|
|
money investment, investment help
* * * *
12/13/05 Investment House Daily
* * *
Investment House Daily Subscribers:
MARKET ALERTS:
Target hit alerts: None issued
Buy alerts: ADTN; CLE; INT
Trailing stop alerts: None issued
Stop alerts: VCLK; FEX; SBAC
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:
- Stocks cautious before FOMC decision, after the FOMC decision.
- Fed suggests the end of the game is near, falls back on Phillips Curve with respect to additional hikes.
- Market now knows end game is near but has it already factored this in?
Stocks get a little life from FOMC decision but not enough to deliver a breakout.
The market was pensive ahead of the FOMC decision, bouncing in a narrow range in the 4.5 hours preceding the decision, basically holding flat in anticipation of a potential change in language and thus policy. Retail sales were released pre-market, and the headline was a hair less than expectations (+0.3% versus 0.4%). Auto sales unexpectedly rose 2.6%, and when factored out that dropped sales 0.3% (0.0% expected. Needless to say that data, while it did not hurt given the Fed is still in a hiking mode, did not inspire any buying. At the very least, ahead of the FOMC decision investors were not ready to act upon it.
There was also other data that was equally mixed. PG and HPQ announced some upside guidance. Best Buy announced lower than expected earnings. Citigroup downgraded the entire steel sector, and GS once more talked of its 'super spike' in oil, the latter most likely coming when oil is just about to head into a cyclical correction inside its ongoing secular rise. Mixed data points, and when the market is anticipating something big such as a potential change in Fed policy, mixed data was not going to spur any action.
When the announcement came and the Fed dropped any reference to 'accommodation' and said that just 'some' further measured rate hikes might be necessary, the market surged straight up to new session highs, a 17 point swing on NASDAQ and 11 points on SP500. That took them to resistance and there they stalled and gave back half of that surge on the close. Volume surged back up as trades, hedge funds, etc. jockeyed for position after the announcement, squaring positions given the new lay of the land.
All in all it was another fairly lackluster session as stocks did not know what to do before the FOMC announcement and while they did know it was worth rallying given the language change, they could not make a strong drive higher that clearly signaled another leg to the upside move. Typically it takes investors a day or two to digest what the Fed does and then take a firm stand. With a language change no doubt the market needs to figure out the lay of the land.
Thus the fact that the market could not make much of the language change on Tuesday may not be an indication of trouble for the rally; the move could pick up the pace Wednesday or Thursday. Still, the market was unable to make anything of it, and we know that the move has stumbled for over a week after what looked like a very strong resumption of the move on 12-1-05. The market has moved in anticipation of a language change, and indeed the market often rallies a couple of months ahead of the end of a cycle or when it becomes known the cycle is near the end. After that the market needs a rest because it has already rallied in anticipation and the actual news gets a 'so what?' shrug. It takes a consolidation after that news where the market digests the gains and then can rally again knowing the Fed is out of the picture. In short, the rally needs to show us some strong upside this week.
THE ECONOMY
Fed acknowledges rates are no longer accommodative, but it is still acting PC.
The Fed changed its direction Tuesday. No it did not end the rate hikes, and indeed it said that more were likely, but it told us that the end of the game was at hand. It did so when it removed not the 'measured' pace language that many thought would come out, but the 'accommodation' language. That omission means that the Fed views current interest rate levels as nearing neutral, i.e. not stimulating economic growth nor inhibiting it. It further acknowledged that by saying that 'some further measured policy firming is likely'. While that means there will be more rate hikes, it is almost an afterthought-like statement. No longer are measured hikes indefinite into the foreseeable future; there are just 'some' more left to finish the job, i.e. to do the final mop up of the extra liquidity in the economy.
That was good to hear, but the Fed has not turned a new leaf, viewing economic growth as a positive that can occur without inflation pressures. It noted that 'possible increases in resource utilization . . . have the potential to add to inflation pressures.' In English, that means the Fed is worried that a low unemployment rate and high levels of capacity and production could spark inflation. That, as you know from our previous discussions, is the Phillips Curve mentality, i.e. the 'you cannot have your cake and eat it too' theory of economics. It theorizes that inflation inevitably arises from low unemployment and economic prosperity.
It is just a theory and a poor one at that. It simply does not track with the centuries of economic history, yet it is taught in our economics schools. Former Dallas Fed president McTeer openly scoffed at the Fed's comments Tuesday, saying the statement sounded "very Phillips Curvish." McTeer noted that the Fed was backsliding again, focusing on employment rates as inflationary, something McTeer said just does not mesh. He concluded that the PC was dead in the long run, but that "for some reason" the Fed "seems to be holding onto it short term."
Thus the acknowledgement that rates were no longer accommodative and that just 'some' further hikes were likely was good news indeed as it clearly implies the end game, but the Fed's PC bias is THE problem we discussed last week (and many times before) with the Fed. It talks a good game during the start of an economic expansion, but without fail the Greenspan Fed has reverted to PC principles when the expansion is mature. Indeed, it uncannily starts worrying about growth leading to inflation after the expansion has peaked, adding insult to injury as it piles rate hikes onto the economy even as the economy has peaked.
