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us stock market, trade stock
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12/05/05 Investment House Daily
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Stop alerts: None issued
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SUMMARY:
- Stocks fade in a sluggish session, holding near support.
o Nothing to trigger stocks: mixed overseas, higher oil
- ISM services weaker than expected but still a strong reading.
- Set up to continue the rally but need the performance chasing big money to return.
Oil keeps stocks subdued to begin the week, but not a bad test of near support.
Stocks never got off the dime, posting sluggish pre-market action on a mixed overseas market and rising oil prices. The US indices started lower, sold off more, and then managed to recover to mid-range by the close. Three attempts to rally stocks starting at lunchtime could never quite get past intraday resistance, and stocks wandered to a modestly lower close.
It was not a bad session as the indices made a nice tap of the 10 day EMA on the lows and rebounded off that level, holding that support and the Thursday solid moves higher. Volume was lighter on NASDAQ and a bit heavier on NYSE, but even the heavier volume on the lower NYSE close was not really a negative. SP500 and SP600 both tapped at their 10 day EMA and rebounded to recoup losses; that is not bad action.
That keeps the indices set up well to continue the move higher, but they need some buyers to drive them higher once more. We talked with traders today in the early malaise and a pervasive them was the action early this year when a year end rally was quickly tossed aside. They did not want to be caught in that position again and thus there is some hesitation that is keeping some money on the sideline. Thus far the big money has been there, chasing performance into the year end. Price/volume action and leadership has been excellent. That keeps the market set up to move higher and the Monday action did nothing to change that, even enhancing it some with the test of near support and rebound. The market is ready to move, but we will have to see the big buyers return to send it higher. Monday was not the session to do that.
THE ECONOMY
ISM services weaker but still a strong showing.
November showed 58.5, just off the 59.0 expected and below October's 60.0 reading. While below expectations, it was the 32nd consecutive growth month, i.e. over 50.0. Jobs rose to 57 from 52.9. New orders were up to 59.5 from 58.2. Prices paid fell to 74.2 from 78.0. In short the report, despite missing expectations, showed no real decline in activity from the larger part of the economy. Indeed most of the sub-indices showed improvement. Hard to call that a disappointment as the trend remains strong.
The Fed still on deck to raise even though money supply, not economic growth, is the demon.
That strength will keep the Fed in action because the Fed believes the economic growth causes inflation. They don't come out and say that, but the Greenspan Fed has demonstrated in his almost 20 years that after some lengthy economic growth it falls back on the Phillips Curve, feeling that continued growth leads to inflation. What leads to inflation is too much money following too few goods.
Excess money in the system is the Fed's problem because the Fed creates the money. The Fed likes to blame other areas for inflation, a favorite being 'wage-led' inflation. There is talk about this right now even though wage growth has lagged everything else in this recovery. To say there is something called wage-led inflation or the like is absurd when real wages are lagging and when you know that inflation is caused by excess liquidity with all else being equal. Thus, higher wages does not create more money; the Fed controls the money supply. Higher wages just changes the size of the slices of the money pie: higher wages mean workers get more and employers have less. In other words, employers are not creating more money when they pay employees more; they are simply making less themselves.
Thus a strong economy where workers command more pay is not necessarily an inflationary economy. Workers may get more but that only means employers get less. Now some would say that employers will then raise prices to compensate, but there are major holes in that theory as well. As seen in the 1990's, the 1980's, etc., employers often cannot raise prices just because they would like to. Competition, technology increases, productivity, etc. all put a ceiling on price increases. If the money supply is not out of control and supply is able to meet demand prices will remain stable.
What does all of this mean? Not much other than the Fed is going to continue to raise rates in order to sop up excess liquidity but it won't phrase it that way. It made a mistake with leaving rates too low for too long and letting liquidity run out of control. Greenspan fought the tax cuts in Congress but later admitted they worked. Certainly flooding the economy with excess money did not work because there was no incentive for businesses to invest. Not until the investment incentive tax cuts were passed did businesses start to spend. It was fiscal policy, not monetary policy, that led to that spending and thus the economic recovery. The Fed left rates too low and had too much money in the system as the tax cuts really took effect, and that is the genesis of the pricing pressure we see now.
The Fed, however, won't admit that. It will blame wage increases, deficits, entitlements, energy costs, the stock market - - generally anything that is an attribute of an active economy. Thus we get this misguided debate about inflation and fiscal policy is tailored based on bad information. The Fed needs to say there is too much liquidity and it is acting to sop it up and quit blaming economic prosperity for the problems. If that were to happen our lawmakers might, just might, be able to focus on what is needed from the fiscal side. As it is there is not real good information and thus it is no wonder we have problems.
THE MARKET
MARKET SENTIMENT
VIX: 11.6; +0.59
VXN: 14.6; +0.68
VXO: 10.94; +0.27
Put/Call Ratio (CBOE): 0.86; +0.02
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: -15.73 points (-0.69%) to close at 2257.64
Volume: 1.73B (-5.09%). Volume backed off below average as NASDAQ faded to tap at near support on the low. That is the action you want to see on a pullback, but of course after the Thursday break higher we would prefer to see strong upside trade as NASDAQ continues the run.
Up Volume: 584M (-566M)
Down Volume: 1.127B (+478M)
A/D and Hi/Lo: Decliners led 1.63 to 1. Fairly modest downside breadth, nothing to change the character after seeing strong upside breadth last Thursday as the rally continued.
Previous Session: Advancers led 1.15 to 1
New Highs: 168 (-10)
New Lows: 36 (-1)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
NASDAQ has not capitalized on the Thursday break higher yet, edging higher Friday on lower volume then fading Monday to test 2151 and the 10 day EMA (2246) on the low (2250.84) before a modest rebound in the afternoon session. Lower trade shows no distribution, just a breather. NASDAQ has not given up the Thursday move, and a hold here at the 10 day EMA keeps things alive and looking for a continued year end rally here in December. As noted earlier, need to see the big buyers return, indicated by stronger trade as NASDAQ moves higher.
