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us stock market, stock watch
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12/03/05 Investment House Daily
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SUMMARY:
- Thursday advance quelled by Greenspan, FOMC member comments.
- Jobs report sports solid gain in keeping with recent economic data.
- Greenspan and company hit the road to dispel notion the Fed is packing its bags.
- One week at a time heading into the new year as technical action is good but sentiment hitting extreme levels.
Market lulls after strong Thursday break higher, aided by our friends at the Fed.
It is not unusual for the market to take a pause after a strong move, and Friday started out softer, helped by some solid jobs numbers that signaled a further recovery from the Gulf storms and also that the Fed is likely to be sitting on the market's shoulder longer than most want. That softer start gave way to a budding move higher to continue the Thursday surge, but it was hit by an early frost in the form of a couple of Greenspan speeches where he waxed very political once more. He also unleashed his cohorts to further spread the word that despite the FOMC minutes released last month the Fed was still in the game because there are just so many issues that require its vigilance. The pinball president of the Dallas Fed was a case in point, echoing Greenspan's warnings about deficits, braying the Fed was not going to 'monetize' the deficits, whatever the hell that means. Man, talk a bout a broken man; he showed a little independence in the summer with his 'eighth inning' analogy, but got slapped down. Since then he has been Greenspan's puppy, echoing everything Greenspan says, even going further with his 'colorful' analogies.
With that overhang, the early rebound attempt foundered and stocks slogged around through lunch and most of the afternoon. Then once more the upside bias took over and stocks spent the last 45 minutes rebounding. SOX led the way with NASDAQ following. By the close they were back to positive, closing at new highs for the year. Volume was low and breadth was poor, but when it came to the end of the day the upside bias asserted itself once again.
Chips led the way on reports that chip prices are up due to chip shortages such as Intel's mobile chips. Other chips for electronics are in high demand as well, and there are shortages pushing up prices. Thus there may be fewer chips sold due to shortages, but overall sales are up because of price increases. NASDAQ was not too far behind, and SP600, though basically flat, posted another new high for the year as well.
This bodes well for the market next week; as noted Thursday, when this trio is leading the market has made its best moves over the past two years. There were not a lot of great moves during that period, but when it happened they were the leaders. Indeed, when the market crawled out of its hole starting in October 2002, these were on point. Thus even though Friday was a low volume slog, the continued positive action in the leadership indices leaves the market in good position to move higher, particularly after the strong resumption of the rally Thursday when everything went up on strong volume. Despite the Fed being back on the hiking path and the return of higher energy prices, the action to this point has been impeccable: excellent price/volume action, strong leadership, great breadth when coming off the tests. Again, that is good action and with the break higher Thursday and the leadership, the market remains set up to continue higher this week.
THE ECONOMY
Broad rebound in non-farm payrolls; wages rise modestly.
Jobs rebound from summer storms, post best reading since July. After a very slow September and October (17K and 44K jobs), the job market appears to have rebounded, absorbing the hit and continuing to progress. Indeed, that is the story of most of the economy as seen in the recent data. More than that, the economy is not just rebounding but appears to be gaining strength not seen even prior to the storms. Case in point is the Q3 GDP reading at 4.3%. That is the highest reading since Q1 2004, coming off the blistering growth in Q3 and Q4 of 2003 when the tax cuts really took effect.
The jobs growth topped the pre-storm average of 196K per month and was due in part to 37K construction jobs in storm-related recovery. The growth was not just storm-related, however; it was spread across the economy with manufacturing up 11K, food and beverage services +38K, education +36K. Retail gained just 9K but is expected to increase as the holidays wear on. Of course it was expected to increase last year and never did get on track.
