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money investment, financial investment
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2/06/06 Investment House Daily
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SUMMARY:
- Large caps struggle once more at 50 day MA while SOX, SP600 try to lead higher.
- Economic forecasts revised higher in wake of January jobs data.
- Stocks trying to absorb all the negatives and salvage the rally.
Chips and small caps showing strength, trying to coax large caps to come along.
Stocks started the session sluggish once more as investors found little to excite them after the weekend and the Friday gap lower. Indeed the negatives once again made all the headlines what with the Iran nuclear story, higher energy prices, and an Al Qaeda prison break in Yemen. No earnings or economic reports to drive stocks, just Bernanke's formal swearing in as Fed chief. Hardly a reason to load the boat with stocks.
Stocks actually started positive, but it was over quickly as NASDAQ and SP500 quickly came under fire. NASDAQ undercut the 50 day EMA and SP500 fell further below that level as well, and it looked as if the selling was going to pick up where it left off, only violating key support. Mid-morning stocks found a rebound bid and bounced, taking NASDAQ back above the 50 day EMA. Once more stocks sold in the early afternoon, however, as stories hit about the Yemen prison break. After new session lows, however, stocks turned and slowly improved into the close. That had every index except NASDAQ (-0.17%) and NASDAQ 100 (-0.42%) back to positive by the close. Indeed, SOX posted a 2.15% gain and SP600 a 0.49% advance.
That helped push breadth positive as the small and mid-cap issues that make up most of the market posted very solid advances off of last week's test of near support. While those leadership groups look rock solid, the large caps continue to flounder. Overall volume was lighter on both NASDAQ and NYSE; once again there was no dumping overall, but there has been some distribution in the large caps, i.e. some high volume selling that indicates institutional money is moving out of some of those stocks.
Though the large caps have felt some distribution and were struggling again Monday, they did managed to hang at the 50 day EMA. SP500 even edged higher to retake that level on the close. No major victory in that move, but it does show that they are not in full retreat and that the leadership from SP600 and SOX is keeping them afloat. Split action is never great unless it is just part of rotation. This has not been rotation with respect to the large cap stocks the past three weeks, but with the selling being on lighter volume overall these stocks are not being abandoned by the large buyers. Thus if SOX, SP600 and SP400 can continue their solid action, i.e. actually showing accumulation, they can drag the large caps along with them. They were trying to do that Monday as the both looked very good. Not much success, but after last week's drop it was a start to keep the large caps at the 50 day EMA.
THE ECONOMY
Jobs data keeps analysts busy through the weekend.
In the weekend report I talked about the concern that the Fed would keep on raising rates right into an economic slowdown, goaded on by talk of strong employment data somehow indicating a surging economy. Monday the administration was talking it up as well as the 2006 budget was released with charts extolling surging jobs growth. Yes, we must be back in the economic catbird seat.
That is apparently what many brokerage houses and other financial institutions feel. Contemporaneously with the budget they were releasing their new and improved economic outlooks for 2006. The increases for Q1 are quite impressive ranging from 3.5% on the low end to 5% on the high. Pretty serious charge ahead given the 1.1% increase in Q1.
What about that 1.1%? Dallas Fed president/hip shot specialist Richard 'ninth inning' Fisher, a relative Fed newbie since his predecessor's retirement (McTeer, who would have been a great choice for chairman), said that Q4 growth could be revised higher and that the housing market was not such a peril to the economy this year. He sounded pretty hawkish about the growth, just as the other economists out on Monday with revised growth forecasts, hardly like the guy who all but said the Fed was through back in the summer of 2005.
He also covered another interesting counterpoint that we have articulated before with respect to the economic doomsayers and the large US current account deficit, i.e. the trade deficit resulting from more imports than exports. Many say the US will face a cataclysmic event in the future when other countries fail to buy into the dollar and US treasuries and thus 'fund' the current account debt. They would buy other currency denominated assets and the dollars would come back to the US not as investments, but as unwanted family members returning home, sparking a jump in interest rates and inflation.
Fisher looked at the practical issues, always hard for those in the ivory towers to grasp. What would happen if the US started saving en masse according to the doomsayers' stated remedy (as if we don't already save by our investments in stocks, bonds, etc.)? The companies supplying the US with the goods we consume would have massive upheaval in their own economies because their populace consumes little of the goods produced there. In short, their market economies would have no outlet for their goods and their economies would slide. Fisher said those voicing such dire warnings over the trade deficit should with equal fervor admonish those other countries to encourage domestic demand.
