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us stock market, trend trading stock
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12/05/06 Stock Split Report
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Stock Split Report Subscribers:
MARKET ALERTS
Targets hit alerts: FMD; MTW
Buy alerts: AMX; SINA
Trailing stops: None issued
Stop alerts issued: GLDN; SUPX
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 SSR alert service you can sign up at the following link:
http://www.investmenthouse.com/alertssr.htm
SUMMARY:
- New money pushes NYSE to post-2002 highs but techs struggle again.
- ISM Services grows, purportedly giving Fed hawks more ammunition.
- Fed should be happy as unit labor costs fall, but should they have any bearing on inflation decisions?
- Watching the NASDAQ as new money rally turns more selective Tuesday.
New month rally continues but NASDAQ starts to lag.
Futures were up and they held higher through the open, starting stocks out on some good footing, building upon the Monday rally as the new month got underway. Despite another tolling of the bell from homebuilder TOL (forecasting a 62% profit drop in 2007) and a slower gain in productivity (0.2% versus 0.5% expected), stocks started higher, buoyed by the lower unit labor costs in the productivity number. Oil was up and down (closed at 62.43, -0.01), bond yields edged higher (4.52% 2 year versus 4.45% 10 year), and stocks found some more money coming into the system.
Stocks started higher but were struggling to hold the gains practically out of the gates. Then the ISM Services was reported stronger and stocks rebounded to new session highs on the prospect the economy was not spiraling lower after taking a fatal hit. That is where the market went separate ways. SP500 and SP600 moved to new session highs as the NYSE indices enjoyed steady upside moves on stronger volume and decent breadth, with those two indices moving to new post-2002 highs and closed near the session highs.
NASDAQ, on the other hand, spent the rest of the session simply trying to hang on. Sure every index closed higher on the session, but it was not an equal session across all sectors. SP500 showed no sign of slowing, easily pushing to new post-2002 highs. SP600 enjoyed a solid session as well, helping push new highs to a high on this move. Volume was up though it was still below average. NASDAQ volume was up and unlike NYSE the trade was above average. Yet NASDAQ barely scratched out a gain, trading lower than its morning gap price. While the NYSE indices continued higher, NASDAQ once more showed some churn just below the November highs. It is an important growth index and thus very important for the near term market strength. A divided market has trouble standing on its own and thus this development could be an early sign of that new month money running dry.
Technically the action was bifurcated, but even with the NYSE gains the action was still relatively weak overall. Sure volume was up on NYSE, but it was below average volume once more. NASDAQ showed the stronger trade and it was churning. Breadth was decent on NYSE (1.7:1) but flat on NASDAQ. You cannot expect indicators to run higher every session, but NASDAQ showed more weakness than SP500 showed strength despite the new post-2002 high. That was good to see but with a major index churning just below the prior high a caution flag comes out. That does not mean to run for cover, just mind the store with existing positions and making sure new buys are set up well. NASDAQ may be a preview of what the rest of the market will have to deal with shortly or it may be that NASDAQ just had an off day. With the recent churn just before the new week started, however, you don't want to ignore NASDAQ's failure to follow along on Tuesday.
THE ECONOMY
ISM Services shows no slowing.
While a manufacturing company may put off making more scissors, nail cutters, nail files and clothes cleaning equipment if it feels a bit of economic slowing, most people won't stop getting their hair cut, nails done, and clothes cleaned; even if the economy slows you don't save a lot or improve your business by 'going grunge.' Thus while the manufacturing sector fell below 50 (49.9) in November, the service sector actually expanded, rising to 58.9 from 55.5 (57.1 expected).
While manufacturing saw 6 of 10 indicators decline, services saw 6 of 10 rise. Prices rose to 55.6 (jumping from 51.9), but employment was up (51.6 from 51.0) and new orders rose as well (57.1 versus 56.5). Lower fuel costs and interest rates were credited with keeping household service demand strong.
Overall the index rose to a 6 month high though still trending modestly lower over the past 3 years that saw readings from 65 down to 55 during that gradual downtrend. Even though the growth level may be slowing, this band of numbers shows a very healthy continuing expansion in the service sector. Again, services are less likely to be cut when moderate economic softening occurs, and as services are closing in as 80% of our economic activity, the reading and trend suggest an overall healthy economic picture.
