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us stock market, trade stock
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5/25/06 Investment House Daily
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Buy alerts: None issued
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Stop alerts: None issued
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SUMMARY:
- Most stocks continue the rebound as volume, SOX lag.
- Q1 revision GDP apparently 'just right' for market.
- Existing April home sales fall 2%, in line with expectations and general softening.
- Technology PE creeping lower as the sector is overlooked this year.
- Friday likely to see some backing and filling ahead of Memorial Day and potential follow through next week.
Stocks bounce off of Thursday reversal.
Stocks closed at session highs Wednesday and continued the move Thursday, posting solid price gains. Solid in the sense that the gains were the best in three weeks and most stocks participated. Outside of that, the move was not huge. Of course, after the drubbing delivered this month on a daily basis, putting together back to back gains was in itself was a victory.
It is still just part of the bottoming process, however. Volume was lighter on NYSE and NASDAQ, so there is an issue about participation. With the strong reversal volume Wednesday, however, that is not as big a deal. Further, this is all part of putting in a bottom after this sharp blow down. Wednesday was the reversal session and Thursday was just biding time ahead of next week to see if the longer term buyers step up to drive stocks higher. Until then, while we have a good idea Wednesday marked the bottom on this downturn, it is still just a relief bounce.
Indeed, many stocks have to rebuild their patterns to set up a sustained move higher. The strong breadth shows most stocks bounced Thursday, but not a lot of stocks were making strong moves off of a test or new breakouts. It was a rebound move from the selling, and thus not many stocks showed decent buy signals whether they are in good patterns ready to break higher or are still in the depths of a sharp sell off. Indeed, those that have been roughed up hard will likely need to come back again to complete the bottom process.
Thus most stocks, strong or hammered, are still setting up for a move when the overall market is closer to delivering a follow through to the Wednesday reversal session. We will see leaders edging higher ahead of that move, but most of the breakouts will come with the rest of the market next week if it can muster a follow through. Thus we exercise patience here, ready to move into stocks in good position that show strong moves, but not rushing in on any stock that shows a pulse after two weeks of hemorrhaging.
Given that Friday precedes the 3-day Memorial Day weekend, that is just as well. If the April PCE is tame the market will breathe another sigh of relief as it did after the GDP revision on Thursday and put some more upside on this rebound. Before the weekend, however, it is likely to suffer a bit of giveback after the reversal and a couple of sessions of gain (that, of course, includes Friday). That sets up a follow through attempt for next week. Used to be the return from holidays were feared during the long downtrend that started in 2000. This coming week will give us a good look at the market's health by how it responds after the selling , the attempted rebound, and the weekend.
THE ECONOMY
Second Q1 GDP revision is strong but not too strong with inflation not too hot.
The market exhaled a bit Thursday morning when the GDP revision was strong at 5.3%, well above the 4.8% originally reported and also well below the 5.8% expected (and 6% to 6.2% whisper). That was plenty for the market, indeed the best since the blowout Q3 in 2003 (7.2%). No slouch at all, and it just goes to show what a strong economy will do when confronted with events such as the 2005 Gulf storms that almost shut things down in Q4.
Signs of a slowdown hidden in a strong report?
Consumer spending was written down to 5.2% from 5.5%, and that accounted for much of the 'miss' with respect to forecasts. On the other hand, inventories were revised up to -0.1% from -0.5%. Inventories are added to GDP and thus rising inventories pushed GDP higher. With consumer spending lower, the gains could thus be somewhat illusory. In other words, as consumers spent less inventories rose, and that can be an indication, despite the strong GDP number, of a pending slowdown.
That should come as no surprise, however. Even the Fed is predicting a slowdown ahead, one of the reasons it wants to pause over the summer to assess the impact of the prior rate hikes, a slowing housing market, and sharply higher gasoline prices. Indeed, many economists start every interview with their view the economy is going to slow down yet many still say rates have to be raised in order to fend off inflation. Sure there can be inflation in a slow economy; that was the story of the 1970's and its stagflation.
