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5/31/06 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Target hit alerts: None issued
Buy alerts: FSL
Trailing stops: None issued
Stop alerts: SHOO; WEBX; BJS
SUMMARY:
- Stocks show some fortitude, rally back after FOMC disappointment.
- Fed all over the map in its May minutes, remains more opaque than transparent.
- Still in search of a follow through as market tries to make good on the bottoming attempt.
Tuesday's uncertainty is Wednesday's rebound.
We said the market tends to overreact in the short run, and with a new Treasury secretary announced to start the week the market had plenty to mull and ample opportunity to overreact. It sold off hard price-wise, taking back most of the three sessions of gains to end last week.
Tuesday investors had some time to mull the change, and stocks started stronger out of the gates, apparently finding Bush's choice to indeed be a good one. Futures were up and so where stocks early on ahead of the May FOMC minutes release. The Chicago PMI was out stronger, but that did not hamper the upside move. Oil tensions even eased somewhat with the State Department saying Iran could have civil nuclear energy just as any other nation and that the US would discuss it with them . . . if Iran gave up terrorism, agreed to all of the usual inspections, etc. Basically it was an offer Iran could not accept, but it did show some flexibility moving ahead, and that helped calm the energy market. Indeed oil fell modestly to 71.29, -0.74.
At 2ET the FOMC minutes were released and the comments covered the waterfront and gave very little insight as to where the Fed was going next. Basically the market got nothing with the release, leaving it where it was last month, i.e. still looking at data and wondering what faction will win out on the Fed or if there will be a Solomon-like splitting of the baby. The latter is not likely, though dropping back and punting seems to definitely be in the Fed's arsenal of 'weapons' for obstructing the economy.
The market fell on the news, threatening to give back all of the early gains. Volume was solid moving into the report, and it held up afterwards. Fortunately, so did stocks. They foundered after the FOMC but hung on, scratched up off the afternoon lows, then sprinted higher in the last half hour. That put SP500 at its session high and NASDAQ easily in the top half of its range for the session.
The internals were solid. Volume was up sharply, shooting back above average and rivaling the strongest volume of the month on NYSE while NASDAQ turned in an above average, though still ho-hum volume day. Breadth was strong on NYSE (2.9:1) but so-so on NASDAQ (1.9:1). Unlike last week's gains, the Wednesday action had some real backing, particularly on NYSE.
Technically you have to like the gains matched with the stronger volume as well as the ability to come back from the upset after the FOMC minutes and close at or near session highs. SP500 did what you would expect it to do if it was going to recover, i.e. bounced off the 200 day SMA on some volume. NASDAQ, SP500, SP600 and DJ30 all have the makings of a short double bottom, having come back Tuesday on low volume to test the prior low, holding above that low, and then rebounding the next session on strong volume. Not bad.
Good but no follow through yet.
Combine it with the spike in sentiment indicators over the past couple of weeks and you have a pretty interesting picture developing. It was not, however, a follow through session as the price gains simply were not enough to really show the buyers were back in the game and buying hard. Another strong move and then some groups of leadership emerging would provide the building blocks of a good rebound to resume the overall rally.
THE ECONOMY
May FOMC minutes show a Fed divided.
If you looked hard you could see mention of a pause by some of the FOMC members, but it was not called a pause. On the other end of the spectrum the Moskows were calling for the 50 BP hike. In the end the Fed voted for a 25BP hike, saying that level was "appropriate today." Well, one would hope so.
The widely varying opinions on the Fed even after 16 rate hikes and a mature economic expansion shows the Fed has the same old demons haunting the Federal Reserve as always. Bernanke did not exorcise them when he showed up. The difference right now, however, is that no one knows just how much of a force Bernanke is. Of course he is the chairman and that carries its weight, but no one knows how much the lone rangers on the Fed defer to him. With Greenspan you knew it was Greenspan; we just don't know right now how much of the Bernanke Fed decisions is Bernanke.
Thus the market was left a bit unsettled after the minutes were released and it was clear the members were about as unified as North and South in the Civil War. With Bernanke now afraid to lean either way in any written or spoken statement since the pause speech to Congress followed by the weekend confessions to CNBC's Bartiromo, the 'transparent' Bernanke Fed has become opaque at best. At some point it will clarify when we get to know Bernanke's style better, but for now the market is guessing, and lately with the sour investor mood that has meant guessing the worst case, namely the Fed once more overdoing it. How does the song go? 'That's just the way it is. Some things will never change.'
The minutes discussed inflation almost exclusively. Other meetings talked of housing or going too far with rate hikes, but this one was all about inflation. The FOMC seemed surprised that inflation was persistently in the top of the range as measured by the PCE. They expected it to stabilize and decline. It had not done that so they delved into many areas. A new one was the weakening dollar adding to inflationary pressures (you can buy less so imports become more expensive; that is the China problem we have discussed if suddenly China starts to float its currency). That joined energy and the potential for more pass through of costs. Indeed, the Fed looked at all commodities and the run up in prices as a problem. Of course since then commodities have blown off the top and are much lower.
The Fed, apparently in order to be as confusing to the markets as possible, even threw in the kitchen sink, alluding to the trade imbalance as potentially eroding support for the dollar and thus proving inflationary. Hadn't heard that once since Greenspan, so you get an idea how the Fed was scrounging around for ideas to populate the minutes and keep everyone off balance.
In the end, however, there was no change in the outlook. The Fed still sees inflation and growth both moderating ahead, and thus even with the wide ranging discussion, the overriding theme is inflation will remain in control and indeed improve. That more than anything keeps the pause idea alive. Of course the Fed Funds futures rose to a 68% chance of a June 25BP hike on the news; so much for guessing.
