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us stock market, understanding the stock market
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1/31/07 Investment House Daily
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SUMMARY:
- Market ends January with an impressive, Fed-aided surge.
- Bernanke gets it: you can have growth and low inflation.
- GDP even stronger than reported though Chicago PMI posts a three-year low
- Inflation is fading as the leading indicators foretold.
- More earnings to come (Dell warns, GOOG down after it beats) along with more inflation data, but the news is mostly out: can the market hold the break higher this time?
Stocks receive a gift, close out January with gains.
A torrent of earnings and a stronger than expected Q4 GDP report (3.5%) gave investors plenty to chew on but despite the overall good news stocks had a hard time making any headway in the morning. No surprise as the FOMC was set to deliver its latest missive on inflation and interest rates. A blowout earnings report from BA was all that kept DJ30 afloat early on and techs were pressured by misses from SNDK and SLAB as the semiconductors continued their struggles. Chicago PMI was the lowest in almost four years and that sent the indices down, but then oil inventories jumped and the indices rallied back. Those gyrations left the indices basically flat heading toward the FOMC decision.
When the Fed announcement came and removed 'elevated' as the adjective describing inflation, noting that core inflation readings have "improved modestly in recent months." A unanimous vote on the meeting was the icing; even Lacker stopped harping for a rate hike.
That was enough to end the guesswork leading up to the FOMC decision. Everyone figured the Fed would not hike (except some analysts that are just so wrong it is laughable), but it was the mitigating views on inflation that brought buyers back into the market. Even with oil jumping again (58.14, +1.17) stocks rallied to the close. NASDAQ rallied 15 points before a modest late fade. SP500 hit a new post-2002 high and just missed closing at that high. SP500 made good on its pattern and made its new all-time high. NASDAQ, while not breaking any new ground, did close above 2450, the minor resistance that held it back the prior two sessions.
Technically it was a good yet so-so session. Both NASDAQ and NYSE rallied nicely on much stronger volume, making those landmark moves noted. Breadth was strong on NYSE (2:1) but weak on NASDAQ (1.3:1). Retail, energy, and healthcare provided some of the leadership, but techs and chips were lagging, likely feeling the effects of that rebound in oil from 50 to 58. These shortcomings may just be nitpicking; strong volume breaks are what you look for when the market makes its moves. Nonetheless, two solid breakouts higher in the past month were sold off even harder. Thus those nits we are picking have a bit more weight than usual and thus any enthusiasm needs to be mitigated somewhat given recent history. Overall, however, the market weathered some less than positive earnings and earnings outlooks, holding at support, and now things are looking rosier down the road despite what companies think. That puts an overall cautious optimism on the prospects ahead now that January is in the books.
January indicator ends on a positive note.
Speaking of continuing on after January, it started off shaky but as the month wore on and stocks held on, the prospects improved. While SP500 was down the first three sessions of the month, NASDAQ was higher. Though all of the indices hit a wall mid-month, they hung on and closed the month positive. So the January indicator (measures the first three days and the overall month to determine the year), was more positive than not.
The January indicator is reliable, but it does not mean that if the market starts higher in January a straight shot higher is in the bag. There can be some nasty dips along the way and then recoveries to keep the 'indicator' intact. Indeed, that has happened several times. Nonetheless, the indicator jibes with another indicator, the year before a presidential election indicator. In years preceding a presidential election the market has closed positive for the year every time but once back in the 1930's.
What about the lowered guidance from companies? That is coming from the horse's mouth and does not sound very promising. True, but also recall that CEO's are poor predictors of economic activity. Recall that in 2002 and 2003 they said the outlook was terrible even as the economy was recovering. On the crest of the crash in 2000 they were incredibly bullish; companies had to eat billions in inventory because they thought the tap would never turn off. More recently, housing execs back in 2005 were so incredibly bullish when they appeared on CNBC and Bloomberg that we concluded the top was in as that bullishness coincided with real time indicators that the market was waning. Now it appears prices are starting to bottom but housing execs are forecasting gloom for a long time to come.
