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money investment, investment help
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01/05/06 Investment House Daily
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SUMMARY:
- A modest gain starts 2006 the complete opposite of 2005
- Jobless claims power below 300K.
- Farewell to Greenspan
- ISM Services continues trending higher, aided by lower prices.
- Retail sales data shows an interesting turn.
- Jobs report up for Friday, but expecting more technical issues to control the market action Friday as indices run to resistance.
Third gain in a row on solid trade and new leadership.
Stocks posted another gain Thursday, but it was a struggle to get all indices positive by the close. A soft start with SP500 already at resistance, and then a rebound to positive, showing some of that good bullish intraday action. There was some good news to help with low jobless claims and a strong ISM services report. Oil, gasoline, and natural gas inventories ballooned, more bullish news, but the market sold off on the release. That did not keep stocks lower, however, and they fought back.
NASDAQ and SOX were the leaders on the day. Indeed, they never threatened to turn negative. The issue was whether they could rally through resistance and help SP500 do the same? Both managed new post-2002 closing highs, but as with SP500, they both could not close above the December intraday highs.
As for the internals, they were weaker than the prior sessions this week. Volume faded slightly but was still very strong. Breadth had been strong on NYSE, but it faded to barely positive with equally weak breadth on NASDAQ. The positive remains the leadership, however. Thursday technology jumped out after energy, metals, and materials started the year strong. Already a bit of rotation as money moved heavily into technology after moving heavily into energy and metals early in the week. That rotation shows money is being put to work in different areas in the market though not all at once. Energy sold off Thursday, but it was not a breakdown, testing near support. This rotation is a sign of strength for the market overall. As an aside, breadth was weaker because energy was down after helping overall NYSE breadth surge Tuesday and Wednesday.
After the first three days of the year the January indicator is showing solid strength. Beyond just that rather vaporous prognosticator, the action is the antithesis of early 2005. The market is rising on solid breadth and volume while boasting strong leadership. Certainly helped by the FOMC minutes but in the face of continuing high energy prices. In 2005 the market was down sharply on volume and wide breadth. The near term key is whether the indices can, after a pause here at resistance, break on through with continued volume and leadership. Longer term the market has set up an excellent technical base, but it is confronted with fundamental issues such as continuing high energy prices. Thus far the market is looking beyond that and the big money is still finding reason to buy.
THE ECONOMY
Jobless claims hit a 5 year low.
The 291K easily undercut expectations at 320K, hitting a low not seen since 9-2000. Two factors combined to make the number a bit suspect. Year end and the holiday season and related hiring helped push the figure lower. Continuing claims rose 13K to 2.718M, so it was not a lot of claimants falling off the roles that helped push the number lower. These factors make it look like a very seasonal number for the week.
That is the story for the week. The bigger picture shows that after the spike after the Gulf storms the readings are reverting to the trend as the 4-week average fell to 317K, heading back toward the 310K average before those disasters. Continuing claims are still running higher at 2.662M over 4 weeks versus 2.576M pre-storms, but again, the weekly data is reverting.
This still leaves jobless claims very near the 300K level that, as you recall from 1999 and 2000, Greenspan considers a tight labor market. Greenspan was using this as one of his big reasons to hike back in that disastrous campaign against prosperity under the foolish and historically disproved theory that jobs lead to inflation. Let's put that into perspective.
Farewell to the politician Greenspan.
We all often accuse politicians of saying whatever is politically expedient at the time, using the 'facts' as they see fit to substantiate the position of the day. Jobless claims have been falling the past two years following the recovery from the market and subsequent economic collapse of 2000. Even with jobless claims still on a downward trend and basically at the level considered representative of a tight labor market, however, the Fed just advised us it is ready to stop its rate hiking. In 2000 this was poison to a sustained, stable economic expansion. Today it is ignored by a Greenspan, in the twilight of his career, hoping to go out with an expanding economy.
Greenspan, more than any other Fed chairman, is a politician. He has placed himself in the middle of congressional policy debate while at the same time saying it was not his position to be involved. He was used, with his implicit permission, as ammunition by both sides as they pushed their agendas. Thus it is no real surprise to realize that Greenspan's use of economic indicators is reminiscent, indeed identical, to a politician's cherry-picking statistics and facts to make political gain.
