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world stock market, us stock market
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3/0902 Investment House Daily
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MARKET ALERT SERVICE
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SUMMARY:
- Rally continues on better employment data.
- Friday the leaders did little in the rally indicating things are getting a bit extended.
- Lagging employment numbers quick improvement is a real positive.
- Inflation ahead? The sad irony if it is true.
- Senate passes stimulus as most forget about last year's tax cut.
- No selling into rallies of late, but some leaders having a bit of trouble.
- Subscriber Questions
Employment data blows away the market and fuels further Nasdaq strength.
The economy surprised everyone once again with employment numbers that are already showing improvement. Unemployment is a lagging indicator; employers are slow to rehire until they are fairly certain the recovery is here. Seasonal factors may have pumped the number a bit, and the workweek did not improve, but even with the overall job pool increasing, unemployment still fell. There are real positives in the numbers, and the buyers once again reacted to the upside.
Market surges, but leaders hang back.
The Dow and S&P both rallied but lost two-thirds of their gains as NYSE volume slid lower on the session. The Nasdaq was the strongest, holding its 2.6% gain on once again stronger volume as the technology stocks received the majority of the money. It was the only index able to take out significant resistance on strong volume though it fell just shy of a very important break over the top of the November trading range.
The lack of advances in leadership stocks once again indicates the overall market is a bit extended as those stocks were the first to start moving when the rally began. After they made good moves and even started to get 'valuation' downgrades last week, the additional money moving into the market went to those areas that were the most beaten up in the test of the September bottom, mainly technology. The market still moved higher on good news, but money moving into laggard areas while the leaders were peaking is an indication that the move really is getting a bit winded. Seems the market just does not know that yet.
Moreover, not only were the leaders treading water, some recent leaders showed some problems. Many restaurants turned and fell on high volume, higher than that on the way up. They did this one month ago and recovered. They could recover this time as well, but we note that when stocks start the pattern of selling off on sharply higher volume, that is usually an indication that the trend is changing. The increasing frequency of sharp distribution days indicates institutions are dumping shares; once the institutions are no longer holding but have been selling, there is nothing to support the price and a more serious fall starts.
While it thus behooves us to think about taking profits or lightening up on these shares that we have good gains in, it does not mean the market is necessarily rolling over. More than likely what is going on is the start of rotation by some institutions out of these stocks after they have made strong gains. We have seen many valuation downgrades the past week as stocks moved higher. In a strong uptrend, valuation downgrades usually do not impact strong leadership stocks. Restaurants helped lead the market higher as an economically sensitive sector that would be one of the first to benefit from an economic upturn. They are not usually considered long-term leadership stocks. Another leadership group that was under the gun Friday as well was the homebuilders; they suffered some distribution, and they are not long-term leaders as well. Indeed, their sales and revenue growth has not been stellar by historical patterns when looking at leaders. While they would normally perform well in economic recoveries, they have been running for over a year, and fear of higher mortgage rates has some unloading the stocks right now.
We noted last week that the market was ready for a breather. It just would not take heed of our concerns as one solid economic report after another hit. With a slowdown in economic reporting this week and the leaders' not participating in Friday's rally, perhaps that breather will come and when it is done provide some more good entry points.
THE ECONOMY
Employment numbers give reason for cheer, but may not be the clear an indication of absolute recovery some want to believe.
Unemployment fell to 5.5% from 5.6% prior and below the 5.8% expected. If this level holds, the peak unemployment rate during this recession would be below the level the Fed formerly believed would result in inflation. My how times have changed.
66,000 jobs were created versus the 13K expected. The private sector added 77K service jobs while manufacturing lost 31K. Government jobs accounted for only 20% of the 97K total service jobs created; when measuring real economic activity you always like to look at private sector job creation as it is the true measure of activity because it is not at the whim of the government. Of those jobs, retail added 58K and construction 25K (nice weather). Greenspan undoubtedly had a heads up on these numbers before his speech last week given his certainty regarding the recovery; he would not have been so positive unless he knew something about the employment picture.
