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us stock market, top stock pick
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6/06/06 Investment House Daily
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SUMMARY:
- Volume, Fed-speak pick up the pace as market sells, bounces late to hold support.
- Fed painting itself into a corner and throwing away the key.
- Bond market, metals pointing to real economic issues versus pundit discussions of labor costs, rent rates, and other indicia of potential inflation.
- Late rebound continues attempt at grinding out a bottom, but the potential would be better if it wasn't June.
Early bounce gets trounced as Bernanke henchmen hit the microphones.
Stocks were up pre-market on a relief move after the Monday sell off. Monday the selling was on light, indicating the sellers were not controlling the action, just a lack of buy side interest. Tuesday things got a bit more interesting so to speak as volume quickly ramped up ahead of Monday and stocks headed south after the modest bounce ran out of takers.
There were no economic reports released, but the Fed was on the stump again, 'augmenting' chairman Bernanke's new 'bad boy' approach to public commentary about inflation. After Moskow got the ball rolling last week, the Fed speakers have played 'Quien es mas macho?' with respect to talking tough on inflation.
Poole was up to the task Tuesday, noting that even if economic growth slows that alone may not be adequate to hold down inflation. Nothing like raising the old stagflation flag. Why not? It is open season on reasons why you should fear inflation, so why not pull out one of the worst periods in our history and make veiled analogies even though the circumstances are about as different as the could be without occurring on another planet. Nothing spreads fear better than Phillips Curve principles.
Then there was San Francisco Fed president Bies who earlier in the year, as you recall, voiced concern about the Fed once more going too far with rate hikes. Tuesday she was reading from the 'tough guy' Fed playbook, saying that the Fed was in a period of transition and just doesn't know when it will stop. I have a hint for her: look for an economic train wreck; that is when the Fed usually knows its work is done when it gets in this tunnel vision, frenzied mode regarding indications of inflation.
That was enough to choke off the modest rebound attempt (though it was basically doomed before it started), and stocks rolled over. This time sellers came in as volume jumped. Breadth remained sharply negative, though the -2:1 levels were much better than Monday's broad decline. The higher volume pushed SP500 through its 200 day SMA and NASDAQ threatened a new closing low. They did, however, easily hold above the intraday lows of this down period hit on the reversal two Wednesdays back.
They fought back through lunch, gave back half of that move, then rallied in the last half hour as shorts covered when SP500 held too close to the 200 day SMA and NASDAQ bounced off of its August 2004/April 2005 up trendline. That rally recouped much of the losses and very nearly closed SP500 positive on the session. It did not, and thus we see a reversal session that shook out some sellers but was not a technically clear rebound signal given the negative close and volume that was higher but still relatively lackluster in the big picture.
That leaves the indices still with a chance at grinding out a bottom here. Yes there was distribution and the negatives outweigh the positives, but once more the indices tested support at these levels and snapped back. High sentiment levels, higher volatility, still hanging onto support and rebounding after intraday tests; all factors in putting in a bottom. Of course, there still is no bottom at this juncture, attempts to bounce keep getting pushed back, and it is the start of a hot June. As in 'Monty Python's Holy Grail', it is not dead yet. Hard to say it is getting better, however.
THE ECONOMY
All of this tough talk is leaving Bernanke with little of the 'flexibility' he says the Fed has to have.
Do you get the feeling Bernanke got a phone call from someone (or placed the call himself), either Greenspan, Volker, the gaggle of G-8 central bankers, Rodney Dangerfield, and discussed why he just couldn't get any respect from the financial markets? The abrupt change in demeanor and talk about inflation indicates he received a Cliff Notes version of how to be Fed chairman. Just as the Treasury Secretary should always parrot 'a strong dollar is in the US' best interests', the Fed chairman should always give the appearance of an inflation slayer first, then show the thoughtful, sensitive husband side. Of course, you have to consider the source; if it came from any former Fed chairman, with the Fed's track record that advice would be worth what it cost.
Anyway, Bernanke has uttered the statement that inflation is at the top end of the range he and other economic scholars believe is the limit of acceptable inflation. He said more mitigating factors than hawkish (declining growth, declining housing, lag time of policy action), but the market was ready to take it as tough inflation talk, particularly given all of his former statements that show a transition from 'hey we can pause any old time' to 'all I meant was the Fed needed to be flexible in its inflation fight' to 'death to inflation.'
