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3/28/06 Investment House Daily
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SUMMARY:
- Stocks rise into FOMC, fall on results
- Bernanke sticks to the company line while market wanted a boat rocker.
- Consumer confidence jumps despite fact we are told daily how horrible our economic position is in.
- Fed result pushed consolidating markets lower and now we see if it is the final shakeout or a breakdown from a low volume rally.
Investors hear same old story and are unimpressed.
It is supposed to be a Fed where clarity is paramount, but it certainly sounded like the same old story Tuesday afternoon when the Fed issued its statement. There was new but familiar language discussing the economy while the policy paragraph was basically identical. The economic language even added some more concerns, e.g. rising commodity prices in addition to energy prices having potentially inflationary effects. Investors were looking for the same language with respect to the economy and a sign Bernanke was less hawkish. We knew it wasn't coming, but reality is always worse than speculation. When the word came stocks sold off into the close.
All in all it was rather typical action for an FOMC meeting. Stocks rallied in the morning, got some cold feet in the early afternoon, but then drifted higher again into the announcement. With no indication the Fed was going to come to the rescue and indeed indicated a May hike is a certainty, investors looked around at the other issues affecting prices. Oil spiked again, hitting 66.07, +1.91/bbl, and that was more than enough reason to get out of town after the announcement. If the Fed got off the market's back then higher oil prices may not pose such a problem. With the Fed staying the course and oil surging, that old one-two punch was back.
Stocks did not implode lower, however, as there were not many breakdowns following the announcement. Shorts covered some positions ahead of the meeting and thus helped lift prices higher. After the word was out and it provided no olive branch to investors, the shorts put some positions back out, helping drive stocks lower. Volume was running lighter but then picked up the pace after the Fed announcement. It was still below average and on NYSE below the rebound volume levels three weeks back. With NASDAQ still in good shape in its consolidation this could be a final shakeout in this pullback to set the move higher. On the other hand SOX is diving lower once more and the market has to face reality of higher prices and a Fed that is not done yet. Tuesday it was not ready to deal with it, and indeed it usually takes a day or so for the real impact to show itself.
THE ECONOMY
No one and done as Fed indicates another one and them some.
Fed policy did not change Tuesday, meaning that the Fed is still on the path to further rate hikes as it watches the incoming data to see just how much further it has to go. Of course that is somewhat disingenuous to say that because there are still 3 or 4 rate hikes out there yet to hit the economy. If you are watching the most recent data, data that is typically 2 to 3 months old when it hits, you are getting a very backward looking view of the economy. We don't know any drivers with clean records who drive by looking in the rearview mirror. Most of them crash. The Fed is no better at it; it usually crashes the economy as well.
With that history in mind the market was disappointed to see the Fed add some concerns to its economic view. Yes it saw a slow Q4, a faster Q1, and a moderating economy ahead, but it still is looking for inflation wherever it may find it. Now it is worried about commodity prices in addition to energy price increases and increases in 'resource utilization' as in the prior statement. It is adding concerns as opposed to reaching that 'just right' view many hoped for.
It was taken to mean one more for sure in May and likely more after that. The Fed funds futures contract started back to work on 5.25%, pricing in a 16% chance of that level very shortly after the announcement. The market is getting that 2000 feeling all over again, and that is no loving feeling. As we noted back in early 2005, the Fed gets a certain mindset by the end of the rate hiking cycle (or what should be the end) and though it says it is looking at the data, it fails to look down the road, something particularly important with gasoline prices hitting $2.70/gallon in some parts of the country. Again, the Fed gives the impression it is driving with both eyes straight in the rearview mirror.
Still the same old Fed.
What really hampered the announcement was the business as usual attitude the statement seemed to evoke. This Fed is supposed to speak more clearly as to what its plans are, but it adopted the Greenspan statement, and the market knows how up front Greenspan was. After all, Greenspan himself said the markets needed to be surprised every now and then. That is not very transparent. Moreover, Greenspan rarely gave the market good surprises. We heard some boos after the statement hit the wires and more than a few floor traders said there was as if there was no change in Fed leadership.
