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money investment, invest financial
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4/05/06 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Target hit alerts: None issued
Buy alerts: HAL; CYMI; RMBS
Trailing stops: None issued
Stop alerts: None issued
SUMMARY:
- SP500 clears March highs, SOX breaks through 50 day EMA as market moves ahead once more on relatively low trade.
- ISM Services refuses to fade, holding above 60.
- Market nicely rising into earnings, but is it burning both ends of the candle?
SP500 clears pesky resistance as market breaks higher though still lacking real punch.
After the nice consolidation of the prior breakouts, SP500 and NASDAQ broke to new post-2002 highs in sync with SP500 clearing the March highs at 1310 that had capped the move to this point. The move renews the breakouts and keeps the market in a positive stance heading into earnings season in typically one of the best months for the market.
Stocks overcame some negatives with an oil inventories report that saw gasoline inventories dive 4.5M bbl (-1.9M expected) and the economic numbers (ISM Services, weekly mortgage applications) stronger than expected. Even Treasury secretary Snow came out of hibernation to beat the table on the economy's strength, stating that the March employment numbers would be 'good.' Today the market did not take the better economic data as a negative, most likely given the jobs report is out Friday and that, erroneously, is one of the main foci of the Fed.
Market chooses to view better economic data in a good light.
While the economic releases demonstrated positive economic attributes, in an economy burdened by the Fed, good news can be bad news as it gives the Fed more ammunition to continue rate hikes. Indeed, as impossible as it may seem to our readers back in 2000 (and indeed most sane persons), according to FOMC minutes, the Fed was still confused as late as December of that year as to whether the economy was sliding into recession. Hell, GDP had dropped from an 8% to 10% growth rate to 1%; while not negative, that is a massive slowdown, in effect a recession. Of course the economy slipped right into recession in 2001, and the data from the summer of 2000 on all pointed to a massive slowdown coming, presaged by that inverted yield curve that Greenspan said meant nothing.
Thus ANY positive news when the Fed is trying to determine if it should halt rate hikes is indeed bad news. As the FOMC minutes from 2000 indicate, the Fed was looking for a slowdown before it stopped rate hikes. It goes too far (because once it sees a slowdown it is too late) and then it is confused about when to actually get back into the game and cut rates after it has set a recession in motion. Right now everyone feels pretty good about the Fed being close to shutting down its rate hiking campaign, noting the comments about reaching neutrality and even the upper end of neutrality, controlled inflation, etc. Problem is, each statement or commentary ends with the caveat that the Fed's action depends upon the economy. Indeed, on Tuesday Lacker expressly said all of his comments were subject to the economy 'behaving,' i.e. slowing down.
The Fed, just like all Feds in the past, is not going to stop its rate hiking with strong labor reports, strong ISM services, construction spending doubling expectations, etc. It wants to stop but it will feel it can't stop for fear of being viewed as inflation panty waists. People like to think of the Fed as some economically omniscient and reasoned body, but the minutes from 2000 paint a picture of meetings resembling a back alley game of chance where the Fed was willing to let it ride with our financial futures on the line.
Nice break higher and volume picks up but is still light.
NYSE enjoyed some rising volume on the move, but it was still below average trade as that exchange has simply been unable to generate strong buying either on the original breakout or on this move. Higher volume is good, but it only shows the buyers are in control. Above average volume stronger than any downside sessions shows the buyers are in control and that the majority of all investors are buyers. That means less likely upsets if some bad news hits. With this current move the buyers are in charge but they are not a clear majority given the continued below average volume on the moves higher. The lower volume does not mean a bad ending will necessarily occur, it just leaves the market open to downside if something occurs that brings in the non-participants as sellers.
Outside of that there are real positives, starting with the breaks higher, particularly by SP500 and SOX' move over its 50 day EMA. Energy was one of the big drivers given the inventory report and the likelihood of $3/gallon gasoline in the early summer. Looks as if those stocks are just starting to price that move in after a rough couple of months where they sold back on the whole after a strong run. Breadth was still anemic, but the moves were widespread as the market is giving that run into earnings we anticipated. Now we see how far it can carry and what kind of trade emerges. A light volume rally is wide open for upset if the earnings come in lighter than expected or simply don't excite investors. Even with contingency, however, we still have to play the market as it is dealt, and we are not going to go on vacation just because it is not as perfect as we would like it.
THE ECONOMY
ISM services again over 60, topping expectations.
The market bumped higher after the March ISM services index topped expectations with a 60.5 showing versus the 59.0 expected (February 60.1), apparently viewing the strong news as strong for the market. Given that the service sector is the predominant one in the US economy, this is very good news.
