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money investment, financial investment
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10/30/06 Investment House Daily
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SUMMARY:
- Foreign markets fade on US GDP report, but US markets melt higher after weaker start.
- September PCE still not backing off much as consumers make more, spend less.
- October like September posts another gain, trying to set up for another move.
After Friday selling market overcomes a soft start, finishes mostly positive.
Stocks nursed a hangover from the Friday dump lower on the GDP and chip/PC story out of Taiwan, and futures were lower accordingly. Japan was down 2% and Europe was lower as well on the weak US report. WMT reported same store sales +0.5%, well off the 2% to 5% expected and the weakest showing in six years. Personal income was up more than expected, but spending was lower, barely scratching positive. Lacker was out after his last dissent stating consumer spending looks good. At least he is predictable, holding his line of reasoning regardless of what the data says.
Stocks took their lumps early with the indices fading below the Friday close, but the selling never got out of hand. Stocks bottomed within the first hour and began a drift higher pretty much into the close. Lower oil helped (58.38, -2.39) as always, giving stocks a reason to rise even when the buyers lacked any real strength. Volume was low and breadth was modest, but after the early pressure they drifted higher. It was basically a cessation of selling pressure that allowed stocks to revert to the trend, and that is still up.
Technically it was a better session of course, but as noted, it lacked much power. The low to high intraday action resumed once the sloppy early action abated and the sellers gave up. NASDAQ and SOX showed some renewed leadership with some individual solid moves, but they were hardly plowing new ground, still closing below the recent highs. There were some bounces in good, leadership quality stocks as noted, but mostly they are still setting up after NASDAQ tried the April high air and faded back. Indeed, NASDAQ remained below that April high it cracked last week, and it likely needs more work before it is ready to try again given it was pushed back rather quickly. Overall the bullish patterns remain in effect, though DJ30 and SP500, both still quite extended, struggled once more.
An interesting theme Monday was the rather bearish attitude expressed by most commentators. We heard 'overbought' quite a bit along with too many bulls and too long without a significant correction. Overbought is a relative term, but the latter two are both true. Bulls are getting higher, rising toward that 55% level considered bearish. The NYSE large caps have rallied since the July low and DJ30 is putting the moves on a 10% rise above the 200 day SMA. That suggests things are getting overdone.
At the same time all of that bearishness suddenly cropped up, and as we noted in the pre-market alert, even with the high bullishness among investment advisors, that sudden rush to the 'overbought' side of the ledger was in itself near term bullish. We note that it did not take much selling last week to jump the put/call ratio on CBOE over 1.0 on the close. While the overall view of the financial markets is getting more bullish with the average investor (at least 5 people last week started conversations with me with 'well, the market is up nicely, isn't it?'), there is still a hangover from the bear market. As soon as there is any hint of selling out come the comments that the run is over, time to clear out, etc. For now the market has not shown the kind of distribution that would suggest something serious is afoot; the market could easily consolidate more here, but again, at this juncture it is not broadcasting trouble.
The election might cause some bumps this week as investors try to figure out just how many seats the Dems win and how much to discount the changed rhetoric from Pelosi, Rangell and friends ('don't believe what I have done the past six years, believe what I am saying right now'), but as of yet the market is not showing the kind of choppy distribution that gets you on high alert for a decline. NASDAQ and its fight at the April high will remain the key battle point near term, and while techs were up Monday, they still look as if they have more work before they can really break higher regardless of the sentiment.
THE ECONOMY
September incomes up, spending falls, but still solid when adjusted for inflation.
Incomes rose 0.5% (0.3% expected) while spending rose a less than expected 0.1% (0.3% anticipated). When combined with the WMT report of weak weekly same store sales that fueled the slowdown talk and indeed the general bearish attitude to start the week.
Funny thing about numbers, however, is that you can look at them from many different ways and as we often see, the headlines often don't tell the story, at least not the one worth telling. Spending was down in part because of lower prices for gasoline, and when adjusted for inflation spending rose 0.4%. Many economists commented after the numbers that the results showed healthy spending that was not shutting down as many hypothesized due to slowing housing price gains and even housing price losses.
PCE drops modestly from August, still 'discomforting' to Lacker.
There was no major continental shift in the second of the measures of prices the Fed watches, but it was lower. The core PCE for the month rose 0.2%, less than the 0.3% in August and up 2.4% year over year. That was also down, falling from the 2.5% reading in August.
