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world stock market, us stock market
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12/09/06 Investment House Daily
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SUMMARY:
- Stocks cotton to the jobs report, hold the course with modest gains.
- Jobs report stronger than expected, but with massive prior revisions can you put much stock in it?
- Bond yield curve stretching back out as likelihood of Fed rate cut wanes.
- Earnings warnings shaping up to be the holiday wildcard.
Early selling cannot hold the day.
Steady as she goes, Mr. Sulu. Aye, aye captain. The jobs report was stronger than expected and the prior two months' revisions were heavily upside. That helped a weak futures market recover some lost ground, but stocks started weaker as the sellers took another shot at the market. After a bumpy first hour, however, the sellers lost heart and stocks, without the selling pressure, resumed course, i.e. rising with the prevailing holiday trend.
It was not all sugar plums and candy canes, however, as some chestnuts got roasted. NASDAQ and the large cap NYSE indices posted modest gains, but semiconductors had a hard time shaking off the XLNX and NSM warnings while the small caps lagged as energy sold after stronger oil prices turned to weaker oil prices (62.03, -0.46). Oil is still well off of its recent lows near $55/bbl, so this recent day-to-day quibbling over quarters is not really that telling. The more telling aspect is the significant improvement in energy stock patterns; those are telling a story of strength, and energy strength is derived through product price. With Saudi Arabia stating to US officials on Friday that OPEC is 'comfortable' supporting a $60/bbl oil price, the handwriting is on the wall. That was certainly self-evident the way OPEC reacted to oil's decline to $55/bbl. They were snorting and spitting, falling all over themselves in a rush to cut production and raise prices back over 60. After all, it takes a lot of money to finance terror and try to engineer the decline of the West.
But I digress slightly. Stocks answered NASDAQ's Thursday distribution admirably even in the face of those semiconductor warnings. Of course you can admire things that are not really that great or promising. You can admire the fight in a really bad sports team that tries to give the top-ranked team a good game but fails miserably. You can admire the athlete that finishes the race with no hope of winning. After the admiration, however, there is still a pitiful sports team and a mediocre racer with little hope of turning the tables anytime soon.
Friday NASDAQ bounced after its lower high and nasty distribution, but volume was well off of the Thursday selling pace. DJ30 hung in as well, tapping the 18 day EMA on the low and rebounding, refusing to give in to the lower high it made last week. Both moves were admirable and with this never say die uptrend they could both make higher lows from here and keep on moving. Yep, quite admirable.
We have said you have to respect the streak, but that does not mean you have to be a blithering idiot and blindly believe that the trend is unending. All good things eventually come to an end. There are signs it is in some trouble, and though they are just signs at this stage, signs often lead somewhere. Volatility has jumped the past month. Not the volatility measured by the VIX; as you know commentators lament over how that is at low levels, but as we have discussed, volatility was at all-time lows in 1994 and early 1995 before the market embarked upon an historic run. No, this is the volatility that shows up after a nice run. The first bounces up the 10 and 18 day EMA after a breakout are nice, tight bounces of roughly equal size and duration. After 4 to 5 such bounces things tend to get sloppy with larger, sharper advances and larger, sharper declines as the buyers, after being in firm control, relinquish some strength to profit takers. We are seeing this kind of volatility hit SP500 and DJ30 the past 5 weeks. It is not a massive change, but the nice, tight pattern through the first 2.5 months of the run has changed. Just as the weather turns more violent as a season change begins, stocks movements turn more volatile.
In addition to some volatility associated with the length of the run, the price/volume action is degrading some. Several sessions of churn cropped up, i.e. where volume runs higher as the indices move nowhere after a bounce higher. That shows as many sellers moving out as buyers moving in and thus stocks make no headway. That often precedes distribution where stocks sell at higher volume. NYSE has been relatively immune to distribution, but NASDAQ has shown 3 distribution sessions and 3 churning sessions in the past month. Even that is not fatal. Just a sign to be careful.
Along with those two elements you have the pattern on NASDAQ and DJ30 that are in the midst of making lower highs as the churn and volatility increase. As with the other elements, and indeed with patterns in general, you don't want to get too wrapped up in them during the important formative years. They may look as if they are going to turn out to be juvenile delinquents but then straighten up and become doctors and lawyers and such. In sum, it is how they turn out that matters. The volatility and degrading price/volume action don't help, but as noted, they are not fatal at this stage.
Leadership is still in the market as well, and that of course remains a positive. Chips came under some pressure after breaking out, but there are still many areas (healthcare, drugs, internet, energy, financial) and indeed even some chips themselves are still in good position to move higher. There are more than enough strong stocks in solid position to keep us looking for entry points on them. That is the acid test of any move because the market moves when the leaders move.
