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9/07/07 Investment House Daily
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SUMMARY:
- Lack of jobs shocks the market.
- The skinny on the jobs report: the decent, the bad, the non sequiturs.
- Jobs report will in fact be the deciding factor for the Fed as a negative number gives it all the room it needs to cut without looking reactionary
- Lots of leaders in good shape to make another upside move if the market can se through the jobs report.
Jobs report sends the consolidation attempt packing.
The market was putting in a decent consolidation of the rebound move until the jobs report hit. If it came in anywhere near expectations the market would have put in another consolidation session and moved into the weekend. It didn't. The ADP report finally got one right, proving the old saying that even a broken clock gives the right time twice a day. Non-farm payrolls fell 4K. Could have fallen 50K and it would not have changed anything. That minus sign in front of the numbers is what made the difference - - along with downward revisions to June and July as well.
That pushed the futures, how do you say it, sharply lower. Bond yields dove as investors around the world rushed to US treasuries. The two year closed at 3.91%, the 10 year at 4.38%. You could hear the Ross Perot giant sucking sound as bonds sucked up money from everywhere. There was some piling on as well. BZH (homebuilder) was claimed to have default issues though it denied them. XLNX (chips) cut guidance. Greenspan, who by the way has a new book out, compared the current situation to 1987 and 1988.
Back then Greenspan hiked rates so much that the market seized up like an arteriosclerosis riddled 400 pounder 15 minutes into a stress test. The drop was thunderous. Something called Black Monday. Easy for Greenspan to look back 20 years later through coke bottle glasses and reminisce about the good old days and forget that he hiked the economy and market into collapse and then relate that fiasco to the current situation where Bernanke has been off the brake for over a year. Yeah, right Alan, exactly the same.
The market gapped lower, the consolidation attempt gone. Stocks tried an early bounce but that was fuel for more selling. The market hit bottom midmorning and rebounded nicely. Then the afternoon came and the indices sold off to fresh session lows. A late bounce helped but didn't change anything. The indices posted losses near 2% on average, 96% of the SP500 closed lower, only JNJ closed higher on the Dow. When the market gets this kind of news when it is hanging onto a low volume bounce it kind of rattles the cage.
Technically that is what it looked like as the point losses and the jump lower on the major indices was impressive. Breadth was decidedly negative at -3.3:1. Volume was up but it was also still on the low side; no influx of new sellers, just a change out from low volume upside and consolidation to low volume selling. That was the first inkling it was not a total crap out. Of course it was just an inkling as a look at the charts shows what with SP500 undercutting its 200 day SMA again.
Leadership, however, performed much better. Most were lower, it was that kind of day. Most held up nicely above near support on low volume declines. No selling, just some modest profit taking that pushed them lower. If they manage to hold this support and bounce they will not only provide some great entry points but give the market the support it needs.
That certainly was not the mood on Friday with many viewing the jobs report as the final signal the economic expansion is over. With that kind of shock that is the normal response, especially on a Friday in September. It was certainly enough to finally get the Fed more involved, but we are not convinced it is the end of the economy, though the Fed does have to act to cure the credit crisis.
THE ECONOMY
Inside the jobs report: there was good and bad
There are several ways to look at the jobs report. The raw number was a 4 year low. June was revised from 126K to 69K. July was cut to 68K from 92K. Not only was the month bad, but the prior months were not that great. You could write off August as an aberration but the revisions tell more of the story of a faltering jobs market. Construction down 22K. No surprise there. Finance was flat but it has run +20K for months. Government was down for a second month (-28K), and again that was the swing move as services rose 60K and retail jumped 125K. Of course government did not reduce the number by over 100K; all it would have done was push the number positive.
The really telling part of the report was the household survey. Back when the economy was supposedly not recovering and jobs were supposedly in the toilet (back in 2003 and 2004) the household survey (the unemployment percentage based upon responses to the question 'are you working?') was way out in front of the non-farms number supplied by the companies. Why? Because there was an explosion of small businesses as the LLC, partnership and other new filings showed. People were working, just not at the old 9 to 5 standard job.
The rate held at 4.6% but the survey was down 316K, the largest decline in quiet some time. For the year the survey shows a net loss of 16K. That is a dramatic reversal in the expansion of new business and thus new investment that was pushing the economy higher. If the small businesses that started the recession are no longer driving it, at least not as much.
Let's not forget that jobs lag and, believe it or not, you can blame the weather.
