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world stock market, us stock market
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11/12/05 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Target hit alerts: AQNT; TRAD
Buy alerts: NILE; IST; TEVA
Trailing stops: None issued
Stop alerts: None issued
SUMMARY:
- Stocks close out week with a modest rally and light holiday volume.
- Oil holds below its trendline as retailers show there is life after $3/gal gasoline.
- Treasury market may be trying to tell us something with its recent action.
- Week ahead heavy on the data as indices reach for 2005 highs.
- Shades of late 2004 as market anticipates lower oil, Fed cessation.
Stocks sleepwalk higher after Thursday breakout move.
Friday was just about what you would expect given a strong breakout move Thursday and Veteran's Day that saw the bond market closed and many institutional investors taking the day off. It was quiet and sluggish, but stocks managed to walk through the session to a positive close, leaving them holding the breakout move and looking right at the 2005 highs to start next week.
It was quiet but important. After a week-long lateral drift to consolidate the strong late October/early September move, NASDAQ and SP500 broke out of the range Thursday on strong volume. It was not necessarily an easy week to work through. The market was confronted with one obstacle after another, but each time it kept coming back and it kept showing the right kind of price/volume action and leadership as it did. As we noted last week, the character has changed, and when it does the market tends to put its head down and drive higher regardless of what is thrown at it.
One thing we meant to mention Thursday was the commentary we heard before the open that day from some floor traders who were concerned the move was over because the market had 'stalled out' the over prior week. As you are well aware, the action was superb during the 'stall out,' as the market eased laterally on lower volume, setting itself for the next move. That the breakout occurred the same day the 'stall out' concerns were voiced is pretty typical of how emotion works in the market: if the action starts to draw comments and complaints, you can bet the next move is about to begin. That Thursday breakout confirmed the good action we have seen all during this rally, and it sets the stage for the showdown with the 2005 highs.
Friday's session itself was rather unremarkable. Modest gains outside SOX (-0.73%) on very low, below average volume. Breadth was equally unremarkable (1.5:1) as stocks rose but did not have a lot of purpose after the strong Thursday breakout. DJ30 posted the best result for the day, and when DJ30 leads the upside attack you know much of the market is taking a breather.
Stocks closed in the upper half of the range, but early NASDAQ leadership swapped positions with SP500 by the close. No challenges to the 2005 highs were made and not a lot of volume breakouts from leading stocks. Again, it was a slow session but more of the same action seen the past week where stocks rose to the close in the absence of any news or other driving force. A big week lies ahead and some may be concerned because of a 'lack of follow through' Friday, but the Thursday breakout was strong (showing a lot of buyers) and it leaves the market in good shape to face the highs.
THE ECONOMY
Oil makes a key move the past week but has not started to tumble yet.
Oil prices fell below their 200 day SMA Thursday for the first time in two years. Considering all of the issues still confronting the energy market that would validly push prices higher, namely the Gulf storms that have left infrastructure in ruins and much capacity shut in, the drop in oil and energy stocks suggests that the latter part of the run in 2005 was not only demand driven but also an overreaction. It appears the oil market hit a peak and has topped.
Sure there is world demand that exceeds past demand and that puts a strain on supply. That was not the only catalyst to the climb, however, because supply on a day to day basis in 2004 and 2005 was strong. As Exxon's CEO noted early in 2005, there was no trouble getting any supply you needed. Yet price kept rising. Some would say that the fix was on, but as we know, markets get overheated and drive prices, adding another force to push price in addition to supply and demand. Oil rallied sharply all 2005 and then spiked after the storms. The latter is expected; big unknowns as to how much damage was done, how long it would take to bring product back on line, and whether another storm was just a day away from forming and plowing through the Gulf again.
Now the storms are over, the hurricane season is basically finished, but a large portion of supply from the Gulf still remains shut in. Oil inventories are solid, but they have been solid week after week after week. Yet now prices are falling below trend for the first time in two years. Some will say, and no doubt some in Congress won't miss the chance, that the hearings last week helped force companies to ease up. Preposterous, but it will be claimed. No, the market surged on increased demand, uncertainty as to future supplies, and as always, a lot of emotion (remember the 'super spike' to $100 that was forecast?). As with all markets that become overheated, they cool off, break trend, and consolidate before recovering and attempting to move higher. The magnitude of the surge typically determines how long they stay down. Just look at the result of the stock surge in 1999 and then the aftermath when the Fed broke the market's and then the economy's back.