That showed them. Well, not really. What happens when those economies do start consuming domestic production (e.g. in China and India)? They stop needing all those extra dollars from the US to consume their goods. They divest US dollar investments because they need more of their own currency. Once more those dollars come back to the US with the same affect as described before. The answer to this is nothing easy. The key, as with all economic changes is to avoid the cataclysmic change and allow the inherent flexibility in our system to handle the changes.
Now when you think about it, what is more likely to happen? Every day we hear talk of an economic cataclysmic event that is yapping at the economy's heels, ready to send it careening out of control. In economic history, just how many cataclysmic events are there versus gradual change as the imbalances are balanced out by the markets? Sure you hear about and remember the big upheavals (the Great Depression, the Russian currency crisis, the Asian flu, the Brazilian currency spiral), but they are relative few and far between. Kind of like air disasters; when they occur they are horrific, but they rarely occur. It is a lot sexier to write about cataclysm than the gradual change that typically resolves economic imbalances, and thus we hear more about the horrific events to come than the slow, methodical change that is instead likely to transpire.
In any event, the increases in the GDP predictions are yet again very reminiscent of 2000 when the economists overlooked every potential issue for the economy and kept raising their growth forecasts. We have a lot of issues that just don't suggest such a rosy outlook. We have energy at $65/bbl with a mild winter and out of the driving season; but for that mild winter the consumer would burn a lot of cash keeping warm. The yield curve is inverted; that is never a good sign though sometimes the economy can skate by it. We have a Fed that says it is almost through but is getting into that gray area where it believes its hands are tied and it keeps raising rates until things really shudder. The housing market is already going lower; it has run out of gas and is nudging lower. If the Fed keeps going that nudge may turn into an ugly collapse (don't mean to predict any cataclysm here).
In sum, once again we see the same issues as in early 2000 with the Fed raising rates and everyone getting whipped up by stronger employment forecasts of huge growth. Indeed, even more issues are present this time given the higher energy costs (there was an inverted curve in 2000 as well, by the way). Thus with all of these predictions of strength we should not overlook the weakness that is showing up. Perhaps it will return to strong growth after just a slower cycle. What we often see after almost 2 years of rate hikes that the last ones really pile onto the economy. The Fed needs to be careful and not get whipped into the 'we are in the sweet spot now' mentality.
THE MARKET
MARKET SENTIMENT
VIX: 13.04; +0.08
VXN: 17.62; +0.09
VXO: 12.33; -0.56
Put/Call Ratio (CBOE): 0.84; -0.24
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: -3.78 points (-0.17%) to close at 2258.8
Volume: 1.84B (-19.25%). Lower trade as the techs continued to struggle at the 50 day EMA. Volume has trended lower the past three sessions as the index showed weakness, one of the silver linings as it shows no out and out dumping of NASDAQ stocks. The large cap techs remain under more pressure and still do not look well. The market can rally without them being major contributors, however.
Up Volume: 952M (+353M)
Down Volume: 862M (-768M)
A/D and Hi/Lo: Advancers led 1.07 to 1. It was a large cap down session once more as breadth was positive as NASDAQ was down overall. NASDAQ 100 lost even more, however, at -0.42%. Definitely the large cap issues still struggling since the early January earnings releases started.
Previous Session: Decliners led 1.28 to 1
New Highs: 142 (+34)
New Lows: 30 (-2)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixic.html
NASDAQ sold again, this time undercutting the 50 day EMA (2257) early in the session. It recovered but then fell through it once more in the afternoon. That again ushered in a rebound and NASDAQ closed above that support. That gives it the look of a shakeout and trying to set up for another bounce. It held above the mid-January test lower (2248 closing) and kept it at this key support. Volume was lower, again showing no real dumping of the NASDAQ issues. As noted last week, it can still make a higher low and continue the upside move. This is where the rubber meets the road on this move.
SOX (+2.15%) bounced off of the 18 day EMA (529.55) after selling back last week on lower volume, filling the late January gap higher and holding this key support. Very impressive action as the semiconductors continue to find buyers even as overall tech-land struggles. It is the large cap techs struggling the most, and the chips are really showing some nice leadership at a very key time.
