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world stock market, us stock market
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5/06/06 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Target hit alerts: RMD (took some interim option gain)
Buy alerts: SBUX; JOBS
Trailing stops: DXPE
Stop alerts: None issued
SUMMARY:
- Market leadership flips again, NYSE indices surge to highs once more.
- Lower jobs report brings out talk of the 'Goldilocks economy.'
- Housing contributes to Friday rally as TOL announces lower contract levels, but some on the Fed don't get it.
- ECRI inflation gauge still shows inflation has peaked.
- What can you say about a market running higher on huge world liquidity? Just hope the money keeps coming.
Friday brings another day and another change in leadership as the rally picks up the pace.
Of late each day brings a rotation of leadership as the flood of money from around the world searches for a home. Thursday techs and semiconductors stepped up, Friday the NYSE stocks were leading. Industrials, financials, energy, metals, machines, commodities, and transportation were all frisky again: anything related to the continuing industrial surge performed admirably. DJ30 had already broken out once more and of course it was up again. SP500, SP600, and SP400 all surged higher, joining the run as well, the latter two at all-time highs once more as SP500 posted a new post 2002 high. They were strong, but once more DJ30 led, even posting the strongest percentage gain.
The much weaker than expected jobs report (138K) fostered the surge. The indices were already on the move after oil prices reversed Wednesday and dropped hard Thursday on the heels of a surprise build in gasoline inventories after demand flattened to end April when prices hit the $3+/gallon level. Falling energy prices takes the heat off of the consumer and helps keep the economy moving. The significantly lower jobs report takes some heat off the Fed re raising rates, also helping keep the economy moving. The market liked it. After a choppy slog higher, the market finally looks to be putting together a run of more than a couple of sessions.
It was interesting, however, that technology and semiconductors, the leaders Thursday, were up but not leading Friday what with the lower energy costs and the lower jobs that might get the Fed off the economy's back a bit sooner. Those are growth sectors and they were not partying as hard as the industrials. The market is not showing any economic weakness overall, but NASDAQ is still lagging, and economic growth typically fosters stronger technology growth. NASDAQ held its breakout despite the selling early last week and it rallied to end the week, but it has a lot of work still ahead of it before it can again boast a new post-2002 high. The good thing about the Friday tech action? SOX is still in solid shape to move higher, and a day or two of rest only sets it up to move higher once more when the money rotates yet again.
Strong price moves and a lot of stocks participating as NYSE breadth hit 3:1 intraday and closed at 2.8:1. Volume, however, lagged on both NASDAQ and NYSE Friday. No real big deal on NYSE; as noted last week, NYSE trade has been solid for three weeks, and the latter stages it has shown good accumulation. Volume does not have to rise every session to show accumulation. Price gains on strong volume over a period of time show accumulation. NASDAQ trade is not so positive. It showed a bit of distribution Wednesday after a 6 such sessions in April. Volume then proceeded to fall off Thursday and Friday, dropping below average, as NASDAQ gapped higher and rallied after holding support at 2300. Breadth was 1.7:1 on NASDAQ, not bad but hardly keeping pace with its NYSE brothers. NASDAQ is rallying, but it is not showing accumulation as it moves higher. That can change this coming week; it needs to as low volume moves are often unsuccessful in making breakouts and we don't want that bifurcated market.
THE ECONOMY
April jobs come in short, March revised lower. Happiness is apparently a strong economy & lower jobs.
That is, when the Fed is still trying to decide how close it has to take the economy to the brink. Raising interest rates is a game of brinksmanship. It is like curing heartworms: you give the pet enough poison to kill the worms and gamble it is not enough to kill the pet. Unfortunately, monetary policy is not nearly as exact as a heartworm cure.
In any event, jobs gains were 138K, much less than the 200K expected. March was written lower to 200K from 211K. The unemployment rate held steady at 4.7%; 'fears' had been it would fall to 4.6%. Heaven forbid we have prosperity and jobs to boot.
