|
|
us stock market, understanding the stock market
* * * *
9/13/06 Investment House Daily
* * *
Investment House Daily Subscribers:
MARKET ALERTS:
Target hit alerts: None issued
Buy alerts: None issued
Trailing stop alerts: None issued
Stop alerts: None issued
The market alert service is a premium level service where we issue intraday alerts relating to the general market conditions, when stocks hit action points (buy, stop, target, etc.), and when we see other information impacting the market or our stocks. To subscribe to the Daily alert service you can sign up at the following link:
http://www.investmenthouse.com/alertdly.htm
SUMMARY:
- Market puts in a fourth day of gains, moving through some key resistance.
- Inflation expectations turning to disinflation expectations as markets try to determine economic slowdown or recession.
- Impressive market rebound continues in the face of last week's distribution and September.
Energy and financials take the lead and help push indices to next level.
NASDAQ was still moving well Wednesday, but its cohort the SOX needed a rest. That put the three day advance in question, but after 7 days of selling, oil and the energy sector posted a relief bounce, and with the help of the financials breaking higher, the market found enough buying to push the indices overall to a fourth consecutive gain. Energy stocks were ready to rebound after the tail kicking, and were heading higher when the weekly oil inventories showed a larger drop than expected in crude. That helped energy stocks and oil continue their early gains (oil closed modestly higher at $63.97, +0.21).
It was another mushy start that turned into a rally with stocks moving from low to high, continuing the bullish intraday action shown each session of the current rebound. NASDAQ and SP600 pushed through the 200 day SMA. SP500 cleared the September high on rising volume. And in case you missed the CNBC, Bloomberg, etc. alerts, the Dow closed above 10,500, hitting a four month high. In short the market continued its solid response to last week's distribution, for the most part turning that attempt to sell on its head. Not exactly what was expected, but not a whole lot of complaints about the action either.
Technically, there were some key moves made. As noted, stocks continued showing the lower to higher intraday action so often characteristic of a bullish run. The move was still broad but less than Tuesday, with NYSE breadth running 2:1, helped in no small way by the recovery of energy stocks. Recovery is too strong a word; relief bounce after getting slaughtered is more appropriate. NASDAQ breadth was 1.7:1, however, so it was not all black gold forcing the issue. Stocks rallied with decent, not blowout, breadth.
Volume flipped again. NYSE trade rose while NASDAQ trade declined. All in all, trade continues to climb, however as stocks rise. Thus the move may not be as strong as you would like, it is showing accumulation, leadership, moves through resistance, all in response to some selling attempted last week. In addition, nearly all the indices cleared some important resistance, NASDAQ and SP600 moving through the 200 day SMA, with SP500 moving clearly through the last resistance before the May high.
After four sessions higher and moving through important resistance, however, the market is likely going to take a rest before SP500 and DJ30 try the final move, i.e., clearing the May highs. That is why we were not gung ho about entering a bunch of new positions today, preferring to wait for the test of this move to see just how it develops. As of yet there is no return of the sellers with any quick reversal. Given the time of year, however, we continue to look over the shoulder to see if anything might be coming.
THE ECONOMY
Are the markets pricing in a change in inflation expectations?
The past couple of months we have written about this current round of inflation, how it got started, how strong it is, and how far along it is in the inflation cycle. As we all know and hear each day (how can we miss it with so many Fed officials speaking each week?), the Fed is on guard to protect us all from spiraling inflation, and that typically means it is ready to cause a recession or at least a significant economic slowdown to avoid it. The lingering fears of the 1970's when the Fed over-monetized a stagnant, overregulated, and overburdened economy further handicapped by the OPEC oil embargo has left a legacy of hyperactive Fed governors when it comes to managing the economy. Any prosperity we get as a result of all our fiscal policies designed precisely to bring it about is subject to the Fed's wrath for fear inflation may result. On all occasions but one since then (and on most occasions before that time) the Fed has managed to snatch recession from the jaws of prosperity as a result of its attempts to micromanage our success.
