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us stock market, trade stock
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9/06/06 Investment House Alerts Report
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IH Alert Subscribers:
MARKET ALERTS:
Target hit alerts: None issued
Buy alerts: None issued
Trailing stops: AGN; HMSY; GILD; FSL; WEBX; XING; MGI
Stop alerts: ABAX; WEBX; PLCM; CAM; PDS
SUMMARY:
- Higher labor costs provide nervous market a reason to sell.
- Labor costs rise due to productivity declines, but corporate profits still strong.
- Fed Beige book shows slowing growth, higher inventories, slower consumer: generally slower economic activity
- Stepping back some and letting September set its course.
Labor costs trip hair trigger selling.
As if it did not want to be labeled good for stocks after Tuesday's gain, the September everyone fears showed up Wednesday as stocks tumbled lower. One day does not make a trend, so we cannot definitively say that this is the path for all of September. Nonetheless, the point losses were heavy, breadth was very negative, and volume rose, indicating those coming back to the market were sellers. It was definitely time to pare positions more (as we have been doing the past week) and let this settle out and show us where it is heading. Again, the initial read is not very positive for the upside, but then again, it is September.
As you could probably tell from our writings the past couple of weeks, we were not too confident of a continued run after this first week of September. Wednesday before the open you could feel the weight of the sellers when you talked to floor traders and brokers as they scanned their sell orders versus buy orders.
The market was ready to sell as it was down very early and well before the opening bell. When the Q2 productivity numbers were released the selling pressure increased. It did not matter that productivity came in higher than expected; the focus was on unit labor costs that also came in hotter than expected (4.9% versus 4.0%) with Q1 revised sharply higher to a 9% gain. That raised inflation concerns once more even though it is quite clear that the Bernanke Fed is not going to fight lagging inflation by further slowing an already slowing economy. Slow economies do not equal less inflation; less liquidity means less inflation, and as discussed over the weekend, Bernanke has been artfully lowering liquidity this year, doing the dirty work that Greenspan did not want to do.
Thus it was not really inflation fears that spurred the selling. The unit labor report was the trigger, the excuse to sell after a low volume late summer rally. The market confronted some negatives during its August move and overcame them, but now that many more are back in action, the light volume upside bias was overwhelmed when the market had to deal with negative news. When the ISM services came out at 57.0 versus 55.0 as expected investors viewed it as only fanning inflation fears the productivity report rekindled. When the Fed's Beige Book came out at 2:00ET and showed much more slowing, when analysts coupled that with Furniture Brand's comments about weakening business conditions, people started talking about stagflation. In short, it was a Kobiyashi Maru scenario, i.e., a no win situation. Stocks were going lower barring the economic equivalent of a parting of the seas.
Technically the action was heavily negative. Higher volume, sharply negative breadth (-3+:1), a failed midday consolidation attempt, a close at session lows, and big price losses. There was little middle ground on the session. About the only positive is that that indices held close to near support. Of course, that is a hollow victory; if the bell had not rung they would have likely sold even lower. Reminds me of the 1982 Cotton Bowl between Alabama and Texas when Texas came back to win the game late. When asked what the outcome would have been if the game was extended 10 more minutes, Bear Bryant said Texas would have probably scored 10 more points. The point: though the indices closed near support, it was not because the selling was abating at that level.
In sum, September showed up, or more correctly, sellers showed up and took stocks lower on some higher volume. That shows investors overall are not comfortable with the gains stocks scored in their late summer rally given the current view of the economic future. That is a fancy way of saying it looks as if the market feels prices are too high for the earnings that are to come. It was just one day, but it is precisely the kind of day we felt could appear, and it means we need to step back from the general upside plays and focus on specific sectors that can still perform upside during the fall selling season as well as look to the downside and profit from this weak period in the market. The key is to not get too wedded to any one move or direction but to take what the market gives. Moving with the market as opposed to fighting it helps you sleep a lot better.