Okay, that does not sound that great. But when I practiced law when you got the other side's brief it always sounded so solid, so devastating to your position. Then you would start picking at it and the cases were not on point, the logic didn't flow, and you could kick out the legs and the argument would topple. A negative reading is not great, but what the heck does it actually mean? The death of the economy? No.
As we noted leading up to the report, jobs are lagging. The jobs report is the most lagging of the lagging. The economy slowed the second half of 2006 through March 2007. Business investment dropped, the ISM survey hit a couple of sub-50 readings showing contraction. Q1 GDP was a pitiful 1.something percent. Hmmm. The economy slowed for 3 quarters while jobs rose. The economy reaccelerated after that mid-cycle slowdown as the Q2 GDP, ISM, business investment, etc. show. Now the jobs data the past three months slowed. Hmmm. A lagging indicator that was growing while the economy slowed, and is now slowing while the economy accelerates once more. Makes perfect sense: a lagging indicator is lagging the economic activity. Nothing unusual about that at all. That is likely why leading stocks, while down, were not selling off hard. Indeed many are setting up for new buys as discussed above.
Why would the household survey be low, however? This survey includes the agricultural jobs and household workers. A lot of these jobs are performed by illegal aliens and of late there has been a much stronger enforcement campaign. We are hearing from many southern contractors that the workforce has been reduced. This may not account for all of the decline but it is a substantial part of it.
Let's not forget the floods as well. They put a lot of folks out of day jobs all across the Midwest, the southwest, northeast and the plains states. Thus the rise in the weekly jobless claims and the decline in the monthly reports.
In sum, the jobs numbers look bad, but so did the economy in Q4 2006 and Q1 2007. The current jobs numbers are now reflecting that slowdown. That is all.
Outside the jobs report: how it stacks up against the other economic data.
There is more. The thing about the jobs report was not the negative 4K. It was how it is in sharp contrast to economic numbers that are expanding. Q2 was excellent. The credit issues have things slowing somewhat out of caution and concern in Q3, but the data that is coming in, much in contrast to the Q1 and the prior two quarters in 2006, shows a nice reacceleration.
Take the ISM. It showed INCREASING employment in the August reading. That is a forward looking indicator. After a couple of sub-50 readings in the economic slowdown it has ramped right back up to solid levels. The services ISM recovered nicely and hit a 12 month high. Investment is on the rise again. Sentiment is solid even with the credit and housing issues as jobs remain intact. ECRI's weekly indicator rose after 6 down weeks though its annualized growth measure hit a 43 week low. Still, that does not suggest a recession ahead even with this decline. Basically it doesn't show any surge down the road, but no recession either. It may not be the strongest rebound and the credit and mortgage issues are having their impact, but it is not a jobs-led decline.
The Fed now has plenty of room to maneuver.
This, of course, goes hand in hand with how jobs lag. Thus the current jobs report is a non sequitur with respect to the economy, at least at this stage. The real issue is the credit freeze and how commercial paper cannot find a home. That is what is putting the kibosh on current conditions and is the real threat. The irony is, with the jobs report's conveniently timed decline, the Fed will be under pressure or looking at it another way, it will have even more wiggle room (recall the annual core PCE came in at 1.9% for the second straight month) to take more aggressive action. The Fed now has all it needs to take more action.
And that is what it needs to do. Not because the lagging jobs report was shockingly low because of declines in construction (housing slowdown) and manufacturing (those sub-50 ISM readings), but because of the credit freeze that is threatening a widespread collapse. The average person does not realize how locked up the credit market is, but companies simply cannot move their debt paper, and that is causing all kinds of issues with respect to financing new expansions and operations. Without the ability to access capital there is the threat of a widespread shutdown. The Fed can now act, indeed it should act aggressively with a move to start the week, without any chance of being called reactionary or panicky. Now it just needs to act.
THE MARKET
MARKET SENTIMENT
VIX: 26.23; +2.24
VXN: 29.22; +2.58
VXO: 27.4; +3.38
Put/Call Ratio (CBOE): 1.19; +0.31. Right back over 1.0 on the close after two of three sessions below that level. There is still a massive backlog of 1.0 closes, in the neighborhood of 25 over the past month. That is, as they say, extreme.
Bulls: 42.9%. Up again from 41.7% and 40.6% before that, the low on this last round of selling. Wanted to see it crack into the thirties on this leg to really show some negativity. Still a good drop from 53.9% 7 weeks back. Hit 56.7% hit in June. The 55% level is considered bearish, and it topped that level on this last run. 60% in December 2006. For reference it bottomed in the summer 2006 near 36%, and 35% is considered bullish.