Of course, oil broke its trend, but it has yet to break down. It is being just as sticky and difficult as it has been all along when it would toy with breaking down and then strike a gusher and jump right back up. It needs to deliver a more forceful drop, test that fall with a rebound, and then fail again. That will bring prices down near $50/bbl if that occurs. We think it will, but again, crude is being sticky.
A drop in price can only be welcomed. Already gasoline prices are well below pre-Katrina levels, and further drops will only help prices. Friday KSS, once a retail leader, reported much better than expected results, a 15% Q3 gain. Even with higher energy prices retailers are still performing. You can see it in their charts, e.g., JOSB, RL, CHS, COH, etc. Gasoline prices have certainly taken a bite and have altered some consumption patterns. At the same time we saw excellent same store sales results (+4.4%) that show the consumer continues to buying. We will know more when retail sales are released this week, but we can say that the consumer has remained remarkably strong as oil and gasoline prices spiked, and a decline is already improving sentiment (as seen in the preliminary Michigan sentiment report last week). That bodes well for the holiday season ahead.
Bonds close out an interesting week with a rally. Trying to tell us something?
There continues to be much debate as to how many more rate hikes the Fed will impose upon the economy. Fed funds futures have priced in a full 50 BP more to 4.5% and had built in 70% toward 4.75%. Indeed, on November 4 the 10 year bond hit 4.67%, the high water mark in this run, basically matching the spike in the summer. Since the fourth it has turned down, and with the successful treasury funding Thursday the 10 year note dropped sharply. It rebounded some Friday, but the turn lower at the prior high indicates resistance at that level continues.
Looking a bit further back in history, there is a trend that shows the 10 year note peaks about two months before the end of a Fed rate hiking campaign. In 1994 the 10 year peaked on November 4, and the Fed finished its rate hiking at the start of 1995. In this recent time frame, the 10 year hit 4.67% on November 4 and turned back down again. Pretty coincidental, but there is resistance at that level, and there is still the school of thought that reasons Greenspan moved the February FOMC meeting to January 31 so he could be the one to fire the last rate hike shot and give the new Fed chairman what Greenspan felt he did not have when he took over, i.e. some leeway not to raise rates right off the bat.
Another factor that Bernanke will be looking at is the dollar. It has enjoyed a nice surge the past 3 months and is on the verge of a breakout above its May 2004 high. It is also moving sharply higher against the euro to levels not seen in several years. A rising dollar is deflationary: we can buy more with a dollar, making prices relatively cheaper. Bernanke's history indicates he will factor this in to any decisions to raise rates further. You can view a stronger dollar many different ways, but there is one axiom that has held true through history: an economy cannot devalue its way to prosperity (are you listening Bush administration?). Thus we prefer a strong dollar; it keeps the rest of the world coming to us as seen in the Thursday bond auction even if it keeps our trade balance out of balance.
What does this mean? If the 10 year continues to rally and yields fall, it is a strong indication that the Fed is going to be done on January 31. The market is the best indicator of what is ahead, and the bond market is the best of the best. One thing is certain, if the 10 year yield continues to fall and the Fed continues to raise, the Fed is going to take us into a significant economic slowdown, and that is one of our main concerns heading into 2006. If the Fed stops in January, good. If it marches on we are going to have a tough year ahead.
THE MARKET
MARKET SENTIMENT
VIX: 11.63; -0.27
VXN: 14.21; -0.4
VXO: 11.15; -0.21
Put/Call Ratio (CBOE): 0.68; -0.1. This is the lowest reading the ratio has given in about three months, and it coincides with the indices breaking clear of their consolidations and approaching the 2005 highs. Not at an extremely low level at this point, but worth noting that it has hit a low not seen in quite some time, and if it continues as the indices test or break through the 2005 we will have to look at the other indicators very closely to see if the move is running out of strength.
Bulls versus Bears:
Bulls: 50.6%. Bulls surged over 4 points (46.4% prior) the past week following the strong run off the lows. The lateral move this week was not enough to deter them, though another couple sessions of lateral movement before the breakout would have swelled the doubter's ranks. Hit 44.8% on the low on this leg, just above the 43.5% low in May.
