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world stock market, us stock market
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01/31/06 Technical Traders Report Update
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Technical Traders Report Subscribers:
Full report issues Wednesday.
MARKET ALERTS
Targets hit alerts: None issued
Buy alerts: TOMO; WBSN
Trailing stops: None issued
Stop alerts: None issued
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 SSR alert service you can sign up at the following link:
http://www.investmenthouse.com/alertttr.htm
SUMMARY:
- Stocks survive Greenspan's last meeting, set up well for recovery, but GOOG misses.
- Greenspan hiked coming in and hikes going out.
- Consumer confidence strong but expectations weakening
- Employment Cost Index remains tame. Benefits are the key.
- Chicago PMI falls below 60 for first time in 5 months.
- Stocks closed in good shape to rally but GOOG throws a log on the road.
Some more nice consolidation of last week's gains, potential trouble after hours.
The January indicator is indicating a good 2006. Stocks rallied the first three sessions of the year and then overcame some adversity in the second half of the month to post a 4.5% gain on NASDAQ and a 2.6% SP500 gain. In a general sense this indicates a good year ahead, but there are many derivations of the rule, one being mid-term election years as an exception to the general rule. As usual, any general rule can generally be excepted. Hey, if that were not the case there wouldn't be any conflict on the financial stations and ad revenues might fall.
That said, the market was pensive ahead of the FOMC meeting, but as is usual, stocks rose heading into the move. Of course, with the early pullback they gave themselves room to rise. In the end, however, the market got what it wanted, or at least what it expected, from the Fed: a 25BP hike to 4.5%, moderated language on the necessity of another hike, and Greenspan definitely leaving. He has to leave because Bernanke was confirmed on the heels of the FOMC rate hike. The market also received a bit of boost from OPEC. It took just 60 minutes in Vienna to come to a 'no cut' decision. Venezuela and Iran made noise about needing production cuts, but Saudi was emphatic that there would be no cut and indeed no cut through Q2.
Stocks sold on the news after rising into the decision, but then recovered and turns positive. They could not hold the gains into the close, but the losses were modest. Yes volume jumped on both NASDAQ and NYSE but it had the look of recovery volume. Put it up next to breadth (positive on both NASDAQ and NYSE despite a down session) and it is a pretty good picture as the market continued a modest consolidation of last week's gains and set up for the next move higher. As the market closed out we liked what we saw.
Then GOOG missed on earnings and was rocked. Down $80 when it resumed trading, it managed to 'recover' during the conference call to -$56. That puts it well, well below the 50 day EMA in what looks to be a continuation of the formation of the left side of a new base. GOOG needed the rest, but unfortunately the earnings miss from this leader was impacting the overall market. QQQQ was 0.40 off its closing price, a significant drop for this measure of the NASDAQ 100 as many large cap techs fell after hours along with GOOG.
That leaves the market closing in good shape to continue the rebound and now having to overcome another challenge before it can move higher. The market action acted to shake out some sellers Tuesday, and a weak open Wednesday will do that again and with more force. With one of its leaders on the skids, the market's upside resolve will be tested. We see many stocks rebounding in late trade, boding well that stocks will shake off some of the GOOG pressure. The proof, however, will be in the regular session.
THE ECONOMY
Greenspan goes out as he came in, hiking interest rates.
It was not the reckless 50BP hikes that spawned Black Monday in 1987, but the fourteenth consecutive 25BP hike, raising the Fed Funds rate to 4.5% from the 1%. As usual, the act was not the focus but what the Fed thought about the economy in the months ahead, particularly given the new chairman who was confirmed on the heels of the FOMC rate hike.
The Fed moved its stated position closer to neutral, likely in order to give Bernanke as clean a slate as possible as he takes over. It removed 'measured' for the first time since the hikes started. That gives the Fed latitude to pour the coals on either way if it wants. It won't, but it could. The Fed also changed some key language regarding whether future rate hikes were necessary. Instead of saying further policy firming was 'likely,' the Fed said that "some further policy firming MAY be needed (emphasis added)." That was not as neutral as some wanted, but on the other hand it was a clear attempt to give Bernanke the ability to say 'no mas' on March 28, the next FOMC meeting.
