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money investment, investment help
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2/14/06 Investment House Daily
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SUMMARY:
- Large caps & small caps show some love, NASDAQ and SOX still question marks.
- Retail sales surge in January, gasoline or no gasoline.
- Stocks to make a stand as Bernanke speaks.
- NASDAQ action on Bernanke comments key to market.
A rally, but a very mixed market.
All of the major indices rose Tuesday, coming back from a sloppy open that saw semiconductors, techs and small caps lagging early. Retail sales stormed past expectations for January, and that knocked modestly higher futures back heading into the bell. It looked as if it could be another bounce higher and then fade given the futures' action before the bell.
Stocks started sluggish, moving up and down in the first hour but holding gains outside of the semiconductors and small caps. Then a nice thing happened. Oil continued its fade, but it did so with a bit more aggression, falling below $60/bbl on the close, down $1.67. That move in combination with the retail sales sparked some buying and then some short covering. The small caps turned from negative to gain 1.2%, leading the market with DJ30. SP500 enjoyed a nice gain as well as the financials turned back to the lead as well.
NASDAQ and SOX, while posting gains, both struggled. SOX managed to retake the 18 day EMA and NASDAQ the 50 day EMA, but they moved on lower volume, lacking any power. It had the look of some short covering in the large cap techs driving the tech action. That was not all of the NASDAQ move, but the large cap techs have been roughed up and rebounded modestly.
Indeed it was a tale of two markets Tuesday with some solid, above average volume on NYSE to propel large caps and small caps higher. Breadth was solid as well at 2:1. NASDAQ was not the opposite, but it certainly lacked that punch. Volume was up but it was still well below average and well below the levels hit on the rally and in the recent selling. Breadth was solid at 1.9:1; it was not just a large cap tech rebound but it was not a strong move.
That leaves the market heading into Bernanke's inaugural speech to Congress split at least with respect to recent strength. NASDAQ remains in its technically weak position, and though SOX recovered its 18 day EMA, it has taken on some water. The large caps have stepped up, perhaps finally ready to lead as has been predicted for two years. With the small caps performing as well on Tuesday, however, we would not count them out by any stretch.
Overall, however, the recent weakness was the result of nervousness regarding more Fed rate hikes, and in order to overcome that Bernanke would have to prove he is not going to hike rates beyond March. Remember, many are saying Bernanke has to prove himself by raising rates in March, May and beyond, and with the economic data, they have convinced themselves that more rate hikes are necessary. Until that is proved wrong the market has to deal with the specter of indefinite rate hikes. That will be tough medicine for the market after almost two years of rate hikes and the idea that the Fed is almost done. Unless in the unlikely event Bernanke tips his hand that he is not going to keep hiking indefinitely, the market is likely to struggle further in the current range if the economic data shows the improvement it did in January as that is interpreted as requiring more Fed action. The sentiment regarding rate hikes has pulled a 180 since early January; maybe the Fed will bring the market's perception back around to where it was back then. We are not holding our breath on that one, at least not on Wednesday.
THE ECONOMY
Retail sales surge on more than gasoline prices in January. With jobs market strength, they will tell us whether Bernanke is PC or not.
Something seems a bit strange in the retail world. December was reported at a 0.7% gain originally, but it was revised down to 0.4%. Then January surges past expectations both overall (+2.3%) and ex-autos (+2.2%; 0.2% December). Gasoline price increases played a role, but with those and autos factored out you still get a 1.8% gain.
One factor was warm weather (the warmest winter in 100 years before the past weekend). It pushed sales forward as seen in clothing (+4.2%). Weather was not the only factor, however, as electronics rose 2% and furniture climbed 3.7%. Further, just a month before the warm weather was lamented as a drag on sales. Gasoline was up a big 5.5%, but as noted, it was not the only driver.
As for the other reasons, many were offered but few hold a lot of weight, at least no more than any other year. Some say bonuses helped. Maybe people waited to spend their bonus money, but that is not usually the case. Others say the solid jobs gains helped confidence, but jobs have been steady for months and we know that consumer confidence has little to do with spending. Jobs are very important to consumption, but it is a steady paycheck that is the ticket; consumers typically only slow down when they get a pink slip.