New orders posted a solid 3.3 point gain to 59.5. Prices paid fell to 60.5, the lowest since February 2004 (58.1). The move was due to energy prices, however, and that is not going to happen in April. Employment was down, but at 54.6 the pundits say the labor market is still 'tight.' Please. Just four months ago the labor market was viewed by many as in the crapper. The Fed starts talking about 'tight capacity' and suddenly it is supposedly common knowledge that the labor pool is tight.
This is the same kind of horse hockey that occurred in 2000 when everyone was all too eager to agree with the Fed's view of the economy and markets. With no one on the national level standing up and shouting the emperor had no clothes, the Fed was left to its own devices to choke off another expansion and toss us into another recession. The labor market is not tight. There are still tens of thousands coming back into the labor pool just now after abandoning the search over the past two years. Hell, even if it was tight it would not mean much in the real world. In the real world as borne out by historical, empirical evidence, more employment does not mean inflation. Paying somebody more does not mean there is excess liquidity, the cause of inflation. To draw that conclusion is simply an incorrect application of economic theory, but it is made on a daily basis by those trying to 'simplify' the concept of inflation from one that correctly focuses on excess liquidity.
In sum, the services sector continues a very healthy expansion, and as noted above, that is only going on the 'need to raise rates further' side of the ledger at the Federal Reserve. No matter that gasoline is going to hit $3/gallon this summer and the slowdown in consumer spending that price will bring about (as seen post-Katrina and Rita last year). That is looking down the road, and as everyone knows, the proper way to steer an economy is looking backwards.
THE MARKET
MARKET SENTIMENT
VIX: 11.13; -0.01
VXN: 15.92; -0.34
VXO: 10.6; -0.1
Put/Call Ratio (CBOE): 0.86; +0.04
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: +14.39 points (+0.61%) to close at 2359.75
Volume: 2.037B (-3.63%). Volume gave it a good late run, coming up just short of the Tuesday level and thus just short of another accumulation session for NASDAQ. NASDAQ showed a flash of greatness with its breakout a week back, powering higher on strong, above average volume. Since then volume has tracked below average again. It is close to showing some above average trade upside days, and indeed the rising volume on the past two up sessions after that strong break higher is not bad.
Up Volume: 1.371B (+345M)
Down Volume: 630M (-411M)
A/D and Hi/Lo: Advancers led 1.22 to 1. The large caps easily topped the overall NASDAQ as they posted a 0.94% gain, pacing the market and thus controlling its advance. There were some mega-cap generals leading but not many troops were willing to follow.
Previous Session: Advancers led 1.06 to 1
New Highs: 203 (+34). Still too weak on this break to a new high. Again, the move was narrow and when that happens you simply don't get the increased new highs that show the overall index is participating aggressively.
New Lows: 42 (0)
The Chart: http://www.investmenthouse.com/cd/^ixic.html
Gapped higher, tested the move midmorning, and then rallied through lunch and into the afternoon session. It then worked laterally for two hours before a last hour break cemented the upside move. Volume was lower and still below average; if not for last Wednesday's volume on the breakout, NASDAQ's action would be very similar to SP500, i.e. low volume advances. It is easy to carp about it. What we have to do is stay awake and play the move but be ready in case something tries to dump over the apple cart. That could be earnings, energy, the Fed, etc. If we get a run into earnings and volume remains low, we need to proceed with caution.
SOX (+2.76) broke through the 50 day EMA (511.72) and is on the way to the 50 day SMA (522) and some price resistance in the 525 range. Sure it has layer after layer of resistance to deal with, but recovery moves always face that challenge. After the three week lateral move at support at 500, we like this break higher (who wouldn't on the long side?). It is not out of the woods but it is a nice start to a recovery that has room in front of it if it to continue higher.
SP500/NYSE
Stats: +5.63 points (+0.43%) to close at 1311.56
NYSE Volume: 1.606B (+7.06%). Trade increased as SP500 resumed its breakout move. Volume was still below average, however, leaving NYSE in the same position as the initial move: nice but wanting full support. Monday's reversal volume was above average; while that was likely due to the start of the quarter and the associated shuffling, that shows there are potentially still enough sellers out there to drive it back if the market gets some heartburn over earnings or any of the other issues facing it.
A/D and Hi/Lo: Advancers led 1.55 to 1. Even with all NYSE indices higher the breadth was anemic. As with NASDAQ, the mega caps were the leaders.
Previous Session: Advancers led 1.39 to 1
New Highs: 252 (+46). Better but still too light with the large cap, small cap and mid-cap indices hitting new highs.
New Lows: 57 (+7)
The Chart: http://investmenthouse.com/cd/^gspc.html
Solid break higher, finally clearing that March resistance at 1310. Volume was up but still below average, nothing really new for SP500 from its original breakout move. We wanted more volume on this move as a sort of follow through to that original breakout, showing that the rest of the market was saying 'better move in before the train leaves a second time.' Thus far they are apparently waiting for the third and final boarding call. Hard to complain, but we like to do it. In any event, it cleared the resistance on some better trade. One step at a time, baby.
