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us stock market, trade stock
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5/31/08 Investment House Daily
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SUMMARY:
- NASDAQ leads market to weekly gains, but still no new breakout.
- Economic data in line to better, and while no great endorsement of economic activity, things are not as bad as made out.
- Market advance since March forecast modest economic improvement, but is there more to come?
- Some money comes out of commodities stocks on NYSE, but has yet to move elsewhere.
- New month, some new money, but also the dog days cometh.
A week of gains leave market still seeking a more definitive move.
The shortened week was one of gains, and Friday was no exception, though the gains once again were not felt throughout the market. Spending and income were in line with modest gains (0.2%) though if you adjust for inflation both were big goose eggs. With PCE inflation at 0.1% on the core and 2.1% annually, however, investors found some reason to push stocks higher at the open. When the Chicago PMI and the Michigan sentiment reported better than expected results, the market added to its early gains with all indices in positive territory.
The market survived a midmorning test of the early move, and then went into a slow, steady climb into the afternoon. It was the end of the month, however, and that meant money was going to get moved around. It was. In the last hour the indices dropped sharply in the fist half of the hour, then recovered just about up to session highs. A literal last minute decline shaved 6 points off NASDAQ and 40 points off DJ30, leaving the Dow negative on the day. With the overall narrow range for the session and the end of month shuffle, it is somewhat pointless to play 'pin the tail on the meaning of the session.' Best to look at the entire week to get the flavor.
The week showed gains on all of the indices as they rebounded from the sharper selling in the week before the Memorial Day of honor. Those gains, however, were modest and left the indices, overall, shy of significant moves that reverse that downside move. Of all the indices only SP600 and Russell 2000 broke new closing high ground for the rally off the March lows. That the small caps led to new high ground in the rally is significant given their close ties to a stronger domestic economy (hurray!), but the fact that the majority of the other indices did not really even scare new highs leaves the continuation of the rally somewhat problematical.
Again, there were solid moves in individual stocks, and we bought into quite a few of those in anticipation of the small and mid-caps continuing to lead higher, but as is often the case, we tend to buy in when things are unsettled because emerging leaders tend to tell you to buy them when the outcome appears still problematical. Many pronounced the rally dead two Fridays back after that reversal at the 200 day SMA by the large cap indices. You have to like that pessimistic view from a contrarian standpoint, but it sure would have been nice to see some of the other indices come along with the leading stocks and SP600.
TECHNICAL. Low to high action intraday Friday was again a positive for the session, but it was a volatile day inside an intraday trend higher. The action in the last hour showed how fragile the move was as end of month shuffling easily shoved the indices down then up then back down as some window dressing and positioning for the coming month took place. Hey, that is normal; we participated in that as well as we picked up several positions in solid stocks that broke higher and then held their gains into the close with modest pullbacks that gave us some good entry points.
INTERNALS: The advance/decline line was nothing special with 1.2:1 readings on the indices. Volume advanced, moving to above average levels on both NYSE and NASDAQ. That suggests some accumulation on the session, and given some of the moves in leaders that was the case, but it also is simply a characteristic of some end of month portfolio adjusting and positioning both for window dressing in some monthly reports as well as getting ready for the next month. The new high/new low ratio lagged a bit on this move over the prior 7 weeks, suggesting this last rebound is not as strong as the previous upside legs in this rally. New lows were a bit more prominent on this dip than in the April decline that more or less matched the last decline. A bit of deterioration in the quality of the move based upon this indicator, and frankly, the other indicators paint a similar picture.
CHARTS: As noted, the indices rose on the week but with the exception of the small cap indices and a new closing high on NASDAQ 100, there were no new rally highs. The large cap NYSE were again the laggards, coming nowhere near the prior rally high before the latest significant downside leg in the rally. Note that in the week following the April downside leg (the leg that the last pullback most closely matched in points) the indices bounced right back up to new rally highs. Not nearly the case on the large cap NYSE indices, and NASDAQ, even with its move back over the 200 day SMA on Friday, did not move past those prior rally highs. That leaves a major challenge for the week ahead for the rally to survive. Either new leadership in the small to mid-caps takes over and drives the rally further or the large cap laggards will drag it down.
LEADERSHIP: Speaking of leadership, there was a continuation of the same theme from later in the week as some new areas asserted or reasserted themselves. Technology both large and small put up some decent gains. Growth areas in medical areas (biotechs, medical appliances and equipment) posted gains. Industrial stocks (and this does not mean large industrials) led all week. Small foreign financials were up once more. It did not hurt that some commodities and energy stocks scored gains to end the week even with the declines in the underlying commodity prices on the week. There are many smaller issues and overlooked large cap issues that are setting up nice patterns and moving higher, flying under the radar. Thus despite the sluggish upside last week, there is good promise ahead for the coming week.
