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us stock market, trade stock
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2/04/06 Stock Split Report
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Stock Split Report Subscribers:
MARKET ALERTS
Targets hit alerts: None issued
Buy alerts: SLB; IMGC
Trailing stops: None issued
Stop alerts issued: RIO; CRM
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:
- Stocks under pressure again as jobs report rekindles notion Fed is not almost done.
- Non-farm jobs miss expectations, but revisions and a 5 year low in unemployment show underlying strength.
- Shades of 2000: Recent economic indications all showing some weariness even as Fed purportedly prepares to extend rate hike campaign.
- Factory orders post solid rise, particularly business spending.
- Market will have to show some unexpected strength once again as rally nears the end of the rope.
Stocks sold again on more Fed fears with large caps leading lower even as many stocks set up to try another move.
Futures were down but got really ugly after the jobs report showed 4.7% unemployment and wage gains for those with jobs. Techs were the focus and NASDAQ gapped lower, continuing the Thursday selling. NASDAQ and SP500 fell to the 50 day EMA early on. There they held and bounced, with SP500 even cracking positive in the early afternoon (NASDAQ was within 6 points) with a very nice response to the selling. It almost had the look of a shakeout. Problem is, the large caps were under pressure all session, and after this bounce they spearheaded the move back down into the close.
NASDAQ and SP500 found the 50 day EMA once more as the large caps, particularly mega cap techs, were the focus of the selling once more, similar to mid-January when they started reporting earnings. SOX held its 18 day EMA and SP600 the 10 day EMA as non-large caps went about their own business. Recall that SP600 was ready for its own pullback after leading the pack higher. It is doing just that. Unfortunately, we were looking for the large caps to step in and rotate to the lead position for a bit while the small caps rested. Instead the large caps are bell flopping lower with the top 100 market cap techs leading the way.
The catalyst was not the rumors swirling Thursday (change in terror alert status, blowout jobs number), but a rekindled belief the Fed is not really that close to completing its rate hikes. Now the story you heard on the financial stations hung the collar on the jobs report with its low unemployment rate and growing wage measure. Funny thing that argument. When we were convinced jobs were growing outside the non-farm payroll number back in 2004 based on the unemployment rate decline, the Fed was arguing that data point was grossly inaccurate in assessing jobs growth. Now two years later that data is somehow imbued with that power. More than that, the figure is being used to suggest that the economy is very strong and thus the Fed is going to have to continue raising rates to corral inflation.
Jobs don't foretell the economic future.
We have to call BS on that, at least as to jobs indicating a strong economy ahead. The Fed may very well continue raising rates indefinitely, it always seems to do that, precipitating an economic slowdown or recession in the process. The irony is, history is so clear that job growth lags far behind economic growth. Employers are slow to fire when the economy slumps. When it recovers, they are fearful to hire and wait until the employees that survived the jobs cuts are in revolt due to overwork. That typically is after the expansion has been raging. Indeed, job growth really ramps up after the expansion has peaked. Thus you can have the odd situation of jobs growth even as the economy has posted its high for the cycle.
Unfortunately, the Fed also frets about too many jobs. No one can forget (or should not forget) FOMC member Moskow's comment about the need for higher unemployment in 2000. The Fed, despite denials, operates under a Phillips Curve mentality that says too many jobs and higher wages leads inevitably to inflation. NO it doesn't. If employees get more dollars they will likely spend them. Is that inflation? No! Inflation is too much money chasing too few goods. If supply remains stagnant then extra wages can work to bid up prices. Unless supply is constrained producers will make more goods in order to take advantage of that extra money in the marketplace. This is not a cartel; producers won't just keep production the same and charge more because they perceive consumers have more money. There is always some producer out there that will undercut the others in order to gain market share and advantage. Unless there is regulation or some misguided policies (tariffs, etc.) that restrict the ability of producers to meet demand, more jobs and more wages do not inevitably lead to higher prices.
The Fed historically does not follow what history shows us, however, and thus it focuses on lagging indicators just as it always has done (and as in 2000). That leads it to continuing attempts to restrain growth even as growth is already running its course naturally. Thus we tend to get over-corrections that push the economy into a slowdown or worse, a recession.
Bond market inversion worsens on fears of Fed.
That is the reason the bond market sold off sharply early Friday. Not jobs indicating economic strength, but the market knowing the Fed's history and how it looks at the wrong indicators late in the cycle in making the decisions that 9 times out of 10 lead to it overshooting. The Fed can say all it wants to in its minutes about going too far, but talk is cheap. It has rarely gone too little.