Bears: 37.4%. Held flat for a third straight week. Bearishness is not falling as the market recovers; just pondering what it all means. Strong run from 18% just 7 weeks back. This tops the June 2006 peak. 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: -48.62 points (-1.86%) to close at 2565.7
Volume: 1.894B (+2.87%). Volume was up as NASDAQ sold, making it 2 of 3 sessions of higher volume, both higher sessions on an index decline. Trade was still well, well below average, even the pre-August average volume levels at 2B shares.
Up Volume: 207.26M (-877.309M)
Down Volume: 1.671B (+935.726M)
A/D and Hi/Lo: Decliners led 3.52 to 1. Plenty of downside in techs as the large caps outsold the smaller cap techs.
Previous Session: Advancers led 1.29 to 1
New Highs: 11 (-74)
New Lows: 51 (-7)
NASDAQ CHART: http://investmenthouse.com/ihmedia/NASDAQ.jpeg
After jumping over the 50 day SMA to start the month in a solid move, the best of the rally, it consolidated at that level for two days, looking pretty good. Friday it gapped lower, through the 90 day SMA and closed below the March up trendline. Not a knockout punch but definitely not more consolidation action. The large cap techs were boxed around the most and thus the trouble in the index as they had been leaders. They were the poster children for the selling given they were the strongest in the recovery. Some support at 2550ish. Needs to hold there to keep the current pattern in shape.
SOX (-2.50%) fell right back down to the November and December peaks. As with NASDAQ, this is where it has to hold to keep the current attempt at moving higher alive.
SOX CHART: http://investmenthouse.com/ihmedia/SOX.jpeg
SP500/NYSE
Stats: -25 points (-1.69%) to close at 1453.55
NYSE Volume: 1.46B (+13.98%). Volume was the strongest in four weeks as the NYSE indices started back down. Higher volume on the selling is not what you want to see. It was still below average, but of all the volume during the rebound, the selling volume was the strongest. Not a good sign for the pattern that was forming.
Up Volume: 142.238M (-679.327M)
Down Volume: 1.308B (+857.657M)
A/D and Hi/Lo: Decliners led 3.39 to 1. The small caps were slapped around, and with 96% of the SP500 lower as well, breadth was going to be negative. It was not, however, the -5:1 and worse seen in the selling. That is quite a stretch for a silver lining.
Previous Session: Advancers led 1.66 to 1
New Highs: 14 (-29)
New Lows: 44 (-25)
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
So much for the attempt to break higher. SP500 failed at the 1490 level early in the week and it collapsed back through the 200 day SMA (1460) Friday as volume moved higher. It bounced off the low at 1450, trying to hold a bit of support at that level, but we will just have to see how this pans out as the new week starts. Definitely does not look good with this kind of rollover after a lower high that failed just below the early August rebound high.
SP600 (-2.00%) turned sharply lower after it tapped the 50 day SMA on Tuesday and could not push through. It fell below the 200 day SMA Friday after trying to consolidate at that level. Small caps do not look good technically with this breakdown.
SP600 CHART: http://investmenthouse.com/ihmedia/SP600.jpeg
DJ30
The blue chips were not left out of the move lower, matching NASDAQ with the percentage loss. Volume was up, the second highest level for the week. On the low DJ30 tapped and bounced slightly off the July 2006/March 2007 up trendline. If it holds there it holds the trendline as it did in late August and makes a higher low. As with the other indices that remains to be seen though SP500 looks quite weak here with its rollover.
Stats: -249.97 points (-1.87%) to close at 13113.38
Volume: 238M shares Friday versus 203M shares Thursday. Outside of Tuesday, the strongest volume of the week.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
MONDAY
Friday left the indices looking weak and ready to make a test lower, perhaps to the August low, after their consolidation attempt was scuttled. It had some promise on the rebound, but it was tenuous given the low volume. Some shock and awe news such as the weak jobs report kicked it in the knees.
As noted, many of the solid leaders in the market, e.g. RIMM, GRMN, DO, SLB, DE, BIDU, ISRG, MON, CTRP, CMED, etc. were down but they were not suffering one bit, holding at near support in rather typical, low volume pullbacks after nice moves higher. While the overall indices look weak in immediate response to the jobs, the action of the leaders is quite a contrasting positive, very similar to the solid economic data everywhere but jobs. As pointed out above, the leaders looked solid despite the jobs data, treating it as if it was the outrider that we believe it is. If that is the case then the indices will likely find some support. Good leadership action versus the weaker overall action of the main indices. Godzilla versus Mothra.