After a 'jobless' recovery, then supposedly crappy jobs when they finally started showing up, and low wages, now we have all these worries about the job market sparking inflation. Jobs don't cause inflation, excess liquidity does. The Fed knows it, but why give away a carefully built 'inflation indicator' you can use when you want to raise rates? If you have too much liquidity you can have poor jobs creation and still get inflation. A lot of jobs and surging wages can help exacerbate inflation in an over-liquefied economy, but they don't cause inflation. Thus though hourly earnings rose 0.5% (0.3% expected), we are not going to waste time about its meaning. The Fed uses it as needed to raise rates. Thus it is an offset to any perceived economic weakness.
Debate remains over a June hike. Not likely, but with talk of a 'Goldilocks' economy and some of the Fed statements you have to wonder.
A rate hike to 5% is coming Wednesday. There were some on the financial stations Friday still questioning whether a hike was coming Wednesday. The Fed funds futures contract has a 100% certainty for a hike, and within two weeks it is as accurate as my mother's knee in predicting a rainstorm.
The real debate is 5.25% in June. The 10 year bond has bounced around like a golf ball the past week, jumping to 5.13%, then down to 5.07%, then back up to 5.15% midweek before another slide on the jobs report. The Futures contract probability has dropped down below 45%, but that is still high and it is still too far off to be accurate.
The strong economic data from Q1 and the start of strong data for April (strong same store sales, ISM reports) yet lower April jobs rekindled talk of a Goldilocks economy, i.e. one where the economy runs stronger but without any inflation. You never like to hear that talk; it tends to come after the run has had its best days.
Housing continues to weaken, but some at the Fed see that as inflationary.
Of course, then there is the other side of the story, the one where you hear the Fed make up inflation indicators just as they did in 2000 to justify hiking rates into a beautiful economy and killing it off. Thursday Fed governor Bies rekindled that old line of BS with her comments on the housing industry.
Friday TOL gave the latest indication the market is slowing when it reported signed contracts down 30% and cancellations up 8.5%. Bernanke has studied what housing slowdowns do to the economy; in most cases economic growth falls in half or worse within six months. Bernanke received his doctorate at the absurd age of 21 or something close to that. His early work is required reading at many economics schools. He is worried about what a housing drop off will do to the economy.
Governor Bies has another take. She reasons a slowing housing market will boost the CPI (consumer price index) because if people are not buying houses they are renting instead. Rents will thus rise, and since they are a big component of the CPI, it will rise and thus inflation. Wow. If the housing market falls off and the economy follows as Bernanke says it typically does, then rents are not going to go up. Everything is going lower unless of course we get into stagflation. That is not likely.
Bies' assertion is simply absurd. You can find inflation in denim prices if you want to. As noted, it is a throwback to 2000 when similar idiotic 'inflation indicators' were trotted out as justification for slowing a healthy economy. With this kind of rhetoric on the Fed, you have to be glad Bernanke is there and has done much of the seminal work on the housing market and its economic effects.
ECRI indicators show inflation has peaked. Likely no June hike.
We have discussed it before, i.e. ECRI's track record at accurately predicting turns in economic cycles. Its weekly indicator continues pointing toward an expansion; slowing but still an expansion.
Hand in hand with that is the future inflation gauge, ECRI's measure of inflation to come. It rose 0.7 in April. That followed two monthly declines in February and March. Annualized the growth rate was 0.6%. That put the April reading at 121.8, well below the 126 level in October that marked the high in the cycle. ECRI interprets the results as a continuing 'easing trend' for inflation pressures despite the tick higher for the month.
While the Fed does not comment whether it watches ECRI or not (it would never admit to it with all of the letters after their names), Bernanke has basically laid out his plan for rate hikes. He is concerned about what the slowing housing market will do to the economy. It is not suffering a rapid slowdown, however, so that is not a front burner issue. With gasoline prices hitting $3/gallon, however, and Bernanke's comments regarding the impact of high prices as being destructive more than inflationary, Bernanke has basically told us he is going to pause during the summer drive months to see if there is a slowdown due to high energy prices. Then he wants to see if things pick back up or remain slow and base Fed actions upon that.
That is a sane manner to approach additional rate hikes. Thus one is attempted to discount it immediately given the Fed's history is not one where sane action dominates. Nonetheless it looks as if it is going to happen as Bernanke tries to keep the expansion ongoing and not at a burnout pace by keeping money supply growing even as rates are raised, energy prices spike, and housing cools as the economy nears its peak. At least he is trying to balance the issues as opposed to an all-out, 2000-like assault on prosperity.