THE ECONOMY
Unit labor costs rising even as profits rise. Is there a disconnect? Yes.
Productivity was up 1.6%, above the 1.1% originally reported and at a solid 2.5% year over year. Unit labor costs, however, jumped as well, rising 4.9% in Q2 and 5% year over year. That blew away the 4.0% gain expected, and with Q1 revised upward to a 9.0% gain, investors returned to fearing more Fed action with respect to rate hikes, or at least that is the spin put on the Wednesday selling.
At the same time wages were rising in Q1 and Q2, however, corporate profits were rising as well. Profits are what is left over after expenses are accounted for. The major expenses are plant/office and related overhead, materials and equipment used for products, and labor. We know materials costs were still generally rising at the time (energy, metals, etc.) as the Beige Book Wednesday afternoon confirmed. Yet, the Beige Book also said that those increases were not passed along to the consumer of the goods or services. If wages were rising as well, then were overhead costs falling to make up the difference and more, thus giving increased profits? Those are typically fixed costs not prone to fluctuation. If they are relatively steady while materials costs rise along with labor costs, how do profits grow?
Clearly the data is not adding up to the reality we see. We conduct our own rather unscientific surveys from around the nation and we don't hear many workers talking of their rising wages. Indeed, the typical complaint is that despite the economic expansion they are not seeing a commensurate increase in their pay. Digging a bit deeper we hear from some that the reason wages appear to be rising in Q1 and some into Q2 is the combination of large bonuses on Wall Street (it was a huge year for the big and smaller houses) as well the treatment of stock option awards. Those items are skewing the unit labor costs and the Wall Street bonuses account for much of that huge revision to Q1 results.
Fed Beige Book paints a pretty grim picture.
News flash: for those lamenting the unit labor costs as presaging another Fed rate hike, forget it. The Beige Book released Wednesday paints a clear picture of economic slowing with five regions out of twelve reporting slowing conditions with the other seven reporting very slow growth. The slowing growth is led by the consumer. While manufacturing continues to expand, you have to ex-out autos to show the upside. That is another signal that the consumer is slowing down pretty fast. As an aside, the weekly mortgage applications showed a 1.8% increase for the week, but that is down 26% year over year.
Outside of the consumer business spending continues at a solid pace, but as we found out in 2000 to 2003, the economy cannot survive if just the consumer is spending or just the business side is spending. Both are needed for a continued expansion, one that benefits everyone. Indeed, looking at inventories to sales, the ratio hit a 10 year high in the period measured by this report. As noted above, that is a pretty grim picture.
Further we need to take a look at energy prices and energy stocks. Yes the summer drive is over and gasoline prices are falling as demand falls, but is there more here? Are the prices starting to foretell a decline in demand related to slower economics? That remains to be seen bit with the other data it is an area we are going to watch closely.
Thus with housing falling rapidly, the consumer slowing, and close to half of the regions reporting economic slowing, the Fed is not going to backtrack and hike rates further at this juncture. Bernanke has been the Fed chairman just a short while, but he has shown that he is has definite ideas about how to manage monetary policy, and he is not going to jump back and forth because inflation indications continue just as you would expect them to at this juncture in the economic cycle.
THE MARKET
MARKET SENTIMENT
VIX: 13.74; +1.11
VXN: 20.19; +1.84
VXO: 12.67; +1.43
Put/Call Ratio (CBOE): 1.27; +0.31. Nice jump in put activity as the market made its first sharp push lower. That shows concern levels remain quite high even after the bounce, and help keep the patterns trying to set up since the May peak.
Bulls versus Bears:
Bulls: 42.1%. After a sideways move for a few weeks, bulls are starting higher, rising from 40.0% the week before (40.2% and 41.5% the week before). Bulls are still well below the early 2006 highs and even the April high. The low of the cycle was in June at 38.7%. It remains below the levels hit on the last market sell offs in October 2005 and March 2006, but above the June low when it kissed the bears.