The employment numbers themselves are lagging indicators as indicated above. Thus, the fact that they are already showing improvement was a big boost to the market. When a lagging indicator starts to show improvement that is something worth noting.
Where the numbers really accurate?
Immediately there were some claiming the numbers were not really accurate. First, seasonal adjustments were questioned. Post-Christmas numbers are adjusted (inflated) higher to smooth out the seasonal layoffs that follow the holidays and the pre-Christmas hiring. As the holiday hiring was not as strong, the adjustments may have been too generous.
Moreover, non-farm payrolls were up 66,000. In historical recoveries, the increases were in the 300K to 400K range when things were turning back up. Not only did February's numbers not hit this level by a long shot, January's numbers were lowered to a 126K loss versus a prior reported 89K loss. That downward revision and the seasonal implications suggest the February numbers were indeed a bit high.
Another indication that things were not as glowing as many reported: the total hours worked edged up by just 0.1%; the factory workweek did likewise to 40.7 hours from 40.6 In a recovery one of the first signs is an increase in hours worked: as demand recovers employers work existing employees more, waiting to hire until they are certain demand has increased enough to incur the expense of rehiring (finding employees, hiring, benefits, etc.).
Jobless rate will climb again.
It is almost foregone that jobless claims will rise again before heading lower for good as the recovery takes hold. Why? As more laid off workers regain confidence that the recovery is here, those that had given up their job hunts will re-enter the available worker pool, and if they do not find jobs immediately, the unemployment rate will rise. It is a VERY good sign, however, that even though the worker pool grew by 821K in February, the unemployment rate still fell. That means that those extra workers were absorbed, i.e., they got jobs. That jibes with the continuing jobless claims number that was reported falling on Thursday.
Long list of economic indicators pointing to economic recovery.
The employment numbers were the last in a long list of improving economic reports that indicate recovery has already been underway. We started reporting that the numbers were improving in the summer of 2001. That was the time of transition. Now they are beyond transition and show actual recovery. In the past few weeks we have seen the ISM and ISM Services indexes (purchasing managers optimism) surge to expansion levels, continued strong retail sales, downtrending weekly jobless claims, rising GDP, record home sales, solid factory orders, and strong durable goods orders.
Tax cuts deliver.
On top of all that good economic news that Greenspan is taking bows on as some commentators give sole credit to the interest rate cuts, there are the tax cuts that most have forgotten. The fact that the talk of repealing them or suspending them has been shot down and indeed even more mild tax relief is on the way in the form of the accelerated depreciation in the stimulus package is giving certainty to the addition of liquidity in the economy that tax cuts bring (they are going to be kept in place, so that allows businesses and individuals to plan and spend based on them). This quiet force has been in the background all along. As reported last week, personal income increased last month, but it was not credited to increased wages but in large part to tax cuts. The tax cuts have played a key role in increasing economic activity and will continue to do so. Thus, while they seem to be forgotten, they are providing a much needed tonic for the economy, and contrary to those that were against them, they did indeed have a much more immediate impact than the opponents suggested.
Talk of inflation is incredible. If any shows up, point both barrels at the Fed.
No need to raise short term interest rates any time soon.
Just as improving stock prices bring out cries of overvaluation, improving economic numbers have jaws flapping about possible inflation and Fed rate hikes. Some are saying it would actually help lower long term rates to raise the Fed Funds rate. That old song and dance has been out there every downturn and recovery, and every time the Fed starts to raise short term rates, long term rates rise. That argument has some appeal to it, just no empirical evidence. History shows the exact opposite.
Yes, eventually the Fed will have to raise interest rates; a 1.75% Fed Funds rate has the pedal pushed pretty far toward the floor. It cannot keep that level for an extended period or there will be too much money running into the market and may indeed create artificial demand that jumps ahead of the ability for the supply side to recovery and crank back up. That is how inflation does in fact occur.
