom of the November/December range
The 18 day EMA at 10,420
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.
November 07
Consumer Credit, September (15:00): -0.1B actual versus $5.8B expected and $7.9B prior (revised from $4.9B)
November 09
Wholesale Inventories, September (10:00): 0.3% expected and 0.5% prior
Crude Inventories, 11/4 (10:30)
November 10
Export Prices ex-ag., Oct (08:30): 1.1% prior
Import Prices ex-oil, Oct (08:30): 1.2% prior
Trade Balance, September (08:30): -$61.0B expected and -$59.0 prior
Initial Jobless Claims, 11/05 (08:30): 320K expected and 323K prior
Michigan Sentiment-Prelim., November (09:45): 76.0 expected and 74.2 prior
Treasury Budget, Oct (2:00): -$50.0B expected and -$57.3B prior
End part 1 of 3
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us stock market
stock prices
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