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3/30/06 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Target hit alerts: None issued
Buy alerts: None issued
Trailing stops: Cleared out some non-movers. BMRN; BOOM; GILD; ADM
Stop alerts: Ditto. GPN; NDAQ; OPLK; ORCC
SUMMARY:
- Wednesday move stalls on renewed inflation and oil fears.
- Q4 final GDP in line but PCE jumps, igniting more inflation fears.
- After taking a day off market faces a heavy economic calendar as quarter ends
Lackluster session as investors again ponder higher rates and higher oil.
After an important move stocks will often take a moment, and Thursday they had a bit more reason to do so with inflation fears picking up on a strong core PCE reading and interest rates running higher. Q4 GDP was in line (1.7%) but consumer expenditures rose much more than initially reported. The bond yield curve is now no longer inverted, but the 10 year note motored through 4.80%, and that leaves many wondering if the dam broke, at least the one at that 4.8% level.
With that backdrop investors were in no hurry to push things higher. Well, they were ready to do so early as the market rallied on the open. SP500 moved up to its March high at 1311, but there stocks lost their strength as bond yields continued higher. Stocks turned over and by midmorning were negative. They pretty much stayed there for the rest of the session as buyers simply did not want to open the wallet as they did Wednesday.
A modest afternoon rebound pushed NASDAQ back to positive. Indeed, we liked NASDAQ's action as it formed an intraday double bottom at the January high, bouncing twice from that level and posting a modest gain. The move is not going to curl any toes, but the action of twice holding the level it just broke through is helping cement that as support. Volume was lower on NASDAQ, somewhat of a mixed picture given its modestly higher close. Given the gain was not much, lower volume is probably the best volume scenario. NYSE trade was up by a couple of percentage points, however, maybe indicating a wisp of distribution as SP500 tried the March high and then turned back over.
Same old issues still there: oil, Fed, rates
Basically it was just a sluggish session with a hangover from the NASDAQ breakout exacerbated by the PCE worries, bond yields moving through 4.8%, and oil breaking past $67/bbl (closed at 67.15, +0.70). In short, the same issues that have nipped at the market's heels for over a year. Once more they are coming to the forefront given that the Fed meeting is over and there is a lull ahead of earnings season that gets underway in a couple of weeks.
Quarter end, quarter beginning, earnings & warnings
The quarter end is also an issue ahead. We postulated that some of the Wednesday action could have been end of quarter shuffling, but we also note that the first couple of days of a new quarter and the first day of a new month have been upside as new money is put to work. After shuffling ahead of the quarter end some of that money will want to move again with the new quarter.
That takes the market toward earnings season, one that thus far has seen more big names increasing guidance than lowering guidance. Thursday, for example, NOK raised its phone sales guidance to 15% growth versus 10% growth. Indeed, the warnings are running at a much lower rate than previous quarters. Perhaps that is what the market has been trying to tell us the past month when it started to rally once more and produced breakouts by SP500, DJ30 and SP600. Now NASDAQ has joined, just about rounding out the table.
The glaring missing link are the semiconductors; overall they are dragging. The question is whether they drag the rest of the market with them. In 2004, however, SP500 and NASDAQ moved higher overall while the semiconductors notably lagged. It was not until Q2 2005 that the chips really started to come back to life and rallied. In short, the market can live without the chips, but the move is not as strong as it could be with all of the oars in the water.
THE ECONOMY
PCE jumped even as GPD posts a weak quarter.
The overall GDP number provided little excitement with the anemic 1.7% Q4 growth rate as a result of the Gulf storms and the resulting high energy prices and bottlenecks around the country in terms of shipping, getting export goods to port, etc. That weaker growth rate will be easily erased this quarter as a lot of deferred business and rebuilding effort was crammed into the quarter.
The big question for Q1 will be whether the PCE, i.e. the prices consumers pay for goods in the quarter (not a fixed basket like the CPI, but covers the waterfront of all expenditures) spikes up for a second consecutive month. The core PCE rose 2.4% in Q4, stronger than the 2.1% originally reported. That puts it on par with the Q4 2004 and Q1 2005 core (2.3% and 2.4% respectively) that appeared to mark the last bumps in the PCE before the decline that followed.