Let's talk about that some. That was one of our fears back in 2004 when we were concerned about the continued economic expansion in 2005 what with the tax incentives expiring and oil on a steady climb. Well, the economy easily handled that easily and has expanded with earnings moving solidly higher. Indeed, one of the keys we worried about, business capital spending, has done just what we said it had to do: businesses continued to invest even as the tax incentives ran out. With corporations loaded with money still, we anticipate more capital spending ahead.
With that spending we doubt that even the consumer pullback would really sink the economy. The combination of gasoline prices and declining housing will be a drag, but business investment is a great offset as businesses are just about ready for the next technology upgrade cycle in late 2006, early 2007. As seen in the last recession, the business side of the economy is as much part of an expansion as the consumer.
Business investment fends off stagflation.
A big, big side benefit of that corporate investment with respect to inflation is the acquisition of the latest and greatest technology. That allows businesses to operate more efficiently and most importantly, business is able to keep supply rising to meet demand. If demand backs off a bit as businesses continue to invest in systems to provide supply, inflation pressures ease. Even if there is excess liquidity, if supply is sufficient to meet demand, prices tend not to rise.
This recovery has been tinged with inflation because the initial recovery stimulus was demand based even though demand held remarkably steady through the recession. It was supply, i.e. business investment in the equipment and systems to meet demand, that went into recession. Thus the recovery goosed demand even more while not impacting supply. Not until the real supply side stimulus was passed did businesses start to invest to meet the demand. They did a good job, but the ingredients for inflation where already baked in to a certain extent, and that is what we are seeing right now.
Thus the key ahead is to keep businesses investing in the supply system to meet demand even as demand pulls back some. That will help balance the scales between supply and demand, and in doing so it will alleviate the inflationary pressures now in place and also avoid the 'S' word, stagflation.
Existing home sales really do fall.
Sales fell 2.0% in April, basically in line with expectations. As with new home sales, March sales were revised lower, but even that was not enough to push the April sales to a gain as with new home sales. The year over year decline was much more significant at 5.7%. Inventory rose to a record 3.38M, a 6 month supply (new homes have a 5.8 month supply). That is the highest since a 6.4 month supply in January 1998. It was also a jump from the 5.6 month supply reported in March.
These are declining numbers, but they are not tanking numbers. It is the same as we have reported for the past 12 months: a nice, orderly decline as interest rates move higher.
THE MARKET
MARKET SENTIMENT
Sentiment indicators backing off some after spiking higher the past two weeks as the market sold, hitting levels that in past sell offs during this uptrend that spurred further advances. The sentiment indicators have done their job and now we see if the market rebound in response can gel and continue higher with new long term buying.
VIX: 15.5; -1.86
VXN: 19.69; -2.22
VXO: 14.15; -2.41
Put/Call Ratio (CBOE): 0.91; -0.51. Closed below the 1.0 level for the first time in 10 sessions. Definitely high levels on this run that suggest too much belief in the downside move.
Bulls versus Bears:
Bulls: 43.8%. Bulls dove back to levels hit three weeks back, dropping sharply from the 46.3% last week. That is a solid drop from the April peak at 53.2% and closer to the 42.3% hit on the last low. It is also just above the levels hit in May and October 2005 that saw new upside runs.
Bears: 27.6%. Solid jump from 25.3% the week before. That is still below the 28.6% hit three weeks back. Bears 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: +29.07 points (+1.34%) to close at 2198.24
Volume: 2.039B (-24.39%). Volume fell below average after the huge reversal trade Wednesday. That means not a lot of buyers on this continued move higher, making it more of a momentum move after the shorts covered Wednesday. As noted above, however, the real issue with volume comes next week as we see if NASDAQ can post a strong price gain on strong volume, showing us that the longer term upside buyers are back in the market after pausing some after the initial reversal to start the rebound attempt.
