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world stock market, us stock market
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6/16/07 Investment House Daily
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Investment House Daily Subscribers:
MARKET ALERTS:
Targets hit alerts: ATHR; BCSI; CAT; FCX; GRMN; RIG; SUN
Buy alerts: CCJ; TRA; TRMB
Trailing stops: None issued
Stop alerts issued: None issued
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SUMMARY:
- CPI delivers the goods, market delivers a follow through.
- A bevy of strong data as CPI, New York, PMI, Current account offset a gas-burdened Michigan sentiment report.
- China tariff update: Senate trying to start a trade war with China, but as usual they are playing politics over what is good for most US citizens
- From the brink of a breakdown to short term overbought: the momentum has shifted but there is still more to prove.
CPI provides market all it needs to dispel the interest rates equals inflation myth.
Futures were milling nervously about just ahead of the May inflation report, trading just above fair value. After rallying Wednesday and Thursday into the number, it needed to be something more than just in line to continue the move. It was. Core inflation rose just 0.1% and that brought the year over year down to 2.2% from 2.3%. The New York PMI leapt past expectations (25.75 versus 12.0), net foreign purchases of US assets blew past expectations as foreign buyers again flocked back to US securities. Earnings were guided higher or affirmed. M&A activity returned again with PENN the object of a takeout.
The flood of good news, particularly the CPI, exploded futures higher. We anticipated it would take this kind of news to continue the move, and it did the trick. The question was whether it was enough to make the gains stick. In addition to the other economic reports, bond yields fell nicely down to 5.02% on the two year and 5.16% on the 10 year. That put yields well off the 5.33% hit early Tuesday morning when the market was in the throes of hard selling. We discussed it Thursday, and with the Friday move it certainly looks as if that Tuesday high was the peak for now.
The market followed futures and gapped higher, posting strong gains that took NASDAQ to a new post-2002 high. All of the indices surged on the open but most of the action was over in the first hour. The Michigan sentiment report was less than expected as consumers fret over gasoline prices, but that really did not impact the action. Investors got what they wanted, but it was expiration Friday as well as S&P rebalance time, and thus there was a lot of jockeying for the rest of the session.
The market sold down after the initial surge and then bounced up and down all session. The gains were never threatened, however, so there was no sell off or reversal as we feared one of the outcomes might be. It was quite still quite volatile as expected. We really did not wait around to see the volatility come in that we anticipated. Instead we took some nice profits on that first surge higher, then waited to see where it shook out. Lots of gaps made it harder to move into positions, and frankly, many stocks are somewhat extended near term after the torrid rebound. Thus the buys were not sprouting like mushrooms; most of the buys were earlier in the week when we were picking up a lot of positions, and we were already able to reap some reward Friday as they surged higher once more.
Technically it was a solid session with big volume, but expiration and rebalance volume is not that indicative of a lot of new buyers. Breadth was nicely positive, so it was not all position shuffling. Indeed there were strong moves in many leaders once again (energy, metals, and even some techs) as they continued their rebounds after the selling ended Tuesday. The indices continued their rebounds with NASDAQ moving to a new post-2002 high, SP600 blowing past its May peak, while DJ30 and SP500 rallied to the June peaks which are also all-time highs.
For the week the market once more came back from the brink of a sell off that saw distribution, higher day-to-day volatility, DJ30 breaking down through support levels not seen since April, and the other indices broke below their trends. Not a great story. But . . . the Fed Beige Book started the turn as investors saw that improving economic conditions and a rising jobs picture did not lead to higher prices or wages. With that news the indices checked up the selling and held where they had to at the 50 day EMA, bouncing off that level on the news. Leadership emerged once more with energy, copper, chemicals and even some tech leading the way. Retail sales were huge. The modest core PPI kept the ball rolling, and then the CPI sealed the deal.
Even with that rebound, the prior volatility and distribution are not complete wiped out, and DJ30 and SP500 have just made it up to their old highs. The market still has issues. Yet, it has had issues all the way up, and that is likely why, along with a ton of liquidity, it continues to rise, playing brinksmanship with sell offs only to recover and surge to new highs. Indeed, looking at SP500 and DJ30 you can view the action as a nice run up the short term moving averages that needed a deeper test before continuing higher. They made the test and then, boom. Right back up, resuming the run. The expiration and rebalancing week skewed the internals so we still have to see how the SP500 and DJ30 test of the old highs plays out. Skewed internals or not, when there is plenty of strong leadership from quality stocks, moves tend to be the real thing.
THE ECONOMY
Friday economic data caps a series of stronger reports with no inflation.
