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us stock market, trade stock
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8/28/06 Investment House Daily
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SUMMARY:
- Investors lose confidence on confidence report, get reassurance from FOMC minutes.
- Consumer confidence slips through 100, rattling market but still not in a danger area
- FOMC minutes show a Fed worried about inflation, but more worried about slow US growth due to housing declines, weaker consumer, lower capital investment levels.
- Set for a further move higher but needs some help from the economic reports to really reel off some strong gains as with the prior legs in the rally.
- Exit strategies toward the weekend.
Midmorning stumble threatens third leg just as it starts, but market shows continued fortitude.
Stocks started soft again once more on the lack of economic data, measuring up for the next move higher after starting the third leg in this late summer rally on Monday. Oil was lower once more as well (closed at 69.71, -0.90), maybe giving a bit more throttle to the upside move. The move was just getting its legs when the Conference Board reported August Consumer confidence at 99.6 versus the 102.5 expected. Despite the falling gasoline prices the past couple of weeks, the data did not pick that up (late decline in the price) and investors at first blush were not ready to look past that lower than expected level. Stocks sold off with all indices turning negative, though SOX hung in at the flat line, showing solid relative strength once more.
That left the market to muddle through the morning, giving back roughly half of Monday's gains. Didn't look too promising, but midmorning stocks put in their bottom though through lunch all they could manage was a 3.5 hour lateral move. At 2ET the FOMC August meeting minutes were released. The minutes had a little bit for every side of the argument, but the bottom line was the Fed decided to pause and it wasn't holding its nose or crossing its fingers as it did. It saw inflation pressures still, but also felt the rate hikes to this point had not been fully felt and, in a new twist, viewed the economy as performing below potential for 6 quarters to come.
The articulated views regarding the economic slowdown's length pretty much put the idea of another rate hike in the future into the Glad garbage bag at the curb. Stocks pulled a knifepoint turn and rallied into the close. NASDAQ ran 27 points from low to close, SP500 9 points, and SOX an impressive 9 points as well. Never hurts to show a bit of character when confronted by some obstacles.
Technically the day was very similar to Monday though there was an additional notable or two. Volume was up again as stocks put in gains. It was nice to see rising volume with the pattern as well, the old reach lower intraday and then a solid surge back to positive. In short, buyers took advantage of the pullback when the sellers tried to push the market lower on the confidence news. Solid and bullish intraday action once more.
Breadth was solid as well at 2:1 on NYSE and NASDAQ; again nothing spectacular, but solid. It was particularly good to see given the intraday reversal. Breadth often lags such reversals, and the fact that A/D finished solid shows the move had some guts to it all along.
Finally, there were some key moves on the indices. NASDAQ managed to push through its 90 day MA that stalled it the past week as it tested and set up the next move higher. In doing so NASDAQ moved through the August highs and held that move on the close. That puts it in line for the July high as the next key point (2190). We want to see it move through that level on this run, however, making at least a wave at the 200 day SMA (2225). Now that would be a sweet move.
SP500 also made a pretty important intermediate move. It managed to hold a new August closing high to the close. That keeps it in a range of resistance from roughly 1300 to 1312 on a closing basis, and the further it pushes into this range, the sweatier the shorts get. A lot of shorts are betting that SP500 cannot move through the low 1300's. They tried to push their hand Tuesday after the market weakened on the consumer confidence report, but SP500 again held at the 10 day EMA and rebounded. If SP500 can continue to push higher the upside momentum will only add more pressure for the shorts to cover and thus provide more upside strength. That would set off the stronger upside rally we want from this leg, something it has not yet flashed as it did in the second leg higher.
THE ECONOMY
Confidence drop rattles investors but not at a dangerous level and not heading that way.