While we will miss Greenspan because he made such a good punching bag during his tenure, it will also be very refreshing to have a Fed chairman that does not insert himself into the political debate. Bernanke's comments during his confirmation hearings indicate he is going to purposefully avoid the intervention that Greenspan seemed to relish. One can only hope that he, unlike the Fed in general, can stick to a plan once it is initiated.
ISM Services tops expectations, continues post-storm improvement.
December's 59.8 topped the 59.0 expectations and November's 58.5. From August, the progression is as follows: 65.0, 53.3 (storms in September), 60.0, 58.5, 59.8. September was abnormally low due to the storms and October was a rebound month. What we see with December is a nice advance and a solid continuation of gains in the service sector: each reading above 50 is expansion, adding onto the prior month's gains.
The 'inside' numbers were even more impressive than the overall reading. New orders jumped to 61.9 from 59.5. Prices paid fell to 69.5 from 74.2; high, but still a low since August. Prices from August: 67.1, 81.4 (September storms), 78.0, 74.2, 69.5. Employment edged up to 57.1 from 57.0, but again, this is an expansion on top of many expansions, indicating the employment sector continues to improve.
Overall these are very good numbers and indicate a solid expansion in economic activity. Any cracks? Sure. Energy continues to be the stumbling point. Prices paid spiked due to energy costs after the storms, subsided some, but is going to rise because oil has surged $4 the past week, easily pushing back into the 60's. Natural gas has plummeted on the warm weather, however, and that will help keep prices subdued. Once the weather reverts back to its norm, however, prices will head back up there as well. That continual pressure from prices takes a toll on the economy. Determining the precise price point at which energy slows consumer and business activity is difficult as it is a moving target based upon usage of other products that are more weather oriented (e.g. natural gas). As noted last night, however, if oil remains above $60/bbl as we head into the summer driving season, the economy will be pressured.
Retail sales mixed but solid. Do Wal-Mart's numbers suggest something good?
As usual there were winners and losers in the holiday retail binge. Specialty retailers were mixed as well, somewhat of a different story from their solid domination of the retail scene the past two years. TGT, COST, JWN, FD were the big names posting results that topped expectations. ANF posted a 29% gain, AEOS 9.8%, ARO 11.4%.
Then there were the losers. JCP missed its same store sales slightly, GPS, LTD, TOO, SHLD, and WMT. WMT was an early leader in the holiday sprint, relying on heavy early discounting. In the final tally, however, sales rose just 2.2%, below the 2.4% expected and its lowest since the 2000 season. Its Q4 profits will be at the low end as well.
Too many that means the season was not that great. To us it indicates something that is a surprise to us given WMT's early success and the impact of high energy costs. Note that this was the lowest growth for WMT since 2000. That was the last boom year of the economy. After that WMT's sales surged as we went into recession and consumers sought more cost-effective retailers. WMT led the 2001 and 2002 holiday retail seasons as the economy struggled in recession that started in late 2000. WMT's sales jumped over the summer and post storms as consumers were worried about the future and felt the impact of high gasoline and energy costs. They sought to make precious dollars go further.
What the holiday season shows us is that consumers recovered from the Gulf storm scare and started consuming again, particularly as gasoline fell well off the $3/gallon spike. They did not feel compelled to spend the bulk of their holiday dollars at the biggest discounter. That is a real positive for the economy and a consumer that is supposedly tapped out. Consumers spend when they are confident about their jobs. Spiking energy makes them worried that their job may be in jeopardy as companies try to cut costs where possible given rising energy prices. Energy subsided, the job market improved again after the storms, and consumers went to the stores they wanted to go to, not the stores they felt they had to go to. The result is lower sales for the 'cheaper' discounters, and a really solid retail season overall.
THE MARKET
MARKET SENTIMENT
VIX: 11.31; -0.06
VXN: 15.01; +0.16
VXO: 11.63; +0.26
Put/Call Ratio (CBOE): 0.62; -0.13. Has dropped back significantly of late as the market rally firmed. Used to be it had to get down to 0.3 or so to show complacency, but it has spent most of its time above 0.7 the past couple of years.
