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money investment, investment help
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5/30/06 Investment House Daily
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MARKET ALERTS:
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Buy alerts: SWB; AMT; AGIX; BJS
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Stop alerts: DJO; ICU
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SUMMARY:
- Last week's relief bounce slapped back down hard, making a follow through tougher.
- Consumer confidence falls but beats expectations as late April data not included.
- 'Huge' budget deficit same as in 1995 but could be smaller if Republicans acted as they did in 1995.
- Volatility jumping higher again as new rally attempt hangs on by a thread.
Same old fears plus the uncertainty of a new Treasury secretary.
Speculation for months, denials, half-hearted denials, rumors. In short, the usual Washington D.C. two-step was in full swing and a replacement for Snow was expected, at least if Bush could find someone to take the job. Indeed, the story was that all who were approached crossed themselves and pulled out their rosaries before politely saying 'no thanks.' Thus despite the speculation it was something of a surprise when the administration announced Goldman Sachs' Paulson would take the helm.
Paulson is in a long line of GS leaders who have heeded the 'higher' calling and left private practice to serve the country. Ruben under Clinton, Corzine who bought the New Jersey senate seat before running for governor after 1 term in D.C., and now Paulson. Thus there is some pedigree to this choice, one that was obviously made to give the financial markets some support given the prior two Treasury secretaries were old economy stock. They didn't work worth beans so why not go back to the same well Clinton dipped out of?
Be that as it may, the market did not like it. The market hates uncertainty, and it spent at least the morning trying to make certainty out of the replacement. The market also always overreacts in the short term to news, good or bad. If it doesn't know if it is good or bad, it will react anyway, and the way it goes depends upon the current market mood. With Paulson it will most likely end up liking the choice, but with the market in a sell off and questions swirling about the Fed going too far, the Fed not going far enough, housing weakness, inflation gains, etc., the market was ready to treat the news as bad until proven otherwise.
More than just a new cabinet member.
Thus the return from holiday was greeted rudely by investors. It didn't help that WMT chimed in, reporting its monthly sales were tracking at the lower end (2.3%) due to high gasoline prices biting consumers in the high side of the butt, right where the wallet sits. It also didn't help that the FOMC's default junkyard dog Moskow gave an interview to CNBC's 'senior economic correspondent' stating that inflation at the top end of the comfort range was not good enough, that it had to be tamped down to send the message that inflation at the top end was not acceptable.
That statement in itself is rather nonsensical. Why have a range of 'acceptable' inflation growth yet say that growth at the top end of the range is not acceptable? Lets face it, Moskow is a died in the wool, inflation tight-ass who would rather see people lose their jobs than suffer even a hint of inflation. Back in 1999 he said just that as he commented there needed to be higher unemployment to stave off inflation. Of course inflation never showed up even though it is a lagging indicator. Moskow would say the Fed did its job; it put millions out of work and voila, no inflation. Of course, there was no inflation when those millions were gainfully employed. His argument is basically the same as saying you prevented higher property taxes by burning down the house.
While Moskow is a known-inflation hawk and Fed bomb thrower, it did not help the market on Tuesday, already in a foul mood after the Treasury secretary surprise. We won't even go into once again the disturbing trend where Fed officials are starting to give individual reporters 'scoops' that can be released at any time the reporter desires. The issue for the market is the continued fear the Fed will once more go too far in with its rate hikes. Inflation is a lagging indicator but the Fed is embroiled in a public relations debacle because Bernanke miss-stepped when he panicked and retracted his 'pause' language in the other CNBC interview. Now he is perceived as wishy-washy and moved by market perceptions. That is interpreted as having insufficient spine to stand up and try to avoid the mistakes of the past and thus hiking too much yet again.
Market action was technically weak but managed to hang on to a few positives.
The news started stocks weak and they only weakened more as the session progressed, closing at session lows. This was the action seen up through last Tuesday until the relief rally saw stocks rebound and close at session highs. There is not much middle ground in the market right now.
Breadth jumped on the decline, coming in better than -3:1 on both NASDAQ and NYSE. Once more the downside breadth outstrips the upside advances on the up sessions. That is the kind of breadth you want to see on an upside follow through. Given that breadth is so strong downside, it will take a heck of a follow through to be convincing.
Finally, the price losses were substantial with better than a 2% decline on NASDAQ, SOX, and SP600, and 1.6%+ losses on SP500 and DJ30. NASDAQ gave back almost 90% of its gain from the three rally sessions while SP500 virtually gave back its entire upside move. While you can have a test of the rebound attempt, when most of the move is 'tested' in one session of heavy price losses, that is not a sign of orderly testing that is setting up the next spike higher.
A few positives . . .
