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us stock market, trade stock
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11/15/05 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Target hit alerts: None issued
Buy alerts: ELOS; SOX; NIHD
Trailing stops: PSUN; BCSI; TRAD; HAE
Stop alerts: BCSI
SUMMARY:
- Stocks swallow economic news & rally, but get afternoon indigestion on tepid retail outlook, Bernanke promise to follow Greenspan lead.
- Core PPI turns negative in October, drops sharply year/year
- Retail sales jump when autos are removed, but costly energy, building materials and the like contribute to the gains.
- Some retailers pensive about the holidays, others full speed ahead.
- Market stumbles, looks to test the 10 day EMA as it works through Tuesday's issues.
Economic data wave starts, and market handles it at first but then chokes a bit.
The wave of important economic data started Tuesday before the open with PPI, retail sales, and the NY Empire PMI. The NY PMI was much stronger than expected (22.8 versus 15.5 expected), indicating that the regions are coming back strong after the hiccup following the storms when a lot of doubt was cast upon the economic future. That appears to have cleared up. The PPI was much higher than expected overall (0.7%) but the core was much lower than expected (-0.3%). Retail sales were a better than expected -0.1% (-0.7% expected), but take out autos and they jumped 0.9%, three times expectations.
The market seemed to handle that news without much trouble. Futures were modestly weaker, and they strengthened a bit on the news. Just a bit. Then target reported earnings and they were okay but the company had a very pensive outlook for the holiday season. AEOS and JAS, also retailers, chimed in with downward guidance. That shook retail, but again, the market appeared to handle it.
Indeed, the market started soft and sold modestly in the first hour. It turned higher and into positive territory into lunch, surviving Bernanke's morning session before Congress. Volume was running higher as it turned to the upside, and stocks appeared to be mirroring the action of the entire rally: soft early, finish stronger.
Then the buyers dried up as NASDAQ hit 2205 again. Some blamed it on Bernanke saying he would continue the Greenspan method. Others looked to the retail data as the trigger. If it was those items, it was a delayed reaction as the selling did not come until the afternoon, well after the market absorbed the data. In any event, retail stocks started to struggle more and then the financials rolled back. That stalled out the move and some sellers entered. Stocks gave back the gains, turned negative, and kept selling into the last hour. The indices managed to find some footing and bounced, but it was a lame move without any punch.
Volume was up early and it was up after the selling, moving above average on SP500 as some distribution popped up. Some investors did not like the retail news, and the talk of inflation targets and Greenspan ideology did not help. Breadth was negative at better than 2:1. It was a negative session in most respects: started slow, rallied, but then reversed and sold off broadly on rising trade. Now it is up to the market to absorb more data and complete a test to the 10 day EMA, a move that tests the Thursday breakout. That, of course, is an important test for this move as you want to see each breakout sustained; that shows the move is still strong.
THE ECONOMY
Core October PPI shows continued decline.
PPI rose 0.7%, well above the flat reading expected. That could get you going, but when you look at the core it fell 0.3% when a 0.2% gain was anticipated. The year over year core rate fell to 1.9% growth from 2.4% growth the prior month. Moreover, the overall number was pushed higher by the timing of the data measurement; since they were taken, energy prices have posted a more dramatic decline. In any event, once again in yet another energy spike cycle we are not seeing costs pass through to the core. Energy rose 4.1% overall and natural gas rose 12.7%. Yet, those increases did not make it into the core; it went down.
Okay, we all know the debate: is the overall reading the key or is the core? Many on the financial shows say you cannot ignore food and energy prices. To the extent they measure the overall burden on producers and potentially consumers, that is true. But you also have to look at why some prices are rising and why some are declining.