Bears: 33.7%. Continuing the decline from 34.7% last week and the 36.6% the week before and 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: -37.86 points (-1.72%) to close at 2167.84
Volume: 1.842B (+2.62%). Volume up to above average as NASDAQ gapped lower and sold through the 10 day EMA on the close. Not heavy distribution, but the first solidly above average volume session since one of the mid-August upside sessions on the second leg of the rally. That tells us that for the first time since that session the sellers have grown in number above he buyers.
Up Volume: 168M (-910M)
Down Volume: 1.605B (+924M)
A/D and Hi/Lo: Decliners led 3.07 to 1. It was ugly downside all session as techs and all NASDAQ stocks sold across the board. It easily overwhelmed the best upside sessions during the rally.
Previous Session: Advancers led 1.56 to 1
New Highs: 60 (-48)
New Lows: 37 (+3)
The Chart: http://www.investmenthouse.com/cd/^ixic.html
NASDAQ gapped lower and only made one real attempt at a comeback. That midday bounce did not bring it anywhere near positive for the session; it was down all session without any hope of making it upside. It undercut the 10 day EMA (2171) on the close, falling through the July high as well. It gave up the August 2004/May 2005 up trendline at 2200 as well. In general, a lot of the work done as it rallied higher in the summer rally, including the Tuesday move higher, was tossed away. Now it is sitting on top of the mid-August high (2164) but is not likely to slow there. It looks ready to test the 18 day EMA (2150) but at this juncture each support level is just a possibility. We want to see the overall pattern from May hold up, but it can fall to 2100 and still do that.
SOX (-3.28%) took a serious licking but that is what typically happens when the market sells as SOX has a higher beta. It cut through the 10 day EMA but did hold near support at the 18 day EMA (437). Still a very nice cup base since May with a reverse head and shoulders the past 3 months. Now we see if it can hold here (preferable) or at 425 to keep it going. Many chips still remain in solid position at near support.
SP500/NYSE
Stats: -12.99 points (-0.99%) to close at 1300.26
NYSE Volume: 1.436B (+7.13%). Volume rose once more on NYSE, but it was still below average; there is just not a lot of excitement yet with respect to NYSE. There was some distribution, but it was equal to the accumulation just a week ago. In other words, the selling volume is not good but it is not clearly turning the tide from the late summer rally.
A/D and Hi/Lo: Decliners led 3.93 to 1. Pretty much a slaughter any way you look at it.
Previous Session: Advancers led 1.36 to 1
New Highs: 67 (-110)
New Lows: 27 (+10)
The Chart: http://investmenthouse.com/cd/^gspc.html
Pretty much straight down as SP500 sold through the 10 day EMA (1302) and just clipped the mid-August high (1302). Still holding near support but one heck of a sharp drop, wiping away a week of upside work. Just have to see where this selling decides to settle out, but we have a feeling it is a bit early to be anticipating a rebound. The 18 day EMA (1296) is next, then 1290 to 1288.
SP600 (-2.03%) was the picture of weakness Wednesday as its recent relative strength vis- -vis the large caps went flying out the window. Tuesday it cleared the 200 day SMA and Wednesday that is a distant vision as the small caps fell through the mid-August high (368.46 closing) on down to the early August closing peak at 365. We thought the 200 day SMA (371.67) would be its zenith on this leg, and Wednesday that was driven home as the small caps were hammered.
DJ30
DJ30 held up relatively well with its 0.55% loss. Of course DJ30 has been the poster child for indecision compared to the other indices. It lagged on the last leg higher and, to its benefit, it lagged in the Wednesday selling. That leaves the index set up quite well still, holding above the 10 day EMA (11,383) and maintaining its sharp break higher from last Friday. Not likely to hold that, but it has some room to fade down to 11,300ish (the 18 day EMA is at 11,325) and still be in very good shape for a September.
