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7/06/06 Investment House Daily
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SUMMARY:
- Stocks push higher but get a bit of cold feet ahead of jobs report.
- Competing jobs reports leave market guessing, but a solid report is likely.
- ISM services slow but still quite solid.
- Market still set up, looking for a trigger. Even a strong jobs report could lead to a short covering rebound.
Not quite able to divorce from the jobs report.
After the Wednesday missile launches cast an international intrigue pall over the market and pushed back the Monday climb, Thursday stocks were ready to try the upside once more. Retail sales were basically mediocre, and that added to the upside impetus in this 'slower is better' market psyche given the Fed is still tilting at inflation. Challenger came out with its lay off report suggesting more layoffs, countering the ADP forecast of a monster non-farm jobs report. A weaker than expected ISM services report further bolstered stocks with NASDAQ pushing above its trendline and SP500 clearing the 50 day SMA.
Then the oil inventory report showed a surprise drop in oil inventories, down 2.4M bbl versus the +1.9M bbl expected. Gasoline was up, but it was not enough to offset its recent rise and crude's push higher toward $75/bbl. When that report hit the market took a hit as well, and it just never could get back on track. Indeed, the indices even turned negative mid-afternoon, giving back a solid early price move. A late bounce managed to push all positive but SOX and NASDAQ 100, but the market definitely did not have the same positive look at the close it had earlier.
Seems oil is a continuing problem now that it is back at $75, and investors were not simply ready to ignore the jobs report. The Wednesday selling factored in a stronger jobs report, but not the 360+ jobs ADP is looking for. If that happens then the market is going to have a hard time Friday holding last Thursday's move higher.
Technically the market remains on pretty solid footing for a move higher. NASDAQ tried to recapture the trendline but just missed out, instead showing a doji at the 18 day EMA and the May low. SP500 moved through its 50 day SMA but faded to close right at that level, still perched on top of the 50 day EMA as it works laterally, trying to set up for the next move higher. Volume was basically flat, lower on NYSE, modestly higher on NASDAQ. Breadth was positive but very mediocre.
Basically stocks tried to move but then ended up in a holding pattern ahead of the Friday jobs report. Stocks priced in a stronger report Thursday, but still got cold feet ahead of the actual report, unable to divorce themselves from the idea that jobs are an inflation indicator. They are not. Prosperity is never a sign of inflation and jobs are just a part of prosperity. Moreover, jobs are a lagging indicator; they run high usually at the end of a cycle when employers finally feel safe enough to hire more. Unfortunately they end up training them just in time for a slowdown. The Fed similarly gets most excited at the end of a cycle. Recall that inflation was basically flat when the Fed started raising rates. Seventeen hikes into the campaign and inflation has risen near 2%; that is normal because inflation is a lagging indicator, lagging the peak in the economy just as with jobs. Thus the Fed, and thus the market, looks to an indicator that is not all that great in predicting the economy ahead. In the short term, however, that makes it a key report.
THE ECONOMY
More jobs or less jobs? Even the jobs report doesn't really know.
The jobs report is over-hyped, but as noted above, the Fed looks at it hard and thus so does the market. The ADP (the payroll guys) forecast of 368K non-farm jobs hurt the market Wednesday as that is far in excess (about 200K) of the original consensus. Thursday the Challenger survey reported 67K layoffs, up from 53K in May. It was the first increase in layoffs in six months, though the pace of layoffs remains well below 2005 levels. To be really significant you have to see 100K or more, but an increase is noteworthy after a long dry spell of lay offs.
That leaves you with ADP saying strong and Challenger seeing more announced layoffs. Monster.com may be the swing report. Its June ad index rose to a record level, up over 35 points from June 2005. The Monster report has pretty accurately tracked the recovery in jobs, and with the ADP report it would indicate a solid report Friday though 368K is likely a stretch. If jobs come in around 200K or so then the market can likely absorb it.
ISM Services, though lower, logs another solid month.
June services posted a 57.0 reading, down from the 59.0 expected and 60.1 prior, but still well above the 50 level that separates expansion men from declining boys. The slowing was across the board, however, with the sub-indices still showing expansion as well, but some skirting closer to the breakeven point.
New orders fell to 56.6 from 59.6. Employment dropped to 52 from 58 in May; maybe ADP is overstating June job creation. Prices paid were even lower, but at 73.9 (down from 77) you can't really take comfort that the service sector is about to experience a serious price drop.
As for the bigger trend, while maintaining 55 or above since early 2003, the index has peaked, making lower highs the past year. Makes sense as 2002 to 2003 was the growth spurt in the economy as it came off the mat. It matured the past 1.5 years or more and thus the softening numbers. Indeed, it dipped below 55 for a month in the second half of 2005, making a lower low to accompany some lower highs. It is not trending lower, just showing those lower tops that suggest a slowing economy.