Our view is that it was likely just a blip brought about by the Gulf storms. They sapped the life out of the quarter yet they also created bottlenecks and demand issues as products made in the south were shut down or could not get out of or through the region. That was a real demand outstripping supply issue, and that is the root of inflation. Thus prices did climb.
On the other hand, the primary driver of the climb according to the government was rising medical costs. That can be considered good to the extent it was just one specific area that rose. On the down side that is not really a storm-related issue. Despite the government's data, what we heard from our surveys was the storm impact on supply and demand, i.e. the inability to meet demand due to logistical tie-ups and plant closings. Again we await the Q1 data to see if supply was able to catch up to demand. It does not matter how fast growth is despite all you hear to the contrary. The key is whether supply can match or outpace demand. That typically occurs in a free, unfettered, and efficient economy. Greenspan liked to crow about how flexible and adaptable the economy has become. The Q1 data will give it a chance to show its stuff.
Fed Funds on the defensive.
Bonds yields were rising on the news with the yield curve no longer inverted though still flat (4.86% 10 year versus 4.84% 2 year). The Fed Funds Futures contract is now pricing in a 30% chance of a 5.25% Fed Funds rate after the June FOMC meeting. Last week the percentage was 0.
On the positive side, rates are finally doing some of the Fed's work for it. Greenspan was and now Bernanke is frustrated that the short end rate hikes were not pushing up long rates. Thus they came up with the 'inverted curve is an okay curve' theory in order to keep pushing on the short end even if the long end was not rising. If the long end responds as it is starting to do, the Fed will relax a bit. Right now it is too early to indicate any lasting change that will let the Fed stand down, but this is part of an overall picture that, despite the rising Q4 PCE, shows a slowing economy.
THE MARKET
MARKET SENTIMENT
VIX: 11.57; +0.62
VXN: 16.14; +0.33
VXO: 10.88; +0.69
Put/Call Ratio (CBOE): 0.83; +0.01
Bulls versus Bears:
Bulls: 46.7%. Edging higher last week after a sharp jump to 46.3% from 42.3% the week before. 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: 28.3%. Bears fell from 30.5% the prior week as the aftermath of the rally. A sharp drop from 33% the prior week. Continues the 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: +3.04 points (+0.13%) to close at 2340.82
Volume: 2.209B (-9.83%). Volume remained above average but was lower as NASDAQ tried to push higher but then closed basically flat. Solid buying on the Wednesday breakout, and that is the key takeaway thus far this week.
Up Volume: 1.199B (-898M)
Down Volume: 979M (+646M)
A/D and Hi/Lo: Advancers led 1 to 1. Modestly positive, matching the price move.
Previous Session: Advancers led 2.63 to 1
New Highs: 235 (+7)
New Lows: 28 (-4)
The Chart: http://www.investmenthouse.com/cd/^ixic.html
NASDAQ rallied to 2353 on the high, extending its move past the January high at 2333, but it gave back 13 points to close just positive. Volume shrank back though still above average, something rather rare in the market. Tried to lead the rest of the market higher but the market was not ready to follow. Still like the breakout move despite the inability to hold a further move Thursday. We anticipate the start of the quarter will bring NASDAQ a bit more upside as more money is again put to work.
SOX (-0.02%) rallied along with NASDAQ, tapping at its 50 day EMA (512.54) on the high. It then gave the move back and closed once again below near resistance at the 18 day EMA (506.34). Anticipating another run at the 50 day to start the new month and new quarter, and that will be the more significant test.
SP500/NYSE
Stats: -2.64 points (-0.2%) to close at 1300.25
NYSE Volume: 1.603B (+1.99%). Volume was higher but still below average as SP500 rallied to the March high but then reversed for a loss. A bit of churn here shows some indecision that SP500 did not have on its early March move higher.
A/D and Hi/Lo: Decliners led 1.3 to 1. Very modest downside breadth.
