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money investment, investment help
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6/01/06 Investment House Daily
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SUMMARY:
- Rally continues as indices post strong gains, but early strong trade fizzles in afternoon.
- FOMC minutes used as spin to help bail Bernanke out of his missteps.
- Rebound continues into jobs report as stocks still look for definitive follow through.
Good rally just cannot quite give a clear follow through.
Wednesday the market came up short for a real follow through as volume was strong but the price moves were marginal. SP600 managed a moderate follow through but we wanted to see the other indices kicking into the kitty as well. Thursday the price moves were there but the volume, strong early, faded in the afternoon rally continuation. You can piece the two days together and come up with a patchwork follow through; certainly the rebound has been solid, showing much more pop than the prior attempt last week. That still does not necessarily translate into any clear follow through, but we are seeing some good moves lead the way and that is always a key ingredient.
Stocks had some help getting the move started once more with some economic news that plays better into the hand of a thoughtful Fed ready to analyze the impact of high energy prices, 16 rate hikes, declining housing etc. Futures turned positive when the Q1 productivity revision was released. Though lower than the prior reading it came in above expectations. That pushed unit labor costs up just 1.6% versus the 2.5% originally reported. Moreover, Q4 labor costs were written down to -0.6% from +3.0%. Huge, huge revision to a key indicator that the Fed uses as one of its primary inflation gauges.
In addition, commodities were getting spanked once more as the selling from their blow off top continues. Gold was down well over $20/oz early on and the copper market was closed as the metal was limit down early on. It later reopened and managed to bounce off those lows along with other metals, but the selling continues after that absurd spike higher that lathered up a lot of people who know better into thinking inflation was spiraling out of control. As one of the saner heads noted, copper at $4 was as high as it will likely get in his lifetime. Anyone want some froth with their metals?
That was not all. Retail sales were stronger than expected outside of discounters such as WMT and DG, both noting that high gasoline prices was eating into sales. JCP had its best May ever while ANN, TGT, JWN and others topped expectations. Oil is eating into the lower socioeconomic ranges' ability to consume, but it has yet to slow much of the consumer sector.
And then there was the ISM, lower than expected and below April levels (54.4 actual, 55.5 expected, and 57.3 prior), but looking about 'just right' for investors wanting an expanding economy (above 50 is expansion) but not one that is 'out of control' or some other nonsensical description hawks use to attack our prosperity. Prices were higher (77 versus 71), new orders were down to 53, and employment fell to 52.9. All are still expanding, however, and the market felt that was about right.
Thus the nice price gains on the indices and the spurt higher in the afternoon session to put emphasis on the move. Chips were getting some buying after helped techs lead the market higher. The large cap techs were the strongest of the session as that historically low P/E we discussed last week has some buying into the beaten up stocks.
You could call this short covering as the trashed large cap techs led the move, but the breadth on NASDAQ is just darn good (2.8:1). Plus you had buyers coming in 5 sessions later, indicating it was more than just short covering. A clearer follow through would be nice, but the market is a place where you have to look at the whole as well as the individual. No doubt there has been some solid buying the past two sessions as the indices rebounded after getting drubbed and sentiment indicators shot higher.
THE ECONOMY
The Fed statement versus the FOMC minutes. We thought we were through with the Greenspan era cloak and dagger bit.
When you go back to the FOMC statement from March and then move on to the May statement, you don't see much difference. There is that 'yet' insertion that has people wondering yet today as to what the yet the Fed meant. Then you look at the minutes from May and they talk quite candidly about FOMC members' concern that the Fed would go too far as it had done in the past, resurrecting that discussion from late 2005. The Fed seemed to be truly looking at the totality of circumstances versus the Greenspan 'hike until you feel the weight of the slowdown' approach.
It sounded rational given the hikes to this point, slowing housing, high energy prices, and truly tame inflation in the big picture. Bernanke even said the Fed could pause if it felt it warranted in order to asses the situation. Sounded very un-Greenspan like.
Then commodities, after a strong rally, spiked higher and sent the Chicken Littles squawking about inflation. The pundits questioned Bernanke's manhood (even heard more of that today after the slower economic data). If Bernanke had let it stand he would have been okay. He panicked, however, gave an exclusive interview to CNBC's Bartiromo who then aired it at least 24 hours later during the last hour on her show. Aside from the ethical issues for Bernanke (public trust, getting information disseminated quickly) and Bartiromo (why would a news organization hold extremely relevant market information back until the last hour of the next trading day?), Bernanke made a big mistake in back peddling on his convictions. Some still said he was weak. Others said he was incompetent. Many said both.