August confidence was knocked back to 99.6 from 107.0 in July (revised up from 106.5), and that was below lowered expectations (102.5). That was the largest decline in 9 months, i.e. since Katrina. Despite falling gasoline prices (though much of the decline came late in the survey period), consumers are worried about the jobs outlook and the economy despite the Fed's pause in rate hikes. Indeed, it is likely partly due to the Fed's pause that consumers are a bit more pensive. The consumer wonders if the Fed's actions are predicated on some inside knowledge it has that trouble looms.
The FOMC minutes show the Fed doesn't have that kind of knowledge, though there are enough signals out there to warrant the pause at any rate. The real questions are whether this level of confidence will harm the economy and whether a lower trend is setting in. To the first question, no. Confidence has to get down to the low 60's and really into the 50's to threaten recession.
As for the second question, that remains to be seen. This was only the second decline in six months. Confidence remains at elevated, indeed high levels, since coming off lows hit in 2002. It is naturally struggling some with worries re the economy given oil prices, Fed rate hikes, and the typical brawling in a national election year. You always have to watch to see if there are cracks in a trend, and if you have a hiccup in the number there are immediate shouts of concern. One data point is not a trend and it does not change a trend. Thus far the trend is strong. It can change, particularly if the economy heads lower further into 2006. If that is going to happen we will see other issues telling the story before then, specifically the stock market. If it breaks down through the bottom of the current consolidation, that is an indication there is more economic slowing coming than currently expected.
Some reading the FOMC minutes as hawkish, but Fed makes some serious admissions about the economic slowdown.
CNBC's head economic reporter was scratching his head Tuesday wondering why the market rallied after the FOMC minutes came out as Steve perceived them as hawkish. The market tends to find esoteric reasons to treat data a certain way, so getting too analytic as to why the market moved as it did is typically a frustrating exercise. The most likely reason stocks bounced on the report is that it was not outside of expectations in that it did not show any latent hawkishness and did not reveal any major panic regarding the economy.
Thus when the report hit and there were no major bombshells the market rebounded from the selling after the confidence report. We said the FOMC minutes would help the rally if they didn't have any surprises, and that was exactly what happened.
Was it a totally agnostic report, however? Not in our view, and likely not in the market's. Sure the Fed talked about the continued inflation pressures and the need to act if necessary to keep it under control, but that is not new. That is what the Fed has said for, well, the entire hiking campaign. What was new in this statement is the Fed's mention of a recent Fed report that anticipates the economy underperforming its potential for the next six quarters. That is a serious admission; it may not have come out and totally endorsed that as its official view, but it put it in the minutes and expressly noted the conclusions. Second, the Fed spent quite a bit of time discussing the bond market and what the financial markets are showing with respect to economic growth expectations and inflation expectations. It concluded that the markets were not indicating inflation getting out of control. Finally, the Fed specifically discussed the impact of the existing rate hikes still to affect the economy combined with the rapid and relatively recent declines in housing.
When you stack up a few sentences here and there about the need to be vigilant against any growing inflation pressures, it is pretty easy to see where the Fed is leaning. Think of it as writing an 8 page persuasive essay citing all of the reasons you should invest and save for the future after noting in the initial paragraph that it could all be for naught because you could die in five years. Sure that is a possibility, but the bulk of the paper suggests you need to plan on living and retiring versus buying the farm in a half decade.
In sum we read the minutes as saying the Fed stopped for definite, serious reasons and not just a lark to 'wait and see' what was going to happen. It is going to wait and see, but it is doing so because it is looking at historical patterns and current markets as leading indicators despite what lagging inflation is doing. This is a milestone for the Fed if it can stick to its course. Looking at history, we believe it will. In no instance where the Fed has 'paused' and said it was doing just that (versus stopping outright) has it ever gone back to raising rates during that economic cycle. Of course, the reason is it usually (13 out of 15 times) wrecked the economy with its rate hikes and liquidity draining and ended up having to cut rates to counter the recession it caused.
