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money investment, investment help
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2/22/06 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Target hit alerts: None issued
Buy alerts: RSTI; CELG; SIRF
Trailing stops: None issued
Stop alerts: None issued
SUMMARY:
- Soft start, good finish as oil dropped, consumer prices remain contained.
- Energy pushes overall CPI higher but core remains tame for the month and year.
- NASDAQ and SOX hold where they have to, start road to recovery as NYSE stocks continue to work toward new highs.
- Market continues to hang on, but it is doing the minimum.
Stocks rebound early, hang onto gains in afternoon.
A flat, soft start sent the indices in different directions in the first hour. That is nothing unusual of late as the NYSE indices have rallied while tech and semiconductors sought lower ground once more. Once more the NYSE indices were up and the techs were down. NASDAQ and SOX were in trouble again, undercutting their 50 day EMA early as some big names in semiconductors and mega cap techs were selling (DELL cancelled an analyst update meeting, postponing it until September due to its own lack of guidance). It looked pretty bleak for them but that slight undercut of the 50 day EMA stopped the bleeding and NASDAQ wandered laterally through the first 1.5 hours.
Things got the soft start on a CPI that was stronger than expected overall but showed an inline core and remained tame year over year. It was not enough, however, to relieve worries about a Fed with ADD (meaning it forgets why it started hiking in the first place), but it was also not the type of data that ensures the Fed will go beyond 2 more hikes. The Fed said in its January minutes released on Tuesday that it was looking at consumer prices. They are not seeing a big pass through from energy, something we have seen before in 1984 and 1994 with big energy price spikes.
Speaking of energy, after the Nigerian spike to start the week, oil dropped back down to 61.01 (-1.73). Nowhere near the 58/bbl last week, but it softened and energy was immediately weaker as well. Energy stocks have really come under pressure this month, rebounded last week, and are now at the waffle point after that rebound. They are indicating oil is going to go lower, but as we have seen each time oil has weakened for the past year and one-half, a new crisis comes up that props it up and sends it on another surge. This past week it again broke its trendline, but then quickly rebounded. If the energy stocks fade again here, however, that may be the catalyst that sends it to a new low on this cycle.
With that background stocks managed to hold on early and then took off midmorning when a buy program hit. The large caps and small caps were out in front, rallying toward the January highs. SOX, the downside leader, reversed sharply and led the market in overall gains. NASDAQ was second. Of course, they were deeper in the hole, and the rebounds only mitigated the recent selling; it did not change their character. You would think a pretty sharp reversal off the 50 day EMA would do that. It did to an extent, but volume was just slightly higher and still below average. NASDAQ had bad breadth as well; chronic halitosis has been its frequent problem. Basically NASDAQ and SOX did what they had to do, i.e. hold the 50 day EMA and start a rebound.
Volume was up on NYSE as well, but it was also below average. Breadth was good at 2:1 as financials led the large caps and small caps were up across the board as SP500 and SP600 to a lesser extent test their January highs. Volume is still likely not enough for serious breakouts; it will need to improve. Nonetheless, despite the lagging NASDAQ and the pervasive belief the Fed is in the game for a minimum of two more hikes (and a third starting to price into the Fed funds futures contract), the market is holding up well. Declining oil prices go a long way to offsetting the Fed; they are not at the level that will do that, but if the energy stocks are forecasting oil prices we will see oil down in the mid to low fifties, and that will help put the Fed more at ease.
THE ECONOMY
CPI remains tame on the core while wages lag inflation.
The headline 0.7% gain topped the 0.5% expected on energy price gains (5%). The core came in at 0.2% as expected, higher than the 0.1% gain in December (revised lower from 0.2%). That kept the core at 2.1%, below December's 2.2% and very tame, continuing the decline after the 2.4% peak hit in February 2005.
That still has the core just over the Fed's preferred 2% limit, and that keeps the Fed on for March and likely May. But one of the Fed's bugaboo worries, so-called 'wage-led' inflation is not likely. A lot of ink and worry has been spent over the recent employment data and how that is indicating an overheating economy. The whole theory behind that notion is that employment gets so tight that employees demand higher wages and then run out and spend those wages, driving up prices. That ignores that suppliers will ramp up supply to sell more product to meet extra demand (there are few monopolies out there). That ignores also that Greenspan himself asked for more data after he crashed the economy in 2000 as to whether a wealth effect really exists. In other words, the Fed is worried about a source of inflation that it does not even know exists.
