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world stock market, us stock market
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11/16/05 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Target hit alerts: GILD; CRM
Buy alerts: CAM
Trailing stops: NWRE; STMP
Stop alerts: BEAV
SUMMARY:
- Market weathers early bumps, makes test of near support, drifts higher to close to set up continued move.
- Strong foreign capital inflows send bond market higher, yield curve flatter.
- CPI in line, making it the slowest rise in four months.
- Market set to continue the move to test 2005 highs.
Another slow session but setting up for the continued move higher.
Stocks were bouncing pre-market on some decent consumer price data and some strong foreign capital inflows. Given the strength of the downturn Wednesday, however, we were not convinced the early bounce would have a lot of life, and sure enough after a stronger open it took stocks about 15 minutes to get the modest buy demand worked out of the system.
Stocks turned lower and sold all morning. It did not help when oil inventories were released and an expected 2M bbl gain in crude was actually a 2.1M bbl decline. That sparked some buying in oil and further put the brakes on the early attempted upside move. The turn came when NASDAQ hit the 10 day EMA. That sparked a rebound into lunch, but that too lost its punch when AXP announced that earnings expectations for Q4 were much too high. Stocks faded but made a higher low at lunch, and that set the bottom for the rest of the session. From there stocks walked sideways until the last hour when they drifted upside to finish near the session highs.
Volume was lower on NYSE, so there was no return to strong buying yet. NASDAQ posted another average volume session, up a bit from Tuesday. Good to see the test and rebound on solid trade. Overall the market resumed the more bullish intraday action, i.e. coming back from early weakness. No great breadth (it was negative), no strong price gains (the indices closed mixed but basically flat), but a good intraday test of near support that we were looking for, and then a rebound from that level to set up the further move higher in this rally.
THE ECONOMY
Foreign capital inflows surge in September.
The bond sale last week gave us a good indication that foreign interest in the US is not waning, and the capital inflow data released Wednesday, though from September, simply confirms that the demand continues unabated. Expectations were for $72.5B, a bit lighter than the record August inflows at $89B. In September they set another record at $101.9B, more than enough to offset September's $66.1B trade deficit.
We discussed this last week with the Treasury sales and the cool response early followed by the strong foreign buying Thursday. There is a continued debate over the ramifications of the US current account deficit (trade gap), with a favorite view among detractors being that 'at some point' foreigners will no longer fund the trade gap.
That is nonsense. It frames the issue as if foreigners were doing us a favor by coming to the US monthly and buying our securities to bail us out of a potential jam. As Bernanke noted Tuesday, they are not doing us a favor. They are more than happy to invest their extra dollars in the US because it is one of the safest places to put their money: strong rule of law, strong economic markets.
It even goes further than that. As we have discussed before, there is a very necessary symbiotic relationship between world economies. Over the past twenty years many of the newly industrialized countries have geared their economies to provide goods to the US consumer. During the bleak times of the 'Asian flu' and in the 1990's when the US economy boomed while the world lagged, they depended upon the US to consume their goods. They continue to seek the US consumer as the primary source for their goods. If they were to do anything that would jeopardize the US consumer and economy such as dumping US dollars (as if that would do it anyway), that would be putting the knife to their own economic throats.
It is not a favor to the US, it is not some greater benevolence by foreign investors, but a very real desire to find safe haven for their savings and to continue the extremely beneficial relationship between their economies and the US consumer. That keeps foreign investment coming to the US and points out how absurd a notion it is that some day foreign investors will wake up and decide to dump dollars. That may occur some day, but it will follow a decline in US consumption on a long term basis and an accompanying decline in the US economy that makes it no longer the most desired place for foreign investors to save.
CPI posts gains, but also shows the spike in prices is over. Good news but for the Fed.
We saw the headlines all day screaming 'October prices rise more than forecast!' or some derivation thereof. CPI came in at 0.2%, higher than the 0.0% reading expected. It is true to say that was more than expected, but it leaves out the biggest part of the story, i.e. that it was the slowest advance in the past four months.
The core was as expected at 0.2%. That pushed the year over year core to 2.1%, up from 2% last month. But what the bond traders are focusing on is how this is still showing that the spike higher in late summer has abated. Indeed, many bond traders and indeed the bond market as reflected by the gains in bond prices, believe that the inflation scare has already peaked.
That is one reason we see a 9 basis point difference between the 10 year bond and the 2 year bond. That is pretty much pancake flat. A flat yield curve does not indicate a recession, but it typically portends slower growth. An inverted curve, i.e. long rates lower than short term rates, has been an almost perfect predictor of recession.