Of course, we were not expecting any change; Bernanke's hands were tied. If he went out on his own he would have drawn ire for being a maverick or worse a dangerous neophyte unable to grasp the finer points of Fed leadership. If he uses the current statement he is branded a Greenspan clone. He did what he had to do at the first meeting. It is just not what the market hoped for. The real read on Bernanke will be the May meeting as well as the lead in up to that meeting. Then we see if he has any original thoughts that take him outside the realm of chairmen that have consistently led the economy into recession with rate hiking campaigns styled as being 'good for' our economic future: don't worry about the recession, just focus on how great the recovery will be. No thanks. Let;s just enjoy a strong economy.
Consumer confidence runs higher despite the polls that supposedly show a country in despair.
Watching the nightly news and you would think that 2 out of 3 US citizens view the US as in dire condition. March economic confidence, however, jumped well past expectations, coming in at 107.2 versus the 102.0 expected. February was pumped up as well, coming in at 102.7 (101.7 originally reported). That was the highest level since May 2002. Expectations finally started to come around, rising 7% after two months of decline.
You can basically make whatever you want out of sentiment readings, but the takeaway is always the overall trend versus any particular data point. With sentiment cruising near 4 year highs there is no real worry the consumer is going to suddenly drop spending.
The problem is, however, that much of the recovery was due to improving energy conditions, particularly gasoline, following the hurricanes. As noted, gasoline is over $2.70/gallon in some parts of the country, and when gasoline hits $3/gallon this summer we should expect confidence as well as consumption to fall. It dropped like a stone after the hurricanes when gasoline hit that $3/gallon mark. If prices don't moderate after the mandatory changeover to ethanol currently underway, we are in for a long, expensive energy summer, and that will hurt confidence. More than that, high sustained gasoline prices will keep the consumer home.
THE MARKET
MARKET SENTIMENT
VIX: 11.58; +0.12
VXN: 16.3; +0.19
VXO: 10.92; +0.4
Put/Call Ratio (CBOE): 1.05; +0.18. Lots of put activity after the Fed announcement.
Bulls versus Bears:
Bulls: 46.3%. Bulls are rebounding, up sharply from 42.3% last week after holding steady at that level for two weeks. Down from 60.4% at the start of 2006, the fall was hard in February, and is now leveling off (48.9% to 45.3% to 42.6% to 42.3% to 43.6%). It has undercut the two prior lows that helped spark rallies in May and October.
Bears: 30.5%. The rally has removed some of the bears from the market, falling sharply from 33% last week. This is a dramatic turn from the steady rise from right at 20% on this leg. The progression: 33% from 31.3% from 30.8% from 29.5% from 27.7% from 25.5%. Again, it started this move just above 20%, the threshold level. Above 20% is considered better while below 20% is considered bearish for the market. Bears surpassed the readings from the two prior market bottoms in May and October 2005 (30% and 29.2%, respectively).
NASDAQ
Stats: -11.12 points (-0.48%) to close at 2304.46
Volume: 2.05B (+7.18%). Volume was running lower but then picked up speed as the market sold after the FOMC announcement. Volume remained below average but was within a whisker. Distribution but NASDAQ fared very well, holding above near support and refusing to dive for a severe loss. When volume jumps while an index holds its ground that is a sign there is some buying going on to prop up the index.
Up Volume: 807M (-356M)
Down Volume: 1.214B (+539M)
A/D and Hi/Lo: Decliners led 1.54 to 1. Modest on the downside.
