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world stock market, us stock market
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01/19/06 Investment House Daily
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SUMMARY:
- Solid gains return on solid volume as chips, small caps, and energy lead the way.
- Housing market continues its volatility and its decline.
- Jobless claims fall well below 300K.
- Philly Fed much weaker as regional reports show some conflicting data.
- Nice recovery from the selling. SOX and small caps need NASDAQ to continue to keep the rally moving.
Investors focus on the growth company earnings and send stocks back up.
After gapping lower for two sessions NASDAQ returned the favor and gapped higher. Yes EBAY and AAPL earnings continued the disappointment, but a slew of other growth companies reported strong earnings and guidance, and that easily overwhelmed the results the mega caps offered. It is very interesting that the market is not hanging on every word the former leaders utter but instead realizes that the future is elsewhere.
We have said it before, but it is still striking: AAPL, MSFT and even DELL used to be on the cutting edge of technology. Now they are making glorified record players, video games, and televisions. Hardly the stuff that changes the world and underscores a great irony with respect to Steve Jobs. When Jobs sought a new CEO for Apple he asked Pepsi's John Scully if he would prefer selling sugar water or wanted to go out and change the world. While one can argue that Apple's iPod and iTunes are changing the way we interact, it is a far cry to suggest that those items are changing the world.
There is another great irony here as well. It is widely considered that Bill Gates 'won' the battle of technology when Microsoft managed to abscond with a cheap knockoff of Apples Mac operating system. AAPL barely survived but Jobs managed to change the company's direction and found new lucrative niches. Pixar's success and Jobs go hand in hand. And now Disney is purported set to buy Pixar, and that would make Jobs the largest Disney shareholder. While Gates struggles to keep Microsoft's hold on its eroding empire, Jobs has 'bought into the system' and is arguable much more the businessman and success than Gates. Some battles never end, though they lose their sex appeal.
In any event, the market was not buying the large cap line and instead rallied around the growth areas. That shoved NASDAQ, SP600 and SOX sharply higher on the back of strong earnings results. A weaker Philly Fed midday spurred the market further despite rising oil prices. Sellers tried their hand when a new Osama Bin Laden audio tape was released, promising more attacks on the US and a 'conditional truce' in Iraq and Afghanistan to allow those countries to rebuild. The market hiccupped but then saw this for what it was and rallied even stronger.
Is it any surprise that Bin Laden was on the tape, the first 'appearance' since December 2004? Just days after a missile attack is said to have killed 4 to 5 top AQ leaders including AQ's number 2 man, the one we see in every tape, OBL makes an appearance to warn of new attacks, rally his troops, scold AQ in Iraq, and offer a truce. Connecting the dots and It is possible that his right hand man met the business end of a few hellfire missiles and thus was unavailable for comment. You also figure that AQ needs an image makeover given it is spending most of its time killing those it says it is helping. Moreover, it wants a truce because it has to find some more living leadership and drum up some money. Don't forget the summertime letter to AQ in Iraq begging for $100K so that AQ could keep the lights on in whatever cave the 'leaders' are holed up in. That was enough to get OBL out of his hole and risk a sidewinder missile up the backside. But maybe not. It was an audio tape of poor quality so maybe he stayed in the hole to record it, unable or unwilling to come out of hiding. AQ is not going to quit, but it sure sounds as if it is on the ropes still. Time to go to the body punching and finish the job.
Volume was strong on the recovery, stronger than the prior sessions. Breadth was strong as well, coming in above 2:1 on both NYSE and NASDAQ. NASDAQ moved back through the 10 and 18 day EMA. SOX blasted higher to the early January highs. SP600 hit and closed at a new all-time high. Energy was leading along with the chips as oil moved right up to $67/bbl once more. An Iran showdown is coming and that is building in a premium into oil. A world without a nuclear-desiring terrorist harboring regime is a nice thought, but getting to that point is going to be dicey. Some are saying we need to get used to the idea of an Iran with nukes. Frankly, with the guy in pajamas in North Korea putting nukes on long range missiles, the thought of something similar in the Middle East is more than you want to have on your plate.