Unemployment held at 5%, and the argument about non-farm payrolls or household survey cropped up again. With non-farms back over 200K, however, there was not too much carping about the numbers. Average wages rose 0.2%, up 3.2% year over year. That was the highest since March 2003 and it has some worrying about wage-led inflation. Others noted that it would take gains greater than 0.2% for several months to make an argument for wage inflation. Still others (us, and for that matter history) say there is no such thing as wage-led inflation: if consumers have more money that they want to spend then there will be increasing supply to meet that demand as long as we don't get too cute and try to regulate every aspect of the economy such as tacking on additional taxes just because one sector is in a particularly sweet position and is making a lot of profit. It is all cyclical. Techs made huge gains via stock in the 1990's. Real estate in the eighties, nineties and the first few years of this decade. If our leaders decide in a socialistic, Marxist manner that they are making too much money and tax that 'excess' then we certainly will have less supply because less money is invested in those sectors. That is one way you get inflation. There are other less obvious ways of curtailing supply, but it usually involves regulation and taxation.
Fed not letting things go to investors' heads.
The FOMC minutes released last month helped further the year end rally. In those minutes the Fed noted that the financial markets were suffering after Fed comments regarding inflation, implying that the markets were taking the Fed-speak too much to heart. Of course that language helped the market bounce and continued the rally toward year end. As usual, in the irony of Fed attempts at fine tuning the markets, now the Fed is out trying to take back some of that language in the minutes, fearing the market read too much into those minutes.
Greenspan is in the process of his farewell tour similar to Kareem Abdul-Jabbar. Since Greenspan can't go city to city making sky hooks and grabbing rebounds he has to try and make his mark by shaping policy moving forward. Again he was harping on the problems of deficits, how they were becoming secular and not cyclical, and how if nothing is done the correction process could be unpleasant. Greenspan was once more crossing the boundary of Fed chairman to fiscal policy maker, not just for the US but for the world. Hell, he didn't just cross the barrier, he blew through it at 90 mph. The past few years he has not hesitated to jump into the political fray, but we were hoping he would leave it at that and just stick to monetary policy in his last few months. Unfortunately he wants to leave a real stamp on his tenure. Maybe he does not realize it, but he has. So much so that the incoming chairman refuses to answer any question related to fiscal or non-monetary policy issue. That is very refreshing, and frankly we cannot wait until Greenspan is finished. He will still be making speeches, but as no longer the Fed chairman he won't be making policy.
Trying to take back what it just gave out.
As noted, the Fed presidents and governors are out again, and they are out en masse. Dallas Fed president Fisher, fresh out of his creative communications class, was using more 'power' words in describing what the Fed was going to do. Through all of the fancy talk the Fed is trying to again fine tune expectations about what it is going to do with rates. The 10 year note had a wild week, starting at 4.40% and finishing at 4.52% as investors tried to figure out what the Fed was saying. In the end it erred on the side of further hikes. Indeed, the Fed funds futures contract has once again just about priced back in a hike in March to 4.75%. When all else fails, turn to the bond market to more accurately reflect where rates will wind up.
THE MARKET
MARKET SENTIMENT
VIX: 11.01; -0.23. Approaching the July lows (9.88 - 10.23) where the SP500 peaked before falling to the October low. Something to keep an eye on with respect to year end if price/volume action weakens.
VXN: 13.92; -0.5
VXO: 10.67; -0.45
Put/Call Ratio (CBOE): 0.84; 0
Bulls versus Bears:
Bulls: 55.8%. Well, bulls crossed over the 55% level considered bearish (up from 53.6% last week). The theory behind this reading is that when too many investors are bullish, then most of the money is in the market and it has a hard time sustaining itself. For now the nuts and bolts are solid (price/volume action, leadership), but we need to watch closely; if they deteriorate the combination of the sentiment and technical deterioration would be a sign to start paring back. Hit 44.8% on the low on this leg, just above the 43.5% low in May.
Bears: 21.1%. Holding just over the 20% level considered bearish. Quite a drop from the 23.2% the prior week. With bulls jumping if bears fade further that would be even a stronger indication and make any technical deterioration dangerous for the rally. 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: +6.2 points (+0.27%) to close at 2273.37
Volume: 1.823B (-13.25%). Volume faded Friday but remained above average as NASDAQ pushed a bit higher after the strong Thursday move. Not bad at all given the Thursday continuation of the rally and the solid performance the prior day. As we have seen all through this rally, the breakout or rebound sessions have shown stellar upside volume as the big money chases year end performance. As noted, price/volume action has been mostly outstanding though there was a distribution session during the last pullback to test the 10 day EMA.