Everything else remained the same. Despite the 1.1% Q4 GDP gain, the Fed noted that the overall expansion appeared solid, core inflation was relatively low, and that long-term inflation expectations were contained. On the other hand, the level of resource utilization and higher energy prices could lead to further inflation pressures. Thus the Fed would continue looking at data to make further decisions, yada, yada, yada.
The key ahead is just WHAT data the Fed will be eying. We know Greenspan would be focused on wages, core inflation, and other Phillips Curve indicators. Bernanke is known as an inflation target economist, but what he ahs been leaning on the past few years as well as in his recent statements is the action in the leading financial markets, e.g. the bond market. To us that is one of the best indicators you can look to in determining economic direction. Of course when the Fed inverts the curve as it will do as a result of the Tuesday action and when the curve is already impacted by large foreign and hedge fund purchases of treasuries, the read is a bit harder than the Sunday comics. Even at that it is a better indicator than grain imports from third world companies.
So now where Greenspan?
You can find him on the lecture circuit, yanking down about $100K an appearance. He may do some consulting again back at his old firm, but he loves the limelight and that means he wants to be at the podium expanding upon all of his intrusions into policy making while he was at the Fed. Maybe he can join up with the Clinton/Bush duo and they can put on a show where Bush criticizes and Clinton bites his lip while Greenspan stumbles about the stage.
Are we going to say anything about Greenspan now? Not really. As we noted a few months back, we are glad he is gone because he had turned to Phillips Curve ideals in his last years in addition to stepping out of bounds on issues a Fed chairman should not even go near. What about his legacy? Bob McTeer put it best: the success of a rain dance depends mostly upon timing. In other words, most economists agree that Paul Volker and Ronald Reagan broke inflation's back and set the stage for the 1990's and Greenspan just happened to be the lucky guy who sat in the driver's seat once the economy got on the highway. He learned a hard lesson early on and was humbled by it. It took him a decade to get too cocky once more and forget the lessons of 1987, proceeding with the action that would ultimately wipe out our technological advantage over the rest of the world. We are still paying the price for that action and our children and grandchildren will do the same unless we get some initiative to power investing in new technology, e.g. taking the lead on hydrogen propulsion technology.
Consumer confidence hits 2.5 year high.
The 106.3 reading looks pretty impressive, topping expectations (105.0) and a solid December (103.8, revised from 103.6). After a fairly volatile series of reports following the 2005 storms, confidence has returned to strong levels. Current conditions jumped a strong 6.4% (128.4) on a more upbeat jobs outlook, but expectations fell 1.2% (91.5). The Conference Board indicated that the wavering expectations component and the gap between current conditions and expectations are suggesting an overall decline in the number in the coming months.
The expectations gave those wanting to find fault with a strong report something to chew on. You know the type; they find fault in a De Vinci masterpiece. There is some merit to the widening differential between expectations and current conditions; anytime a spread widens there is some undercurrent, but it does not always mean a major change.
The bigger picture is what you have to look at. After a very tough summer and early fall given energy and the storms, confidence was understandably shaken. A lot of political jockeying occurred after the storms and the response to the victims as well as the response to spiking energy prices (finger pointing re no energy plan in the past 12 years, windfall profits hearings, etc.). That on top of the $3/gallon gasoline was more than enough to dampen confidence. But, November sales were huge despite the confidence fluctuations heading into that month.
As we have often noted, at these levels confidence is not an issue. There was a threat that the trend was possibly changing, but that threat was squashed. Things would have to get a lot worse and sentiment would have to fall into the 60's or 50's before we would have recession-type consumer worries. That could occur this summer if oil remains high. At this level another strong Gulf storm that moves through the production areas would sent gasoline prices spiking. If production was offline for an extended period again, then gasoline prices would do the same. That would be devastating for the consumer what with the fading housing market and wage growth that is just inching along.
Employment Cost Index continues to inch higher.
The most recent iteration of the ECI shows wages are just inching along. The ECI, a measure of wages, salaries and benefits, rose 0.8% in Q4 (0.9% expected). That continues the narrow 0.7% to 0.8% growth range over the last 5 quarters. Year over year that puts the ECI at 3.1%, and that is the lowest since Q3 1999. Wages and salaries, despite being weak for years, did show some life, growing at 0.8%. That is the strongest showing since Q1 2003 and put the year over year growth at 2.6%.