The CPI was much of the story though not all of it, but we would be remiss if we did not discuss some details. The headline was stronger than expected (0.7% versus 0.6%), pushing the year over year to 2.7%. as with PPI, gasoline pushed the overall higher with its 10.5% gain. Education was up as usual (+0.6%) but that was about all. Televisions were down huge. Computers lost 6.7%; apparel -0.3%; vehicles -0.2%; drugs were lower and medical costs rose 0.3% versus the 0.4% prior. That stronger gasoline price jump pushed Michigan sentiment down to 83.7 from 88.3 and an expected 88.0.
Of course there is the 'raging' debate on all the financial and news stations about inflation and whether it is rising or falling. Prices are higher. Gasoline is higher. Ethanol is pushing food prices higher. Education and healthcare are perennial gainers. Anything with petrochemicals, steel or copper in it costs more.
Well, not everything. Televisions are diving in price, down 27% year over year. Computers are lower as are auto prices. Housing is lower. In short, there are rising prices and there are falling prices, but the losses in the decliners are more than offsetting the price gains. Problem is, a lot of the declines are in things you don't run out to the store and buy every week. Thus prices don't seem to be falling, but factoring in the items you don't frequently purchase the overall price tag is lower.
The inflation report comes after the PCE annual growth rate, the Fed's supposed favorite, fell to 2.0%. It also is on the heels of a steady stream of improving economic data over the past two to three months. Regional and national manufacturing and service reports are surging. Jobless claims are low and job production is solid. Business capital investment is again showing strong gains. Retail sales surged back after just a one-month hiatus following an early Easter. A very solid recovery is underway after that slowdown with inflation falling as it recovers. Imagine that.
China issues again.
Now imagine our Congress and its continuing belief that we are all affable but basically stupid oafs in need of parental guidance from Washington. This past week Senator Schumer once again was on the warpath, ready to slap tariffs on China because of its refusal to quickly remove its peg to the dollar. Last time I checked, China was a sovereign nation and could do what it wants with its currency whether it is good for the US or not.
Schumer et al argue it is bad for the US, claiming that China's low wages due to its pegged currency make it impossible for US businesses and workers to compete. Their proposed remedy is to impose tariffs that will make Chinese goods more expensive and thus less desirable to US consumers. Of course if they get what they want Chinese goods will be more expensive and less desirable to US consumers. It is a lose-lose situation for China so of course it is dragging its heels with respect to any changes.
More than that, it is a lose-lose situation for the US consumer. With tariffs prices rise so we pay more. With a stronger yuan our prices rise so we pay more. This trade deficit that we hear about month after month and how it is a detriment to the US is benefiting us. We get lower priced goods and we get lower interest rates as well as China uses those funds to buy US treasuries.
Most of the Chinese trade deficit comes from US goods manufactured in China.
And what about those 'Chinese' goods we are buying. Those jobs-robbing, outsourcing inducing, foreign products that are closing domestic producers down. Did you know that 85% of the trade imbalance with China is made up of products assembled in China for US manufacturers that are then re-imported to the US? US companies are using cheaper Chinese labor to assemble US goods, paying for the labor, and then selling those goods in the US so we can have high quality goods at a cheaper, more competitive price with the rest of the world's manufacturers that enjoy lower tax rates than our corporations. As you can see, it is our tax structure that makes it harder for US companies to compete that is driving them in part to seek out and use this cheaper labor source. The goods are still US company goods and the sales benefit US companies (and US consumers as well).
This was quite common back in the 1980's and 1990's in Mexico with many US goods being 'hecho in Mexico.' There were some rumblings about losing US jobs to Mexico, but nothing ever came of it. Of course Mexico was our neighbor, we did not have a big trade deficit with Mexico, and we did not fear Mexico as we do the Chinese. Most of all, the US public did not mind getting lower cost goods from US companies via Mexico. This is similar to the immigration issue now. Many do not like the situation of illegals, but they also like cheaper services and goods because of the lower cost labor. With the current proposed legislation, however, no one I have talked with likes the idea of illegals receiving citizenship but not having to pay back taxes on their prior work in the US. This was dropped from the bill by the Bush administration because it would be 'too hard' to calculate. News flash: it is too hard for US citizens to calculate their taxes with a 57,000 page tax code. If it is good enough for illegals not to pay taxes, then it is good enough for the rest of us. But I digress. The point: we got over the 'made in Mexico' issue because it was mutually beneficial. Same thing with China.