SP500/NYSE
Stats: +0.99 points (+0.08%) to close at 1265.02
NYSE Volume: 1.526B (-13.02%). Volume fell back below average Monday for the first time in over a month. Again this shows there is no heavy selling or unloading of NYSE shares overall though the large caps as with the large cap techs are still bearing most of the pressure.
A/D and Hi/Lo: Advancers led 1.5 to 1. The small and mid-caps helped post a decent breadth reading.
Previous Session: Decliners led 1.48 to 1
New Highs: 133 (+36)
New Lows: 30 (-4)
The Chart: http://www.investmenthouse.com/cd/^gspc.html
SP500 clawed back above the 50 day EMA (1264.75) on the close after starting below that support and rebounding twice from attempts to sell it further. No power on this move so we don't want to make sound like some major turning point. It was another tough session where the large caps struggled to hold onto key support and attempt a higher low above the mid-January low (1261.49 closing). As with NASDAQ, this is where the rally has to make its stand.
SP600 (+0.49%) along with SP400 (+0.45%) are doing what they can to keep the NYSE moving in the right direction. SP600 tapped at the 18 day EMA (371.94) on the intraday low and rebounded for a solid gain in this market. Strong leadership action as the large caps struggle and try to follow along. Ironic as you will recall the small caps are supposedly dead. They look mighty healthy for being dead.
DJ30
DJ30 tried to recapture the 50 day EMA (10,807), but it failed to do so, showing a loose doji below that resistance on lower, below average volume. That keeps it looking pretty weak as it still works on the right shoulder of a 10 week head and shoulders top. These patterns, however, can look just about completed and then get blown apart. We saw that happen on SP600 two times in the second half of 2005. Suffice it to say that DJ30 is still just following along. It has a knack of looking really crappy all the time and just stumbling along to follow the rest of the market when it moves higher.
Stats: +4.65 points (+0.04%) to close at 10798.27
Volume: 263M shares Monday versus 346M shares Friday. Volume fell back below average as well.
The chart: http://www.investmenthouse.com/cd/^dji.html
TUESDAY
Stocks are trying to make a stand once more in the face of continued pressure from global news, energy prices, an inverted yield curve, more Fed action than thought, and a potentially weakening economy that is stressed by all of the above. Monday was no major return to buying with NASDAQ and SP500 still struggling at the 50 day EMA and NASDAQ 100 still leading the way lower. SOX and the small and mid-caps, however, continue to provide remarkable support and show strong action. Over the weekend we discussed those stocks still surprisingly strong given the action in NASDAQ and SP500. Monday saw little change in those stocks and indeed many started higher.
The question is whether the large cap techs and SP500 stocks can follow to some extent. They don't have to lead, but they do need to follow. Semiconductor strength helps NASDAQ. The financial stocks also looked pretty solid Monday and of course energy started to rebound off the recent pullback. The leaders are trying to show the way and we will know pretty soon if the laggards are going to follow along at least for appearances sake.
We have to remain cautious because don't like this rampant economic bullishness. It may just be memory hangover from 2000 but the similarities are worrisome, particularly with the overlay of higher energy prices.
As we always say, however, the market is where the story is told, and despite weakness in NASDAQ 100 and SP500 we see the leaders in this rally holding and starting to move higher once more. We are going to continue looking at them as the vehicle we ride as they show good action as the rally tries to get back onto its feet at this important point.
Support and Resistance
NASDAQ: Closed at 2258.80
Resistance:
2273 is December 2005 closing high.
2278 is the October/December up trendline.
2278 is December 2005 intraday high.
The 18 day EMA at 2281
The 10 day EMA at 2281
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 1265.02
Resistance:
The 10 day EMA at 1272.77
The 18 day EMA at 1273.53
The December highs at 1275 (intraday) and 1273 (closing)
The October to December up trendline at 1284
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 1264.75
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 10,798.27
Resistance:
The 50 day EMA at 10,806
The 10 day EMA at 10,837
The 18 day EMA at 10,842
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): $5.0B expected
February 8
Crude oil inventories (10:30)
February 9
Initial jobless claims (8:30): 385K expected and 273K prior
Wholesale inventories, December (10:00): 05% expected and 0.4% prior.
February 10
Trade balance, December (8:30): -$64.8B expected and -$64.2B prior
Treasury budget, January (2:00): $8.0B expected and $8.6B prior
End part 1 of 3
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money investment
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