Thus upshot is that this all makes 2006 potentially one of those 'interesting years' that the Chinese wish upon their enemies. A pretty good wall of worry is building, and economic indicators are questioning the duration of the growth. Nonetheless the market is showing the opposite thus far this year. It is not slipping on the oil slick even as it becomes clear that high energy costs are eating into profits. We see a lot of issues, and that keeps us wary, but when the market is speaking it is best that investors listen to what it is saying and tune out our personal views or biases.
THE ECONOMY
After big November, housing starts and permits return lower.
If you look at a chart of housing starts for the past 5 years or even the past year you see a strong uptrend that has started to erode just of late. No breakdown, just starting to waffle. Indeed in November starts and permits shot higher after a weak October. The weak October followed a very strong September. A roller coaster ride, but a ride trending higher, right?
Therein lies part of the problem or at least an indication of what is happening. There are other key points as well. First, the long run higher in itself was an aberration. It was already in progress when 9-11 hit, and that only increased interest in homes as everyone became homebodies. It continued as the economy recovered, and it continued along even as the economic recovery matured. Housing is an early cycle sector, and it never really slowed during the recession and picked up steam in the recovery. For it to last as long as it has is atypical, helped by the events related to terrorism and the unusually low and prolonged interest rate play by the Fed. Basically the housing market is just tired having run much longer than normal.
Second, that volatility indicates the trend higher is eroding. The ride up to mid-2004 has been rather smooth, i.e. straight up at a 45 degree angle on the chart. Starting in the summer of 2004, however, the road became bumpier. Big months followed by big dives followed by big recoveries. Sure some of the action last fall was dominated by the Gulf storms, but that only magnified what was already occurring, i.e. big monthly swings in starts. The first indication was in June 2004 when a strong May was followed by barely any housing starts. The a dearth of starts in September and then November followed by huge upside swings. Early 2005 recovered but then the volatility resumed in the second half of the year.
Volatility in a trend is a sign the trend is changing. Moreover, volatility tends to increase as the trend starts to change. It indeed increased in the second half of 2005. In December housing starts fell 8.9% and permits 4.4%, more than expected, after a big surge in November. The West and Midwest suffered declines in excess of 20%. The bigger swings indicate the trend is changing.
Now some point to permits and say the market is just fine. Permits were lower but for the tenth straight month they topped starts. Some view that as starts in waiting. Problem is, permits are somewhat sentiment and mostly just part of good business planning. Builders are ALWAYS bullish until the bitter end, and they get permits they never use when the market fades. Indeed, they HAVE to get permits in the event the market stays firm. If they stop and building spikes, their business is in a bind and they answer to shareholders. Thus they keep the permits flowing until the market falls out and then they stop or slow down. In any event, permits are not the forecaster many say they are.
The upshot of the December data is the same as we have seen: the housing market is in solid shape but has started a rather orderly decline overall. There are pockets of weakness developing as the regional data shows, but those are coming off very high levels and there is no collapse anywhere. Thus far the start of the decline has been contained just as, we hate to say it, the Fed wanted. As noted Wednesday and last weekend, if the Fed stops its hikes it may just about get it right IF nothing else happens to upset the apple cart, always the wildcard anytime the Fed takes action.
Many are predicting housing will collapse, calling it a bubble. We are seeing a prolonged slowdown or top here, and many we know in the business are very aware of this slowdown and they have had enough time to make adjustments. That will further an orderly decline as there the rush to the exits is not happening over a very brief period. In other words, the players are getting up out of their seats and walking to the exits right now as opposed to running on rumor of a fire in the building. If the Fed declares victory and leaves the building itself, housing may just continue to settle down on its own.