Sure there are some here in the US who lose out because they are unable to compete with lower wages overseas, but in the history of our economy those jobs that can be performed cheaper elsewhere migrate offshore while we produce the new, next generation jobs because of our vibrant economy creates new technologies and ideas that require new and different skills. In sum, many benefit to the detriment of a few due to this constructive destruction of jobs.
Congress was not this concerned during the 1980's energy bust.
Looking back at history you have to wonder why Congress is so concerned. In the 1970's oil prices exploded higher and the oil companies made a lot of money. This was, of course, after the 1960's when the oil and gas business was a bust and US oil companies were struggling. They were finally making some money, recovering from that bust when the federal government enacted the Windfall Profits Tax to appropriate some of those 'obscene profits.' What do you get when you tax something? Less of it. The oil companies gave back a lot of those profits as a result of the tax, and then came another oil bust when Saudi Arabia decided it wanted to control the world oil market and flooded the world with crude, pushing it down to $9/bbl. Without the 'obscene profits,' the oil industry suffered horribly and we lost half of our domestic oil companies and the majority of our onshore production that became no longer viable to operate.
That left tens of thousands out of work in the oil industry alone, and that had ripple effects all across the south, southwest, the Rocky Mountains and the west coast as the S&L crisis emerged from this bust along with a mortgage crisis as jobs were lost in all sectors. Now as I recall (as I was in the business in the 1980's), no one was crying about all of those out of work oil and gas workers who walked on mortgages due to lack of jobs and funds. No one threatened to impose tariffs to raise the price of oil in order to save domestic jobs. No, Congress chortled at the sight of $9/bbl oil and suggested those oil and gas workers out of a job should go retrain themselves, and that is exactly what we did.
Politics as usual.
Why do we have to raise the cost of living, basically importing inflation, in order to save a relative small number of jobs that should more than likely migrate to regions with lower average wages? Underwear makers must be more sympathetic than oil patch folks. After all, no one was crying about some oil guy's inability to make the payment on his Mercedes. As usual, it is all about politics, using misinformation to scare the masses and thus gain the leverage to do stupid things that benefit a few to the detriment of us all. Problem is, most buy off on the heart-string pulling arguments and agree to the action. By the time they find out they were hosed by their leaders it is too late.
This legislation won't survive a veto, but Bush's time in office is limited, and in another chapter of history repeats itself (or, in this case, like father, like son), he has so alienated the conservatives that an outcome similar to 1992 is likely. Recall how Bush I raised taxes despite his 'read my lips, no new taxes' pledge. He must have been lip-syncing because he bought into a democratic Congress' argument that he had to reduce the deficit. He ticked off the conservatives so much it gave an opening to a 'maverick' named Ross Perot and his great sucking sound of jobs rushing across the border to Mexico. That was enough to drain off some votes and gave the White House to President Clinton.
The point: Bush is gone at the end of 2008 and he has so polarized his own party that the republicans will have less money to spend on the election due to upset prior supporters, and that very anger is likely to lead to another interloper appearing given conservatives have no champion. Indeed, that is why Fred Thompson is entering the race. High level GOP strategists realized history was repeating itself and thus Thompson was petitioned (a.k.a. begged) to enter as a Reagan disciple and thus keep the part together in the primary process and stave off any third party fire and brimstone conservative entering the race. If democrats still win that ultimately means China gets hit with tariffs, but the real people getting hit will be US citizens.
THE MARKET
MARKET SENTIMENT
VIX: 13.94; +0.3
VXN: 15.94; +0.51
VXO: 13.2; -0.49
Put/Call Ratio (CBOE): 1.04; +0.25. Jumped above 1.0 again on the close, but this was more tied to expiration than to any particular market action.
Bulls versus Bears:
Bulls: 56.7%. Well so much for bulls fading in the selling. They spiked above 55% from 52.2% after falling over the past three weeks from 54.3%. This is over the 55% considered bearish, and is thus another factor along with the lower volume on this recovery bounce that suggests the market is still overbought here. Still off the 60% hit in December 2006 but getting closer. For reference it bottomed in the summer 2006 near 36%.
Bears: 21.1%. Tanking as well, falling from 22.8% last week. A one-week bounce from 21.5% is right back down. It hit 20.7% three weeks back after spending some time below the 20% level considered bearish (19.6%). It is still well off the 27.5% hit 2 months back. The rally has taken the bears down from the recent highs near 29 (28.4% and 28.9%), matching its January and February lows. For reference, it hit a post-2002 high in that late June 2006 move (hit near 36%), 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: +27.3 points (+1.05%) to close at 2626.71
Volume: 2.571B (+27.22%). Colossal volume, the biggest since late April, as NASDAQ moved to a new post-2002 high. Sure there was some action attributable to expiration and rebalancing, but there were also some very strong moves in chips and techs as they broke higher from good patterns.