Stats: -63.08 points (-0.55%) to close at 11406.2
Volume: 191M shares Wednesday versus 185M shares Tuesday. Volume was up but still below average as DJ30 faded. Some modest distribution as with NYSE, but as with that index, the selling volume is also less than the upside trade on the second leg of the rally.
The chart: http://www.investmenthouse.com/cd/^dji.html
THURSDAY
An ugly session as we got a test of September selling. Strong point losses on stronger volume as shares were dumped across the board. After the nice advance to end summer some of the indices remain in good shape even with the harsh point losses, e.g. SOX, DJ30, and even SP500 and NASDAQ. In short, one day did not take away all of the gains and pattern building through Tuesday.
Of course, just one day is likely not the end of the selling by any stretch. There was distribution Wednesday, always a key point to watch in any market as that shows us whether the majority of players are buying or selling. Wednesday they were selling after a summer rally left stocks at a level where many of the institutions are wondering if earnings to come justify the current prices. That is often how September works; there is uncertainty about the future and managers are positioning for a potential run to the end of the year after a rally in the summer. This one has more significance given the Fed hiking campaign is over and even the Fed is wondering if it went too far yet again.
In short, one day of upside Tuesday did not indicate September was an upside lock just as the Wednesday downside session does not mean a complete breakdown is coming. It does show there are sellers in the market where there were few during the summer rally. The point losses, volume and breadth indicate there is a potential shift underway. Thus as the market tries to decide its course we step back and let it do so. That means we have to look at upside plays that will tend to perform better in a weaker market such as healthcare, medical, maybe some insurance. Those will move higher in selling and they can also move. We can look at consumer staples, but in general they don't tend to move much; many can move up for two weeks and have just $1 to show for it. That is not always the case of course, and we will as always be watching for strong movers in that group set up to move well. At the same time we will look for downside plays with stocks that have rallied from weakness during the late summer rally but are now starting to roll back over. We can capitalize on their resumed downtrends for nice gains as the market tries to decide its direction.
Support and Resistance
NASDAQ: Closed at 2167.84
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
2200 is the August 2004/April 2005 up trendline
The 200 day SMA at 2224
2230 is the June 2006 peak (2234 intraday)
2250 is the March 2006 closing low.
Support:
The 10 day EMA at 2170 is giving way
2168 is the August intraday high.
2158 from the May 2005 low.
The 50 day EMA at 2135
2100 from the early and mid-2005 peaks
2072 is the June closing low
2050 from the summer 2005 lateral range lows
S&P 500: Closed at 1300.26
Resistance:
The 10 day EMA at 1302
1302 the recent August highs
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:
The 18 day EMA at 1296
1294 is the January 2006 high and 1297.57 is the February 2006 high.
The early June high at 1288
The late January peak at 1285
1280.37 is the recent July peak.
The 50 day EMA at 1282
The 200 day EMA at 1277
1264 is an old trendline from the August 2003/August 2004/October 2005 lows.
Dow: Closed at 11,406.20
Resistance:
11,642 is the May 2006 closing high
11,670 is the May intraday high
Support:
11,401 from the September 2000 peak and April 2001 highs
11,384 is the August intraday high.
The 10 day EMA at 11,382
11,350 from the May 2001 peak
The March 2006 highs at 11,329 to 11,335
The 18 day EMA at 11,332
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 11,221
11,097 to 11,137 is the last peak from the February top.
The 200 day SMA at 11,075
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
September 6
Productivity, revised (Q2) (8:30): 1.6 actual versus 1.6% expected, 1.1% prior
ISM services, August (10:00): 57.0 actual versus 55.0 expected, 54.8 prior
Fed Beige Book (2:00)
September 7
Initial jobless claims (8:30): 315K expected, 316K prior
Wholesale inventories, July (10:00): 0.7% expected, 0.8% prior
Crude oil inventories (10:30)
September 8
Consumer Credit, July (3:00): $6.5B expected, $10.3B prior
End part 1 of 3
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