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2/02/06 Stock Split Report
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Stock Split Report Subscribers:
MARKET ALERTS
Targets hit alerts: None issued
Buy alerts: None issued
Trailing stops: None issued
Stop alerts issued: JCOM; TLM
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/alertssr.htm
SUMMARY:
- On the verge of continuing its breakout the market slumps lower.
- Q4 productivity dives just as it vaulted in Q3: truth is in between.
- Retail sales coming in stronger than expected.
- Back to the drawing board to keep rally alive as investors focus on jobs report, inflation issues, Fed, oil, yield curve and the economic future.
Troubles swallowed on Wednesday try to come back up on Thursday.
Wednesday the market showed some character, overcoming the GOOG earnings miss and rebounding from losses to close higher. Chips were starting back upside, ready to lead once more. The prospects of a continued rally looked good heading into Thursday.
The momentum was lost along the way and was replaced by downside momentum, at least for Thursday. A softer start looked okay; just more of the same seen the prior three sessions. With the solid Wednesday finish this looked to be just one more shakeout before a continued move higher.
Early weakness tried to resolve upside, but an hour into the session, just as natural gas inventories were to be released, the indices slipped to new session lows and that triggered an ugly morning session sell off that saw all indices lose a percentage point or more. Volume, though finishing the session a bit lower, was still strong as stocks sold. Breadth was negative by more than 2:1 as all sectors felt the bite. NASDAQ and SP500 snapped through several near support levels before finding some support over the December highs and the 50 day SMA, respectively. It was pretty heavy selling.
There was no specific catalyst. A delayed reaction to the FOMC meeting is possible; the market did this after the last meeting and it was not until the minutes were released that the market did a double take, made a 180, and renewed the November rally. It was also a rumor session with talk of a terror threat increase and a possible blowout number on the Friday jobs report. Maybe.
Q4 productivity was much less than expected (-0.6% versus 1.0%) and 7 times lower than Q3. Such variant results typically means the truth is somewhere in between, but the low reading jumped unit labor costs 3.5% and that scared some that inflation was still a threat. With the year/year rate at a measly 1% and the Q4 gains still less than 2004, this is hardly the inflation horn blowing.
No there was no real catalyst, and you never like to see that when a market looks otherwise quite solid and going about its business of setting up the next rally. What that tells you is that there are some serious, longer term and potentially corrosive issues eating at the market. It is likely a combination of what has worried us about this year: oil, the now inverted yield curve, how far the Fed is really going to go, real inflation, and generally how all of these are going to impact the economy and thus earnings. When you look at all of them in a string such as that you wonder how anyone can seriously believe the economy can continue to move higher, yet it has done just that in the face of these issues for over a year now.
The session was not a disaster. It was indeed a setback given the market looked ready to continue its rally after a nice, orderly test of last week's move to start this week. The indices had built enough cushion to take a jolt so they are still holding support levels, still capable of making higher lows on this pullback. Higher lows and higher highs are what you want to see. Right now the market has a lower high and is fighting to make a higher low to continue the move. Indeed, SOX looks super with a nice easy test of the 10 day EMA after a solid breakout move. Moreover, leaders were all coming back late in the session and most of our plays managed to hold a near support level. Thus the market still has leadership and is still holding up after Thursday; it just does not have much more rope to play with.
We have to pay close attention here. Most everything was taken out and beaten up to varying degrees Thursday. How the market and the leaders respond is the key. With the indices eyeing the January highs, this is no time for a protracted test. We are concerned that this somewhat out of the blue selling represents a more concerted effort to sell the market, i.e. large holders starting to shed their holdings. Now you can have sharp sell offs in an ongoing uptrend; that is not atypical. Further, the leaders are holding on for now and the indices are in no real danger. This second sharp downside session in two weeks (even if one was expiration), however, demands vigilance.
THE ECONOMY
Q4 GDP helps drive Q4 productivity negative. Does that indicate inflation?
The productivity report is derived from GDP, so the larger than expected falloff in GDP not surprisingly led to a lower productivity read as well (-0.6% versus 1% expected and 4.1% prior). Even with the decline the 3 year trend is +3.3%.
The lower productivity means higher labor costs as the two move inversely. Even with the lower productivity, unit labor costs rose 3.5% for the quarter. That is an imposing rise, but year over year it is just 1%. In context it is nothing compared to the 3.4% year/year growth at the start of 2005.
Thus the inflation worries discussed by many of the reporters on financial stations were a bit overstated. There was a lot more potential inflation pressure to start 2005 than now, at least coming from the wage side. And, unless you believe in the Phillips Curve, you know wages don't drive inflation. Indeed, if you study economic history you know this. Yet Greenspan had this strange mix of Phillips Curve and supply side attributes that fostered growth (the supply side) but then choked it off in fear when things actually started growing (the Phillips curve side).