Though it did not look good for a successful follow through session ahead, the rally technically remains intact. Volume was higher, but it was up against very light pre-holiday trade. Overall the volume was quite light, coming in well below average on both NASDAQ and NYSE. The sellers were definitely in control Tuesday, but they were not even as strong as the buyers from last week.
Second, though the price losses were significant and gave up most of the gains, the indices are still well above the Wednesday intraday lows that mark the bottom of the latest rally attempt. Thus we could see even a further test lower and still have a positive bottom set up if the prior lows are not violated. Indeed, many bottoms are formed like this: sell off, rebound, then sell off to test the prior lows.
Third, and once again, the market always overreacts to news in the short run. The Treasury secretary replacement is big news and the market is mulling it over. In this market environment it prefers to do that from a lower point.
Given the spiking sentiment indicators the past few weeks (they were jumping again Tuesday), the combination is compelling. As we said last week, bottom making is similar to sausage making; it is not pretty and takes a strong stomach to make it through the process. While Tuesday was very disappointing to many, there could very well be a surprise lurking at some point this week as the indices test the recent low. At this juncture the sentiment signals look promising still, but we will have to see that successful test and rebound. We expected a test as noted over the weekend, but this one today was more than we wanted to see on the first day of the pullback.
THE ECONOMY
Consumer confidence falls but less than expected. That likely overstates current feelings.
May sentiment came in at 103.2, up from the 100.0 expected though lower than the four year high hit in April at 109.2. Good news indeed, but the cut off date for the data missed much of the recent market selling, and that will likely push June sentiment lower unless the market bottoms this week and starts a pretty torrid run.
The bottom line, however, is that confidence as measured by the Conference Board is still over 100, and that keeps it way, way above levels where the consumer starts to shut down consumption with respect to discretionary goods. The report showed solid confidence in jobs and wages, and that helped keep confidence levels humming along.
The counter to that, however, is rising gasoline prices. While it takes sentiment readings down in the range of 60 to 50 to really stifle consumption to recessionary precursor levels, gasoline can do the trick at a higher level. We still see no change in demand flattening as gasoline approaches $3/gallon. WMT sees consumers backing off on spending with gasoline prices hovering near $2.90/gallon. Thus while consumers feel pretty good overall, the fact it takes $70 or more to fill up a medium sized vehicle literally takes money away from other purchases.
New Treasury secretary, same old problems.
The hope of the Bush administration is the new secretary can better elucidate the economic success and explain the policies the got us to this point. That means having to answer to the same old tired accusations of budget and trade deficits, tax issues, and how the economy really works.
One that we heard today was one of the usual ones: the 'huge' budget deficit. 'Huge' is often used by critics to denigrate policies they don't like, e.g. the 'huge' tax cut in 2001. That tax cut was on a percentage basis a piker compared to the 1981 tax cuts.
As for the budget deficit, we looked back at some past numbers and saw that in 1995, part of the years democrats like to look back on with warm fuzzies and call the economic golden years, the budget deficit was 2.2% of GDP. We seemed to survive that just fine and move on into the run through 1999. Right now the budget deficit is a gnat's butt from . . . 2.2% of GDP. Moreover, tax receipts continue to increase, and that, in theory, should drive the budget deficit lower.
Moreover, and very importantly, the economy right now is growing much better than it was in 1995, the period that preceded that big boom to end the century. It would be argued to death by detractors who just refuse to accept economic success, but the US is in better position now than it was at that time.
Well, yes and no. Back in the mid-1990's there was a GOP controlled Congress that won because general displeasure with the Clinton administration's moral fiber. Strong economy but the democrats lost control of the Congress. Part of the GOP's victory was a contract with America to reduce spending, etc. They did in fact reduce spending by refusing to spend on new wasteful programs or expand existing wasteful programs. With a strong economy throwing off tax revenues and reduced spending, the budget deficit fell.
So you would think that with a GOP controlled Congress and White House that the deficit would be plummeting. You would be wrong. There are many reasons, one being a lingering war, but the root of the problem is the internal conflict of the GOP. In short, though many Republicans want to cut spending, the White House does not know how to do so. No vetoes in 6 years. Can you imagine the bloated Medicare prescription drug benefit passing under Clinton? The same senators that voted for it to give Bush a 'win' would have voted against it if proposed by a democrat.
A 'compassionate conservatism' President does not go with a Congress of the same party. Profligate spending is not checked in such a situation. That is how we got the Great Society debacle passed in the early 1960's; forty years later it is an obvious failure but the poverty it exacerbated and engrained into society keeps any realistic attempt to rein it in or eliminate it altogether out of the question. Thus we have 'non-discretionary spending' that gets worse and worse and thus our deficit will NEVER be resolved despite the islands of yearly surpluses (the underlying debt still remained) as seen in the Clinton years as a result of the 20 year boom and the end of the Cold War that freed up billions and billions of dollars.