Up Volume: 1.657B (+100M)
Down Volume: 352M (-767M)
A/D and Hi/Lo: Advancers led 2.79 to 1. Solid breadth for the first time in quite a while on NASDAQ.
Previous Session: Decliners led 1.13 to 1
New Highs: 58 (+11)
New Lows: 69 (-93)
The Chart: http://www.investmenthouse.com/cd/^ixic.html
Another gap higher that held the early morning test, filling some of the gap and then rallying well into the close. The bullish intraday action the past two sessions is of course the opposite from what the market showed in the selling and indeed on the gaps higher last week as the market struggled to try and start the bottoming process. NASDAQ is still well below the 200 day SMA (2228), and we feel it is going to have to make some form of a test before it can make a serious run at moving back through that level. We expect a bit more upside Friday early and then some waffling ahead of the three day weekend. The recovery attempt is still quite youthful and thus investors still nervous. A bit of a stall before a follow through is normal. Indeed, after a follow through we can still see a test that firms up the bottom.
SOX (-0.44%) was the laggard in the market yet again, unable to post a gain with the rest of the indices. It is trying to hold support at 460 to make the bounce, but it failed to do so even as the red carpet was rolled out for it on Thursday. An interesting feature of this lag is that technology P/E's overall are down to 18, historically a very low number. The semiconductor book to bill ratio moved back over 1.0 last month for the first time in over six months. DRAM prices are finally starting to rise once more; slowly, but they are rising. This is a stealth recovery in semiconductors.
SP500/NYSE
Stats: +14.31 points (+1.14%) to close at 1272.88
NYSE Volume: 1.736B (-14.49%). Volume was the lowest in over a week but still above average as the NYSE indices continued their moves higher off of what looks to be the bottom and the reversal to set the bottom Wednesday. That session was on very strong volume; good sign.
A/D and Hi/Lo: Advancers led 3.37 to 1. Very positive as the commodity and energy stocks recovered along with the rest of the market.
Previous Session: Decliners led 1.41 to 1
New Highs: 35 (+16)
New Lows: 83 (-134)
The Chart: http://investmenthouse.com/cd/^gspc.html
SP500 moved back above the 200 day SMA (1258) with a strong run to next resistance near 1275 (the 10 day EMA at 1274 is there also). Good reversal, solid continuation. As with NASDAQ we expect some more upside and then a pause ahead of the weekend. Good to put some distance on the 200 day, and after this initial surge is over we look for some testing and a follow through next week, not necessarily in that order.
SP600 (+1.68%) helped lead the Thursday rebound, moving up to next resistance at 380 to 382. This continues the move from Wednesday after an intraday move all the way down to the 200 day SMA (364) and then a furious rebound, a 15 point swing and 4% move. Key level here at 382 to top the January through March peaks that suggest potential left shoulders to a head and shoulders peak.
DJ30
DJ30 almost hit a triple digit gain, rallying near the 10 day EMA (11,225) as it continues the move off of the test at the potential neckline (11,040 to 11,075) of a head and shoulders pattern. It is approaching significant resistance at the 50 day EMA (11,250) and then the March highs (the potential left shoulder) at 11,335. Good reversal volume Wednesday and then light, below average trade Thursday. Important move coming ahead, and knowing the market, DJ30 will try and throw a curve, stalling some at that level and looking as if the pattern is ready to consummate. It likes to jack up the fear again after the 'glad that is over' response to the first leg lower.
Stats: +93.73 points (+0.84%) to close at 11211.05
Volume: 295M shares Thursday versus 403M shares Wednesday. Volume dropped sharply on the second day of the rebound move. As noted above, this is typically not good to see, but after the reversal on volume, we can let it run higher on low trade for now as we look for a strong break higher next week on a resumption of volume.