Jobless claims fall well below 300K
Claims fell to 271K, the lowest in 5 years (April 2000). Somewhat suspect as was the late December 292K, but the 4 week average is 299K, the lowest since October 2000. Continuing claims fell to 2.534M, down 158K and the lowest level of the cycle since the jobs market peaked and rolled over into the recession.
These recent low numbers will cause a lot of buzz about what the Fed will do with another rate hike, but even with the low December numbers we are hearing from Fed members that the labor market improvements is not leading to inflation pressures. This is a 180 degree shift from 1999 and 2000 when the Fed often cited this report as reason to raise rates. Now it looks at the same data and is sanguine. What is going on?
As we have noted of late, in the last days of the Greenspan Fed it is putting out sounds as it did in the mid-1990's, i.e. if there is no inflation from real inflation indicators, don't mess with the free market. That changed when it got scared of screwing up and started playing prevent defense in the late 1990's, afraid even of the specter of inflation. Now, even with indicators at levels that spooked it in the late 1990's (or so the Fed said; there was another agenda there as we have discussed before), the Fed is looking at real inflation indicators and not seeing pressures despite its 'indicators' from the late 1990's saying there could possibly be inflation at some point. In a turn away from the Phillips Curve, it is saying if you don't see inflation, don't get involved.
That itself is an implicit recognition that employment is a lagging economic indicator. In this recovery it is even more so than usual given the oft-uttered mantra of the news media and certain politicians of a 'jobless recovery.' Employers are always late to lay off and late to hire. Changing the status quo is always hard. They fret over laying off, but when the decision is made, look out employees. Then once they are comfortable with the decision and use increased profits in a recovery as a salve for the guilt (or a memory loss drug), they don't want to hire until forced to. By that time the economic cycle is humming along, and when hiring really ramps up the cycle is getting gray.
Thus the lower jobless claims mean little for the economic future. It is hard to call them a contrary indicator because employment can run high for a long time before an economic cycle runs out of gas. It is an indication that the cycle has reached a stage where business confidence is high enough for more hiring, and that is something of a negative because confidence is somewhat inverse to the cycle.
Philly Fed Tanks.
In other indications that the economy may be slowing, the Philly Fed regional manufacturing index dove lower to 3.3 from 10.9 in December (revised down from 12.6). Expectations came in at 13.0. No gain, but a big blow down. New orders were up to 11.1 from 5.8, about the only silver lining. Prices paid edged lower to 44.9 as energy fell. Employment rose to 11.7 from 7.9; good news but as noted above, employment is a lagging indicator. The house could be burning and hiring is ongoing.
You might ask why the hell the overall index was lower when the components were solid? Well, it is somewhat of a bogus report. The overall number is independent of its components. Remember, these manufacturing surveys are glorified sentiment reports. As we have seen over the past couple of years, you can show some commentators reams of data showing strong economic growth, hitting levels not seen since the early 1980's when Reagan's tax cuts and incentives jumpstarted the economy. 7.3% GDP growth in Q3 2003 and 5% in Q4 that year? An aberration. 4% growth in Q4 2005 (showing the staying power of the expansion)? Nope, the economy is still 'in tatters.'
The point: the underlying data can be strong but the overall view does not reflect the data. That is a common human failing. Thus the Philly report may look weak, but the components are strong, and that is what matters most. There was a benefit to the market: when the weak overall number hit the wire the stock market rebounded from an early sag that followed the strong open. As long as the Fed is out there and is basing its next decision on that available data, we are in a 'weaker is better' mentality.
THE MARKET
MARKET SENTIMENT
VIX: 11.98; -0.27
VXN: 16.51; -0.6
VXO: 11.72; -0.6
Put/Call Ratio (CBOE): 0.87; -0.08
Bulls versus Bears:
Bulls: 56.8%. After a week that finally saw bulls fade from 60.4% (55.7% last week), bullish advisors turned back up. Not surprising given the strong market move. Still over the 55% level considered extreme. This, as with VIX, is an indication and not a fact of market direction. Too strong, but the strength in price/volume action and leaders is outweighing this sentiment indication. Hit 44.8% on the low on this leg, just above the 43.5% low in May.