THE MARKET
MARKET SENTIMENT
After a lull, the selling brought out the stronger sentiment readings once more with volatility jumping higher and the put/call ratio doing the same. You often see many such spikes as a bottoming process is attempted.
VIX: 18.66; +4.4. Back up to April 2005 levels and threatening August 2005 levels, both of which sparked upside rebounds.
VXN: 22.1; +3.52
VXO: 17.85; +4.77
Put/Call Ratio (CBOE): 1.2; +0.45. Tenth close above 1.0 in 12 sessions. Definitely piling up like cordwood and suggesting a further bottoming process.
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: -45.63 points (-2.06%) to close at 2164.74
Volume: 1.779B (+12.89%). Volume rose but was still way, way below average on the selling. It was not heavy duty downside dumping as volume came in lower than all of last week's rebound sessions other than Friday which had basically throwaway volume given the pre-holiday session.
Up Volume: 372M (-641M)
Down Volume: 1.39B (+858M)
A/D and Hi/Lo: Decliners led 3.2 to 1. Advancing issues hit 2.8:1 last Thursday, still well off the intensity of the downside breadth seen on the selling. There is a continuing top being put in by the A/D line. It is not a surefire indicator, but we note that the advance to this point was broad, and this is indicating a change trying to take hold. Whether that means large caps are going to take over to the upside or the move is going to fail across the board is a question this indicator does not answer.
Previous Session: Advancers led 1.55 to 1
New Highs: 61 (-25)
New Lows: 76 (+33)
The Chart: http://www.investmenthouse.com/cd/^ixic.html
Gapped lower and sold into the close. In short the ugly got uglier as NASDAQ gave up most of the gains from the Wednesday through Thursday rally. Volume was up but still extremely weak; a thin silver lining given the hard price drop. It is still in the rebound move, however, because the low the rally started from, way down at 2136, is still a long way off from being violated. If it can hold and this selling volume remains overall light, then the sentiment indicators and the light selling may help set a bottom on this pullback.
SOX (-2.16%) tanked as well, falling from an attempted lateral move last week; SOX did not rebound with the rest of the market. It has not violated the Wednesday low (456.32), but it is a hair away from doing so, and SOX has led the market move lower thus far. Weak and getting weaker, and this is NASDAQ's Achilles heel.
SP500/NYSE
Stats: -20.32 points (-1.59%) to close at 1259.84
NYSE Volume: 1.552B (+15.84%). Volume was up on NYSE as well as the NYSE indices tanked, but trade was below average and low compared to all of the trade the past three weeks. Thus we don't see it as runaway selling. It wasn't anything to get all misty over either, however.
A/D and Hi/Lo: Decliners led 3.28 to 1. Decliners hammered advancers, and as with NASDAQ, the upside days cannot compare with the strong downside breadth as the A/D line stumbles. Some are saying this is where the large caps take over. If they do that is not going to be necessarily good for anybody, however.
Previous Session: Advancers led 2.39 to 1
New Highs: 25 (-17)
New Lows: 129 (+46)
The Chart: http://investmenthouse.com/cd/^gspc.html
SP500 turned down from the 18 day EMA (1281), running lower like a stuck pig. Volume was up but still well below average and less than the upside or downside volume over the past three weeks. Thus it was not the complete butt kicking the price loss indicates. On the other hand it was not that nice, easy fade that you typically see in a test. What it looks like is a breakneck plunge to scare out the last sellers. As long as volume remains under control and it can hold above the Wednesday low way down at 1245 (a lot closer after the Tuesday meltdown) it ahs a chance to work the old 'scare them out and then rebound' scenario that the sentiment indicators suggest is building.
SP600 (-2.44%) was crushed, reversing from the 10 day EMA (379) and tanking below the Wednesday close. It too is still above its Wednesday low (364.44; the 200 day SMA is at 364.26). Needs to hold above that level and help lead the rebound. Not looking too pretty here as the small caps are looking for some sector to take some upside leadership position.
DJ30
Similar to SP600, DJ30 gave up its Wednesday close and thus all of the gains from the end of last week. Volume was up but still below average; as with the other indices, no heavy dumping but an ugly price loss. If volume does not ramp up then it too has the same chance of holding above the intraday lows on the selling (11,030) and finishing the bottom. As we said over the weekend, big week for the Dow as well as the other indices.
Stats: -184.18 points (-1.63%) to close at 11094.43
Volume: 261M shares Tuesday versus 240M shares Friday. Volume remained below average, the third such session in a row. Good but could be better as the upside volume was anemic.