Bulls versus Bears:
Bulls: 60.4%, up from 58.8%. No drop off in the climb higher and there are way too many bulls at this point for the market's good. Four straight weeks bullishness has exceeded the 55% benchmark considered bearish. 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. The market is struggling to move higher, more leaders are balking, and the small caps are on a bumpy road. The rally needs to resume this week. Hit 44.8% on the low on this leg, just above the 43.5% low in May.
Bears: 20.88%, down from 21.6%. Continues to slide lower as bulls rise. Bad combination. Still above 20% that is considered a bearish reading, but close enough for horse shoes. 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: +13.41 points (+0.59%) to close at 2276.87
Volume: 1.961B (-0.94%). Another strong volume session as NASDAQ assumed some leadership again. A strong start to 2006, showing upside volume as opposed to 2005's downside volume.
Up Volume: 1.443B (-47M)
Down Volume: 495M (+37M). Still a lot of buying versus the downside.
A/D and Hi/Lo: Advancers led 1.15 to 1. Continued meek breadth even as NASDAQ moved to a new post-2002 closing high. The move was dominated by chips and specific areas such as wireless.
Previous Session: Advancers led 1.63 to 1
New Highs: 169 (0). Hmmm. Not good. Want to see new highs surge at this stage of the game, and it is not doing it. It was a narrow advance Thursday. Maybe not that bad on the third day of a solid advance, but needs to improve as the advance continues.
New Lows: 25 (+1)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
New post-2002 closing high and on continued strong volume as buying remains solid in technology to start the year. NASDAQ still ahs to move through the December intraday high at 2278. That would appear academic but for all of the indices bunching up around those highs and a solid 3 day run. We may see a rotation back to energy, metals and materials once more while NASDAQ takes a breather and sets up for the next breakout move. It has leadership and buying. It needs some breadth and new highs.
SOX (2.39%) was the leader and it also scored a new 52-week high though not a post 2002 low high. SOX rallied early but then went into a long slump in 2004. It has shown a breakout in early December, a test of the 50 day EMA, and then another surge higher this week. While overall breadth was not great on NASDAQ, breadth in the chip sector was solid. Has to clear 510 on the close to really break that two week range of resistance that built up in early December.
SP500/NYSE
Stats: +0.02 points (0%) to close at 1273.48
NYSE Volume: 1.789B (-2.51%). Volume faded but as with NASDAQ it remained strong and well above average as NYSE shows new volume life in 2006. Now it posted a very small gain, and with high volume that is an indication of some churn. Not surprising after the strong rebound off the 50 day EMA, and it was lower trade.
A/D and Hi/Lo: Advancers led 1.24 to 1. After huge breadth the first two sessions of the year as energy, metals and materials rallied, breadth pulled back as it was the day of the chips and a few tech sectors. No complaints given the NYSE indices basically ran in place.
Previous Session: Advancers led 2.53 to 1
New Highs: 199 (-89). New highs fell off pace as the NYSE indices went nowhere, but they were not screaming toward the moon on the prior advance. Of course, SP600 has to move toward a new high to help out.
New Lows: 35 (+6)
The Chart: http://www.investmenthouse.com/cd/^gspc.html
SP500 spent most of the day slightly negative, hugging the flat line. A late push by the entire market sent it positive on the close, but it was a marginal gain, showing a doji on the candlestick chart. That pretty much means that the momentum has dissipated for now. Not surprising. SP500 showed the relative strength during December and led the move higher off the late December selling. It rallied up to the December highs and then waited for the rest of the market to catch it. They have done that (at least on NASDAQ and SOX), and now it needs a breather.
SP600 (+0.19%) continued higher off the 50 day EMA (351.97) but it is still well off the December highs (362.80 intraday, 361.46 closing) as it has lagged leading into and on this recent move. It has formed a short double bottom off the 50 day, and after reaching toward 360 it may just move laterally for a few sessions with SP500, form a handle, and then be ready to make the break.
