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world stock market, us stock market
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6/29/06 Investment House Daily
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SUMMARY:
- Fed steps back from automatic rate hikes, spurring continued Thursday rally.
- All stocks jump Thursday, but leaders have been moving already.
- Fed acknowledged actual economic slowing, reminds everyone of its dual mandate.
- Gold jumps on the FOMC statement but the yield curve rights itself.
- Factors converge to drive stocks through near resistance. Will gains stick after quarter end and start a new leg in the rally?
Fed gives 25BP hike but turns more dovish on the future.
Stocks started higher Thursday ahead of the FOMC meeting, continuing the modest Wednesday bounce from that Tuesday distribution session. Short covering ahead of Fed and quarter ending position squaring provided the impetus for the upside as volume was so-so. We did see some strong stocks take off early and we opened some positions, but at the time we knew that was a riskier move with the FOMC still to come and the likely possibility of a 'ditto' to the May meeting.
After the morning run stocks gave back some gains over lunch but again turned higher toward the announcement. When the 25BP move came stocks shot higher and volume jumped. It did not sell because the Fed gave some dovish tweaks to its statement wording, noting the economy is in fact slowing and it was looking at that as well as inflation. It even noted that unit labor costs were contained, one of the inflation lightening rods (though historically inaccurate as it may be) for the Fed and thus the market.
That was the big difference to what we feared, i.e. the Fed staying pat on its language with a 25BP hike. This was a significant admission for the Fed, and stocks blasted off at that point, more than doubling their morning gains by the close. Volume surged as well as long buyers bought and shorts covered. Breadth was huge, over 5:1 on NYSE. The indices broke out of their lateral consolidation ranges, pushed past near resistance, and broke their May downtrends. Leaders were popping like popcorn at the neighborhood 36 screen multiplex. Jumbo size with butter.
Strong move with leadership popping.
This is about as powerful a move as you will see post-2000 crash. It is a real follow through session to the reversal 12 sessions back. That puts it a bit far out from the original reversal for a strong rally, but it definitely have enough strength for a couple of follow through sessions. With the leadership exploding as well it is very hard to argue with the move. You can have reservations about it being an end of quarter event; it was in part. You can worry it was a lot of short covering; it was. You can worry that gold shot higher and the dollar tanked on the more dovish Fed, suggesting the Fed is missing the boat. But with leaders moving higher across the market, a key element in any sustainable move. Again, it is hard to argue against such a move, especially with the leadership punching in with strong price and volume gains.
What is it about leadership that makes the difference? It is not just a beaten up stock in a nasty drop that the shorts have been kicking along the downtrend like a can down the road and the shorts suddenly decide to cover when good news hits the market. Take a look at AAPL, AMAT, XLNX, DELL, etc. They are in downtrends, and when good news hits the market after a prolonged down leg the shorts cover to lock in gains and that means they buy the stock. Thus the stock that has been sold over and over by the shorts is bought by the shorts. The downside impetus is gone and they all rush to buy shares back. Thus a stocks that is in a downtrend rebounds. There is no accumulation at this stage to sustain a big recovery, just an abatement of the selling pressure. Some stocks will recover and move higher, many won't.
It is a bigger gamble in guessing which can has been kicked long enough and hard enough so that the shorts don't want to kick it anymore than looking at the stocks that held up well during the selling and are moving up. Those are the stocks the big money did not want to totally sell out of. They use the pullback to accumulate shares slowly. That supports the stock from really tanking; the stock doesn't turn back up sharply, it just eases to support and holds around that level. Then when a big event hits the market they are taking off as more money jumps into stocks that are showing strong sales and earnings growth rates. They can run well and sustain their moves better because of that support from the big money. They showed their mettle by using the market selling to consolidate for the next move. To us that means they are less likely to get pushed back down hard when the initial impetus for the move dissipates. It is not a surefire 100% guarantee, but time after time they outperform other stocks and they keep the market moving forward. That is why we watch leadership for market health as well as for our investment buys. That is why we were buying leaders the past couple of weeks even with the questionable market action and why we were at it again Thursday as the market jumped.