Nonetheless, it is still very important to note the direction and strength of the manufacturing index as manufacturing is more sensitive to economic swings. Those swings can give us a heads up as to potential problems for the rest of the economy that could evolve enough to actually impact whether you wear your suit one more time or wait until next week to get your nails done. The Fed should not use the ISM services to brush off the contraction in the ISM, but you know the hawks (e.g., Moskow the Mouth) are already spinning the services report to their favor.
Productivity fails to rise as expected, but unit labor costs trim their rise even more.
Productivity at 0.2% growth was well off the 0.5% expected though it did top the 0.0% rate in Q2. That number was not great but livable. The data that captured the market's attention was the 2.3% rise in unit labor costs. Sounds high, but when the prior period showed a 3.8% gain and you were expecting a 3.2% gain, that was some pretty productive news.
Bernanke, the Fed chairman on high himself, has recently expressed concerns about how a tighter labor market and associated higher wage costs could act as a push on inflation. This decline in costs even as productivity posted a mediocre rise (versus expectations) punched some holes in that theory. Of course that theory is all crapola itself. Rising wages don't cause inflation. There is this idea that if people are paid more they run out and buy more thus creating shortages and therefore inflation. That argument appeals intuitively to Bubba when the Fed wants to sell a rate hike, but it holds not intellectual water. Only if there is too much money in the system will prices rise. In that instance it is not a question of higher wages pushing prices higher, it is a matter of all areas related to money rising in price.
If you pay someone more and they go buy something they normally would not buy, there is no impact on prices unless there is not enough supply. In a healthy economy where the government does not tell producers what to produce and when (either through a structured format such as in communism or a more subtle approach through subsidies, incentives and the like) supply will meet demand because in a free market money flows where it is needed. Indeed, as we have discussed before, supply creates its own demand versus demand creating supply (e.g. personal computers, cell pones, iPods, wireless connectivity). If there is more money in the system than is warranted based on economic activity, then prices will rise because that money will not sit idly by. If it has nowhere to go it will work into prices.
Thus the main area of concern for the Fed should be how much money is in the system vis- -vis the economic activity. All the Fed has to do is get the money supply right and then it doesn't have to worry about wages, employment levels, resource utilization, etc. In short, if the Fed didn't let easy money run so long under Greenspan then we would not be worrying about inflation rates now. That goes into an entirely different chapter, but the point is that the Fed needs to keep its eye on the ball and look at the markets as its key as to where money supply should be. Look at oil, look at bonds, look at leading indicators. They all indicate that the inflation peak occurred last year and that the Fed's curtailment of money supply growth from 6.2% to 0.2% this year has done most of the work, allowing the Fed to pause even as inflation as measured by the PCE and CPI continued to rise. Thus we know Bernanke is looking at aggregate money supply growth versus economic activity and tailoring policy accordingly. The question is whether he throws in these comments about labor costs and inflation for continuity's sake in order not to rattle the markets by revealing he doesn't give a rat's hind end about labor costs and other so-called 'inflation indicators.'
THE MARKET
MARKET SENTIMENT
VIX: 11.27; +0.04
VXN: 16.2; -0.29
VXO: 10.6; +0.13
Put/Call Ratio (CBOE): 0.76; -0.12
Bulls versus Bears: Bulls have moved above the key 55% but this is not the best timing indicator. It is a warning to watch for distribution, failing leadership and the like.
Bulls: 58.5%. Bulls are jumping even more, posting another big gain from the already high 56.4% last week. Second week the bullish advisors topped 55%, the level where the market is viewed as overdone and some corrective activity can enter. It started to do just that Friday and Monday. A sharp jump from 52.1% the week before and closing in on the January peak at just above 60%.
Bears: Held steady at 22.3%, hovering just above the 20% level considered bearish. Sharp drop from 26.0% and flirting with the 20% level considered bearish. Well off the 37.1% hit in July (the highest level in this entire cycle). 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: +3.99 points (+0.16%) to close at 2452.38
Volume: 2.04B (+2.15%). Volume remained above average and edged a bit higher as NASDAQ gapped higher and then worked hard to hang onto that early move. Some more churn coming back in similar to what we saw to end November. Churn, to recap, means money is moving out as fast as it moves in, leaving the index to run sprints in place. It is a form of distribution that occurs after a run higher.