The bond market did manage to recover, but it was the long end and not the short end. That inverted the yield curve further (4.58% on the 2 year, 4.53% on the 10 year), reaching the worst level in this cycle. There are petro-dollars and hedge funds influencing rates, but that has simply pushed the overall curve lower. The curve's reaction to the economic events still shows you what the bond market is thinking overall. Indeed, it has fully priced in a 25BP hike in March, and has priced in a 70% chance of a hike at either the May or June meeting. That would bring the Fed Funds rate to 5%, but Friday we were hearing many saying 5.5% and even 6% based on this data. Based on the Fed's history, THAT is a scary proposition.
Shades of 2000 once more.
What the bond market sees is a similar situation to 2000 with respect to the economy. The curve inverted in early 2000 as the Fed continued waging war on inflation it figured had to be just around the corner (same as the 1929 central bank). Even as it did we were writing about signs the economy was slowing. There was no massive tank (that came later as the Fed kept hiking), but the economy was showing all kinds of signs it was slowing down yet the Fed kept pressuring it. The market was the first to go, and as we saw in late 2000, the economy folded as well with a massive decline in GDP growth.
Right now the economic data is not falling off the table, but is showing signs of slowing. The Gulf storms have thrown some ambiguity into the mix, but things have slowed. Q4 GDP had some aberrations that slowed it more than expected, but even if you factor them out it was at 2.8%, the reading expected and below what most consider trend. The ISM reports have softened nationally and regionally, durable orders are fading some, the housing market is cooling; there are enough factors to suggest at least a slowdown in the cycle. Indeed, ECRI readings (an accurate leading indicator of economic conditions ahead) suggest the economic cycle has peaked for this expansion. The problem is, the Fed can turn a slowdown in a maturing expansion into the expansion's end. The 2000 economy had issues, but the Fed forced them into serious crises. The market saw it first, started to distribute, sold off hard, and then tanked. The economy rolled over later that year.
Market showing some trouble signs, also some continued strength.
Last week we saw some distribution, i.e. high volume selling, hit the market. Expiration Friday was a combination of position shuffling and some institutional selling. A good recovery, then some distribution again this past week. This rally rescued a selling market on the notion contained in the FOMC minutes that the Fed was just about done. With continuing high energy and gasoline prices, an inverted yield curve, and the return of the thought that the Fed is going to continue hiking because of these lagging (and irrelevant) indicators, the market is slipping once more. With the Fed gone the market saw a chance. With the Fed still acting to slow the economy, stocks are starting to distribute and we have to be careful here.
That said, we still see, almost surprisingly given the significant index price losses Thursday and Friday, many stocks that are holding at near support, testing strong upside moves or breakouts. Energy is holding support as you would expect, but it is not just energy. As noted, SOX and SP600 remain at near support themselves, indicating their constituents are doing the same. Thus some of the surprising resilience in the face of adversity remains; as long as leadership holds near support that is a positive for the market and keeps alive the possibility of a rally continuation.
They are, however, close to the end of the rope with respect to this rally as they are the holdouts with NASDAQ, SP500 and NASDAQ 100 already down to or past their 50 day EMA. They are holding for now, but they can also slip as well if the worry re the Fed continues to grow. When you consider the rally was ignited by the FOMC minutes suggesting the Fed was close to finished, it is no wonder stocks are struggling now that the notion the Fed may not be that close to finished back in vogue.
THE ECONOMY
Pretty much said it all in the market summary: the economy remains strong but it is slowing some after three years of growth. It could simply be a typical down cycle in an otherwise continuing expansion, but you have the Fed still slowing things down, an inverted yield curve, and high, sustained energy prices. That combination can take an interim slowdown in an up cycle and kill it.
Jobs miss mark, but revisions, unemployment rate show market is still growing.
193K was less than the 250K expected, but that has been common of late. What has also been common is revisions to stronger levels. November and December were revised higher as more data came in, adding 80K more than originally reported. Indeed, in the past 5 months, 151K more jobs were added than originally reported.
The unemployment rate at 4.7% was the lowest in 5 years (4.9% expected). Heaven forbid. Set the dogs out, lock up the daughters; trouble is surely ahead, particularly when you factor in wage growth at 3.3% year over year. After laying dormant for years this rise has many economists edgy. Hence that is all you heard about Friday. Important points that received little or no play: average workweek was stagnant and the participant rate did not pick up. If the workweek is not rising you don't have to get all worked up about wage gains (you shouldn't get worked up about them anyway). That still shows there is slack in the system and it indicates the wage gains are very much tied to the lower productivity previously reported.
In sum, nice to see the steady jobs and lower unemployment rate. It is not, however, a legitimate reason to get all worked up over inflation. Indeed, that is a joke, but unfortunately it is one that many of the powers that be are part of.
Factory orders show business investment continues.