We have to see how the stock market holds up here in this current correction and rebound attempt. The bond market rallied a bit further Tuesday on the FOMC results, pushing yields to 4.87% on the 2 year and 4.78% on the 10 year. The inversion remains at its wider gap and the short term and longer term bond yields are moving lower as well, far below the 5.25% Fed Funds rate. That is not an encouraging economic outlook and one of the reasons the Fed paused and devoted time to a discussion of the financial markets in its August minutes.
THE MARKET
MARKET SENTIMENT
VIX: 12.28; +0.1
VXN: 17.29; +0.06
VXO: 10.89; -0.04
Put/Call Ratio (CBOE): 1.01; +0.03. A gain sees the put action top the call action. That shows us that there was some covering taking place Tuesday as the market reversed and rallied back with SP500 moving above 1302 on the close.
Bulls versus Bears:
Bulls: 40.0%. Bulls fell from 40.9% as the market moved up ahead of the current consolidation. Somewhat contra-intuitive given the market put in a decent move. Has waffled some the past few weeks (40.2%, 41.5% the week before, still well above the 38.7% in July. It remains below the levels hit on the last market sell offs. On the last pullback bulls 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: 34.7%, much lower than the 36.6% reading last week. Bears continue to become more endangered, sliding from 37.1% hit in July. The 37.1% was the highest level in this entire cycle, easily clearing the 34.4% hit in late June back when bulls and bears kissed, just missing a crossover. Hit a new post-2002 high in that late June move, 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: +11.6 points (+0.54%) to close at 2172.3
Volume: 1.649B (+18.59%). Volume again rose as NASDAQ put in another gain. This trade, while still below average, was much better than Monday with its bump in trade. Now we are still in a low volume period but there was a jump in trade Tuesday to the highest level since the second leg in the rally. With the dip and rebound there was some short covering along with long buying that pushed volume higher. Either way you look at it, the trade was solid.
Up Volume: 1.115B (-7M)
Down Volume: 499M (+244M)
A/D and Hi/Lo: Advancers led 1.95 to 1. Very solid breadth as the move extends.
Previous Session: Advancers led 1.77 to 1
New Highs: 89 (+18)
New Lows: 47 (+2)
The Chart: http://www.investmenthouse.com/cd/^ixic.html
NASDAQ was up early then gave it all back and more with another test of the 10 day EMA (2143) after the confidence report. Then the 27 point swing that took NASDAQ through the 90 day MA (2157) and past the August high (2168). Now it has the early July high in its sights (2190.44), but we think it has more in it in this run if it can get a little bit of help from the economic data. It showed great character Tuesday in coming back from the confidence report, but this leg needs some clear sailing so it can stretch its legs upside as opposed to having to scramble and make the come from behind move each session. In that way it can make it to 2200 and beyond on toward the 200 day SMA (2224) and June high at 2234.
SOX (+1.66%) showed the best relative strength Tuesday, holding near flat after the early selling got underway and then leading to the upside. It still only managed a close just below the August closing high (446.11) and has to deal with price resistance all around 450. It has set up a reverse head and shoulders, however, and if it can blast through 450 with another strong NASDAQ move it will be on its way to a run at 475.
SP500/NYSE
Stats: +2.5 points (+0.19%) to close at 1304.28
NYSE Volume: 1.377B (+18.84%). NYSE volume posted its best showing in two weeks as SP500 moved through the August high and the small caps pushed through the 50 day EMA on the way to the 200 day SMA. Good upside trade that signaled some buyers after the early selling, and some short covering as well. As SP500 pushes further past 1300 we expect to see even more short covering.
A/D and Hi/Lo: Advancers led 2.09 to 1. Still solid breadth as the NYSE indices moved higher.