Even assuming there is a thing called 'wage-led' inflation, wages are running behind the inflation rate. Year over year CPI registered 4.0% in January. That was lower than September's 4.7%. Both are higher than the 3.3% to 3.9% gain in wages (depending upon which measure you choose to use), meaning that wages are not keeping up with inflation. Wages are not keeping up with price rises, so it is less likely that there is a the kind of surge in spending that the Fed purports to worry over.
The skinny of the report is that there is inflation (always better than deflation), but it remains at very contained levels outside of energy. Everyone assumes there will be a pass through in costs to the consumer. Inflation has increased its pace so there has been some pass through, but it is nowhere near the ratio of the increase in energy costs. This happened in 1984 and again in 1994, periods that also involved Fed rate hikes. The key this time is that there appears to be no end in sight for oil. But wait a minute. There was no end in sight for oil in the 1970's, again in the 1980's, and by golly, again in the 1990's. Each time, however, saw oil indeed drop back to low levels.
Why? Because oil is incredibly cyclical. Oil was certain to go to $100/bbl under the conventional wisdom in the late 1970's. Before the cycle was over it was at $9/bbl. Every time everyone becomes convinced there is only one outcome, a different end unfolds. That is why we are closely watching the patterns of the energy stocks; they have deteriorated across the board, and if this rebound effort fails they are likely forecasting lower oil prices. Damn good thing too; we have worried about $3/gallon gasoline this summer before any storm hit if oil remained in the $65/bbl and above range. If oil can break down into the mid-fifties it would take another bad storm to get gasoline at those levels.
THE MARKET
MARKET SENTIMENT
VIX: 11.88; -0.53
VXN: 15.34; +0.09
VXO: 10.79; -0.6
Put/Call Ratio (CBOE): 0.73; -0.18
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: +20.21 points (+0.89%) to close at 2283.17
Volume: 1.889B (+5.84%). Modest rise in volume on the rebound, showing some accumulation, but trade was still well below average. Simply not a lot of strength on the rebound, particularly when you had an early sell off on NASDAQ and SOX before an intraday reversal.
Up Volume: 1.171B (+680M)
Down Volume: 693M (-593M)
A/D and Hi/Lo: Advancers led 1.61 to 1. Disappointing breadth once more as NASDAQ 100 posted a 1.32% gain versus 0.89% for NASDAQ overall. Large cap techs led but that is not a showing of overall strength.
Previous Session: Decliners led 1.67 to 1
New Highs: 151 (+7)
New Lows: 26 (+1)
The Chart: The Chart: http://www.investmenthouse.com/cd/^ixic.html
NASDAQ undercut the 50 day EMA (2261) on the low and then rebounded off that level on a rising volume day. It retook the December high (2278) on the close. Trade remained below average as it recovered, however. Better than Tuesday, but not much. Basically NASDAQ did the minimum it had to do to keep the upside alive: made a hold at the 50 day EMA and recovered the December high as it attempts a higher low to break the string of lower highs and lows since January. Not bad but that low volume remains a real Achilles heel as NASDAQ tries that move to take out the recent high (2295) before it can even get to the lower January high (2315).
SOX (+1.34%) showed similar action, undercutting the 50 day EMA (519.55) and rebounding on that slightly rising volume. It led the gains, but it was also in real trouble, having just made a new lower low for this cycle. It rebounded through some resistance at 525 but stalled short of the 18 and 10 day EMA (534.43, 535.18) and the early January highs at 539. Good recovery by the key names but as with volume overall, trade was questionable.
SP500/NYSE
Stats: +9.63 points (+0.75%) to close at 1292.67
NYSE Volume: 1.615B (+4.32%). Volume improved on an up session after fading on the prior two down sessions. This continues some much improved price/volume action though the overall volume levels are lagging. Indeed, volume came in below average Wednesday as SP500 pushed past the February high. It will need to show more as it tackles the January high.
A/D and Hi/Lo: Advancers led 2.1 to 1. Solid breadth returned to NYSE as the led across the board even without energy. Plenty of stocks moving but not on a lot of volume.