THE ECONOMY
Things are not great, but they aren't as bad as they are made out to be: welcome to the politics of economics.
Remember back in 1992 when the recession from 1991 (the economy was already pulling out of recession in 1992) was described by some as the worst since the Great Depression? Please. Classic election year hyperbole. It was in fact one of the shallowest, but everything is magnified and distorted in election years. It is similar to a court case where both sides highlight and argue the points they view as the most important to the case. They are often arguing about the same facts but the presentation based upon perspective is truly different. You can take any angle, any data point, and build an argument. As we always try to do here, however, you have to take it all into account and not cherry pick an indicator or data point and build a case around it.
Right now the economic data is not that great. It shouldn't be, however, given that the economy is still in a slowdown and is not even a year out from the credit issues that put economic activity in a deep freeze for several months in 2007. To think they should be roaring ahead so quickly is rather absurd simply because it takes time for that freeze to ripple on through the economy.
At the same time, the economic condition is nowhere near as bad as it is made out to be each night on the news. There are indeed serious problems with oil over $120/bbl (closed at 127.71 Friday) and food prices surging given we have opted to tie our food prices to energy prices, but the data also tell you that the economic times, while down, are not the typical stuff of major slowdowns.
The Friday data underscore that. Consumer spending and income rose 0.2% for April, down from 0.4% in March and stood at 0% when you factor in inflation. Since the start of 2008 and the mediocre GDP growth exhibited, however, consumer spending is still flat to trending slightly higher and NOT declining as the media would have you believe. Those big energy price increases and the declines in home prices are not sending consumption negative, but have only slowed the growth in spending. Not bad given spending will only increase over the summer into September as the stimulus checks fans out across the nation.
The key takeaway from this data is that while spending and income point to sluggish economic conditions, there are not those negative readings that are so pernicious and are associated with serious declines in economic activity.
Michigan sentiment stays in the 50's.
But what about consumer confidence and its impact on spending? Both the Conference Board's reading and the University of Michigan show confidence levels in the fifties, and that is historically associated with recessions. What about a recession now?
By our measure of a recession, we have been in one. We said that back in Q4 when the market peaked and rolled back down given all of the volatility we were seeing. To us a recession is not the textbook two quarters of negative GDP growth but the relative decline in economic activity from the growth trend. After humming along at 3.5% to 4.5% growth rates, a decline to 1% or less GDP is a recession. All of the market volatility and the pullback in economic indicators showed a significant change in the growth trend that would be more than just a normal pause in a continuing uptrend.
The consumer sentiment indicates that as the case even as GDP has held positive though well off its prior established growth trend. Is this lower sentiment predicting a recession to come? Conventional wisdom would say that if the consumer is worried spending will contract and that will translate into slowed consumption in the future and thus even slower economic activity than seen to this point. Indeed that is what you hear right now on the financial stations with respect to the housing shoes still to fall.
Historically, however, sentiment is lagging because it is an emotional indicator. It remains suppressed or declines further even as the economy begins to improve. Levels in the fifties are associated with recessions, but they hit those levels after the damage is done. Just as corporate CEO's remain pessimistic even as the economy recovers and their own numbers improve, the consumer remains emotionally battered even as things recover simply because you are not where you were before the economy hit the skids. Thus, while sentiment continues to slide and this is a cycle low for Michigan sentiment (78.4 in January and a constant slide since basically the start of 2007), it does not presage further economic weakness in itself.
Improvement in the economic foundation has been priced in. Is there more?
As discussed Thursday, the foundation in the economy is improving as certain pieces fall into place, e.g. a top in gold, a higher low in the dollar, a breakout in real interest rates (i.e. not inflation), some serious distribution in oil. Those are all positive set ups for further economic improvement.
The market has priced in this economic improvement, or should we say, the lack of a serious further economic slowdown as GDP skirts negative and the Fed's innovative actions taken last year and early this year (in particular this year) thawed the credit market and put that part of the economy on the road to healing. Hence the March bottom in stocks coincided almost perfectly with the Fed action re BSC and its broader use of facilities to get the liquidity to where it was needed by letting just about anyone bring their junk collateral to the discount window, get a 28 day swap for money, and thus conduct business as necessary. The inability to do this is what killed BSC; the Fed took the steps to ensure none others would fall in that manner.