If prices rise due to unobstructed supply and demand issues, that is not inflation. Inflation occurs if there is too much money chasing the same amount of goods, and that can occur when there are bottlenecks or imbalances that leave a bunch of money sitting around ready to buy. After the gulf storms when most of the Gulf production was shut in there were imbalances that resulted in some inflation: people wanted the product but supply was shut in. It was there, but it could not be brought out. Once the repairs are made, supply starts to flow and that imbalance is rectified, and inflationary pressures drop. Overall energy costs remain high, but not because there is excess money chasing it. It is higher because more countries now want more oil.
This is the main confusion today in discussing prices, the dollar, interest rates, the Fed, etc. Rising prices are assumed to be due to inflation. Inflation occurs when there is too much money in an entire economic system and that liquidity inevitably finds its way into the price of everything. We have seen in prior historic examples, the most classic in recent history is the monetary infusion by the Fed in late summer 1999 ahead of Y2K. Billions and billions were pumped into the system to facilitate a smooth transition and allay fears over the clock stopping at midnight. There was no run on the banks, and thus the banks put that money into the stock market. Hence the 70+% NASDAQ run that fall and winter. That money found its way into the system, in this case the stock market, and it inflated stock prices well beyond their worth. When the Fed called the money back in March the banks had to sell out of their holdings. The market lurched, swung up and down in violent volatility, and then broke.
Right now there is likely still a bit too much liquidity in the economy. The Fed is raising rates but there is still liquidity in the money supply. In a great irony, if the Fed would sop up some of that excess money, short term rates would likely start to FALL as the dollar strengthened. Markets know when there is too much money in the system. The short term yield has been pushed higher but the long term is resisting because it knows the score. The Fed can try to push it until it breaks (invert the yield curve), or it can clean up the money supply a bit more, see short term rates fall, increase the yield curve, and deliver a healthy economy, free of inflation AS IT IS DEFINED IN ECONOMICS.
That is why the core does in fact matter. Smug commentators saying it costs more to buy items at the store confuse inflation caused by monetary reasons with supply and demand. The entire Bernanke hearing was checkered with this confusion by Congressional members. Hopefully Bernanke knows the difference.
Retail sales rise outside of weak auto, gasoline sales. TGT as Scrooge?
Sales fell 0.1% overall (-0.7% expected), led by a drop in auto sales and in gasoline prices. Take out autos and sales rose 0.9%, much better than the 0.3% anticipated. Clothing sales jumped 3.1% while department and general merchandise stores saw 1.5% gains. Furniture gained 0.7%, personal care products 0.4%, food and beverages 0.7%, restaurants 0.9%.
Sounds good. It was strong ex-autos even when gasoline sales eased 0.8%. Lately the gasoline sales have pumped up retail sales, giving it the air of strength but using up a lot of retail dollars on high priced fuel. Building materials rose 3.1%. This is another one of those areas that can be read two ways: good to see materials sold, but materials cost more now. It is not a unit measure, but a dollars spent measure. If prices are higher as they indeed are for building materials, it is not necessarily a great showing of retail strength.
Overall, however, the report was very solid. Consumers were still spending in October. But what about TGT and its tepid outlook for the holiday season? It helped torpedo the market move this afternoon, and there were others hitting sour notes on the holiday trumpet, e.g. AEOS and JOS, both in retail. Could they be the harbingers of a slowing consumer?
Man it sure does not look like it from what we are hearing from the retail stores and other sources. The retailers are telling us they are having great responses to their early season sales as they take a new tactic this year, priming the pump with sales to get consumers to break open the wallets as opposed to waiting each other out to see who blinks first. Then there are the consumer sentiment reports on the rebound as gasoline prices slide; that is not the best indicator, but it does not hurt. Then there are the same store sales reported last week, and the strong outlooks from WMT, HD, LOW, ANF, etc. That makes this look, somewhat surprisingly, like a Target thing as opposed to a retail-wide issue. Indeed, from what we see the holiday season is going to show another solid increase as it has the past two years. Not a blowout, but another solid increase.
THE MARKET
MARKET SENTIMENT
VIX: 12.23; +0.05
VXN: 14.79; +0.11
VXO: 12.08; +0.48
Put/Call Ratio (CBOE): 0.86; -0.03. Hanging in the higher range after a dip late last week to near 0.60. Want to see it bump higher again as the market tests near support.