Lower, but not low enough for the Fed's designated protagonist Lacker. He was speaking Monday again, and noted that inflation was still 'discomforting.' Lacker has dissented the Fed's pause the past three meetings, and remains opposed to the current policy given his view on how inflation runs its course. Many said after the Friday GDP report that Lacker was dead wrong, and while we think he is as well, it is not for the same reason. Inflation doesn't decline because output declines; as McTeer noted, increased output helps reduce inflation pressures.
Declining GDP does not mean inflation will automatically follow; that is the common misconception, just as a rising economy fosters inflation. As seen in the 1980's and 1990's and the early 1960's, that is just not the case. Indeed, while those were upside years with low inflation, the economy showed the flip as well, i.e. the back breaking high inflation of the 1970's when the economy was stagnant, when the US was supposedly past its prime and no longer a world economic power.
We have noted the past month that the Fed May talk the PCE and CPI as its primary indicators, but it does not appear to be walking that walk. Monday we noted a few economists suggesting the same thing, i.e. that the Fed may just not put as much weight on this as it indicates. Remember, those were Greenspan pets and in order to form a more perfect transition, Bernanke stated he would follow the Greenspan policies. As we have noted, the pause when the Greenspan indicators were on the rise is not something Greenspan would do, and thus we conclude that the Fed is really looking elsewhere, easing the markets into its view of the world of monetary policy. At some point it will have to start showing its hand; indeed, it may have started just that with Poole talking about the Fed needing to follow markets in its policy decisions. A small step, but the start is always a small step.
THE MARKET
MARKET SENTIMENT
VIX: 11.2; +0.4
VXN: 17.99; +0.58
VXO: 10.65; -0.08
Put/Call Ratio (CBOE): 0.82; -0.21. Dropped back quickly, but again we note how easy it was for the ratio to jump back above 1.0 on the close at the first sign of any selling. Despite the bullishness that is now seeing the retail investor return, the ghosts of bursting bubbles and bear markets past are quick to rise in the investor psyche.
Bulls versus Bears:
Bulls: 52.7%, up modestly from 52.2% where it held for 2 weeks. Still advancing toward that 55% level considered bearish. Up from 49.5% and 47.4% before that. This has caught the April high and is moving closer to the January peak at just over 60%. 55% is considered a bearish indication.
Bears: 30.1%. Actually rose a bit from 30.0% as bears hold near 30% after dropping rather sharply from 35.4% before that and the 37.1% hit in July (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). It is still well above the 20% level considered bearish, and if it holds at a high level even as bulls move higher, it acts as a governor on the bullishness. 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: +13.15 points (+0.56%) to close at 2363.77
Volume: 1.761B (-22.6%). Volume fell off the map, coming in below average as NASDAQ opened lower and then rebounded for a modest gain. The lower volume on the selling is good, but the low trade as it rebounded shows no real buying interest, just a lack of sellers Monday. That indicates NASDAQ most likely still has some work to do before it can make a run at the April high stick.
Up Volume: 1.308B (+540.414M)
Down Volume: 429.096M (-1.064B)
A/D and Hi/Lo: Advancers led 1.22 to 1. Modest is about the only way to describe this action.
Previous Session: Decliners led 2.02 to 1
New Highs: 120 (-47)
New Lows: 38 (+2)
The Chart: http://www.investmenthouse.com/cd/^ixic.html
NASDAQ bounced right back after a lower open, posting a modest gain on below average volume. It did not charge back from the Friday dump lower that gave back Thursdays break above the April high (2376), but it did rebound above the near support at the 18 day EMA. About all you can say about that is that it stemmed that selling attempt. Not a bad thing obviously, but the lack of volume indicates NASDAQ may have some more work to do to clear that April high and make the move stick. As noted above, this is the next key battle for the market as NASDAQ tries to join DJ30 and SP500 with a new post-2002 high. It had it in its hands Thursday but could not generate any additional momentum in the face of the Taiwan report about motherboard sales. If it can break higher quickly on strong volume again, that would be a solid positive as it would affirm the same reasons NASDAQ is at this crossroads in the first place.
SOX (+1.13%) rebounded as well, leading the market in its percentage gain. That is often the case, up or down, given its higher beta. Nonetheless it too held where it had to (the 50 day EMA at 451) and bounced, showing some good individual moves as it did. As with NASDAQ it has to show more, but also, it is showing enough as it held the 50 day EMA in the selling from last week and continued working on its base. That is exactly what we want it to do for now.