After 3.5 years of solid growth that is not surprising. As we have said all along, the economy has enough strength to carry on with the expansion, but the fear is whether the Fed gets too aggressive with rate hikes in combination with a reduction in liquidity. The world central banks started draining some liquidity early this year and we saw the commodities take a tumble as speculative money left the building.
The key for the Fed is not to get too aggressive at both ends, i.e. the rate end and the money supply end. That was the problem with the 2000 Fed; it burned the candle from both ends with rate hikes, recalling all money, and restricting the loan status of thousands of banks. There simply was no money left for anything, so nothing was done and the economy imploded. The Fed is actually doing a better job of cleaning up liquidity of late, something Greenspan did not do while he was at the helm during this rate hiking. Thus inflation got even more of a foothold that Bernanke and company have to clean up. Again, they are doing that in drabs, going slow as with rate hikes, something that the vigilantes are not taking note of or simply refusing to acknowledge. Hopefully Bernanke has the stones to stick to his guns and do it his way.
THE MARKET
MARKET SENTIMENT
VIX: 13.65; -0.5
VXN: 19.8; +0.02
VXO: 12.71; -0.54
Put/Call Ratio (CBOE): 0.8; -0.52
Bulls versus Bears:
Bulls: 38.7%. With the Thursday advance investment advisors turned more bullish, up from 37.4% and 35.6% the week before. After a decline from 53.2% at the April peak bulls are on the rise once more. On this pullback, however, they hit the lows for this rally, i.e. since 2003. That put it below the 42.3% hit on the last low and the May and October 2005 readings that preceded new upside runs.
Bears: 34.4%. After kissing bulls two weeks back the bears are on the decline this week, down from 36.3% the week before. Just missed crossing over with the bulls, but that in itself is not a bad indication for the upside. That prior week put Bears at a new post-2002 high, eclipsing 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: +1.75 points (+0.08%) to close at 2155.09
Volume: 1.65B (+1.35%). Modest climb in volume but still well below average. As with the Wednesday trade where there was no real distribution, there was no real accumulation Thursday with this modest gain in trade. Investors still sitting on their hands ahead of the Friday jobs report.
Up Volume: 750M (+528M)
Down Volume: 880M (-511M)
A/D and Hi/Lo: Advancers led 1.13 to 1. Hardly worth the comment, but it was simply a match for the go nowhere session.
Previous Session: Decliners led 2.16 to 1
New Highs: 80 (+12)
New Lows: 60 (-4)
The Chart: http://www.investmenthouse.com/cd/^ixic.html
NASDAQ pushed through its up trendline (2162) early in the session, pushing to 2168. Its Achilles Heel were the large caps; they closed down 0.15% and don't have the same perky pattern overall NASDAQ sports. Overall NASDAQ was not that strong either , however as it couldn't hold its move, fading back to the 18 day EMA (2148) on the low. It showed a doji on the candlestick pattern, right on top of near support, however; that's the perkiness I was talking about. That puts it at the May low and above the mid to late June peaks. In short, sitting on support and in a good position to move higher. You could call it a double bottom with handle forming or you can see the right shoulder of a reverse head and shoulders pattern forming. Either way those are bullish patterns suggesting NASDAQ is ready to move higher if it can get the right trigger.
SOX (-1%) remains the anchor chain. It was the weak link Wednesday and was down again Thursday, unable to get off the mat. Intraday it rallied through the 18 day EMA (444.33), the level that held it in check during its entire downtrend in May and June. It could not hold up and faded once more, but there is a lining that is somewhat silver here. It held at the two June lows, suggesting it too is finally trying to put in a bottom as it works more laterally the past four weeks than in its downtrend lower.
SP500/NYSE
Stats: +3.16 points (+0.25%) to close at 1274.07
NYSE Volume: 1.409B (-5.7%). Lower volume returned, though Wednesday trade was low by any standard even though it was up over Monday's half session. That means no accumulation, but not bad action at all given SP500 and SP600 sat on support for the session, trying to gird up the loins for a move higher after the jobs report.
A/D and Hi/Lo: Advancers led 1.62 to 1. Was 2:1 at the high, but as we have seen of late, that is a pretty modest breadth reading. Looking for breadth to return as SP500 and SP600 try a higher run after the jobs report.
Previous Session: Decliners led 2.58 to 1
New Highs: 80 (+9)
New Lows: 66 (-17)
The Chart: http://investmenthouse.com/cd/^gspc.html
SP500 rallied through the 50 day SMA (1274) but then faded to close right smack at that level. That keeps it holding above the 50 day EMA (1268), moving laterally on low trade after that big Thursday surge a week back. As with the other indices, it is set up to move higher off of something of a double bottom with handle or the right shoulder of a reverse head and shoulders. It is set up to move, now we see if the big money can deliver the move.