Thus a lot of talk about 'wage-led' inflation that was a lot of wasted time and effort, and takes our eye off the ball. Once things get growing, then the PC economists panic and try to stop it. In reality, if you create a growth oriented environment and don't try to micromanage where money is invested and in what, the market does a good job in making sure supply meets demand and thus avoiding inflation. When the Fed gets overactive and tries to finesse the economy it starts creating the very imbalances it fears. We call it self-fulfilling monetary policy. Others call it a series of four letter words, ending with 'that blew trillions of dollars in US citizens' retirement accounts.'
January retail sales continue a strong run of gains.
Despite the imminent death of the US consumer, a death as lingering as Ivan Ilych's, the consumer won't actually die. Last year the consumer had his and her obituary written. Problem is, the consumer never showed up for the wake. In January the consumer apparently was not only dead, but was not showing any signs of illness.
Same store sales results from retailers started coming in, and they were strong overall, posting a 4.9% gain. That topped the 4.1% expected and December's 3.3% gain. That is not just strong for a January, but strong. 72% of the major retailers beat estimates. ANF +33%, GES, 31%, JOSB 21%, DBRN 16%, CHS 12%, ANN 11%. The list goes on, but it is clear that gift cards are stealing some thunder from December but are stretching the holiday sales season into January. Moreover, retailers report that people typically spend more than the gift card amount (not many items that are exactly $20 or $25), and thus January is even bigger than the gift card sales themselves.
As soon as the numbers were out they were downplayed in favor of theories the consumer is going to slow down if not out and out die again in 2006. Maybe it will be time. If oil stays high gasoline will certainly be at $3/gallon without any storms. Toss in a major storm and we see a spike to $4. That will definitely put a cramp in the consumer's style. Thus far the consumer keeps showing he is not dead yet. If jobs remain on the upswing in 2006, it will take some serious events to knock back consumption.
THE MARKET
MARKET SENTIMENT
VIX: 13.23; +0.87
VXN: 17.79; +0.67
VXO: 13.07; +1.08
Put/Call Ratio (CBOE): 0.96; +0.03. The put/call ratio remained at a high level Thursday on the selling. It did not, unfortunately, spike higher on the selling. That would show a good rise in fear that indicates things getting a bit sold out.
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: -28.99 points (-1.25%) to close at 2281.57
Volume: 2.338B (-0.15%). Trade was a bit lower but at this level it is a game of horseshoes. Selling was strong. It did not rise to the level of the recent buying strength, but was strong nonetheless. That suggests some share dumping on the heels of this last rise off of the expiration selling.
Up Volume: 697M (-802M)
Down Volume: 1.604B (+777M)
A/D and Hi/Lo: Decliners led 2.02 to 1. Strong downside breadth matching that on the upside last week. Equal intensity shows they are in a fight right now.
Previous Session: Advancers led 1.17 to 1
New Highs: 170 (-49)
New Lows: 30 (+9)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixic.html
NASDAQ was down at the open and failed an early attempt to recover. Then if failed big time, falling through the 10 and 18 day EMA (2291, 2286), failing to recover the latter in a last half hour bounce. The move kept NASDAQ above the December highs (2278 intraday, 2273 closing). That was the good news. Technically NASDAQ made a lower high, unable to seriously challenge the January high at 2333. That is not great action but it is not fatal action either. What it has to do now is regroup and make a higher low at the October/December up trendline (2271) or the 50 day SMA (2266) and start the rebound once more. Not great action, but not fatal either.
SOX (-1.02%) bounced off the 10 day EMA (535) Wednesday but faced the same pressure as the rest of the market Thursday and fell right back to that near support. It would be a coup for the market if SOX could hold this level and resume the climb higher. It is an important leader at this juncture, and it is still holding its near support.
SP500/NYSE
Stats: -11.62 points (-0.91%) to close at 1270.84
NYSE Volume: 1.903B (-0.99%). Lower volume on NYSE as well, but that is splitting hairs. Strong, above average volume nonetheless as the NYSE indices suffered a rough session and distribution as well.
A/D and Hi/Lo: Decliners led 2.33 to 1. Pretty much everything was under pressure as the breadth shows. Breadth does not show, however, how the stocks held support. A stock can be down 0.01 and still be a decliner.
Previous Session: Advancers led 1.23 to 1
New Highs: 154 (-144)
New Lows: 46 (+13)
The Chart: http://www.investmenthouse.com/cd/^gspc.html
SP500 could not hold the October/December uptrend (1281), the 10 or 18 day EMA (1277, 1276), and gave up the December highs as well. It finally managed some support at the 50 day SMA (1269), rebounding some from that level slightly to close. Similar to NASDAQ, SP500 has made a lower high below the January highs (1295) and needs to hold near this level to make a higher low and try another run at that January high. Was under some distribution pressure Thursday; the jobs report may put things in a bit clearer perspective. As one of our traders says, it will make it or break it.
