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investment help, financial investment
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5/01/06 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Target hit alerts: None issued
Buy alerts: WEBX
Trailing stops: NETL
Stop alerts: BBY; LEH; THQI
SUMMARY:
- If it sounds too good to be true . . . Bernanke backpedals on his statements.
- Personal income & spending, construction spending beat expectations: March data (Q1) remains strong but that is no surprise.
- An economic bear turns more bullish.
- NASDAQ leadership slipping away, leaving it up to NYSE to drag NASDAQ back and keep the rally going.
So-so session tries to rebound but Bernanke's "you got me wrong" comments sends NASDAQ through its 50 day EMA.
Futures tried to bounce stocks higher, but there was no real pre-market punch as personal spending and incomes and construction spending from Q1 blew past expectations. That rattled the pre-market bounce, and when the market opened higher many stocks started peeling back. The April ISM data came in hotter as well, and that further undermined the early bounce attempt. That good data in a data dependent market is not what investors want to hear when the Fed is still on the hunt for inflation.
Nonetheless, stocks managed a midday bottom and started drifting higher over lunch and into the early afternoon, with all indices turning positive and set up somewhat decently for an afternoon rebound. Then CNBC reported that Bernanke told a reporter over the weekend that the market misunderstood his comments to the Joint Economic Committee last week. That sent the market diving lower in the last hour with NASDAQ giving up 20 points in less than one-half hour. In the process it broke through the 50 day EMA along with NASDAQ 100. SP500 and SP600 held up just fine, but NASDAQ has been a leader and the market needs it to continue its breakout move.
It was very interesting that CNBC waited until the last hour to break this story. The anchor said she was told this over the weekend yet held the story until here last hour show. CNBC likes to say the last hour is the most important, and if you hold news stories until you can announce it on your show in the last hour then that certainly is the case. The question many day traders should be asking is why did CNBC sit on this obviously market moving news for most of the session just so the anchor could deliver it on the show. Is CNBC in the business of reporting financial news or making it? Monday it made it.
Volume was lighter though still above average on both NASDAQ and NYSE. That took some of the sting out of the Fed chairman's comments, but volume did not have a lot of time to swell given the news came out late in the session. Breadth flipped modestly negative on NYSE late in the session after a decent showing intraday. Basically it was a modestly upside session that turned modestly negative on the late Fed news. The key takeaway Monday is the action on NASDAQ and whether it is a leader to the downside or just a momentary test of next support. The market has been fighting the issues of higher energy costs (gasoline futures jumped $0.05 to $2.14/gallon, higher interest rates (10 year bond stormed back to 5.14%), where the Fed is in its cycle (I didn't really mean a pause), geopolitical tensions, and now a long in the tooth earnings season. The Bernanke news gave the attempt to hold the line and break forward a punch in the gut.
Bernanke: I am not a dove.
We thought Bernanke could possibly be a new kind of Fed chairman, one who felt that doing the right thing was more important than doing what was popularly perceived he should do. Thus if some thought he was too dovish he would not worry but instead look down the road to see what should be done as opposed to looking at last quarter's economic reports. We may have been premature in our conclusions (hopes?).
Bernanke reportedly said that he was not as dovish as the market apparently perceived from his statement to the Joint Economic Committee last week. He said his talk of a potential pause was merely designed to give the Fed flexibility, but that he saw the market taking it as meaning the Fed was done with rate hikes. He said, again, that a pause was not necessarily an end to rates, but just a pause to size up the impact of rate hikes already in the pipe and see what needed to be done in the future.
That really is nothing new. We said on Thursday night that the market probably read more into his statements than was there and that Bernanke had expressly said a pause could give way to further hikes down the road. Of course, not many believed that the Fed was already done with rate hikes. Another hike this month is built in and the question is whether the Fed will go to 5.25% in June or hold pat, taking a pause. That did not change one bit from what Bernanke supposedly said last week. Bernanke did not take back the very likely pause he is going to take in the summer to assess the impact of high gasoline prices and the rate hikes already in the pipeline. He himself may have read the market's reaction incorrectly if he feels the market thinks the Fed is done. Again, no one we know seriously thinks the Fed is done now.