Thus you cannot put too much stock into forecasts, particularly out beyond the current quarter. Sure they know what is happening right now in this quarter so you have to give that some credence. But again, how many times do we get revised guidance only to see a company miss that guidance two weeks later?
The point: don't put too much weight on forecasts from companies. History proves they are wrong most of the time. It behooves you to look at the real leading indicators such as ECRI and the market itself to determine health.
THE ECONOMY
The new maestro should take a bow: Bernanke shows an understanding of markets and money that Greenspan can only envy.
When Greenspan took over the Fed he inherited some inflation and a strong stock market. He followed the lead of his 1929 Fed predecessor and attacked the market as a cause of inflation. We benefited from this wisdom with Black Monday and a 34% decline in the stock market during Greenspan's first year. Bernanke inherited some inflation (from Greenspan) and a solid stock market as well. He managed to quell inflation and let the market expand to a 14% gain in the first year of his term. Far cry from the 'amateur' label one idiotic senator placed upon Bernanke early in 2006. I would love to play that one over and over during his next political campaign.
The FOMC statement Wednesday was a landmark one similar to the landmark pause last August. In this statement the Fed no longer viewed inflation as 'elevated' but instead noted core inflation had improved even as the economy recovers from its soft patch in Q2 and Q3 of 2006. Wow. Economic growth and lower inflation. The Phillips curve economists are rubbing their heads in profound confusion or, as they were doing on the Wednesday financial shows, refusing to bear witness to facts.
The Fed has received exactly what it wanted: a pause in the economic growth and a moderation in inflation pressures, and now a rebound in economic activity. The statement Wednesday was the point where the Fed has started to turn the ship from a tightening bias to a neutral bias just as it started to turn the boat in the summer ahead of the August pause. Despite those who still say the Fed has to raise rates, the Fed is setting up so it can proclaim it is neutral. Even if you don't believe that, the statement released Wednesday assures that the Fed is not going to hike for a long time to come.
Bernanke's handling of the inflation problem has been masterful. Despite the Fed rhetoric he allows to flood the media, as we discussed at the time of the pause, Bernanke's actions belie the Fed's public statements and show a Fed chairman who understands economic history as well as economic cause and effect. Thus as soon as he took over the Fed he slowed money supply growth from 6.2% under Greenspan to 0.2%. Inflation is a monetary issue, and to get it under control you have to dry up liquidity. Greenspan hiked rates for a year and one-half yet kept money supply surging. The result was increasing inflation.
Bernanke knew he had to kick the Greenspan inflation so he slowed money supply growth, not cutting it off and choking the economy as Greenspan did in 2000, but giving the economy some money to continue to grow while taking out the liquidity. Commodities ended their surge that summer when the liquidity dried up, starting a nice, easy correction. Lo and behold, inflation readings started to fall that fall EVEN AFTER Bernanke paused IN August while the CPI and PCE were still rising. To the hawks this was craziness. To Bernanke it was economic cause and effect.
It was also artful. While Bernanke slowed money supply growth he did not want to go too far and repeat the mistakes of the past. When he determined inflation pressures cooled enough he let up, pausing rate hikes in August, resisting the hawks who wanted a 50BP 'kicker' as Greenspan did in 2000 (remember the calls for the 50 BP hike?). More than that, he allowed money supply to start growing again. Not contemporaneously with the pause, but several months down the road. As reported here last night, money supply growth when charted versus the SP500 is making the upside crossover that historically goes hand in hand with a market advance for many months ahead.
