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world stock market, us stock market
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5/22/06 Investment House Daily
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SUMMARY:
- Friday rebound turns into further selling as foreign markets dive.
- National gasoline prices edge lower as demand flattens at this level.
- Yet another shakeout and rebound as stocks still seek an oversold bounce.
US markets follow foreign stocks lower, manage a rebound off lows.
Friday's expiration bounce was gone on the Monday open as stocks gapped lower, following foreign markets that lost enough in one session to fit most definitions of a correction. India was down 10% and trading was halted. Government agencies were on 'high suicide' watch. Might sound funny but recall back in 1929 when we were a burgeoning industrial nation and the stock market crash deluded some into thinking their lives were worth nothing. Russia was down 11% and trade simply stopped.
Of course this action brought forth comparisons to the 1987 crash when the US market suffered a 23% gutting and foreign markets were slammed as well. That is about as far as the comparison goes in our book; the climate is much different now than in 1987 with respect to the relative health of economies.
If there is any comparison, and this is the real rub, it is the FEAR of a 1987-like problem because we have a new Fed chief (as in 1987) and there is talk of him needing to prove his manhood with respect to inflation (I hope we don't really care about it in other respects) with a 50 BP hike in June. If you pause to assess the impact of spiking gasoline prices, slowing housing, and 16 consecutive rate hikes you are a wimp. If you stubbornly moved forward regardless of the warning signs you are a tough, savvy Fed chairman. We saw what Greenspan's 'damn the torpedoes' attitude in 1987 helped create when he went ahead and socked the market with 50 BP rate hikes to try and bring things under control. That 'tough guy' stance helped foster Black Monday. Thus, in that respect, yes there may be some comparison to 1987.
Stagflation anyone?
The blame was on inflation, but as we pointed out last week, with commodities selling in what looks to be the aftermath of a blow off top, that argument is not a true match. Commodity price increases can be a signal of inflation (they are not inflation as discussed before), but this had all the earmarks of speculation as commodities shot higher as money poured into those markets, jumping prices 50% and more after they had already surged.
With commodities backing off the word of the day Monday was stagflation. World economies may be falling based on commodity prices dropping hard (never mind the absurd ballistic shot higher before this fade), and if inflation pressures continue as economic activity declines, you could get stagflation as in the 1970's.
We talked about stagflation in 2005 a few times when energy prices climbed and held high levels and how the demand-side tax incentives first passed to stimulate the economy had set the foundation for inflation pressures. With all of the ongoing private capital investment right now there is little evidence of stagflation.
That doesn't mean it won't happen; we always seem to find a way to make the wrong policy decisions that set the wheels of exactly what we don't want in motion. Some examples? How about a 27.5% tariff on Chinese goods? Wreck world trade and raise the cost of goods in the US overnight. Or, how about browbeating China into moving its currency higher. That would raise our costs here overnight as well while demand, supply, etc. remained constant. That is inflation (it is a monetary event, after all). Even more, let's pass some policies that keep underwear making jobs here in the US when they want to go overseas on the hope that will keep more people working here. As we said before, those jobs should go overseas and we our policies should be geared toward encouraging development of new industries and technologies here in the US that will create jobs that will raise our standard of living. While almost everyone likes a good pair of underwear, a good pair of BVD's does not signify a high standard of living.
In short, we can always bring about any financial disaster we want, and often we do. A lot of it is caused by our obsessive need to meddle with markets, thinking if we just push it here and nip it there we can guide it down the path we want. Of course the law of unintended consequences always upsets the carefully laid house of sticks. A closer analogy is that the dike built to direct the economic activity always springs leaks, and more often than not a few of those leaks become floods.
US markets at least make a partial recovery.
The US market gapped lower and sold off further, but by the afternoon stocks were rebounding, ironically, as oil and gold rebounded. SP500 and DJ30 actually turned positive heading into the last hour, but a last half hour dip took them out of the green. Even with that it was not a complete washout on the close as the indices did hold a good chunk of their rebound.
NASDAQ and SOX were again the laggards with the semiconductors looking like complete garbage as their indices were unable to rebound similar to the rest of the indices. The chips helped lead the tech slide lower and while the other indices rebounded Monday, they remained in the gutter. Once more you ask whether the chips will lead lower or whether the other indices can at least put together an oversold bounce.
They continue to try and do that with SP500, SP600, DJ30 and even NASDAQ rebounding off their lows following the foreign market beating. For the second session those indices sold lower and rebounded, trying to set up a bottom for an oversold bounce. That didn't keep them from sporting losses yet again, and pretty significant ones on NASDAQ (-0.96%). Those price losses blunted the positive impact of lower volume (but also post-expiration volume). The indices are oversold and they are rebounding off their lows the past two sessions, but thus far other issues have blunted every attempt.
THE ECONOMY
Oil fade, demand push gasoline prices lower.
Gasoline prices fell to $2.93/gallon last week, down 1.5 cents. Oil closed below $68/bbl Friday and was below $68 Monday intraday (rebounded to close at 69.96), contributing to the lower prices. That is down from the last run at $75 where oil again lost its mojo.