In sum there are enough negatives to give us some serious concerns about just how much further the market can as a whole can continue in this leg of the rally before needing a deeper test toward the 50 day EMA. Enough so that we are looking at and buying into some downside plays. On the other hand, even though the market rallied through the typically weak September and October months and likely borrowed some from the future, the holiday rally is a strong force, particularly with a prevailing uptrend in place. Thus, Luke, listen to the force and stay with upside leaders. Of course, we are also willing to bolster our returns with those stocks that are not cutting the mustard, i.e. that are the typical fallout when the market starts to weaken a run.
THE ECONOMY
Jobs growth spurred by the service sector.
It is the majority of our economic output, and as the ISM services report just confirmed, the service sector is growing, not declining. Indeed, it is growing at an increasing rate over the past six months. Friday's job report showed a larger than expected increase in jobs (132K versus 105K), and the bulk of the gains were thus logically driven by the service industries. Services pumped out 172K jobs while manufacturing lost 15K and construction lost 29K. Of the services, 43K were professional related and 31K in the 'hospitality' sector. We are told that includes restaurants and the like, and you have to wonder if 'the like' includes brothels, at least the legal ones. Now that is a statistic I would like to see.
There was more than just the November jobs, however. October was revised down to 79K from 92K. Not good. September, however, was revised up to near 200K jobs versus the 51K originally reported (though it was revised up in October). That means a net 42K more jobs were added than originally reported, and that helped boost the view the economy is still in decent shape (though jobs are a hugely lagging indicator).
Can you rely on the data?
Of course, until the second revisions come out, do we really know what the heck the numbers are? The government data, regardless of the report, has been woefully inaccurate the past several months. Is the government getting worse at forecasting or is it something else? Remember, these are just projections based on models that in some cases are no more accurate than the wild-ass guess method based on prior trends. It is similar to forecasting the summer weather in Houston. You have a high probability it is going to be hot, humid, and possibly rain in the afternoon. When it does change it usually catches the weather forecasters off guard unless it is a Cat 4 hurricane churning in the Gulf.
Thus, this data may be indicating a potential change similar to how market volatility signals a potential market change ahead. If the government consistently gets it wrong, it is usually underestimating or overestimating strength. We saw this as the economy plunged in 2000 (reports were way too optimistic) and when it recovered in 2003 (reports way underestimated the actual strength). Right now the reports are missing on the upside and the downside with no one trend taking over. That in itself suggests there is some change afoot, and given the economy has been on a long upswing it behooves us to watch the leading indicators closely.
What about construction.
One indicator is construction. Everyone talks about the housing market, but big buildings and developments (even big housing developments), take years in the planning stage. They don't turn on and off over a 6 month period. The Friday jobs report showed that construction woes are growing, and though many talk of a bottom in the housing market, the problems are only likely to grow, at least as far as jobs are concerned.
Why? Because many builders, particularly in housing, are in the process of completing projects, and once they are done, they are not going to initiate new projects. Thus with construction layoffs already jumping, we can expect they will jump even more as these big projects are completed.
Thus the manufacturing sector is likely to continue to weaken (meaning more ISM's below 50 ahead), but thus far there is no let up in services and indeed they are expanding. Services do tend to follow the lead of the manufacturing sector to an extent, however, so this trend of expansion may start to falter some in the months ahead.
Of course, other countries are no better.
Japan reported its Q3 growth rate at 2% in November. Everyone was gushing over the Japanese recovery. The revision of that number was 0.8%. Got that decimal point in the wrong place when doing the calculations. The US was way off as well, from 1.6% to 2.2%. Maybe they are using the same outsourced data calculator.
What about the leading indicators?
ECRI, the best economic indicator, continues to forge ahead, showing solid improvement for the economy. Its leading index posted 138.7, up solidly from 137.1 the prior week, the highest reading since April. The 4-week annualized growth rate was 1.8%, a 6-month peak. Before you get all hot and bothered, however, that is forecasting modest growth, not gangbuster expansion. Nonetheless, it shows a resumption in growth ahead after a slowdown that we are currently experiencing and that is likely to get a bit worse before it gets better. Remember, ECRI looks down the road longer than most indicators.
As for inflation, ECRI's FIG rose to 119.4 from 118.8 . That, however, is just a minor fluctuation in the steady trend lower, and it remains well below the October 2005 peak in the indicator. Remember, though the CPI and PCE show inflation growing, they are lagging indicators because they show what has been in the past couple of months. ECRI looks well down the road at inflation pressures, the things that will cause inflation. They have been easing since October 2005. Thus inflation can be rising even as ECRI inflation measures are falling because ECRI accurately forecasts what inflation will be.