Now is this not craziness once more? After all, GDP surged again in Q4 and if Bernanke lets this go on surely inflation will result. Thus the continued crow caws, I mean calls, for rate hikes over the next few months. Bernanke is telling us through his actions, however, just what Milton Friedman told and Arthur Laffer is telling us: you can have simultaneous strong growth an low inflation as long as you keep control of the money supply. Right now the proof is in the results, and the first year is Bernanke 14%, Greenspan -34%. Just as the 2005 Heisman trophy was awarded to the wrong player, the wrong Fed chairman was awarded the 'maestro' moniker.
Q4 GDP strong, but also stronger than it admits.
The 3.5% was ahead of the 3.0% expected and the 2.0% in Q3. Quite a roar back. Housing fell 19.2% while consumer spending rose 4.4%. Yep, all of those that mortgage refinancing really took it out of consumers. Moreover, the results show you that while housing is important, it is not that heart of the US economy. Housing fell 20% and GDP still surged.
Earlier in January we noted that GDP would be stronger (but not 3.5%) given the surge in exports. Those really helped, pushing GDP up 1.6% overall. At the same time, inventories fell by $20B ($35B from $55B). Inventories are added to GDP, and thus the drop subtracted from GDP. With the economy expanding once again, however, we know production will be required to bring products back up to meet demand. That means even more activity ahead and thus GDP was understated (Bob McTeer noted this after the FOMC meeting in his commentary). Moreover, with business investment turning back up this quarter (it was down for three prior months and -0.4% in the report), there is even more upside growth ahead.
Inflation indicators continue to soften.
All of the inflation data accompanying the GDP report was softer. The deflator fell to 1.5 from 1.9, below the 1.6 expected. The employment cost index (ECI) fell to 0.8 from 1.0. The core PCE fell to 2.1% from 2.2% prior (and that prior was a decline), just outside the Fed's comfort zone and still falling. We will get the latest iteration of that on Thursday and the monthly reading is likely to be negative. They are falling into line and again, it looks as if Bernanke played this one pretty much perfect.
Chicago PMI posts a surprise decline.
The 48.8 reading was the lowest since April 2003, just before it turned above 50 until this last reading. That was well below the 52 expected and the 51.6 in December. It caused some ripples on Wednesday, but was overshadowed by the GDP, inflation readings, and of course the FOMC statement.
Much of the decline is attributed to seasonal auto issues, but heck, it has weathered that for almost four years. It tried to turn negative in December but benchmark revisions kept it above 50. It has trended lower and now has made the move to contraction to start the year. That cuts against the view that things are only going to improve economically. New orders fell to 46 from 56. Employment slid a bit further below 50 after doing so in December. Prices paid slid as well but held above 50 at 54.9, down from 56.9. Of course they were at 86.1 in June.
The national ISM is out Thursday and it is still expected to come in above 50. That is expected; the national number lags the regional by a couple of months. The national number is trending lower as well, and will be closely watched Thursday and the next month.
THE MARKET
MARKET SENTIMENT
VIX: 10.42; -0.54
VXN: 17.19; -0.79
VXO: 10.14; -0.52
Put/Call Ratio (CBOE): 0.79; -0.14
Bulls versus Bears:
Bulls: 52.7%. Well, bulls jumped right back up after plunging to 50.5% from 55.4%. That break higher by NASDAQ last week jumped them up and the reversal did not quell the spirit. The action this week likely will. Peaked in January 2006 peak at just above 60%.
Bears: 20.9%. As bulls rose, bears declined from 22.1%. Right back down after a nice recovery where bears almost undercut the 20% level considered bearish. It fought off 20% but is heading back to that level that is considered bearish for the market. Hit a new post-2002 high in that late June 2006 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: +15.29 points (+0.62%) to close at 2463.93
Volume: 2.348B (+29.84%). Volume surged to match the distribution level from a week back, really picking up after the FOMC decision. A good turn of price/volume action, but again, we have to see how the sellers treat this. The past two high volume upside moves were sold of even harder.
Up Volume: 1.41B (+259.802M)
Down Volume: 737.724M (+127.363M)
A/D and Hi/Lo: Advancers led 1.29 to 1. Very disappointing as the large cap techs led the move (+0.82% on NASDAQ 100).