Greenspan, based on the one time an inverted curve did not cause a recession (1994), is saying that the predictive capabilities of the yield curve have diminished, and thus he is not as concerned an inverted curve would mean a recession. Of course, Greenspan does not say just how much the predictive capabilities have diminished; is it 1%, 5%, 25%? Only Greenspan knows because frankly, our leaders in Congress have failed to grill him on this theory when he expresses it at congressional hearings.
From our viewpoint we don't really like relying on the one aberrant time in history an inverted curve did not result in recession. That is like relying on the Phillips Curve to do all of your economic analysis even though in the entire history of world economics it only 'worked' for a few short years. Everyone is out of step but Johnny.
Bernanke to provide relief?
Unfortunately, Bernanke is somewhat in the mold of Greenspan, but there is hope. He is more concerned with deflation than inflation. You might think that is preposterous what with all of the concern about inflation the past several months and the Fed's continued battle with it. A recent history lesson, however, shows this is a very real concern.
Japan went into recession back in the late 1980's ahead of the US. The US followed as we all know, but then started to come out of the recession even before the elections of 1992. Japan started to come out as well. The Japanese central bank, again similar to the US, started raising interest rates to forestall inflation. It worked. It worked too well. It not only forestalled inflation, it turned a budding recovery into another recession, a recession that Japan has yet to pull out of. That is a depression, though no one likes to call a spade a spade in this too politically correct world.
The US has moved out of a nasty recession of its own, not a deep drop to negative growth, but a dive off the high board from very strong growth, trillions of dollars in retirement lost, and the loss of our technological lead and thus many technology jobs. That has fundamentally altered our economy, and it is still in the process of making the transition as mature industries (e.g. airlines, autos) fight through pension issues and their very survival. If housing should collapse and more savings lost as a result, the US worker would be in an extremely difficult position, not much different from Japan. In Japan, it did not have the demographics to move it out of depression because unlike the US and its post-WWII baby boom, Japan suffered a baby dearth due to the loss of so many males, young and old, in that war.
That is why Bernanke's worry of inflation is not out of right field, and it also gives us an idea that Bernanke is not going to keep hiking rates. The bond market still says 4.5% (50BP more) for sure, and maybe 4.75%. The Fed continues to walk the tightrope. Problem is, we are the ones hurt if it falls.
THE MARKET
MARKET SENTIMENT
VIX: 12.26; +0.03
VXN: 13.96; -0.83
VXO: 11.82; -0.26
Put/Call Ratio (CBOE): 0.78; -0.08
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: +1.19 points (+0.05%) to close at 2187.93
Volume: 1.758B (+0.47%). Volume edged higher on NASDAQ, coming right at average. Good to see the Tuesday selling answered with a test of the 10 day EMA on the low and a rebound on rising trade. That shows buyers stepping back in at that test of near support.
Up Volume: 878M (+290M)
Down Volume: 850M (-268M)
A/D and Hi/Lo: Decliners led 1.47 to 1. Still no broad turn back up, but that can change quickly as NASDAQ moves up off the 10 day EMA.
Previous Session: Decliners led 2.31 to 1
New Highs: 66 (-15). This will have to get a lot better as NASDAQ resumes the move back up toward the 2005 highs.
New Lows: 100 (+19)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
NASDAQ completed the test of the 10 day EMA (2177), tapping that level on the Wednesday low and rebounding for a slight gain on stronger, average volume. A good response to the Tuesday higher volume selling: nothing like an immediate, in your face response. After about 2.5 days of downside action NASDAQ looks to have set the bottom for the next rebound in the continuing rally. It needs to show broad strength, i.e. good volume, leadership, breadth and highs, as it resumes the move. It is definitely set up to do that.
SOX (-0.08%) tapped its own support (460) on the intraday low and rebounded some to close just fractionally lower. It has spent the week following the Thursday breakout above that level testing laterally. It is set up to move just as is NASDAQ. After hours AMAT reported earnings that at first were received well but as the late session wore on the stock was sold. SOX will have to contend with that in the morning, but it does not look as if that report is going to upset the tech sector.
SP500/NYSE
Stats: +2.2 points (+0.18%) to close at 1231.21
NYSE Volume: 1.581B (-5.98%). Lower volume as the NYSE indices tested lower intraday as well and then rebounded into the close. Lower volume but still just below average.
A/D and Hi/Lo: Decliners led 1.08 to 1. Basically flat. Has struggled as the small caps have struggled to make the breakout with the rest of the market.
Previous Session: Decliners led 2.09 to 1
New Highs: 46 (-34). As with NASDAQ, this is going to have to improve as the indices move higher, and that means getting some help from the small and mid-caps.