The small cap SP600 (-1.02%) took a whacking as well, but as noted Wednesday, it was also set up for a pullback. It sold below the 10 day EMA (374.62) intraday, but it also rebounded to hold that level, shaving almost 3 points off its losses, about half of the intraday downside. It is still in a strong uptrend and was in need of a test. It is likely going to test some more before it recovers and continues its trend if it can. You know, we hear that the small caps are through this year. Just as they were through in 2005, and 2004, and 2003.
DJ30
The blue chips jumped higher Wednesday and then gave it all back Thursday. It managed to hold the 50 day SMA on the close. That keeps it in the December range and above the 50 day EMA (10,807). It is hanging on, trying to set up for the next run higher if it can.
Stats: -101.97 points (-0.93%) to close at 10851.98
Volume: 314M shares Thursday versus 333M shares Wednesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
FRIDAY
Earnings are winding down, and the season definitely has had its ups and downs. A weak start with mega cap stocks, particularly techs, disappointing, then a solid recovery when some real growers reported. Now there is a bit of a lull, but just as with the retail sales season slopping over into January from December, earnings now slops over from January into February. There are still a lot of earnings to come from mega caps such as DELL and CSCO along with many other companies. After hours many more reported, and outside of a few that were well received, the sour tone of the market during the session continued with investors venting on stocks that were not up to muster.
The point is that the market has pretty much pegged its view on the earnings season at this point, and it was not enough to drive stocks past the January high. It did not sell them off, but the market could not punch through when the better results came in following the initial disappointments.
Now the market is turning back to the other issues such as oil, the yield curve, and the Fed. There is a growing concern that the Fed is not only not done with the January 31 meeting, it is not done at the March meeting or even meetings beyond that one. We believe the inflation cycle has peaked for now though a few more data points are needed. Nonetheless, the Fed typically keeps tightening well past the point when the cycle indicates it has peaked because the Fed finds it difficult to change course and also, at least under Greenspan, it looked at contemporaneous or dated data as opposed to looking forward. That meant the Fed kept tightening until it saw things slowing, and that was always too late. That mindset is filtering back in the market now with some indications of a continued strong economy and whiffs of inflation from 'indicators' such as the wage data released Thursday.
Beyond that there is the harsh reality that oil is still high. It is just below $65/bbl at today's close, putting it well off the almost $68/bbl last week. That is still way too high as we approach the summer with gasoline prices holding near $2.20/gallon nationally. The inverted yield curve is also an issue even with the massive foreign treasury purchases. Everyone says sure, sure we understand that, yet they are still justifiably concerned about what the curve suggests and what the Fed is going to do.
Thus the Thursday break lower is a concern. The expiration selling was part expiration and part distribution. It was not that critical until we get this Thursday selling out of left field just when the indices looked ready to resume their upside move. There is some selling in the market that was not here before. We will see if the buyers win the day once more when the indices complete this test and if they can make a higher low and resume higher on stronger trade. As noted, they are still able to make higher lows and continue the move, supported by leaders that are holding near support and indices such as SOX and SP600 that are in excellent shape. They will have to remain that way in order for a recovery by NASDAQ and SP500.
We are approaching Friday with some concern given the employment data. It is a lagging indicator, but the market doesn't tend to view it that way at first blush simply because the Greenspan Fed didn't. The market appears to have awakened again to economic concerns and some big money has started to shed some positions. Friday we are going to watch for some downside follow through but then see if SOX, SP600, and even NASDAQ can provide some new leadership. May not get our answers Friday, but we still like the way our plays are holding up. Indeed, this pullback is putting many in position to pick up additional shares if the market holds and they start the rebound move.
Support and Resistance
NASDAQ: Closed at 2281.57
Resistance:
The 18 day EMA at 2286
2288 from December 2000 low.
The 10 day EMA at 2291
2328 from the May 2001 peak
The January high at 2333
3015 is the December 2000 peak and the October 2000 low
Support:
2278 is December 2005 intraday high.
2273 is December 2005 closing high.
2271 is the October/December up trendline.
The 50 day EMA at 2257
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 1270.84
Resistance:
The December highs at 1275 (intraday) and 1273 (closing)
The 18 day EMA at 1276
The 10 day EMA at 1277
The October to December up trendline at 1281.50
The January high at 1295
1315 is the May and May 2001 peaks
1324 to 1329 from the October 2000 lows.
Support:
1264 from the December 2000 lows
The 50 day EMA at 1264.76
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 10,851.98
Resistance:
The 18 day EMA at 10,854
The 10 day EMA at 10,858
10,868 is the December 2004 high
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:
The 50 day EMA at 10,807
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): 1.0% actual versus 0.2% expected and 0.5% prior (revised from 0.2%)
ISM, January (10:00): 54.8 actual versus 55.5 expected and 55.6 prior.
Crude oil inventories (10:30): +1.9M actual and -2.4M prior
February 02
Initial jobless claims (8:30): 273K actual versus 295K expected and 284K prior
Productivity, Q4 prelim. (8:30): -0.6% actual versus 1.0% expected and 4.5% prior (revised from 4.7%).
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 3
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