Thus while the market may have read in more than was there last week, it also reacted more to the downside than it should have Monday. The market typically overreacts in the short term, and Bernanke may need to learn that as he makes his proclamations. Thus it was likely unnecessary to come back over the weekend and 'clarify' what he said to Congress; it was clear enough and the market was in the process of properly allocating weight to it given the pullback last week after Bernanke's talk to Congress. His retraction or clarification has only extended the process of finding equilibrium after his initial comments.
So in the final analysis, the Fed is still likely to pause after the May meeting, waiting a couple of months to see how energy prices and slowing housing impact the consumer (HOV lowered guidance after hours) along with the rates hikes already in the pipeline. As Bernanke said, that does not mean the Fed is done. It also means that Bernanke may be a bit more enlightened than other Fed chairmen, but at this point his 'clarification' has left that at issue. Without a doubt, he is not as clear as we had hoped; his words last week were clear but now he says they were misunderstood. Geez. In the final effect it sounds like more of the same we had before.
THE ECONOMY
Last of Q1 data is strong as it should be.
Q1 was billed as a recovery quarter after a storm-induced pathetic Q4, and the GDP last week, while lower than originally thought, was indeed strong. Monday saw some of the straggling data come in with personal income (0.8% versus 0.4%), personal spending (0.6% versus 0.4%) and construction spending (0.9% versus 0.4%) all almost doubling expectations. This data was included in Friday's GDP final for Q1, and thus you would expect it to be strong.
You would also expect spending to be strong because consumers have to spend more for gasoline. It did not make its bigger spike higher in Q1, but it was no slouch either, rising for most of the quarter. Quite naturally spending was up; gasoline prices necessitated that as long as consumers kept spending.
That last point is the real germane point to the spending: consumers continued to spend even as gasoline prices rose. Of course, gasoline did not hit $3/gallon until the start of Q2, and thus we will see if that has started to peel back demand as it did in the fall. Initial data is mixed on that point. There is some pulling back we hear from some areas while WMT reports sales remain strong. Of course, WMT also sells a lot of gasoline now, and with its cheaper prices it pulls in business it did not have before at the pumps. That is somewhat offsetting any declines in other areas, but WMT is reporting no real erosion of buying in April.
One argument floating about is that as gasoline prices rise a nickel here and a dime there, hitting $3/gallon over several weeks, consumers are not taken aback as much by the prices and thus don't shut down their spending as they would if gasoline suddenly jumped to $3/gallon from $2.50/gallon. There is no doubt some immunity or tolerance built up as prices slowly work higher. The bottom line, however, is that once prices get high, whether by a big jump or by repeated blows to the body with a steady climb, the longer they stay at a high price the more damage is done. Consumers cannot continue to shell out $70 to fill the tank without altering behavior.
Need to look to new data, not the old.
Bernanke knows this and has voiced concern over the inflationary impact of high energy prices versus the consumption destruction of high energy prices. He is also aware of the impact of a falling housing market on an economy, i.e. that the economy significantly slows in the months after the housing market peaks and rolls over. After hours Monday HOV lowered its guidance; you can bet Bernanke is looking at that (or we hope he is).
What the market is really getting wrong in our view is the emphasis placed on old data. Q1 data is strong and we knew it was going to be strong. So the magnitude was off a bit, lower on the overall number but up on the some of the component reports as seen Monday. That is old news and tells us nothing about what the Fed rate hikes in the pipe and the recently surging gasoline prices are doing. The ISM for April was stronger than expected (57.3 versus 55.0 and 55.2 prior), so that has the hawks talking of a stronger Q2. The ISM is a sentiment poll; we saw some of the regional reports softening, and they tend to soften a month or two ahead of the national average.