Even with Bernanke's entry onto the scene and what appears to be a Fed chairman guided by history and a deep understanding of economic cause and effect (as opposed to Greenspan's flexible and admittedly seat of the pants helmsmanship), the stock market, the bond market, the gold market (and commodities in general), along with the housing market and some other quickly cooling economic indicators have suggested the Fed may have gone too far.
It has been a rollercoaster that got a lot of emotions stirred up. Recall how oil shot to $75/bbl in May as it along with gold, copper, silver, and just about every other commodity and raw or processed material exploded higher. Many smart minds were clamoring it was a sign of inflation, that Bernanke's musings about how the Fed could pause even if inflation was still rising were fooling and only fueling the inflation fire as inflation EXPECTATIONS were ratcheted higher. We were watching the bond market at the time, however, and though the spreads indicated some move toward inflation, overall rates were heading the other way. There were many theories to explain it, i.e. why this time the bond market was wrong (as Greenspan proffered in 2005), but the old 'this time it is different' argument has never flown with me. We posited that the commodities move was technical, that it was a blow-off top where speculation runs to high and thus runs its course with a spectacular run higher before a correction. In other words, we said it was not indicating inflation, just too much speculation as seen in 1999 when there was too much money in the system ahead of Y2K. Sure enough commodities rolled over and gave back the entire speculative move from March to May. Copper did the same. Oil fell well off its highs as well.
At the same time, however, bond yields did not shoot higher, indicating inflation was down the road. The stuck stubbornly lower, and that has kept us concerned all along. Blow off tops tend to happen at the end of runs. If Bernanke's comments about a pause helped fuel an inflation fear run in commodities, why did commodities not spike again when Bernanke actually followed through, pausing at the August meeting even as inflation pressures seemed to mount? Instead commodities have continued lower, falling through the late 2005 lows. That is not an inflation indication at all. It has the look of a speculative run that cracked near the end of the cycle, and now they are diving lower in anticipation of some slower economic times. That certainly is more of a match to what the bond market has been saying all along, and now we see the commodities coming into line with bonds. Pimco's Bill Gross has recently stated that we should be ready for a bull run in bonds, i.e. lower yields. He is the quintessential bond watcher because that is his business, and he controls billions in bonds.
At the same time we keep hearing Fed-speak about how inflation is past its comfort level, how the Fed will step back in if necessary, blah, blah, blah. That is talk the Fed has to make. It cannot come out when inflation indicators it says it has watched for 20 years are high and say there is no need to fear inflation. The Pavlovian markets were trained by Greenspan; they have to be weaned off that Phillips Curve nonsense, i.e. they cannot go cold turkey. Thus the subterfuge by Bernanke, allowing his attack dogs to keep barking about rate hikes when bonds and anyone that has seriously tracked his comments and theories knows there is no way he is going to raise rates again in this cycle.
It thus appears that Bernanke got it right by making some probably too honest comments to Congress on monetary policy back in the spring. Money supply was too loose under Greenspan and that was a major cause of the current inflation. Bernanke curtailed it sharply but did not pull a Greenspan and cut it off altogether; he knew he had to let the economy grow its way out of any inflation. The worst thing that could happen would be to stall the economy and recreate the 1970's. So he walked the fine line of cutting money supply but leaving enough for the economy to grow. He hiked rates a couple more times but did not want to choke off all of the housing market.
Now the question is what is the outcome, recession or just a change in inflation expectations? Those expectations jumped in the spring and early summer and thus the wild speculation. Now commodities are dropping like the stones, metals, etc. that they are. Oil is well off its high. Gold has plummeted from $735 to less than $600; still holding part of its pre 2006 gains but not spiking higher. Leading indicators suggest slowing, but thus far no recession and not even what you would call a significant slowdown where growth heads to nearly flat. The stock market was in a steep correction starting in March as measured by SOX, an index that has shown to be a good leading indicator. It is now fighting back, however, building a base that could (the jury is still out, however), lead to an upside breakout and thus an indication of further economic growth. The small caps are lagging, and how their base resolves itself will be an important outcome for the market and thus the economy. Thus the leading indicators have not totally answered the question yet, partly because Bernanke is new and is still a wildcard. Thus they factor in the possibility of the Fed coming unglued and hiking rates and reducing money supply more.