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: -14.21 points (-0.65%) to close at 2186.74
Volume: 1.75B (+23.05%). Volume jumped back to average, the first time since the Thursday breakout, as NASDAQ fell back. Distribution session as volume was strong in the morning climb and then strong as it fell in the afternoon. A rally can survive a session of distribution now and then, but as NASDAQ approaches the 10 day EMA it needs to back off.
Up Volume: 588M (-154M)
Down Volume: 1.118B (+454M)
A/D and Hi/Lo: Decliners led 2.31 to 1. Strong downside breadth as NASDAQ fell back from 2205 once more. Breadth was rather tepid on the recent climb, and that makes this something to note if NASDAQ cannot find support near at hand after the Thursday breakout.
Previous Session: Decliners led 1.35 to 1
New Highs: 81 (-66)
New Lows: 81 (+27)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
NASDAQ started soft, rallied positive, and then gave up 18 points to the close, turning negative on rising, average volume. NASDAQ along with the other indices hit a snag on fears of a possible holiday retail disappointment, fears that are likely overblown, and some issues about Bernanke as Fed chairman. It was a distribution session, i.e. where stocks are sold on higher volume, but we also note trade was just average and much lower than the volume on the break higher to start the month. Thus sellers are not strong yet, though they did win the day. What we want to see now is NASDAQ test the 10 day EMA (2174) and hold in that area. That keeps the breakout in tact and it gives it a good point to mount another attack on the 2005 at 2220. First it has to clear 2005, a point that has turned up as resistance in recent sessions.
SOX (-0.31%) was solid early, leading the market. It high 468 on the high and stalled similar to Friday when it hit the same point and returned to support at 460. Still holding that level, and that is where we want it to find support and continues its breakout move.
SP500/NYSE
Stats: -4.7 points (-0.38%) to close at 1229.01
NYSE Volume: 1.682B (+20.68%). Volume rose to average on NYSE as well as SP500 and SP600 gave up early gains to finish lower. Distribution session here as well, but as with NASDAQ, a lower volume session than the prior buying.
A/D and Hi/Lo: Decliners led 2.09 to 1. The small caps continue to lag and that weighs on the NYSE breadth. Financials were also struggling in response and in anticipation of a Bernanke Fed.
Previous Session: Decliners led 1.65 to 1
New Highs: 80 (-42)
New Lows: 214 (+43). Note that new highs never broke 200 on the recent run higher while new lows are already ramping up. You want to see the highs build as the index rallies near the prior highs and that was not happening. This is something we saw in the summer when NYSE indices ran out of gas in August.
The Chart: http://www.investmenthouse.com/cd/^gspc.html
SP500 hit 1238 on the high, clearing recent resistance and looking good, but it could not hold the move and rolled back with the market, particularly when the financials started to struggle. Volume rose to average as SP500 comes back to test the Thursday breakout. It too can hold the 10 day EMA (1223) and keep the breakout in tact. Want to see that volume fade back below average as it continues the test.
SP600 (-1.06%) continues to act as a drag on the market. It did not make the breakout with NASDAQ and SP500 last week, and it is now falling toward the bottom of its two week range, still holding above the 50 day EMA (341.16). No breakdown as it is in the handle to its double bottom, but its lack of movement on lat week's breakout makes it suspect. Needs to hold the 50 day and then move with the rest of the market when it rebounds form this test.
DJ30
DJ30 rallied well once more, clearing the 10,720 range on the high (10,742). Volume was up and above average. It could not hold the move either, but it closed basically flat, unlike NASDAQ and SP500. A big doji on the candlestick chart indicates its run needs a test. The key issue as with the other indices is whether this will be just a test back to make a higher low and then rally for the breakout, or another failure and roll lower at this heavy resistance point. We need to be prepared for that event as the other indices are struggling a bit below their 2005 highs.