Thus we get to the May FOMC statement. It barely mentioned going too far after 16 rate hikes and many as of yet to impact the economy. Instead it was all about inflation and how the Fed had to be vigilant in fighting this menace, this scourge of modern prosperity. Actually, it is when the Fed talks this way that we know what the real scourge of prosperity is.
The real story is that the May minutes look to be contrived in an effort to rebuild some Fed credibility and take Bernanke's castanets out of the fire (chestnuts if you prefer). The problem is, it likely does not fool the market just as his retraction of the 'pause' language. The market had figured out what Bernanke meant and sold back the 'pause' bounce even before his mea culpa. When he went ahead and retracted, then he looked quite eunuch-like.
This recent bounce shows it as well. The market sold on the news, overreacting in the short run, but that then allowed it to bottom and is now rebounding even with the hawks foaming at the mouth. Even those pundits that are more middle of the road are wondering if the Fed is really opaque as a planned purpose or just confused about what to do.
We think the Fed is being purposefully opaque (even misleading) in an attempt to help rehabilitate Bernanke and his misstep. We hope it is not the other; if you are confused then you need to stop and get your bearings, not plow ahead in ignorance as did Greenspan in the late 1990's and early 2000. He later admitted that one of his primary indicators, the 'wealth effect,' really had no substantive data behind it as he sought input from investors, educational institutions, etc. well after he had crashed the market and then the economy. As mind-boggling as that seems it is what happened. In other words, Greenspan 'thought' he knew something was happening, gambled on it, pushed the hikes and money supply reductions too far, and we all paid the price. He gambled with our futures and lost.
We would hope that the current Fed has a better grasp on reality, acting on what it knows, not its conjecture. We complained bitterly at the time that Greenspan was making up inflation indicators in order to justify his policies, and it turned out that is just what he was doing. No doubt after the strong May same store sales released Thursday that Greenspan would have referred to the consumer as 'runaway' once more if he was on the Fed. After all, how can a sane consumer continue to buy with gasoline near $3/gallon? We wonder the same thing, but the difference is the consumer is doing it and the market is rebounding in the face of the news. We all get in trouble when the Fed starts thinking it is smarter than the aggregate of US citizens and the financial markets.
Thus we think this is a smokescreen and that Bernanke is still going to pause. As noted above, there are many issues with the economy right now that scream 'pause'. Housing, energy, slowing economic indicators; don't go until you break the economy as all Fed's in the past have done. We truly believe based on Bernanke's past statements and his actions as Fed that he plans to pause and give the economy time to show the impacts of the actions previously taken. I have something of a fever tonight, so maybe I am suffering from a delusional state. At this juncture, however, all you can do is hope the Fed is smarter than it has been in its long and infamous history.
THE MARKET
MARKET SENTIMENT
VIX: 14.52; -1.92
VXN: 18.86; -2.6
VXO: 13.34; -2.25
Put/Call Ratio (CBOE): 1.13; +0.18. The market rose and so did the ratio, closing back above 1.00. That is likely due to closing out positions as the market bounce continued versus rolling over.
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: +40.99 points (+1.88%) to close at 2219.86
Volume: 2.167B (-5.67%). Volume remained above average but it was lower than Wednesday's already marginal trade. No clear follow through buying on NASDAQ.
Up Volume: 1.712B (+108M)
Down Volume: 394M (-274M)
A/D and Hi/Lo: Advancers led 2.79 to 1. Solid breadth. Not great, but solid.
Previous Session: Advancers led 1.86 to 1
New Highs: 101 (+30)
New Lows: 45 (-40)
The Chart: http://www.investmenthouse.com/cd/^ixic.html
NASDAQ continued its rebound, posting its second gain and fifth in six sessions after the Wednesday reversal on huge volume. It has rallied up to the 18 day EMA (2220) in a huge afternoon spurt that saw NASDAQ tack on 26 points to its early session gains. It remains below the 200 day SMA (2197) after gapping below that level a week into the nasty May selling. It is likely going to have some reckoning at that point, particularly with a weekend and no strong return of surging volume on this most recent rebound. We still expect it to hold the move and come back to test the 'hump' in the short double bottom at 2210, perhaps forming a handle to consolidate and then resume the move.