Looking back at the bond market, you see that the TIPS (Treasury inflation protected securities) are yielding near 2.7%. Real nominal interest rates are in the 4.7% to 4.8% range. This spread indicates rates are going to head lower still. As we have discussed before, they are pricing in Fed rate cuts. More than that, they are pricing in lower real rates as well. Now, that can indicate recession: if short term money is more valuable than longer term money, the implication is that the economy will be slower down the road. Thus the inversion/flat yield curve remains a worry.
IF the yield curve can revert to a normal curve and remain at these low or lower levels, that would indicate a shift to disinflation expectations versus inflation expectations, and we would be sitting pretty. In the 1980's, despite the big deficits, interest rates fell as the economy grew. It carried over into the 1990's, but rates started to rise as the deficit fell. That is an entirely different story we have discussed before and will discuss again; it is not key here.
The point: falling interest rates do not foretell doom if the curve is as it should be. Indeed, they foretell boom. The key remains the curve and whether it can work it out. It tried after Bernanke paused, a contemporaneous indication that Bernanke did the right thing. Now the question remains whether he did the right thing soon enough. We still have slowing ahead of us; it is going to happen. The key is how deep does it go? The stock market is trying to forge higher, and if it breaks out we can start viewing the turn in commodities and inflation expectations not as a turn in fear of recession, but as a return to the same kind of disinflation experienced in the 1990's that allowed lower interest rates and provided incentives to put capital to work in business as opposed to bank notes. That is how we generate a booming economy and the technological advancements we need to create the jobs that raise our standard of living.
THE MARKET
MARKET SENTIMENT
VIX: 11.18; -0.74. Heard more comments today worrying about the VIX given it gapped lower, matching the March lows before rebounding modestly. The fear is it shows high complacency that can trigger a sell off. We have noted this before: volatility can remain low for long periods of time, even when the market is going nowhere as in 1994. Then it starts rising as the market rises. We went through a Fed hiking campaign that stalled the market just as in 1994. Volatility is naturally low during a sideways market, just as in 1994. Low volatility did not kill the ensuing move higher from 1995 to 2000. Volatility rose as the market rose until the market peaked and then volatility started to spike.
Thus the current levels may suggest some short term issues as in any move higher, but longer term we don't see this as the threat many say it is. Keep in mind also that over the past two years the complaint has remained the same: volatility is too low and the end is near. Sure we had some selling, but it was not the end. Thus far the post-2002 recovery remains in tact.
VXN: 17.59; -0.67
VXO: 10.9; -0.26
Put/Call Ratio (CBOE): 0.75; -0.21. We also heard commentary about the put/call ratio dipping lower the past two days. Well, in a relative sense it is not very low at all. Typically you get concerned when it dips below 0.4 for awhile. It has not been there for some time. if it does get there it would be worth noting given the ratio has remained easily above 0.60 for almost a year.
Bulls versus Bears:
Bulls: 43.2%. Bulls continue to rise, up from 42.1% last week and 40.0% the week before, a post-June high (bulls and bears kissed in June. That is still, however, well below the peaks from January and April, and well below the 55% level considered bearish.
Bears: 33.7%. Bears held steady, stalling the steady decline from the 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: +11.85 points (+0.53%) to close at 2227.67
Volume: 1.937B (-6.05%). Volume was lower but still above average as NASDAQ moved through the 200 day SMA. Lower volume on an upside move, but still very solid trade, definitely showing continuing buying in tech stocks.
Up Volume: 1.339B (-540M)
Down Volume: 530M (+365M)
A/D and Hi/Lo: Advancers led 1.76 to 1. Breadth faded as the move extended through resistance, but it was still solid.