Previous Session: Advancers led 2.75 to 1
New Highs: 258 (+20)
New Lows: 54 (+3)
The Chart: http://investmenthouse.com/cd/^gspc.html
SP500 rallied early to the March high at 1311, but as at that time, it was unable to push through. On the low it tapped the 18 day EMA (1296) and it managed a close at the 10 day EMA (1299). Volume was up, indicating there was a fight between the buyers and sellers as the buyers were met on the early move by sellers. SP500 managed to hold the near support it gave up Tuesday but recaptured Wednesday. It is still in position to move higher, making a higher low at the January and February highs (1294-95). It is positioned to move and new money at the start of April could give it the push past 1311.
SP600 (-0.17%) stalled a bit itself after the strong Wednesday moved sent it through its upper channel line with a bit of authority. Volume was lower on that move, so it lacked definitive power. When a stock or index breaks higher than its longer term range you have to be cautious of the move. The small caps have been consistent leaders, particularly since recovering in late 2005, and they are showing no weakening. Thus we are not anticipating anything out of the norm of a continued move in its trend.
DJ30
DJ30 struggled more than any other index, falling back to its February highs(11,137) again on the low and then holding that level on the close. Volume remained below average but at Wednesday levels. DJ30 is testing its move and it is a key test of its breakout earlier in the month.
The chart: http://www.investmenthouse.com/cd/^dji.html
FRIDAY
The Thursday economic news helped squelch the strong NASDAQ breakout on Wednesday. Friday a full docket including personal income and spending, final Michigan sentiment, Chicago PMI, and Factory orders. Unfortunately, none of this is likely to overly impact the Fed other than further building a picture of the economy. While more and more are starting to see the economy as having some growth issues, the Fed typically does not alter its path until something more serious occurs. Thus just slowing is not viewed as bad, indeed the Fed views it as the desirable result. It keeps up the pressure until the pressure causes something to crack. The data Friday is likely not going to show any major slowing and thus the Fed will view the economy as still plenty strong and more than able to endure further hikes.
That keeps the market in the hesitant movement; hesitant though still trending higher. It has been able to handle the issues confronting it and still move higher though in a choppy manner. Though the indices have risen to new post-2002 highs, the move this year has been halting. Now that NASDAQ has joined the breakouts after its solid base and SP500 is making a test of its move we will see if there is real strength here even in the face of the Fed, rising interest rates, and continued surging energy prices.
We are looking for more upside to start the quarter ahead of earnings. If that comes about the next issue confronting the market will be a nice run into earnings, where expectations have been priced in. That leaves it subject to some selling on the news, but that is a problem we hope to have to deal with.
Support and Resistance
NASDAQ: Closed at 2340.82
Resistance:
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 January high at 2333
2328 from the May 2001 peak
The recent high at 2325
The 10 day EMA at 2315
The 18 day EMA at 2306
2288 from December 2000 low.
The 50 day EMA at 2286
2278 is December 2005 intraday high.
2273 is December 2005 closing high.
A minor peak at 2249
2240 is closing low in recent range.
2218 from August 2005 peak
S&P 500: Closed at 1300.25
Resistance:
1311 is the March intraday resistance on this move.
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 10 day EMA at 1299.50
1297.57 is the recent February high.
The 18 day EMA at 1296.54
The January high at 1295
The late January peak at 1285
The 50 day EMA at 1285
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 11,150.70
Resistance:
11,159 is the February high.
11,176 - 11,186 from April 2000
The 18 day EMA at 11,177
The 10 day EMA at 11,205
11,350 from the May 2001 peak.
11,401 from the September 2000 peak.
11,425 from April 2000 peak
Support:
The 50 day EMA at 11,057
11,044 is the January high.
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: +2.1M actual versus +2M to +1.3M expected, -1.31M prior
March 30
GDP, Q4 final (8:30): 1.7% actual versus 1.7% expected, 1.6% prior
Chain deflator (8:30): 3.5% actual versus 3.3% expected, 3.3% prior
Initial jobless claims (8:30): 302K actual versus 305K expected, 312K prior (revised from 302K)
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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