The chart: http://www.investmenthouse.com/cd/^dji.html
WEDNESDAY
Pretty important economic session ahead with the Chicago PMI and then the FOMC minutes at 2:00ET. Despite all of the issues confronting investors, the Fed remains the biggest fear. Yes energy prices are important along with the dollar, the new Treasury secretary, housing, etc., but they only underscore even more the necessity that the Fed not screw the pooch yet again.
As discussed above, one of the problems is the Fed is now caught in the public debate about inflation. It is not the aloof, calculating overseer that hands down its decisions with clear and rational logic; it is giving interviews to Bartiromo and Leisman at CNBC to explain its position (positions?) or missteps. That cares the smart money because it knows the Fed tends to get overexcited itself at the end of a cycle of hikes.
It seems simple enough to understand what is occurring and to act with restraint. Inflation is a lagging indicator that shows up as a cycle peaks or even starts to cool. The Fed itself says economic activity will cool as the year progresses. Yet, the Fed often engages the enemy after the war is won, i.e. when it should be pulling back, saving its ammo and letting the natural progression run its course. Bernanke and others on the Fed have raised the issue of going too far and given the new Fed makeup that is seen by some as being weak on inflation. It is being smart on inflation because it recognizes history and economic fact.
It remains to be seen if Bernanke can stick to his guns and do what he knows is correct. Right now the big money is concerned he won't do that and thus the distribution leading into the sell off.
Thus we remain in the yoyo as each significant piece of economic data is released, and that is grinding the market. It is also jacking up the sentiment indicators. Those are not surefire market indicators; they show when the market is getting close to a rally but they are not great at timing, and they can shift in their required intensity levels. Right now they are equal to the prior levels in the overall market advance that sent the indices back up on a new leg. They are working on that now and as noted above, the most recent attempt is still alive, but it got pummeled Tuesday.
The market is trying to put in a bottom, but it will need some leadership when it does. One of the things we don't see a lot of is leadership. As noted over the weekend, there are stocks that are strong and in good shape to advance, but they are scattered across different sectors and appear to be more lone wolves than groups of strength. That is a critical aspect of any rally and it needs to improve with more stocks setting up for moves in any rebound attempt.
That means we are going to continue looking at both sides of the fence. The downside moves, as seen Tuesday, can be quick and abrupt. We took some downside positions Tuesday to take advantage of that abrupt drop. We will look at some more that are in good position to fall further to take advantage of a continued hard drop. At the same time we will also continue to look at stocks holding up in nice patterns; we may not move into them in the next session or two, but if we get a second low here that hold and then delivers a strong rebound, we want to be ready for those stocks to move.
Support and Resistance
NASDAQ: Closed at 2164.74
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
The 18 day EMA at 2232
2240 is closing low in February range.
2273 is December 2005 closing high.
The 50 day EMA at 2274
2278 is December 2005 intraday high.
2288 from December 2000 low.
2300 from the April intraday lows.
Support:
2162 to 2155 from December 2005 and September 2006
2143 is the August 2004/April 2005 up trendline.
2100 from the early and mid-2005 peaks.
S&P 500: Closed at 1259.84
Resistance:
1272 to 1268 is the November and December 2005 closing highs and March 2006 closing low
The 10 day EMA at 1272
1280 from the April lows
The 18 day EMA at 1283
The late January peak at 1285
The 50 day EMA at 1291
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 1314
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 1258.76
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 11,094.43
Resistance:
11,097 to 11,137 is the last peak from the February top.
11,159 is the February high.
The 50 day EMA at 11,245
The 18 day EMA at 11,256
11,320 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:
11,044 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 30
Consumer confidence, May (10:00): 103.2 actual versus 100.0 expected, 109.2 prior
May 31
Chicago PMI, May (10:00): 56.0 expected, 57.2 prior
Crude inventories (10:30)
FOMC minutes, May (2:00)
June 1
Same store sales reports released
Initial jobless claims (8:30): 320K expected, 329K prior
Productivity, Q1 (8:30): 3.9% expected, 3.2% prior
Construction spending, April (10:00): 0.1% expected, 0.9% prior.
ISM Index, May (10:00): 55.7 expected, 57.3 prior
June 2
Non-farm payrolls, May (8:30): 170K expected, 138K prior
Unemployment rate (8:30): 4.7% expected, 4.7% prior
Average workweek (8:30): 33.8 expected, 33.9 prior
Hourly earnings (8:30): 0.3% expected, 0.5% prior
Factory orders, April (10:00): -2.1% expected, 4.2% prior.
End part 1 of 3
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