Previous Session: Advancers led 2.76 to 1
New Highs: 125 (+13)
New Lows: 47 (-9)
The Chart: http://www.investmenthouse.com/cd/^ixic.html
NASDAQ extended the rebound, moving through the 200 day SMA (2223) and the June closing high (2219) though it is still looking to get by the June high (2234). The Tuesday and Wednesday move pushed NASDAQ up and out of its 14 week reverse head and shoulders pattern that formed at the bottom of the 5 month base that started with the sharp sell off in May. Good breadth, upside volume kicking in and overshadowing the distribution sessions last week, solid leadership. All the attributes you want to see for a move. After four upside sessions and clearing resistance, however, it is likely to need a test or rest in the near future.
SOX (-0.78%) was already making a modest test the day after an explosive move cleared the recent highs, breaking it from its own 14 week reverse head and shoulders base as well. SOX has led the overall market on every move it seems, selling off first as the correction started, then rallying well on the rebound. The fact that it is showing some weakness here suggests NASDAQ is going to take that rest soon as well. No big deal as long as it is just a typical rest.
SP500/NYSE
Stats: +4.96 points (+0.38%) to close at 1318.07
NYSE Volume: 1.654B (+18.25%). NYSE continues to have issues with its volume and we are not certain the Tuesday trade reported is accurate (we talked with some at the NYSE who said trade was really 1.7B). Either way the volume was back above average Wednesday as SP500 cleared the early September high and takes aim on the May high. Volume is good; better than it was in last week's distribution.
A/D and Hi/Lo: Advancers led 2.17 to 1. Solid breadth, aided by the rebound in the energy sector. Without that the move would have been rather thin.
Previous Session: Advancers led 3.07 to 1
New Highs: 186 (+2)
New Lows: 27 (-20)
The Chart: http://investmenthouse.com/cd/^gspc.html
SP500 rallied well and on volume, moving through the early September high (1314.67), passing through the March and April trading range. Now it has its mark on the May high (1326.70), and as we wanted last night, it gave us the stronger trade on the move. It too is getting a bit extended, and if it can make the May high on this run it will need to take a breather before continuing. No complaints about this move.
SP600 (+0.93) led the market move in percentage terms, making an impressive break through the 200 day SMA (372) on that strong NYSE volume. It was not as strong a move as Tuesday of course, but it was a solid continuation, not balking at the 200 day SMA that turned it back in early September. That, of course, means SP600 did clear the early September high on the move, and that opens the door toward 379, the July high. SP600 still lags, but it is showing a return to accumulation. Combined with the discussion above about the economic future, that is starting to suggest improving economics. As with the other indices, after a try at 380ish it will like need a blow.
DJ30
DJ30 made the break above the early September high (11,488) clear with the Tuesday move. Volume was lower but the move is solid and DJ30 is taking square aim on the high at 11,670.19 hit in May (11,750.28 is the all-time high hit in 2000). It closed off the high and after this move it is going to need a break as well. The question is when does it come, after a test of the move, after a break higher, or even before it gets there.
Stats: +45.23 points (+0.39%) to close at 11543.32
Volume: 214M shares Wednesday versus 237M shares Tuesday. Trade was lower and below average but still above the distribution levels last week, just as on the other indices. That tells us the trade is accumulation trade.
The chart: http://www.investmenthouse.com/cd/^dji.html
THURSDAY
Economic data comes back into the picture with August retail sales. With the retail stocks moving crisply higher this week this is going to be a pretty important number for the market. Then Friday the CPI is out, and though the market is saying the Fed is done, a strong number will rattle investors, particularly after this solid move higher that extended the summer rally and put DJ30 within a gnat's butt of its all-time high and SP500 ready for a 2006 high. While the VIX and put/call ratio are not issues to the market as some believe, the move has raised bullishness a bit high. We watch some other market analysts, and when they get all excited about an upside move or glum about a downside dive then you can be pretty sure the move is at least going to take a break. Many were very excited about the 'follow through' Wednesday to the Tuesday breakout. Well, the follow through was in August after the original reversal off the July lows was tested and the market broke higher. By the time they are comfortable enough to talk follow through the rally has been running for awhile.