Sentiment could change quickly before the quarter is over, and indeed that is typically how the economy responds. Headlines trumpet strong old data while the leading signals suggest that the activity is not going to stay that strong (energy costs, homebuilders). Indeed, this is nothing new at all. Most expect economic activity to cool. The problem is, they are getting caught up in the moment while looking at old data. Old data came out Monday and that led many to conclude things will be stronger than thought down the road merely based on the strength of the out of date reports. That is how the headline news and the Fed gets it wrong. That is how the economy in April and May 2000 was described as 'white hot' even as the market pitched over and the leading indicators were, as they are now, showing some weakening.
We have said it before: weakening in itself does not mean recession. An economy surges and slows as it continues its trend. What makes the difference is how the powers that be react to the data. The Fed historically overshoots and sends us into a significant slowdown or recession. That is why the economic hype right now is worrisome. That is why Bernanke's words last week were reassuring. That is why Monday's words were cold water. Is this just going to be the same old Fed that gets overly stimulated by the strong economic data that triggers it into overreacting? While that seems not really possible given the economic data, history shows that is always a possibility and indeed it happens all too frequently. Again, remember 2000.
Long time economic bear turns bullish: the top is in?
Morgan Stanley's Stephen Roach Monday turned more bullish after years of being an economic bear. Of course this follows his fall 2000 call that the Fed would have to raise interest rates another 100 basis points after the start of 2001. His call had more to do with the global economy and steps that have been taken in Japan and China to normalize rates in a neutral setting.
Nonetheless, when an economist whose history the past six years shows he typically makes the wrong call 3 to 4 months out from a turning point, it is worth looking at. Roach was a long term bear and is now more sanguine. You should continue to be vigilant for signs of economic slowing given this news. In Roach's defense he correctly pointed out that continued rising energy costs and geopolitical risks could still put the world economy in jeopardy. We view the energy costs as the key factor and think that unless they do reverse the climb to $75/bbl and beyond there will be economic slowing. Maybe we will be wrong, but the similarities to 2000 in the view of the economy and equally disconcerting 'bold' predictions of many economists have to make you take pause moving ahead.
THE MARKET
MARKET SENTIMENT
VIX: 12.54; +0.95
VXN: 16.33; +0.82
VXO: 11.63; +0.84
Put/Call Ratio (CBOE): 0.91; +0.04
Bulls versus Bears:
Bulls: 45.4%. Bulls continued their second week of decline, falling from 48% and 53.2% before. After a month climbing close to the 55% level considered bearish, a much needed decline. It rose from 42.3% on the low this cycle, a level below the prior lows in May and October 2005. It is already heading back down to that level.
Bears: 25.8%. Faded slightly from 26%. Just a one-week blip higher thus far after declining for a month as bulls rose simultaneously. Rebounded from 24.5% the prior week but still well off its high at 33% for this cycle, a level that topped the prior two highs that gave way to strong rallies. The 20% level and below is considered bearish. It started this move just above 20%, the threshold level. Bears surpassed the readings from the two prior market bottoms in May and October 2005 (30% and 29.2%, respectively).
NASDAQ
Stats: -17.78 points (-0.77%) to close at 2304.79
Volume: 2.154B (-17.15%). Volume fell back from the strong Thursday and Friday levels, though it remained above average. No distribution, but as noted over the weekend, six previous distribution sessions thus month have undermined the attempted move higher, helping set the stage for NASDAQ to slip below the 50 day EMA to start the week.
Up Volume: 793M (+50M)
Down Volume: 1.343B (-463M)
A/D and Hi/Lo: Decliners led 1.65 to 1. Modest downside as NASDAQ had fought back to positive in the afternoon then tumbled in the last hour. Large cap techs were downside leaders (NASDAQ 100 -0.83%); thus the relatively modest downside breadth and NASDAQ's rather hard drop.