SOX (-1.57%) was the leader upside and Monday it was the leader downside. Its losses were not that substantial, however, just giving back some of the strong 3-day move that started last Wednesday with a bounce off the 10 day EMA (487.39). We might get a nice test here from SOX in the range of 490 that sets it back up for the next leg higher.
SP500/NYSE
Stats: -2.99 points (-0.24%) to close at 1262.09
NYSE Volume: 1.685B (+10.31%). Volume rallied above average on the session, the opposite of NASDAQ. AS the NYSE indices lost ground you could argue it was a distribution session (high volume selling of stocks by the big holders), but the intraday action suggests at least partially otherwise. The test of the 10 day EMA on the low and rebound to cut the losses shows buyers entered at that level. That is a good indication that buyers are still there and ready to pick up stocks as they dip.
A/D and Hi/Lo: Decliners led 1.45 to 1. Very modest downside breadth, certainly no comparison to the strong upside breadth Thursday when the NYSE indices surged higher.
Previous Session: Advancers led 1.12 to 1
New Highs: 151 (-43)
New Lows: 78 (+24)
The Chart: http://www.investmenthouse.com/cd/^gspc.html
SP500 tapped the 10 day EMA (1257) on the low and rebounded to recoup over half the session losses. That keeps the Thursday break higher easily in tact and the Monday action, while a loss on higher volume, was not that negative. Buyers came back in at near support to pick up positions, and that suggests it is going to resume the break higher. It is trying to recover a new 2005 high, needing to clear 1268.25 to do that. One day of technical distribution, but not that nefarious as indicated, but we are watching to see if there is more.
SP600 (-0.47%) also tested lower intraday but recovered, reclaiming more than half of its modest loss on the session. It easily held above the 10 day EMA (355.86) on the low (357.14) and is indeed still right at an all0time high hit Thursday as the market rebounded in its year end rally. That leaves SP600 set up very well to continue its move now that it has recovered and joined the market leadership.
DJ30
DJ30 slipped through the 10 day EMA (10,841) but managed to hold above 10,800 and bounce slightly from the low to close. All that talk about Dow 11,000 was a bit too exuberant, and now DJ30 is doing what it often does, i.e. struggle to hold on after failing to make the final move. Volume was up but still below average on the session. May come back to fully test the 18 day EMA (10,778) before resuming, but 10,800 has been holding as the low on this pullback and did so again Monday (low at 10,810).
Stats: -42.5 points (-0.39%) to close at 10835.01
Volume: 237M shares Monday versus 214M shares Friday. Volume moved above average as DJ30 made the latter part of its run, then fell below average the past week as it makes its test above 10,800.
The chart: http://www.investmenthouse.com/cd/^dji.html
TUESDAY
Productivity and factory orders are on the bill for Tuesday, but after all of the solid economic data the past few weeks the focus is more on the 'conundrum' that faced the market all this year, namely the Fed and oil prices. Oil cracked back above $60/bbl intraday Monday, this after breaking its trendline just a couple of weeks back. In late 2004 the market rallied on the belief that oil prices were about to break down and the Fed was almost done. We are now a year later and oil has threatened to break down again but has not done so and the Fed protests that it is not done yet. After all, it has not sunk the market yet, and that is what it usually does when it is just about finished with rate hiking.
That conundrum was, as noted above, on the top of the minds of many floor traders and market makers, and the market action was very sluggish. It was not a breakdown or approaching one, but the wallets were on the hips, and without that big money chasing performance at the end of the year the upside that Thursday renewed stalled out. Last year saw two tests of the 18 day EMA in the first half of December as the market continued its rally that started in August. Thus some hesitation here is not that significant. We do, however. Want to see that volume drive the move higher soon given the strong Thursday push and the view about a year end trap.
That said, we like the action we saw Thursday and Monday, and still see stocks in good position. In addition, there has been nothing to change the overall posture of the market. Sentiment is getting extreme to the upside, and that is always something to watch, but as a timing mechanism it is poor. A rally can continue well after sentiment suggests it is getting winded. Thus we are still looking at plays that can rally for us in December (after all, there are still three weeks left) and put some Christmas money in the bank for us.
Support and Resistance
NASDAQ: Closed at 2257.64
Resistance:
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:
2251 is the January 2001 low (2273 is the closing low)
The 10 day EMA at 2246
2220 is the August high
The 18 day EMA at 2226
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 2178
S&P 500: Closed at 1262.09
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 1257
1250 may prove to be some psychological support.
The 18 day EMA at 1248
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 1229
December 2004 high at 1219 and June high at 1220
1210 held in late September on the close.
Dow: Closed at 10,835.01
Resistance:
The 10 day EMA at 10,841
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:
The 18 day EMA at 10,778
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 10,624
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): 58.5 actual versus 59.0 expected and 60.0 prior
December 06
Productivity-Rev., Q3 (08:30): 4.5% expected and 4.1% prior
Factory Orders, October (10:00): 2.2% expected and -1.7% prior
December 07
Crude Inventories, 12/2 (10:30): -4.188M prior
Consumer Credit, October (15:00): $5.0B expected and -$0.1B prior
December 08
Initial Jobless Claims, 12/03 (08:30): 318K expected and 320K prior
December 09
Michigan Sentiment-Prelim., December (09:45): 85.0 expected and 81.6 prior
Wholesale Inventories, October (10:00): 0.5% expected and 0.6% prior
End part 1 of 3
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us stock market
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