Up Volume: 982.812M (-616.43M). Pretty much a dead heat as were all of the internal indicators.
Down Volume: 1.026B (+646.461M)
A/D and Hi/Lo: Advancers led 1.05 to 1. Flat as well after that solid showing Monday.
Previous Session: Advancers led 2.3 to 1
New Highs: 231 (+35). Not too bad but has not really ramped upon NASDAQ during this climb.
New Lows: 36 (+1)
The Chart: http://www.investmenthouse.com/cd/^ixic.html
Another gap higher but NASDAQ could not add to the gap Tuesday, instead closing with a modest gain on modestly higher above average volume. NASDAQ is just below the November high (2469) and showing some churn, and that is not technically positive: as the index approaches the old high it starts losing holders. New buyers are coming in but just as many holders are moving out of the market, becoming 'non-holders' of NASDAQ stocks. The sellers and buyers are evenly matched, hence the lack of movement. The November high acts as resistance as it was the place where the sellers won out last time. This churn shows the sellers are at it again, using the bounce to exit. Churn is not automatically deadly, but it is a sign to proceed with caution, particularly when it occurs near an old high.
SOX (+0.77%) enjoyed a better percentage gain as it gapped higher. It could not advance the ball significantly, however, as it tapped at the November high intraday but then gave up almost as much ground as it gained on the session. It too is just below the November high and needing a break through that level to continue the solid mid-November breakout over the 200 day SMA.
SP500/NYSE
Stats: +5.64 points (+0.4%) to close at 1414.76
NYSE Volume: 1.543B (+10.37%). A significant jump in volume as NYSE indices gained ground and indeed making new post-2002 highs. There was accumulation in these shares but it was so-so as volume was still below average on the advance. Good news but muted good news.
Up Volume: 1B (-47.869M)
Down Volume: 522.998M (+180.991M)
A/D and Hi/Lo: Advancers led 1.72 to 1. Solid though not stellar as it was Monday. Still a good session for NYSE internals.
Previous Session: Advancers led 3.22 to 1
New Highs: 547 (+71). Very impressive, finally hitting levels that are very positive.
New Lows: 12 (+6)
The Chart: http://investmenthouse.com/cd/^gspc.html
The large cap SP500 started higher and finished higher and near session highs. Rising volume, solid breadth, closing near session highs and indeed hitting a new post-2002 high. It is very hard to find any fault with this action though the continued below average volume combined with NASDAQ's struggles on Tuesday suggest in the bigger picture that the move is still fed by new money to start the month. With that in mind we will simply watch as it moves higher, and if it too starts to struggle, take some gain and protect positions.
SP600 (+0.39%) posted a new post-2002 high as well and that also put SP600 at a new all-time high as well (along with SP400; the mid-caps hit a new high Monday). As with SP500, it is hard to find fault with this action as volume was up and breadth was solid. It closed about a point off the high, so it was not a run for the roses to the close. Nonetheless the small caps broke through the November high after churning a bit, moving to a new all-time high. Hard to argue with that as the other growth index we watch had a good day versus NASDAQ's mediocre churn. We will see who wins out.
DJ30
DJ30 continued higher as well and it too closed near session highs. Volume was lower and below average, however, and it has yet to take out its November high (12,361 intraday). It is just reaching that level, however, so we will see if it has the mustard to do so when it gets there. We are still concerned about a new month and new money rally here to start December, and the mixed action has us watching closely to see which side wins out. As with the other indices, hard to argue with success but DJ30 has a NASDAQ-like test here at the November high itself given the lower trade as it approaches that level.
Stats: +47.75 points (+0.39%) to close at 12331.60
Volume: 233M shares Tuesday versus 270M shares Monday. Volume fading below average as DJ30 moves to test the November highs. Not a power move.
