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us stock market, stock split
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2/18/06 Stock Split Report
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Stock Split Report Subscribers:
MARKET ALERTS
Targets hit alerts: None issued
Buy alerts: FFIV (bonus); PD
Trailing stops: None issued
Stop alerts issued: 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:
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SUMMARY:
- Stocks soften ahead of long weekend, hurt by oil issues, PPI.
- PPI is hotter than expected, but lower than the month before and year over year core remains low.
- Bernanke parroting Greenspan on curve inversion, unfortunately.
- Market trying to get back on track but the techs keep straggling.
Low volume pullback ahead of long weekend caps a decent week.
Pretty much as expected stocks struggled Friday after a 3-day rebound, the best upside stretch for the market since late January. Some of the catalysts for the upside move reversed as the week wore on. Oil tanked early but rebounded to close the week, helped by the call for a 'total war' by Nigerian rebels against foreign oil companies. PPI jumped more than expected, and that continued the worry about the Fed and the yield curve inversion. After a rebound for the week and ahead of a long weekend, that was plenty to send stocks back a bit.
A 3-day bounce is hardly inspiring, but there was some significant movement on the week. SP500 broke back above the late January high, sitting back on top of that level on the Friday close. It still has the January high to top, but the stronger volume move Tuesday to start the bounce was promising. SP600 bounded solidly off the 50 day EMA on Tuesday as well, avoiding a lower low and taking aim on the last high. DJ30 was one of the stars, hanging around, holding on, then making its move to a new post October 2002 high similar to a snowboarder in a snowcross board race. All solid advances; a bit more work to do on SP500, but a solid advance.
Then there is NASDAQ. It was up as well for the week and it recaptured the December high, moving on some stronger volume Thursday as it did. That was a first step, but it is still below the two January highs, the recovery volume was still mediocre, breadth is weaker, and it is just sluggish as it continues to lag on this recovery attempt. SOX is also questionable, clearing the December highs with NASDAQ on Thursday, but then rolling back down Friday and toying again with the 18 day EMA. Still in the uptrend but lacking any pop as well.
That left the market split on the week. Yes the indices were all up, but as noted, they were not all treated equally. Maybe that is just some rotation, but if the economy is going to continue its expansion even in the face of an inverted yield curve you would expect NASDAQ to be out in front. It is not tanking but it is still technically weak and has yet to make the moves of the other indices. Its action is more parallel with the yield curve.
On the other hand, the small cap SP600 bounced nicely off key support and is closing in on its recent all-time high. Its rebound again put it at the fore of the market. Small caps are economically sensitive. If the economy was going to roll over, small caps would be showing it because the market is a leading economic indicator. Right now it has its major indices in uptrends, including NASDAQ. Indeed, NASDAQ is still holding the November breakout from its 2 year ascending triangle base. The market is being tested by higher oil and the Fed and is showing some wear, but it has not broken down. The inverted curve gives reason to exercise caution along with NASDAQ's action, but again, the indices have not broken down.
THE ECONOMY
January PPI is a bit hotter than expected, but the news was a bit overblown in an inflation fearing market.
The headline was 0.3% (0.2% expected, 0.6% December) but ex food and energy the 0.4% was stronger than the expected 0.2% and December's 0.1% gain. That was the largest core gain since a 0.6% jump in January 2005, and as you would expect that fanned further inflation fears. The market is obsessed with inflation right now, and understandably so given that the Fed has hiked 15 times, is still talking about inflation problems, and typically screws the pooch when it does.
The reason is because by the end of the cycle the Fed is typically as emotionally whipped up as an investor at the peak of a bull run. It talks a good game at the start but cannot stick to the game plan and starts looking at the wrong indications at the end of the cycle. Take employment for example. It is not looking at the employment data when it starts hiking rates; when it started hiking on this round employment was still questionable even according to the Fed's own statements. It is clearly a late cycle indicator based on the history of all economic expansions. Why on earth would you use it as a reason to try and slow an economic cycle that history tells you is already mature?
