|
|
money investment, Breakout test
* * * *
11/30/05 Investment House Daily
* * *
Investment House Daily Subscribers:
MARKET ALERTS:
Target hit alerts: DBRN
Buy alerts: COHU; SBAC
Trailing stop alerts: None issued
Stop alerts: None issued
The market alert service is a premium level service where we issue intraday alerts relating to the general market conditions, when stocks hit action points (buy, stop, target, etc.), and when we see other information impacting the market or our stocks. To subscribe to the Daily alert service you can sign up at the following link:
http://www.investmenthouse.com/alertdly.htm
SUMMARY:
- Large caps stumble on higher volume but rest of market looks good.
- Q3 GDP surges to 4.3% on strong consumer, business spending as core inflation falls.
- Chicago PMI remains strong, but prices explode higher.
- Mortgage applications fall for third week: can't keep increasing sales if applications are falling.
- Just about enough nervous downside to set the bottom on this pullback.
Strong economic data causes investors to take pause regarding Fed's future actions.
Stocks started softer after a very strong second iteration of the Q3 GDP (4.3%), but turned that into a modest gain in the first half hour. Then came a strong Chicago PMI with surging prices paid, and once again investors were taken aback over strong economic data and some potential pricing issues. They fought back once more and then oil inventories came in much lower than expected. Again stocks sold but then managed to rebound through lunch and early afternoon. NASDAQ traded to a session high, up roughly 10 points, when the Fed Beige Book was released. It gave no indication of any slowdown by the Fed and indeed noted a strong recovery after the Gulf storms and energy surcharges becoming commonplace.
That was the last straw for a session that was marked by very nervous, volatile trade. The indices retreated from the highs, particularly SP500 and once again finished out a session at or near the lows. It appears that the strong economic data that this market rally foretold has cooled investors' feet as they ponder how this strong economic data (GDP, consumer confidence, consumer spending, durables orders, regional PMI reports, etc.) will play with a Fed that many felt was almost through with rate hikes. Very similar to the end of 2004 and beginning of 2005: investors felt the Fed was almost done, but when the year was over so was the rally given the realization that the Fed was still on the agenda and oil prices were not crashing.
The year end rally has hardly ended at this point, however. SP500 slipped through the 10 day EMA on rising, above average volume, some of the strongest trade in a month. The large caps had a tougher session. The other indices did not. NASDAQ showed a nice doji as it held the 10 day EMA, and SOX and SP500 both bounced off of their near support on stronger volume. Indeed many leadership stocks continue to show very good action, holding near support and even starting to rebound Wednesday on improved trade (e.g. COHU, HYSL, BBBB, DBRN). While the large cap action was less than stellar, overall the action remains very solid and still setting up another run higher toward year end.
A nice touch to the action Wednesday was the start of the whining about a stalled rally. As noted Tuesday, the first two days of the pullback were taken as just a normal pullback, but today we heard frustration about the inability to capitalize on the good economic news along with gripes about the Fed and oil prices. A charting service that often opines on market conditions is saying the rally is over once again, ready to give back a big chunk of the rally. The last time it said that was 11-9-05, the day the SP500 surged out of its lateral consolidation that started the month. Not quite there yet with the doubters, but the negative bias about the viability of a continued rally is growing. Combined with the action we are seeing in the market it is getting close to finding the bottom on this pullback.
THE ECONOMY
Q3 GDP pretty darn stellar even as Gulf storms shave 1% off growth.
This is the most unheralded strong economy I can remember. Just last night I watched a show that talked about the lousy economy. While it may not be at the stage where the economic transition we are experiencing is producing millions of jobs per year, it is far, far from the bleak picture painted by many in the news and in politics. If I were president I would be taking credit for the strength every day, telling people how great things are. It worked for Reagan and Clinton; they never missed a chance to talk up the economic accomplishments they claimed as their own. Why break tradition? Instead this administration acts as if it is embarrassed by 4.3% growth. That has an affect on the populace: if the top brass doesn't seem to think it is that good then it must not be that good.