THE MARKET
MARKET SENTIMENT
Sentiment indicators backed off after another spike higher on the Tuesday selling. That told us that there is still a lot of fear or belief more downside is to come even after the rebound last week. That continued anxiety about the downside helps set the bottom.
VIX: 16.44; -2.22
VXN: 21.46; -0.64
VXO: 15.59; -2.26
Put/Call Ratio (CBOE): 0.95; -0.25
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: +14.14 points (+0.65%) to close at 2178.88
Volume: 2.297B (+29.12%). Nice pick up in volume as NASDAQ rebounded off the Tuesday selling and well above the prior lows.
Up Volume: 1.604B (+1.232B)
Down Volume: 668M (-722M)
A/D and Hi/Lo: Advancers led 1.86 to 1. Kind of decent but not follow through caliber.
Previous Session: Decliners led 3.2 to 1
New Highs: 71 (+10)
New Lows: 85 (+9)
The Chart: http://www.investmenthouse.com/cd/^ixic.html
Decent recovery, gapping higher, testing after the FOMC, then coming back to close near the session high on rising, above average volume. The 0.65% gain is not enough to be considered a meaningful follow through; there just was not that much power on NASDAQ. It was a good start, however, showing good price/volume action (upside day on rising volume) after an attempt to sell off the market Tuesday. Has the makings of a short double bottom in place, and a strong follow through would be great. Some leadership would help as well. Despite being in the toilet overall, some chips are trying to point the way higher.
SOX (+1.77%) led the market in the percentage gain, but when you have not bounced at all there is some pent up spring in the step when a bounce does show up. SOX is still way down at the bottom of its range, but ready to make a rebound move here.
SP500/NYSE
Stats: +10.25 points (+0.81%) to close at 1270.09
NYSE Volume: 1.988B (+28.06%). Excellent surge in volume, definitely enough for a follow through if only the price gains had been equivalent. The trade was in line with the highest volume sessions of the month, showing excellent interest.
A/D and Hi/Lo: Advancers led 2.89 to 1. Good enough for a follow through.
Previous Session: Decliners led 3.28 to 1
New Highs: 44 (+19)
New Lows: 114 (-15)
The Chart: http://investmenthouse.com/cd/^gspc.html
SP500 held the 200 day SMA (1259) again, using that support to bounce again, this time on some impressive trade. It has the makings of a double bottom here at this key support, and looks ready to try out a run up toward the 50 day EMA (1289). Want to see a strong price and volume session on the way this week. A 'just right' employment number Friday could be the final catalyst.
SP600 (1.34%) came close to delivering a follow through with its percentage gain coupled with the strong NYSE volume. It can be classified as a modest follow through, but we will need some confirmation from the other indices as well Thursday or Friday. Nice reach down to the 200 day SMA (364.41) last week on an intraday test and now a test again on Tuesday and a bounce on volume Wednesday. Has the look and action to show it is ready for a bounce form this more bullish pattern.
DJ30
Similar action on DJ30 as the blue chips shook off the low volume selling Tuesday and bounced Wednesday on stronger, above average volume. Held above the April lows and the February highs (11,030) and looks ready to try and challenge the 50 day SMA (11,275), the 'hump' in the attempted double bottom that has formed the past three weeks. It is set up to make that move.
Stats: +73.88 points (+0.67%) to close at 11168.31
Volume: 353M shares Wednesday on the rebound versus 261M shares Tuesday. Good return of above average volume in a timely fashion.
The chart: http://www.investmenthouse.com/cd/^dji.html
THURSDAY
Another big economic session ahead with same store sales, construction, ISM, crude inventories (delayed due to holiday). That is all a set up for the Friday jobs report which, finally, we think is not going to be that important in the continuing Fed watch. It will be important, but just not the edge of chair, make or break prominence it has had the past six months.
The problem for the market is the Fed is still very divergent in its views on how to proceed. You have to think Greenspan would love this scenario, keeping the markets on edge. Despite all of the intrigue with respect to Iran, energy prices, inflation pressures, housing, etc., they are all subsets of what the Fed will do with rates and the money supply. Energy is more of an independent element, but how the Fed reacts to it will tell the story. The hawks believe rising energy costs mean inflation as prices are passed on. Problem is, in the real world if energy prices continue rising the result is a slowing economy. In short, energy acts as its own economic regulator.
The market is digesting all of this and is trying to come to a conclusion: will the Fed do its usual job and kill off the economic expansion or will its impact be limited enough to let the economy continue higher? The only real factor going the market's direction is a new and apparently very clear-headed chairman (at least with respect to what really does and doesn't work in the economy). It remains to be seen if he can keep from going that one (or two, three or four) rate hike too many.
Based on the sentiment and the action of the past couple of weeks it looks as if it is coming to a near term conclusion the Fed might not overdo it. The indices are showing a short double bottom attempt, and we will be looking for some upside leaders to move into if the indices can continue and show us a follow through session. After the move runs higher we will assess its strength and see if it is going to fade and open up more downside.
Support and Resistance
NASDAQ: Closed at 2178.88
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 18 day EMA at 2220
The 200 day SMA at 2229
2240 is closing low in February range.
The 50 day EMA at 2265
2273 is December 2005 closing high.
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 1270.09
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 1280
The late January peak at 1285
The 50 day EMA at 1289
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 1315
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 1259
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 11,168.31
Resistance:
The 50 day EMA at 11,242
The 50 day SMA at 11,276
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:
11,159 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 30
Consumer confidence, May (10:00): 103.2 actual versus 100.0 expected, 109.2 prior
May 31
Chicago PMI, May (10:00): 61.5 actual, 56.0 expected, 57.2 prior
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
Crude inventories (10:30)
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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