SOX (2.29%) showed some leadership Thursday, bouncing from a week long lateral move along some support at 455. It is a start, and SOX is heading for a test of the 200 day SMA (492) and the high when SOX bounced to 490 just before the last leg lower.
SP500/NYSE
Stats: +15.62 points (+1.23%) to close at 1285.71
NYSE Volume: 1.69B (-14.96%). Lower but above average volume as SP500 continued its bounce from the 200 day SMA and SP600 did the same from 370. SP600 showed a follow through session on the Wednesday move; just wanted to see the others join in today, and in a way (price) they did.
A/D and Hi/Lo: Advancers led 3.51 to 1. Excellent breadth, very follow-through caliber.
Previous Session: Advancers led 2.89 to 1
New Highs: 71 (+27)
New Lows: 73 (-41)
The Chart: http://investmenthouse.com/cd/^gspc.html
The large caps continued their move off the 200 day SMA (1244) second test that formed a modest double bottom off the May selling. It is approaching the 50 day EMA (1289) next as it tries to dig its way out of this hole. As with NASDAQ at the 200 day SMA, this is likely where SP500 has to pause and catch its breath before continuing (see, even markets pause). The volume was disappointing.
SP600 (1.76%) continues is bounce off support at 370. The move has taken it back near the March high (intraday) at 383.72 and then the 50 day EMA (385.38). Still deep in the hole but making the right steps to recover, particularly with the Wednesday break higher. Digging out of a hole is work, and after a move up to the 50 day EMA or a bit further (some resistance at 390) it will need to test.
DJ30
The Dow continued its rebound as well, coming back late in the session to clear the 50 day EMA (11,243) and just below the recent peak and the 50 day SMA at 11,276. Volume was up Wednesday but fell below average Thursday. As with the other indices, not exactly the really strong volume you want to see. Important level to clear here, particularly the March highs at 11,335.
Stats: +91.97 points (+0.82%) to close at 11260.28
Volume: 295M shares Thursday versus 353M shares Wednesday, slipping below average on the continued bounce.
The chart: http://www.investmenthouse.com/cd/^dji.html
FRIDAY
The jobs report is out before the open, but as said Wednesday night, we don't see it as having as big an impact as it had during the past year. The unit labor costs on Thursday answered a lot of nervous Fed members, and the jobs report itself has showed some slowing of late. The market assessed the hawkish FOMC May statement and has managed to use that to make a second low and then rebound sharply. That suggests it is looking past this May report (as markets always do in the longer run).
We will see what happens with the report, but we have a suspicion the market is going to use it to add some more gains up to the next resistance before giving some back ahead of the weekend. It didn't do that last Friday, but this one saw some new money put to work to start the new month, and after some more upside it is going to want a breather. The Thursday advance was pretty darn sharp.
We will continue to look for some upside opportunity as the market continues even if we expect some giveback after a further early move. There are always leaders that take on the market themselves and make their own wake.
That raises an interesting point. We need more leadership. Thursday saw some semiconductors turn back up and some of them started leading earlier in the week. On the whole, however, they have been roughed up and are rebounding very similar to the large cap techs that led the market bounce Thursday (2.34%). Rebounds from banged up stocks are not necessarily leadership material; it all depends upon the pattern. We will try our best to hone in on those still ready to lead.
Support and Resistance
NASDAQ: Closed at 2219.86
Resistance:
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 2264
2273 is December 2005 closing high.
2278 is December 2005 intraday high.
2288 from December 2000 low.
2300 from the April intraday lows.
Support:
2205 is the December 2005 closing low
2185 to 2182 is the September 2005 peak and interim high from November 2005.
2162 to 2155 from December 2005 and September 2006
2145 is the August 2004/April 2005 up trendline.
2100 from the early and mid-2005 peaks.
S&P 500: Closed at 1285.71
Resistance:
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 18 day EMA at 1280
1280 from the April lows
1272 to 1268 is the November and December 2005 closing highs and March 2006 closing low
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 11,260.28
Resistance:
The 50 day SMA at 11,276
11,283 is the 'hump' in the attempted double bottom.
11,330 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:
The 50 day EMA at 11,243
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): 336K actual, 320K expected, 329K prior
Productivity, Q1 (8:30): 3.7% actual, 3.9% expected, 3.2% prior
Construction spending, April (10:00): -0.1% actual, 0.1% expected, 0.9% prior.
ISM Index, May (10:00): 54.4 actual, 55.7 expected, 57.3 prior
Crude inventories (10:30): +1.6M versus -2.99M 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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