THE MARKET
MARKET SENTIMENT
VIX: 12.07; -0.6
VXN: 17.14; -0.79
VXO: 11.27; -0.69
Put/Call Ratio (CBOE): 0.78; -0.09
Bulls versus Bears: Bulls moved further above the key 55%, but bears rose over a point and one-half as skeptics are growing along with the bulls. Somewhat of an offset to the rise in bulls, but not a complete offset. Still a warning to watch for distribution, failing leadership and the like.
Bulls: 59.8%. Another solid jump, up from 58.5% and 56.4% the week before. Third 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: 23.9%. Up from 22.3%, bouncing after getting as close to 20% as it has on this entire run. Held steady at 22.3% for 2 weeks then started this rebound attempt. 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: +9.67 points (+0.4%) to close at 2437.36
Volume: 1.831B (-12.03%). Significant drop in volume (well below average) as NASDAQ reclaimed some of the Thursday lost ground on that distribution day. Not a good answer volume-wise but hanging in there. 3 churn days, 3 distribution days in the past month. Another couple of distribution sessions, however, and the prognosis is not great.
Up Volume: 1.225B (+524.813M)
Down Volume: 577.945M (-784.947M)
A/D and Hi/Lo: Advancers led 1.03 to 1. Pretty nondescript.
Previous Session: Decliners led 1.6 to 1
New Highs: 127 (+26). How do you spell mediocre?
New Lows: 21 (+4)
The Chart: http://www.investmenthouse.com/cd/^ixic.html
A good save at the July up trendline (now at 2422) on the Friday low and a bounce to positive. That keeps it in the uptrend obviously, and that keeps it in the game. It is still trying to fight off that lower high made to start December and the recent churn and distribution. Chips are not helping, at least not last week. The lower volume bounce was basically the minimalist approach: NASDAQ did the minimum it had to do to hold the uptrend. It still ahs to find some renewed buying on some volume in order to break up this slightly toppish pattern here. But for the extended runs for the entire market we would not be too worried about this action. Of course you cannot take a pattern out of context or the lifecycle of the index; there is too much of that going on in the political arena for us to do that. No, it is extended and thus under some pressure, but it is also still in the trend and it is the season for uptrends to hold, at least through the holidays.
SOX (-0.66%) was a downer what with the start of earnings warnings, but it was not a complete capitulation. Sure it gapped lower but it held a key level at 475, clinging to support. There are still some chips that are in great shape to run higher, and as noted, the overall SOX pattern is not a breakdown despite the warnings late last week.
SP500/NYSE
Stats: +2.55 points (+0.18%) to close at 1409.84
NYSE Volume: 1.359B (-6.18%). Lower volume as the NYSE indices finished mixed. No accumulation, no distribution. Both SP500 and SP600 remain in solid position in their uptrends, holding up much better than DJ30 and NASDAQ.
Up Volume: 716.967M (+190.226M)
Down Volume: 622.665M (-276.888M)
A/D and Hi/Lo: Decliners led 1.03 to 1. The weaker small caps hurt the overall breadth, but it was basically a wash.
Previous Session: Decliners led 1.45 to 1
New Highs: 203 (+17)
New Lows: 8 (+3)
The Chart: http://investmenthouse.com/cd/^gspc.html
SP500 continues to hold easily in its uptrend. Indeed, it held above the 18 day EMA all week, never threatening that level after getting a bit turbulent the week before. There is not much to say here because it simply is not showing the same moderate wear and tear of the other markets despite the long run leaving it somewhat extended.
SP600 (-0.09%) posted a loss, but it was negligible, especially when you consider the tap to the 18 day EMA on the low and the solid rebound. As with SP500, the small caps are in great shape, continuing the uptrend after the October breakout. The energy sector is helping support them, but it is not energy alone. There are big buyers still in the small caps, indicating a belief that growth will continue in the economy. Not bad at all.
DJ30
The blue chips tapped the 18 day EMA (12,240) on the low and rebounded for a modest gain on a bump in volume up to average. DJ30 is still fighting with the November high (12,262), but it is trying to make a higher low here to set up a break through that level. The 4 week lateral move in itself is nothing bad; it is the fact that DJ30 is on a 5 month run that makes the action more noteworthy. For 5 weeks DJ30 has started to change from the tight rally higher to a looser, more volatile pattern. It can still iron this out and continue higher; volatility signals some potential change but in itself is not definitive. We have doubts about the ability to move significantly higher from here but that does not mean it won't try and rise the holiday higher. Watching that November high very closely this week.
Stats: +29.08 points (+0.24%) to close at 12307.49
Volume: 240M shares Friday versus 212M shares Thursday. Good recovery with the tap at near support and rebound to positive on rising volume. That is the action you want to see.