Benefits are still the fastest growing component, rising 1.1%. Even with that gain, however, benefits are actually continuing a softening trend. That put year over year growth at 4.5%. Pretty staggering until you look back at 2004 and see 7% annual growth. Ouch.
Of course, most of the benefit cost is attributable to healthcare costs. Companies continue to foot most of the medical costs for their employees, though that trend continues to change as the cost of traditional healthcare outstrips the ability of many small businesses' wherewithal to provide it for their employees. For instance, our company carried traditional healthcare insurance but saw premiums rise 30% every six months for over two years until costs were in excess of $1200/month per family.
A healthcare alternative that is working and needs expanding.
We switched to HSA's (Health Savings Accounts) that carry a high deductible but also come at a much lower premium (deductibles run from $1,000 to $5,000ish, and some have even higher for very low premiums). You can save, tax free, the cost of your deductible in an HSA account. You can also deduct from your taxes the premiums and many, many healthcare costs that you traditionally could not deduct. You don't have to use the account to pay for expenses if you don't want to; you can let it build up as a type of retirement account while you keep the receipts for all medical so if you ever want to pull it out you can back up that you are offsetting the money by what you spent on healthcare costs.
It took some educating of our healthcare providers to get them out of the 'insurance will pay for it' mindset. Indeed, that is one of the many goals of the HSA program. A lot of our costs are due to unnecessary procedures simply because 'insurance will pay for it.' I dropped one doctor because she ordered a lot of unnecessary tests. You see, when she heard galloping behind her she assumed it was a herd of zebras instead of horses. So she orders 5 different tests when all that was needed was some common sense and an over the counter medicine. Insurance companies know there are doctors out there, many thousands, just like her. That is one reason premiums are so high: the 'insurance will pay for it' mindset is costing us all billions.
So, some re-education with some progressive doctors, dentists, etc. and some willingness on our part to educate ourselves about our healthcare has dramatically reduced our healthcare outlays. Indeed, we are negotiating our own discounts just as an insurance company would. We don't have clout, but you would be surprised at how open healthcare providers are to such ideas. President Bush is going to speak on expanding HSA's in the State of the Union address. We view this as a huge positive, because the more that do it, the better policies and benefits offered AND lower overall costs for everyone. Doubters are those who want the government to control everything and complain that the individual just is not smart enough to take charge of healthcare issues with the underlying intent on pushing through 'universal' healthcare, a.k.a. federalizing healthcare. That is absurd. We have just become lazy because we have not had to shop for insurance. We spend a lot less time now with insurance than before when we were constantly looking for cheaper alternatives. As always, get the consumer involved and you get better results.
Chicago PMI for January slides below expectations.
The 58.5 reading was well shy of the 59.8 expected and the 60.8 prior (revised lower from 61.5). That was the first sub-60 reading in 5 months after the August thud lower (Gulf storms) and shows a slowing in an otherwise strong Midwest manufacturing sector.
New orders and production were lower, but they are still very strong. New orders fell to 63.7 (from 65.7) while production was 60.6 (down from 63.1). Down but still holding above 60; that is an indication of continued solid expansion. Prices paid fell to 75.3 from 81.8; substantial drop but similar to falling off the top of Mount Everest and landing on a ledge just off the peak.
At these levels we don't worry about the sector, particularly from monthly modest swings in results. Now the Philly region was much weaker than expected, and the modest dip in Chicago could be seen as a trend. It is modest, however, and likely not to show up to any serious degree in the national ISM on Wednesday.
THE MARKET
MARKET SENTIMENT
VIX: 12.95; +0.56
VXN: 18.58; +0.69
VXO: 12.19; +0.65
Put/Call Ratio (CBOE): 0.81; +0.15
Bulls versus Bears:
Bulls: 53.7%. The selling in mid-January had its impact, pushing bullish advisors below the 55% level considered bearish. Quite a drop from the prior week's 57.3% reading. It hit 60.4% three weeks back. Good to see it down, but with this market advance it is likely heading right back up. Hit 44.8% on the low on the last leg, just above the 43.5% low in May.