Stats: -10.73 points (-0.1%) to close at 10686.44
Volume: 267M shares Tuesday versus 211 shares Monday. Good volume returned on the move, but it was accompanied by a doji on the candlestick chart, and that indicates some churn as DJ30 once more struggles to break through the top of its range.
The chart: http://www.investmenthouse.com/cd/^dji.html
WEDNESDAY
More key data Wednesday with the biggest being the CPI. As with the PPI, it is expected to drop on lower energy prices, but as seen in PPI, the timing of the reading may not give us that drop. The core will be the key; it is expected to rise, but as with PPI we may see a decline. Indeed, core PPI is in a downtrend the past six months, and CPI is starting to follow it. Again we have to be clear about what is and is not inflation, and the core helps us determine that.
The PPI is important, but the CPI tells the story as to the consumer, and that is the Fed's key focus. Of course the CPI is not the Fed's favorite inflation indicator, but it goes into the mix. The PCE is favored, and it has been falling as well of late.
We believe the Tuesday selling was an overreaction to some sales forecasts and some comments from Bernanke. That got two recent leading sessions heading lower (retail and financials) and that helped torpedo the entire market. If it is an overreaction we should see NASDAQ and SP500 pull up and hold near their 10 day EMA, and do so on some lower or at least steady volume. From there we need to see the rebound on volume to move toward the 2005 highs. DJ30 is stalling again at 10,720, and we don't want to see it dump lower on high trade either. A pullback to test is okay; a dump lower on continued volume and negative internals is not a good sign.
While we still believe this is just a blip in an otherwise solid performance by the market, we have to continue to listen to what the market is saying, and if we see stocks breaking support we are not going to see just how far they might fall. What we believe this will bring about is a set up to make another run at the 2005 highs, and that will provide us some entry points on current strong plays as well as a chance to get into some plays that got away from us on the last move.
Support and Resistance
NASDAQ: Closed at 2186.74
Resistance:
2192 from the January intraday high and the mid-July high.
2205 was intraday resistance last week
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:
2187 is the September high.
2178 is the January closing high
The 10 day EMA at 2174
The 18 day EMA and the January 2004 high at 2154
2144 is the October gap up point.
The 50 day EMA at 2132
2100 was key resistance and support in the past
The 200 day SMA at 2080
S&P 500: Closed at 1229.01
Resistance:
The September high at 1243
The August high at 1246
1273 is the May and May 2001 peaks
Support:
March 2005 closing high at 1225 and intraday high at 1229.11
The 10 day EMA at 1223
December 2004 high at 1219 and June high at 1220
1210 held in late September on the close.
The 50 day EMA at 1211
The 200 day SMA at 1201.82
1200 was solid price support at one time
1190 from prior prices
Dow: Closed at 10,686.44
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 10,593
The 200 day SMA at 10,504
The 50 day EMA at 10,473
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): 22.8 actual versus 15.5 expected and 12.1 prior
Retail Sales, Oct. (08:30): -0.1% actual versus -0.7% expected and 0.3% prior (revised from 0.2%)
Retail Sales ex-auto, Oct (08:30): 0.9% actual versus 0.3% expected and 1.1% prior (revised from 1.1%)
PPI, Oct. (08:30): 0.7% actual versus 0.0% expected and 1.9% prior
Core PPI, Oct (08:30): -0.3% actual versus 0.2% expected and 0.3% prior
November 16
CPI, Oct (08:30): 0.0% 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): 4.424M prior
November 17
Initial Jobless Claims, 11/12 (08:30): 322K expected and 326K prior
Housing Starts, October (08:30): 2060K expected and 2108K prior
Building Permits, October (08:30): 2170K expected and 2219K prior
Industrial Production, October (09:15): 1.0% expected and -1.5% prior
Capacity Utilization, October (09:15): 79.6% expected and 79.0% prior
Philadelphia Fed, November (12:00): 15.0 expected and 17.3 prior
End part 1 of 3
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