Up Volume: 1.898B (+436M)
Down Volume: 657M (+122M)
A/D and Hi/Lo: Advancers led 2 to 1. Not spectacular, but solid.
Previous Session: Advancers led 1.5 to 1
New Highs: 220 (+80)
New Lows: 53 (-1)
NASDAQ CHART: http://www.investmenthouse.com/ihmedia/NASDAQ.jpeg
NASDAQ was out of the gates with a shot, gapping higher and over its upper channel line. It bounced up and down in a tight 9 point range for the rest of the session, coming off a midmorning selling attempt to close mid-range. Volume was tremendous as noted. Even with expiration pushing volume higher, with this kind of gain there was accumulation ongoing, and you always like to see higher volume on this kind of upside. NASDAQ also provided a second follow through move on the heels of the last round of selling. It posted the first on Wednesday and then a new one Friday. That shows the turn back up has some serious backing. Now that it is at a new post-2002 high we see what kind of staying power it has.
SOX (+1.71%) was again the market leader as it surged higher through the top of its range that it cracked through Thursday. Just 7.5 points from that May high at 510. Improbable, but after it made that higher low the chips shot higher and are trying to take the lead.
We have said it many times the past few months that if NASDAQ and the chips would really start to rally the market move would take on even more strength. Each time they tried the attempt failed, but this time around NASDAQ has made the first new high of the group. It is not just showing some internal relative strength but is actually taking the lead.
SP500/NYSE
Stats: +9.94 points (+0.65%) to close at 1532.91
NYSE Volume: 2.043B (+41.08%). Volume was even stronger on NYSE than NASDAQ in a relative sense. It was the largest volume session since the late February selling on the first China story. This time it was upside though a lot of this had to do with the rebalancing of the S&P indices. Some great moves by leaders on the NYSE indices contributed to the volume as well, but parsing it in impossible. It was a strong volume session that took the NYSE indices toward their prior highs and how volume responds as they test those levels this week will tell much more of the story.
Up Volume: 1.61B (+591.237M)
Down Volume: 398.373M (-17.75M)
A/D and Hi/Lo: Advancers led 3.57 to 1. Very strong upside breadth follows a couple of weeks of big back and forth swings. This volatility is a caution sign.
Previous Session: Advancers led 1.87 to 1
New Highs: 358 (+145)
New Lows: 43 (-20)
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
The large caps posted a solid gain that tapped at the June all-time high before backing off on the close. A solid advance, the third in a row, after making the bounce off of the 50 day EMA Wednesday. It made two quick tests of that level and looked to be in trouble, but a higher low earlier this week set the stage for a possible run higher and it put it together nicely by the end of the week. SP500 still has to clear that old high to totally validate this move, but it may back off some given the solid surge that reversed the selling. As noted above, SP500 held the key 50 day EMA after a rally up the 18 day EMA, and now it is breaking higher on stronger volume. That is typical action in a strong stock after a breakout, and thus all the concern about being extended and lacking great price/volume action could very well just be more bricks in the wall of worry the market continues to climb.
SP600 (+1.21%) continued its rebound off the 50 day EMA as well. It cleared the mid-May high on the move though unlike SP500, it did not make it to its all-time high. It sold back harder than the other indices, and thus had some more ground to recover. A very solid 3 days to end the week, however, and it looks as if SP600 has successfully tested and rebounded from its 50 day EMA. A bit of a pause to set up the next run at the high may be in order here.
DJ30
The blue chips rallied to the prior all-time high before fading some into the close. Similar to SP500, it sold back, using its up trendline versus its 50 day EMA as support to form a double bottom with a higher low on the second leg that sent it back up. It is likely to pause here at the old high and try to set up that break to a new all-time high.
Stats: +85.76 points (+0.63%) to close at 13639.48
Volume: 425M shares Friday versus 228M shares Thursday. Huge volume as the blue chips surged and the S&P was rebalanced.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
MONDAY
The market has absorbed a lot of news and nearly all of it solid on the economic and stock front. There was that worry about rising interest rates killing off the M&A and indicating inflation, but the facts showed that once again was not the case and the market, after overreacting short term, figured it out and rallied back with some impressive leadership.