Key to the price, however, is the return to more normal refining levels after the switchover to ethanol from MTB, and most importantly, demand has flattened as price bounces to $3/gallon and above.
Fortunately the Lundberg Survey suggests that prices will further soften barring any 'big snafus' in refinery operations or surges in oil prices. Nothing new there regarding refineries or oil interruptions, but that gasoline prices will further fade is a positive for the economy.
Cheapest gas? Wichita, Kansas at $2.59. Most expensive? San Diego at $3.40. Houston, loaded with refineries (you remember them from 'Urban Cowboy, right?), comes in at $2.93, higher than Denver (2.75), Atlanta (2.81), Minneapolis (2.72) and St. Louis (2.71). Proximity to a refinery doesn't do you much good if you have to put all kinds of special blends together to fight ground level ozone.
THE MARKET
MARKET SENTIMENT
VIX: 17.72; +0.54. On the high VIX hit 19.62, now matching the levels from August 2005 when the market bottomed at that juncture. These bottoms are not a one to one correlation. It can take some time for the bounce to ripen even if the sentiment indicators are hitting the right levels. Case in point is in September and October 2002 when the VIX shot higher, the put/call ratio was spiking, etc. but the bottom took several weeks to gel.
VXN: 22.54; +1.59. Still well off the August 2005 low for NASDAQ when it hit 28 on the highs.
VXO: 16.07; +0.49
Put/Call Ratio (CBOE): 1.21; -0.06. Another close above 1.0, making it seven straight. As noted over the weekend the overall put/call ratio (all exchanges) closed three straight times above 1.0, and did so five times in six sessions. That has not occurred since September 17-20, 2002. You know that time; it was during the second leg of the double bottom in 2002 that set the bottom on the bear market. As noted above, the market did not bottom, until mid-October with, about 100 more points to the downside on SP500. This large number of high closes indicates enough anxiety, speculation, or predictions of more downside to show the crowd has bought into the downside. That is usually when the downside is over.
Bulls versus Bears:
Bulls: 46.3%. Bulls rebounded for the second week, rising from 44.3% and 43.9% before that. Bulls had been declining from the April peak at 53.2%. This rebound is surprising given the hard fall to end last week. After a month climbing from 42.3% back close to the 55% level considered bearish, the recent slide was good until this rebound. It rose from 42.3% on the low this cycle, a level below the prior lows in May and October 2005.
Bears: 25.3%. Bears were in sync with bulls, falling even as the market sold off to end last week. A significant drop from the 26.8% last week and the 28.6% the week before. This time around they peaked well below the 33% hit on the high the last time bears started growling. 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: -21.03 points (-0.96%) to close at 2172.86
Volume: 2.322B (-10.23%). Lower after expiration but still easily above average and rivaling levels hit earlier this month. It was no daisy, but we did like, again, how the index rebounded after the selling and on some decent volume.
Up Volume: 555M (-1.016B)
Down Volume: 1.69B (+699M)
A/D and Hi/Lo: Decliners led 2.22 to 1. Still some pretty serious downside breadth as NASDAQ continues to languish, unable to put together a bounce.
Previous Session: Advancers led 1.28 to 1
New Highs: 50 (-5)
New Lows: 170 (+28)
The Chart: http://www.investmenthouse.com/cd/^ixic.html
So much for a bounce after 8 downside sessions. Just make it 9 out of 10. NASDAQ gapped lower once more and though it rebounded, it never came close to recapturing positive ground. Just another day of grind for technology stocks, but there was some grind with a positive tilt. For the second session the NASDAQ reached way down on the low (2156 on Tuesday) and then rebounded. Monday there was no positive close, and that is always a bit better indicator than a reversal that closed 21 points lower. Go figure. In any event, NASDAQ held some support at 2155 and bounced. It is trying to put in an oversold bottom. Trying.
SOX (-4.19%) was not playing along. After the Friday rebound it rolled over and undercut its recent lows. By any reckoning it was a pretty ugly butt kicking. It tapped at some old support on its 463 low, but the rebound that followed hardly blunted the selling. The rest of the market is trying to set up an oversold bounce, but the chips look to be setting up to head the other way. Again.
SP500/NYSE
Stats: -4.96 points (-0.39%) to close at 1262.07
NYSE Volume: 2.047B (-1.56%). Volume was lower, but by a nano. Expiration volume was strong and Monday volume was strong. Liked how it undercut the 200 day SMA and rebounded, however, even turning positive late in the session before a late fade brought it back down. Good volume rebound for second straight session.
A/D and Hi/Lo: Decliners led 1.96 to 1. Getting a bit better but not really that great when juxtaposed to the point loss (seems heavy for the points). The A/D line has flattened out and of course in this selling is heading lower.
Previous Session: Advancers led 1.42 to 1
New Highs: 27 (+4)
New Lows: 176 (+15)
The Chart: http://investmenthouse.com/cd/^gspc.html
SP500 sold through the 200 day SMA (1257.85) again on the low, and once again rebounded from that move, rallying back on strong, above average volume. The index did not close positive, but it was a second good rebound from this key support level. SP500 is showing some good action at the 200 day, indicating a rebound bounce, but as of yet that has not gelled.