Back to producer prices. They were up but there are four big considerations that suggest it is all worry and little substance at this stage. First, the year over year core was up just 1.5% and that was the smallest gain since August 2004. Core PPI peaked in mid-2005 and has declined since. This is being confirmed by ECRI, an excellent leading indicator that suggests the inflation cycle has peaked. Second, there is a 'January' effect for producer prices as well as equity prices. This is when a lot of price increases go into effect for the year. It is no wonder that the January core price jump was the largest since January 2005. Indeed, each year for the past 5 years has started with a price bump. Finally, producer prices have yet to show a pass through to the consumer side. In 1983 to 1984 energy prices increased sharply but never made it to the consumer. In 1994 the same thing happened and there was no pass through.
Now energy prices have held high for a long time and that could start prices higher, but you also have to remember something important about inflation: inflation results from too much liquidity chasing a finite number of goods. Prices can rise because demand rises but not result in inflation. There could be no more money in the system but demand rises for overall because people feel good about the future. That is not inflation and the last thing you want to do in that environment is clamp down on the economy and choke off supply. Then you could start creating inflation.
Right now it appears the inflation cycle has peaked and started the decline. There was a real issue back in late 2004 through mid-2005, but that has abated. Unfortunately the Fed appears to be fighting the last inflation battle after the war is over. That is the reason the bond yield remains inverted and investors are cautious with respect to tech and growth. We can only hope that Bernanke, once he really takes the reins at the March meeting, will utilize his more progressive attitude and back off the drive to 5.
The curve inversion remains an issue.
Unfortunately, Bernanke has parroted Greenspan's theory that the inverted yield curve, in this instance, does not mean anything nefarious for the economy. Greenspan talked frequently about this in 2005 when it was pretty clear the Fed was going to keep tightening and the long end was not going to rise, resulting ultimately in an inversion. Greenspan proudly pointed to 1994 when the curve inverted slightly and no recession followed. Okay, that was one time in modern history that an inverted curve did not lead to a recession or significant economic slowdown. It can happen as there is history to that effect, but you have to defy massive odds for that to occur.
Of course Greenspan overlooks 2000. The yield curve inverted in early 2000 but Greenspan kept hiking into early summer, adding 50 BP kicker to end the job and ultimately the economy. All during this period he said the same thing: an inverted curve does not necessarily mean recession, again proudly pointing to 1994. Of course that led to one of the worst wealth destructions in US history and gave away our technological advantage as no capital investment or risk investment occurred in the US for three years.
For most rational people, relying on the exception is not the way to go through life, and it is certainly not worth gambling our future once more just 5 years after the Fed gambled it away the last time. To give yourself a chance to consistently win at Black Jack in Las Vegas you stick to the rules and play the odds. If you don't you can lose big once or twice and blow all the gain you have made to that point. Again, do you want to risk everything on a low percentage shot, particularly when there is plenty of anecdotal evidence to suggest the economic cycle and inflation cycle have peaked? No me. Been there, done that. Unfortunately, the Fed has been there and done that basically since its inception, and we have all paid the price over time. Just think how well off we would be if the Fed had not overreacted and stalled the economy and destroyed wealth every 5 to 10 years? Yep, the Fed is a good thing for us.
THE MARKET
MARKET SENTIMENT
VIX: 12.01; +0.53
VXN: 15.11; +0.18
VXO: 10.97; 0
Put/Call Ratio (CBOE): 0.83; +0.13
Bulls versus Bears:
Bulls: 48.9%. Bulls continued to fade last week, falling from 51.6% and 52.6% the week before. A further decline 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; again, some of the bullish sentiment has cracked. If it gets below the mid-forties it is getting into a good indicator level. It hit 44.8% on the low on the last leg, just above the 43.5% low in May.