The sales surge poached sales from February and maybe even March, but that is not that great a worry; at the end of the day it is total sales whether they occur in January or February. The strange inversion of December and January as well as the further write down of December leave us wondering about how solid the data is. While gift cards may be helping get consumers into the stores and thus lengthening the holiday season, when placed side by side the December and January results indicate there was no holiday season in December. That belies what a lot of retailers said about that month. Gift cards certainly helped get people into the stores, but there must have been a lot of additional spending over and above that to get the kind of results achieved.
How will the Fed deal with the data? Unless Bernanke changes history, poorly.
In any event, that is the government's story, so that is what we have to live with regarding how the data is used. That means the Fed will be looking at the spending surge and if Bernanke and his compadres are still clinging to the Phillips Curve they will see a solid jobs market, some wage gains, and a surge in sales not tied just to gasoline. That is the PC recipe for inflation. How they respond will tell us just what the philosophy of this new Fed is. If they believe in the market and its ability to deliver the supplies and goods (as it has done for over 200 years outside of interference that artificially created problems) they will look at the strong business investment and take comfort that supply will meet demand and thus avoid inflation. If they don't, well, we know how that story goes.
What happens is that these lagging indicators of employment and spending (though spending can be leading as well; it is the combination with employment that sends you down a cold rabbit trail) push the PC believers into tightening even after the economic cycle has peaked. They naturally lag the expansion and they continue to improve even as the forces that drove them higher are already ebbing. Thus you get rate hikes designed to curb the economy foisted upon an already slowing economy all in the name of fighting inflation that supposedly arises from jobs and consumption. That means a slowing economy gets dumped on even more, and often it results in a significant economic slowdown if not recession. The Fed is 8 for 10 or even 10 of 11 depending upon your definition of a recession. That just is not a good record.
Thus while many say the Fed is the expert and should be given deference, its record at accomplishing its mandate is woeful. When it acts it does so too late and then for too long, and that applies to both rate hiking and rate cutting. Back in 2005 we wrote about how the Fed would start out with good intentions and would look good by reviewing the data, making its decisions, etc. But, as is always the case, by the end of the cycle it gets tunnel vision because it sees what could be inflation pressures (as this one has done despite a very tame core CPI and PCE), and then the employment market inevitably strengthens as the economic cycle matures. If you believe in the P Curve that makes you sweat. That is when we get those extra rate hikes and then as in May 2000, that last 50 BP hike kicker that really piled onto an already problematic economy.
The economy is indeed the point. It is not bad at all right now, just going through a natural slowing in the cycle after a solid run. It is old in terms of economic upturns, but that does not mean it cannot continue. What happens in those 80% (or 90% if you are really hard on the Fed) of the cases is that the Fed overreacts to the employment strength and goes too far.
It gets caught up in the emotion of the markets just as the market itself is caught in its emotion and it overcorrects just as any market does. Therein is the folly of a central bank. It is supposed to be above the fray, calm, cool and collected, but its track record, despite all of the revisionist history the Fed tries to paint for itself, is lousy.
That is why the market has been struggling so hard this month and why the bond market continues to post low longer term yields. It has been through this drill for almost 100 years and it knows the probable outcome. Its one hope is that a new Fed governor installed during the rate hike campaign will have a fresh, realistic, beginning of the rate hike cycle mindset when he takes office. That would require a very firm conviction given the pressure from inside the US (e.g. Greenspan, many economists) as well as from the World Bank, IMF, and other central banks to keep raising rates.
THE MARKET
The large caps were strong and techs were weak. Why the difference? NASDAQ stocks tend to need growth to be successful, and that means a growing economy. Despite the strong economic data, they are lagging while the 'safer' large caps are pulling higher on volume. That could mean that big investors are, despite the economic data, betting on the Fed dampening growth enough to impact tech earnings. After all, the mega cap tech earnings were a disappointment even with the solid economy. If the Fed cuts the hikes short of expectations that could turn the tide. As of now the expectations are that it won't, and thus some gravitation toward the large caps over techs. The interesting wrinkle is the small caps surged Tuesday on that strong NYSE volume. That shows not all growth is anticipated to be out the window.