Bears: 22.1%. Down from 23.7% the prior week where bears spiked up to from 20.88%. Still in decent shape, acting as something of a counterbalance to the excess number of bulls. 20% is the threshold where a lack of bears is considered extreme and bad for the upside. 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: +22.17 points (+0.97%) to close at 2301.81
Volume: 2.381B (+1.17%). Strong volume once again, this time on the upside in an in your face response to the Wednesday gap lower. Like to see sharp, fast responses to such selling. In any event, the buyers were back Thursday.
Up Volume: 1.628B (+777M)
Down Volume: 719M (-760M)
A/D and Hi/Lo: Advancers led 2.22 to 1. Excellent breadth on the recovery, the best of the month and it held well into the close despite the afternoon drop in the index to close off its intraday highs.
Previous Session: Decliners led 1.17 to 1
New Highs: 213 (+97)
New Lows: 25 (-11)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixq.html
NASDAQ gapped higher, filling the Wednesday gap lower and indeed filling the Tuesday gap lower on an intraday basis (hit 2311.71 on the high). The move held the breakout over the December highs and was a good answer to the selling that accelerated as the large cap techs started announcing earnings. Recall that NASDAQ was already in a modest pullback before those earnings, consolidating its strong early January move. The large cap earnings accelerated it a bit, but it looks as if investors answered it. NASDAQ now needs to hold the rebound and continue higher to give SOX and SP600 support for their strong moves.
SOX (+3.05%) led the market with a gap higher and rally to 538.43 that matched the prior January highs. It backed off from that level on the close, but not much. Strong move as this market leader resumes its rally after a nice test of the 18 day EMA. Two strong moves back to back but still want to see it take out those highs (539.02) and continue the move.
SP500/NYSE
Stats: +7.11 points (+0.56%) to close at 1285.04
NYSE Volume: 1.772B (+4.81%). Stronger volume as SP600 rallied to another all-time high, continuing its solid move higher. SP500 put together a decent move as well, moving off its 18 day EMA. That shows solid accumulation as the NYSE indices turn back up and continue their rally for now.
A/D and Hi/Lo: Advancers led 2.43 to 1. Excellent breadth returned as the small caps took the lead.
Previous Session: Decliners led 1.33 to 1
New Highs: 231 (+133). Need to see more as the move continues.
New Lows: 33 (-1)
The Chart: http://www.investmenthouse.com/cd/^gspc.html
SP500 lagged, but it also put in a solid move off of the 18 day EMA (1227) test. A higher low that held the breakout over the November and December highs, a sign of strength. Good volume shows plenty of accumulation. A good start to a continued move higher, led by some of the big financials (e.g. LEH, MER) and big energy stocks that came to life once again.
SP600 (+1.37%) continued the move off the 18 day EMA (362.50) that it tested on the Wednesday intraday low, powering higher to a new all-time high. The small caps were late to this rally, but have easily slipped into a leadership role as the growth stocks and small energy stocks that populate the index are leading the market higher.
DJ30
DJ30 was pretty pathetic once more, posting a market lagging 0.24% gain and failed to take out the 10 and 18 day EMA on intraday tests. What can you say about this index that is basically filled with laggards in terms of growth capability.
Stats: +25.85 points (+0.24%) to close at 10880.71
Volume: 370M shares Thursday versus 361M shares Wednesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
FRIDAY
The only scheduled economic report the preliminary Michigan sentiment statement for January. With 200 respondents it hardly seems worth the effort, but the market hangs on anything dealing with the consumer now because one of the 'issues' confronting the market in 2006 is a consumer that many argue is ready to hang it up. Of course we can go back to the early 1990's and recall reading articles and books about how the US and the western economies were ready to slip into the abyss at any time. They may do that some day, but the clock has been ticking for over a decade for some of these predictions, predictions that are renewed each year. The 2006 version is little different though the housing market decline is an added point of discussion for those viewing the economy as on the edge of a tidal wave, brink of the cliff or any of the other comparisons used to describe our impending doom.