DJ30
Oh yeah, the blue chips finished basically flat on lower, below average volume, but that is not all that bad. They bounced with the rest of the market off the 50 day EMA (10,740) in a good shakeout in the 5 week handle to its 10 month base. It is going nowhere and the financial stations are moaning about it. That is good; that means the handle is doing its job, i.e. wearing out the market watchers and getting those on the brink to go ahead and sell. Showed a doji Thursday at 10,900 resistance, and we may see another pullback toward the 18 day EMA at 10,825. Still setting up for a move over 10,960.
The chart: http://www.investmenthouse.com/cd/^dji.html
FRIDAY
The December jobs report is up Friday, and it will be closely watched. It is losing some of its mojo as far as the market, however, as it is very much a lagging indicator. The big issue is how the economy continues in 2006 with energy prices again over $60/bbl. Jobs will be impacted down the road. What we are likely to see is a steady return to trend after first falling following the summer storms and then rebounding sharply as things normalized.
After the initial impact, we expect technical issues to control the market action to end the week. The market has enjoyed three solid sessions with good volume and leadership to start the year. This was much better than expected, and the move has been so successful the indices have run right back to the December highs. A strong, quick move that is likely to need a breather as SP500 is indicating with its doji Thursday.
That means we could see rotation once more just as we have already seen this year. As noted, energy, metals and materials got the first salvo of new money. Wednesday saw some shift, and Thursday saw the money move almost strictly into semiconductors and specific tech sectors. Now that NASDAQ and SOX have caught up to SP500 we could likely see money move back toward energy, metals and the like. This is healthy action. Volume is up as stocks are rallying, a clear indication that money is being put to work. That always suggests more staying power in the market overall.
Thus we could see an overall malaise Friday ahead of the weekend after some surprising gains that finds the indices at near resistance with a few sectors posting gains. Energy, for example pulled back to near support after big early week gains. We will look for opportunity in the areas that are providing it on Friday, but we will also be patient and let things set up for the next move. The action is solid and surprising, but the market always has its way regardless of what any analysts think.
Support and Resistance
NASDAQ: Closed at 2276.87
Resistance:
2278 is December 2005 intraday high.
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
The 10 day EMA at 2245
The 18 day EMA at 2242
2220 (2218 intraday) is the August high
The 50 day EMA at 2215
2192 from the January intraday high and the mid-July high.
2187 is the September high.
2178 is the January closing high
S&P 500: Closed at 1273.48
Resistance:
The recent highs at 1275
1267 to 1273 is the May and May 2001 peaks (1315 intraday)
1324 to 1329 from the October 2000 lows.
Support:
1264 from the December 2000 lows
The 10 day EMA at 1264.76
The 18 day EMA at 1262.47
1250 may prove to be some psychological support, but it did not hold Friday.
The August high at 1246
The 50 day EMA at 1248.93
The September high at 1243
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 10,882.15
Resistance:
10,952 - 10,965 from Q4 2000 and late November 2005
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 10,834
The 18 day EMA at 10,825
10,754 is the February high
The 50 day EMA at 10,734
10,720 is the high in the recent lateral move
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.
January 03
Construction Spending, November (10:00): 0.2% actual versus 0.7% expected and 0.8% prior (revised from 0.7%)
ISM Index, December (10:00): 54.2 actual versus 57.5 expected and 58.1 prior
FOMC Minutes, December 13 (14:00)
January 04
Auto Sales, December: 5.7M expected and 5.5M prior
Truck Sales, December: 7.6M expected and 7.0M prior
Factory Orders, November (10:00): 2.5% actual versus 2.4% expected and 1.7% prior (revised from 2.2%)
January 05
Initial Jobless Claims, 12/31 (08:30): 291K actual versus 320K expected and 326K prior (revised from 322K)
ISM Services, December (10:00): 59.8 actual versus 59.0 expected and 58.5 prior
Crude Inventories, 12/30 (10:30): -1.01M actual versus -1.25M expected.
January 06
Non-farm Payrolls, December (08:30): 200K expected and 215K prior
Unemployment Rate, December (08:30): 5.0% expected and 5.0% prior
Hourly Earnings, December (08:30): 0.2% expected and 0.2% prior
Average Workweek, December (08:30): 33.7 expected and 33.7 prior
End part 1 of 3
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