SP500/NYSE
Stats: +0.59 points (+0.04%) to close at 1377.93
NYSE Volume: 1.427B (-8.02%). Volume fell well below average as the large and small caps posted modest gains. No real volume to drive stocks higher but also no real interest in selling.
Up Volume: 669.318M (+281.873M)
Down Volume: 730.467M (-417.053M)
A/D and Hi/Lo: Advancers led 1.16 to 1. Basically flat on the session, matching the action.
Previous Session: Decliners led 1.82 to 1
New Highs: 163 (-92)
New Lows: 19 (+1)
The Chart: http://investmenthouse.com/cd/^gspc.html
SP500 was under pressure early along with the other indices, but held near the 10 day EMA (1374) on the low and bounced modestly. Not much of anything other than a test of the continuing uptrend and a hold at support. It remains extended but still in that strong uptrend as money continues to chase into large caps.
SP600 (+0.39%) struggled early, testing down toward the 18 day EMA (387) on the low and rebounding nicely to hold above the 10 day EMA (390) and post a modest gain along with the SP500 and SP400. The small caps broke higher on Thursday and then gave it back similarly to NASDAQ. Still solid, still looking for another break higher over that earlier October high (392.82).
DJ30
The blue chips came back from a test below the 10 day EMA (12,062), posting a modest loss on very low, below average volume. No distribution, just another test of the 10 day EMA that has acted as support for the past 5 weeks; before that the 18 day EMA also acted as support. It may make the break below the 10 day EMA that has held the latter part of this run, and if it does that will be noteworthy. The 18 day EMA (11,986) would still likely try to hold the move higher. That certainly would not jeopardize the trend unless the 18 day fell into as well.
Stats: -3.76 points (-0.03%) to close at 12086.5
Volume: 206M shares Monday versus 277M shares Friday.
The chart: http://www.investmenthouse.com/cd/^dji.html
TUESDAY
Employment cost index, Consumer confidence, Chicago PMI, and trick or treat. Monday stocks for the most part responded to the Friday worries about technology with a shoulder shrug and a drift higher. There was no conviction buying, but there was no selling with force either. Instead, stocks were shaking off the fog of a strong break higher Thursday followed by a quick fade Friday on growth worries mainly in tech. Even with that, NASDAQ remains perched near the April 2006 high, the post 2002 watermark (outside the Thursday close where it eclipsed that level for all of one day). That remains the key point for this most recent move as NASDAQ, after lagging the large cap NYSE stocks, is trying to join the fight, and the near term move for the market turns on whether it is successful.
As noted above, there may be some near term bumps from the election as the market really has to come to grips with a possible power change in Congress. To this point it has not only weathered that prospect, but it has prospered under it. The idea seems to be if the Dems take the House but the Reps can hold the Senate, some sort of standoff will ensue. There is this idea that gridlock is best for the market, but that is really a bogus analysis. They point to the 1990's under President Clinton as the example, but that was not gridlock. Gingrich on the republican side worked with Clinton and they cut spending, cut taxes on capital gains, and helped keep the prosperity rolling for a bit longer. The higher marginal tax rates ultimately played a role with the Fed draining money supply to choke off the economy, but the point is that it was not gridlock but actual compromise in order to move forward. If there is gridlock this time around what happens? The tax cuts expire and the Dems get what they wanted without taking affirmative action to look like tax hikers. As always, it is too easy to pigeon hole events, and often that analysis is wrong.
In any event, October is winding down and the market has escaped thus far with gains, just as it did in September. There was some last day selling in September and the first session of October, but that was just about it. That puts the market, as we heard all morning, overbought and overwrought. Somehow the market is not hearing it. This is all occurring because money keeps chasing stocks higher. At some point there will be a re-jiggering of this by on every pause mentality and a steeper correction will occur. If those chasing decide to wait for a pause, the pause will likely occur. The key is how far down they are willing to let stocks fall before they move back in.