MARKET SENTIMENT
VIX: 12.25; -1.1
VXN: 16.91; -0.48
VXO: 12.11; -0.99
Put/Call Ratio (CBOE): 0.86; -0.15
Bulls versus Bears:
Bulls: 51.6%. Bulls did not rally to end January despite the market bounce off the 50 day EMA, but last week's drop and choppy trade did push bulls lower from 52.6%. That continues the drop from 60.4% hit in January on the high for this cycle. It is a positive to see bullishness fade during the rebound to end January; finally some of the bullish sentiment has cracked. It still, however, has a way to go to reach a level that will produce enough negative sentiment to spark a rally if this one should fail. It hit 44.8% on the low on the last leg, just above the 43.5% low in May.
Bears: 25.3%. Bears did not rally as bulls faded, instead dropping modestly from 25.8%. We expect that to change after this week, but really wanted to see bears start to ratchet higher now that bulls are cracking. Bears have held above 20% on this last rally. 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: +22.36 points (+1%) to close at 2262.17
Volume: 1.877B (+9.98%). Volume rose on NASDAQ's rebound but volume was still below average. It was hardly a strong recovery for NASDAQ. Techs had the look of an oversold bounce that did not attract many sellers.
Up Volume: 1.318B (+879M)
Down Volume: 527M (-710M)
A/D and Hi/Lo: Advancers led 1.91 to 1. Very solid breadth, backing off from 2:1 earlier. This breadth shows it was not all a large cap relief bounce.
Previous Session: Decliners led 1.93 to 1
New Highs: 89 (+16)
New Lows: 20 (-11)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixic.html
NASDAQ gapped higher, gave it back, but then rallied to recover the 50 day EMA (2257). It fell short of the December highs (2278 intraday) and could not take out the near term moving averages (18 day EMA at 2268, tapped on the high). That leaves NASDAQ with still a weak technical pattern, making a lower low Monday and a weak rebound Tuesday. It is not dead but it needs to show the same kind of strength displayed by the large caps in order to shake off this weaker pattern.
SOX (+0.69%) was the weakest Tuesday even though it too managed to rebound from its low at 526 and reclaim the 18 day EMA (534.75) on the close. It managed to avoid a lower low after that second top in February that reversed just below the January high where it reversed as well. It remains in its uptrend and can still recover, but it has taken on some water with the techs very recently. Still below the 10 day EMA (538.28) where there is some resistance and well above the 50 day EMA (516). If Bernanke does not provide any solace to the market, SOX could find itself at that key support rather quickly.
SP500/NYSE
Stats: +12.67 points (+1%) to close at 1275.53
NYSE Volume: 1.814B (+32.72%). Solid volume surge that took volume to its highest level since the start of the month that saw strong volume as the market sold back. A good answer to the recent lateral move.
A/D and Hi/Lo: Advancers led 2.06 to 1. Breadth was solid all session as the small caps joined the large caps in a solid, strong volume rally.
Previous Session: Decliners led 1.7 to 1
New Highs: 116 (+49)
New Lows: 31 (-12)
The Chart: http://www.investmenthouse.com/cd/^gspc.html
Volume jumped on NYSE as SP500 moves back through the 50 day EMA (1265) with some authority. It posted the same percentage move as NASDAQ, but its gains were more significant, at least with respect to positive chances of breaking from this range. It rallied through 1275 resistance at the December intraday high during the session, fading in the lat hour to close at that level. It has not broke through that point nor has it broken the recent downtrend from the January peaks. With the strong upside trade, however, it gave itself good footing to make a run at snapping that short downtrend.
SP600 (+1.27%) led the move higher, but it got a slow start, lagging the large caps when they started higher early. After a tap of the 50 day EMA (364.78) it rebounded and rallied to beat some price resistance at 371, the mid-January highs. It tried the 10 day EMA (371.47) on the high but ended up closing right on the 18 day EMA. Good volume bounce off the 50 day EMA and now it needs to seal the deal.
DJ30
From laggard to a leader with another solid session, this time on some better volume. The clamor was a move over 11K, but on the high (11,048) it still did not clear the January high at the same level. The large caps are getting the volume right now as uncertainty dominates regarding the Fed's future actions with rates. Growth is at issue with the tech stocks, and that is helping push money into the large caps ahead of the Bernanke Fed's first actions.
Stats: +136.07 points (+1.25%) to close at 11028.39
Volume: 307M shares Tuesday versus 244M shares Monday.