Up Volume: 1.15B (-591M)
Down Volume: 649M (+306M)
A/D and Hi/Lo: Advancers led 1.15 to 1. Modest all session, but it was the strong Thursday breadth as the rally continued that shows the underlying strength in the move.
Previous Session: Advancers led 2.3 to 1
New Highs: 178 (-26). Still has not jumped up on this breakout to a new 2005 high. That is a continuing weakness of this rally and may, along with sentiment indicator, be its undoing as we hit year end.
New Lows: 37 (-8)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
Not a spectacular move but a good comeback once more in the last hour to close near session highs and post another new high for 2005 and following the October 2002 low. Volume was weaker and breadth was basically flat, matching the modest price gains. Friday was basically a boring session, but on the heels of a strong Thursday continuation of the rally we do not see the session as anything other than a breather after a strong move. Indeed, if you look at the last time NASDAQ started higher in mid-November, the second session was equivocal. Thursday was a strong move, just like the other moves when NASDAQ has resumed its upside it showed all of the characteristics you want to see.
SOX (+0.73%) was again the leader Friday, posting its second consecutive 2005 high. It closed off of its intraday high (508.34), but it still has room to run before hitting a minor resistance point at 518-520 and then at 532. Showing excellent leadership as the market resumes its rally. This rally needed some additional leadership and SOX joining the move is an important shift, giving it much more upside potential.
SP500/NYSE
Stats: +0.41 points (+0.03%) to close at 1265.08
NYSE Volume: 1.527B (-18.96%). Volume fell below average as NYSE indices stalled for the session, posting very modest gains. The low volume on a Friday after a strong move was nothing unusual or nefarious
A/D and Hi/Lo: Advancers led 1.12 to 1. Huge breadth Thursday when it counted, i.e. when the NYSE indices made key moves either resuming their breakouts or making their first breakouts.
Previous Session: Advancers led 3.29 to 1
New Highs: 194 (-24). As with NASDAQ, not showing us anything even as SP600 hit a new high.
New Lows: 54 (-19)
The Chart: http://www.investmenthouse.com/cd/^gspc.html
SP500 went nowhere, showing a candlestick doji on low volume as it approaches the recent high at 1268.25 (closing). A nothing session Friday, but a very important Thursday move as SP500 vaulted off 1250 on very strong above average volume. Friday it had issues with Greenspan and the fact it was Friday after a big Thursday session. Still set up for another new 2005 high this week.
SP600 (+0.02%) posted the most modest of gains, scratching out another new all-time high by a hair. That was not the key move. As with the other indices, Thursday was the important session with a breakout to a new all-time high as SP600 finally returned to market leadership with a breakout to a new 2005 high. Nice base set up and a great breakout, and after a pause it is ready to resume the move this week.
DJ30
DJ30 continues to flirt with an 11K breakout, hitting 10,921 Friday before backing off for a negative close on lower volume. This is starting to look very much like a handle to a nine month double bottom base. It needs a bit more work on the handle, but then again, we don't expect DJ30 to be leading the way higher. Indeed, it is not as NASDAQ, SOX, SP600 and SP400 have taken that mantle. And when they do, that is when the market overall has performed its best.
Stats: -35.06 points (-0.32%) to close at 10877.51
Volume: 214M shares Friday, versus 257M shares Thursday. Volume never moved above average last week, even on Thursday when DJ30 joined the other indices with a big price bounce. It continues to lag as its collection of stocks fails to attract a lot of buying attention. No problem; the market does not need it.
The chart: http://www.investmenthouse.com/cd/^dji.html
MONDAY
A lot happens this December besides holiday sales. The primary event outside Christmas and Hanukah is the Iraq election that will see all factions take part in the political process. As with Germany and Japan after WWII, the near term thinkers cannot get passed the daily news reports and see that the process is slowly gelling; when the opposition caves in and participates in the political process the beginning of the end has occurred. Thus a successful election in December is key for the stock market because it would be another affirmation that Iraq is further down the road to self governance, and that hastens the day we can look elsewhere both internationally in the war on terror and domestically with some much needed changes here at home.