The chart: http://www.investmenthouse.com/cd/^dji.html
WEDNESDAY
Oil inventories are the only scheduled economic data due on Wednesday, and other than the stray Fed commentary streaking in that leaves the markets (stock, bond, currency) alone to work out their issues. The dollar was up a bit versus the euro on Tuesday, but that is after getting pelted with rocks and garbage for a couple of weeks. Seems Warren Buffet might finally be getting his 2 year old currency play right. Remember his rants about how the dollar would dive and it didn't. If he was in it for the long run as he always says he is then maybe he is getting close to even now.
We have now seen a couple of days of new money hitting the market for December, and in this run the end of the new money for the month has not always been a bad thing as stocks simply fade a bit, regroup, and move back up. The past month SP500 and DJ30 turned much more volatile, something that typically occurs toward the end of a strong run before a test that drops a bit lower than typical for the rally. That is not anything to be worked into a knot over, just a fact of life. With options we don't want to ride it lower while with stock plays it just depends upon your time horizon.
We will have to see if the NASDAQ's churn catches on with the other indices or if the SP500's and SP600's moves to new post-2002 highs convert the NASDAQ back into accumulation mode. The action of the indices the past month has us more on guard than at other points in this run, and of course the high bullish sentiment plays into the overall picture of the market needing a rest. Nonetheless it is the holiday season and stocks can find reason to rally even if they are overbought in need of a holiday themselves.
Thus we will continue to mind the store, using a further advance to help unload some positions that are tired out, worn out, or just not performing well. If we see a reversal start after another push higher we will also look at taking some more gain off the table. And of course, we will be watching as always for opportunity to buy into solid stocks that are in good position to move if it turns out SP500 and SP600 are going to control the action. NASDAQ's action was worth noting in light of the more volatile action the past month, but it was not the final word on this move. We still suspect the action is telling us the market is readying for a deeper test, but as noted, the market can still find upside further into the holiday season, running on momentum before it takes a rest later on.
Support and Resistance
NASDAQ: Closed at 2452.38
Resistance:
2468.42 is the November 2006 high
2477 from January 1999
2493 is an interim peak from February 1999
Support:
The 10 day EMA at 2434
The 18 day EMA at 2423
2412 from June 1999 low
2402 is the July up trendline
2384 is an interim peak from January 1999
2379 is the October high.
2376 is the April high, the former post-2002 high
2368 is the early October handle high.
The 50 day EMA at 2360
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
2300 represents some price support
S&P 500: Closed at 1414.76
Resistance:
1420 is a July 2000 low
1425 is an interim high from November 1999
1444 from February 2000
1475 from peaks in December 1999 and January 2000
Support:
1410 is an interim high from March 2000
1408 is the November high
1401 is a low from April 2000
The 10 day EMA at 1401
The 18 day EMA at 1395
1390 is the October high.
1389 is a low from November 1999
1382 is the July up trendline.
1378 is a low from May 2000
1371 to 1373 is the December 2000 peak and the January 2001 peak
The 50 day EMA at 1373
1358 to 1362 mark a series of peaks from April 1999 to August 1999 high and the February
2002 low at 1360.
Dow: Closed at 12,331.60
Resistance:
12,361 is the November 2006 high
Support:
The 10 day EMA at 12,247
The 18 day EMA at 12,218
October high is 12,167
The 50 day EMA at 12,033
11,986 is price support from mid-October and the early November low.
11,865 from the early October consolidation
11,750.28 is the prior all-time high
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.
December 5
Productivity, Q3 revision (8:30): 0.2% actual versus 0.5% expected, 0.0% prior
Factory orders, October (10:00): -4.7% actual versus -4.0% expected, 1.7% prior (revised from 2.1%)
ISM Services, November (10:00): 58.9 actual versus 55.5 expected, 57.1 prior
December 6
Crude oil inventories (10:30): -360K prior
December 7
Initial jobless claims (8:30): 325K expected, 357K prior
Consumer credit, October (2:00): $4.5B expected, -$1.2B prior
December 8
Non-farm payrolls, November (8:30): 105K expected, 92K prior
Unemployment rate (8:30): 4.5% expected, 4.4% prior
Hourly earnings (8:30): 0.3% expected, 0.4% prior
Average workweek (8:30): 33.9 expected, 33.9 prior
Michigan sentiment, Dec. preliminary (9:45): 92.0 expected, 92.1 prior
End part 1 of 3
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