Bears: 24.7%. Dove lower from 26.8% last week, also a sharp drop fro the 29.2% reading hit on the high as the market sold in October. That was just below the 30% level hit in May, so a very respectable showing during the selling, and enough to do its job.
NASDAQ
Stats: +5.79 points (+0.26%) to close at 2202.47
Volume: 1.462B (-26.51%). Volume dove back below average Friday in holiday lightened trade. After a week of below average readings, NASDAQ blasted higher Thursday in a breakout move. Friday's modest volume and drift higher was nothing bad. The real test comes this week as volume will need to resume as NASDAQ takes on the 2005 highs.
Up Volume: 941M (-257M)
Down Volume: 506M (-263M)
A/D and Hi/Lo: Advancers led 1.2 to 1. Another modest upside breadth session on the heels of the lackluster performance Thursday given the breakout move. The smaller caps have yet to really join this move and make the clean break from their lateral consolidation as have NASDAQ and SP500.
Previous Session: Advancers led 1.49 to 1
New Highs: 170 (+30). This is going to have to improve as NASDAQ nears the August high.
New Lows: 52 (-22)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
NASDAQ gapped slightly higher Friday and generally trended higher all session, posting a modest gain on very light volume. It found resistance at 2005 on three occasions, and that looks to be the point to beat as it continues the breakout move from Thursday on towards the August high at 2220. NASDAQ has done what it needed to do, consolidate the strong move higher and then breakout on stronger trade. It should have continuing momentum heading into this week as NASDAQ takes on the August highs. As noted Thursday, a break through that level would take it out of a 23 month triangle. When it gets to that level it will likely take a pause and then make a real run at the next breakout. The action has been great and it has been pretty much textbook on this move from the test of the October low and surge on volume, to the low volume lateral consolidation, to the fears the move had stalled out, to the strong volume breakout Thursday. This week we expect NASDAQ to continue moving higher to test that August 2005 high.
SOX (-0.73%) struggled all session after gapping higher, trying to continue its breakout over 660. SOX formed a classic double bottom with handle in October and November, breaking higher Thursday with the rest of the market. It could not advance Friday, but it did not give up the breakout over 460. We are looking for it to continue higher this week toward 480 and the highs at the top of its range since August at 480-483.
SP500/NYSE
Stats: +3.76 points (+0.31%) to close at 1234.72
NYSE Volume: 1.293B (-26.05%). Volume fell off the table on Fridays light holiday trade, coming in well below average and the lowest trade in over two months. Drifted higher on the continued upside bias.
A/D and Hi/Lo: Advancers led 1.31 to 1. Very modest upside as the small caps again lagged the action.
Previous Session: Advancers led 1.48 to 1
New Highs: 136 (0). As with NASDAQ, this is going to have to improve as the NYSE indices head toward the August highs.
New Lows: 113 (-44)
The Chart: http://www.investmenthouse.com/cd/^gspc.html
SP500 continued the move Friday, but it was more of a drift higher into the close. That is a marked change from October when the market would fall in the absence of news, or for that matter, even if there was decent news (and there was not much of that). It started the day soft and then steadily rose through the close. As noted, it swapped positions with NASDAQ; the techs had the early lead but as the session wore on SP500 gained strength while NASDAQ faltered some. Managed to clear 1230 resistance, and is making its way toward the September high (1243.31) and August high at 1245.86. A breakout takes it to a new post 2002 high. We anticipate SP500 will use the Thursday breakout to move toward that level this week and then take another pause before attempting to break through and continue the year end run.
The small cap SP600 rose Friday (+0.27%), matching NASDAQ's gain and edging out of the lateral consolidation of the past week that made up the handle to its double bottom pattern formed in October. It was not a breakout, just a drift higher. The small cap index lagged last week, but it is still set to make its move, and we anticipate it will break higher this week as the other indices attempt to move on their August 2005 highs.
DJ30
DJ30 led the 'charge' Friday with a 0.43% gain. The move took it to the cusp of 10,700 on the high (10,696), just below the high in its six month range at 10,720. Volume was painfully low as well, so there was little possibility in making a breakout stick. This week is another story, however, as DJ30 and the rest of the market is showing solid action and provided a strong breakout.
Stats: +45.94 points (+0.43%) to close at 10686.04
Volume: 195M shares Friday versus 293M shares Thursday. After the break higher Thursday, volume drifted off. Will need to advance above average once more to take out the highs at 10,720.