Previous Session: Advancers led 1.19 to 1
New Highs: 183 (+13)
New Lows: 51 (0)
The Chart: http://www.investmenthouse.com/cd/^ixic.html
NASDAQ rallied to the 18 day EMA (2331) early, faded, and was back to positive for an afternoon run when the Bernanke news was finally released by CNBC. That sent NASDAQ back down and through the 50 day EMA (2314) as it moved further below its October/March up trendline (2329). It managed to hold some support at 2300 where it tapped twice in mid-April. Not looking all that chipper here, giving up last week's Bernanke bounce. If it was at the lick log before, it is in danger of falling off here.
SOX (-0.95%) also slipped below its 50 day EMA (513.45), but the move was quite modest and not as groundbreaking as NASDAQ. After all, SOX has spent most of the past 8 weeks below that level, just recently making some higher lows and higher highs to push it through. Moreover, it has not given up the level with any authority. Many chips were still moving well Monday and SOX is still trying to make a higher low right at this support. It would be a good point for it to step up and do just that given NASDAQ's Monday slump.
SP500/NYSE
Stats: -5.42 points (-0.41%) to close at 1305.19
NYSE Volume: 1.731B (-3.37%). Volume remained above average but it was lower as SP500 reached higher once more and rolled back down once more. No distribution, however, a welcome sign as NASDAQ struggles below its 50 day EMA.
A/D and Hi/Lo: Decliners led 1.23 to 1. Very modest downside breadth but of course it gave up a decent upside breadth session. Energy and metals continued to hold up and that helped the small caps and that in turn helped breadth.
Previous Session: Advancers led 1.53 to 1
New Highs: 230 (+57)
New Lows: 122 (+24)
The Chart: http://investmenthouse.com/cd/^gspc.html
SP500 rallied once more to 1317 on the high and once more backed off from that level. Monday it could not hold a gain, turning negative in the afternoon selling on the staged CNBC report. It managed to hold near support at the 18 day EMA (1303), and that keeps it in position to continue its trend higher. Looks good compared to NASDAQ, but it also is struggling itself, unable after repeated attempts to move through the 1317 barrier. Nonetheless it is holding near support and still in position to move. Kind of a role reversal with NASDAQ over the past two weeks.
SP600 (-0.14%) turned negative late, but it was bolstered all session by the energy and commodity stocks. On the close it held the 18 day EMA (393.53), still capable of a higher low here to give it the launch point for a next bounce higher in its continuing uptrend. We note that once again (as in the past three sessions) it tapped the upper channel line on the high (398) and faded. Thus SP600 is not immune from the market chop; it also is not just powering higher.
DJ30
DJ30 hit 11,428 on the high, right in range with its two prior sessions, and as with SP600, it faded back for a modestly lower close. It held the 10 day EMA (11,315) on the close on lower though still above average volume. It is resting on top of its recent breakout, still looking like the market leader after the more defensive tone taken late last week in the market overall.
Stats: -23.85 points (-0.21%) to close at 11343.29
Volume: 365M shares Monday versus the Microsoft induced 738M shares Friday.
The chart: http://www.investmenthouse.com/cd/^dji.html
TUESDAY
Car sales are out in the afternoon Tuesday, but not a whole lot of other scheduled news. More earnings are coming, and as noted above, HOV reduced its guidance after hours as yet another homebuilder ratchets in expectations for the rest of 2006. That should help offset, just a bit, some of the Bernanke fade late Monday. Bernanke worries about housing, and these warnings (TOL before HOV) are forward looking, not the Q1 data that is aged as much as fine cheese.
The issue for Tuesday is whether the market is ready to be reasonable or still has some Bernanke take-back to digest. Of course, if CNBC had released the story when it discovered the information the market would have had all of Monday to deal with it. Given the timing of the release Monday the market had to shoot first and ask questions later. That leaves it still seeking the floor on Tuesday. SP500, SP600, and DJ30 all look fine. SOX isn't even that bad. It is NASDAQ that now has gone from leader to laggard in the space of two weeks. The action definitely puts a premium on watching the market right here. No distribution Monday, but there was plenty on NASDAQ last month leading into this session to start the new quarter. It survived the initial selling, but the late news was too much for a weak tape to begin with.