This means that the Fed, as expressed in the statement, is going to be looking at the data it views as inflationary, e.g., employment, wages, consumer spending, energy prices, in determining just how many more rate hikes are necessary. For sure there is one more at the January 31 meeting, and the April Fed Funds futures contract has greater than a 50% chance for an additional 25 BP to 4.75% in March. In short, nothing changed in the bond market before or after the FOMC announcement. The curve did steepen, but that was because the short end fell as opposed to the long end rising.
That means there is a chance for the Bernanke Fed to raise rates as well at his first meeting as chairman. This far out, however, there is plenty of room and time for change. Indeed, some smart bond traders are suggesting that the housing market is going to continue to fade and pick up the pace as it does over the next few months, and that will be the data point that stops the Fed in its tracks as early as the January 31 meeting, meaning 4.5% and then out. That would not be so detrimental to the yield curve. It remains to bee seen if the data weakens enough to stop the Fed after January 31, but there is definitely enough good news re productivity, wages, and the core PCE to warrant cessation if the housing market continues to fade.
THE MARKET
MARKET SENTIMENT
VIX: 11.11; -0.36
VXN: 14.22; -0.61
VXO: 10.56; -0.47
Put/Call Ratio (CBOE): 0.61; -0.08. Creeping lower after running up to 1.0 early last week during that selling.
Bulls versus Bears:
Bulls: 56.2%. Up slightly from the 55.8% last week. That makes two consecutive weeks that bullishness has exceeded the 55% benchmark considered bearish. As noted, 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. We continue to watch the nuts and bolts (price/volume action, leadership) closely for signs of weakening. Some leading stocks have dropped but thus far it has been limited. Hit 44.8% on the low on this leg, just above the 43.5% low in May.
Bears: 21.9%. Last week's 21.1% was the low water mark on this run thus far, and the bounce this week is a sign of that near term concern for this rally we discussed above. It is holding just over the 20% level 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: +4.05 points (+0.18%) to close at 2265
Volume: 1.93B (+13.3%). Volume was up all session and rallied further above average after the FOMC decision. Some accumulation, but also a lot of position squaring given the change in the Fed policy.
Up Volume: 937M (+28M)
Down Volume: 909M (+138M)
A/D and Hi/Lo: Decliners led 1.06 to 1
Previous Session: Decliners led 1.02 to 1
New Highs: 117 (-27)
New Lows: 43 (+12)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
Volume was up as NASDAQ posted a gain but could not make the breakaway from its three week lateral consolidation. Held the 10 day EMA (2254) on the low and rallied to resistance at 2272 on the high before running out of gas and fading some into the close. Nervous, range-bound trade ahead of the FOMC decision then a surge higher. NASDAQ is trying to make the move, but it has yet to find the strength to make the breakaway. It is approaching the high hit at the first of December (2273 closing), tapping that that level Tuesday before fading back. That will be the key move for NASDAQ if it is able to break through on continued strong trade.
SOX (+0.53%) posted a nice gain as it continues its move off the 18 day EMA (488) test, closing in on the early December closing high (505.59). It managed to clear that level intraday but faded in the last hour with the rest of the market. SOX has been a leader in the more recent leg of the rally, and it is trying to make the next break higher and lead the continued year end run. It and SP600 look like the best candidates to take the lead.
SP500/NYSE
Stats: +7 points (+0.56%) to close at 1267.43
NYSE Volume: 1.775B (+26.24%). Nice volume as SP500 continued its move up off the 18 day EMA, testing new 2005 high territory on the high before fading back. Good volume and some accumulation on SP500. SP600 is holding a very tight range as this volume jumps; that is also a good indication, kind of like a spring being compressed, building energy for the release and spring higher.
A/D and Hi/Lo: Advancers led 1.25 to 1. Once again very modest breadth, something we want to see change on a break higher from this range.
Previous Session: Advancers led 1.13 to 1
New Highs: 179 (+6)
New Lows: 168 (+68)
The Chart: http://www.investmenthouse.com/cd/^gspc.html
SP500 tested the waters for a new 2005, clearing 1270 and running to the top of the resistance range from 1267 to 1273 before fading back to close. Strong volume on a solid upside session that pushed SP500 right up to the 2005 closing high (1268.25) and is setting the stage for a breakout move if the market can continue to view the Fed decision as breathing life into the economic expansion. Very nice pattern, but as with all pretty pictures, we need to see the breakout move.
SP600 (+0.04%) barely budged, continuing the lateral move above the 10 day EMA (358) and below resistance at 360 as NYSE volume rose above average. As noted above, this is like compressing a spring, building up the energy before it bounces higher. Very good action is setting up for a break to a new 2005 and all-time high.
DJ30
DJ30 posted above average volume gains with the help of PG and its raised guidance and accompanying strong price and volume moves. DJ30 managed to clear 10,800 on the close though it did give back almost 50 points (about half) of its session gain. Good recovery over the 18 and 10 day EMA (10,787 and 10,809), something it had to go given it was not dealing from a position of strength after the closes last week and on Monday.