Previous Session: Decliners led 1.02 to 1
New Highs: 198 (-31)
New Lows: 32 (+9)
The Chart: http://www.investmenthouse.com/cd/^ixic.html
NASDAQ rallied toward the January high (2333; hit 2328 intraday) but reversed on the Fed news. It sold down toward the 18 day EMA (2297) on the low and rebounded modestly to hold the 10 day EMA on the close. This keeps NASDAQ solidly in the top of its 11 week lateral consolidation, looking very nice as it continues trying to set up for the breakout. If SP500 held up a bit better and if SOX did not swan dive off the 18 day EMA, it would be very nice.
Speaking of SOX (-2.05%), after tapping the 18 day EMA (506.53) on the Monday high, it dove lower, easily leading the market lower. It made a new closing low on this leg lower, and that is taking it down from its right shoulder to its 4 month head and shoulders base. Some big chip names are heading lower (e.g., MRVL, BRCM, AMAT, KLAC), and thus the very weak action. The 200 day SMA (480.64) and then some price support at 475 are the next levels if it breaks lower from here.
SP500/NYSE
Stats: -8.38 points (-0.64%) to close at 1293.23
NYSE Volume: 1.54B (+12.57%). Volume jumped as SP500 rolled over in the afternoon. Ahead of that it was lower, so the sellers definitely moved in after the Fed announcement. Volume was still below the upside volume on the rally three weeks back.
A/D and Hi/Lo: Decliners led 1.77 to 1. Ramped up as the selling got underway as the afternoon pullback picked up speed. Still not extremely negative, but it was a reversal session.
Previous Session: Decliners led 1.3 to 1
New Highs: 148 (+12)
New Lows: 48 (+13)
The Chart: http://investmenthouse.com/cd/^gspc.html
SP500 made a modest attempt higher, hitting 1306 on the high and then rolling over. It undercut the 10 day EMA (1298) that had been acting as support during the consolidation. It also fell below the 18 day EMA (1295) and is now trying to hold the January and February highs at 1294. Up to this point the action has been solid, and this may be a near term overreaction to the FOMC result and the disappointment attached thereto. Some support at the 50 day EMA at 1284. Want it to find support before it gets that far.
SP600 (-0.35%) continues to hold its ground but it is also at the top of its channel, indeed, closing right on top of that level Tuesday (388.33). It is holding the line but has been unable to push the move further. Still expecting a test back after this run to the channel. The 10 day EMA (385.80) and the 18 day EMA (383.18) are likely as well as 381-38 from January and early March.
DJ30
The blue chips gave up near support as well at the 10 day EMA (11,217) and the 18 day EMA (11,176) as volume rose but was still below average for the session. Next support is the February high (11,137) and then 11,044 from January. At this juncture it is a matter of seeing where DJ30 can stem the tide or if the selling increases in intensity. Thus far it is the knee-jerk reaction to the Fed.
Stats: -95.57 points (-0.85%) to close at 11154.54
Volume: 272M shares Tuesday versus 226M shares Monday. The low volume pullback suffered a setback a la Fed.
The chart: http://www.investmenthouse.com/cd/^dji.html
WEDNESDAY
Nothing like the Fed to louse up a good consolidation. SP500 was one of the primary positive patterns and it is going to be challenged given its first blush higher volume push below near support. NASDAQ looks solid, but it has the semiconductors diving lower and tugging at it. Some strong, some weak. That makes this initial reaction to the FOMC decision a continuing theme for some market segments and a real test for others. SP500, SP600, DJ30 and even NASDAQ have shown recent strength that is now being put to the test. Though the reaction move Tuesday was lower and on rising volume, we like the action on NASDAQ and see that as a potential bulkhead for the rest of the market, particularly SP500.
At this point we have to see how the reaction move plays out. We were overall pleased to see relatively few breakdowns after the announcement; those that occurred were mostly in trouble before the FOMC statement. We expect to see some more downside early as follow through, kind of a last shakeout. Then we see what is left in the rally when as SP500 tests support. The semiconductors remain a big issue; the market can rally without them but it makes the move harder: take a step, drag SOX, take a step, drag SOX.