The chart: http://www.investmenthouse.com/cd/^dji.html
WEDNESDAY
New York regional manufacturing index, industrial production and utilization, crude inventories, and Bernanke. The latter is the focus, but Tuesday we saw how oil prices falling below $60/bbl and tanking gasoline futures can help the market, particularly when there is uncertainty regarding the Fed. Oil has been working against the economy, and if this is the turn down that is being predicted (a drop near $50/bbl), that would provide a new boost. If the Fed would read a history book and step back and look at what is going on now we might get a couple of real positives for the market.
For now there is only speculation as to what Bernanke will do. We will see more straight talk Wednesday than with Greenspan, but that also will likely limit what he will talk about. He wants to pare back the chairman's range of discussion and speak clearer. That might mean a shorter meeting before Congress, but we also know that many want to feel him out extensively so as to understand his statements better in the future. After all the smoke clears we will likely come away still wondering how many hikes are left in the bag.
That means the moves Tuesday could be somewhat vaporous once the prepared remarks hit the wire and the Q&A is over. If oil continues to fall, that could act as a counterbalance to the continued uncertainty (and perhaps some disappointment) as to the Fed's moves over the next few meetings. Right now the Fed funds futures are pricing in a couple of hikes; one for sure at the March meeting and then some split as to the next hike between the next two meetings.
We cannot ignore the strength in the large caps and the small caps. We also cannot ignore the lack thereof in NASDAQ and to a lesser extent SOX. We expected more weakness but the market got a vitamin shot from lower oil prices. Even with that, NASDAQ could not muster a significant move. Given that action we anticipate more struggle for NASDAQ and tech stocks Wednesday when Bernanke likely gives little new insight as to what the Fed will do with respect to how many rate hikes are still in the till. If oil really plummets, however, that can act as a temporary bridge over the uncertainty regarding Fed rate hikes.
Support and Resistance
NASDAQ: Closed at 2262.17
Resistance:
The 10 day EMA at 2263
The 18 day EMA at 2268.44
2273 is December 2005 closing high.
2278 is December 2005 intraday high.
2288 from December 2000 low.
2295 is the October/December up trendline.
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 2263
The October 2005 up trendline at 2230
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 1275.53
Resistance:
The December highs at 1275 (intraday) and 1273 (closing)
The late January peak at 1285.
The January high at 1295
1315 is the May and May 2001 peaks
1324 to 1329 from the October 2000 lows.
Support:
The 18 day EMA at 1270
The 10 day EMA at 1268
The 50 day EMA at 1265
1264 from the December 2000 lows
The bottom of the November/December 2005 range at 1248
The August 2005 high at 1246
The September 2005 high at 1243
March 2005 closing high at 1225 and intraday high at 1229.11
The 200 day SMA at 1226
Dow: Closed at 11,028.39
Resistance:
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:
10,985 is the March 2005 intraday high
10,965 from Q4 2000 and November/December 2005
10,868 is the December 2004 high
The 10 day EMA at 10,890
The 18 day EMA at 10,871
The 50 day EMA at 10,825
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 14
Retail sales, January (8:30): 2.3% actual versus 0.9% expected, 0.4% prior (revised from 0.7%).
Retail sales, ex-autos (8:30): 2.2% actual versus 0.8% expected, 0.2% prior.
Business inventories, December (10:00): 0.7% actual versus 0.5% expected, 0.6% prior (revised from 0.5%). Business inventories rose for the seventh straight month. Some indication of lower consumption, but the strength in sales continues as well.
February 15
New York Empire Index, February (8:30): 18.0 expected, 20.1 prior.
Capacity utilization, January (9:15): 80.8% expected, 80.7% prior.
Industrial production, January (9:15): 0.2% expected, 0.6% prior.
Crude oil inventories (10:30): -318K prior
February 16
Building permits, January (8:30): 2.068M expected, 2.075M prior
Housing starts, January (8:30): 2.023M expected, 1.933M prior
Philly Fed, February (12:00): 9.2 expected, 3.3 prior
February 17
PPI, January (8:30): 0.2% expected, 0.9% prior
Core PPI, January (8:30): 0.2% expected, 0.1% prior.
Michigan sentiment, prelim, February: 91.0 expected, 91.2 prior.
End part 1 of 3
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