Oil is our continued worry, and if we get a spike near $80/bbl we could be in serious trouble. The Iran issues could spark a further jump if some aggressive action is required this year and/or some more big storms hit the US production. We are worried about it eating into profits and thus earnings, but the growth companies in the economy are still showing big growth and are saying they continue to see growth. That is helping fuel the market after the Fed got things started with its last FOMC meeting minutes. That breakout took NASDAQ out of its 2 year base on a big surge in volume, and that is a strong indication of strength.
That is getting out there a bit, and with everything in life you make some plans but then have to be adjustable enough to handle the inevitable changes. As we said, we are going to keep wary given the oil issues, but the market is showing very good action right now, indicating it wants to continue the breakout that started this year. It is climbing that wall of worry, and frankly we want to continue hearing about how debilitated the consumer is, how much trouble Iran is, how AQ is going to attack again, how the economy is going to slow, etc. Many on the tube talk of wanting the retail investor or the average citizen to have confidence in the market again as if that will signal the return to nirvana. Well, when you feel as if you get to nirvana you better start running for the train because it is already pulling out of the station.
Support and Resistance
NASDAQ: Closed at 2301.81
Resistance:
The 10 day EMA at 2295.88
2328 from the May 2001 peak
3015 is the December 2000 peak and the October 2000 low
Support:
The 18 day EMA at 2283.69
2288 from December 2000 low.
2278 is December 2005 intraday high.
2273 is December 2005 closing high.
2251 is the January 2001 low
The 50 day EMA at 2244
2220 (2218 intraday) is the August high
S&P 500: Closed at 1285.04
Resistance:
1315 is the May and May 2001 peaks
1324 to 1329 from the October 2000 lows.
Support:
The 10 day EMA at 1281.83
The 18 day EMA at 1277
The recent highs at 1275 (intraday) and 1273 (closing)
1264 from the December 2000 lows
The 50 day EMA at 1260
The August 2005 high at 1246
The September 2005 high at 1243
March 2005 closing high at 1225 and intraday high at 1229.11
Dow: Closed at 10,880.71
Resistance:
The 18 day EMA at 10,897
The 10 day EMA at 10,912
10,965 from Q4 2000 and late November 2005
10,985 is the March intraday high
11,176 - 11,186 from April 2000
11,248 from the May 2001 peak.
11,238 from the September 2000 peak.
Support:
10,868 is the December 2004 high
The 50 day EMA at 10,803
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
Price consolidation at 10,600
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
January 17
New York Empire State Index, January (8:30): 20.1 actual versus 21.0 expected and 26.3 prior (revised from 28.7).
Capacity utilization, December (9:15): 80.7% actual versus 80.5% expected and 80.3% prior (revised from 80.2%).
Industrial production, December (9:15): 0.6% actual versus 0.5% expected and 0.8% prior (revised from 0.7%).
January 18
CPI, December (8:30): -0.1% actual versus 0.2% expected and 0.2% prior.
Core CPI, December (8:30): 0.2% actual versus 0.2% expected and 0.6% prior.
Net foreign purchases, November (9:00): $89.1B actual versus $104B prior (revised from $106.8B).
Federal Reserve Beige Book (2:00)
January 19
Housing starts, December (8:30): 1.933M actual versus 2.035M expected and 2.123M prior
Building permits, December (8:30): 2.068M actual versus 2.1M expected and 2.163M prior
Initial Jobless claims (8:30): 271K actual versus 315K expected and 309K prior (revised from 309K)
Crude inventories (9:30): 2.741M versus -2.887M prior
Philly Fed, January (12:00): 3.3 actual versus 13.0 expected and 10.9 prior (revised from 12.6)
January 20
Michigan sentiment, prelim., January (9:50): 92.5 expected and 91.5 prior
End part 1 of 3
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