Not much on the agenda Wednesday, but the one item is always important, i.e. oil inventories. With oil over $66/bbl, gasoline closer to $3/gallon than $2/gallon, and the Fed still in the 'do what it takes' mode with respect to rate hikes, oil inventories indeed are important. We heard one commentator today calling for $100 to $150/bbl oil; thought we were flashing back to 1978. Sure we are 25 years further down the road from then and sure there are some huge nations coming of age in the industrial world, but in 1978 the experts were just as sure oil was heading over $100/bbl as they are now, citing the same 'principals' and energy 'fundamentals' they are citing today. We do know that oil is cyclical; if it goes to $100/bbl it likely will not go a lot higher because it will ruin a lot of economies and destroy demand. Oil is very, very cyclical, and demand is very elastic.
Back when this rally was underway we were concerned regarding the lower volume move higher. It has consolidated and now has a disappointment to deal with along with surging oil. The initial reaction was down. Now we see if the leaders can hold near support, if NASDAQ can show some leadership, and if SP500 can stem the tide and rebound. We are watching some nice plays set up and actually show good action in the face of the Tuesday afternoon selling, and we will be watching other leaders making pullbacks to see if they develop into good entry points for us.
Support and Resistance
NASDAQ: Closed at 2304.46
Resistance:
The recent high at 2325
2328 from the May 2001 peak
The January high at 2333
2477 is the January 1999 peak
2523 from the December 2000 low
3015 is the December 2000 peak and the October 2000 low
Support:
The 10 day EMA at 2303
The 18 day EMA at 2297
2288 from December 2000 low.
The 50 day EMA at 2282
2278 is December 2005 intraday high.
2273 is December 2005 closing high.
A minor peak at 2249 is still holding.
2240 is closing low in recent range.
2218 from August 2005 peak
S&P 500: Closed at 1293.23
Resistance:
The January high at 1295
The 18 day EMA at 1295
1297.57 is the recent February high.
The 10 day EMA at 1298.54
1315 is the May and May 2001 peaks
1324 to 1329 from the October 2000 lows.
1358 to 1362 mark a series of peaks from April 1999 to August 1999 high and the February 2002 low at 1360.
1371 to 1373 is the December 2000 peak and the January 2001 peak
Support:
The late January peak at 1285
The 50 day EMA at 1284
The December highs at 1275 (intraday) and 1273 (closing)
1264 from the December 2000 lows
1254 is the February low
1248 to 1250 is the bottom of the November/December 2005 range
Dow: Closed at 11,154.54
Resistance:
11,159 is the February high.
The 18 day EMA at 11,176
11,176 - 11,186 from April 2000
The 10 day EMA at 11,218
11,350 from the May 2001 peak.
11,401 from the September 2000 peak.
11,425 from April 2000 peak
Support:
11,044 is the January high.
The 50 day EMA at 11,046
10,985 is the March 2005 intraday high
10,965 from Q4 2000 and November/December 2005
10,931 is the November 2005 high
10,890 is the December 2005 closing high.
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
March 28
Consumer confidence, March (10:00): 107.3 actual versus 102.0 expected, 102.7 prior (revised from 101.7)
FOMC policy decision: 25BP hike to 4.75% on Fed Funds rate. Basically no change in statement though Fed added a concern about commodity prices in addition to energy and utilization rates.
March 29
Crude oil inventories: -1.31M prior
March 30
GDP, Q4 final (8:30): 1.7% expected, 1.6% prior
Chain deflator (8:30): 3.3% expected, 3.3% prior
Initial jobless claims (8:30): 305K expected, 302K prior
March 31
Personal Income, February (8:30): 0.4% expected, 0.7% prior
Personal Spending, February (8:30): 0.0% expected, 0.9% prior
Michigan sentiment final, March (9:45): 86.9 expected, 86.7 prior
Chicago PMI, March (10:00): 57.0 expected, 54.9 prior
Factory orders, February (10:00): 1.3% expected, -4.5% prior
End part 1 of 3
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