THE ECONOMY
It isn't just all about inflation. Bernanke gets it and the market saw that in the statement.
Bernanke is getting kicked around on a regular basis by both the doves and the hawks. Greenspan got the business as well from the markets and he felt he had to prove himself and thus some 50BP hikes and the 1987 crash. Greenspan got in the trap of focusing just on inflation fighting. He fought it to the death; the death of the market, that is. To Bernanke's credit, despite a pretty good savaging from all sides, he is keeping the game at a higher level, sticking (albeit intermittently) to his ideas about how monetary policy, housing, energy, etc. impact the economy. The inflation hawks have used that more reasonable approach (especially reasonable given the Fed's lousy track record when it hikes to fend off inflation) to call Bernanke an inflation weakling, and that has exacerbated the swings seen the past two months.
Despite all of that, the Fed reminded the world Thursday that it has a dual mandate: maintain price stability AND maximize sustainable growth rates. Too often the focus is just inflation and the Fed ends up devastating the economy and thus the market and our portfolios. Thursday the Fed expressly said that economic growth IS moderating (not the usual 'looks to be moderating') and that aggregate demand growth is moderating as well. No 'could be', 'possibly', etc. It expressly noted that energy price increases are important as a drag on the economy versus just a potential inflation indicator. It expressly stated that the "extent and timing of any additional firming that may be needed to address . . . risks will depend on the evolution of the outlook for BOTH inflation and economic growth." (emphasis added).
In other words, the Fed isn't just dogmatically pursuing a course to quash inflation. It is going to try to break the mold and strike a balance between inflation and sustaining economic growth. Good golly. It is going to try and abide by its mandate. Thus it talked of gradual cooling of housing and the lagged effects of increases in interest rates and energy prices.
This was the change in the historical public face of the Fed, and it was the trigger for the continued market rally Thursday because it shows the Fed is not dogmatic in its approach to economic growth and that it won't thus pursue rather modest inflation growth to the end of the economy. If he carries through he will be the first Fed chairman since Greenspan to do that. Of course Greenspan was around for 18 years and managed two real beauties of market collapses.
Gold versus the Bond curve: Curve still flat but recovers from inversion.
After the FOMC statement Gold jumped $8 to $589 and the dollar fell versus other currencies. That indicates renewed concern as to the Fed and whether it is really going to fight inflation or not. It was not a massive surge, but it will be watched closely over the next week to see if it continues higher or whether this initial surge was just a knee-jerk reaction to what the inflation hawks see as a too dovish Federal Reserve.
Looking at the bond curve, however, you get a sense that the Fed is on the right track. The month-long second inversion of the curve finally reversed after the FOMC meeting, with the 10 year at 5.20% and the 2 year at 5.19%. That is still a flat curve and a flat curve implies a slower economy, but reversals have to start somewhere and then build with time. The curve did not invert in a day and it won't right itself in an afternoon. It was, however, a very positive development. Remember, this was one of our four keys to the market over the past three weeks (price/volume action, bond curve, SOX, leadership), and to see it healing itself is a very important development for the economy and the market.
THE MARKET
MARKET SENTIMENT
VIX: 13.03; -2.76
VXN: 17.93; -3.52
VXO: 12.28; -3.34
Put/Call Ratio (CBOE): 0.68; -0.19
Bulls versus Bears:
Bears rose but so did bulls, and after kissing last week that just kept them from a crossover move that historically is a very strong indication of sentiment being really ripe for a move. With the strong price/volume and leadership move it looks as if the sentiment did its job.
Bulls: 37.4%, back up from 35.6% last week. That stalls somewhat the sharp decline the prior week (down from 38.7%), but still at a low level after a high at 53.2% at the April peak. It surpassed the 42.3% hit on the last low. The current level puts it below the May and October 2005 readings that saw new upside runs.
Bears: 36.3%, up from 35.6%, but not enough to crossover the bulls, typically a surefire indication that the market is ready to rumble. Still chasing the bulls and would have caught them but for the Thursday rally. Nice climb to a new post-2002 high as it eclipses the March 2006 high (33%) and well above the 2005 highs that spawned new rallies (30% in May 2005, 29.2% in October 2005).