New Lows: 218 (+4)
The Chart: http://www.investmenthouse.com/cd/^gspc.html
SP500 held easily above the 10 day EMA (1224) on the low (1227) before rebounded to post a modest gain on lower trade. Not as clear a test and rebound as NASDAQ, but SP500 is also in solid shape to continue the breakout move toward the August 2005 highs (1246). As with NASDAQ, want to see volume pick up along with breadth and new highs.
SP600 (-0.07%) will have to be a part of that move higher. It tested the 50 day EMA (341.24) on the low and rebounded for a modest loss. That kept it in the range that is the handle to its October double bottom. SP600 was unable to breakout last week as the large cap indices moved higher. SP600 will have to be part of the next move higher, and this test and rebound from the 50 day EMA may have finally set the break higher for this index.
DJ30
A very orderly pullback Wednesday after DJ30 made a run through resistance (10,720) Tuesday but was pushed back once more into its range. Wednesday it faded slightly though volume was higher and still above average. It looks as if it needs more of a test to reset and try again to breakout of the range, but the large caps have been showing more pop than the smaller caps. Thus it could turn back up from here and continue the move if NASDAQ and SP500 have completed their tests.
Stats: -11.68 points (-0.11%) to close at 10674.76
Volume: 286M shares Wednesday versus 267M shares Tuesday. More high volume as DJ30 backs off from the top of its range. It still looks as if it could use more of a pullback to test, make a higher low, and then charge back up.
The chart: http://www.investmenthouse.com/cd/^dji.html
THURSDAY
Not much relief from the economic data blitz with housing starts, industrial production, and the Philly Fed regional report. Housing is a big buzz right now as the financial stations are finally picking up on the fact that housing is and has been slowing. Wednesday it was the real estate's own industry poll as to the outlook for future sales. Over the past six months one homebuilder CEO after another has paraded across the financial stations' stages with an ebullient view of the future. The poll out Wednesday is basically a sentiment survey, and it fell 12% in one month. Welcome to the party guys. That puts a bit more spice into the Thursday numbers that report for October.
The market weathered the economic data thus far, a partial rebound in oil prices on the inventory data, and various complaints from companies (e.g. TGT, AXP) regarding sales and earnings for Q4. After the break higher last Thursday, the market has sold back to near support, held, and started edging higher Wednesday. It looks ready to continue the breakout move from last Thursday. Indeed, we once again were hearing the complaints from the floor about how the move has stalled once more. As noted last week, that typically means the test is just about over.
We need to see the small caps come into play more for the market to take out the August highs. The market is poised to continue the move, but it does need to show a real flash of strength that includes strong breadth and rising new highs along with volume. That will indicate everything is hitting on all cylinders as it heads for the showdown with the 2005 highs. We have to chuckle when we hear talk about a potential Christmas rally; the rally has already started and it is coming to its real test on the move. In 2004 it lasted until year end, just barely clearing the prior highs before buckling to start 2005. We definitely want to see it clear the 2005 highs (NASDAQ and SP500) on this move as there is still 1.5 months left in the year, and to put together a further decent rally it will have make the breakout.
It is set up well with this modest pullback to test near support just below the old highs. Given the solid action to this point we will continue to look for positions to enter to take advantage of that run to the highs and beyond into the end of the year. After that we will once again have to be on our toes as the new year starts; will stocks again falter on concerns the Fed is not done and oil prices are not rolling over? We ride the move for now but we also have to be ready to get off if trouble starts muscling in.
Support and Resistance
NASDAQ: Closed at 2187.93
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 2177 held on the Wednesday low.
The 18 day EMA at 2158.
The January 2004 high at 2154
2144 is the October gap up point.
The 50 day EMA at 2135
2100 was key resistance and support in the past
The 200 day SMA at 2080
S&P 500: Closed at 1231.21
Resistance:
The recent highs at 1238
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 1224.62
December 2004 high at 1219 and June high at 1220
The 50 day EMA at 1212
1210 held in late September on the close.
The 200 day SMA at 1202
1200 was solid price support at one time
1190 from prior prices
Dow: Closed at 10,674.76
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 10,608
The 200 day SMA at 10,504
The 50 day EMA at 10,481
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): 0.2% actual versus 0.0% expected and 1.2% prior
Core CPI, Oct (08:30): 0.2% actual versus 0.2% expected and 0.1% prior
Business Inventories, Sep (08:30): 0.5% actual versus 0.3% expected and 0.4% prior
Net Foreign Purchase, 0 (09:00): 101.9B actual versus 0 expected and 91.30B prior
Crude Inventories, 11/11 (10:30): -2.1M bbl versus 2.0M bbl expected
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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world stock market
us stock market
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