Friday may have started the test of the August low, and if that is the case even the leaders will have issues. If they crack near support that they held so nicely on Friday then we will have to close our positions on them and see where they shake out. Their action in the midst of that tempest, however, looked so good that we were tempted to move in on some of them late. We opted to wait and see what the first of the week brings. Perhaps they are anticipating a surprise Fed rate move; that would surely change the picture.
If these stocks hold and start to bounce we will be moving in with more positions, riding the leaders higher. If the crack we will close them. There was certainly enough gloom and speculation about how the economy is crashing and the market is heading down to the August lows in the wake of the jobs report to muddy the water with just what the jobs report meant. It was very easy to conclude that the credit issues and mortgage malaise caused the jobs, but as noted, jobs are lagging indicators, and if you look at the economic cycle the past year, they are doing just what they should be doing with respect to lagging the economic activity. Again, the action of the leaders belies the prognostications of gloom, but the market tends to overshoot near term and thus the market could head lower toward a test of the August low, that second test that so often occurs. The start of the week will tell a lot more about how sage it is going to be for the near term. For now we let the strong stocks make their tests and act accordingly, knowing that in the background there is a good chance of a Fed rate cut coming this week. Even if there is a test of the prior low it still looks as if the data is solid enough at this stage to indicate it will hold and rebound, but much depends upon if the Fed acts expeditiously to free up the credit markets.
Support and Resistance
NASDAQ: Closed at 2614.32
Resistance:
The 50 day EMA at 2575
The 90 day SMA at 2588
The 50 day SMA at 2596 gave way after trying to hold the consolidation
2634.60 is the June peak
2640 is the October/December trendline
2673 is the early July high
2682 is the November/December/February up trendline
2709 is the November/February up trendline
2725 is the July high
2778 from a July 1999 peak
2887 from a September 1999 peak
2920 from an October 1999 peak
Support:
2531.42 is the February high (post-2002 high); 2525 intraday
The 200 day SMA at 2513
2509 is the January 2007 high
2450 is some price support from November and December 2006
2410 is that old trendline from August 2004 to May 2005
2400 is price support
2386 is the August intraday low
S&P 500: Closed at 1453.55
Resistance:
The 200 day SMA at 1460
1461.57 is the February 2007 high.
1475 from peaks in December 1999 and January 2000
The 50 day EMA at 1476
The 50 day SMA at 1486
1490 is the July 2006/March 2007 up trendline
1490.72 is the early June closing low and early August peak.
1534 is the early July high
1539 is the mid-June intraday high
1541 is the early June high.
1553 intraday high from March 2000 is the all-time index peak
Support:
1440 is the mid-January high
1427 represents some interim peaks from December 2006 and the early August low
1406 - 1407 from March 2007 and November 2006 interim peaks
1389 from October 2006 interim peak
1375 - 70 from March 2007 low
1370 is the August intraday low
Dow: Closed at 13,113.38
Resistance:
13,121 is minor support from the April peak
The 50 day EMA at 13,336
The 90 day SMA at 13,443
The mid-May peak at 13,556
The early July peak at 13,671
The mid-June high at 13,689
The early June high at 13,676 (closing), 13,692 (intraday)
The August high at 13,696
The July high at 14,022
Support:
13,076 is the July 2006/March 2007 up trendline
The 200 day SMA at 12,919
12,845 is July closing low
12,796 at the February 2007 high
12,518 is the August intraday low
12,500 is the December 2006 peak
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
September 10
Consumer Credit, July (3:00): $9.5B expected, $13.2B prior
September 11
Trade balance, July (8:30): -$59.0B expected, -$58.1B prior
September 12
Crude oil inventories (10:30): -3.97M prior
September 13
Treasury Budget, August (8:30): -$190.0B expected, -$192.6B prior
September 14
Export prices, August (8:30): 0.0% prior
Import Prices ex-Oil, August (8:30): 0.2% prior
Retail sales, August (8:30): 0.5% expected, 0.3% prior
Retail ex-autos (8:30): 0.2% expected, 0.4% prior
Industrial production, August (9:15): 0.3% expected, 0.3% prior
Capacity, August (9:15): 82.0% expected, 81.9% prior
Business inventories, July (10:00): 0.3% expected, 0.4% prior
Michigan sentiment, preliminary, September (10:00): 83.5 expected, 83.4 prior
End part 1 of 3
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