NASDAQ
Stats: +62.54 points (+2.96%) to close at 2174.38
Volume: 2.257B (+36.95%). Impressive jump, but when you have traded at basement levels for a couple of weeks pretty much anything looks impressive. Nonetheless volume did move back above average for the first time in two weeks, and it came on a strong price gain. Price/volume action was one of the market keys. Last week there was an upside day on volume, Tuesday was a downside day on volume, Thursday was a strong upside day on much stronger trade. Looks much better.
Up Volume: 2.035B (+1.045B). This is about as strong a ratio as you will see at 10:1.
Down Volume: 194M (-387M)
A/D and Hi/Lo: Advancers led 3.92 to 1. Impressive. Better than the downside sessions.
Previous Session: Advancers led 1.15 to 1
New Highs: 101 (+58)
New Lows: 73 (-104)
The Chart: http://www.investmenthouse.com/cd/^ixic.html
Tuesday NASDAQ was on the ropes with higher volume selling, but it held up and recovered its lateral range. Then it got a trigger to send it higher when the Fed took a more scholarly, dare we say it, learned view of the economy and rate hikes. NASDAQ cleared the 18 day EMA, its old up trendline (2160). Good start back up and now looking at the 50 day EMA (2189) and the December 2004 high (2177). After such a strong move the index will likely need a bit of backing and filling, but we anticipate it will put some more upside in toward next resistance if this move is more than a one-day event.
SOX (+3.99%) jumped back sharply, just about recapturing all of Tuesday's loses. It is still below the 18 day EMA (448.46) and 450 resistance. It very much looks like one of those rebounding shorted stocks discussed in the market summary. Big hole to climb out of still. One of the market keys, it is still an anchor chain.
SP500/NYSE
Stats: +26.87 points (+2.16%) to close at 1272.87
NYSE Volume: 1.886B (+26.4%). First above average volume in two weeks as well as SP500 put on its moves. Strong price/volume action on the upside as SP500 moved back up through several key resistance levels. Key to the market and the best price/volume action since the second week of June.
A/D and Hi/Lo: Advancers led 5.46 to 1. Very impressive.
Previous Session: Advancers led 1.55 to 1
New Highs: 93 (+68)
New Lows: 125 (-98)
The Chart: http://investmenthouse.com/cd/^gspc.html
SP500 did not violate its consolidation range even with the Tuesday selling, and its Thursday move far surpasses anything on the downside since the reversal 12 sessions back. Moved through the May down trendline, the 200 day SMA (1262) and the 50 day EMA (1267) all in one stroke. Approaching resistance at the December 2005 high. As with NASDAQ it will have to back and fill at some point, but if this move is as strong as it looked Thursday it is going a bit higher first.
SP600 (2.16%) jumped through the 200 day SMA (366.45) and up to the 50 day EMA (373.21) on the close. Next real resistance is 380 to 382 from the January and March tops, and that is where it should start to pause for a test if this move has some strength.
DJ30
Similar to the other indices, it was a big day for the blue chips as they rallied through the 50 day EMA (11,099) up to the 50 day SMA (11,191). Serious resistance is at 11,283 from the late May high that is the closing high in the right shoulder of the head and shoulders pattern that sent DJ30 lower in June. As with the other indices this is where DJ30 should try if this is a strong move with some staying power.
Stats: +217.24 points (+1.98%) to close at 11190.8
Volume: 337M shares Thursday versus 260M shares Wednesday. Trade moved up just above average on this strong break higher.