The numbers, the facts, say otherwise. The second round of GDP revisions for Q3 showed 4.3% growth versus the 4.0% expected and the 3.8% reported earlier. Consumer spending rose 4.2% versus 3.9% in Q2. Business investment posted a strong 8.8% gain versus 6.9% prior. Very importantly, the price deflator, the amount you have to subtract out to account for inflation, fell to 3% from 3.1%. You might ask what the big deal is, but when you look at the core deflator it is remarkable: it fell to 1.2% growth for the quarter and just 1.9% year over year. By either measure that is low. Moreover, after the spike higher in Q4 of 2004 and Q1 of 2005 (2.3% and 2.4% respectively), inflation pressure has dropped off sharply even as the economic strength improves. It demonstrates yet once again: strong economic activity does not cause inflation. Inflation is caused by excess money creation by the government or its quasi governmental branches, e.g. the Fed. The Fed has been sopping up some of the massive liquidity in the economy, and that is helping curb the inflation picture even as the economic strength rebounds from already solid growth levels.
One down spot in the report was a 3.7% loss in corporate profits. That, however, is directly attributable to the Gulf storms. Those storms destroyed actual capital goods in the region, directly subtracting from GDP. In addition there were massive insurance payouts related to storm losses, and those payouts reduced insurance profits for the quarter. Indeed, the Gulf storms are estimated to have subtracted another 1% from GDP. In other words, GDP without the storms was in the neighborhood of 5.3%. While not the huge 7.3% growth in Q3 2003, it is amazingly strong given two years have intervened and the expansion is seemingly long in the tooth. Don't tell that to the economy.
Chicago PMI tops expectations, but prices top everything.
The 61.7 reading beat expectations of a still solid 60.0 (62.9 prior), but that strong regional showing was trumped by the prices paid sub-index that surged from a high 79.6 to 94. That was the highest in the 15 years of the survey. Prices were expected to fall due to falling oil prices. That was not quite right. Moreover, the Fed's Beige Book mentioned energy surcharges on services, and combined with the spike in prices paid, inflation fears were running again
On top of that the employment index fell to 50.3 from 51.3. New orders fell to 61.6 from 72.6. The index posted a gain, but key components softened. On the other hand, order backlogs grew, indicating continued activity ahead.
So what to make of the report? The Fed will worry that economic growth leads to inflation, and thus it will stack this report on the negative side of the ledger. In reality the prices paid rose on continued high energy prices. Energy is not rising because of excess money but because of strong worldwide demand. That is not inflation, and the Fed is not going to slow energy demand worldwide by raising interest rates in the US. Of course, the Fed cannot do much other than raise rates, so that is what it is going to do at least through January 31.
Mortgage applications continue to fade as the Fed takes notice.
For the third straight week mortgage applications fell, dropping 1.8% overall. While new purchase mortgages edged higher 0.8%, refinancing tanked 6.3%, hitting a 16 month low. The data Tuesday suggested new home sales are surging. The mortgage application data tell us that cannot continue: fewer and fewer applications will inevitably result in fewer and fewer home sales.
The Fed noticed this in its Beige Book from last month, finally acknowledging that housing has indeed slowed. It did not say housing had peaked, something it has done, and that could be a problem. A bike racer can slow his or her pace for a while before resuming a stronger pace. Once that rider 'pops' as they say in the sport, then the race is over. The housing market has 'popped' and the Fed has to recognize this. Otherwise it will continue on pace as usual and cause real damage. Unfortunately that is pretty much SOP for the Fed, always late and fighting the last battle.
THE MARKET
MARKET SENTIMENT
VIX: 12.06; +0.17
VXN: 15.31; -0.09
VXO: 11.78; +0.45
Put/Call Ratio (CBOE): 0.85; -0.25. After two closes above 1.0 it seems that option players sated their needs, buying back the puts sold in anticipation of a further market climb. Now that they have bought them back the market appears just about ready to resume its move.
Bulls versus Bears:
Bulls: 53.6%. After surging the past three weeks, bulls started to flatten a bit, rising just a bit higher than last week's 53.1%. Flattening out just below the 55% level that indicates an excess number of bulls. Hit 44.8% on the low on this leg, just above the 43.5% low in May.