Previous Session: Advancers led 2.34 to 1
New Highs: 161 (+26)
New Lows: 40 (+11)
The Chart: http://investmenthouse.com/cd/^gspc.html
SP500 pushed to a new closing high for August, moving base 1302 that marked the highs from last week. It is in the teeth of a swath of resistance from 1300 to 1312, but it is showing better volume as it forges into that tangle of prices from March and April, the interim highs just before peaking in early May. Picking up speed and we can still get a move up to 1320ish on this move if it, as with NASDAQ, can get some help from the economic data and put in a session or two where it can run from bell to bell as it did in the second leg.
SP600 (+0.96%) pushed through the 50 day EMA (364.11). A necessary move after making a higher low at 360 the past three sessions, but still below the August closing high at 368.46 and the 200 day SMA (371). That was our original target for SP600 given its laggard status in the market the past 4 months. We would be open for a chance of character, of course, but we are not expecting it.
DJ30
DJ30 posted a gain itself, but it was quite muted compared to NASDAQ and indeed the tamest move of the big indices. It limped higher on modestly rising volume but could not push to a new August closing high (11,382). It did manage to bounce once more off the 10 day EMA (11,309) and rebound, but that was the extent of it. It is not lighting the first as it did two weeks back, though at that point it was a laggard as well. It needs to lend some support to the rest of the market with a strong break higher from here.
Stats: +17.93 points (+0.16%) to close at 11369.94
Volume: 198M shares Tuesday versus 180M shares Monday. Volume continued to improve as DJ30 bumped up again against the August highs.
The chart: http://www.investmenthouse.com/cd/^dji.html
WEDNESDAY
Another iteration of Q2 GDP is out before the open, and economic activity is expected to rise from the 2.5% surprise (to the downside) originally reported back to the 3% expected on that first go round. Reported with the GDP is the chain deflator, a measure of inflation pressures, as well as the PCE. Investors will obviously prefer softening inflation indications to keep the Fed on idle as it watches the inflation data. A soft inflation angle and the market is ready to continue the advance.
We obviously want to see a better push higher Wednesday, a bell to bell run as opposed to having to come back intraday and end up with modest gains. If it can do that it will have some momentum into Thursday and thus perhaps manage another upside move for at least part of that session. A strong Wednesday move and a decent half day move Thursday will give us some nice gain to lock in on our upside positions. If the market continues higher we will let it; it could rally on through Friday as well and even next week when we all get back from Labor Day.
The odds of that, however, are not that likely given the very nature of a 3-day holiday and the post Labor Day period as one that can be challenging so to say. Indeed, a strong run up to the weekend will very likely lead to profit taking simply because of the run ahead of the uncertainty of the longer weekend.
In short, our plan at this point is to let the rally unfold as best it will, riding our positions higher with the intention of taking some gain Thursday or Friday if the rally can extend to those sessions, but ready to move as well if we get a strong surge Wednesday that gives us one of those 30 to 40 point NASDAQ moves. Again, such a strong move if mirrored by SP500, SOX, DJ30 and SP600 could mean that a much stronger move is ahead even after Labor Day as the market skips past the traditionally weak September and October selling season.
We don't want to delude ourselves, however. Even with another 50 to 75 points by NASDAQ, the rally has been on low volume and modest internals all around. Until it shows something else it is a late summer rally, and thus far the attributes are exactly that. Thus if we get some solid gain we will be locking it in. We won't do it all at once, but we will be letting our stocks extend as best they will. Some are running out in front well, e.g. NVDA, and another good push that takes it near 30 is a logical place to take some gain if it starts to stall. We will be looking at all our positions for the same kind of treatment: let them run with this third leg as far as they will go and take some gain.
How much we take off the table depends a lot upon our positions and how well the stock has performed. With options we will be taking a lot of them completely off the table. A leader that is working well we can hold stock positions to see how they work through the start of September. A position that has performed marginally even if the market puts in another couple of sessions or is just a rebound play that was more for short term is a candidate to be completely closed.