Even with this public transformation, everything Bernanke says still indicates that he would really like to pause in June, but it looks more and more as if he feels he has to hike in order to satisfy market expectations, expectations ratcheted up by virtue of his statements in addition to other Fed members. He was in great shape to pause back in early May, before he opened his mouth to Congress. Since then he has made a series of statements and speeches where he has, as Archie Bunker once put it, painted himself into a corner and thrown away the key. By acknowledging inflation was at the upper end of an acceptable range, the only way he can save face is for economic data to crap out before June 29. And that is not likely to happen (and of course, no one wants it to happen) . . . or is it?
Bond and metals markets are worth looking at again.
Four weeks back all of the financial talk shows were talking about the rise in gold (and to a lesser extent, silver) and commodities in general as an indication of inflation. Gold surged to $725/ounce on May 13. The financial shows were frothing at the mouth about how this was THE certain inflation indicator and thus inflation was here. At the time we wrote it looked like a blow off in those metals and commodities, i.e. a ballistic run higher after an already stellar steady climb, and that blow offs typically ended with big price declines. Copper went from $2 to $3 to $4. $4 copper is insane; it becomes more economically sensible to melt down your pennies and sell them at that price. THAT is the classic sign of a top.
Sure enough the frenzy is correcting. Gold closed down $14 Tuesday at 634.70, about 12.5% lower than on 5-13. Gold is still enjoying a nice run, but before the blow off it was all attributed to people in China and India now buying gold jewelry, etc. for themselves. When it took off in a PURELY TECHNICAL move (as the late comers piled in with a lemming-like run) it suddenly became inflation. Nope. The subsequent action shows that.
Now that it is correcting we don't hear much gold and commodities. The talk has shifted to labor costs, rents, etc. as inflation. As we have discussed before, those are potential indicia of inflation, but they are not inflation. Just because wages rise it does not mean there is wage inflation. Wages could rise because business is good and employers reward hard work. It all depends upon whether there is excess liquidity in the system that generally makes all prices rise. That is not the case because all prices are not rising.
Bond yield curve pancakes.
Bond yields are also showing it is, unlike Poole, more worried about the economy's future than inflation. While the bond market has been volatile of late, this later move is sticking. 10 year bond yields fell from 5.19% four weeks back to 5% Wednesday. The 2 year bond is at 4.99%. That basically flattens the curve and puts the 10 year even with the Fed Funds Rate. If this holds that leaves the Fed with the unsavory prospect of tightening and inverting the yield curve with its next hike, a hike that Bernanke et al have made all too probable over the past week.
Some will say this is just more of the same that the market experienced earlier in the year when the yield curve flattened and inverted and foreign buyers were credited with pushing rates lower. Well, rates jumped higher and the curve looked pretty good in the interval, but now is right back at it on the heels of all of the new 'tough guy' Fed talk. The bond market is responding to what the Fed is doing, and this tough talk (and follow through with action) is how Greenspan caused a few crashes of his own.
The market doesn't forget, and when you look at bonds and metals it is clear that the jump four weeks back was a technical move that is being unwound and that the market is now worried the Fed is going to pull a Fed and go too far. This more adamant talk about inflation even as it is clear the Fed should almost be finished is exactly what we wrote about in early 2005 as one of our main fears as this rate hiking continued. Just a little bit of history repeating.
Stocks are dealing with this now and it is no coincidence they have sold since these comments started to flow in early May. As we noted Monday, the key will be whether the market can hold onto the recent lows given this higher level of rhetoric. It is a leading indicator and is right now still trying to hold above the recent lows and set a bottom of this base. The bond curve has not inverted for now, another plus.
THE MARKET
MARKET SENTIMENT
VIX: 17.34; +0.69. Hanging around the 2005 April and May highs as it continues at a higher level. Thus far it has not been high enough to spur a lasting reversal and rebound.
VXN: 22.18; +1.28
VXO: 16.6; +0.25
Put/Call Ratio (CBOE): 0.99; -0.05. The late bounce helped keep it below 1.0 on the close, but it has been above that level 12 times in the past three weeks, easily enough to set the stage.