Bears: 27.7%. Very good, up from 25.3% and resuming the stronger move higher as three weeks back it was 25.8%. Bears held above the key 20% level on this cycle and they are approaching levels where sentiment helped turn the market. 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: -12.27 points (-0.53%) to close at 2282.36
Volume: 1.96B (-2.97%). One decent volume bump during the week gave NASDAQ some slight accumulation overall. That volume bump was still rather anemic compared to the early February trade, and thus we cannot put too much faith in the week as one that turned the corner from a volume standpoint. It can best be summed up in that there was no further distribution. High praise indeed.
Up Volume: 704M (-509M)
Down Volume: 1.23B (+553M)
A/D and Hi/Lo: Decliners led 1.16 to 1. Very modest downside breadth, indicating very little selling pressure Friday. That is a good sign. We note also, however, that breadth was still laggard on this rebound. Solid to start the move on Tuesday, but modest afterwards.
Previous Session: Advancers led 1.79 to 1
New Highs: 186 (-3)
New Lows: 16 (-4)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixic.html
NASDAQ's big accomplishments for the week were avoiding further distribution and then managing a takeout of the December high (2278) on the Thursday move and managing to hold that on the Friday pullback. That still leaves NASDAQ below both January highs (2314, 2333) after making a lower low on this last pullback. That keeps NASDAQ in the short term downtrend, still trying to find the footing to join SP500, DJ30 and SP600 and take it out of this 2006 weakness fostered by renewed concerns over the Fed's future actions and how they will impact growth stocks.
SOX (-1.93%) lagged as well, posting the largest drop and closing below the 18 day EMA (536.17) after a nice gap higher and run Thursday. Still in the uptrend but similar to NASDAQ it has made two lower highs and despite the rebound Thursday, not showing a lot of upside momentum. Still in the uptrend, but struggling some to hang onto it here.
SP500/NYSE
Stats: -2.14 points (-0.17%) to close at 1287.24
NYSE Volume: 1.568B (-5.5%). Volume backed off to below average on the Friday pullback. That followed a solid surge Tuesday as SP500 jumped off the 50 day EMA and a solid volume session Wednesday though a bit lower. Fairly solid price/volume action, particularly when compared to NASDAQ, but it was no massive surge higher.
A/D and Hi/Lo: Advancers led 1.3 to 1. Breadth remained positive even as the NYSE indices gave back some gains. Not a very negative session.
Previous Session: Advancers led 2.36 to 1
New Highs: 219 (0)
New Lows: 18 (+5)
The Chart: http://www.investmenthouse.com/cd/^gspc.html
SP500 backed off slightly Friday, posting a lower volume close after a 3-day rebound. SP500 made a significant move of its own last week as well, recovering the lower January high (1288) Thursday. It gave that up by a hair Friday; still work to do but the lower volume breach was nothing serious. Setting up potentially a classic double bottom here with the lower leg this month. It will likely take a few more sessions to complete the lateral move and break higher if it is going to make the move stick. Last week was a solid step in that direction with a strong volume recovery.
SP600 (-0.07%) was solid Friday, holding steady on lower, below average volume. Strong move Tuesday off the 50 day EMA (366.05) turned a wobbly move into something stronger. SP600 maintained its uptrend that has used the 50 day EMA as periodic support. The Thursday move took SP600 up to the upper channel line in its 4.5 month channel higher, and it showed a doji Friday just below that level. May see it pause here for a session or two before it can continue higher.
DJ30
Stellar week for the blue chips. It was the dog in our view but it rallied on rising volume Tuesday, taking it up to the January high and following through on a rally attempt that started on 2-8. It continued higher, clearing the January high (11,048) with some ease after all the struggles to get there. Volume was up Friday as it paused, showing a doji on the candlestick chart. It will likely take a couple of days off as well before it considers moving higher and takes on the longer term peaks (11,350; 11,401; 11,425).