THE MARKET
MARKET SENTIMENT
VIX: 11.62; -0.24
VXN: 14.43; -0.51
VXO: 11.05; -0.14
Put/Call Ratio (CBOE): 0.82; +0.18
Bulls versus Bears:
Bulls: 43.9%. Falling further, down from 45.4%, 48% and 53.2% at the peak in April. Very nice decline continued even as the market trended higher (though NASDAQ did fall). The market chop was taking its toll. After a month climbing from 42.3% back 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.
Bears: 28.6%. The NASDAQ decline and overall market chop and volatility had its effect on bears as well, rising from 25.8%. Not as dramatic a move as the Bulls as they are still well off their high at 33% on the last cycle. Up from 24.5% on the low this time around. The 33% high hit last cycle topped the prior two highs (30% in May 2005, 29.2% in October 2005) that gave way to strong rallies. The 20% level and below is considered bearish. It started this move just above 20%, the threshold level.
NASDAQ
Stats: +18.67 points (+0.8%) to close at 2342.57
Volume: 2.014B (-4.45%). NASDAQ volume continues to disappoint. 6 distribution sessions in April, another last Wednesday as NASDAQ reached below support at 2300 and then managed a rebound. Thus not totally distribution as buyers emerged as NASDAQ undercut support. Though no major distribution, there was no accumulation as NASDAQ rebounded late in the week as volume faded both sessions, falling below average Friday for the first time in two weeks.
Up Volume: 1.367B (-61M)
Down Volume: 597M (-30M)
A/D and Hi/Lo: Advancers led 1.7 to 1. As with Thursday, another decent but hardly blowout showing. NASDAQ was up but this was another indication it is following the other indices higher in general buying and is not in a leadership role.
Previous Session: Advancers led 1.68 to 1
New Highs: 273 (+31)
New Lows: 34 (+4)
The Chart: http://www.investmenthouse.com/cd/^ixic.html
NASDAQ gapped higher on the employment data but as we watched the index all day we saw a lot of tag along buying that lacked the kind of strength that indicates buyers are really committing to the sector. It managed to lead the market Thursday but volume did not rise. It will need more rotation back into technology to continue the move given the low volume rise. As noted above, technology is a classic growth sector; in order to post stock gains investors have to see continued solid economic expansion in the future. Technically it still has plenty of work ahead of it to put together a breakout similar to the other indices. It has twin peaks at 2375 from April and a double bottom at 2300. Buying can always materialize as the massive liquidity looking for a home shifts to tech. It did the same thing with SP500 in mid-April when it looked dead below the 50 day EMA. It will have to show up for NASDAQ soon, but we will likely see NASDAQ take a pause and move laterally as it approaches the old high, setting up a launch point.
SOX (0.40%) lagged the entire market Friday, showing a doji at the April closing high (529.30; closed at 528.94) after two strong sessions off the 50 day EMA (514.81). Given the lack of buying in technology Friday, a pause here is not unusual and a couple of days of lateral movement sets up its continued run higher. SOX has formed up well, stair-stepping its way higher since the mid-March low. The last low held the 50 day EMA and it is ready for a higher high on this move. It continues to look very good.
SP500/NYSE
Stats: +13.51 points (+1.03%) to close at 1325.76
NYSE Volume: 1.687B (-2.84%). Volume faded but remained easily above average. Three weeks of strong trade as SP500 and SP600 tested near support, forming a tight lateral and lower range, then breaking higher. That shows accumulation in a tight range. That led to the impressive Friday breakout.
A/D and Hi/Lo: Advancers led 2.82 to 1. Hit better than 3:1 intraday. Strong session for NYSE stocks across the board, showing internal strength in addition to the volume that was strong for weeks leading into this move.
Previous Session: Advancers led 1.68 to 1
New Highs: 375 (+140). Getting there. Would finally like to see some 500+ sessions as these indices hit new highs.