Bulls versus Bears:
Bulls: 42.6%. Backing off as expected given the market struggles, down from 43.8% the week before and well off the 46.3% hit three weeks back. Still heading lower after the April peak at 53.2% and almost matching the 42.3% hit on the last low. We don't expect it to improve much after this week given the volatile action that saw some improvement but no clear return to buying. The current level is also just above the levels hit in May and October 2005 that saw new upside runs.
Bears: 29.8%. Solid climb in bears as the selling and increasing volatility worked against positive market attitudes. That is up sharply from the 27.6% as week that was also a solid jump from 25.3% the week before. Bears have now topped the 28.6% hit on the interim high on this selling. The 33% high hit in March topped the prior two highs (30% in May 2005, 29.2% in October 2005) that gave way to strong rallies. Bears are again at a level that could help drive this current rally attempt further. The 20% level and below is considered bearish. It started this move just above 20%, the threshold level.
NASDAQ
Stats: -6.84 points (-0.32%) to close at 2162.78
Volume: 2.161B (+18.66%). Volume moved up to average as NASDAQ again reached lower and rebounded to cut most of its losses. Not huge reversal volume. Volume was heavy early, showing some distribution and remained solid on the rebound/short covering. The recovery was not bad but it was still technically some distribution.
Up Volume: 720M (+493M)
Down Volume: 1.416B (-171M)
A/D and Hi/Lo: Decliners led 1.52 to 1. Improved from -2.2:1 at the last hour.
Previous Session: Decliners led 3.6 to 1
New Highs: 53 (-40)
New Lows: 142 (+73)
The Chart: http://www.investmenthouse.com/cd/^ixic.html
NASDAQ rolled over after an early bounce higher. A steady trend lower mid-morning took NASDAQ to its August 2004/April 2005 up trendline (2144) that it tapped two weeks back when NASDAQ reversed on some big volume. Once more it rebounded from that test but could not close positive on the session. It did shave 18 points off the low, recovering two-thirds of the loss; pretty impressive. That keeps it in the game for putting in a bottom. Bigger picture it is still in well below the 200 day SMA (2230), trying to set up another rebound to test that level. That 200 day is the 'hump' in another attempted double bottom pattern.
SOX (-0.45%) held at the late May low (456.42) and bounced modestly. Impressively weak after failing at the 18 day EMA (475.20) following the Friday test. Needs to hold here and put something together that breaks through the recent high at 479.38.
SP500/NYSE
Stats: -1.44 points (-0.11%) to close at 1263.85
NYSE Volume: 1.892B (+16.43%). Volume jumped back above average as the NYSE indices sold hard early but then rebounded with SP500 just missing a flat close. The volume was good enough for a reversal session and the basically flat close offsets the early volume selling.
A/D and Hi/Lo: Decliners led 1.83 to 1. Recovered from -2:1 as well on the late rebound.
Previous Session: Decliners led 3.63 to 1
New Highs: 28 (-27)
New Lows: 136 (+48)
The Chart: http://investmenthouse.com/cd/^gspc.html
SP500 cut through the 200 day SMA (1260) on the morning selling, hitting 1254 on the low then recovering 9 points in the last half hour to retake that support. Strong volume, good rebound at key support. Has the trappings of another try at a rebound back up to the 50 day EMA (1287) that stalled the index on last week's move.
SP600 (-0.67%) tested its own 200 day SMA (365.09) as it did two weeks back and staged another bounce off that level. Not as impressive as it still closed down for the session, but the move shows there is still some support left at that level. Very similar to SP500, the small caps are set up to bounce and try the 50 day EMA (384.24) again. Set up but they buyers have to be ready.
DJ30
DJ30 undercut the May lows (11,030) Tuesday for its lowest dip since early March. It reached down to 10,926 on the low, bringing out much commentary on the financial stations about undercutting the 11K mark. It managed to rebound but still did not recapture the late May lows and made a new closing low on this leg lower. Not a really good technical position as DJ30 is struggling with its head and shoulders, undercutting the neckline Tuesday on a big jump to above average volume. Fortunately it has the 200 day SMA (10,869) not too far away.
Stats: -46.58 points (-0.42%) to close at 11002.14
Volume: 385M Tuesday versus 255M shares Monday.
The chart: http://www.investmenthouse.com/cd/^dji.html
WEDNESDAY
Crude oil inventories, Consumer credit, and likely some more inflation-bashing Fed-speak. Despite all of this the market rebounded late Tuesday, holding the prior lows and looking very similar to the reversal two weeks back, particularly on NASDAQ, SP500, and SP600. Sentiment indicators remain high as they have been for three weeks. The market doggedly continues trying to put in a bottom. It is back at the water hole, but will it drink?