SP600 (-0.73%) showed the same action as SP500, just higher. Two tests lower to support at 370 and then a rebound the past two sessions. This action suggests an ongoing shakeout that typically leads to a relief bounce toward the next major resistance, in this case the 50 day EMA (388.16).
DJ30
DJ30 is showing the same tests lower followed by a rebound to close as SP500, SP600. It also held some support on the tests, here at 11,040. Turned positive in the last hour, but just missed a second positive close after this drop. Nicely set up for a bounce to test the 50 day EMA (11,264) or the trendline (11,285).
Stats: -18.73 points (-0.17%) to close at 11125.33
Volume: 340M shares Monday versus 485M shares Friday. Continued above average volume as it tests this support and then rebounds. Good action.
The chart: http://www.investmenthouse.com/cd/^dji.html
TUESDAY
The action on the big indices along with the sentiment indicators continue to suggest a relief bounce is forming. As noted above, it sometimes takes time to gel even when the sentiment indicators 'get right.'
Many stocks are still struggling but we also continue to see some good moves and some stocks set up to move. That suggests two things. One, the action on the indices does suggest a rebound bounce is setting up. Two, and this is not as clear, that there is leadership that can lead the market to a resumption of the uptrend. Good breaks higher from stocks that have laughed at the selling, using it a as rest stop often show a rally has continued backbone.
That is getting a bit ahead of the current action. There are indications of a bounce, but no bounce at this point and certainly no concrete suggestion the uptrend will resume if the rally comes about. As noted over the weekend, any rebound (and given Friday's move was not continued Monday) has to be viewed as a relief move. If it does not recover back into the uptrends showing volume, breadth, and leadership, it is likely going to roll back over and then make a deeper test that takes the market into the summer where it then has to set up for a more traditional move higher in the fall.
That latter sounds pretty grim, but given the distribution to this point and the inability to put together any quick bounce indicates there was dumping with no rush to buy back in. We cannot get too carried away with any one emotional view of the market, however. The sentiment indicators suggest a meaningful bottom is trying to form. There is still some leadership out there as well. Thus we will continue to look to play a bounce with plays that can make us some money on a bounce, and if it goes further, really do well. If it is a resumption of the trend there will be plenty of opportunity as it continues. A bounce that is narrow and lacks volume, on the other hand, will likely fail, and we will use that set up to get ready for more downside and play the summer doldrums lower, taking, as always, what the market gives.
Support and Resistance
NASDAQ: Closed at 2172.86
Resistance:
2185 to 2182 is the September 2005 peak and interim high from November 2005.
2205 is the December 2005 closing low.
2218 is the August 2005 peak before the sell off through October 2005.
The 200 day SMA at 2229
2240 is closing low in February range.
The 18 day EMA at 2258
2273 is December 2005 closing high.
2278 is December 2005 intraday high.
2288 from December 2000 low.
The 50 day EMA at 2289
2300 from the April intraday lows.
Support:
2162 to 2155 from December 2005 and September 2006
2100 from the early and mid-2005 peaks.
S&P 500: Closed at 1262.07
Resistance:
1272 to 1268 is the November and December 2005 closing highs and March 2006 closing low
1280 from the April lows
The 10 day EMA at 1283
The late January peak at 1285
The 50 day EMA at 1295
1297.57 is the recent February high.
The January high at 1303
The October/April trendline at 1309
1311 is the March intraday resistance on this move.
1315 is the May and May 2001 peaks
1317, the recent intraday highs from April.
1324 to 1329 from the October 2000 lows.
Support:
The 200 day EMA at 1258
1250 to 1248 from the November and December 2005 lows.
1245 from the August 2005 high and 1241 from the September 2005 high
1225 from the March 2005 high
Dow: Closed at 11,125.33
Resistance:
11,159 is the February high.
The 50 day EMA at 11,264
11,285 is the October/January/February up trendline.
The 10 day EMA at 11,287
The 18 day EMA at 11,326
The March 2005 highs at 11,329 to 11,335
11,350 from the May 2001 peak
11,401 from the September 2000 peak and April 2001 highs
11,417 from the recent April highs.
11,425 from April 2000 peak
11,452 from December 1999 peak
11561 is the DJ30 closing high
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:
11,097 to 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 24
Durable goods orders, April (8:30): -0.5% expected, 6.4% prior
New home sales, April, (10:00): 1.150M expected, 1.213M prior
Crude oil inventories (10:30)
May 25
GDP, Q1 (8:30): Next iteration. 5.8% expected versus 4.8% prior reading
Deflator, Q1 (8:30): 3.3% expected, 3.3% prior
Initial jobless claims (8:30): 315K expected, 367K prior
Existing home sales, April (10:00): 6.79M expected, 6.92M prior
May 26
Personal Income, April (8:30): 0.7% expected, 0.5% prior
Personal spending, April (8:30): 0.6% expected, 0.6% prior
Michigan Sentiment, final, May (9:45): 79.5 expected, 79.0 prior
End part 1 of 3
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world stock market
us stock market
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