New Lows: 60 (-38)
The Chart: http://investmenthouse.com/cd/^gspc.html
SP500 blasted out of its three week lateral move along the 18 day EMA (1308), moving yet again to a new post-2002 high. It has stair-stepped up the 50 day EMA (1298) and then made a higher low at the 18 day EMA. About all you can nitpick about is the volume, falling as it made the breakout. Again, with the strong trade for three weeks and the lack of distribution since the recovery from the April lows at 1280, the lack of a volume surge Friday was not the same as on NASDAQ.
SP600 (+1.02%) broke to a new all-time high Friday. It was not the session leader, that went to DJ30 and SP600 had to share second place with SP500. Nonetheless it is one of the triumvirate of NASDAQ, SOX and SP600, and it was good to see this growth-tied index again moving to a new high. That gives NASDAQ and SOX some realistic hope of moving higher in the coming weeks as well.
DJ30
Another leadership session for the blue chips. The index was the first to break to a new post-2002 high in this most recent run, and after a lateral move along the 10 day EMA (11,401) it exploded higher Friday as well. Volume remained above average and crept higher. Impressive in that it had to overcome its laggard technology components, namely MSFT and INTC. Even those helped some Friday, rebounding off of their recent dives. DJ30 is not far from its all-time high of 11,750, and as stated last week, looks destined to test it on this leg.
Stats: +138.88 points (+1.21%) to close at 11577.74
Volume: 338.9M shares Friday versus 334M shares Thursday. Solid trade continued as DJ30 pushes higher. Plenty of buyers of industrials. There is an awful lot of liquidity pushing things higher.
The chart: http://www.investmenthouse.com/cd/^dji.html
MONDAY and the week ahead.
The Fed decision for May is due on Wednesday, and as the Fed Funds futures tell us, the Fed will raise rates to 5.0%. That is baked into the market. The next hike or two is always the key, and the June FOMC meeting is thus the key for the market. Last week it struggled when CNBC belatedly reported Bernanke was having some seller's remorse with the way his statement to Congress was taken by the market (or so he thought). Then it surged with the breakouts Friday when the jobs report indicated strength, but not the 2000 'runaway' or other such nonsense. All of that was not about the May meeting but the June meeting.
Thus this week's FOMC will come down to the statement, but the statement as usual. The last statement changed but not significantly. This one is more of a 'Bernanke statement,' and it will be interesting to see if there is any pause language in it. Given his response to his perception of the market's response to his Congressional speech, however, if he had planned on saying that the Fed could pause if the data suggested that was the right thing to do, he has likely jettisoned that idea. What we are likely to get is a similar statement that raises concerns regarding the housing market and gasoline costs (both from an inflationary aspect and economic destruction aspect) but still says the Fed is data dependent moving forward. When the Fed pauses, we won't know it (at least from the Fed) until it announces it when it decides to skip a hike at a meeting. For now the FFF contract says it is not June, but that is subject to change if gasoline prices hold and housing continues to wane into June.
That leaves the market basically ready for a hike Wednesday and then hoping for a pause in June. In the interim what drives the market is the money. There is a vast pool of money sloshing around the world. A solid 3.5 year world economic recovery will do that. If you throw on top of that surging oil prices with the payment going to countries that already have a lot of infrastructure and wealth, that money has to find somewhere to go. Thus foreign emerging markets have enjoyed a lot of investment the past two years. As always, the US market, bond and equity, is also getting a lot of money in the form of petro-dollars and dollars from US companies and citizens.
Indeed, money supply in the US continues to grow. Last week M2 rose $3.7B to $6.79T. M1 money rose $18.2B to 1.4T. The Fed is not taking money from the system as it did in 2000 as it raised rates; the Fed is raising rates but it is also keeping money supply moving ahead. The hope is that as rates move higher, it will crimp the speculative action often associated with strong economies (e.g. the housing market) and thus avoid a speculative rush that leads to burnout and a run on the bank when the money slows down.
That money supply keeps the wheels of commerce greased, but there are also trillions floating around the world looking for investments as the world economies continue to grow. Even as the US and other central banks raise rates to try and stave off speculation, you can already see it in the commodities markets as metals of all kinds, energy, and related stocks continue to surge higher and higher. Yes it is some payback from decades of languishing and the apathy regarding conservation that low prices bring, but it is also speculation. Energy has a $20 speculative/uncertainty premium built into it right now. The run to $75/bbl has been thrown back twice; if it fails again we could see some of that speculation start to come out of the market. Nothing like a bit of failure to get rid of the easy money.