The chart: http://www.investmenthouse.com/cd/^dji.html
MONDAY
After a quiet week as far as economic data, this week is chock full of reports from regional manufacturing, retail sales, PPI, CPI, housing starts, and industrial production. The market will have plenty to feed off of if it so desires. As noted above, as the market's character changed so did its response to news: it basically ignored it. Now that it has broken out of the range, some good news can help drive it higher and toward the August 2005 highs, the high water mark for NASDAQ, SP500, and SP600 since the October 2002 low.
Indeed we anticipate the indices to continue their breakout move this week, heading back toward the August highs. NASDAQ has led the move to this point, and a break above that high takes it out of its long ascending triangle, leaving it with a lot of room to run upside. SP600 will have to get on track as well, but we anticipate a breakout from its nicely formed double bottom with handle base.
While we expect the indices to move toward those August highs this week, whether they make the breakout is problematical. To reach that point NASDAQ will have traveled 45 points; after a move like that it could be due a rest, particularly with major resistance at that point. We anticipate a pause below that level or a break through and then a fade to test. The latter is always better; the index has broken the ice and is testing.
Given the strong Thursday breakout, we intend to continue looking for stocks that are giving us the opportunity to ride them on the move to the August highs and beyond with a breakout over that level. Semiconductors sold back Friday, but they are still holding the breakout and ready to move, providing some opportunity for an entry point after this test. The market action remains solid after the October bottom, and we will continue to look for opportunity to carry us through the end of the year. After that the ballgame may change rapidly as it did in late 2004/early 2005, but for now the market is showing excellent strength as it anticipates and oil decline and a cessation of the Fed rate hikes. Gee, that sure sounds a lot like the end of 2004, doesn't it?
Support and Resistance
NASDAQ: Closed at 2202.47
Resistance:
2205 was intraday resistance Friday.
2220 is the August high
2251 is the January 2001 low (2273 is the closing low)
2264 from the June 2001 peak
2328 from the May 2001 peak
3015 is the December 2000 peak and the October 2000 low
Support:
2192 from the January intraday high and the mid-July high.
2187 is the September high.
2178 is the January closing high
2165 is the 10 day EMA.
2154 from January 2004 high
2144 is the 18 day EMA and the October gap up point.
The 50 day EMA at 2127
2100 was key resistance and support in the past
The 200 day SMA at 2078
S&P 500: Closed at 1234.72
Resistance:
March 2005 closing high at 1225 and intraday high at 1229.11
The September high at 1243
The August high at 1246
1273 is the May and May 2001 peaks
Support:
December 2004 high at 1219 and June high at 1220
The 10 day EMA at 1219
1210 held in late September on the close.
The 50 day EMA at 1209
1200 was solid price support at one time
The 200 day SMA at 1201
1190 from prior prices
Dow: Closed at 10,686.04
Resistance:
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 June highs at 10,646 to 10,656
Price consolidation at 10,600 is giving way
The 10 day EMA at 10,545
The 200 day SMA at 10,502
The 50 day EMA at 10,455
The May high at 10,406 and 10,400, the bottom of the November/December range
10,350 was 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.
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
November 15
NY Empire State Index, November (08:30): 15.0 expected and 12.1 prior
Retail Sales, Oct. (08:30): -0.6% expected and 0.2% prior
Retail Sales ex-auto, Oct (08:30): 0.3% expected and 1.1% prior
PPI, Oct. (08:30): 0.1% expected and 1.9% prior
Core PPI, Oct (08:30): 0.2% expected and 0.3% prior
November 16
CPI, Oct (08:30): 0.1% expected and 1.2% prior
Core CPI, Oct (08:30): 0.2% expected and 0.1% prior
Business Inventories, Sep (08:30): 0.3% expected and 0.4% prior
Net Foreign Purchase, 0 (09:00): 91.30B prior
Crude Inventories, 11/11 (10:30): 4424K prior
November 17
Initial Jobless Claims, 11/12 (08:30): 326K prior
Housing Starts, October (08:30): 2060K expected and 2108K prior
Building Permits, October (08:30): 2146K expected and 2219K prior
Industrial Production, October (09:15): 1.0% expected and -1.5% prior
Capacity Utilization, October (09:15): 79.3% expected and 79.0% prior
Philadelphia Fed, November (12:00): 16.3 expected and 17.3 prior
End part 1 of 3
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