Bears: 25.3%. A nice gain in bears from 22.9% after bottoming at 20.88% recently. It held above the 20% level that indicates too little bearishness. 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: -0.96 points (-0.04%) to close at 2305.82
Volume: 2.38B (+20.6%). Volume surged on the FOMC decision day, jumping up to near the highest levels of the month. Though NASDAQ closed lower, it recovered off a test of the 10 day EMA and closed nearly flat. That higher volume on a reach lower to support and recovery on volume is a sign of accumulation as buyers moved in and drove the index back up to the close. Thus we view the Tuesday price/volume action as positive.
Up Volume: 1.147B (-45M)
Down Volume: 1.143B (+377M). Dead heat as the index traded basically flat.
A/D and Hi/Lo: Advancers led 1.16 to 1. Breadth remained positive even on a downside session, always a good indication that the selling was contained. Indeed it was.
Previous Session: Decliners led 1.1 to 1
New Highs: 198 (-25)
New Lows: 21 (+4)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixic.html
NASDAQ took another moment to consolidate last week's recovery, reaching down to tap at the 10 day EMA (2289) on the intraday low and then rebounded to close basically flat. Volume surged, and as indicated above, that is a positive when an index reaches down to support and then rebounds. All in all the session acted as a shakeout, i.e. where those unsure about market direction bail out on the downside, giving more committed investors their shares at a cheaper price. If enough of this occurs, the sellers are eventually wrung out of the market leaving stocks in the hands of those wanting to hang onto stocks. That provides the floor, and any new buying drives prices higher. In great position to take on the January highs (2333), but has to get through the Google earnings to do so.
SOX (-1.44%) was the downside leader, nothing unusual as its higher delta magnifies its moves vis- -vis the rest of the market. It closed near session lows, unable to rebound significantly as did NASDAQ. It did officially close the gap up from last Friday, bouncing some after testing that level. It likely will test a bit lower toward the 10 day EMA (532.69) given the GOOG earnings. Would love to see it hold there, make a higher low after filling the gap, and then resuming. Love to see it, but 528 (the 18 day EMA) is not out of the question if the GOOG earnings have a lot of coattails.
SP500/NYSE
Stats: -5.12 points (-0.4%) to close at 1280.08
NYSE Volume: 1.946B (+16.94%). Volume jumped on NYSE as well as SP500 tested back to near support and cut some of those losses. Not as big and clean a rebound as on NASDAQ, and thus not the same type of upside buying that drove the index higher after early selling. Decent, but more problematical than NASDAQ.
A/D and Hi/Lo: Advancers led 1.17 to 1. As with NASDAQ, positive breadth on a downside session. At least as to the large caps. The small cap and mid-cap indices posted gains and thus positive breadth.
Previous Session: Decliners led 1.06 to 1
New Highs: 285 (-2)
New Lows: 40 (+11)
The Chart: http://www.investmenthouse.com/cd/^gspc.html
SP500 reached down to the 10 day EMA (1277) intraday as well, holding that near term support as well as the October/December up trendline (1279.50). Volume shot higher, showing some buying as the large caps recovered. They gave a lot more back late than NASDAQ, making the rebound buying more problematical as far as a good indication that buyers are still in control. It held the December intraday highs on that test as well (1275), also a good indication. It has to hold and make another higher low and continue its effort to retake the January high (1295). Overall good action, working to set up the next try at those highs. Now we see if it can hold the position after the GOOG earnings disappointment.
SP600 (+0.43%) scored another new all-time high on a solid volume jump. It along with the mid-caps (SP400) are trying to lead the rest of the market higher, something SP600 managed to pull off on the last step higher. Large caps will be sluggish tomorrow so we want to see the smaller cap stocks hold the line and provide a floor for the rest of the market to hold to.
DJ30
DJ30 sold back as well, unable to try and further its move and challenge the high in the range prior to the January break to 11K (December highs at 10,960). Not bad action, falling back toward the 18 day EMA (10,842). Volume rose, however, showing some slight distribution as it makes the test. Not expecting it to lead, but it needs to hold here at near support as well to lend support to the rest of the market.
Stats: -35.06 points (-0.32%) to close at 10864.86
Volume: 369M shares Tuesday versus 323M shares Monday.