That will not slow the flow of funds, however. Indeed, lower energy prices would aid in further economic growth and despite what some in Congress seem to think, real economic strength and growth is what makes wealth. High energy prices act as a tax on everyone because you have to pay more for something you don't get anything more out of. In other words, more of your money goes toward gasoline, but that doesn't mean you get more miles per gallon. All it does is take away money from other areas of consumption. That is what a tax does.
The problem with massive liquidity is that everyone loves it and then it disappears all at once. We loved it in the late 1990's and then it was gone. Carnage followed. That is the problem with a lot of liquidity; it can disappear almost overnight once the economic drivers are gone. Right now in the US there is much confusion about inflation even though ECRI shows inflation has peaked. That confusion can lead to mistakes with respect to handling monetary policy. The Fed screwed up big time in 1998 to 2000 with its starve the economy, then flood it with money ahead of Y2K, then yank it all back. Greenspan thought the economy was invincible, but if you treat anything that way, any weaknesses will emerge. They did and the market and then the economy collapsed on lack of investment dollars.
Bernanke appears to be making the right decisions or at least is doing so in theory as he tries to keep the economy moving forward while unwinding some of Greenspan's foibles of the past. For now the market is responding, breaking to new post-crash highs. It will be very important for NASDAQ to join the party and make its own breakout to a post 2002 high in the next couple of weeks. For now the liquidity is pushing world markets higher, but NASDAQ's lag is a genuine concern as this growth index tries to hang on and then catch up. It continues to hold its breakout from its two year accumulation base, however, and that remains a positive for it and the market overall as that base formed during the economic expansion (NASDAQ was the early leader out of the crash) and then broke out. That forecasts continued economic growth of the nature that will continue to provide growth stocks with reason to gain value. Thus while NASDAQ still holds its breakout it will also need to show the next breakout and match the other indices in the weeks ahead.
Support and Resistance
NASDAQ: Closed at 2342.57
Resistance:
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:
The January high at 2333
The 18 day EMA at 2328
2335 is the October/March up trendline.
2328 from the May 2001 peak
The late January highs at 2325
The 50 day EMA at 2315
2300 from the April intraday lows.
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 1325.76
Resistance:
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:
1317, the recent intraday highs from April.
1315 is the May and May 2001 peaks
The October/March up trendline at 1314
1311 is the March intraday resistance on this move.
The January high at 1303
The 18 day EMA at 1306
1297.57 is the recent February high.
The 50 day EMA at 1298
The late January peak at 1285
Dow: Closed at 11,577.74
Resistance:
11,638 from January 2000
11,723 is the January 2000 closing high
11,750 is the January 2000 intraday and all-time high.
Support:
11561 is the DJ30 closing high
11,452 from December 1999 peak
11,425 from April 2000 peak
11,417 from the recent April highs.
11,401 from the September 2000 peak and April 2001 highs
11,350 from the May 2001 peak
The March 2005 highs at 11,329 to 11,335
The 10 day EMA at 11,402
The 18 day EMA at 11,344
The 50 day EMA at 11,212
11,202 is the October/January/February up trendline.
11,159 is the February high.
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
May 9
Wholesale inventories, March (10:00): 0.5% expected, 0.8% prior.
May 10
Crude oil inventories
Treasury budget, April (2:00): $73.5B expected, $57.71 prior
FOMC statement (2:15): Hike to 5% expected. No mention of pause expected.
May 11
Business inventories, March (8:30): 0.4% expected, 0.0% prior.
Initial jobless claims (8:30): 322K prior
Retail sales, April (8:30): 0.6% expected and 0.6% prior
Retail sales ex-autos, April (8:30): 0.8% expected, 0.4% prior
May 12
Export prices, April (8:30): 0.2% prior.
Import prices, April (8:30): -0.3% prior
Trade balance, March (8:30): -$67.5B expected, -$65.71 prior
Michigan sentiment, prelim (9:50): 86.5 expected, 87.4 prior
End part 1 of 3
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world stock market
us stock market
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