Is this economic set up going to lead to more growth or has the stock market priced this in already and this last leg higher and the failure to make a new rally high indicates that there is no more? After all, oil sold hard and was under distribution, but it did not break its trend. It closed at 127.71, bouncing back 1.09 Friday after some nasty downside sessions the past week. It is under duress, but unless it falls near 100 the economy, and thus the market rally, are in jeopardy. When oil spiked to 135 we found the choke point. It needs to back off sharply from that for the economy to really benefit.
ECRI, the best human index for predicting economic cycles, was up the past week, hitting a 22 week high. That, however, left it at -6%, still indicating the same kind of recession-like sluggishness the economy is feeling right now. Not a nasty tank lower but not much of a recovery there either.
Indeed, the slowdown, as noted above, was not this massive turn to negative GDP growth or the same kind of 10% GDP to negative GDP growth rates seen in the last Greenspan recession from 2000 (though you could call the current one his as well given the sorry state he left things in). No big slowdown means no big backlog of pent up demand that is typically the catalyst for a strong recovery. Modest slowdown, modest recovery. Equal and opposite reaction.
That could very well be one of the probable paths ahead, particularly with the type of stimulus the federal government decided to bestow upon us. This is the same kind of rebate methodology that failed to stimulate the economy in 2001 and 2002; it took the business side stimulus to unlock the economic potential once more. A bit more of the same would not hurt, particularly given the continuing pundit angst over housing. Will a few hundred dollars change consumer buying habits if their home values continue to fall as they need to do? Of course not. Better to give businesses, small and large, incentive to invest to create new jobs and hire more workers. That is how you get a recovery ramped up.
Thus the current market rally needs that something extra to get it going. We noted that Thursday when we said that a break in oil's uptrend would be the goose the market needed. That did not come last week despite some ugly downside sessions in oil. Thus the market is holding back as it needs something new to price in. Some might even say its failure to make new rally highs even as oil struggled suggest oil is not going to break its trend. That means we just have to wait and see if that occurs, watching how leaders perform in the interim.
THE MARKET
MARKET SENTIMENT
VIX moved down to the October levels when the market topped and the initial response has been a market selloff, particularly on DJ30. The trick still is how the other indices hold on this test.
This is also a test of the credit facilities the Fed has incorporated and if they can hold sway with spiking oil prices. The Fed entered the game with its credit facilities that actually work, the correlation with VIX that set up during the correction is broken. Volatility and hence VIX can decline and hold at low levels for a very long time and have no bearing on any continued rally.
VIX: 17.83; -0.31
VXN: 20.85; -0.43
VXO: 18.57; -0.02
Put/Call Ratio (CBOE): 0.84; -0.02
Bulls versus Bears:
This is a reading of the number of bullish investment advisors versus bearish advisors. The reason you look at this is that it gives you an idea of how bullish investors are. If they are too bullish then everyone is in the market and it is heading for a top: if everyone wants to be in the market then all the money is in and there is no more new cash to drive it higher. On the other side of the spectrum if there are a lot of bears then there is a lot of cash on the sideline, and as the market rallies it drags that cash in as the bears give in. That cash provides the market the fuel to move higher. If bears are low it is the same as a lot of bulls: everyone is in and the market doesn't have the cash to drive it higher.
Bulls: 37.9%. Have to love this drop. Over the weekend we discussed how there was a lot of pessimism relating to this rally and its longevity, and this nearly 10 point weekly decline is an indication that the bulls remain very skeptical, and that is always good for the market. Down from 47.3% last week and 46.0% the prior week. A continuing rise from 44.4%, 40.9%, 39.1% and 37.8% where it held for a few weeks. Fell to 30.9% in mid-March as the low. The indicator did its job with the dive below 35% and the crossover with the bears. The bulls and bears were eye to eye in mid-February and have crossed. A move into the lower 40's is a decline of significance. A move to 35% is a bullish indicator. This is smashing that. For reference it bottomed in the summer 2006, the last major round of selling ahead of this 2007 top, near 36%, and 35% is considered bullish.
Bears: 32.2%. Continued the gains from the prior week though not in the dramatic fashion of the bulls. Up from 30.8% last week and 29.9% the prior week. That makes three of the last four weeks to the upside for bears. As with the bulls the jump in bears did its job after hitting 44.7% in the third week of March that was up from an already freakishly strong 43.3% the week before. That was a surge from an already high 36.6% the prior week. Up sharply from a low of 19.6% on the last rally. It is over 30% and indeed over 35% the prior week, meaning it has blown past the range that means business. Big move after falling to a low of 19.6% on this round. Bearishness peaked at 37.4% in September 2007. It topped the June 2006 peak (36%) on that run. That June peak eclipsed the March 2006 high (33%) and well above the 2005 highs that spawned new rallies (30% in May 2005, 29.2% in October 2005). This is a huge turn, unlike any seen in recent history.