The question is what is an extended time? The Fed Funds Future contract is pricing in a 100% chance of a 25 basis point increase at the July meeting (the next meeting is March 19; expect a neutral bias change), and another 70% chance for another 25 basis points. Now this far out, the FFF contract is not as accurate a predictor. In realistic terms, the increase should not occur for quite some time as it is necessary to have sufficient liquidity for the supply side (i.e., business side) of the economy to get cranked up and humming. If the Fed pulls the money plug too fast, it could once again sink the business side as the Fed did in 2000.
There is ample evidence there is no need to hike interest rates any time soon. Hourly wages actually fell; those believing in wage-based inflation (and the Fed used this as one of its reasons to hike rates in 1999) cannot use that as an argument right now. Productivity surged to 5.2%; that too should sooth those wage inflation hawks. To top it off, consumer credit surged again in February. If the Fed is worried about the consumer still (and there is every reason to remain on alert), raising short term interest rates is the same as increasing taxes. Higher rates on debt means lower spending. The economy is still way too fragile to be talking of rate hikes before the end of the summer.
If there is inflation, know who to blame.
All of this inflation talk makes our heads spin. It is d j vu all over. Back in 1998, 1999, and 2000 there was continued paranoia about inflation. That invisible inflation that just was not there. Some prices rose, others fell. Overall there was disinflation, not inflation. Yet the Fed kept hunting that snipe, or at least gave that as a reason for its continued jawboning the market and finally interest rate hikes. The 1929 Fed did the same thing: badmouthed the markets, and when that did not work, it started raising rates until it brought them down. Like the terrible marksman the Fed is, however, it horribly overshot, killing the entire economy and tossing the U.S. and the world into depression. Seventy years later the Fed was shadow boxing with inflation again, and it again overshot the mark, wiping out trillions of dollars in citizen wealth and retirement prosperity.
After trashing the economy such that it took a frenetic, panicked rate cutting binge (6 hikes, 11 cuts, the latter in rapid-fire fashion), tax cuts, and two years of recession pain (8% growth to negative growth) to turn the tide, talk of inflation is ludicrous as long as our leaders do not contain supply. The tax cuts and stimulus have helped business; the government needs to keep investment incentives coming to help full recovery. If there is any inflation, we can blame the Fed. From an environment of great technological advances, productivity, growth, prosperity, and no inflation we have been purposefully (the actions taken were intended if the results were not, and that is debatable) sent into recession, technological stagnation, lost retirements, and talk of inflation. Now that we are recovering after doing the right things (tax cuts, investment incentives), the inflation hawks are quick to chime in. The St. Louis Fed president said Friday the Fed had to 'stay alert' to the inflation fight. Perhaps we can recapture the former synergies. Raising the prospects of another inflation fight when no inflation is present is not the way to do it. By crippling the supply side, the Fed created the potential for inflation if demand outpaces supply in the recovery. Freeing business to meet demand once again is what is needed; if the balance of fiscal incentives and monetary policy is not maintained, we could get inflation where none was in sight before. Again, we know who started the problem.
THE MARKET
More solid economic news interrupted Thursday's rest and consolidation; the market wants to take a breather, but the economy won't let it do so. As noted, the closes well off the highs on the S&P and Dow indicate that the market is a bit extended. Moreover, the strong Nasdaq rally while the leaders took another breather is an indication of the need for a bit of a rest. Still, there cannot be many complaints: economic news indicating the recovery is gaining strength and breaks through resistance on solid volumes are positives the market has not enjoyed since the test of the rally off the September bottom began in January. For now the market needs to continue that orderly consolidation or rest that it was trying to take on Thursday.