The market took a bit of a defensive tone late last week, and Monday certainly saw no quarter given to growth sectors. Energy and metals continued their recovery after a shaky last week through Thursday. We expect the market to continue a bit on the defensive side and the energy/commodities side as investors take a bit of refuge and see just where this 'pause or no pause' debate resumes. If the Fed is not going to pause that certainly removes one of the shaky pillars of the current rally.
That means NASDAQ may find itself facing another weak session as the market once again balances the risks that the Fed is close to finishing its rate hiking versus the dated economic data and the more forward looking data. The problem the market faces is one where the economy is likely just fine if left alone, but if it is hit too hard on the monetary policy side it could suffer as in past Fed rate hiking campaigns. ECRI's weekly indicator fell to 2.9% from 3.0%; that still leaves it in decent shape after flirting with some danger in March. That suggests the Fed has not tightened too much at this point.
Still, the market is a major part of ECRI's forecast, and that leaves us watching the NASDAQ move below the 50 day EMA closely. Will it be a downside leader, or was it just caught up in the gyrations factoring in Bernanke's speech and then weekend comments (released Monday afternoon; had to get that in again) as investors pulled back from growth areas to let the dust settle. Volume was lower on the Monday fall, always a plus, and that always allows a recovery because the stocks were not getting dumped. It will have to make a hasty recovery and join the other indices that are still poised to move but having their own issues as they cannot get through those recent highs.
Support and Resistance
NASDAQ: Closed at 2304.79
Resistance:
The 50 day EMA at 2314.71
The late January highs at 2325
2328 from the May 2001 peak
2329 is the October/March up trendline.
The 18 day EMA at 2331
The January high at 2333
The February closing high at 2361
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:
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.
S&P 500: Closed at 1305.19
Resistance:
1317, the recent intraday highs from April.
The October/March up trendline at 1309
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 January high at 1303
The 18 day EMA at 1303
1297.57 is the recent February high.
The 50 day EMA at 1295
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 11,367.14
Resistance:
11,401 from the September 2000 peak and the recent intraday highs
11,417 from the recent April highs.
11,425 from April 2000 peak
Support:
11,350 from the May 2001 peak is giving way.
The recent March highs at 11,329 to 11,335
The 10 day EMA at 11,315
The 18 day EMA at 11,275
11,170 is the October/January/February up trendline.
The 50 day EMA at 11,168
11,159 is the February high.
11,137 is the last peak from the February top.
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.
May 1
Personal Income, March (8:30): 0.8% actual versus 0.4% expected, 0.3% prior
Personal Spending, March (8:30): 0.6% actual versus 0.4% expected 0.2% prior (revised from 0.1%).
Construction spending, March (10:00): 0.9% actual versus 0.4% expected, 1.0% prior (revised from 0.8%)
ISM Index, April (10:00): 57.3 actual versus 55.1 expected, 55.2 prior.
May 3
Factory Orders, March (10:00): 3.7% expected, 0.2% prior
ISM Services, April (10:00): 59.4 expected, 60.5 prior
Crude oil inventories (10:30): -0.226M prior
May 4
Initial jobless claims (8:30): 310K expected and 315K prior
Productivity, preliminary, Q1 (8:30): 2.8% expected, -0.5% prior
May 5
Non-farm payrolls, April (8:30): 200K expected, 211K prior
Unemployment rate, April (8:30): 4.7% expected, 4.7% prior
Average workweek (8:30): 33.8 expected, 33.8 prior
Average hourly earnings (8:30): 0.3% expected, 0.2% prior
Consumer credit, March (3:00): $4.1B expected, $3.3B prior
End part 1 of 3
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