Previous Session: Advancers led 1.55 to 1
New Highs: 105 (-60). Not impressive as NASDAQ starts a move back toward a new post-2002 high.
New Lows: 19 (-8)
The Chart: http://www.investmenthouse.com/cd/^ixic.html
NASDAQ moved past 2450, the minor resistance that stalled it the prior two sessions. Volume was excellent as it made the move. A good recovery from that harsh distribution last week that pushed it back to the 50 day EMA where NASDAQ held the line and is now attempting to take on a new high again. Breadth was poor so the move did not have a lot of broad backing. That makes us even more watchful over the next few sessions in the event sellers try to come back in. If just a few stocks are being bought up it is easier to turn the tide back. Thus a good hold at the 50 day EMA and volume rebound, but it has more to prove. Still, you have to like how it weathered some less than exciting earnings guidance, held support, and is now making a comeback move. Where is the Gipper?
SOX (-0.35%) closed negative, but it was well off its lows on the session that saw it tap 450 support and then rebound to close dead on the 200 day SMA (458.83). Maybe this is the shakeout double bottom that sends it higher. Maybe I will fly to the moon tomorrow. The point: not a lot of support for semiconductors right now.
SP500/NYSE
Stats: +2.37 points (+0.66%) to close at 1438.24
NYSE Volume: 1.727B (+13.03%). Volume jumped back above average and fell just short of last Thursday's distribution volume as SP500 tested a new post-2002 high and SP600 broke to a new all-time high. Excellent action on top of the Wednesday move. As with NASDAQ, we now see if it can hold without a new high volume sell off attempt.
Up Volume: 1.225B (+156.479M). Good ratio of up to down volume.
Down Volume: 487.015M (+53.291M)
A/D and Hi/Lo: Advancers led 2.07 to 1. Solid, particularly when compared to NASDAQ, but not blowout. You have to like the one-two punch from Tuesday and Wednesday, however, that saw a very broad move. Wednesday was extra nice because it was not all energy driven. The financials were back in the game and we are looking that way once again.
Previous Session: Advancers led 2.42 to 1
New Highs: 191 (-18)
New Lows: 4 (-2)
http://investmenthouse.com/cd/^gspc.html
SP500 pushed to a new post-2002 high intraday though it could not hold onto that by the close. Volume was solid, back above average, just what you want to see on such a move. Financials joined energy in leading, but the move was broad as the 2:1 breadth indicates. SP500 is still holding its trend, indeed it recaptured one of its trendlines from the July 2006 low. Money continues to work its way into the large caps when they approach the 50 day EMA as they did Friday and Monday. The buyers were back and now we see if they can weather any new selling attempt as we saw last week.
SP600 (+0.57%) continued the run off the 50 day EMA test from last Friday. That set a higher low and vaulted the small caps to that new all-time high. The recovery in oil and energy stocks certainly got things going and is helping it continue, but the move is spreading as oil slowed a bit Wednesday. You have to like this move as the small caps represent growth companies, and this set up to a break to a new high preceded the GDP, and it is forecasting further growth ahead.
DJ30
The blue chips hit an intraday all-time high then just missed a new closing high at the bell. Volume was up as BA reported blowout earnings and powered the Dow. Once more DJ30 waived at the 50 day EMA on the lows late last week but held near the 18 day EMA. Once more that worked to set up an upside move. The Dow refuses to give in and more than that it continues to test and then surge, and surge on volume at that.
Stats: +98.38 points (+0.79%) to close at 12621.69
Volume: 258M shares Wednesday versus 244M shares Tuesday. Volume was up, this time powered by some huge upside volume (BA) versus the negative MMM trade Tuesday. There was some accumulation in the blues.