With respect to new positions it is time to be careful. If we are operating under the premise we will get another day or two of upside before the holiday weekend and before a potentially dangerous time then we don't want to open a lot of positions that we need to let grind forward to give us any kind of decent gain. Thus we will naturally be slowing down the acquisitions unless we see something really ripe and the market is responding well to the GDP report. Again, the market is showing much better action as the techs come to life, but it is all in the context of a late summer rally. We are looking at it like that near term, and will adopt the Missouri attitude following the Labor Day holiday, i.e., show me with respect to continuing the move upside.
Support and Resistance
NASDAQ: Closed at 2172.30
Resistance:
2177 is the December 2004 high.
2185 to 2182 is the September 2005 peak and interim high from November 2005.
2190 is the July 2006 high
2198 is the August 2004/April 2005 up trendline
The 200 day SMA at 2225
2230 is the June 2006 peak. This is what we are shooting for on the next leg. About.
Support:
2168 is the August intraday high.
2158 from the May 2005 low.
The 10 day EMA at 2143
The 50 day EMA at 2124
2100 from the early and mid-2005 peaks
2072 is the June closing low
2050 from the summer 2005 lateral range lows
2045-47 from June and October 2005 lows and June 2004 highs
2037 at the October 2005 closing low
2020 is the July closing low
2019 is the April 2005 interim high
S&P 500: Closed at 1304.29
Resistance:
1311 is the April closing high.
1315 is the May and May 2001 peaks
1324 to 1329 from the October 2000 lows.
1326.70 is the May 2006 high
1334 is an October 1999 peak
Support:
1302 the recent August highs
1294 is the January 2006 high and 1297.57 is the February 2006 high.
The 10 day EMA at 1295
The early June high at 1288
The late January peak at 1285
1280.37 is the recent July peak.
The 50 day EMA at 1277.50
The 200 day EMA at 1276
1262 is an old trendline from the August 2003/August 2004/October 2005 lows.
1239 from the late June consolidation range.
1225 from the March 2005 high
1223 is the June 2006 closing low.
Dow: Closed at 11,369.94
Resistance:
11,384 is the August intraday high.
11,401 from the September 2000 peak and April 2001 highs
11,642 is the May 2006 closing high
11,670 is the May intraday high
Support:
11,350 from the May 2001 peak
The March 2006 highs at 11,329 to 11,335
The 10 day EMA at 11,309
11,279 is the late May closing high
11,243 is the early August peak closing high.
11,228 is the July closing high.
The 50 day EMA at 11,176
11,097 to 11,137 is the last peak from the February top.
The 200 day SMA at 11,054
11,044 is the January high.
10,965 from Q4 2000
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.
August 29
Consumer confidence, August (10:00): 99.6 actual versus 102.5 expected, 107.0 prior (revised from 106.5)
FOMC minutes, August 8 (2:00): Some read it hawkish, some dovish. Looked to be long on the reasons not to hike.
August 30
GDP prelim, Q2 (8:30): 3.0% expected, 2.5% prior
Chain deflator, Q2 (8:30): 3.3% expected, 3.3% prior
Crude oil inventories
August 31
Initial jobless claims (8:30): 315K expected, 313K prior
Personal income, July (8:30): 0.5% expected, 0.6% prior
Personal spending, July (8:30): 0.8% expected, 0.4% prior
Chicago PMI, August (10:00): 57.0 expected, 57.9 prior
Factory orders, July (10:00): -0.8% expected, 1.2% prior
September 1
Non-farm payrolls, August (8:30): 125K expected, 113K prior
Unemployment rate, August (8:30): 4.7% expected, 4.8% prior
Hourly earnings, August (8:30): 0.3% expected, 0.4% prior
Average workweek, August (8:30): 33.9 expected, 33.9 prior
Michigan sentiment final, August (9:45): 79.0 expected, 78.7 prior
Construction spending, July (10:00): 0.0% expected, 0.3% prior
ISM Index, August (10:00): 54.7 expected, 54.7 prior
End part 1 of 3
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