Bears: 23.2%. Bears actually rose from the 22.9% low on this leg hit last week. They easily held above the 20% level that is considered bearish. It hit 29.2% on the high this cycle, just below the 30% level hit in May when the market bottomed at that time as well.
NASDAQ
Stats: +0.11 points (0%) to close at 2232.82
Volume: 1.936B (+7.71%). Volume gained as NASDAQ held the 10 day EMA and showed a tight doji at that level. We view that as positive: refusing to give up the support with buyers coming in as it makes the test.
Up Volume: 1.045B (+276M)
Down Volume: 803M (-212M)
A/D and Hi/Lo: Advancers led 1.37 to 1. Not bad given the flat session.
Previous Session: Advancers led 1.05 to 1
New Highs: 125 (+23)
New Lows: 47 (-8)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
NASDAQ gave back its modest rally, but it held the 10 day EMA (2230) and the breakout above the August high (2220). It showed a hammer doji on the candlestick chart as the index held above the 10 day on rising volume. That suggests buyers coming in and buying tech stocks as they held near support. This looks like a positive, and if SP500 was on board it would clearly be the case. NASDAQ was not alone, however, as SOX is showing excellent action and SP600 is not dog food. It might take another session to finish setting up, but it looks darn close right now.
SOX (+1.23%) moved off its 10 day EMA (475.81) on that strong NASDAQ volume, toying with a breakout over the August high (486.34) on its intraday high (484.50). It looked ready to turn back and fill the gap down toward 468, but along with NASDAQ it is showing signs it is going to try and hold up here and deliver that breakout to a new 2005 high.
SP500/NYSE
Stats: -8 points (-0.64%) to close at 1249.48
NYSE Volume: 1.79B (+11.64%). NYSE volume jumped above average as SP500 fell below its 10 day EMA. SP600 and SP400 (small and mid-caps), however, both held up nicely on the move, giving no indication of distribution. As with NASDAQ and SOX, they look ready to move higher from here.
A/D and Hi/Lo: Decliners led 1.03 to 1. Flat on a flat session as the large caps were down and the smaller caps were flat to slightly higher.
Previous Session: Advancers led 1.45 to 1
New Highs: 104 (-19)
New Lows: 79 (-19)
The Chart: http://www.investmenthouse.com/cd/^gspc.html
SP500 tried to hold the 10 day EMA (1251), but a last half hour slide closed it below that level. Volume rose, moving back above average on the loss. That suggests some distribution and portends a test of the August 2005 high (1245.86) that marks SP500's breakout point. Volume selling is always a concern, but we noted the solid moves on SP600 and SP400. Another downside session toward the breakout, and even an undercut of the breakout with a move toward the 18 day EMA (1242) would not be bad. It would ratchet up the anxiety and give a better shot at setting a rebound.
SP600 (+0.38%) posted a modest gain after retaking the 10 day EMA (352.43) Tuesday. Strong NYSE volume bolstered the move as SP500 held above the 18 day EMA (349.78) on this test and looks ready to continue the move, particularly in light of NASDAQ and SOX action. Still looking for that breakout over 357.86 to give it a new closing high for 2005.
DJ30
DJ30 was not immune form the selling as the large caps were taking the beating Wednesday. DJ30 undercut its 10 day EMA (10,817) similar to SP500 as it beat a hasty retreat late in the session. Volume was slightly higher but still below average as it retreated after failing to set a new high for the year (10,940). The large caps are showing larger weakness right now, at least compared to the rest of the market, and DJ30 could very easily find its 18 day EMA (10,740) or even the July, August and September highs at 10,700.
Stats: -82.29 points (-0.76%) to close at 10805.87
Volume: 257M shares Wednesday versus 255M shares Tuesday. Slight tick higher on the Wednesday selling, but hardly moving and still well below average.
The chart: http://www.investmenthouse.com/cd/^dji.html
THURSDAY
The economic data does not let up with October personal income and spending reports as well as October construction spending. November ISM is out as well, and it will be closely watched in the prices paid sub-index given the shocker in the Chicago PMI. Of the reports, that is the most current and will get the major focus.