Stats: +55.95 points (+0.52%) to close at 10823.72
Volume: 329M shares Tuesday versus 254M shares Monday.
The chart: http://www.investmenthouse.com/cd/^dji.html
WEDNESDAY
The trade balance Wednesday will kick up some commentary about some looming financial disaster as a result of our consumption of foreign goods and their production of goods to satisfy our consumption. There is an issue in the future, that is when the Baby Boomers age and die off and our main consumption engine is no longer present. Chinese and Indian consumers are already discovering the joys of consumption, and they are only going to grow in their consumption as they become more industrialized. At that point in the future dollars won't be so desirable because US consumers won't be as powerful, i.e. they won't be buying as many foreign goods and thus the foreign holders won't be so keen on holding as many dollars. That will cause repatriation of a lot of dollars and that will lead to a weaker dollar, inflation, and perhaps some other ills as well. For now that is not going to happen, at least not as a result of Wednesday's numbers.
The major theme for the market will be what it does now that the Fed has spoken and embarked upon the end game with its rate hikes. As noted, the market rallies in anticipation of the end of hikes, and it has been doing that since late October. The Fed did not say it was done, but it tipped its hand that it is damn close. The market did anticipate this and it did rally in advance.
The conventional wisdom says that when the Fed ceases rate hikes the market rallies. A major, major implication of this theory is that the Fed has not gone too far and sends the economy into recession or other significant slowdown. Thus we are only talking about 20% of the time, those times that the Fed does not go too far. Assuming the Fed has not gone too far, in the macro view the market will rally. Shorter term there is more than that. It rallies in anticipation, and when the end comes there is often a necessary consolidation or correction given the gains made in anticipation of the end game. Thus while in general the economy and market applauds when the Fed ceases action (again, if the Fed has not gone too far), it is not just a run higher. The market still moves in the same manner, i.e. rallying and resting. The removal of the Fed from the picture simply removes an obstacle to the economy; it does not alter how the market moves.
That leaves the question of whether this rally has any more legs. It was unable to respond vigorously to the FOMC language change and it has been unable to continue the move that looked to be resuming on December 1. It has definitely struggled to move higher, but it has also not shown any negative action other than the inability to carry the early December move higher. As noted above, SOX, SP600 and SP500 look ready to give that another try, and as the market digests what the Fed decided Tuesday we anticipate another leg to the year end rally.
Support and Resistance
NASDAQ: Closed at 2265.00
Resistance:
2264 from the June 2001 peak
2273 is the January 2001 closing low
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
The 10 day EMA at 2254 is holding on the lows
The 18 day EMA at 2241
2220 is the August high
2205 was intraday resistance last week
2192 from the January intraday high and the mid-July high.
2187 is the September high.
The 50 day EMA at 2195
2178 is the January closing high
S&P 500: Closed at 1267.43
Resistance:
1264 from the December 2000 lows is giving way.
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 1260
1250 may prove to be some psychological support.
The 18 day EMA at 1254
The August high at 1246
The September high at 1243
The 50 day EMA at 1236
March 2005 closing high at 1225 and intraday high at 1229.11
December 2004 high at 1219 and June high at 1220
1210 held in late September on the close.
Dow: Closed at 10,823.72
Resistance:
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 10 day EMA at 10,809
The 18 day EMA at 10,787
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 10,661
Price consolidation at 10,600
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
December 12
Treasury Budget, November (2:00): -$83.1B actual versus -$80.0B expected and -$57.9B prior
December 13
Retail Sales, November (08:30): 0.3% actual versus 0.4% expected and 0.3% prior (revised from -0.1%)
Retail Sales ex-auto, November (08:30): -0.3% actual versus 0.0% expected and 0.8% prior (revised from 0.9%)
Business Inventories, October (10:00): 0.3% actual versus 0.5% expected and 0.5% prior
FOMC policy announce (2:15): 25BP rate hike to 4.25%. Removed reference to an accommodative policy versus measured. Clever.
December 14
Export Prices ex-ag., November (08:30): 0.6% prior
Import Prices ex-oil, November (08:30): 0.8% prior
Trade Balance, October (08:30): -$62.8B expected and -$66.1B prior
Crude Inventories, 12/9 (10:30): 2.720M prior
December 15
NY Empire State Index, December (08:30): 18.5 expected and 22.8 prior
CPI, November (08:30): -0.4% expected and 0.2% prior
Core CPI, November (08:30): 0.2% expected and 0.2% prior
Initial Jobless Claims, 12/10 (08:30): 320K expected and 327K prior
Net Foreign Purchase, 0 (09:00): 101.9B prior
Industrial Production, November (09:15): 0.5% expected and 0.9% prior
Capacity Utilization, November (09:15): 79.8% expected and 79.5% prior
Philadelphia Fed, December (12:00): 15.0 expected and 11.5 prior
December 16
Current Account, Q3 (08:30): -$205.0B expected and -$195.7B prior
End part 1 of 3
|
money investment
investment help
|