SP600 (+0.43%) posted yet another new all-time high as it continues to trend higher above the 10 day EMA (391.83) and the upper channel line at 395. The higher NYSE volume was good but we also see that breadth was light and thus not many smaller caps were participating. Enough to drive the index higher, but not a groundswell across the market. Nonetheless SP600 is riding its uptrend and showing few cracks in the armor other than it is just over the upper channel.
DJ30
DJ30 posted a modest gain, bringing up the rear for the big indices and again on low, below average volume. It is still well off its March high (11,335), lagging SP500's rebound move from this test of the new post-2002 high. No complaints as DJ30 continues to make higher lows up the 50 day EMA (11,075).
Stats: +35.7 points (+0.32%) to close at 11239.55
Volume: 250M shares Wednesday versus 247M shares Tuesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
THURSDAY
Very light economic session Thursday, and just as well ahead of the Friday jobs report that is going to garner all of the attention for the week. That gives the market some relative quiet to stretch the resumed breakout move. Would love to see more volume come in, but with the unemployment report Friday trade might be a bit lighter. With the continued upside bias and the new breaks higher, that should keep the direction of least resistance up.
You can complain about the light volume, weak breadth (outside of a could of sessions last week), and lack of new highs (believe me, we have), but the market continues to move higher. Many sit this type of action out, but our view is that the market knows best and if we see stocks with solid patterns and fundamentals making good moves at good entry points we let them tell us we should invest our money.
We don't lose sight of the overall market and economic environment; if the market is struggling, even leaders will find the going tougher. If the market continues to trend higher, however, we will participate through those strong stocks. Otherwise you are in the group of doubters as in 1997 when breadth was crappy but the market was moving higher due to the large caps. If you refused to participate because of breadth you missed out on huge gains in the stocks that were moving. Kind of like cousin Eddy in the Vacation series who was out of work for years because he was holding out for a management position.
One worry that is worth hanging onto is the continued rally in energy stocks. They are rallying because they are making a lot of money as product prices move ever higher. No problem with that, and as we said, definitely worth looking into. Historically, however, rallies led by energy stocks eventually eat their own, i.e. the very reason for their rally ultimately kills off the economy through high prices and thus demand falls off. As of yet we have not hit that point even with oil prices ranging from $60 to $70/bbl for months, and holding above $50 for a year. If it keeps up, at some point it will break. The very interesting outcome of all of this will be what happens after the wreck when oil prices fall, but don't fall into the thirties. How much will that hamper the next recovery?
That is way down the road and getting pretty esoteric. For now NASDAQ and SP500 just broke to new post-crash highs and SOX is showing renewed signs of life. Given these conditions we will continue to look for those solid stocks ready to make a move for us and just keep an eye out for the macro signs relating to the market.
Support and Resistance
NASDAQ: Closed at 2359.75
Resistance:
2477 is the January 1999 peak
2493 is the February 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
The 10 day EMA at 2333
2328 from the May 2001 peak
The recent high at 2325
The 18 day EMA at 2320
The 50 day EMA at 2295
2288 from December 2000 low.
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 1311.56
Resistance:
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:
1311 is the March intraday resistance on this move.
1297.57 is the recent February high.
The 18 day EMA at 1299
The January high at 1295
The 50 day EMA at 1288
The late January peak 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 11,239.55
Resistance:
The recent March highs at 11,329 to 11,335
11,350 from the May 2001 peak.
11,401 from the September 2000 peak.
11,425 from April 2000 peak
Support:
The 18 day EMA at 11,178
11,159 is the February high.
11097 is the last peak from the February top.
The 50 day EMA at 11,075
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.
April 3
ISM, March (10:00): 55.2% actual versus 57.4% expected, 56.7% prior
Construction spending, February (10:00): 0.8% actual versus 0.5% expected, 0.4% prior (revised from 0.2%).
April 4
ISM Services, March (10:00): 60.5% actual versus 59.3% expected, 60.1% prior
April 5
Initial jobless claims (8:30): 305K expected, 302K prior
April 6
Non-Farm payrolls, March (8:30): 190K expected, 243K prior
Unemployment rate, March (8:30): 4.8% expected, 4.8% prior
Average hourly earnings (8:30): 0.3% expected, 0.3% prior
Average workweek (8:30): 33.8 hours expected, 33.7 hours prior
Wholesale inventories, February (10:00): 0.5% expected, 0.1% prior
Consumer credit, February (3:00): $3.0B expected, $3.9B prior
End part 1 of 3
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money investment
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