Previous Session: Decliners led 1.12 to 1
New Highs: 272 (+74)
New Lows: 13 (-4)
The Chart: http://www.investmenthouse.com/cd/^gspc.html
SP500 started higher and added to its gains all session. It has set up a small double bottom with handle base the past 6 weeks and is on the verge of a breakout move over the January high (1295) that will take it to a new post-October 2002 high. The large caps are showing continued strength, helped out by the big financials (e.g. GS) that have trended higher even as the market went through its recent chop. SP500 is ready for the breakout move, but we would really like to see some volume as it does.
SP600 (+0.78%) bounced off the 10 day EMA (374.78) after holding that level on the Friday and Tuesday 'test' of last week's rebound from the 50 day EMA (366.90). Volume was up though still relatively low as it heads for the recent all-time high at 380.83. Money flow continues to rise ahead of the index; the small caps are once again garnering money even as large caps show more life. Many have treated them as mutually exclusive. They are proving otherwise.
DJ30
Blue chips rallied to a new post-2001 high on another solid volume session. Trade moved up above average from below average volume selling Tuesday. DJ30 continues to forge ahead to new territory, at least new since the crash started back in 2000 and 2001.
Stats: +68.11 points (+0.62%) to close at 11137.17
Volume: 337M shares Wednesday versus a below average 270M shares Tuesday. Not blowing away the trade, but it is showing the right kind of price/volume action.
The chart: http://www.investmenthouse.com/cd/^dji.html
THURSDAY
Oil inventories were pushed to Thursday given the holiday. That will be the top economic news even with the weekly jobless claims report out as well. As noted, oil is definitely helping despite a Fed that remains at bat; the market needs another huge build to help push oil back over into the fifties. Oil made a quick rebound on the Nigerian issues, but it is just as quickly faltering. A big build could push it back over.
Stocks continued to defy the conventional wisdom, rising despite the Fed still on call and an inverted yield curve. The small caps and financials continue showing strength and moving to new highs while the bond market continues its inversion. NASDAQ is trying for a higher low and a comeback move. The market continues to fight and scratch higher, and while it continues to do so we don't want to get completely on the other side of it.
Despite the muted heroics, we are going to remain cautious and let the market show us good moves in specific stocks to participate. The overall move is not that strong. Stocks are moving higher but there is not wholesale participation and buying. Everything is being fought for and you still see some major blowups if there is an earnings miss or some similar story. That indicates to us that energy prices, the yield curve, and the Fed's continued presence are taking their toll on this advance. If we see some real strength we will be more aggressive, but for now we can find plenty of stocks to play to the upside even though the market overall is still somewhat choppy and weak. We would love for it to show us more strength and prove our doubts wrong. Thus far, however, it still has the look of a market that is moving higher but is eating its own as it does in order to fuel the move. It will need to sense the Fed is truly done and that energy is topping for the near term to regain that kind of strength.
We will continue looking at possible upside plays, but we are also watching energy Thursday when the weekly inventory data comes out. We have some that could give us some downside action if this number is high once more and truncates this recent rebound from the early February selling.
Support and Resistance
NASDAQ: Closed at 2283.17
Resistance:
2288 from December 2000 low.
2310 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:
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 2261
The October 2005 up trendline at 2243
S&P 500: Closed at 1292.67
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 10 day EMA at 1280
The 18 day EMA at 1277
The December highs at 1275 (intraday) and 1273 (closing)
The 50 day EMA at 1269
1264 from the December 2000 lows
The bottom of the November/December 2005 range at 1248
Dow: Closed at 11,137.17
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.
The 10 day EMA at 11,026
The 18 day EMA at 10,970
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 50 day EMA at 10,865
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): 1.1% actual versus 0.5% expected and 0.3% prior (revised from 0.1%).
FOMC January 31 minutes (2:00)
February 22
CPI, January (8:30): 0.7% actual versus 0.5% expected and -0.1% prior
Core CPI (8:30): 0.2% actual versus 0.2% expected and 0.1% prior (revised from 0.2%).
February 23
Initial jobless claims (8:30): 297K prior
Crude oil inventories (10:30): +4.85M 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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