SP600 (+0.26%) looks very similar to SP500, holding the 50 day EMA (373.62) on the low and stalled below the 50 day SMA (377.28) on the upside. The 50 day EMA is trying to hold as the right shoulder to a reverse head and shoulders base trying to set up here. Still has resistance at 382 and the early June intraday high at 385, basically the neckline of the base. Looking for the same trigger to send SP500 higher as well.
DJ30
DJ30 continues working laterally as well, using the 50 day EMA (11,113) as the lower support and looking to move through 12,278, the late May high, to really make the break higher. Low volume Thursday, so no real buying behind it, but still a nice picture very similar to the other NYSE indices, working on something of a right shoulder to a potential reverse head and shoulders base. This shelf is a nice last consolidation that sets it up for the break higher.
Stats: +73.48 points (+0.66%) to close at 11225.3
Volume: 224M shares Thursday versus 248M shares Wednesday.
The chart: http://www.investmenthouse.com/cd/^dji.html
FRIDAY
The question for tomorrow is whether the jobs report is stronger than expected or weaker than the stronger than expected projections. Got that? That is about how esoteric this forecasting gets. Given the private companies the report is going to beat expectations, just by how much is the issue.
The real issue is how the market reacts. If it is lower than 300K the market likely breathes a sigh of relief and finds some upside. The lower the better for the market in terms of non-farm payrolls, but we cannot forget average hourly earnings either. Basically the market is set up to move higher, and the lower the jobs number the better for the market as it factors in what is 'just right' to keep the economy moving forward but will keep the Fed moving toward the 'no mas' level.
We have taken positions ahead of this number in some index ETF's as well as many leaders. The market has improved in anticipation of this number and has set itself to move higher. A blowout jobs report sends it in an early tailspin then we see if the set up really has some strength behind it, i.e. if the market sells early but then holds at next support and starts working on a recovery. At least expectations have been adjusted by the ADP and the Monster reports and even if strong it won't be a shock. Thus we look for a hold and the start of a recovery if the market reacts poorly to a strong report.
Over the past week we saw some stocks that moved higher without a lot of volume and then they started to come back down and work laterally. Several are on the report, still in position to move higher. If the market starts weaker we are going to watch them to see if they hold that support, showing that buyers are stepping in. Those are going to be in good shape next week as the market shakes off the employment report after the short term reaction and realizes once again the Fed is in the doorstep, reaching to turn out the light before it locks up and closes shop on this rate hiking campaign.
Unless the jobs report destroys the patterns we think there is still some upside here even after a strong report. Short interest is high, but the market has recovered into a nice set up even with a lot of bad world events. Another push lower is likely to get the shorts the opportunity to cover they wanted, and when that happens the cork is likely to pop higher. We have taken positions in anticipation of that, and we are going to continue looking on a lower start or even a higher start and the early test.
Support and Resistance
NASDAQ: Closed at 2155.09
Resistance:
2162 is the August 2004/April 2005 up trendline.
2162 to 2155 from December 2005 and September 2006
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 2187
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:
The 18 day EMA at 2148
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 1274.08
Resistance:
The 50 day SMA at 1274
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:
1272 to 1268 is the November and December 2005 closing highs and March 2006 closing low
The 50 day EMA at 1268
The 200 day EMA at 1263
The 18 day EMA at 1260
1247 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 11,225.30
Resistance:
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 SMA at 11,180
The 50 day EMA at 11,113
11,097 to 11,137 is the last peak from the February top.
The 18 day EMA at 11,084
11,044 is the January high.
10,965 from Q4 2000
10,931 is the November 2005 high
The 200 day SMA at 10,918
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.
July 3
ISM Index, June (10:00): 53.8 actual versus 55.0 expected, 54.4 prior
Construction spending, May (10:00): -0.4% actual versus 0.2% expected, -0.2% prior (revised from -0.1%).
July 5
Factory Orders, May (10:00): 0.7% actual versus 0.0% expected, -2% prior (revised from -1.8%).
July 6
Initial Jobless Claims (8:30): 313K actual versus 315K expected versus 315K prior
ISM Services, June (10:00): 57.0 actual versus 59.0 expected, 60.1 prior
July 7
Non-farm payrolls, June (8:30): 160K expected, 75K prior
Unemployment rate, June (8:30): 4.6% expected, 4.6% prior
Hourly earnings, June (8:30): 0.3% expected, 0.1% prior
Average workweek, June (8:30): 33.8 expected, 33.8 prior
End part 1 of 3
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