The 1.1% December rise topped expectations at 1.0%, well off the November 3.3% gain (revised from 2.5%), but showing strength the November report did not show. Specifically, civilian aircraft pushed up the November report with its 140% increase. In December that component fell 8.1%. Take out transportation and orders rose 0.9%.
The big story behind the number, particularly given that most think the consumer is going to fold in 2006, is that non-defense capital goods spending less transportation rose 4.1%. Once more business spending continues to surprise upside in 2005 after the investment tax incentives expired in 2004. There was a brief lull as the start of 2005, but that was short-lived as businesses invested in their business.
That is somewhat ironic if you spend anytime listening to the financial shows. There is a lament that corporations are only buying back shares and sitting on cash. Yes they are buying back shares and yes they do have more cash now with the strong profits recovery the past three years. They are also, however, investing in their businesses. As the jobs report shows, they are also hiring as well.
The business investment is key for a number of reasons. First, with the consumer purportedly ready to close shop this year with a fading housing market, it is incumbent upon businesses to make up the consumption. We saw what business investment (or more accurately lack of) can do to an economy in 2000 to 2002. There was no capital investment during that period and the economy went into recession even with a buoyant consumer. Second, with the US technology lead squandered during that same three year period thanks to the plunge in money supply and GDP growth, investment in technology and R&D is imperative. Thus these continue to be encouraging numbers.
THE MARKET
MARKET SENTIMENT
VIX: 12.96; -0.27
VXN: 17.53; -0.26
VXO: 12.89; -0.18
Put/Call Ratio (CBOE): 1.08; +0.12. Getting better with its first close over 1.0 since the last selling bout in December. It takes at least a few of these to start building the anxiety level to the point indicative of a rebound. This is the first thus far.
Bulls versus Bears:
Bulls: 52.6%. Surprisingly bulls continued to fall despite the gains two weeks back, falling from 53.7%. This is the second week below the 55% threshold after a fall from 57.3% from three weeks back and 60.4% at the peak on his cycle. Hit 44.8% on the low on the last leg, just above the 43.5% low in May.
Bears: 25.8%. Bears rose a bit higher, climbing from 25.3% last week and 22.9% the week before. Bears never fell below 20% on this move, helping underpin the advance (low was 20.88%). 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: -18.99 points (-0.83%) to close at 2262.58
Volume: 2.279B (-2.53%). Volume was again lower on the session. Both selling sessions to end the week were on lighter volume, an indication the selling was not just sellers dominating the action or taking over the market. Volume remained above average nonetheless, and that tells us the selling had some substance. Overall the lower trade indicates the big buyers have not given up just yet on the stocks they were buying in January, something their chart patterns are showing us.
Up Volume: 599M (-98M)
Down Volume: 1.63B (+26M)
A/D and Hi/Lo: Decliners led 1.28 to 1. Pretty darn modest downside breadth given a 0.8% loss. That shows it was the large cap techs involved in most of the selling, and indeed NASDAQ 100 dropped 1.26%, significantly weaker than NASDAQ.
Previous Session: Decliners led 2.02 to 1
New Highs: 108 (-62)
New Lows: 32 (+2)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixic.html
NASDAQ gapped lower and sold to test the 50 day EMA (2257) on the early low. It held and NASDAQ rebounded to come within 6 points of positive. That failed, however, and NASDAQ spent the rest of the session falling back toward the 50 day again, forming an intraday head and shoulders that never let it regain traction. On the close it was above the 50 day EMA, but the gap took it down below the October/December up trendline (2276). From here it can still make a higher low on top of the mid-January low that also tested the 50 day EMA after that expiration sell off. NASDAQ is again at the point where it has to make its recovery to save the rally. It made things a bit harder by breaking the short term trendline.
SOX (-1.44%) took the brunt of the selling percentage-wise, and the selling pushed it through the 10 day EMA (534) where it held Thursday. It held the 18 day EMA (528.30) on the close. It took the hardest hit but it also was the leader on the move, and the selling has left it in good position for next week. SOX has filled the gap from late January, is sitting on near support, and the chips have many of the leaders in the market (e.g. BRCM, MRVL, WFR, CYMI, VSEA) and they are also holding near support. The chips need to reassert their leadership this coming week.
SP500/NYSE
Stats: -6.81 points (-0.54%) to close at 1264.03
NYSE Volume: 1.754B (-7.79%). Volume declined on NYSE as well, falling for the second day as the selling continued. It is a modest silver lining, but one in any event because it does show that big buyers are not out dumping their shares. The sellers were in control to end the week but they were not as strong as the buyers on the upside.
A/D and Hi/Lo: Decliners led 1.48 to 1. Quite modest downside breadth. As with NASDAQ, it was a large cap event as the breadth shows (as well as SP600's hold at the 10 day EMA).