The chart: http://www.investmenthouse.com/cd/^dji.html
WEDNESDAY
The economic news front quiets a bit with 'just' construction spending, national ISM and crude inventories. Overlaying that will be the GOOG earnings and how the market responds to this. Analysts late Tuesday saying that the miss was based only on the tax rate and how analysts got the rate wrong (because GOOG does not provide guidance); supposedly everything else was as expected. Still, a higher tax rate means less revenue, and the stock price is set by profits. In any event, the tax issue was not enough to turn the tide though GOOG did rebound almost $20 over the last hour of the late trading session. It was down 20% initially, then 15%, then 12%; it may be the case where it continues to recover. If it does that bodes well for the rest of the market as well that was soft on the GOOG earnings after leaving a good set up for Wednesday at the close.
The State of the Union address is still on tap for tonight, but there is little there to send the market in any particular direction. Expanded HSA's will impact some stocks such as UNH that deal in this area. With the president a lame duck and weakened by low approval ratings, however, even these scaled down proposals will likely find stiff opposition. Right now the democrats are in no mood to do anything for or with the President ahead of mid-term elections, and if they win back a majority in either house they will have even less incentive to try to get something done. After all, if you can forestall any administration proposals and win mid-term elections, surely the same will work in 2008. Maybe. If you get to be too obstructionist you get 'Daschled,' i.e. viewed as only seeking to obstruct. The voters then remove the obstruction.
We will have to see how the market shakes out early after GOOG. As noted, the set up at the Tuesday close was pretty darn good, particularly on NASDAQ. An early test lower that holds once more and delivers a reversal as buyers buy into the GOOG tax event explanation would be good action indeed.
Support and Resistance
NASDAQ: Closed at 2305.82
Resistance:
2328 from the May 2001 peak
3015 is the December 2000 peak and the October 2000 low
Support:
2288 from December 2000 low.
The 10 day EMA at 2289
The 18 day EMA at 2283
2278 is December 2005 intraday high.
2273 is December 2005 closing high.
2264 is the October/December up trendline.
The 50 day EMA at 2254
2220 (2218 intraday) is the August high
2216 is the August 2005 high
2178 to 2182 from the December 2004 high and the September 2005 high; these roughly mark the breakout from the 2 year base.
S&P 500: Closed at 1280.08
Resistance:
The January high at 1295
1315 is the May and May 2001 peaks
1324 to 1329 from the October 2000 lows.
Support:
The October to December up trendline at 1279.50
The 10 day EMA at 1277
The 18 day EMA at 1275.62
The December highs at 1275 (intraday) and 1273 (closing)
1264 from the December 2000 lows
The 50 day EMA at 1264
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 10,864.86
Resistance:
10,965 from Q4 2000 and November/December 2005
10,985 is the March intraday high
11044 is the January 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 18 day EMA at 10,842
The 10 day EMA at 10,838
The 50 day EMA at 10,800
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 30
Personal Income, December (8:30): 0.4% actual versus 0.4% expected and 0.3% prior.
Personal Spending, December (8:30): 0.9% actual versus 0.8% expected and 0.5% prior (revised 0.3%).
January 31
Employment Cost Index, Q4 (8:30): 0.8% actual 0.9% expected and 0.8% prior
Chicago PMI, January (10:00): 58.5 actual versus 59.8 expected and 60.8 prior (revised from 61.5).
Consumer Confidence, January (10:00): 106.3 actual versus 105.0 expected and 103.8 prior (revised from 103.6).
FOMC decision and statement (2:15): Raised FF rate to 4.5%, indicating 'may' need additional tightening and removing 'measured' from the statement.
February 01
Construction spending, December (10:00): 0.2% expected and 0.2% prior.
ISM, January (10:00): 55.5 expected and 55.6 prior.
Crude oil inventories (10:30): -2.4M prior
February 02
Initial jobless claims (8:30): 295K expected and 283K prior
Productivity, Q4 prelim. (8:30): 1.0% expected and 4.7% prior.
February 03
Non-farm payrolls, January (8:30): 250K expected and 108K prior
Average workweek, January (8:30): 33.8 expected and 33.7 prior
Hourly earnings, January (8:30): 0.3% expected and 0.3% prior.
Unemployment rate, January (8:30): 4.9% expected and 4.9% prior.
Michigan sentiment, revised (9:15): 93.1 expected and 93.4 prior
Factory Orders, December (10:00): 1.0% expected and 2.5% prior
ISM Services, January (10:00): 60.0 expected and 61.0 prior.
End part 1 of 2
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