VIX: 21.61; -0.34. Still flat lining at the bottom of the 'normal' range. It is not falling as the market rises, indicating it has become somewhat disconnected at this point. We were amused Friday when some of the financial stations were reporting that the low volatility numbers may be a problem for a continued rally. All of the sudden? Volatility was low even when the rally started.
VXN: 41.62; -2.14. Falling further and further, but we note that it has hit 35 in the past while a rally still surged higher.
Put/Call Ratio (CBOE): 0.62; -0.03. Slight drop on gains in the indexes. Still well above the 0.4 level that is considered complacent.
Nasdaq
Cleared the 200 day MVA on stronger volume but stopped shy of breaking above resistance at the top of the November consolidation. Important moves made on strong volume. We will now need to see it hold them.
Stats: +48.04 (+2.4%) to close at 1929.67.
Volume: 2.058 billion (+8.5%). Volume surged once again, continuing its positive price/volume action on this rally. A higher volume break over the 200 day MVA is a good signal of buying.
Up volume: 1.690 billion
Down volume: 339 million. A strong surge of buying.
A/D and Hi/Lo: Advancing issues ran their lead to 1.76 to 1 (1.12 to 1 Thursday). While the A/D line has been performing well on the up sessions, it has yet to flash a 2:1 or better A/D line on the advance. Thus the move higher has not been as broad as the NYSE, but Nasdaq moves have been narrow in the past.
New highs: 154 (-6). Note that new highs fell on a strong surge higher. That indicates Friday's move did not have as much steam as it appeared.
New lows: 29 (+2)
The Chart: http://www.investmenthouse.com/cd/$compq.html
Friday the 200 day MVA (1905.35) did not stop the index, but 1935 near the top of the November consolidation (1934 to 1941 at the highs) slammed the door three times, never letting the techs breakout above that key range that has acted as resistance and support. You cannot complain about the volume on the move as the Nasdaq tries to catch up with the Dow and S&P on the upside move. The advance has been narrower than we would like, but there is real buying ongoing. It has moved up roughly 200 points without a significant break, however, and it will need one. A break over 1941 on continued strong volume frees it up for a run up to 1980, possibly 2000, but any move from hre is in our view on somewhat borrowed time and will be consolidated. Still, we won't turn down the chance at profit when it is there.
Dow/NYSE
Make it five sessions of head banging at 10,600. Raced over that level but could not take out the intraday high of the summer 2001 consolidation. Without volume it was pushed back down. Still moving laterally as volume slacks off; that is just what we want to see on a consolidation in this tight range of 10,400 to 10,600.
Stats: +47.12 (+0.4%) to close at 10,572.49.
NYSE Volume: 1.421 billion (-6.9%). Volume did not rally with the index, and the lack of volume did not support the move. It remained above average on the move, but is backing off as it attempts to consolidate the recent moves. Normally on an upside move we do not like declining volume, but the fact that the index reversed its action intraday and finished well off the high makes the lower volume gain look much better than a high volume reversal.
Up volume: 855 million
Down volume: 540 million. Buyers tried to win the day and did, but they were not as powerful as in the past as volume ebbed lower on the attempted rally.
A/D and Hi/Lo: NYSE advancing issues continued to lead at 1.11 to 1, increasing the margin from 1.02 to 1, but well off the 2.4 to 1 and better readings earlier in the rally. Still, the move overall continues to be broad.
New highs: 216 (-57)
New lows: 12 (-1). New highs falling on an up day, a signal of a weakening move.
The Chart: http://www.investmenthouse.com/cd/$indu.html
The Dow still fights the top of the summer 2001 trading range, Friday rallying to 10663.83 on the high, just off of the intraday consolidation high of 10,670. The action emphasized the strength of the resistance, but it also shows that the move has to consolidate a bit more before it can make the break. It has four days of lower volume consolidation without giving up much ground. We want to continue to see it hold above the 10,400 level on the consolidation for the move up over the summer 2001 consolidation high.
End Part 1 of 3
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world stock market
us stock market
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