The chart: http://www.investmenthouse.com/cd/^dji.html
THURSDAY
The Fed and the GDP are in the books, but the hit parade does not stop there. Personal income and spending (and the PCE) before the open and the ISM is out at 10ET. A negative PCE could slip the core year over year below 2%. That would, of course, make Bernanke appear even more maestro-like. Aside from that it would be great news because it would really get the Fed on holiday.
There are also more earnings to sort through; earnings season stretches well into February now. After hours GOOG beat expectations and fell but then recovered most of the lost ground. DELL warned yet again, but it also announced Dell was taking over the CEO position again. It was up after hours, kind of an 'anything is better than what you had' vote of approval.
This is all very interesting, but as we noted over the weekend and earlier this week, the market has a gist of the earnings picture at this point and it has survived some uninspiring forecasts, held support, and is now trying a new rally. In short it has seen, it has held, and now it will try again to rally. As noted above, the concern is whether the sellers will enter en masse once again or whether the third time is the charm and the buyers can push all indices to breakouts that hold.
We like the financials again, some energy still looks strong, metals, and machinery to hit a few. Once more the market has overcome an attempt to sell and met it with some upside buying. We will watch for leaders to continue higher, particularly as the market shows continued strength in moving higher and avoids another high volume selling binge.
Support and Resistance
NASDAQ: Closed at 2463.93
Resistance:
2468.42 is the November 2006 high
2471 is the December 2006 high
2509 is the January 2007 high
2493 is an interim peak from February 1999
2523 is price resistance November 2000
Support:
2450 is proving to be some minor resistance.
The 50 day EMA at 2427
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
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 1438.24
Resistance:
1444 from February 2000
1475 from peaks in December 1999 and January 2000
Support:
1435 is the July up trendline
1432 is the December 2006 high
1425 is an interim high from November 1999
The 18 day EMA at 1426
The 50 day EMA at 1412
1408 is the November high
1401 is a low from April 2000
1390 is the October high.
1389 is a low from November 1999
1378 is a low from May 2000
Dow: Closed at 12,621.69
Resistance:
About 8.2% above the 200 day SMA. It turned choppy after hitting 8.5% of separation in late October, but is has not sold off and just put in another new high. Same old story.
Support:
12,499 is the December intraday high.
The 50 day EMA at 12,385
12,361 is the November 2006 high
October high is 12,167
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 pre-2000 all-time high
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
January 30
Consumer Confidence, January (10:00): 110.3 actual versus 110 expected, 110.0 prior (revised from 109.0)
January 31
GDP Q4 advance (8:30): 3.5% actual verus 3.0% expected, 2.0% prior
Chain deflator (8:30): 1.5% actual versus 1.6% expected, 1.9% prior
Employment cost index (8:30): 0.8% actual versus 1.0% expected, 1.0% prior
Chicago PMI, January (9:45): 48.8 actual versus 52.0 expected, 51.6 prior
Construction spending, December (10:00): -0.4% actual versus 0.0% expected, 0.01% prior (revised from -0.2%)
Crude oil inventories (10:30): +2.7M versus 789K prior
FOMC policy statement (2:15): Held at 5.25%, no longer calling inflation elevated.
February 1
Personal income, December (8:30): 0.5% expected, 0.3% prior
Personal spending, December (8:30): 0.7% expected, 0.5% prior
Initial jobless claims (8:30): 315K expected, 325K prior
ISM Index, January (10:00): 51.5 expected, 51.4 prior
February 2
Non-farm payrolls, January (8:30): 150K expected, 167K prior
Unemployment rate (8:30): 4.5% expected, 4.5% prior
Hourly earnings (8:30): 0.3% expected, 0.5% prior
Average workweek, January (8:30): 33.9 expected, 33.9 prior
Factory orders, December (10:00): 1.8% expected, 0.9% prior
Michigan sentiment, revised (10:00): 97.8 expected, 98.0 prior
End part 1 of 3
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us stock market
understanding the stock market
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