The chart: http://www.investmenthouse.com/cd/^dji.html
FRIDAY
Personal income and spending, Michigan sentiment, and Chicago PMI are the follow up to the FOMC decision. Of the three, Chicago PMI is likely the most relevant to a continued data dependent Fed that is watching the economy, not as a sign of inflation, but in order to determine its condition with respect to how far the Fed should go. In other words, this Fed is looking at a prosperous economy not as a sign of inflation. Instead it is looking at 'real' inflation indicators such as the PCE and the CPI on the one hand and how the economy is holding up in the face of high energy prices, 17 rate hikes, a slowing housing market, etc. on the other. If this is more than just lip service it shows that more 'adult' view of the world and thus the positive market reaction. That statement, while at first blush a rehashed version of the May statement, was really a departure from the recent rhetoric from Moskow, etc.
The immediate worry for all will be whether there is any sustainability to the move beyond just a one day wonder. There is a sort of long weekend ahead with July 4 on Tuesday and a 1:00ET close on Monday ahead of the Tuesday closing. After such a strong Thursday move Friday will likely continue higher and then run into some late weakness as the quarter comes to an end before a 3 off days with a half day sandwiched in between. Then the coming week is when we want to see the upside move resume to the next resistance on a return of good trade. That will show us the big buyers are still there as opposed to just a short covering junket.
Friday that leaves us still looking for some upside in leaders that are still in good position to make an upside move. The action will likely slow the pace a bit but we will continue to look for quality stocks making quality moves that are in position to lead much higher. There are many leaders that are in such a position as we noted the past week.
Support and Resistance
NASDAQ: Closed at 2174.38
Resistance:
2177 is the December 2004 high.
2185 to 2182 is the September 2005 peak and interim high from November 2005.
The 50 day EMA at 2190
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 2228
2234 is the early June high
2240 is closing low in February range.
Support:
2162 to 2155 from December 2005 and September 2006
2160 is the August 2004/April 2005 up trendline.
The 18 day EMA at 2138
2100 from the early and mid-2005 peaks
2063 is modest, soft support
2050 from the summer 2005 lateral range lows.
2045-47 from June and October 2005 lows and June 2004 highs
S&P 500: Closed at 1272.87
Resistance:
1272 to 1268 is the November and December 2005 closing highs and March 2006 closing low
1277 is the 50 day SMA
The late January peak at 1285
The early June high at 1288
1297.57 is the recent February high.
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 50 day EMA at 1267
The 200 day EMA at 1262
The 18 day EMA at 1253
1244 is an old trendline from the August 2003/August 2004/October 2005 lows.
1225 from the March 2005 high
1213 from December 2004 high to 1215
1205 from the August lows
Dow: Closed at 11,190.80
Resistance:
The 50 day SMA at 11,191
11,279 is the late May high
The March 2006 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
Support:
The 50 day EMA at 11,099
11,097 to 11,137 is the last peak from the February top.
11,044 is the January high.
10,965 from Q4 2000
10,931 is the November 2005 high
The 200 day SMA at 10,905
10,890 is the December 2005 closing high.
10, 737 to 10,730 from December and February lows
10,705 - 10,965 from July/August 2005 range top to bottom
10,678 to 10,665
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
June 26
New home sales, May (10:00): 1.234M actual versus 1.15M expected, 1.180M prior (revised from 1.198M)
June 27
Consumer confidence, June (10:00): 105.7 actual versus 103.9 expected, 105.6 prior (revised from 103.2)
Existing Home sales, May (10:00): 6.67M actual versus 6.61M expected, 6.76M prior.
June 28
Crude oil inventories (10:30): -3.4M versus -1.4M expected and 1.385M prior
June 29
GDP, final Q1 (8:30): 5.6% actual versus 5.6% expected, 5.3% preliminary
Chain deflator, Q1 (8:30): 31.1% actual versus 3.3% expected, 3.3% preliminary
Initial jobless claims (8:30): 314K actual versus 310K expected, 309K prior
FOMC decision (2:15); 25BP hike with a change in the statement that shows the economy is slowing and that the Fed is looking at the economy as not an inflation indicator.
June 30
Personal income, May (8:30): 0.2% expected, 0.5% prior
Personal spending, May (8:30): 0.4% expected, 0.6% prior
Michigan sentiment, final (9:45): 82.5 expected, 82.4 prior
Chicago PMI, June (10:00): 59.0 expected, 61.5 prior
End part 1 of 3
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