The move staved off the distribution and breaks of support, and it also pushed the indices to something of a short term overbought condition what with NASDAQ rallying 85 points in 3 sessions and the SP500 and DJ30 at their prior highs. Solid action, but it has not totally resolved the volatility and distribution preceding the rebound. How the SP500 and DJ30 handle the prior high will tell more about the short term indications for this move, but as we saw this week and in the prior two months, the economy is expanding once more and doing so with falling inflation rates in addition to falling interest rates. That is a potent combination that spells continued success for the market.
Accordingly we are going to continue looking for quality stocks in position to buy. This move last week sent many higher and we sure enjoyed that ride. The Friday gap higher made us some good money on existing positions, but it kept us out of some plays; we will see if those test the move some this week and give us an entry point. We like playing tests anyway as they show us the buyers still want the stock even after a good move. There are also stocks that looked to be in trouble but with the latest move have recovered into good position.
The question will be how SP500 and DJ30 react to those prior highs. They spurted higher for three straight sessions to get there, coming off some distribution that took them to key support. After that move they could use a bit of rest to set up for the next attempt to break through, particularly as they are trying to shake off that distribution and rather harsh selling. If they do test we look for light trade (it will be hard not to have lighter trade than Friday's huge volume, but we want light trade) to show us the sellers are jumping back in, using the rebound as a chance to sell short again. That will have the added benefit of giving some of those stocks that raced ahead on the rebound a bit of pullback to set up the next move as well.
Again, how SP500 and DJ30 react to this high will be key as the market action prior to Wednesday was not strong at all and the recovery put them in that uncomfortable position of making a sizable run just to get back to the prior high. It will be a test of the strength of this rebound recovery. As noted above, we are going to be looking at strong stocks for the upside this week, and we will also need to be ready for some downside if the sellers move back in with force and reassert that downside strength shown prior to last Wednesday. This market has a penchant for flopping around like a dying fish on hot pavement only to rebound vigorously, so we will stick with the strong leaders that continue to get the money after each selling attempt while we also pick some of the weak stocks to ride lower if things turn down again.
Support and Resistance
NASDAQ: Closed at 2626.71
Resistance:
2622 is the top of the November/February channel
2778 from a July 1999 peak
2887 from a September 1999 peak
2920 from an October 1999 peak
Support:
2606 is the November/February up trendline
2601 is the mid-May intraday peak.
2590-95 from an April 1999 interim peaks
The July/August trendline at 2578
The 50 day EMA at 2548
2531.42 is the February high (post-2002 high); 2525 intraday
2523 was price resistance November 2000
2509 is the January 2007 high
S&P 500: Closed at 1532.91
Resistance:
1528 is the March 2000 closing high
1541 is the June high.
1553 intraday high from March 2000 is the all-time index peak
The upper trendline of the channel at 1545
Support:
1520 from the September 2000 peak
1516 is the late November to February up trendline
1500 from April 2000 peak
The 50 day EMA at 1497
1475 from peaks in December 1999 and January 2000
1461.57 is the February 2007 high.
1440 is the mid-January high
Dow: Closed at 13,639.48
Resistance:
The early June high at 13,676 (closing), 13,692 (intraday)
Support:
The mid-May peak at 13,556
13,405 is the upper channel line in the November/February channel
13,275 is the November/February up trendline that marks the lower channel.
The 50 day EMA at 13,239
12,796 at the February 2007 high
12,700 is the early February peak intraday high
12,623 is the mid-January high
12,511 is the March intraday high.
12,499 is the December intraday high.
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
June 15
Current account, Q1 (8:30): -192.6B actual, -$202.50B expected, -$187.9B prior
CPI, May (8:30): 0.7% actual versus 0.6% expected versus 0.4% prior
Core CPI (8:30): 0.1% actual versus 0.2% expected, 0.2% prior
New York PMI, June (8:30): 25.8 actual versus 12.0 expected, 8.0 prior
Net foreign purchases, April (9:00): $84.1B actual versus $51.2B prior (revised from $67.6B)
Industrial production, May (9:15): 0.0% actual versus 0.2% expected, 0.4% prior (revised from 0.7%)
Capacity utilization, May (9:15): 81.3% actual versus 81.6% actual, 81.5% prior
Michigan sentiment, preliminary, June (10:00): 83.7 actual versus 88.0 expected, 88.3 prior
June 19
Housing starts, May (8:30): 1.485M expected, 1.528M prior
Building permits, May (8:30): 1.475M expected, 1.457M prior
June 20
Crude oil inventories (10:30): 82K prior
June 21
Initial jobless claims (8:30): 310K expected, 311K prior
Leading economic indicators (10:00): 0.2% expected, -0.5% prior
Philly Fed, June (12:00): 7.0 expected, 4.2 actual
End part 1 of 3
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