NASDAQ
Stats: +14.34 points (+0.57%) to close at 2522.66
Volume: 2.136B (+9.63%). There was some accumulation in NASDAQ last week as the index rose on rising trade. Friday saw more upside volume, but as noted above it was also end of month shuffling that pumped up the trade to above average levels.
Up Volume: 1.414B (+144.129M)
Down Volume: 700.017M (+97.497M)
A/D and Hi/Lo: Advancers led 1.2 to 1
Previous Session: Advancers led 1.56 to 1
New Highs: 75 (-17)
New Lows: 93 (+6)
NASDAQ CHART: http://investmenthouse.com/ihmedia/NASDAQ.jpeg
Gapped higher Friday, clearing the 200 day SMA (2514), tested it on the low, and rebounded modestly from there to hold the move. So, NASDAQ passed the 2500 level and the 200 day SMA last week. Not a bad move given the rising trade, but it did not roar back as in April and take out the prior rally high following that decline. That May high at 2551.47 is the next key move by NASDAQ to keep the drive alive.
NASDAQ 100 (+0.67%) did move to a new closing high for this rally. We can quibble with it and we already have. Techs and large cap techs are definitely trying to lead, but it has not been out and out leadership the past two weeks as AAPL and RIMM bounced but did so without any vigor. There are others taking up the torch, however, and if they can step up again this week that bodes well.
SOX (+2.05%) was an important story for the week and on Friday in particular. It moved up off support at 400 and on Friday busted the 200 day SMA once more. Higher low, clearing resistance. Key move heading into this week.
NASDAQ 100 CHART: http://investmenthouse.com/ihmedia/NASDAQ100.jpeg
SOX CHART: http://investmenthouse.com/ihmedia/SOX.jpeg
SP500/NYSE
Stats: +2.12 points (+0.15%) to close at 1400.38
NYSE Volume: 1.415B (+15.13%). First above average volume in over two months. At least it was on an upside session, but there was a lot of swapping taking place in the last half hour. There was money taken out of commodities stocks last week, yet it was not all plugged back into NYSE stocks. If that money now sees financials as a buy (as some smart people are saying), then SP500 may join the NASDAQ and make a key move higher.
Up Volume: 750.894M (+2.917M)
Down Volume: 640.771M (+169.121M)
A/D and Hi/Lo: Advancers led 1.28 to 1
Previous Session: Advancers led 1.58 to 1
New Highs: 70 (+5)
New Lows: 66 (-6)
SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg
Moved up each session last week and on some rising volume, but it was not a powerful move. Could not take out some resistance at 1406, the first stepping stone, though it did recover the February high. Made a higher low, but it has to drive this bounce from last week seriously higher this week toward the 1425 level and beyond. That money needs to move into financials and get SP500 off its butt.
SP600 (+0.54%) continued its move through its 200 day SMA and over its prior May high, closing near session highs. Unlike the other indices, it did not close off the high with late selling. That indicates that money did indeed move into the small caps to end the month and that suggests there is money banking on a further economic recovery. Very promising despite the inability of the large cap indices to move through their prior resistance or basically show any real strength last week.
SP600 Chart: http://investmenthouse.com/ihmedia/SP600.jpeg
SP400 CHART: http://investmenthouse.com/ihmedia/SP400.jpeg
DJ30
Laggard of laggards with a bounce off 12,500 for certain, but stalling at the 50 day EMA both Thursday and Friday, failing to really challenge key resistance at 12,750. Its failure at the early April peak is not a great indication for the blue chips. Again, just find the gumption to tag along and not drag the rest of the market lower as it did after its double top here in May.
Stats: -7.9 points (-0.06%) to close at 12638.32
Volume: 210M shares Friday versus 206M shares Thursday. Crappy volume all week on the rebound.
DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg
MONDAY
A new month ahead and the past two months, both rally months off the March low, have shown strong upside gains to start the month as new money moves in. As noted in the SP500 discussion, money moved out of commodities stocks last week but has yet to move back into the market other than in some small caps and some techs. There has to be a lot more of that buying and indeed the financials need to get some of it for some real strength in the market. Perhaps it is waiting for the new month.