That of course precedes the jobs report on Friday, and that report still gets the most press despite its backward looking bias. While NASDAQ and SOX are set up to move, they might not make the move Thursday given the jobs report Friday and the need for a bit more anxiety to build regarding the future of the current rally. Things are falling into place, and we saw some strong stocks start to move Wednesday, but we just have to be patient. We started to nibble Wednesday on stocks showing good moves, and we will continue to do that Thursday if strong stocks continue to show solid action. If we see strong moves coupled with the overall action seen in NASDAQ, SOX, and the smaller cap indices, we need to act even if things appear uncertain. We are still looking for a run up toward the end of the year, and the market is close to continuing that move.
Support and Resistance
NASDAQ: Closed at 2232.82
Resistance:
2251 is the January 2001 low (2273 is the closing low)
2264 from the June 2001 peak
2288 from December 2000 low.
2328 from the May 2001 peak
3015 is the December 2000 peak and the October 2000 low
Support:
The 10 day EMA at 2230.78
2220 is the August high
The 18 day EMA at 2211
2205 was intraday resistance last week
2192 from the January intraday high and the mid-July high.
2187 is the September high.
2178 is the January closing high
The 50 day EMA at 2167
The January 2004 high at 2154
2144 is the October gap up point.
2100 was key resistance and support in the past
S&P 500: Closed at 1249.48
Resistance:
1264 from the December 2000 lows.
1267 to 1273 is the May and May 2001 peaks (1315 intraday)
1324 to 1329 from the October 2000 lows.
Support:
The 10 day EMA at 1251.52
1250 may prove to be some psychological support.
The August high at 1246
The September high at 1243
The 18 day EMA at 1242
March 2005 closing high at 1225 and intraday high at 1229.11
December 2004 high at 1219 and June high at 1220
The 50 day EMA at 1225
1210 held in late September on the close.
Dow: Closed at 10,805.87
Resistance:
The 10 day EMA at 10,817
10,868 is the December 2004 high
10,952 - 10,965 from Q4 2000
10,985 is the March high
11,176 - 11,186 from April 2000
Support:
10,754 is the February high
10,720 is the high in the recent lateral move
The 18 day EMA at 10,740
The June highs at 10,646 to 10,656
Price consolidation at 10,600
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
November 28
Existing Home Sales, October (10:00): 7.09M actual versus 7.20M expected and 7.29M prior (revised from 7.28M)
November 29
Durable Goods Orders, October (08:30): 3.4% actual versus 1.5% expected and -2.0% prior (revised from -2.4%)
Consumer Confidence, November (10:00): 98.9 actual versus 90.0 expected and 85.2 prior (revised from 85.0)
New Home Sales, October (10:00): 1424K actual versus 1200K expected and 1260K prior (revised from 1222K)
November 30
GDP-Prelim., Q3 (08:30): 4.3% actual versus 4.0% expected and 3.8% prior
Chain Deflator-Prelim., Q3 (08:30): 3.0% actual versus 3.1% expected and 3.1% prior
Chicago PMI, November (10:00): 61.7 actual versus 60.0 expected and 62.9 prior
Crude Inventories, 11/25 (10:30): -4.2M versus -1.7M expected
December 01
Auto Sales, November: 5.3M expected and 5.2M prior
Truck Sales, November: 7.1M expected and 6.2M prior
Initial Jobless Claims, 11/26 (8:30): 325K expected and 335K prior
Personal Income, October (8:30): 0.5% expected and 1.7% prior
Personal Spending, October (8:30): 0.2% expected and 0.5% prior
Construction Spending, October (10:00): 0.5% expected and 0.5% prior
ISM Index, November (10:00): 58.0 expected and 59.1 prior
December 02
Non-farm Payrolls, November (08:30): 210K expected and 56K prior
Unemployment Rate, November (08:30): 5.0% expected and 5.0% prior
Hourly Earnings, November (08:30): 0.2% expected and 0.5% prior
Average Workweek, November (08:30): 33.8 expected and 33.8 prior
End part 1 of 3
|
money investment
Breakout test
|