There is a key mindset driving stocks higher right now as well, and that is the 'traditional' run to the year end. Of course that is often preceded by a September and October that show a bit of selling, something not seen in those months in 2006. Thus tradition can be upset by earlier success where there is usually some selling. It is a pickle, but as we have noted before, you don't want to buy DJX or OEX right now as they are indeed overextended. On the other hand, their pullback may be NASDAQ's breakout as money rotates around the market. Indeed, there has been no sign of vigorous selling that would indicate money leaving the market. Thus we anticipate that if money comes out of DJ30 and SP500 it will find its way into the techs and small caps until the big money buyers decide the large caps have pulled back enough to make the large cap industrials 'values' again.
Tuesday and the rest of this week we remain looking at NASDAQ and the SP600 and how they react around the recent highs. NASDAQ hardly looked ready to take on the April high Monday, rebounding yes, but not coming close to the April high or the kind of volume it will need to make the break stick. We saw some leaders move higher Monday, and we will continue watching those; as more start to make the break higher on volume, you can start to infer the indices will follow. That is why we typically are buying into the leaders as they break higher even though the market overall may be lagging that move initially. As long as the overall market continues showing healthy action we can step out ahead of things with some confidence. We were doing that some Monday and we will continue to do so Tuesday and then go have some tricks and treats.
Support and Resistance
NASDAQ: Closed at 2363.77
Resistance:
2368 is October handle high.
2376 is the April high, the post-2002 high. Just cracked through this level.
2384 is an interim peak from January 1999
2493 is an interim peak from February 1999
Support:
The 10 day EMA at 2351
The 18 day EMA at 2334
2333 is the top of the Q1 2006 trading range (the January and mid-March 2006 highs)
2316 from interim tops in January and March 2006 trading range
2273 is the recent September peak
The 50 day EMA at 2270
2250 is the March 2006 closing low.
2234 is the June 2006 peak (intraday)
2232 is the August 2004/April 2005 up trendline
The 200 day SMA at 2229
S&P 500: Closed at 1377.93
Resistance:
1389 is a low from November 1999
1398 is a low from January 2000
1401 is a low from April 2000
Support:
1378 is a low from May 2000
The 10 day EMA at 1374
1371 to 1373 is the December 2000 peak and the January 2001 peak
The 18 day EMA at 1366
1358 to 1362 mark a series of peaks from April 1999 to August 1999 high and the February 2002 low at 1360.
1339 is the late September closing high
The 50 day EMA at 1338
1334 is an October 1999 peak
1326.70 is the May 2006 high
1324 to 1329 from the October 2000 lows.
Dow: Closed at 12,086.50
Resistance:
Still climbing up the 10 day EMA but still struggling a bit. Back down to 7.5% above the 200 day SMA. It tends to begin struggling when it gets to the 10% level where it typically will start to falter.
Support:
The 10 day EMA at 12,062 has acted as support all the way up. When it breaks on the close that is noteworthy.
The 18 day EMA at 11,986. Likely to hold at least temporarily if the 10 day EMA breaks
11,750.28 is the prior all-time high
The 50 day EMA at 11,730
11,723 is the January 2000 closing high
11,670 is the May intraday high
11,642 is the May 2006 closing high
11,488 is the early September high.
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
October 30
Personal income, September (8:30): 0.5% actual versus 0.3% expected, 0.4% prior (revised from 0.3%)
Personal spending, September (8:30): 0.1% actual versus 0.3% expected, 0.2% prior (revised from 0.1%)
October 31
Employment cost index, Q3 (8:30): 0.9% expected, 0.9% prior
Chicago PMI, October (10:00): 58.0 expected, 62.1 prior
Consumer confidence, October (10:00): 107.8 expected, 104.5 prior
Trick or Treat (6:00 on)
November 1
Construction spending, September (10:00): 0.0% expected 0.3% prior
ISM, October (10:00): 53.0 expected, 52.9 prior
Crude oil inventories (10:30): -3.2M prior
November 2
Initial jobless claims (8:30): 310K expected, 308K prior
Productivity, Q3 preliminary (8:30): 1.1% expected, 1.6% prior
Factory Orders, September (10:00): 3.6% expected, 0.0% prior
November 3
Non-farm payrolls, October (8:30): 125K expected, 51K prior
Unemployment rate (8:30): 4.6% expected, 4.6% prior
Hourly earnings (8:30): 0.3% expected, 0.2% prior
Average workweek (8:30): 33.8 expected, 33.8 prior
ISM Services (10:00): 54.5 expected, 52.9 prior
End part 1 of 3
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money investment
financial investment
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