The market is in need of yet another catalyst as it moves into the dog days of summer when things are historically slow. Oil is the likely candidate, and it is linked to the dollar, rising interest rates, and gold's decline. If they can all maintain their moves from last week the stock market will make the break higher as that money moving from commodities will go to other stocks. The dollar made a higher low the past week but it also has yet to take out the early May range. That is its next move, and if it could just get a modicum of help from the Treasury it could make the move and really change the dynamic of oil and the economic outlook not only by way of declining oil but by lowering our importation of inflation. Lots of benefits, but the Bush administration is apparently going down with the ship on this one, holding on bitterly to a weak dollar policy to its last days.
There continue to be new stocks popping up into position to buy, and if that is the case the prognosis for the rally remains upbeat albeit the weak NYSE large cap index patterns. The small caps are moving higher, techs are trying to make the next move, and mid-caps are still in position to lead again. Summer is traditionally slower as the money managers leave for extended periods, but if these economic dynamics continue to improve (lower oil, rising dollar, rising interest rates), the prognosis for a continued rally into summer is good. These dynamics have to continue; they must continue or the rally will likely fail. We have seen the market cannot handle $130/bbl oil. There was a major hiccup in usage that rippled through the economy at that point. Again, these dynamics need to continue their improvement because the money that was moving into the commodities stocks and driving the market in the absence of financials is now moving out of commodities and is deciding where to go.
Support and Resistance
NASDAQ: Closed at 2522.66
Resistance:
2540 from November 2007 low
2552 is the May high
2576 represents a range of interim peaks and troughs from May 2007 into December 2007. At least 8 in that period.
2618 from a June 2207 peak.
2624 is an old trendline from summer 2004/summer 2005
2668 to 2673 from November/December 2007 interim peaks
2720 (July 2007 peak), 2724 (December 2007 peak) are key resistance points
Support:
The 200 day SMA at 2513
2500 from interim August lows.
The 18 day EMA at 2477
2451 is the August closing low
March 2008 trendline at 2437
The 50 day EMA at 2429
2419 is the January 2008 peak and the early February peak
2392 is the April 2008 peak
2386 is the August intraday low
2378 is the mid-February peak; 2379 from the October 2006 peak
2370 from the April 2006 peak
The 90 day SMA at 2359
2340 from the March 2007 low
2315 is the trendline from the summer 2004/July 2006 lows, Q4 2005 consolidation
S&P 500: Closed at 1400.38
Resistance:
1406 is the August and November 2007 closing low
The 200 day SMA at 1425
1432 is a longer term trendline from the August 2003/September 2004 lows
1433 from a pair of August 2007 lows and December mid-month intraday low
1446 from the December low
1460 is the February 2007 peak
1481 represents several peaks and lows ranging from April 2007
Support:
The 18 day EMA at 1397
The 10 day EMA at 1397
1396 is the February 2008 peak
1387 is the April 2008 intraday high
The 50 day EMA at 1385
1370 is the August 2007 intraday low
1374 is the March 2007 closing low
The 90 day SMA at 1361
1339 is an ancient trendline
Dow: Closed at 12,638.32
Resistance:
The 50 day EMA at 12,688
The 18 day EMA at 12,722
12,743 is the November low
12,750 to 12,768 is the February 2008 peak and a series of lows and highs from August 2007
12,786 is the February 2007 peak
12,845 is the August closing low
The 200 day SMA at 12,984
13,092 is the December 2007 intraday low
13,133 is the May 2008 high
13,250 from price points in second half of 2007
13,563 is the late December peak
13,780 is the early December 2007 peak
Support:
12,573 is the mid-February high
12,518 is the August intraday low
The 90 day SMA at 12,517
12,250 from late March 2007 lows
12,070 from the early February 2008 lows
12,050 from the March 2007
11,731 is the March 2008 low
11,670 is the May 2006 intraday high; 11,642 closing
11,634 is the January intraday low
Economic Calendar
These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.
June 2
Construction spending, April (10:00): -0.6% expected, -1.1% prior
ISM Index, May (10:00): 48.0 expected, 48.6 prior
June 3
Factory orders, April, (10:00): 0.1% expected, 1.4% prior
June 4
ADP Employment survey, May (8:15): -30K expected, 10K prior
Q1 Productivity (8:30): 2.5% expected, 2.2% prior
ISM Services, May (10:00): 51.0 expected, 52.0 prior
Crude oil inventories (10:30): -8.88M prior
June 5
Initial jobless claims (8:30): 372K prior
June 6
Non-farm payrolls, May (8:30): -52K expected, -20K prior
Unemployment rate, May (8:30): 5.1% expected, 5.0% prior
Hourly earnings (8:30): 0.2% expected, 0.1% prior
Wholesale inventories, April (10:00): 0.5% expected, -0.1% prior
Consumer credit, April (3:00): $7.7B expected, $15.3B prior
End part 1 of 3
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