That is pretty big picture stuff, far from the 'what the market is showing us right now' view we have to take despite what our intellect (or in my case, lack thereof) is telling us. We say in our seminars over and over that you don't have to be smart to make money in the market, you just have to think differently. You are continually fighting your usual instincts, training in societal norms, and what you consider logical cause and effect. That is why so many analysts get into trouble: they apply their emotions, schooling, and their view as to what is rational instead of looking at the history of the market and relating that to what the market is telling you in the very recent history as well as current signposts it is erecting. When you start thinking the market should do something because that is rational you are likely just about to get whacked. The market does what it thinks is rational, and while it is a compilation of all human emotions, it is not human.
One of the things we are watching that contributes to market direction is that emotion, a.k.a. sentiment, that we discussed above as well as in last week's reports. As noted last week, the near term sentiment on the pullback was getting overdone as we started hearing complaints about the rally running out of steam. Sure enough the rally resumed the next day in a big way. Friday we heard even more moaning about a lack of 'follow through' that supposedly exposed the Thursday move as a fraud. Good grief. A huge, broad move Thursday just as the other breakout or rebound sessions all through this rally.
We like that interim complaining because the overall sentiment levels are getting to extremes. Bulls are very bullish right now, and that can contribute to topping action in a rally. Right now the price/volume action and leadership are excellent, and those are the nuts and bolts of the market. They can carry the market through the end of the year, but at that time we are going to have to watch them very closely as the sentiment indicators are suggesting some topping action similar to the end of 2004 that saw 2005 start with a thud as the year end buying was immediately bottled up, starting a six month pullback and base.
Thus we are still looking for near term upside as Thursday showed the rally renewing for a run toward the end of the year. We will continue to look at stocks set up to make that move so we can put some more gain into the bank heading into 2006. When we get toward January 1, we will have to be careful once more, watching the nuts and bolts of the market. Last December there were some big downside volume spikes on big downside sessions that hinted at some distribution in the big money. Thus far none of those have cropped up, but we are going to stay vigilant.
Support and Resistance
NASDAQ: Closed at 2273.37
Resistance:
2288 from December 2000 low.
2328 from the May 2001 peak
3015 is the December 2000 peak and the October 2000 low
Support:
2264 from the June 2001 peak
2251 is the January 2001 low (2273 is the closing low)
The 10 day EMA at 2244
2220 is the August high
The 18 day EMA at 2222
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 2175
S&P 500: Closed at 1265.08
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 1256
1250 may prove to be some psychological support.
The 18 day EMA at 1247
The August high at 1246
The September high at 1243
March 2005 closing high at 1225 and intraday high at 1229.11
The 50 day EMA at 1228
December 2004 high at 1219 and June high at 1220
1210 held in late September on the close.
Dow: Closed at 10,877.51
Resistance:
10,952 - 10,965 from Q4 2000
10,985 is the March high
11,176 - 11,186 from April 2000
Support:
10,868 is the December 2004 high
The 10 day EMA at 10,8343
The 18 day EMA at 10,771
10,754 is the February high
10,720 is the high in the recent lateral move
The June highs at 10,646 to 10,656
The 50 day EMA at 10,616
Price consolidation at 10,600
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
December 05
ISM Services, November (10:00): 59.3 expected and 60.0 prior
December 06
Productivity-Rev., Q3 (08:30): 4.2% expected and 4.1% prior
Factory Orders, October (10:00): 1.5% expected and -1.7% prior
December 07
Crude Inventories, 12/2 (10:30): -4.188M prior
Consumer Credit, October (15:00): $5.7B expected and -$0.1B prior
December 08
Initial Jobless Claims, 12/03 (08:30): 320K prior
December 09
Michigan Sentiment-Prelim., December (09:45): 84.0 expected and 81.6 prior
Wholesale Inventories, October (10:00): 0.4% expected and 0.6% prior
End part 1 of 3
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