The market typically figures how it will react to Fed actions prior to them actually becoming fact. The stock market has faded ever since Bernanke started talking about rates. It has reacted to the commentary both up and down as it churns along the bottom of the mid-May sell off. After that reaction to specific commentary gets worked out we will see where the market heads as the indication to its interpretation of what the Fed is going to do. As noted, the indices are still in the realm of attempting to work out a bottom, having refused to give up the prior lows (outside of DJ30) and once more reaching down to support and rebounding. As we noted Monday, with the sentiment indicators hitting levels that sprung rebounds in the prior pullbacks during this rally, the indices need to put in that bottom and resume the move. If they cannot, that is the market telling us there is more at work here, namely the Fed's action.
Leadership is still a question mark with many strong stocks in terms of earnings growth and price pattern sold more than the overall market the past two sessions. Investors definitely had the attitude that if it had a strong run it needed to be sold. Again, now that the indices have tested lower and rebounded once more we see if that was enough of a shakeout to get the shorts covering again and then the longer term buyers back into play as well.
If this were late September or October this action would be more convincing as those are months where the market often finds a low for a run into the year end. We are into summer now, and that sometimes ushers in a weak, lackluster market. We say sometimes because the past few years stocks have not really cared what part of the calendar they were on. In 2005 the market bottomed in early May and rallied for 3 months before sliding back and bottoming again in . . . October. In short, you cannot automatically pigeonhole a market based solely on the calendar. If you did that during any of this recovery you would miss out.
With the hold at support and the rebound we will continue to look for stocks rebounding as well or making breaks higher (having not sold back with the overall market) from positions of strength. It is just about time for the market to make its move as well; during the recovery since late 2002, these bottom making processes have lasted roughly three weeks. This one is homing in on that timeframe, is showing solid rebounds from the prior lows, and has the sentiment indicators at the right position. This market just needs leadership. Even with all of the other factors in place, if no sector(s) steps up to take the lead then the market is not going to make the move.
Support and Resistance
NASDAQ: Closed at 2162.78
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 2215
The 200 day SMA at 2230
2240 is closing low in February range.
The 50 day EMA at 2258
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
2144 is the August 2004/April 2005 up trendline.
2100 from the early and mid-2005 peaks.
S&P 500: Closed at 1263.85
Resistance:
1272 to 1268 is the November and December 2005 closing highs and March 2006 closing low
1280 from the April lows
The 18 day EMA at 1278
The late January peak at 1285
The 50 day EMA at 1287
1297.57 is the recent February high.
The January high at 1303
1311 is the March intraday resistance on this move.
1315 is the May and May 2001 peaks
1317, the recent intraday highs from April.
The October/April trendline at 1320
1324 to 1329 from the October 2000 lows.
Support:
The 200 day EMA at 1260
1250 to 1248 from the November and December 2005 lows.
1245 from the August 2005 high & May intraday low; 1241 from the September 2005 high
1239 is an old trendline from the August 2003/August 2004/October 2005 lows.
1225 from the March 2005 high
Dow: Closed at 11,002.14
Resistance:
11,044 is the January high.
11,097 to 11,137 is the last peak from the February top.
The 10 day EMA at 11,154
11,159 is the February high.
The 50 day EMA at 11,226
11,283 is the 'hump' in the attempted double bottom.
The March 2005 highs at 11,329 to 11,335
11,350 from the May 2001 peak
11,360 is the October/January/February up trendline.
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
Support:
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.
10,869 is the 200 day SMA
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
June 5
ISM Services, May (10:00): 60.1 actual, 60.0 expected, 63.0 prior
June 7
Crude oil inventories (10:30): +1.6M prior
Consumer Credit, April (3:00): $3.5B expected, $2.5B prior
June 8
Initial jobless claims (8:30): 330K expected, 336K prior
Wholesale inventories, April (10:00): 0.5% expected, 0.2% prior
June 9
Export prices, May (8:30): 0.7% prior
Import prices, May (8:30): 0.0% prior
Trade balance, April (8:30): -$65.0B expected, -$62.01B prior
End part 1 of 3
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