Stats: -5.36 points (-0.05%) to close at 11115.32
Volume: 329M shares Friday versus 303M shares Thursday. Not great volume for the week, but consistent and above average.
The chart: http://www.investmenthouse.com/cd/^dji.html
TUESDAY
New expiration period is underway as earnings season limps out on a shortened. It is a big week, however, as the latest FOMC minutes are out on Tuesday and the CPI on Wednesday. The FOMC minutes released in early January breathed new life into a market that was ready to roll over. The market is struggling again, but you have to doubt of the minutes will contain the same kind of goose for the market as in January. After all, that is the old Fed and we have the 'new' one coming in, one that has to prove itself. Some think that means showing it is tough on inflation. To me, the best way to prove yourself is not doing what is popular but what works. Unpopular and right beats popular and wrong any day.
We will also get to see whether the PPI is passing into consumer prices, the monthly ritual that has yet to really show any sustained price increases. As with PPI, core CPI peaked in late 2004/early 2005 and it would be surprising to see it jumping back up at this stage. If it does, the market won't like it as it will imply more Fed action. Right now that Fed action stands at 25BP in March and favoring another 25BP in May. That is a long way off for a market where growth stocks are struggling to hold their own right now.
Heading into the week the NYSE indices, the leaders the past two weeks, are in need of a breather after covering some significant ground last week. Friday was a good start, a low volume, modest loss session. Another session or two like that and SP500 and SP600 will be ready to join DJ30 with a breakout over the recent highs.
That pullback will give us some good opportunity on stocks that used last week to move higher and are testing that move. There are other stocks that used the weakness this month to go about their own business and complete their bases or pullbacks. They will be ready as well to move higher as this pause following the strong run continues. Some favorable vibes from the Fed would help; the market is still weighing whether the Fed will end the expansion or not.
It is definitely still a stock by stock market. The NYSE indices look better, but NASDAQ and SOX (and SMH) are struggling even as some of their stars look great. After the pullback this week by the NYSE indices we will see how investors respond. New money may hit the market to start the week given expiration is over, but it really needs more of a rest. Once that is done maybe NASDAQ and SOX will return to leadership with the other indices. A bit of rotation last week, and now we need to see the money back into the techs to round out the move and give it upside strength.
Support and Resistance
NASDAQ: Closed at 2282.36
Resistance:
2305 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:
2288 from December 2000 low.
2278 is December 2005 intraday high.
2273 is December 2005 closing high.
The 18 day EMA at 2273
The 10 day EMA at 2273
The 50 day EMA at 2260
The October 2005 up trendline at 2238
S&P 500: Closed at 1287.24
Resistance:
The January high at 1295
1315 is the May and May 2001 peaks
1324 to 1329 from the October 2000 lows.
Support:
The late January peak at 1285.
The December highs at 1275 (intraday) and 1273 (closing)
The 10 day EMA at 1276
The 18 day EMA at 1274
The 50 day EMA at 1267
1264 from the December 2000 lows
The bottom of the November/December 2005 range at 1248
Dow: Closed at 11,115.32
Resistance:
11,176 - 11,186 from April 2000
11,350 from the May 2001 peak.
11,401 from the September 2000 peak.
11,425 from April 2000 peak
Support:
11044 is the January high.
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 10,986
The 18 day EMA at 10,936
The 50 day EMA at 10,867
10,754 is the February high
10,720 is the high in the recent lateral move
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
February 21
Leading Economic indicators, January (10:00): 0.5% expected and 0.1% prior
FOMC January 31 minutes (2:00)
February 22
CPI, January (8:30): 0.5% expected and -0.1% prior
Core CPI (8:30): 0.2% expected and 0.2% prior.
Crude oil inventories (10:30): +4.85M prior.
February 23
Initial jobless claims (8:30): 297K prior
Help wanted index, January (10:00): 40 expected and 39 prior.
February 24
Durable goods orders, January (8:30): -0.3% expected and +1.8% prior.
End part 1 of 3
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