Previous Session: Decliners led 2.33 to 1
New Highs: 97 (-57)
New Lows: 34 (-12)
The Chart: http://www.investmenthouse.com/cd/^gspc.html
SP500 undercut the 50 day EMA (1265) on the initial drop, managing to hold the mid-January low (1261) intraday and recoup some losses. Indeed, it managed to turn positive by a hair in the rally through lunch. It could not hold the move and it too sagged into the close, moving back through the 50 day to finish. As with NASDAQ, it can also make a higher low here and resume the move, but it is starting to dangle from the end of its rally rope.
SP600 (-0.40%) is showing it is a market leader as it posted the smallest loss of the day. It undercut the 10 day EMA (374.62) on the low but recovered to close at that level and also holding the upper channel line in the November through January rally. It broke up and through that level in the late January breakout, and that makes this an important level to hold and once again assert some leadership. The rest of the market needs it, and the small caps are holding up well compared to the large caps. They are not out of the woods either with the large caps dangling at support, but it is ironic that once again it is up to the supposedly dead and buried small caps to snatch the market's chestnuts out of the fire.
DJ30
Oh yeah, by the way the Dow sold off again as well, falling below its 50 day EMA (10,807) on the close. Not a great pattern: higher high in January but now failing at the December high, setting up something of a head and shoulders pattern. Once again DJ30 continues to struggle. Despite some strong characters such as BA, CAT, UTX, DJ30 is struggling under the weight of INTC, MMM, DD and others.
Stats: -58.36 points (-0.54%) to close at 10793.62
Volume: 346M shares Friday versus 314M shares Thursday.
The chart: http://www.investmenthouse.com/cd/^dji.html
MONDAY
After a huge week in economic data things cool off considerably this week. Earnings are still coming in, but as we noted last week, even with the improvement in guidance after the marquis names announced the market could still not advance beyond the January highs hit before the earnings really started in. Thus we are not looking for earnings to drive things higher; maybe some of the mega cap techs such as Dell and Cisco will surprise everybody, but that chance is remote. The market is going to have to find buyers again as it has done up to this point each time things looked dire.
The market got spooked this past week on fears the economy was stronger than thought and inflation pressures were stronger, thus forcing the Fed to continue raising rates. As pointed out above, the economy is solid, but it is not gaining strength right now. The hope for this rally is that investors recognize this and buy back into the market here at support. The large caps are struggling but have not breached the prior low. Semiconductors and the small and mid-caps look solid still. Leaders just being leaders, but they will have to show it once more at this juncture.
Those stocks, the small and mid-caps, are leaders in continuing economic expansions. If the fears regarding the Fed going too far are going to get priced into the market these indices are going to break down as they won't be pricing in future economic gains as they have done up to this point. That is why we are watching them closely and how they respond on this test. As noted, many stocks are still holding near support along with these key indices, and the selling volume this past week did not eclipse the buying volume. Thus we will continue to look for upside opportunity, particularly with the leaders that have rallied well and are now testing that near support. That means we are going to be looking at new positions on several of our current plays that are making that test. We like doing that because we concentrate our money into the leaders/winners.
If things don't hold up we are going to look at some downside as well. If the leading indices break down the market is going to be in for some significant selling. After the drop on the large cap indices, however, a further downside follow through after the break below key support at the 50 day EMA will elicit a relief bounce to test the breakdown. That is where the downside will open up for the next leg lower, and that is where we will focus on the downside.
Support and Resistance
NASDAQ: Closed at 2262.58
Resistance:
2276 is the October/December up trendline.
2273 is December 2005 closing high.
2278 is December 2005 intraday high.
The 18 day EMA at 2283
The 10 day EMA at 2286
2288 from December 2000 low.
2328 from the May 2001 peak
The January high at 2333
3015 is the December 2000 peak and the October 2000 low
Support:
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 1264.03
Resistance:
The December highs at 1275 (intraday) and 1273 (closing)
The 18 day EMA at 1274.53
The 10 day EMA at 1274.48
The October to December up trendline at 1283
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 1264.73
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 10,793.62
Resistance:
The 50 day EMA at 10,807
The 18 day EMA at 10,847
The 10 day EMA at 10,846
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:
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.
February 7
Consumer Credit, December (2:00): $4.0B expected
February 8
Crude oil inventories (10:30)
February 9
Initial jobless claims (8:30): 273K prior
Wholesale inventories, December (10:00): 04% expected and 0.4% prior.
February 10
Trade balance, December (8:30): -$64.5B expected and -$64.2B prior
Treasury budget, January (2:00): $6.0B expected and $8.6B prior
End part 1 of 3
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