The chart: http://www.investmenthouse.com/cd/^dji.html
FRIDAY
Another day the market will be waiting to exhale ahead of the April PCE (personal consumption expenditure) index. Thursday Q1 came in at a tolerable level (2.0%), and the market wants some confirmation the tolerable level continues into Q2. If it does, then there is some more ammunition for the Fed to justify a pause during a hot summer with high gasoline and falling home sales and interest rate hikes still yet to fall from the sky. For some reason that course of action is being hounded by those wanting a tough Fed. Indeed, many who denigrated the Fed's actions in the late 1990's through 2001 as going too far (the hikes, the draining of money supply after boosting it ahead of Y2K, and failure to lower rates and lending restrictions quickly enough) are now lamenting Bernanke is not doing the same thing. Go figure. Many of them lost grasp of reason when commodities spiked and they viewed that as inflation versus a market phenomena that occurs when too much money chases a sector.
If the market gets what it wants with the PCE then we can see more upside early on. With a three day weekend ahead, a pretty intense rebound under the belt, and investors still skittish as a June bug in a henhouse, the afternoon will likely bring light volume and some giveback of the move. That is not a bad thing. You can pace the floor over the lower volume move Thursday and likely the same on Friday, but this is a time that requires some patience.
Most stocks sold hard during the past three weeks, but many also held their ground, still working on bases or using the selling to make a rather orderly test of support. Those show some underlying strength and they will likely continue their work during any fade late Friday and into next week. Then we look for the market to resume the upside on strong volume, showing us the longer term buyers are moving back into the game just as they did on the prior sell offs in this rally. There will also likely still be a test of the recent low and this rebound before a sustained move sets in.
Thus we exercise patience, still looking for those stocks ready to move higher making such moves. The leaders will start out in front of market, and we will accumulate some of those shares as they start their moves. We won't move in and load the boat, but will start positions on a rebound and then look for more positions on the next test that holds and the stock starts back up. Patience and key buys. We are moving in a bit early as there is no follow through yet, but the move has the attributes of staying power: some leadership, solid reversal, extreme sentiment indications.
Support and Resistance
NASDAQ: Closed at 2198.24
Resistance:
2205 is the December 2005 closing low and the 10 day EMA
2218 is the August 2005 peak before the sell off through October 2005.
The 200 day SMA at 2229
The 18 day EMA at 2235
2240 is closing low in February range.
2273 is December 2005 closing high.
The 50 day EMA at 2276
2278 is December 2005 intraday high.
2288 from December 2000 low.
2300 from the April intraday lows.
Support:
2185 to 2182 is the September 2005 peak and interim high from November 2005.
2162 to 2155 from December 2005 and September 2006
2140 is the August 2004/April 2005 up trendline.
2100 from the early and mid-2005 peaks.
S&P 500: Closed at 1272.88
Resistance:
1272 to 1268 is the November and December 2005 closing highs and March 2006 closing low
The 10 day EMA at 1274
1280 from the April lows
The late January peak at 1285 and the 18 day EMA at 1284
The 50 day EMA at 1292
1297.57 is the recent February high.
The January high at 1303
1311 is the March intraday resistance on this move.
The October/April trendline at 1313
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 11,211.05
Resistance:
The 10 day EMA at 11,225
The 50 day EMA at 11,251
The 18 day EMA at 11,275
11,300 is the October/January/February up trendline.
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:
11,159 is the February high.
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): -4.8% actual versus -0.5% expected, 6.6% prior (revised from 6.4%).
New home sales, April, (10:00): 1.198M actual versus 1.135M expected, 1.142M prior (revised from 1.213M)
Crude oil inventories (10:30): -3M versus -1.4M expected. Gasoline +2.1M versus +1.6M expected
May 25
GDP, Q1 (8:30): Next iteration. 5.3% actual versus 5.8% expected versus 4.8% prior reading
Deflator, Q1 (8:30): 3.3% actual versus 3.3% expected, 3.3% prior
Initial jobless claims (8:30): 329K actual versus 318K expected, 369K prior
Existing home sales, April (10:00): 6.76M actual versus 6.75M 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): 79.0 expected, 79.0 prior
End part 1 of 3
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