That said we still like what we see, we just have to frame it in reality. The market moves higher in another leg of a rally, the leg lasting about as long as the previous ones, and it clears resistance at the end of the move. That typically indicates the move needs a rest.
That is why we were not too wild about entering a bunch of new positions Wednesday given the run higher, particularly as quite a few good looking stocks moved higher on so-so volume and then caught fire Wednesday. That after early leaders that moved on good volume have already put in solid moves. We can likely pick up positions at a better entry point after the test of this move.
Now we are looking for just a test given the solid advance thus far with the upside volume topping last week's distribution volume. We also have to realize this is expiration week, and as noted last night that can skew volumes as positions are shuffled and rolled over, particularly given the move higher that keeps on running, sending the shorts to cover some more and roll over positions they may have not intended to roll over.
That simply means we have to keep aware of the context of the move and keep an eye out for a missile flying in undetected. Thus far the market is performing very well, extending the summer rally with some solid leadership. We have some great positions taken on and before this move, and we are going to be patient and let others set up. We may still get some more upside on this move and we will be looking at new plays, but again we want to have good entry points, and knowing the market could pull back shortly any new upside positions will be nibbling, i.e. a few here and a few there.
Support and Resistance
NASDAQ: Closed at 2227.67
Resistance:
2230 is the June 2006 peak (2234 intraday)
2250 is the March 2006 closing low.
2316 from interim tops in January and March 2006
Support:
The 200 day SMA at 2223
2204 is the August 2004/April 2005 up trendline
2190 is the July 2006 high
The 10 day EMA at 2186
2185 to 2182 is the September 2005 peak and interim high from November 2005.
2177 is the December 2004 high.
2168 is the August intraday high.
2158 from the May 2005 low.
The 18 day EMA at 2169
The 50 day EMA at 2145
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 1318.07
Resistance:
1324 to 1329 from the October 2000 lows.
1326.70 is the May 2006 high
1334 is an October 1999 peak
Support:
1315 is the May and May 2001 peaks
1311 is the April closing high.
The 10 day EMA at 1305
1302 the recent August highs
The 18 day EMA at 1300
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 1287
The 200 day EMA at 1279
1265 is an old trendline from the August 2003/August 2004/October 2005 lows.
Dow: Closed at 11,543.32
Resistance:
11,642 is the May 2006 closing high
11,670 is the May intraday high
11,750.28 is the all-time high
Support:
The 10 day EMA at 11,427
11,401 from the September 2000 peak and April 2001 highs
11,384 is the August intraday high.
The 18 day EMA at 11,380
11,350 from the May 2001 peak
The March 2006 highs at 11,329 to 11,335
11,279 is the late May closing high
The 50 day EMA at 11,260
11,243 is the early August peak closing high.
11,228 is the July closing high.
11,097 to 11,137 is the last peak from the February top.
The 200 day SMA at 11,090
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
September 12
Trade balance, July (8:30): -$68.0B actual versus -$65.5B expected, -$64.8B prior
September 13
Crude oil inventories (10:30): -2.9M actual versus -1.5M expected
Treasury budget, August (2:00): -64.6B actual versus -$67.0B expected, -$51.3B prior
September 14
Initial jobless claims (8:30): 315K expected, 310K prior
Retail sales, August (8:30): -0.2% expected, 1.4% prior
Retail sales ex-autos (8:30): 0.3% expected, 1.0% prior
Business inventories, July (10:00): 0.5% expected, 0.8% prior
September 15
CPI, August (8:30): 0.2% expected, 0.4% prior
Core CPI, August (8:30): 0.2% expected, 0.2% prior
New York Empire Index, September (8:30): 14.0 expected, 10.3 prior
Capacity utilization, August (9:15): 82.5% expected, 82.4% prior
Industrial production, August (9:15): 0.2% expected, 0.4% prior
Michigan sentiment, preliminary for September (9:45): 83.5 expected, 82.0 prior
End part 1 of 3
|
us stock market
understanding the stock market
|