The chart: http://www.investmenthouse.com/cd/^dji.html
MONDAY
The economic data train does not stop yet, with retail sales and the CPI as headliners for the week. Those and of course the FOMC one-day meeting on Tuesday where the Fed will meet and leave rates unchanged, noting that despite the slowing in manufacturing, the risk for inflation remains its primary concern. We all know that a slowing economy is worse for inflation than an expanding economy, but in this world of make believe that surrounds the Fed, that just isn't accepted. For example, the Fed paused when inflation was still rising despite its self-imposed limits of 1% to 2% inflation growth. With jobs still strong, economic indicators strong, and the consumer strong, the Fed would not pause if it truly believed the Phillips Curve model it was espousing. What the words versus action do underscore, however, is how absurd our system is, and indeed the world's system, when you consider the importance of currency values and money flows. That we play games with such important topics seems to be just about the height of foolishness.
Nonetheless we will continue to play the game and the Fed will say inflation risks are still too high, and the bond curve will continue to expand its inversion. Oh yes, the narrowing inversion that got to 5 BP last week as the odds for a March rate cute topped 80% quickly swung back to a 12 BP inversion by the Friday close (4.67% versus 4.55%) and just a 32% chance of a cut in the spring. We have discussed this often before but it bears repeating: if the Fed let up on the inflation talk the inversion would cure itself because the market sees the Fed as overly restrictive if it follows its tough talk and instead would just back off. We saw that in August with the pause as the inversion reverted. As soon as the Fed started its tough talk back up, however, the inversion resumed. It faded last week after the weak ISM, presuming the Fed would adopt a more tolerant position, but when the Fed did not, the inversion returned.
That aside, parts of the market have something to prove, namely NASDAQ and DJ30. Their patterns are a bit dicey with their lower highs made over the past week. Given the long runs that is understandable, but it is also the case that they have not given up much ground, and the uptrends are still in place as are the holidays. Those often combine for a run higher.
With the Fed likely holding pat, we are likely to get more of the same. Thus far that has not been bad, and with the many positive patterns we still see in some very good stocks, the continuing uptrend, and the season, we could easily see more gains added. NASDAQ and DJ30 will be a key, however; if they fail to resolve their lower highs to the upside, that distribution that has been lurking around NASDAQ could easily show up again. There are some ready to sell if things look weak, and they are nervous ahead of the holidays given the long run and the lack of any correction. Those are definitely valid points but you cannot let the fear of what may happen freeze you into neutral. If we continue to see good stocks set up and break higher with good backing then we will stick with the leading stocks that are making their moves versus relying on emotional, gut feelings. If you go by your guts with respect to the market, you usually end up gutted. Now that is a nice holiday thought.
Support and Resistance
NASDAQ: Closed at 2437.36
Resistance:
The 10 day EMA at 2435.48 has not been resolved
2468.42 is the November 2006 high
2477 from January 1999
2493 is an interim peak from February 1999
Support:
The 18 day EMA at 2427
2422 is the July up trendline
2412 from June 1999 low
2384 is an interim peak from January 1999
2379 is the October high.
2376 is the April high, the former post-2002 high
The 50 day EMA at 2372
2368 is the early October handle high.
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 1409.84
Resistance:
1410 is an interim high from March 2000
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:
1408 is the November high
1401 is a low from April 2000
The 10 day EMA at 1405
The 18 day EMA at 1399.78
1391 is the July up trendline.
1390 is the October high.
1389 is a low from November 1999
1378 is a low from May 2000
The 50 day EMA at 1377
1371 to 1373 is the December 2000 peak and the January 2001 peak
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 12,307.49
Resistance:
12,361 is the November 2006 high
Support:
The 10 day EMA at 12,270
The 18 day EMA at 12,240
October high is 12,167
The 50 day EMA at 12,063
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 11
Wholesale inventories, October (10:00): 0.6% expected, 0.8% prior
December 12
Trade Balance, October (8:30): -$63.5B expected, -$64.3B prior
Treasury Budget, November (2:00): -$74.0B expected, -83.1B prior
FOMC policy meeting statement (2:15): Expecting no change in rates and no change in inflation concerns despite mentioning and brushing off the sub-50 ISM
December 13
Retail sales, November (8:30): 0.2% expected, -0.4% prior
Retail ex-auto (8:30): 0.3% expected, -0.4% prior
Business inventories, October (10:00): 0.5% expected, 0.4% prior
Crude oil inventories (10:30): -1.04M prior
December 14
Initial jobless claims (8:30): 324K prior
December 15
CPI, November (8:30): 0.2% expected, -0.5% prior
Core CPI, November (8:30): 0.2% expected, 0.1% prior
NY Empire State PMI, December (8:30): 20.0 expected, 26.7 prior
Net foreign purchases, October (9:00): $65.1B prior
Capacity utilization, November (9:15): 82.2% expected, 82.2% prior
Industrial production, November (9:15): 0.2% expected, 0.2% prior
End part 1 of 3
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world stock market
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